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Wuhan University of Technology

Masters Degree Thesis

Sort No. UDC

Secrete Level University Code 10497

Wuhan University of Technology MBA Thesis

Title Research on public policy and open innovation strategy in the solar

sector in Mexico taking China as benchmark


Name of Postgraduate Carlos Rubn Torres Vera Name of Supervisor Degree level Name Dr. Hu Shuhua Title School Management School Masters Degree Degree Zip code 430070 MBA

Discipline & Specialty Thesis Defense Date

Thesis Submission Date Degree Awarding Unit Degree Awarding Date

Wuhan University of Technology

Chairperson of Thesis Defense Committee Board Evaluators

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Wuhan University of Technology

Masters Degree Thesis

Original Creation Statement


I hold to the truth of the following statements: the thesis brought forward is my own research fruit instructed by my supervisor. As I know, the thesis doesnt include others research fruits, which have been published or written, and other materials, which have been used in order to obtain degrees or certificates in Wuhan University of Technology or other education institutions, except those noted marks and expressing thanks places. All contributions offered by my colleagues in this research have been noted clearly in the thesis, and I have expressed my gratitude in it, too.

Signature of Postgraduate: Date: Month Day, Year

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I understand the rules on keeping and applying degree theses of Wuhan University of Technology completely, i.e. the right of keeping theses copies submitted and the right of borrowing and referring theses are held by Wuhan University of Technology; and Wuhan University of Technology is able to publicize the whole content of theses and to keep theses by photocopy, micro photocopy, or other replicating ways. Signature of Postgraduate: Signature of Supervisor: Date: Month Day, Year

Wuhan University of Technology

Masters Degree Thesis

Wuhan University of Technology

Masters Degree Thesis

ABSTRACT
Knowledge has become an important means of economic production as countries increasingly rely on its accumulation and absorption for their development. In the knowledge economy, knowledge and networks are important in the formation of firms capabilities and core competencies. Thus, nations and firms must consider the importance of knowledge as an economic resource and understand that its production, transfer and use calls for increasing integration of different types of actors with unique and distinct capabilities and resources, able to absorb the knowledge surrounding them to create new knowledge and deploy it in their strategies. Moreover, the current generation of innovation also emphasises the integration of systems and networking to become a fast innovator to remain competitive. Reflecting this change to a more customer-oriented innovation, open innovation has been adopted as a new paradigm, characterised by use of internal and external resources and ideas in the innovation process of firms. Firms are influenced by their environments, which enhance or constraint their opportunities to learn and to develop their core competences by providing them with resources and capabilities not available or difficult to develop internally. Moreover, as the tacit component of knowledge is difficult to transfer, networks become the most efficient means for its dissemination. Public policies affect and influence the development of firms; the role of public policy is to support innovation by providing the necessary coordination to the whole system and its constituents, fostering the flows among them and solving the issues related with missing functions and institutions. China has become the second most important investor in renewable energies in the world. In the case of solar energy, Chinese firms have taken important leading positions by building key core competences internally and externally sourcing complementary resources and competences. Suntech and Himin are pioneers in their areas of expertise and have benefited largely from an open approach to innovation to strengthen their core competences. An important role in the realisation of both firms strategies has been played by public policy through the provision of skilled labour, the upgrading and improvement of the local science and technology infrastructure and the establishment of long-term policies that encourage the participation of firms in the development of local capabilities in renewable energy. Through these actions, public policies have had a positive impact in the growth of firm by making possible the realisation of their open innovation strategies. We conclude that countries supporting the creation and development of local capabilities as well as the linking among the constituents of the system are more successful to develop local high-technology industries than countries relying only on market-based mechanisms. A second conclusion is that firms networking performance seems more related to their core capabilities than networking itself, with networks strengthening their original core competences by providing access to complementary resources and capabilities.
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INDEX
Chapter I Introduction 1.1 Significance of the research 1.2 Literature review 1.2.1 Knowledge generation, knowledge spillovers, knowledge transfer and innovation 1.2.2 Networking and its impact on innovation 1.2.3 Innovation and public policies 1.3 Main contents and methodology Chapter II Theoretical fundaments 2.1 National development and the role of knowledge 2.2 Knowledge: Conceptual framework 2.3 The Knowledge Economy 2.4 Knowledge: Concept and properties 2.5 The production of knowledge 2.5.1 R&D 2.5.2 Learning 2.6 The process of knowledge reproduction 2.7 The transfer of knowledge 2.8 Absorptive capacity as a condition for knowledge transfer 2.9 Innovation: Theoretical framework 2.10 Typology of innovation 2.11 Innovation patterns 2.12 Innovation and push-pull systems 2.13 Disruptive innovation 2.14 Innovation-generating and innovation-adopting firms 2.15 Firm strategy and innovation 2.16 Innovation as a firm core capability 2.17 Innovation: control systems 2.18 Open innovation 2.19 Networks 2.20 Networks and the firm 2.21 Networks and learning processes 2.22 The creative factory 2.23 The need for active public policy 2.24 Functions of policy in innovation processes 2.25 Innovation policy

1 2 2 5 8 9

10 11 13 14 16 18 19 20 21 26 28 31 33 34 37 38 39 41 44 46 50 58 61 63 65 66 67

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Masters Degree Thesis

Chapter III Solar sector in Mexico and China 3.1 International landscape of the sector 3.1.1 Solar energy 3.1.2 Solar energy in the world 3.2 The evolution of the sector in Mexico and China 3.2.1 Solar energy in China 3.2.2 Solar energy in Mexico 3.3 Sectoral public policy in Mexico and China 3.3.1 Innovation policy 3.3.1.1 Innovation policy in China 3.3.1.2 Innovation policy in Mexico 3.3.2 Policy relevant to the sector 3.3.2.1 China 3.3.2.2 Mexico

72 72 75 76 76 83 84 84 85 92 94 94 97

Chapter IV Empirical study: case analyses of firm-level innovation and networking strategies 4.1 Suntech 99 4.1.1 Innovation 103 4.1.2 Networking 106 4.1.3 Impact of government policy 108 4.2 Himin Group 110 4.2.1 Innovation 113 4.2.2 Networking 116 4.2.3 Impact of government policy 119 4.3 Cal-o-rex 121 4.3.1 Innovation 124 4.3.2 Networking 126 4.3.3 Impact of government policy 128 Chapter V Findings of the empirical study 5.1 Public policy in the sector 5.1.1 Government policies supporting/constraining sector development 5.1.2 Public policy and the insertion of the national industry in the international context 5.2 Firm-level strategy 5.2.1 Innovation-through-networking strategy Chapter VI Conclusions 6.1 Public policy 6.2 Firm strategy 6.2.1 Innovation through networking 6.3 Implications for the development of the sector in Mexico 6.4 Shortcomings 6.5 Further directions of research
IV

131 131 133 134 134

136 136 136 137 138 139

Wuhan University of Technology

Masters Degree Thesis

INDEX OF GRAPHS, TABLES AND FIGURES


Table 2-1 Firm theories in three techno-economic paradigms Table 2-2 Knowledge portfolio Table 2-3 Forms of knowledge production Table 2-4 Institutional forms for the formal production of knowledge Table 2-5 Knowledge flows to a firm Table 2-6 Push and pull systems Table 2-7 Approaches to managing intellectual resources Table 2-8 Differences in the organisational bases of knowledge systems Table 2-9 Globalisation of innovation - implications for national economies Table 3-1 Generations of PV cells Table 3-2 Status of selected renewable energies - characteristics and costs Table 3-3 Top five countries in renewable energies Table 3-4 Installed renewable energy capacity and targets, China Table 3-5 Conversion efficiency, China and the world Table 3-6 China: Main PV producers along the value chain Table 3-7 Divergence in national systems of innovation in the 1980s and 1990s Table 3-8 Chinas Long Term S&T Plan: Areas of responsibility and total number of supporting policies by department Table 3-9 Public policy in renewable energy Table 4-1 Suntechs selected financial data Table 4-2 Grupo Industrial Saltillos selected financial data Table 4-3 Fiscal reductions to Grupo Industrial Saltillo Table 5-1 Patenting activity: Suntech, Himin and Cal-o-rex Figure 2-1 Knowledge production by R&D interaction Figure 2-2 Knowledge transformation between tacit and explicit knowledge Figure 2-3 Technology grid Figure 2-4 Mechanisms of knowledge transfer Figure 2-5 The process of knowledge transfer Figure 2-6 Barriers to knowledge transfer Figure 2-7 Absorptive capacity within an innovation system in an international Environment Figure 2-8 Typology of innovation Figure 2-9 Innovation: typology Figure 2-10 Ideal transitions Figure 2-11 Push and pull systems in the technology life-cycle Figure 2-12 Customer-oriented innovation Figure 2-13 Four keys to a systemic innovation capability Figure 2-14 Innovation blueprint Figure 2-15 Creativity-oriented innovation control system Figure 2-16 Balanced innovation control system
V

12 15 17 19 22 35 43 57 65 73 74 76 78 78 80 85 91 94 100 122 129 134 18 21 23 24 24 26 28 32 32 34 36 37 42 44 45 46

Wuhan University of Technology

Masters Degree Thesis

Figure 2-17 Efficiency-oriented innovation control system Figure 2-18 Innovation partners and their contributions Figure 2-19 Models of relationships between nation state, the academy and the industry Figure 2-20 Business relationships and networks a focal firm perspective Figure 2-21 Types of strategic nets Figure 2-22 Technological parallaxes and parallax axles connection the different layers of a technological system Figure 2-23 The four layers of technological systems Figure 2-24 Differing organisational forms of knowledge systems in industrial clusters Figure 2-25 Value production and network capability base Figure 2-26 Model of value-creating networks Figure 2-27 The creative factory concept Figure 3-1 Public governance of S&T and innovation in China: institutional profile Figure 4-1 Suntech core business Figure 4-2 Innovation at Suntech Figure 4-3 Upstream and downstream networking at Suntech Figure 4-4 Impact of public policy in Suntechs strategy Figure 4-5 Sustainable Triple Recycling Model of Renewable Energy Figure 4-6 Innovation at Himin Figure 4-7 Networking strategy at Himin Figure 4-8 Public policy and Himin strategy Figure 4-9 Cal-o-rex within Grupo Industrial Saltillo (GIS) Figure 4-10 Innovation at Cal-o-rex Figure 4-11 Networking strategy at Cal-o-rex Figure 5-1 Comparison of public policies in the solar sector in China and Mexico Figure 5-2 Innovation-through-networking strategy in China and Mexico Figure 6-1 Strategies for the development of the solar sector in Mexico Graph 3-1 Solar hot water/heating capacity existing, selected countries, 2006 Graph 3-2 Solar hot water/heating added capacity, selected countries, 2006 Graph 3-3 Chinese Government renewable energy new investment forecast by sector, 2006-2020 Graph 4-1 Suntechs year-end PV cell production capacity Graph 4-2 Suntech geographic coverage

46 47 49 54 55 56 56 58 59 60 63 88 101 103 106 108 111 113 116 119 122 124 126 131 135 138 81 82 96 101 102

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ABBREVIATIONS
S&T Science and Technology KE Knowledge Economy OECD Organisation of Economic Cooperation and Development HRST Human resources in Science and Technology IP Intellectual Property IPR Intellectual Property Rights NIS National Innovation System NDRC National Development and Reform Commission COSTIND Commission of Science, Technology and Industry for National Defence MOC Ministry of Commerce MOF Ministry of Finance MOST Ministry of Science and Technology MOE Ministry of Education CAS Chinese Academy of Sciences CAE Chinese Academy of Engineering MOP Ministry of Personnel NSFC National Natural Science Foundation of China UNDP United Nations Development Programme GEF Global Environment Facility FDI Foreign Direct Investment ISI Import-substitution industrialization NEM New Economic Model MNC Multinational Company SME Small and Medium Size Enterprise GTZ Deustche Gesellschaft fr Technische Zusammenarbeit GmbH ICT Information and Communication Technologies EID Eco-industrial Development TW Terawatt STPV Solar thermophotovoltaic PV Photovoltaic TPV Thermophotovoltaic R&D Research and Development kWh Kilowatt/hour Wp Watt photovoltaic MW Megawatt MWp Megawatt photovoltaic DSC Dye-sensitised solar cell GW Gigawatt GWth Gigawatt thermic US United States UK United Kingdom
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Wuhan University of Technology

Masters Degree Thesis

KM Knowledge Management STI Science, Technology and Innovation DUI Doing, Using, Interacting IGO Innovation-generating organisation IAO Innovation-adopting organisation STEG Solar thermal electricity generation kJ Kilojoule cm2 square centimetre m2 square meter TCE Tonne of coal equivalent=0.778 TOE TOE Tonne of oil equivalent OEM Original Equipment Manufacturer SWH Solar water heating

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Wuhan University of Technology

Masters Degree Thesis

CHAPTER I INTRODUCTION

1.1 Significance of the research


The aim of the research is to analyse the development of the solar industry in China to identify the impact of public policy on firms strategies related to innovation and networking. The objective is to analyse the Chinese experience to derive lessons to develop the solar sector in Mexico. The research encompasses three cases analyses of two leading Chinese firms and one Mexican firm in terms of their innovation and networking strategies and the impact that government policies have had in their deployment. There are two specific questions to answer: Are countries that implement government policies to support local firms technological capabilities and the development of linkages between different organizations (private firms, universities, R&D labs and foreign organisations) more likely to successfully nurture high-tech industries? What is the impact of collaboration with third parties in technology transfer, development and commercialisation, in the performance of firms? China is chosen for the analysis due to its having common features with Mexico: developing country facing transformation to a market economy. The second and most important reason is that China is the second largest investor in the world in renewable energies, with more than US$12 billion dollars (Martinot and Li, 2008), and the world leader in solar water heaters, in terms of production and market share. The selection of the Chinese companies included in this research is based on their achievement of market leadership and growth in a very short period: Himin Group, founded in 1995 as a private company, is the worlds largest producer of solar water heaters; and Suntech, founded in 2002, is the world leader in the production of solar panels. The present research is significant because it can provide valuable lessons to other countries with needs and endowments similar to China to implement firm strategies and public policies to develop a local high-tech industry to alleviate unemployment and ensure economic development. Moreover, the focus in the solar sector of this research can also benefit these countries as they can learn from the Chinese experience to balance their needs for economic development and the protection of the environment by nurturing local, sustainable industries.

Wuhan University of Technology

Masters Degree Thesis

1.2 Literature review


1.2.1 Knowledge generation, knowledge spillovers, knowledge transfer and innovation
The changes in technology have modified the economic landscape where new organisational models are more intensive in information and knowledge (Mandeville, 2005; Bastos Tigre, 2005). Knowledge-based and knowledge-driven economies (Carayannis et al., 2006) are best suited to compete in the new economic landscape, where innovation and technology are needed to transform countries (Calestous and Lee, 2005). The transformation of the economy is given at different levels where production of knowledge is accelerated, intangible capital is more important, innovation is becoming a dominant activity and new technologies impact the creation and transfer of knowledge (David and Foray, 2003). This new landscape results from the breaking down of boundaries between formerly separated activities and the rise of organisational networks and collaboration (Mandeville, 2005). The pillars of this knowledge economy are (Dahlman and Aubert, 2001): An economic and institutional regime that provides incentives for the efficient use of existing knowledge and, the creation of new knowledge and entrepreneurship. An educated and skilled populace than can create and use knowledge. A dynamic information infrastructure that can facilitate the effective communication, dissemination, and processing of information. An effective innovation system comprising a network of firms, research centres, universities, consultants, and other organisations that can tap into the growing stock of global knowledge, assimilate and adapt it to local needs, and create new knowledge and technology. Knowledge can be scientific, technological or entrepreneurial (Karlsson and Johansson, 2004) and one important feature is that its stock is not depleted by use and its value to an economy comes from sharing it with others (Brinkley, 2006). Knowledge stems from discovery or invention in a context of activities in which other motivations are predominant; it is non excludable and non rival, often accumulative and can be used concurrently by many (Foray, 2004). These characteristics of appropriability, cumulability and complementarity render it not totally subject to market transactions (Antonelli, 2002). The codified component of knowledge can be transferred at low or no cost; however, the tacit component continues to be less mobile and transferable, requiring face-to-face interactions (Archibugi and Pietrobelli, 2003). Cooperative R&D agreements, strategic alliance, spin-offs and intellectual property rights licensing enable the transfer of knowledge (Carayannis and Roy, 2000). Barriers can be individual, organisational or technological such as excessive regulations, barriers to market entry, competitors response and cultures misalignment (Carayannis and Roy, 2000; Riege, 2005).
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Knowledge transfer success depends on the parties sharing similar knowledge and the extent of interactions between the source and the recipient to transfer and articulate knowledge (Cummings and Teng, 2003). Innovation involves a trade-off between the risk of change and the risk of organisation decline or death due to a lack of change (Meeus and Oerlemans, 2005). The innovation processes can be cognitive, organisation or economic and they happen in conditions of uncertainty and in competition. Innovation involves several subprocesses: production of knowledge; transformation of knowledge into products, systems, processes and services; and, continuous matching of the latter to market needs (Pavitt, 2003). The current generation of innovation processes calls for systems integration and networking where faster development and greater efficiency are key. This generation of innovation is supported by strong interfirm vertical linkages, external horizontal linkages (Rothwell, 1994). Different organisations innovate in different forms: some generate innovations and others adopt innovations. Innovation-generating organisations (IGO) innovate to produce a new product or technology in order to enter or create a new market or industry; innovation-adopting organisations (IAO) innovate to assimilate an existing product or technology in order to remain competitive or excel. Therefore, IGOs must create an environment that promotes and rewards creativity to develop and disseminate innovation, requiring the capability to scan the external environment for technology and the capability to integrate new technology. In the other hand, IAO need scan capacities to identify, select and assimilate suitable innovations. (Arbussa and Coenders, 2005; Damanpour and Wischnevsky, 2006). To develop competitive advantages, firms must rest on distinctive processes (ways of coordinating and combining) shaped by the firms (specific) asset positions (firms portfolio of difficult-to-trade knowledge assets and complementary assets) and the evolution path(s) it has adopted or inherited (Teece et al., 1997). Firms must have four generic categories of assets to innovate: scientific research assets, process innovative assets, product innovative application assets and aesthetic assets; more than one asset has to be mobilised (Christensen, 1995). Innovation must be managed like any other corporate function (Drucker, 1985); thus, a knowledge dimension must be integrated to the strategic tools already available to the firm (Drew, 1999). Most innovative ideas come from methodically analysing seven areas of opportunity: unexpected occurrences, incongruities, process needs, industry and market changes, demographic changes, changes in perception and new knowledge (Drucker, 1985). Firms combining strong versions of the Science, Technology and Innovation (is based on the production and use of codified scientific and technical knowledge) mode and the Doing, Using, Interacting (experience-based model of learning based on doing) mode of learning are more likely to innovate than firms relying primarily on one of them (Jensen et al., 2007).
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Learning can be first- or second-order learning: first-order learning entails doing existing things better and eliminating errors; second-order learning implies coming up with something new (Visser and Boschma, 2004). Transfer is the movement of knowledge and technology via some channel from one individual or organisation to another and requires collaborative activity between two or more individuals or functional units separated by structural, cultural and organisational boundaries (Sung and Gibson, 2005). Without knowledge transfer, technology transfer does not take place and it is not obtainable if there is too big a gap in terms of economic development between transferor and transferee (Li-Hua, 2006). Therefore, laggard economic units must possess the ability to absorb, internalize and utilize the knowledge potentially made available to them or absorptive capacity (Narula, 2004). Potential absorptive capacity is a source of competitive advantage in innovation, especially in the presence of efficient internal knowledge flows that help reduce the distance between potential and realised capacity (Fosfuri and Trib, 2008). Market orientation, learning orientation and entrepreneurial orientation are positively related to innovativeness. Furthermore, market orientation, entrepreneurial orientation and innovativeness are the strongest overall drivers of performance (Hult et al., 2004). Learning orientation has four components: commitment to learning, shared vision, open-mindedness, and intra-organisational knowledge sharing (Calantone et al., 2002). A new innovation paradigm is Open Innovation where valuable ideas can com from inside or outside the company and places external ideas and external paths to the market on the same level of importance as reserved for internal ideas and paths to market. This changes the function of research, which must comprise knowledge generation and knowledge brokering (Chesbrough, 2003). However, innovation also has risks: well-managed companies have failed because the logical, competent decisions critical to their success are also the reasons why they lose their positions of leadership: the innovators dilemma (Christensen, 1997). In the particular case of Chinese firms, their catch-up strategy involves two stages: first, firms take advantage of the modularisation of manufacturing in an industry, source technology externally and are intensely market-oriented in their product innovation; in the second stage, they pursue internal capabilities in technological development to generate process and product innovations (Liu, 2005). The main innovation strategy adopted by most Chinese high-tech firms is outsourcing (Chen and Yuan, 2007).

Wuhan University of Technology

Masters Degree Thesis

1.2.1 Networking and its impact on innovation


Firms do no operate in isolation from others and their growth and development do not occur independently of the financial, educational and labour market systems which they are embedded in (Hakansson and Ford, 2002; Asheim and Herstad, 2003a). Local contexts can represent important parts of the knowledge base and knowledge infrastructure of firms and regions. Consequently, innovation can not be performed in isolation and firms must be able to link themselves to and cooperate with external parties (Asheim, 2003). Network resources have a significant influence on firm performance; however, some firm resources and capabilities are relation-specific and are not easily transferable to other networks (Dyer and Hatch, 2006). For instance, R&D co-operation, external knowledge acquisition and experience with knowledge search are key antecedents of potential absorptive capacity (Fosfuri and Trib, 2008). Global competition, demands for shorter and more flexible delivery times at competitive prices and quality have caused important changes in the interactions between suppliers and their customers (Mller and Halinen, 1999). To maintain a long-term relationship with the customer, firms need to demonstrate their ability to think for the customer, and to conceive and implement new ways to serve them better. To do so, an organisation needs the assistance and partnership of their respective stakeholders: employees, suppliers and distributors (Kandampully and Duddy, 1999). Open organisational cultures (competitive and entrepreneurial), stronger market orientation, and innovativeness all had a pattern of positive effects on performance (Deshpand and Farley, 2004). Market orientation makes a significant contribution to the innovation projects impact performance, measured by intermediate benefits for the firm, but little effect on market success, measured by sales and profit performance (Atahuene-Gima, 1996). A strong learning orientation may be more important to the firm than a strong market orientation. However, both are key to successful innovation-driven performance: alongside the customer driven approach to product innovation, firms must make deliberate, systematic efforts to install the ability to engage in dynamic generative learning if they want to be consistently first to market with differentiated successful innovations. Higher-order learning requires not only the ability to experiment with new ways to deliver core product category benefits, but also the ability to discard limiting benefits and assumptions about the external marketing environment. (Baker and Sinkula, 1999). Nowadays, firms must equip customers with tools to design and develop their own innovation, which redefines their relationship as the location where value is created and captured changes and the companies must reconfigure their business models accordingly (Thomke and Von Hippel, 2002). The more a technological change renders obsolete the capabilities of a firms suppliers or customers, the poorer the firm performs (Afuah, 2000). Thus, in addition to competition, cooperation has significant impact on innovation (Bengtsson and Slvell, 2004). This leads to coopetition (Bengtsson and Kock, 2000). Firms might enter in strategic alliance to enter new markets, obtain new technology or best quality at a lower cost, reduce financial risks and share costs of R&D or achieve competitive advantage (Elmuti and Kathawala, 2001).

Wuhan University of Technology

Masters Degree Thesis

The Market-as-networks (MAN) tradition proposes that organisations are linked via relationships, characterised by competition, conflict, coexistence, and cooperation. The relationships are structured by the enactment of selective ties and relationships between autonomous actors, where buyers and sellers are active participants in the exchange process and every organisation deploys resources, which calls for internal coordination between different areas. Each relationship is different and takes place within an institutional matrix where social, legal, cultural and other forces impact the ability of organisations to engage in exchange activity (Loughlin and Horan, 2002). Knowledge-based constructed advantages require interfacing developments in various directions: economy, governance, knowledge infrastructure, community and culture (Cooke and Leydesdorff , 2006). The concept of innovation system includes all important economic, social, political, organisational, institutional and other factors that influence the development, diffusion and use of innovations (Edquist, 1997; in Chaminade and Edquist, 2006). Innovation systems perform several functions (Hekkert et al., 2007) Entrepreneurial activities. Knowledge development. Knowledge diffusion through networks. Guidance of the search. Market formation. Resources mobilisation. Creation of legitimacy/counter resistance to change. One type of innovation system, at the region level is the networked innovation system or innovation network, which is constituted by parts of the production structures and institutional set-up that is territorially integrated in a particular region and is built by a bottom-up, interactive innovation model (Asheim and Herstad, 2003b). Firms can become part of such networks to access technology, reduce cost and improve quality, benefit from a surge in capacity, leverage knowledge brokers and resolve market uncertainty (Anderson Jr. et al, 2008). In a context of innovation system, not only firms are players, and but also universities and public research institutions are conducting R&D as scientific outputs from this sector serve as important inputs to firms innovation activities (Motohashi, 2006). Universities and public research organisations are key institutions supporting the process of catching-up of laggard countries (Mazzoleni and Nelson, 2007). In the Triple Helix model, the surplus value of an overlay of relations among the three components of a knowledge-based economy (the knowledge-producing sector, the market and the government) leads to constructed advantages (Cooke and Leydesdorff, 2006). However, the Triple Helix model is problematic due to the major institutional barriers among industry, research universities and governments and because changes introduced for the
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provision of scientific services on the basis of a competitive market have created conditions in which these sectors have moved away from an initial clear division of labour to situation where they are now frequently in competition for the same work (Georghiu, 2006; Cooke, 2007). Although geographical proximity facilitates interactive learning, it may also have negative impacts on innovation due to the problem of lock-in (Boschma, 2005) due to structural factors that constrain innovative activity to largely incremental innovations: vertical cooperation, fierce horizontal competition (Asheim, 1996). Therefore, a diverse knowledge base and external links with world-class, national and international competence centres and innovation systems are important to avoid the negative effects of congestion and improve the performance of local firms to stay competitive (Baptista and Swann, 1998; Asheim and Herstad, 2003b). Therefore, the ability to integrate a large periphery of heterogeneous weak ties and a core of strong ties is a distinctive relational capacity that allows lead firms in interfirm networks to gain competitive advantage whose sustainability is based on dynamic innovative capability resulting from leveraging a dual network structure (Capaldo, 2007). Global production networks (GPN) or global value chains (GVC) have boosted international knowledge diffusion providing new opportunities for capability formation by local suppliers in developing countries because they have a strong incentive to internalise transferred knowledge through various forms of knowledge conversion. However, firms based in industrial countries often determine the scope for insertion and upgrading of these producers. Developing country companies are most likely to succeed when they treat global competition as an opportunity to link up to strategic players, learn and build capabilities as it may provide new opportunities for effective knowledge diffusion to local firms and industrial districts in developing countries, provided appropriate policies and support institutions are in place to enable local suppliers to exploit the opportunities and pressures resulting from network participation. (Ernst and Kim, 2002; Bonaglia and Goldstein, 2007). Galanakis (2006) proposes the concept of creative factory that has as its centre the firm. The models main focus is the Core Innovation Process which is constructed from Knowledge Creation (from public or industrial research); the New Product Development process, which transform knowledge into a new product; and the Product Success in the market, which depends on the products functional competencies and the organisational competencies of the firm to produce it at a reasonable price and quality and place it adequately in the market. The process is affected by other internal factors of the firm as well as by external factors in the National Innovation Environment.

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Masters Degree Thesis

1.2.1 Innovation and public policies


All experiences of successful catching-up and sometimes overtaking incumbent leaders have involved institution building and policy measures affecting technological imitation, the organisation of industries, trade patterns and intellectual property rights (Cimoli et al., 2007). An economy whose comparative advantage is new knowledge requires a different industrial structure and economic values (Audretsch and Thurik, 2000). When the price mechanism is unable to provide all the information, markets are unable to set the right incentives to move in the right direction and governance mechanisms and economic policy have provide the necessary coordination (Antonelli, 2002). Non-market institutions are part of the socio-economic tissue and thus, institutions provide the governance structure for many activities that can not be carried out efficiently by the market, influence and restraint the behaviour of economic agents and their relationships (Cimoli et al., 2007). Coordinated market economies are competitive in supporting the evolution of embedded firms through support of cooperative, long-term and consensus-based relations between private and public actors (Asheim and Herstad, 2003a, 2003b). However, there is not a single strategy that can be followed by all countries (Archibugi and Iammarino, 1999). The current approach to public policy refers to contexts in which companies are able to compete via innovation and the policies role is to support companies in diverse ways, so that they can make use of these competitive weapons (Barros de Castro, 2002). The appropriate policy would target inputs involved in the creation and commercialisation of knowledge (basic and applied research, investments in general education and advanced technical specialties and training and upgrading of the skill levels of workers) to create favourable environments (Audretsch and Thurik, 2000). Governments must nourish, protect and harvest the knowledge commons; be ready for and exploit knowledge waves; and prepare communities for participation in the knowledge economy (Hearn and Rooney, 2002). Public policies have several functions (Carlsson, 2006): Ascertain the existence of a sufficient knowledge base Create transparent incentives to reinforce positive forces or to overcome negative forces Promote entrepreneurial experiments when entrepreneurial climate is lacking Create markets or guarantee appropriate market conditions Create or augment resources Promote positive externalities (division of labour and knowledge spillovers)

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1.3 Main contents and methodology


In the following chapter, an overview of the current views on knowledge economy, innovation, the formation of networks and the role of public policy in innovation is presented, which is fundamentally based in documental revision of existing literature on these topics. The chapter ends with a summary of the importance of these topics to the current research. The third chapter provides an introduction to solar energy and its development in Mexico and China, comparing the policies in both countries that have had led to the sector to its current configuration. This chapter is result of research based on secondary sources and its contents provides the background to introduce the cases of chapter four. In chapter four, two Chinese and one Mexican firm operating in the solar energy sector are presented as case studies. The information in this chapter is based in secondary sources, such as available publications from the companies in the form of financial reports, presentations and web-sites. The information from these secondary sources was complemented with personal interviews with the Chinese firms and phone interview with the Mexican one. The findings of the research are contained in the fifth chapter and are presented according to their nature: either related to public policy or to firm strategy. The final chapter, sixth, presents the conclusions of the research and their implications as well as the limitations of the present work.

Wuhan University of Technology

Masters Degree Thesis

CHAPTER II THEORETICAL FUNDAMENTS

2.1 National development and the role of knowledge


Nations experience several stages of economic development. In the last two stages, knowledge-based economy and knowledge-driven economy, knowledge becomes increasingly important as a means and goal of economic production and exchange and as a valuable economic resource, under continual renewal, sharing and utilisation (Carayannis et al., 2006). Criscuolo and Narula (2002) also identify several stages of development, in terms of the ability to accumulate knowledge: pre catching-up stage, catching-up stage, pre frontier sharing and frontier-sharing. As nations advance through each stage, they increasingly rely on the accumulation and absorption of knowledge, which calls for the existence of local absorptive capacity and investments in infrastructure and the development of a local innovation capability. (Criscuolo and Narula, 2002). Four categories of nations can be identified in terms of their technology divergence, comprising their capacity for science, technology and innovation and the number of disciplines where each country is proficient (RAND Corporation in Calestous and Lee, 2005): Scientifically advanced countries Scientifically proficient countries Scientifically developing countries Scientifically lagging countries Abramovitz and David (1994) argue that laggard countries, however, may grow faster due to their potential of realising higher improvements in the average efficiency of their productive facilities by introducing the leaders state-of-the-art technology and organisation. Their effective potential is determined by gaps in levels of technology, capital intensity, efficient allocation, access to resources, market scales, relative factor supplies, income constrained patterns of demand, and institutional characteristics restricting their abilities to finance, organise and operate the firms required to exploit the technologies at the frontier of science and engineering. The main constraints faced by these countries are: Those governing their relative growth potential: limitations of technological congruence, due to the frontiers of technology advancing in an unbalanced, biased fashion, reflecting the influence of past science and technology on the evolution of practical knowledge; the scale of markets, consumer demands and technical capabilities of the countries operating at or near the frontier of technology. Those that influence their ability to realise the potential: social capability that covers levels of general education and technical competence; commercial, industrial, and financial institutions; and the political and social characteristics that influence the risks, incentives and personal rewards of economic activity.

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At the firm level, the development process has two stages (Liu, 2005). In the first stage, innovations are market-oriented and incremental and local knowledge and cost advantages are the basis of competitiveness. Firms learn to effectively source and implement external technology and may have little or no core product technology of their own. In the second, leading companies have gained economies of scale and have capabilities in design, marketing and branding, and use their financial resources and marketing capabilities to bring together core technologies from outside. The new process of transformations at the firm are characterised by new organisational models more intensive in information and knowledge (Bastos Tigre, 2005) where increased flexibilisation is exploited 1) internally, through the use of IT-based production technology (process innovations) and a reflexive work organisation based on functional flexibility (organisational innovations) where the separation between manual and intellectual work is disappearing; and, 2) externally, through the outsourcing of specific production tasks and functions to local (increasingly global) production systems as well as establishing inter-firm production networks (Asheim, 2003).

2.2 Knowledge: Conceptual framework


The Neoclassical, Industrial Economics and the group of Evolutionist and Neo-institutionalist theories have been advanced to explain technological change. Evolutionist and Neo-institutionalist theories emphasise the importance of knowledge and networks in the formation of firms capabilities and core competencies in a fast-changing world and how important these are for the planning, implementation and follow-up of the firms strategies. Of particular relevance is the growing importance of knowledge in the economy as an input to and output from production chains (Bastos Tigre, 2005). Evolutionist, or Neo-Schumpeterian, theories have three basic principles: 1) economic dynamics is based on innovation of products, processes and organisational forms, where innovation can be gradual or radical, the latter leading to instability in the economic system; 2) the rationality of agents is the result of their learning process due to their interaction with markets and new technologies (procedural rationality); and, 3) firms have a property of self-organisation, as a result from the fluctuations in the market, which rejects the idea of market equilibrium as it cant be achieved in a collective environment of economic agents with distinct routines and capabilities. These theories propose a plurality of selection environments where technologies and market structures are idiosyncratic to the type of industry and to the dynamic nature of particular configurations that condition the competitive process (nature of the entry barriers, the regulations, the degree of competition and the possibilities to explore scale and scope economies). Each market structure is associated with one cycle of the technological evolution of the product: at initial stages of an industry entry is easy and firms tend to be small, as well as the market; when a dominant technological pattern emerges, entry barriers are levelled up increasing the scale and capital needed to compete. In the setting, the competitiveness of the firm is defined as the sum of
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differentiated technological capabilities, complementary assets and routines, generally tacit and non-transferable. The evolution of firms depends on the transformation of secondary competences in core competences as the technological opportunities come (Bastos Tigre, 2005). Neo-institutionalist theories analyse the interactions among economic, social and political agents that foster the capabilities and favour the diffusion of innovation in a given country, where the selection process occurs in a specific environment where the quality of technical and scientific institutions, the strategies of the private sector, and the financial stimulus to innovations play a fundamental role. They attribute the economic performance of nations to the nature of their institutions: as some institutional frameworks will favour economic development and others may hinder it, there is no optimal institutional framework. The institutional framework influences the decisions and the knowledge accumulation process of the firms, generating trajectories or path dependency. (Bastos Tigre, 2005).

Table 2-1 Firm theories in three techno-economic paradigms


Main theory (-ies) Neoclassical Equilibirum Agents' rationality Industrial Evolutionist and NeoEconomics institutionalist Market structure Technological change Economies of scale Growth of firms Institutions Relative rationality Transaction Cooperation costs Oligopoly Firms networks

Central issues

Emphasis on exchange relationships (Firms as a Small firms Vertical Industry structure and specialisation Multinational firm organisation Dependency on firms external economies Laissez-faire State with minimum Features of national Interventionist regulatory state systems of regulation functions Owners' full responsibility Source: Bastos Tigre, 2005, p. 217

Global oligopoly

Deregulation

Globalisation

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2.3 The Knowledge Economy


The current transformation of the economy is taking place at different levels (David and Foray, 2003; Carayannis et al., 2006). The production of knowledge is accelerating with the creation of knowledge-based communities that spearhead the phenomenon and the revolution on instruments of knowledge that enable remote access to information, enhancing the capacity to create a wealth of information and the creative interaction among scholars, scientists, product designers, suppliers and customers. The changes in the production of knowledge enable the exploration and analysis of gigantic databases and new combinations of the previous forms of knowledge production in large-scale de-centralised systems for data gathering, calculation and results sharing. Also, intangible capital at the macroeconomic level is rising and the disparities in the productivity and growth of countries are related with their capacity to improve the quality of human capital, through increased emphasis on higher education and life-long learning, and factors of production, by means of massive investments in research and development (R&D), training, educations, software, branding, marketing, logistics and similar services, to create new knowledge and ideas, which are to be incorporated in equipment and people, developing a service-based economy with intellectual content becoming more pervasive and decisive. In consequence, innovation is becoming a dominant activity, growing in speed, intensity and source, where breakthroughs can come about through formal R&D work off-line (isolated and sheltered from the regular production of goods and services) and through learning on-line (learning by doing), which intensifies competition between enterprises and nations based on new product design, marketing methods and organisational forms and lead to continual restructuring of economies to cope with constant change. These transformations have led to the knowledge economy (KE) with a high and growing intensity of information and communication technologies (ICT) usage by well-educated knowledge workers and a growing share of gross domestic product (GDP) devoted to knowledge intangibles. The KE consists of innovating organisations using new technologies to introduce process, organisational and presentational innovation and is characterised by the existence of convergence and the rise of organisational networks and collaboration to be more efficient, to innovate, or to access wider markets, coupled with a growing importance of intangible knowledge activities and assets (Mandeville, 2005; Brinkley, 2006). The four pillars of the KE are (Dahlman and Aubert, 2001): An economic and institutional regime that provides incentives for the efficient use of existing knowledge and the creation of new knowledge and entrepreneurship. An educated and skilled populace than can create and use knowledge. A dynamic information infrastructure that can facilitate the effective communication, dissemination, and processing of information. An effective innovation system comprising a network of firms, research centres, universities, consultants, and other organisations that can tap into the growing stock of global knowledge, assimilate and adapt it to local needs, and create new knowledge and technology.

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To benefit from the KE, firms, individuals and nations must face its challenges: access to information and knowledge bases, uneven development of knowledge from one sector to the next, the dilemma between the protection of intellectual property and the public domain of knowledge, the raise of new problems of trust, a society bereft of memory and fragmented knowledge (David and Foray, 2003).

2.4 Knowledge: Concept and properties


Knowledge can be understood under three conceptions (Karlsson and Johansson, 2004): Scientific knowledge, which consists of basic scientific principles that can form the basis for the development of technological knowledge and entrepreneurial knowledge. Technological knowledge (implicit and explicit blueprints), which is in the form of inventions that either materialise in new products or can be readily used in the production of goods and services. Entrepreneurial knowledge that comprises business-relevant knowledge about products, business concepts, markets, customers, and so on. The useful stock of knowledge is not the sum of all knowledge that has been created as a lot of knowledge has been lost in the process (Lam and Lundvall, 2004). Knowledge is different from information and data. Knowledge empowers its possessors with the capacity for intellectual or physical action (cognitive capability) whereas information is structured and formatted data that remain passive and inert until used by those with the knowledge needed to interpret and process them (David and Foray, 2003). Knowledge is a public good as its value to an economy comes from sharing it with others (Brinkley, 2006). Knowledge can be found in two states: tacit and codified, also known as implicit and explicit, respectively (Antonelli, 2002; Jensen et al., 2007). Tacit knowledge is difficult to articulate and may be embedded in ways things are done. Its ownership resides with the holder of know-how and is difficult to copy and transfer. Explicit knowledge is written down in some medium and though it is easier to transfer, it can be protected using mechanisms of law (Edvinsson and Sullivan, 1996). Knowledge has properties that make it a unique economic good. It is difficult to control (retain) and can not be appropriated; it is non rival, not depleted by use, in individual and collective dimensions. In the individual dimension, users can use the same knowledge an infinite number of times to reproduce an action without extra costs; in the collective dimension, an infinite number of agents can use the same knowledge without depriving any one of it. Knowledge is cumulative in two temporal dimensions (time and speed): some cumulative processes cover a long period of time and cumulativeness can be very fast and involves recombination and use of pieces of knowledge that are available. Knowledge is uncertain as it not possible to know a priori the outcomes of the research process and its risks. Knowledge is indivisible and complementary: there is a minimum scale of knowledge needed before any new knowledge can be created
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(Nelson, 1959, and Arrow, 1962, in Smith, 2000; Antonelli, 2002; Foray, 2004; Brinkley, 2006; Jensen et al., 2007). These properties of knowledge entail social benefits: it can be used by concurrently by different people at no additional cost and without diminishing its availability to any users; and, it will not become depleted through intensive use. However, some properties impede the full realisation of social benefits: knowledge is partially localised and weakly persistent (forgetting occurs); transfer and use of knowledge are difficult due to its tacitness and stickiness and its being dispersed and divided (Foray, 2004). Knowledge can be subdivided in different types such as know-what, know-why, know-how and know-who (Lundvall and Johnson, 1994; in Jensen et al., 2007). Know-how is related to innovation and process capabilities, know-what to professional expertise, know-why to business dynamics and know-who refers to important personal, political and social relationships (Drew, 1999). A different typology of knowledge is presented by Drew (1999) in relation with the knowledge surrounding firms, requiring different management strategies.

Table 2-2 Knowledge portfolio


What we know we know Emphasis on knowledge sharing, access and inventory; tools: benchmarking, communities of practice What we don't know we know Emphasis on uncovering hidden or tacit knowledge; tools: knowledge maps, audits, training, networks What we know we don't know Emphasis on knowledge seeking and creation; tools; R&D; market research, competitive intelligence What we don't know we don't know Emphasis on discovering key risks, exposures and opportunities; tools; creative tensions, audits, dilemmas, complexity science

Knowledge awareness

Knowledge content Source: Drew, 1999, p. 134

Edvinsson and Sullivan (1996) identify intellectual capital as a particular type of knowledge. They argue that in intellectual capital is where knowledge can be converted into value and encompasses inventions, ideas, general knowledge, designs, computer programmes, data processes, and publications. Structural capital and intellectual assets are some of its components. Structural capital is the infrastructure firms develop to commercialise their human capital and can be tangible or intangible. One form of structural capital are complementary business assets, used to create value in the commercialisation process; they comprise two types of assets: business assets widely available (generic) and specific complementary assets. The latter can be used as barrier to competition, licensed, sold, to attract joint-venture partners or to protect a technology from competitors. On the other hand, intellectual assets are codified, tangible or physical descriptions of specific knowledge to which the company can assert ownership rights, that they can readily trade and that can be protected through patents, copyrights, trade secrete laws and similar instruments. Intellectual assets can be further divided in three main types (Edvinsson and Sullivan, 1996): Commercialisable assets: products, processes and services.
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Customer-related assets: relationships, agreements and history. Structure-related assets: plans, procedures and processes.

Technology is a knowledge system relying heavily on modes of learning; adaptation to new technologies; educational systems; industrial policies and policies on science, technology and innovation; the nature and composition of the private sector; and the capabilities inherent in the public sphere (Calestous and Lee, 2005). Technology comprises the ability to recognise technical problems and to develop new concepts and tangible solutions for them, including the concepts and tangibles themselves, as well as their efficient use. It involves four components: coded information, physical hardware, individual skills and organisational competencies (Autio and Hammeri, 1995). The economic value of technology remains latent until it is commercialised in some way; the same technology commercialised in two different ways will yield different returns (Chesbrough, 2003). Knowledge firms are companies that use their knowledge as a source of competitive advantage, deriving their profits from the commercialisation of knowledge created by their human resources (Edvinsson and Sullivan, 1996). Different organisations take different functions with respect to knowledge: knowledge producers, knowledge users and appliers, knowledge regulators, knowledge diffusers and knowledge funders (De la Mothe, 2003). In terms of tacitness and collectiveness of knowledge, firms have specific knowledge architectures (Asheim and Herstad, 2003a): Embedded firms, based on collective, tacit and embedded knowledge. They are characterised by an organic team structure operating in tandem with a formal, integrating hierarchy and a stable social organisation (informal relationships), which results in a superior capacity to generate, mobilise, and accumulate tacit knowledge. Knowledge and learning is contained within the formal structure. Operating adhocracies, based on tacit, individually accumulated but based on collective and often inter-organisational learning (actor embodied knowledge). Its seen as the most innovative structure if coupled with an effective innovation system able to supply critical R&D-based knowledge and a localised network of partner firms (development coalition). Learning and knowledge are contained collectively by the network of organisations, resulting in less clearly defined specialised capabilities in the individual organisation but distinct capabilities in the network as a whole.

2.5 The production of knowledge


New technological knowledge can be used in the economy in two ways: in the production of a specific unique product by the firm that developed it, where its use by a third firm can be, or not, protected; and, to increase the total stock of technological knowledge, which may spillover to other firms, increasing the productivity of knowledge production in the economy; it may benefit
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others as much or even more than it benefits the creator of the new knowledge (Karlsson and Johansson, 2004). Knowledge creation is a systemic phenomenon fostered by two groups of actors: firms who undertake formal and informal R&D, as well as providing training to their employees; and, non-firm actors, such as universities, state-subsidised R&D organisations and standards-setting bodies. Non-firm actors act as support organisations for firm actors, but their role is no secondary (Narula, 2004). The process is characterised by functional specialisation and integration within industrial R&D and laboratories, technological convergence and vertical disintegration in production techniques, industrial linkages with universities and heterogeneity in the innovation process (Pavitt, 2003). The amount of external knowledge becomes an important endowment as the actual chances of generating new knowledge for each agent depend upon the levels of accumulation of skills and competences, education and access to information of other agents in the community (Antonelli, 2002). Knowledge development can be either incremental or radical. In the former, economic units acquire knowledge by exploring in the vicinity of their existing knowledge assets, undertaking routines that lead to incremental innovations (learning-by-doing). Knowledge is also acquired by interaction with the external environment, customers, suppliers, competitors and government agencies (learning-by-interacting). These forms of development create patterns of behaviours, learning and interaction that become routines (routinised learning), which add to the existing knowledge and competencies of a firm without fundamental changes in the nature of is activities. Radical or learning involves changes in company routines and experimentation with new alternatives; firms are generally averse to radical change (Narula, 2004). New knowledge stems from a discovery or invention and is often produced in four different forms in a context of activities where other motivations are predominant (Foray, 2004):
Table 2-3 Forms of knowledge production
Off-line process On-line process Search model R&D Learning-by-doing Coordination model Formal integration Informal integration Source: Foray, 2004, p. 50

The forms of knowledge production identified in table 2-3 also correspond to those identified by Antonelli (2007): learning (learning-by-doing), socialisation (informal integration), recombination (formal integration) and R&D. Their efficiency depends on internal and external factors. Internal factors are internal competence and knowledge; external factors are external knowledge embodied in capital goods, intermediary inputs or technological information, licenses, patents and technological spillovers made available though technological transactions and interactions (Antonelli, 2007).

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Foray (2004) identifies three models of innovation that make critical to produce integrative knowledge: one is related to the increasingly scientific nature of research methods; in the second, users increasingly engage in knowledge production; and, the third comes from the increasing complexity and modularity of the industrial architecture. Each model implies different critical relations and organisations. In the first model university-industries relations, start-ups and large integrated firms are important; in the second model user-producer relations and user communities are crucial; in the third one, architect and module designers, strategic and standardisation consortia are key.

2.5.1 R&D
Knowledge production through R&D interaction counts on flows of internal and external knowledge, which is incorporated to the available stock of knowledge in the firm, whose output is new knowledge in the form of innovation (Cusmano, 2000).

In-house R&D

Cooperative R&D Research capacity

Spillovers Absorptive capacity

Knowledge flow

Knowledge stock

Innovativeness

Source: Cusmano, 200, p. 12

Fig. 2-1 Knowledge production by R&D interaction

There are several institutional figures in the formal production of knowledge (Foray, 2004).

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Table 2-4 Institutional forms for the formal production of knowledge


Dominant form of funding arrangement Information disclosure regime Public access Public and private patronage Public contracting and expenditures Private business contracting and expenditures

Universities and non- Governmen civilian Corporate basic research profit institutions labs and institutes campuses University-industry research centres contract Government defense Corporate R&D labs organisations

Private access

Source: David, 2000, in Foray, 2004, p. 123

Three forms of corporate specialisation have taken place: developing of large manufacturing R&D firms laboratories specialised in the production of knowledge for commercial exploitation; the development of a myriad of small firms providing continuous improvements in specialised producers goods; and, specialisation between private knowledge developed and applied in business firms and public knowledge developed and disseminated by universities and similar institutions. This has led to a heterogeneous and path-dependent pattern of technological change, which requires complex processes of coordination (Pavitt, 2003).

2.5.2 Learning
In the context of innovation, learning implies a process in which all kinds of knowledge are (re)-combined to form something new and depends on the communication between people or organisations that possess different types of required knowledge (Meeus and Oerlemans, 2005). Learning processes are intrinsically social and collective phenomena, occurring through imitation and emulation of individuals and because of joint contributions to the understanding of complex problems, which requires common codes of communication and coordinated search procedures (Carayannis et al., 2006). Technological learning is the process by which a technology-driven firm creates, renews, and upgrades its latent and enacted capabilities based on its stock of explicit and tacit resources. It combines purely technical with purely administrative learning processes (Jelinek, 1979; in Carayannis et al., 2006). Learning can be first- or second-order learning. The former entails doing existing things better and eliminating errors; the latter implies coming up with something new. Culture, norms, values, emotions, preferences and internal experience favour the ongoing exploitation of tacit localised capabilities (first-order learning) with a risk of lock-in. The dynamic aspect of different patterns of social interaction, action strategies, cognitive change and learning across space (region-specific cognitive and institutional conditions) may favour entrepreneurship, flexibility, curiosity, communication, competition, and various forms of cooperative interaction between firms and across private/public sector, promoting second-order learning and making the re-invention of
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advantages more likely (Visser and Boschma, 2004). Learning-by-doing takes place at the manufacturing and/or utilisation stage after a product has been designed and leads to many kinds of productivity improvements: technological or organisational; however, most incremental innovations are not produced only through learning-by-doing mechanisms. Learning-by-using is learning-by-doing related to the use of a product or process. It has two aspects: final users learn how to use the product and about its performance characteristics, which are highly uncertain before the product has been used for a long period (Foray, 2004). Learning-by-doing and learning-by-using have decreasing returns as the firm approaches the frontier and in-house learning and learning-by-alliances become more efficient options (Criscuolo and Narula, 2002). Mixed learning strategies, combining strong versions of two modes of knowledge: the science, technology and innovation (STI) and the doing, using, interacting (DUI) modes, have been found to foster innovation at the firm. The STI mode is based on the production and use of codified scientific and technical knowledge whereas the DUI mode is an experience-based model of learning based on doing (Jensen et al., 2007). To be able to learn, firms must possess learning orientation, which differs from innovativeness as it emphasises the organisational value of obtaining knowledge; innovativeness focuses on the organisations willingness to change (Calantone et al., 2002). Learning orientation is the degree to which the organisation values knowledge, is open-minded and has a shared vision (Sinkula et al., 1997; in Baker and Sinkula, 1999) and refers to the organisation-wide activity of creating and using knowledge to enhance competitive advantage including obtaining and sharing information as well as development of new technologies to create new products that are superior to those of competitors. It influences the kind of information that is gathered, how it is interpreted, evaluated, and shared, impacting the innovativeness of the firm. The components of learning orientation are (Calantone et al., 2002): Commitment to learning. The degree to which an organisation values and promotes learning and associated with a long-term strategic orientation. Shared vision. An organisation-wide focus on learning. Open-mindedness. The willingness to critically evaluate the organisations operational routines and to accept new ideas. Intra-organisational knowledge sharing. Collective beliefs or behavioural routines related to the spread of learning among different units within an organisation.

2.6 The process of knowledge reproduction


Knowledge can be reproduced through demonstration, codification or audiovisual recording of the action (Foray, 2004). However, it is costly to reproduce and some things will be altered or lost in the process (David and Foray, 2003). The reproduction of knowledge implies changing its state between tacit and explicit, which involves four processes (Nonaka and Takeuchi, 1995; in
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Boutellier et al., 2008): Socialisation. A process in which experience is shared among team members, generating redundant tacit knowledge; it requires physical proximity between team members. Externalisation. The articulation of tacit knowledge in explicit concepts; physical proximity between team members is also necessary. Combination. A process of systematising concepts into a knowledge system where different explicit pieces of knowledge and information are reconfigured (monitoring, combination, and categorisation). It might be carried out inter-locally if the appropriate information and communication technology is used. Internalisation. A process done through learning by doing and may be carried out inter-locally.

To From Tacit knowledge Explicit knowledge

Tacit knowledge

Socialisation

Externalisation

Explicit knowledge

Internalisation

Combination

Source: Nonaka and Takeuchi, 1995, in Boutellier et al., 2008, p. 280

Fig. 2-2 Knowledge transformation between tacit and explicit knowledge

2.7 The transfer of knowledge


Knowledge between organisations is asymmetric as one of the parties will have greater knowledge (Cooke, 2007). Without knowledge transfer, technology transfer does not take place. Furthermore, technology transfer is not obtainable if there is too big a gap in terms of development between transferor and transferee (Li-Hua, 2006). Knowledge transfer has two mainstreams: intra and inter-organisational (Carayannis et al., 2006). The former focuses on the factors influencing the efficiency of knowledge transfer: sender, receiver and context (Hansen, 1999; in Carayannis et al., 2006). The latter argues that the outcome of knowledge transfer is highly dependent on the absorptive capacity of the recipient (Carayannis et al., 2006). Effective knowledge transfer involves consciousness of and the capability to control variables, such as time and embeddedness, and constant interaction with relevant environments (Cooke, 2007).
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Knowledge flows to a firm can be transaction-based, transaction related or spillover flows.


Table 2-5 Knowledge flows to a firm
Flow Flows from knowledge providers as inputs to R&D activities TransactionFlows in the form of inventions (innovations) sold to the firm based Flows between cooperating firms in R&D projects Flows of knowledge embodied in the delivery of inputs from a supplier TransactionKnowledge from supplier spilled over unintentionally to the firm related Knowledge from the input-buying firm spilled over unintentionally to the suppliers Spillovers' Unintentional knowledge spillover from competing firms in the same industry flows Unintentional knowledge spillover between firms in different industries Source: Karlsson and Johansson, 2004, p. 8

Transfer is distinct from imitation and emulation. Knowledge and technology transfer a complex time-based process involving several stages, multiple actors and elements and various different patterns of relationships; it implies the movement of knowledge and technology, tangible and intangible, via some channel from one individual or organisation to another through collaborative activity between two or more individuals or functional units separated by structural, cultural and organisational boundaries (Bessant and Rush, 1995; Sung and Gibson, 2005). Imitation occurs when firms discover and simply copy a firms organisational routines and procedures; it is based on replication: transferring or redeploying competences from one concrete economic setting to another. Emulation is when firms discover alternative ways of achieving the same functionality (Teece et al., 1997). Due to globalisation, firms are moving to trade disembodied innovation; they profit from their ideas, trademarks, expertise and technological innovations, while subcontracting production. This has changed the process of transmission of know-how: the codified component of knowledge can be transferred at low or no cost to any part of the world; however, the receiving part should know the code and have the capabilities to use it effectively. On the other hand, the tacit component of knowledge continues to be less mobile and transferable, requiring face-to-face interactions (Archibugi and Pietrobelli, 2003): Knowledge and technology transfer has several levels (Sung and Gibson, 2005): Knowledge and technology creation. Individuals conduct state-of-the-art research or develop best practices into knowledge. Knowledge and technology transfer at this level is a largely passive process that requires little collaborative behaviour. Sharing. This level calls for the beginnings of shared responsibility between knowledge and technology developers and users. Success occurs when knowledge and technology are transferred across personal, functional or organisational boundaries and it are accepted and understood by users. Implementation. Success is marked by the timely and efficient implementation of knowledge and technology; users must have the resources needed to implement them, which can occur in terms of manufacturing or in terms of best practices.
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Commercialisation. It builds cumulatively on the success achieved in attaining the objectives of the three previous stages but market strength is required. Success is measured in terms of return on investment or market share.

The technology grid (Sung and Gibson, 2005) describes the different conditions of knowledge and technology transfer using the following variables: communication, distance, equivocality and motivation. Communication refers to the degree to which a medium is able to efficiently and accurately convey task-relevant information. Distance involves physical and cultural proximity. Equivocality refers to the degree of concreteness of knowledge and technology to be transferred. Motivation involves incentives for and the recognition of the importance of knowledge and technology transfer activities. In Cell I all elements are right for the successful application of the transferred knowledge: highly interactive communication processes, a variety of incentives and recognitions for knowledge and technology transfer, cultural proximity among developers and users, and knowledge/technology is unambiguous and its application understood. Cell II describes a situation in which there is high interactive communication and high motivation combined with high equivocality and high cultural distance. Success is likely to occur. Cell III has low cultural distance and low equivocality combined with low interactive communication and low personal motivation. Knowledge and technology transfer is likely to be successful. In Cell IV success of knowledge and technology transfer is less likely: low interactive communication, low personal motivation, high cultural distance, and high equivocality.

Motivation Low High IV Equivocality III Low Low Communication I Low High II Distance High High

Source: Sung and Gibson, 2005, p. 8

Fig. 2-3 Technology grid

The mechanisms of knowledge transfer are distinct in their nature and the role of the knowledge suppliers and are presented in Fig. 2-4. Non-market mediated mechanisms have become important as many firms are now part of value chains and the transfer of technology can not take place through traditional market transactions. It is important to note that all types of transfer
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mechanisms are important to tap the existing stock of knowledge, with some of them having pre-eminence in distinct settings, according to the nature and strategies of the firms involved.

Role of knowledge supplier Active Passive

Market mediated Market mediation Non-market mediated

Formal mechanisms: FDI, turnkey plants, technical consultancies

Commodity trade (standard machinery transfer)

Informal mechanisms: Flagships provide technical assistance to local suppliers

Informal mechanisms: Reverse engineering, observation, literature

Source: Kim, 1997, in Ernst and Kim, 2002, p. 1424

Fig. 2-4 Mechanisms of knowledge transfer

In the process of knowledge transfer there are several types of organisations involved, each one fulfilling distinct functions in the process. The process is described in Fig. 2-5.

Demand/Feedback/Knowledge generation

Direct transfer Scientific and technological development Producers Universities R&D organisations R/D firms Indirect Intermediaries Research vicinity Economic vicinity Self-standing transfer Demand Users Conversion in existing and new business areas, new firms Firm and environmental development

Initiators Local, regional, national, insternational institutions

R&D policy

Source: Astor, 2003, p. 28

Fig. 2-5 The process of knowledge transfer

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Wuhan University of Technology

Masters Degree Thesis

Knowledge transfer depends on the parties understanding of where the desired knowledge resides within the source; the extent to which they share similar knowledge bases and of interactions between the source and the recipient to transfer the knowledge and to participate in its articulation process (Cummings and Teng, 2003). Enablers of knowledge transfer are cooperative R&D agreements between industry and government labs and agencies, strategic alliances, spin-offs, IPR licensing and learning-enabling mechanisms (Carayannis and Roy, 2000). Other critical factors to knowledge exchange between organisations are adequate technology (infrastructure and data exchange), trust and cooperative partnerships, common interests and exchange of tacit and explicit company knowledge for the public-good aspect of the firm (Braun, 2002; in Carayannis et al., 2006). However, the properties of knowledge, technology and learning pose constraints to their transfer (Cimoli and Primi, 2007): The transferability of knowledge results segmented, limited by its tacit and non-codifiable nature and enhanced by the proximity of capacities and capabilities of firms, systems and countries. The tacit, non-codifiable and non-transferable component of knowledge, embedded in procedures, routines and organisations, guarantees its appropriability beyond any direct effort to protect it. The transferability of technologies is enhanced or constrained by the technological proximity of producers and users, by their absorptive capacity, and by networks, partnerships, routines, etc. There is no guarantee of automatic substitution between obsolete technologies and improved ones. The transferability of learning requires a sequence of adaptive trial and error processes. It is constrained by the structural capacities and capabilities of agents and is completely appropriable due to its inner nature of being a process embedded in organisations and routines. As any form of knowledge spillover needs to be decoded from the transmitters firm specific context to that of the receivers (Cantwell 1991; in Narula, 2004), there are several phenomena that reduce the dimensions of spillovers (Foray, 2004): Uncontrollability. The tacit dimension of knowledge and the role of complementary assets. Rivalry. The costs of accessing, reproducing and transmitting knowledge can be very high. Non-cumulativeness. Trust in the validity of existing knowledge as the dynamics of knowledge is marked by the phenomena of obsolescence. Moreover, the cultural dissimilarity between any pair of organisations gives raise to barriers to transfer (Anderson Jr. et al., 2008). Barriers impeding knowledge sharing are related to individual, organisational and technology.-related factors (Riege, 2005). The barriers faced in the process of transfer of knowledge are described in Fig. 2-6.

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Wuhan University of Technology

Masters Degree Thesis

Attributes of knowledge: Causal ambiguity/compleixty

Attributes of the source: Lack of motivation Lack of credibility

Attributes of the recipient: Lack of motivation Lack of absorptive capacity

Attributes of the recipients internal process:Internal process rigidities

Attributes of the recipients network/external environment: Network constraints

Soure: Szulansky, 1996, in Dyer and Hatch, 2006, p. 715

Fig. 2-6 Barriers to knowledge transfer

Other obstacles to knowledge transfer (Carayannis and Roy, 2000) are excessive regulations, barriers to market entry, competitors response and culture misalignment (engineering vs. management or private vs. government vs. university).

2.8 Absorptive capacity as a condition for knowledge transfer


Absorptive capacity is the recipient firms ability to identify, assimilate, and exploit knowledge and value from the environment (Cohen and Levinthal, 1989; in Narula, 2004; Carayannis et al., 2006). Absorptive capacity is a subset of technological capability, which also includes the ability to generate new technologies through innovative means (Narula, 2004). A minimum level of absorptive capacity is necessary for firms to be able to interpret and internalise technology efficiently (Criscuolo and Narula, 2002). Absorptive capacity has several dimensions (Zahra and George, 2002; in Fosfuri and Trib, 2008): Acquisition. A firms capability to identify relevant external information over the total amount of information that surrounds it. Assimilation. The firms routines and processes that allow it to analyse, process, interpret and understand the information obtained from external sources. Transformation. The ability to modify and adapt external knowledge and combine it with existing and internally generated knowledge.
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Wuhan University of Technology

Masters Degree Thesis

Exploitation. The ability to transform knowledge into competitive advantage.

The acquisition and assimilation dimensions constitute the potential absorptive capacity whereas the transformation and exploitation dimensions are the realised absorptive capacity (Fosfuri and Trib, 2008). The potential absorptive capacity captures efforts expended in identifying and acquiring new external knowledge and in assimilating knowledge obtained from external sources (Zahra and George, 2002; in Jansen et al., 2005). R&D cooperation, external knowledge acquisition and experience with knowledge search are key antecedents of potential absorptive capacity, which is a source of competitive advantage, especially in the presence of efficient internal knowledge flows that help reduce the distance between potential and realised capacity (Fosfuri and Trib, 2008). The realised absorptive capacity encompasses deriving new insights and consequences from the combination of existing and newly acquired knowledge, and incorporating transformed knowledge into operations (Zahra and George, 2002; in Jansen et al., 2005). Organisation units may differ in their ability to manage levels of potential and realised absorptive capacity, to create value from their absorptive capacity and follow different development paths. This is because organisational mechanisms associated with coordination capabilities (cross-functional interfaces, participation in decision-making, and job rotation) primarily enhance potential absorptive capacity whereas organisational mechanisms associated with socialisation capabilities (connectedness and socialisation tactics) primarily increase realised absorptive capacity (Jansen et al., 2005). The firms capabilities to absorb and assimilate new inputs of technology include (Bessant and Rush, 1995): Recognition of requirements for technology through systematic and regular audit of current competencies. Exploration of the range of technological options available and search widely for these so as to get a good fit with their needs. Comparison between all the options available, which can be achieved through some form of benchmarking. Selection of the most appropriate option based upon comparison. Acquisition of the technology (either through purchase, alliance, licensing, collaboration, etc.), which involves extensive negotiation around price, specification, transfer of knowledge, property rights, etc. Implementation of the technology within the firm, involving intensive project planning and management activities and require configuration of technology and organisation to get a good and workable fit. Operation of the technology and learning how to best use it, which may involve extensive learning and development. Competence is the product of this stage of accumulation and incremental development and much of it is highly firm-specific and often tacit in form. Within an innovation system the components of absorptive capacity are (Narula, 2004): Basic infrastructure Advanced infrastructure (universities, advanced skilled human capital, research institutes, banks and insurance firms)
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Wuhan University of Technology

Masters Degree Thesis

Firms o Appropriate human and physical capital to internalise technology flows. o MNE affiliates acting as users and creators of technology flows. Formal and informal institutions o Intellectual property rights regime o Technical standards, weights and measures o Incentives and subsidies to promote adaptation and creation of new technologies o Taxation o Competition policy o Investment promotion and targeting schemes o Promotion of collaboration between economic actors (domestic and foreign) o Promoting entrepreneurship

Private funding organisations (banks, venture capitalists)

Supra-national organisations (ISO, WTO)

Industrial policy, including competition policy

Intellectual property rights regime

Foreign suppliers/customers

Stock of knowledge in MNE subsidiary Domestic knowledge

Governmental funding organisations

Foreign firms/purchase of technology/parent of MNE subsidiary Stock of knowledge in domestic firms

Government funding for education Universities Stock of knowledge in domestic non-firm sector

Foreign knowledge

Foreign non-firm organisations and institutions

Hybrid Supra-national

Domestic Foreign

Source: Narula, 2003, in Narula 2004, p. 16

Fig. 2-7 Absorptive capacity within an innovation system in an international environment

2.9 Innovation: Theoretical framework


Firms have one static and two dynamic functions. The static function corresponds to the allocation of resources; the dynamic functions are divided in first- and second-order functions and correspond to exploiting underutilised resources by entering into new activities and

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Wuhan University of Technology

Masters Degree Thesis

speeding-up learning and creating new competencies, respectively (Lam and Lundvall, 2004). Likewise, firms have several organisational processes that serve three roles (Teece et al., 1997): Coordination/integration (static concept). Managers coordinate or integrate activity inside the firm. Strategic advantage requires the integration of external activities and technologies. Learning (dynamic concept) is a process by which repetition and experimentation enable tasks to be performed better and quicker. Reconfiguration (transformational concept). In rapidly changing economies there is value in the ability to sense the need to reconfigure the firms asset structure and to accomplish the necessary internal and external transformation. The capacity to reconfigure and transform is itself a learned organisational skill. The more frequently practised the easier accomplished. Innovation derives from customer orientation: the firms desire to serve and reward their customers (Kandampully and Duddy, 1999) and is part of the third function and performs the second and third roles; innovation is also one of the two sources of value for the firms; the other source of value is complementary business assets, such as processing, distribution, finance, sales and purchasing (Edvinsson and Sullivan, 1996). Innovation is a trade-off between the risk of changing products, processes and routines threatening the reliability and accountability of organisations and the risk of organisational decline or even death due to a lack of change (Meeus and Oerlemans, 2005). Innovation presents two notions: continuity and discontinuity of innovation. In the former, innovative behaviour proceeds along paths (technological trajectories) specific to a particular technology (technological paradigms); evolutionary change is cumulative and gradual, often associated with series of continuous, small-scale, incremental changes. In the latter, dramatic breaks (innovative breakthroughs) in the direction of techno-industrial development occur accompanied by new and unstandardised knowledge and different kinds of information; they take place slowly as prevailing routines and institutions may act as impediments to their adoption and diffusion (Boschma, 1996). In consequence, innovation is inherently uncertain, given the impossibility of predicting accurately the cost and performance of new artefacts and the reaction of users (Pavitt, 2003). Innovation has become key to firms as innovativeness is positively related to business performance. At the same time, market orientation, learning orientation and entrepreneurial orientation are positively related to innovativeness and are the strongest overall drivers of performance. It is necessary to pay attention to knowledge creation as a process of equal importance to the processes of learning and forgetting to avoid focusing excessively in incremental innovations (Asheim, 2003). The fourth generation of innovation is characterised by the integration of suppliers into the new product development process at an early stage while integrating the activities of different in-house departments and parallel development. The fifth generation of innovation, lean innovation, is a development of the fourth generation where the technology of technological change is itself changing. It is a process of systems integration and networking where practices are being put in place towards faster development and greater efficiency: internal organisational
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Wuhan University of Technology

Masters Degree Thesis

features, strong inter-firm vertical linkages, external horizontal linkages and the use of sophisticated electronic toolkits. The fifth generation sees being a fast innovator as an important factor determining a companys competitiveness so the ability to control product development speed can be seen as an important core competence. Its key aspects are: integration, flexibility, networking and parallel (real-time) information processing (Rothwell, 1994). Innovation has globalised following three main categories, which are complementary and not mutually exclusive (Archibugi and Iammarino, 1999): International exploitation of technology produced on a national basis. Innovators attempt to obtain economic advantages through the exploitation of their own technological competence in markets other than the internal one through exports, FDI, and concession of licenses and patents; the activities of the firm in the host country are limited only to production. Global generation of innovations. It includes innovations conceived on a global scale from the moment they are generated (MNEs). Global technological collaborations. Agreements between firms for the communal development of specific technological discoveries take place. Successful innovations result from a conscious, purposeful search for innovation opportunities, found only in a few situations (Drucker. 1985): Industry o Unexpected occurrences and failures. o Incongruities between economic realities and between expectations and results. o Process needs. o Industry and market changes. Companys social and intellectual environment o Demographic changes. o Changes in perception of facts. o New knowledge, which originates knowledge-based innovation that is more market dependent than any other kind of innovation. Innovation involves processes of learning either through experimentation or through improved understanding, some of which are firm specific. Innovation processes involve the exploration and exploitation of opportunities for new or improved products, processes or services, based on an advance in technical practice, a change on market demand, or both. At the firm level, innovation processes can be categorised into three broad and overlapping sub-processes, which are contingent and differ in many dimensions according to sector, field of knowledge, size of firm, corporate strategy and prior experience, type of innovation, historical period and country (Pavitt, 2003): Cognitive: how firms generate and maintain the know-how to conduct their tasks. Organisational: how firms do things internally or together with other organisations. Economic: how firms establish internal incentives to ensure innovation proceeds quickly and in the right direction.

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Wuhan University of Technology

Masters Degree Thesis

The dynamic process in innovation has the following key elements, with their respective changes along the innovation cycle (Utterback, 1994; in Afuah and Utterback, 1995): Product: from high variety, to dominant design, to incremental innovation on standardised products. Process: manufacturing progresses from heavy reliance on skilled-labour and general-purpose equipment to specialised equipment tended by low-skilled labour. Organisation: from entrepreneurial organic firm to hierarchical mechanistic firm with defined tasks and procedures and few rewards for radical innovation. Market: from fragmented and unstable with diverse products and rapid feedback to commodity-like market with largely undifferentiated products. Competition: from many small firms with unique products to an oligopoly of firms with similar products. The recent changes in the production of scientific knowledge have some implications for innovation processes (Pavitt, 2003): Manufacturing firms are path-dependent as they search heavily conditioned by what they have learned. Firms with specialisation in different products and related technological fields are likely to stress different features of the innovation processes, given the nature of the fields in which they operate. Innovation processes will differ greatly between large and small firms. The rate of innovation is influenced by several factors: opportunity conditions (firms likelihood to innovate), appropriability conditions (possibility of protecting innovations from imitation and gaining a large share of the profits), degree of accumulativeness (probability of innovating given the amount of innovations already produced) and knowledge base (type of knowledge upon which the firms activities are based) (Baptista and Swann, 1998). Furthermore, innovation has to face several obstacles such as short-term focus; lack of time, resources or staff; unrealistic expectations; inadequate incentives to reward innovation; lack of systematisation of the innovation process; and, excessive risk aversion (Loewe and Dominiquini, 2006).

2.10 Typology of innovation


According to its nature and characteristics, innovation can be classified in distinct types, as shown in Fig. 2-8.

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Wuhan University of Technology

Masters Degree Thesis

Service Process Product Component Material

Changes core design concept to nrew architecture Discontinuous

Other typology of innovation is presented by Edquist (2001) where product innovations refer to what is being produced whereas process innovations deal with how it is produced. Product and technological innovations are tangible, whereas service and organisational innovations are intangible.

Modifications, refinements, enhancements, simplification Incremental Incremental

Develops into major new business or spawns an industry

Moments in history that set the stage for the future

Dominated by societal and government regulations Systems New-tothe-market

Source: Gaynor, 2002, p. 29, 32

Fig. 2-8 Typology of innovation

Obsoletes technologies, processes and people Architectural

Brings the user a new value proposition Disruptive

Breakthrough

Radical

Breakthrough

Innovations

Process

Product

Technological

Organisational

Goods

Services

Source: Edquist, 2001, p. 7

Fig. 2-9 Innovation: typology

During the emergence of a dominant design, competition between companies shifts from product
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Wuhan University of Technology

Masters Degree Thesis

to process innovation (transition phase), with companies unable to make the transition disappearing and a few remaining in the market. Then, the technology reaches a mature stage (rigid phase), and the market is characterised by standardised and interchangeable problem solution concepts: competition is fought over price, not product performance; thus, process innovation focuses on cost reduction and rationalisation:. (Abernathy and Utterback, 1978; and Utterback, 1994; in Boutellier et al., 2008).

2.11 Innovation patterns


Innovation presents different patterns, which may emerge simultaneously, and render it less predictable (Kash and Rycoft, 2000): Normal pattern: predictable where incremental improvements by an established network and technology co-evolve along an established trajectory. Transition pattern: less predictable movement to a new trajectory by a co-evolving established network and technology. Transformation pattern: highly uncertain launching of a new trajectory by the co-evolution of a new network and technology. The patterns change over time, indicated by the disintegration of the technical community, the presence of invading networks or organisations that become new competitors, new technology waves and changes resulting from the interaction of the market, public policy and the broader social system (Kash and Rycoft, 2000). Berkhout et al. (2004) identify four ideal types of transition, which are multilineal, multivalent and multidimensional, and are presented in Fig. 2.10.

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Wuhan University of Technology

Masters Degree Thesis

External resources

Reorientation of trajectories Low coordination Emergent transformation

Endogenous renewabl High coordination Purposive transition

External resources

Source: Berkhout et al., 2004, p. 67

Fig. 2-10 Ideal transitions

Endogenous renewal: actors make conscious efforts to respond to a perceived competitive threat based on resources within the socio-technical regime: the transformation process will tend to be incremental. Reorientation of trajectories: trajectories of change may be radically altered by internal processes without being associated with discontinuities; the stimulus for the radical reorientation is a shock originating either inside or outside the incumbent regime but the response is formed within the regime. Emergent transformation arises from uncoordinated pressures for change and responses formed beyond the incumbent regime. There is little basis to distinguish between the alternatives that will catch on and those that will not as their impacts may remain quite uncertain. Purposive transitions are intended and pursued to reflect expectations of a broad and effective set of interests, largely located outside the regimes in question. However, this form of transition does not necessarily generate benefits, especially when co-opted by existing regimes.

2.12 Innovation and push-pull systems


Innovation can be framed in a push or pull system (Brown and Hagel III, 2005), whose specific features are provided in table 2-6.

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Wuhan University of Technology

Masters Degree Thesis

Table 2-6 Push and pull systems


Push systems Demand can be anticipated Top-down design Centralised control Procedural Tightly coupled Resource centric Participation restricted Limited number of major reengineering efforts Zero-sum extrinsic rewards Pull systems Demand is highly uncertain Emergent design Decentralised initiative Module Loosely coupled People centric Participation open Focus on innovation Rapid incremental innovation

Source: Brown and Hagel III, 2005, p. 88

In the pull scenario the focus is providing a technical answer to a market need (anticipated or existing); the push scenario identifies a market need to accommodate an existing technical solution. Both terms can be defined from a technology or market view (Carayannis and Roy, 2000): In technology push R&D brings an idea from the invention stage to its fruition in commercial markets. Technology pull is a reaction to demand in the market, creating incremental improvements in technologies that may lead to a critical mass of innovations and possibly to radical innovations. Market push addresses the creation of markets through marketing-driven efforts that along with technology pull can lead to the creation of technological standards that define and enable the emergence of new markets. In market pull the market dictates the products to be supplied and the firm must constantly strive to increase performance and customer satisfaction. In the emergence and growth stages of technology development market pull (customer demands) and technology push (standards development) are more influential in shaping the technology; technological innovation leads technological commercialisation. In the maturity and decline stages, technology tends to react more to market factors. At these stages, technological innovations lag technological commercialisation (Carayannis and Roy, 2000).

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Wuhan University of Technology

Masters Degree Thesis

Decline

Maturity

Growth Emergence Tech push Mkt pull Tech push Mkt pull Tech pull Mkt push Tech pull Mkt push

Source: Carayannis and Roy, 2000, p. 292

Fig. 2-11 Push and pull systems in the technology life-cycle

To overcome the push/pull concept, managers resort to market (customer) orientation, which can take place early in the process. Market orientation applies to the integration of internal and external customers. Nevertheless, the firm can be caught in a complexity-cost trap where the firm must manage the dilemma between central, top-down economics of scale and the decentralised demand for individual products and ever shorter product cycle times. Moreover, customer orientation is not enough as breakthrough innovation is rarely initiated by existing customers; so, the firm has to face the needs of existing markets and to secure long-term innovativeness including not yet existing markets at the same time through customer-oriented R&D, constituted by research activities that are consequently adjusted to the needs of internal and external customers (Boutellier et al., 2008).

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Wuhan University of Technology

Masters Degree Thesis

Market requirements Sales unit Customers Market pull

Corporate strategies Technology Product-market

Product management Product creation process Technology management New products

Technology push Core competencies Skills Technologies Resources

Product planning Harmonisation with field operation Resources check in R&D Idea backlog (good projects but not resources)

Source: Boutellier et al., 2008, p. 154

Fig. 2-12 Customer-oriented innovation

Although learning orientation has pre-eminence over market orientation, both are key to successful innovation-driven performance. Therefore, firms must seek higher-order learning, which comprises the ability to experiment with new ways to deliver core-product category benefits and the ability to discard limiting benefits and assumptions about the external marketing environment (Baker and Sinkula, 1999). The latter aspect refers to market orientation, which is the degree and speed with which the organisations acquire, distribute and act upon market intelligence (Kohli and Jarowski, 1990; in Baker and Sinkula, 1999). Market orientation is specially significant in high market turbulence (Hult et al., 2004).

2.13 Disruptive innovation


Major innovations have disruptive effects on the economic system. On the micro-level, prevailing routines and high adjustment costs may hamper the ability of established firms to divert into totally different fields of technology. On the meso-economic level major innovations bring about structural changes, altering and displacing the previously existing economic and institutional structures. On the macro-economic level major innovations may have small economic effects unless they occur in clusters, paving the way for the resurgence of long-term economic growth by offering new opportunities for investments, new markets and productivity gains as their diffusion is likely to sustain a prosperity phase for some time (Boschma, 1996). Disruptive innovation presents major challenges as it is easy to predict the potential capabilities of technological breakthroughs in terms product but nearly impossible to predict how the social
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Wuhan University of Technology

Masters Degree Thesis

practice will be shaped (John Seely Brown in Chesbrough, 2003). Disruptive technology has five principles (Christensen, 1997): Companies depend on customers and investors for resources. Highest-performing companies are good at killing ideas customers dont want and find difficult to invest in disruptive technologies; when customers want such products it is too late for them. Small markets dont solve the growth needs of large companies. Disruptive technologies enable new markets to emerge and companies can enjoy first-mover advantages; however, as the market is not large it can not sustain the firms growth. Markets that dont exist cant be analysed. In disruptive innovations, the right markets and the right strategies to exploit them can not be known in advance; discovery-based planning should be used instead. An organisations capabilities define its disabilities. Capabilities are not flexible so strengths in one context may be disabilities in another context; managers must create new capabilities to address new problems. Technology supply may not equal market demand. Products whose features and functionality match market needs today often follow a trajectory of improvement by which they overshoot market needs tomorrow and products that underperform today may become directly performance-competitive tomorrow. Then, the basis of competition changes: from functionality to reliability, then to convenience, and finally to price. As companies tend to create a vacuum at lower price points, competitors employing disruptive technologies can enter. Firms should carefully measure trends in how their mainstream customers use their products to catch the points at which the basis of competition will change in the markets they serve. To face disruptive technologies, firms should set up separate organisations small enough to take responsibility for them, plan for failure in the initial stages and not count on breakthroughs finding a niche outside the mainstream market for attributes of the technology that are not attractive for mainstream customers (Christensen, 1997).

2.14 Innovation-generating and innovation-adopting firms


Generation is a creative process in which new and existing ideas are combined in a novel way to produce an invention or a configuration that was previously unknown (Duncan, 1976; in Damanpour and Wischnevsky, 2006). The generation process includes recognition of opportunity, research, design, commercial development, and marketing and distribution. Adoption is a problem-solving process in which an existing idea is adapted to address the recognised needs and identified problems within an organisation. The adoption process is conceived to include initiation and implementation. The initiation process consists of all activities that pertain to recognising a need, becoming aware of a possible innovation, and evaluating its appropriateness, leading to a decision to adopt the innovation. The implementation process consists of all events
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Wuhan University of Technology

Masters Degree Thesis

and actions that pertain to modifying the innovation and the adopting organisation, using the innovation initially, and continuing to use the innovation until it becomes a routine feature of the organisation. The generation process emphasises the distinctiveness of the innovation whereas the adoption process emphasises the integration of the innovation into the organisation (Damanpour and Wischnevsky, 2006). Innovation-generating organisations (IGO) innovate to produce a new product or technology to enter or create a new market or industry; innovation-adopting organisations (IAO) innovate to assimilate an existing product or technology to remain competitive or excel. IGO require competences to create change, whereas IAO need capabilities to absorb change. Therefore, IGOs challenges are to create an environment that promotes and rewards creativity to develop and disseminate innovation; on the other hand, IAO have to identify, select and assimilate suitable innovations (Damanpour and Wischnevsky, 2006). Firms producing innovations require the capability to scan the external environment for technology and the capability to integrate new technology. On the other hand, firms imitating innovation require scan capacities only (Arbussa and Coenders, 2005).

2.15 Firm strategy and innovation


Firms are faced with a mismatch between plans and actual market conditions, caused by the introduction of innovations. The firm can adjust passively or might consider the introduction of new technologies. However, the irreversibility of its decision-making limits the possibility to change its techniques. The irreversibility and the limited knowledge engender switching costs and costs in terms of missed opportunities for learning. Technological change is local and its amount is determined by several factors and two forces. The factors are the amount of resources available; the unit costs of the activities necessary to valorise the internal learning processes to make explicit the tacit knowledge accumulated and to access (networking) the external knowledge available; and, the amount of spillovers and external knowledge that can be internalised and their actual complementarity. The forces are the negative pecuniary externalities of the costs of generating new localised technological change and the positive effects of knowledge supermodularity, when raising the internal research increases the returns to networking and vice versa (Antonelli, 2007). Corporate technological and organisational practices co-evolve with markets where the most important processes to be managed are those of responding to and creating market needs and demands, and matching organisational practices with technological opportunities by coping with radical change and managing conflict between old and new specialised functions and disciplines within the firm (Pavitt, 2003). Technology strategy involves modifying an existing strategic position and the search of novel opportunities, while maintaining some stability and cohesiveness of the overall set of activities (De Meyer and Loch, 2008).
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Wuhan University of Technology

Masters Degree Thesis

A firms decision-making of technology innovation strategy involves two phases: the firm must decide whether to innovate and, if it chooses to innovate, it has to decide how to organise its innovation. In the first phase, firms show clear distinctions in their motivation to innovate influenced by market structure, scale, intensity of competition and other factors. In the process of innovation, a firm may choose between internal R&D, outsourcing and cooperative R&D. Outsourcing involves direct purchase of technology (patent licensing or technology transfer) and purchase of new-technology-embedded assets (equipment, factories, personnel), which are all means of technological innovation (Chen and Yuan, 2007). Innovation strategies are seen from two competing perspectives (Meeus and Oerlemans, 2005): Selection perspective. It stresses environmental selection due to the limits of organisational influence over environments. The cognitive limits on strategic and efficient choice increase the risks and uncertainties associated with change, and consequently inert behaviour is considered as the best safeguard for survival. Adaptation perspective. It stresses the co-evolution of organisational competences, behaviour and environmental dynamics and infers that a fit between strategic choice and environmental change significantly enlarges life chances of organisations. To innovate, firms can resort to any of the following strategies (Boutellier et al., 2008): Invention leader, often an R&D-intensive small company whose access to capital is restricted and usually has little know-how in implementing and sustaining the business development of its ideas. Innovation leader, successful in bringing the invention to the market by considering technological as well as market requirements. Early follower, imitator once a dominant design is apparent. It differentiates itself with superior marketing concepts, technology modifications, refined after-sales service or simply drastic cost savings based on scale effects. Late follower, acts in a market of mature technologies and established players. Cost leadership is the main alternative to achieve market share, though it is prone to fail in dynamic markets. The key to choose the appropriate strategy is the ability to recognise the emergence and inherent potential of a dominant design in all important markets on a global scale using appropriate tools such as technology monitoring, patent research or competitor, technology and market analyses on a global scale (Boutellier et al., 2008). Moreover, managers must consider the following issues while devising their innovation strategy (Pavitt, 2003): Keep technological practice not too far ahead of scientific theory. Government-funded programmes need to be treated with caution using methods for evaluating their potential contribution to the corporate goals, the financial and organisational goals of participating, the risks involved in not participating and the way in which the government programmes can complement and fit into the overall corporate strategy. Multi-technology firms, modularisation and systems integration. Managing innovation uncertainty.
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Wuhan University of Technology

Masters Degree Thesis

2.16 Innovation as a firm core capability


The dynamic capabilities perspective argues that the competitive advantage of firms lies within its managerial and organisational processes (routines or patterns of current practices and learning), shaped by its (specific) assets position (endowments of technology, intellectual property, complementary assets, customer base and external relations with suppliers and competitors), and the paths (strategic alternatives and the presence or absence of increasing returns) available to it. Dynamic capabilities are the firms ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments and allow the firm to achieve new forms of competitive advantage. The dynamic aspect refers to the capacity to renew competencies to achieve congruence with the changing business environment; the term capabilities emphasises the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organisational skills, resources, and functional competences to match the requirements of changing environments (Teece et al., 1997). At the firm, there is a hierarchy of competences, where resources (physical, human and organisational) are the building blocks of competencies and the inputs into the organisations value chain. Resources are firm-specific assets that are difficult if not impossible to imitate. Capabilities are the corporations ability to exploit its resources (business processes and routines that manage the interaction among resources) and reside in a particular function. A competency is a cross-functional integration and coordination of capabilities; an activity performed when firm-specific assets are assembled in integrated clusters spanning individuals and groups. Core competences are those competences, skills and areas of knowledge shared across business units that define a firms fundamental business as core and result from the interaction between (integration of) different strategic business units competencies (Teece et al., 1997; Javidan, 1998). Competences can provide competitive advantage and generate rents only if they are based on a collection of routines, skills and complementary assets that are difficult to imitate or emulate (Teece et al., 1997). Resources may be accessed in the market but capabilities have to be accumulated within the firm and the decisions concerning the accumulation, funding, strategic orientation and management of innovative assets may take place at different organisational levels or in different functional or hierarchical interfaces (Christensen, 1995). Relevant skills to build certain competencies are created and enhanced through long-term organisational learning processes; because they are difficult to formalise and transfer, its acquisition is considered time consuming, costly and always involving a strategic approach. Consequently, the identification of technical competencies which are key to success (technical core competencies), the ability to communicate the technical core competencies throughout the management of the whole company (R&D marketing), and the identification of the technical core competencies that must be protected, exploited and enhanced have become vital to the survival of firms (Boutellier et al., 2008). Assets for technological innovation are resources and capabilities required to bring about technological innovation and differ with respect to their competence bases, their functional
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Wuhan University of Technology

Masters Degree Thesis

contribution to industrial innovation and their organisational attachment: most technological innovations may require the activation and coupling of different types of innovative assets; not two firms possess identical asset profiles, and even minor differences may provide firms with major competitive advantages or disadvantages. Changes in asset profiles are consequence of new technological opportunities, contingencies specific to the product, market or industry and the creative destruction of pioneering firms. There are four generic categories of assets for technological innovation: scientific research assets, divided in pure scientific research and the processing and exploiting of existing scientific knowledge; process innovative assets that are the capabilities associated with manufacturing technology, logistics, quality control and plant lay out; product innovative application assets, which are resources and capabilities required to deal with product development activities; and, aesthetic design assets that involve interaction with marketing to reflect trends in taste and fashion (Christensen, 1995). The keys to a systemic innovation capability are processes and tools, people and skills, culture and values and leadership and organisation (Loewe and Dominiquini, 2006).

Visionary leaders and organisation aligned around a common definition of innovation Leadership and organisation

Processes and tools

Innovation effectiveness

Culture and values

Systemic approach and supporting tools to enable idea generation and elaboration, and pipeline and portfolio management People and skills A critical mass of people across the organisation proficient in innovation approaches and tools

Collaborative, open culture and incentives that reward challenging the status quo

Source: Loewe and Dominiquini, 2006, p. 25

Fig. 2-13 Four keys to a sistemic innovation capability

Firms can choose between two types of strategies to manage their intellectual resources, presented in table 2-7.

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Wuhan University of Technology

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Table 2-7 Approaches to managing intellectual resources


Intellectual resource Conventional company Intelligent company Knowledge Power Added-value potential Starting point for Patents Result of R&D activity technology-based innovation Market research Justification for new product development Individual support tools, controlling mechanism Starting point for innovation brainstorming

Databases Workshops Library, archives

Organisational and distributed knowledge of high quality Exchange of information Product and service and experience development (Physical) collection of (Virtual) location for books, journals and inspiration, information documents and exchange

Source: Hasler and Hess, 1996, in Boutellier et al., 2008, p. 21

The innovation blueprint describes the environment and behaviours necessary for ongoing innovation in an organisation, highlighting eight areas of focus that define what is required in terms of integration of context and behaviours necessary to drive operational innovation. The innovation environment, management-centric, describes the context in terms of intentions and infrastructure that must be created by management to support innovation. Behaviours, employee-centric, identify the temperaments and characteristics necessary to drive the market orientation of employees and the implementation of innovation. The innovation blueprint is divided in four quadrants with the innovation nexus at is centre (Dobni, 2006): Quadrant 1: innovation intent where there are certain commitments to do things fundamentally different and new and focuses in the propensity and architecture to innovate and the employee constituency. Quadrant 2: innovation infrastructure, which consists of financial, human and structural (technology and physical) resources, aligned to support innovation efforts. It involves changes in focus considering employees skills and learning and technological and financial support. Quadrant 3: innovation influence, centres in the behaviour necessary to support innovation and includes knowledge management and the firms sphere of influence (industry, competitors, customers, emerging technologies, channels and knowledge flows). Quadrant 4: innovation implementation that addresses execution and comprises empowerment and experimentation and co-alignment (fit between employee-centric behaviours and the competitive environment. The innovation nexus is the place where continuous innovation is achieved and where competitive interaction is viewed as an opportunity to discover emergent wealth-creating opportunities: strategy and innovation become interdependent.

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Wuhan University of Technology

Masters Degree Thesis

Pr o arc pens hit it y ec an t ur d e

Employee centric

Em p exp owerm erim ent a ent atio nd n

nst e co lo ye Emp

ncy itue

Innovation nexus
of ere Sph uence l inf
e nc
Em p lo and yee s lear kills nin g

K ma now na led ge ge me nt

e flu in

t io

no In

va

Innovation behaviours

Innovation environment

Source: Dobni, 2006, p. 330 Fig. 2-14 Innovation blueprint

According the Christensen (2003), although innovation is a key core competency, it also poses a dilemma as well-managed companies have failed because the logical, competent decisions of management critical to the success of their companies are also the reasons why they lose their positions of leadership: the innovators dilemma. This failure is caused because: Strategically, sustaining and disruptive technologies are distinct. Sustaining technologies foster product performance; disruptive technologies result in worse product performance in the near-term because they bring to the market a very different value proposition: cheaper, simpler, smaller, and more convenient to use. The pace of technological progress can give customers more than they want or are willing to pay for; disruptive technologies may underperform today, relative to market demands, but may be fully performance-competitive in the same market tomorrow. Investing aggressively in disruptive technologies is not a rational financial decision because disruptive products usually promise lower margins; disruptive technologies typically are first commercialised in emerging or insignificant markets because leading firms most profitable customers generally dont want, initially, products based on disruptive technologies.

2.17 Innovation: control systems


A companys innovation control system has to be adapted to its specific needs to produce successful new products and services tailored to market needs and the speed of technology. The
44

Management centric

n tio va no In

tio ta en lem p im

n
In no va tio n

int en t

ov Inn

o ati

nfr ni

tu r ruc ast

Co t en m gn ali

nd al a g ic o rt o lo supp l chn Te ancia fin

Wuhan University of Technology

Masters Degree Thesis

core elements of an innovation control system are: strategic management and technologies, project portfolio management, project management and innovation performance measurement. Several determinants affect an innovation control system: organisational characteristics (leadership, structure, job design, problem solving, environment, compensation and innovation paradigm), and individual characteristics of the personnel involves in innovation activities. The combination of industry conditions, core elements and determinants of an innovation system shape three archetypes of innovation control systems: creativity-oriented innovation control system, balanced innovation control system and efficiency-oriented innovation control system (Prez-Freije and Enkel, 2007), shown in Figs. 2-15, 2-16 and 2-17.

Strategic management of technologies

Project portfolio manament

Project manament

Innovation performance measurement

Multifunctional management teams Frequent and open-ended exchange between management and specialists Collaborative strategy definition Organisational slack and no systemic approach

Evaluation of environmental changes High cognitive abilities needed Frequent leader-member exchange Simple rules for project evaluation with high autonomy level Inituitive problem- solving

Well integrated learning loops Defined goals but low supervision level Cross-functional project teams

Focus on technological competitiveness and learning rates Subjective-qualitative measures Competence assessments

Opportunity identificatio and analysis

Idea genesis and generation

Concept definition

New product development

Market launch

Milestones to track projects

Source: Prez-Freije and Enkel, 2007, p. 19 Fig. 2-15 Creativity-oriented innovation control system

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Wuhan University of Technology

Masters Degree Thesis

Strategic management of technologies

Project portfolio manament

Project manament

Innovation performance measurement

Innovation team conducts creative sessions

Cooperation and collaboration between competence centres and innovation management Competitive analysis

Cross-functional project teams

Regular strategy check Evaluation of knowledge base

Opportunity identificatio and analysis

Idea genesis and generation

Concept definition

New product development

Market launch

Focusing on existing business Central technology board

Systematic evaluation process Decisions based on best available data and rational evaluation

Rules and explicit information dominate Stringent developent process Feedback loops with steering committee

Output oriented evaluation

Source: Prez-Freije and Enkel, 2007, p. 20 Fig. 2-16 Balanced innovation control system

Strategic management of technologies

Project portfolio manament

Project manament

Innovation performance measurement

Marketing evaluates future market needs

Satellite teams support core project teams with expertise in different areas

Opportunity identificatio and analysis

Idea genesis and generation

Concept definition

New product development

Market launch

Occasional analysis of technologies based on project ideas

Product-centred analysis Centralised project decision Customer-focused idea evaluation

Formalised project management Regular risk assessments Organisation discipline and tight processes Project performance reflects teams performance

Optimise resource allocation Output-oriented Objective quantitative measures

Source: Prez-Freije and Enkel, 2007, p. 21 Fig. 2-17 Efficiency-oriented innovation control system

2.18 Open innovation


Successful innovation often demands an innovative business model; innovation must be innovated as most of the smart people is distributed in multiple institutions (John Seely Brown in Chesbrough, 2003). In the Open Innovation paradigm valuable ideas can come from inside or
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Wuhan University of Technology

Masters Degree Thesis

outside the company and external ideas and external paths are placed on the same level of importance reserved for internal ideas and paths to market: firms win by making the best use of internal and external knowledge; research must comprise knowledge generation and knowledge brokering. Firms can create and capture value from their new technology in three basic ways: incorporating the technology in their current business, licensing the technology to other firms or launching new ventures that exploit the technology in new business arenas. In this paradigm, governments and universities need to address the imbalances of private R&D: government will need to fund a big deal of basic research; maintain a transparent, predictable patent-awarding process; and, encourage the production and dissemination of the basic research discoveries by supporting the broad disclosure of the results and encouraging universities and firms to forge win-win agreements (Chesbrough, 2003). There are several potential innovation partners to a firm, which might contribute different capabilities, described in Fig. 2-18.

Administration Subsidy Political support Mediations, transfer Laws, (de-)regulations

Suppliers Producers of means of production New technologies of material, components and systems

Research and training institutes Research Training Qualified personnel

Co-suppliers Complementary knowhow Solving interface problems

Focal company Own competences Own authority

Competitors Joint basic research Establishing standards Getting subsidies

Consultants Innovative concepts Structuring of processes Financial, legal and insurance services

Buyers Defining new requirements Solving problems of implementation and market acceptance reference function

Distributors Changing and weighing of demands Gathering information about developments of competitors

Source: Gemnden et al., 1996, in Ritter and Gemnden, 2003, p. 746

Fig. 2-18 Innovation partners and their contributions

Firms have to compete intensively to retain and continue to develop their market position, which gives rise to intense competition of which there are two types of competitive climate (Bengtsson and Slvell, 2004): Hot climate (Symmetric): inter-firm attitudes are hostile, and competition is intense. It stimulates product and process development. Cold climate (Asymmetric): firms do not compete intensively with each other and can develop friendly attitudes towards each other, directly because of the asymmetry and indirectly because of the low intensity of the competition. It works in the opposite direction of the hot climate.

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Wuhan University of Technology

Masters Degree Thesis

In the cold climate, coopetition, the dyadic and paradoxical relationship that emerges when two firms cooperate in some activities and at the same time compete with each other in other activities, is more likely to happen. The advantage of coopetition is the combination of a pressure to develop within new areas provided by competition and access to resources provided by cooperation. Firms involved in a coopetitive relationship need to have unique resources that serve as means for competition and at the same time other unique resources that enhance and develop both firms simultaneously. The decision to either cooperate or compete in a specific product or market area needs to be made with regard to all the competitors positions and the connectedness between them; coopetitive relationships can be cooperation-dominated, competition dominated or equal relationships (Bengtsson and Kock, 2000). Coopetitors serve several roles such as being source of innovation, information transmitters, lead users, alliance partners, and source of critical resources (Afuah, 2000). Relations with customers are related more strongly to product development while relations with suppliers are related more strongly to process development (Bengtsson and Slvell, 2004). Strategic alliances are partnerships of two or more corporations or business units that work together to achieve strategically significant objectives that are mutually beneficial. Growth strategies, entering new markets, the acquisition of new technology or best quality/cheapest goods, reduction of financial risks, cost sharing and achieving competitive advantage are reasons to create strategic alliances. Successful strategic alliances present several factors in common: senior management commitment, similarity of management philosophies, effective and strong management team, frequent performance feedback, defined and shared goals and objectives, thorough planning, clearly understood roles, international vision, adequate partner selection and communication between partners. Despite of their benefits, strategic alliances must face several risks and problems such as clash of cultures, lack of trust, clear goals or coordination, differences in operating procedures and attitudes, relational risk (opportunistic behaviour), performance risk and the possibility of nurturing a future competitor (Elmuti and Kathawala, 2001). In the case of relationships with customers, understanding their needs is a costly and inexact process as the need information resides with the customer but the solution information lies with the manufacturer. In response, some companies have equipped their customers with tools to design and develop their own innovations, leading to a redefinition of their relationship, which can be risky as the location where value is created and captured changes and business models must be reconfigured accordingly (Thomke and von Hippel, 2002). The engagement of users in innovative activities is related to three factors: agency problems, situated nature of learning and sticky knowledge. The agency problem stems because the user will be motivated to find a solution that will fit exactly with his specific needs and circumstances rather than the firms sought solutions. As for situated nature of learning and sticky knowledge, users acquire a certain kind of knowledge, particular to a specific site and/or usage and difficult to transfer; when knowledge is costly to transfer, the locus of problem-solving activity can shift to the user (von Hippel, 1994; Tyre and von Hippel, 1997; and, von Hippel, 2001; in Foray, 2004). Users engagement in innovation has three forms (Von Hippel, 2001; Christensen, 2003: and, Gallon, 1999; in Foray, 2004):
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Wuhan University of Technology

Masters Degree Thesis

Creation of technical and organisational systems through which the producer leaves it up to users to make adjustments and develop the design that suits them best. The emergence and upsurge of user cooperatives, which take over the functions of innovation (open innovation). The activities of very particular types of users who become experts on their own situations and may be involved in the process of knowledge creation.

User innovation makes traditional product development faster and better because a company can bypass the expensive and error-prone effort to understand customer needs in detail and the trial-error cycles can progress much more quickly because iterations will be performed solely by the customer. However, outsourcing product development to customers should not eliminate learning by doing at the firm (Thomke and von Hippel, 2002). Universities and public research institutions conducting R&D are important to firms innovation activities (Motohashi, 2006). Universities and public research organisations are key institutions supporting the process of catching-up of laggard countries (Mazzoleni and Nelson, 2007). Three models describe the evolution of innovation systems in terms of the relationships between nation state, the academy and the industry (Etzkowitz and Leydesdorff, 2000). Model I: the nation state encompasses academia and industry and directs the relationship between them (socialism). Model II: there are separate institutional spheres with strong borders dividing them and highly circumscribed relations among the spheres (laissez-faire). Model III: a knowledge infrastructure in terms of overlapping institutional spheres, with each taking the role of the other and with hybrid organisations emerging at the interfaces (Triple Helix).

Etatistics model

Laissez-faire model

State

State

Industry

Academia

Industry

Academia

Triple Heliz model Tri-lateral networks and hybrid organisations

Academia

State

Industry

Source: Etzkowitz and Leydesdorff, 2000, p. 111 Fig. 2-19 Models of relationships between nation state, the academy and the industry

49

Wuhan University of Technology

Masters Degree Thesis

Technological innovation is produced by the research sector, composed of different types of organisations: corporate R&D, government laboratories and universities (Georghiu, 2006). The Triple Helix model assigns universities an enhanced role in innovation: technological innovation provides the variation, markets are the prevailing selectors and the institutional structures, public or private, provide the system with retention and reflexive control (Nelson, 1994; in Etzkowitz and Leydesdorff, 2000). To foster cooperative work between industry and universities, changes at universities and in enterprises are needed so the latter can become strong demanders of formers capabilities, helping to transform them into capacities (Calestous and Lee, 2005). Changes in policy requiring universities to patent their discoveries and participate in knowledge markets to raise the funds needed to continue their R&D, coupled with a reduction of R&D funds and a stricter supervision of their use, has moved them to participate more in market transactions (Antonelli, 2002). The convergence between the three research performing sectors has brought about positive and negative consequences. The positive consequences are an increased efficiency through competition between sectors, closure of uncompetitive performers and contestable scientific advance. The negative outcomes are overcrowding in the contract sector, loss of coverage and variety, movement from the original mission, compromised scientific advice, loss of externalities, lack of interest by purchasers to secure supply and increasing difficulty in investments due to uncertainty and growing amounts of capital required. The latter have created areas of conflict with disputes between universities and private sector over ownership of intellectual property and between government laboratories and industry over the role of the former in managing work on behalf of the government, contracting in the market and commercialisation of intellectual property. Furthermore, changes introduced for the provision of scientific services on the basis of a competitive market have created conditions in which the three major research-performing sectors compete frequently for the same work (Georghiu, 2006). One problematic aspect of the Triple Helix model is due to the major institutional barriers among industry, research universities and governments due to three asymmetric knowledge problems: quality of information; knowledge institutions being not research but learning oriented so that little research is produced, particularly of interest of innovation; and, one of the main partners may dominate knowledge and innovation practice asymmetrically (Cooke, 2007).

2.19 Networks
A companys technological competence is not the only factor of its innovation success: increasing attention must be paid to a companys ability to interact with its environment (Ritter and Gemnden, 2004). To maintain a long-term relationship with the customers, firms need to demonstrate their ability to think for them and to conceive and implement new ways to serve them better, with the assistance and partnership of its respective stakeholders: employees,
50

Wuhan University of Technology

Masters Degree Thesis

suppliers, distributors and other organisations (Kandampully and Duddy, 1999). In an economy of customised production in networks, what matters is the system of firms organised as local production systems of market-oriented firms and their suppliers and subcontractors (Asheim, 2003). Learning regions are largely constrained to incremental innovation because of the limited potential for horizontal technological cooperation due to vertical cooperation, the fierce horizontal competition between firms and the absence of a large firm acting as the centre for strategic decision-making; they will be able to avoid lock-in through the formation of dynamic flexible learning organisations at intra- and inter-firm level (Asheim, 1996). The process of re-specialisation of firms in their core competences, leaving non-essential activities to third-parties, leads to the development of networks of firms characterised by their long-term horizon and by the mutual commitment with specific investments and compatible operational patterns. The importance of firm networks is increased as an intermediate form of coordination between the vertical firm and the atomised market, ensuring flexibility and short lead times to firms (Bastos Tigre, 2005). Furthermore, innovation and knowledge clusters and networks are key factors to make the transition to become knowledge-, technology- and know-how-generating and exporting country (Carayannis et al., 2006). The competitive arena of the 21st century includes the management of informal networks across corporate boundaries and geographic borders, where most companies should pursue at least a mixed centralised/de-centralised approach with concepts like technology gatekeeper, job-rotation within business units and external research institutes, project manager pools and professional clubs (Boutellier et al., 2008). Strategic networks can provide firms with tangible and intangible resources needed to compete (Capaldo, 2007). Systems fulfil several functions, which can be performed by the same actor and where the same actor can perform several functions: research, implementation, end-use, linkage and education (Liu and White, 2000; in Edquist, 2001). Entrepreneurial activities, knowledge development and diffusion through networks, guidance of the search, market formation, resource mobilisation, creation of legitimacy and counter resistance to change are important processes for well-performing systems as they influence each other and affect the systems overall performance (Hekkert et al., 2007). Of particular importance to firms are the knowledge and resource networks (Karlsson and Johansson, 2004). The markets-as-networks (MAN) tradition sees organisations linked via relationships (generalised connectedness). It assumes that buyers and sellers are active participants in the exchange process, taking into account what has gone before and what will likely arise in the future when planning and executing exchanges. In their exchanges, organisations deploy resources, placing particular emphasis on the need for internal coordination, and collect information of different kinds. Each relationship is different: they are characterised by competition, conflict, coexistence, collusion and cooperation. However, cooperation is given a particular role as a coordinating mode. Social, legal, cultural and other forces impact the ability of organisations to engage in exchange activity and emphasis is given to identify those organisations directly and indirectly linked to the ability of the local firm to exchange (Loughlin and Horan, 2002).

51

Wuhan University of Technology

Masters Degree Thesis

Global production networks are characterised by their coverage of intra- and inter-firm transactions and forms of coordination whose purpose is to provide flagship companies with quick and low-cost access to resources, capabilities and knowledge that are complementary to its core competencies through the combination of geographic dispersion with spatial concentration (Ernst and Kim, 2002). The international division of project work is possible only if certain conditions regarding the type of innovation, the availability of resources, the type of information exchange and the systemic nature of the project are met. One extreme is complete self-coordination with no central project authority or control; the other extreme is complete centralisation of the project team and all required resources with closely controlled integration of external R&D partners (Boutellier et al., 2008). Developing-country companies are most likely to succeed when they treat global competition as an opportunity to link up to strategic players, learn and leverage on these partnerships to build capabilities, move into more profitable industry segments and adopt strategies that turn their latecomer status into a source of competitive advantage (Bonaglia and Goldstein, 2007). Network participation may provide new opportunities for effective knowledge diffusion; however, participation in global production networks is no substitute for domestic upgrading efforts: once a network supplier upgrades its capabilities, there is an incentive for the transfer of more sophisticated knowledge (Ernst and Kim, 2002). Effective interactive learning and innovations require an absorptive capacity open to new ideas (cognitive dimension) and mechanisms of coordination and control that are flexible and outward looking (organisational, social, institutional and geographical dimensions). Cognitive proximity is a prerequisite for interactive learning processes to take place while the other four dimensions of proximity are mechanisms that may bring together actors within and between organisations (Boschma, 2005). Open organisational cultures (competitive and entrepreneurial), strong market orientation and innovativeness have a pattern of positive effects on performance, regardless of countries cultural or economic characteristics (Deshpand and Farley, 2004). Innovation becomes more productive the more sources of information and ideas are applied and shared. Openness to the outside, prominently partners and a network of global outposts are part of the organisations ability to learn (De Meyer and Loch, 2008). Innovation is a continuous learning that does not occur in a socio-cultural vacuum (Acs et al., 1996). Firms are crucial, though not exclusive, repository for knowledge, embodied in operational routines, and modified over time by their higher level rules of behaviours and strategies. They are nested in networks of linkages with other firms as well as with other non-profit organisations and financial, educational and labour market systems, which enhance or constraint their opportunities to improve its problem-solving capabilities, to grow and to develop (Cimoli, 2002; Asheim and Herstad, 2003a). Each companys considerations and actions can only be fully understood within a structure of individually significant counterparts and relationships (Hakansson and Ford, 2002). Local capabilities and untraded interdependencies (socio-institutional settings, inter-firm communication and interactive process of localised learning) also play decisive roles in processes of innovation and growth (Bathelt et al., 2004). The institutional mix of actors (individuals, firms, the state and other organisations) determines
52

Wuhan University of Technology

Masters Degree Thesis

the milieu in which technological innovation occurs (Calestous and Lee, 2005). A firms post-technological change performance decreases with the extent to which the technological change renders coopetitors (suppliers, customers, and complementors whose success may underpin the firms success and with whom it must collaborate and compete) capabilities obsolete (Afuah, 2000). When the knowledge is tacit, close interactions are needed (Antonelli, 2002). To create, adapt and disseminate knowledge networks are critical (Dahlman and Aubert, 2001). Firms search linkages to promote inter-firm interactive learning and for outside partners and networks to provide complementary assets and help firms to spread the costs and risks associated with innovation among a greater number of organisations, to gain access to new research results, to acquire key technological components of a new product or process, and to share assets in manufacturing, marketing and distribution (Cimoli, 2002). A meta-national organisation is able to combine information and knowledge from different parts of the world to create innovation (Doze et al., 2001; in De Meyer and Loch, 2008). Such organisations use sensing, melding, and deploying. Sensing refers to gathering knowledge about user needs all over the world. Melding requires entrepreneurial insight of identifying an opportunity to create an innovative product, service or process. Deployment requires the cumulated wisdom of the organisation (De Meyer and Loch, 2008). Firms get together because they derive benefits from the demand and the supply side. On the demand side, firms may take advantage of strong local demand, they may gain market share by moving closer to the competitors, customer search costs would diminish as more firms may be found in a cluster, and customers may be a source of good ideas. On the supply side, firms can benefit from labour market pooling, the provision of industry-related traded and non-traded inputs, knowledge spillovers and easy access to physical infrastructure (Baptista and Swann, 1998). Networks are unstructured organisations working by cohesion and providing horizontal links cutting through organisational boundaries to share and create ideas; they comprise clusters of communicating agents sharing common interests, values, trust or goals (Mandeville, 2005). Networks are also interrelationships between a focal firm and other external organisations that are bound to better respond and adapt to the changing environment (Mller and Halinen, 1999).

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Wuhan University of Technology

Masters Degree Thesis

T ec co m hno lo p le gic cha xit y &al nge

3rd tier suppliers 2nd tier suppliers 1st tier suppliers Partnerships
Universities, research institutions Government & other public agencies Competitors

n at io balis ion Glo mpet it o of c

Competitor alliances

Firm - SBU business processes - internal value activities organisation & culture personnel Partnerships 1st-level customers & distributors End customers Customers customers

ic tron E lec aces & f int er arkets m

I inte ncreasin and rdepen g conn denc e ect e dnes s

Source: Mller and Halinen, 1999, p. 415

Fig. 2-20 Business relationships and networks a focal firm perspective

Networks have three sets of resources distributed among its members: existing core capabilities, existing complementary assets and the capacity to learn (Kash and Rycoft, 2000). The dynamics of networks can be bottom-up and top-down. Bottom-up dynamics involves a form of organisation to cope with the limited learning ability of hierarchies (whose principle of integration is threat/coercion) and the limited capacity of information processing of markets (whose principle of integration is associated with exchange). Bottom-up networks are consensus/inducement-oriented organisations and institutions whose structure is distributed, decentralised, collaborative and adaptive based on trust and reciprocity as self-reinforcing mechanism. Top-down dynamics builds on a centralised mindset, based on paradigms and mindsets to routinise thinking (Acs et al., 1996). To be successful, networks must count on several factors such as maintaining an informal structure open to new members, managing support to networking activities, maintaining its objective and repositioning in case of changes in the environment. Networks must face and overcome several barriers to be effective: geographical distances between networked organisations and people, differences in behaviours and networking competencies among network members, networks lack of value to the participants, networking costs and lack of resources on the side of network members, lack of awareness of the network among participants and absence of critical mass (Boutellier et al., 2008). Strategically, three types of networks can be identified: vertical value nets (supplier nets, channel and customer nets and vertically integrated value systems), horizontal value nets (competition alliances, resource/capability access alliances, resource and capability development alliances, market and channel access/cooperation alliances and networking forums) and multidimensional value nets (MDVN), which are classified in core organisations, complex business nets and new
54

Wuhan University of Technology

Masters Degree Thesis

value-system nets. The goal of vertical nets is to increase the operation efficiency of their underlying value system. Horizontal nets are characterised by competitor alliances and cooperative agreements involving various institutional actors either to provide access to existing resources or to co-develop new resources. MDVN range from well-defined value systems to emerging systems exhibiting radical change. The simplest net contains a hub organisation that integrates products and services from different types of suppliers and channel firms; more complex business nets require the knowledge and developmental capabilities of several actors; the most radical nets are formed to create new technologies or new business concepts requiring the orchestration of several actors and the creation of new value activities (Mller et al., 2005).

Vertical value nets

Horizontal value nets

Multidimensional value nets

Suppliers

Channels & customers

Stable value system

Multisupplier nets

Channel & customer service nets

Competition alliances

Hollow organisations

Incremental change

R&D cooperation nets

Pilot customer/lead user nets

Resource & access alliances with competitors/institutions

Complex business nets

Radical change

Integrated-value-system nets

R&D/Technological alliances

New value system nets

Source: Mller et al., 2005, p. 1277 Fig. 2-21 Types of strategic nets

There are other types of networks: innovation networks, knowledge clusters, technological knowledge systems and technological systems. Innovation networks (networked innovation systems) are real and virtual infrastructures and infra-technologies, constituted by parts of the production structure and institutional set-up built by a bottom-up and interactive innovation model, that serve to nurture creativity, trigger invention and catalyse innovation in a public and/or private domain context (Carayannis et al., 2005, in Carayannis et al., 2006; Asheim and Herstad, 2003b). The networked innovation system is a planned interactive enterprise-support approach to innovation relying on close university-industry cooperation involving a degree of long-term, stable interdependence (Asheim and Herstad, 2003b). Knowledge clusters are agglomerations of co-specialised, mutually complementary and reinforcing knowledge assets (knowledge stocks and knowledge flows) that exhibit self-organising, learning-driven, dynamically adaptive competences and trends in the context of an open systems perspective (Carayannis and Campbell, 2005; in Carayannis et al., 2006). Technological knowledge systems are interconnecting networks of agents, interacting in a specific technology area under a particular institutional infrastructure or set of infrastructures, involved in the generation,
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Wuhan University of Technology

Masters Degree Thesis

diffusion, and utilisation of technology. These networks include communications, knowledge (tacit and explicit) and actors, where no single group controls the outcomes, and have four layers: individual, organisational, industrial/sectoral, and national (Carlsson and Stankiewicz, 1991, in Autio and Hammeri, 1995; Calestous and Lee, 2005). Such networks are described in Figs. 2-22 and 2-23.

Nation

Parallax axle 3

Techno-economics=nations, industries, technologies National institutions=politics, culture, science Social institutions=education, welfare, judiciary Technology policy=assessment, incent6ives

Industries

Industries=new, old New=subsidies, science, firms, uncertainty Old=unions, associations, economic constraints, firms

Parallax axle 2 Firms Firms=humanware, hardware, management Humanware=individuals, knowledge, experience Hardware=artefacts, production facilities Management=organisational methods, values, finance

Parallax axle 1

Individuals

Individual=action, uncertainty, knowledge, incentives Knowledge=private, public, values Uncertainty=change, invention, innovation Entrepreneur=individuals

Source: Autio and Hammeri, 1995, p. 380

Fig. 2-22 Technological parallaxes and parallax axles connecting the different layers of a technological system

Public S&T infrastructure

Co

Cu sto me rs

s tor ac ntr

Existing technology base

Company

Individual
Co mp eti to r s

Related industries

Source: Autio and Hammeri, 1995, p. 381

Fig. 2-23 The four layers of technological systems

56

Related technologies

Co r bo lla r ato s

Wuhan University of Technology

Masters Degree Thesis

The organisational basis of knowledge systems differs in several dimensions, presented in table 2-8.
Table 2-8 Differences in the organisational bases of knowledge systems
How the characteristics vary Organisational characteristics With respect to internal knowledge flow and replication Spatial proximity and Structured and active Basis for diffusion among small firms passive externalities cooperation Vertical through userHorizontal between firms Dominant direction of knowledge flows producer links and producing similar goods production chains Non-existent or crisisPervasively and consistently Role of technology/training institutions driven/intermittent important Role of large firms Unimportant Pervasively important Structured, cooperative and Composite 1-4 Unstructured and passive active With respect to acquiring, generating new knowledge Within a low total of new Within a high total of new knowlege acquisition knowledge acquisition Knowledge sources internal/external High proportion originating High proportion originating outside the system inside the system Limited and informal channels Frims' role relatively small High proportion as byproduct from doing Unstructured, undirected and closed Pervasive informal channels plus organised gatekeepers Firms' role relatively large High proportion generated by purposeful research Structured, purposeful and open

Channels for external sourcing Role of firms in learning Type of learning Composite 5-8 Source: Bell and Abu, 1999, p. 1728

Knowledge systems comprise differences in the complexity of technologies, varying distances from the technological frontier and differing effectiveness in sustaining the technological dynamism of clusters Hwith similar technologies operating at similar distances from the technological frontier (Bell and Albu, 1999). Due to differences of knowledge systems, these have different organisation forms, described in Fig. 2-24.

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Wuhan University of Technology

Masters Degree Thesis

Cooperative and active system

Organisational basis for intrasystem knowledge diffusion

More dynamic systems

Less dynamic systems

Unstructured and passive system Undirected and closed system

Organisational basis for acquiring/generating new knowledge

Purposeful and open system

Source: Bell and Albu, 1999, p. 1728

Fig. 2-24 Differing organisational forms of knowledge systems in industrial clusters

It is important to consider that networks imply three paradoxes, with several implications for the decision- and strategy-making at the firm (Hakansson and Ford, 2002): Companies in a network are not free to act due to the restrictions imposed by the nodes and threads: the stronger the threads, the more important they will be in giving life to the node, but the more they will also restrict the freedom of the node to change. A companys relationships are outcomes of its strategy and its actions and the company is itself the outcome of those relationships and of what has happened in them. The most successful is a company in forcing its thinking onto the network, the network may cease to exist and become a hierarchy, posing long-term problems.

2.20 Networks and the firm


Putting together a network of firms to build the set of capabilities necessary to build a market offering that delivers high value becomes a major strategic thrust of the firm (Kothandaraman and Wilson, 2001). The constructed advantage, a knowledge-based construction, requires interfacing developments in economy, governance, knowledge infrastructure and community and culture. It is conceptualised as the surplus value of an overlay of relations among the three components of a knowledge-based economy: the knowledge-producing sector (science), the market (firms) and the government, whose interactions are intra-regional, national and global (Cooke and Leydesdorff, 2006). The relations between organisations and institutions are two-way relationships of mutual embeddedness, influencing innovation processes and the
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Wuhan University of Technology

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performance and change of systems of innovation (Edquist and Johnson, 1997; in Edquist, 2001). Some organisations create institutions and some institutions lead to the creation of organisations. The relations between the components are either market relationships to coordinate transactions or non-market, mediating the relations between components (Edquist, 2001). To benefit from networks, firms must develop different networks capabilities, which vary according to the nature of the value production in the network (Mller et al., 2005).

Core value production

Value-adding relational value production

Future-oriented value production

Efficient production & delivery of products, process excelence & flexibility

Incremental innovation enhancing efficiency

Innovations & new solution supporting customers business

Radical innovations opening new business opportunities

Demand forescating & influencing

Cross-fim management infosystems

SCM & CRM capability

Deep partnering capability

Net mobilisation Net management

Network visioning capability

Network orchestration capability

Production capability

Delivery capability

Process improvement capability

Incremental innovation capability

Radical innovation capability

Mastering customers business capability

Source: Mller et al., 2005, p. 1280 Fig. 2-25 Value production and network capability base

Network management comprises four levels: industries as networks, where network visioning and orchestration is important because networks are not transparent; firms in strategic nets, where net management becomes a key issue and the capability to identify, evaluate, construct and sustain positions and relationships is essential; management of net and relationship portfolios, where the selection of activities to carry out internally and the activities to be outsourced is a core strategic issue and the capability to manage ones positions and roles in multiple nets is required; and, exchange relationships, where individual customer/supplier relationships form the bases of strategic nets and the capability of creating, managing and concluding strategic relationships is a core resource for a firm (Mller et al., 2005). The extent of value creation by the network (Fig. 2-26) is influenced by the core capabilities of the member firms. The way the firms in a network combine to create value is influenced by the nature of their relationships. The core capabilities constrain the quality of their relationships and the final value that costumers want determines the nature of the core capabilities valued by the network members (Kothandaraman and Wilson, 2001). The formation of capabilities in a network involves absorptive capacity, tacit and explicit knowledge and the processes of knowledge transformation (Ernst and Kim, 2002).

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Relationships

Re or inf

Ma int ain

ce

t it a cil Fa

Co nst rain

Create Core capabilities Determinate Customer superior value

Source: Kothandaraman and Wilson, 2001, p. 384

Fig. 2-26 Model of value-creating networks

It is very important that firms adopt a dual network structure to avoid being locked-in because of strong ties. This structure allows the firm to rely on a narrow core of long-lasting, repeated, trust-based relationships with similar partners for exploitation purposes while at the same time exploring more distant knowledge areas, different organisational routines, and new markets through a large periphery of diverse, weak relationships. The strengths of a dual network are the elimination of hazards of being locked in a restricted number of relationships; the amplification of variance within the network due to contributions from numerous partners; and, increasing openness of the overall networks and their leading actors toward new market trends (Capaldo, 2007). Network competence is the degree of network management execution and the extent of network management qualification possessed by the people handling a companys relationships. It has a strong positive influence on the extent of inter-organisational technological collaboration and a firms product and innovation success and is affected by access to resources, network orientation of human resource management, integration of inter-organisational communication and openness of corporate culture. The components of network competence are network management tasks (relation-specific tasks, cross-relational task) and network management qualifications (specialist and social qualifications) (Ritter and Gemnden, 2003).

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2.21 Networks and learning processes


People with knowledge need to be matched with people who need knowledge as tacit knowledge can be deployed only face to face (Calestous and Lee, 2005). Firms with useful knowledge can achieve competitive advantage by exploiting their knowledge assets with a supplier network. Network resources have a significant influence on firm performance and some firm resources and capabilities are relation-specific and are not easily transferable to other networks. Network constraints represent a potential barrier to knowledge transfer, especially within a value chain producing a customised, complex product (Dyer and Hatch, 2006). Close cooperation with suppliers, subcontractors, customers and support institutions will enhance the process of interactive learning and create and innovative milieu that facilitates localised learning, innovation, and continuous improvement (Asheim, 2003). Interactive learning demands close cooperation between users and producers where a higher rate of innovation causes more intense patterns of interaction between users and producers and a higher level of innovation affects the complexity of the knowledge exchange; especially, radical innovation requires intensive interactions as new codes have to be developed on a trial and error basis (Meeus and Oerlemans, 2005). Knowledge networking results from the exploration and search of resources of external technological knowledge and the intentional direction of internal research and learning activities towards complementary external knowledge and includes knowledge transactions, cooperation among firms based on several contractual forms, knowledge interactions based upon proximity (geography, industrial, and knowledge), constructed trust and reciprocity. Knowledge networking is complementary to internal learning and in-house R&D activities (Antonelli, 2007). Collective knowledge can be implemented only by interactive agents that belong to a community of action and understanding, whose dynamics is determined by the feedback of innovations on the levels of mismatch and the interplay between positive and negative externalities. There are several cases of dynamics of collective knowledge (Antonelli, 2007): Fragmented knowledge: networking costs are high and the effects of knowledge supermodularity are poor. Each bit of knowledge is result of idiosyncratic research and learning activities internal to firms and specific to their conditions. Technological change is occasionally introduced by firms in isolation. Positive feedbacks: the effects of positive and negative externalities increase with the number of firms engaged. However, the technical externalities (positive) are greater than the (negative) pecuniary externalities. The dynamics is endogenous as the feedback of the introduction of innovations translates into larger amounts of research activities. At each point of time the amount of innovation is larger than in the previous one. Localised supermodularity: takes place in a circumscribed region of technological knowledge and for a limited number of firms. The potential complementarity among the knowledge base and the competence and the stock of knowledge of diverse firms can be identified, implemented by means of effective networking and well focused research activities and fully exploited. The number of innovations at each period will be larger
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than in the previous one causing the mismatch to be larger, which will increase the firms R&D activities. Collective knowledge calls for knowledge communication among learning agents. The network structure of knowledge communication can be either geodesic or centred networks. In the geodesic form each agent has a direct link with other agents: communication costs are high and the dissemination of new knowledge is hampered by communication costs and decay with distance and heterogeneity among agents. Centred networks are based on many interconnected and competitive hubs and knowledge is disseminated better (Antonelli, 2007). Learning processes in a community can take place by just being there (buzz) and through the knowledge attained by investing in building channels of communication (pipelines) to selected providers located outside the local milieu (Bathelt et al., 2004). Buzz is the information and communication ecology created by face-to-face contacts, co-presence and co-location of people and firms within the same industry and place and consists of specific information and their continues updates, intended and unanticipated learning processes, the application of the same interpretative schemes, mutual understanding of new knowledge and technologies and shared cultural traditions and habits within a particular field of technology, which stimulate the establishment of conventions and institutional arrangements and does not require particular investments (Storper and Venables, 2002; in Bathelt et al., 2004). Local buzz is beneficial to innovation processes because it generates opportunities for spontaneous and unanticipated situations where firms interact and form interpretative communities (Bathelt et al., 2004). Pipelines refer to the channels used in distant interactions (Owen-Smith and Powell, 2002; in Bathelt et al., 2004) and are impacted by the degree of trust that exists between the firms and their development takes time and involves costs. Pipelines bring in extra knowledge, intensify knowledge from the buzz and enable local actors to go beyond the local routines. Therefore, the existence of local buzz of high quality and relevance coupled with a well developed system of pipelines connecting to the outside world will lead to greater dynamism. However, a balance must be kept between too much inward- and outward-looking organisational structure because of the risk of buzz congestion and segmentation (Bathelt et al., 2004). Complementary local and non-local learning interfaces are essential as firms find themselves in need of specialised high-end knowledge. Non-local linkages exist in the form of linkages to source knowledge and linkages to sources of incentives and constraints originating outside the cluster (Asheim and Herstad, 2003b). Most learning processes increasingly include international interaction as the sources of knowledge available are a complex blend of domestic and foreign components. The interaction between the domestic firm sector and the foreign-owned firm sector varies considerably, either because the domestic component is large in different sectors or because the two have evolved separately (Narula, 2004).

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2.22 The creative factory


The concept of creative factory has as its centre the firm, as generator and promoter of innovations in the market, and includes the industrial sector and the nation. The main focus of the model is the Core Innovation Process, which comprises Knowledge Creation (from public or industrial research), New Product Design and Development process (transforms knowledge into a new product) and Product Success in the market (depends on the products functional competencies and the organisational competencies of the firm to produce it at a reasonable price and quality and place it adequately in the market). The process is affected by internal and external factors. The internal factors refer to corporate strategy, risk-taking policy, technological capabilities, organisational structure, organisational climate and the creativity of the firms employees. The external factors are constructed from the financial system, the infrastructure, the demand conditions, the critical mass and physical resources as well as the knowledge and human resources available in a nation and the regulations relevant to the firm (Galanakis, 2006).

Corporate strategy Firms internal factors Creativity

Risk-taking policy Technological capability

Organisational climate Knowledge creation Core innovation process Public research Ideas generation Private research New product design & development

Organisation structure Product success Products functional competences

Product development & manufacturing

Organisations competences

National innovation environment Regulations

Financial system

Infrastructure Demand conditions

Knowledge & human resources

Critical mass & physical resrouces

Source: Galankakis, 2006, p. 1231 Fig. 2-27 The creative factory concept

2.23 The need for active public policy


The presence of human capital is not a sufficient condition for knowledge accumulation; it requires the presence of institutions and economic actors that determine the stock of knowledge in a given location and the efficient use of markets and hierarchies - be they intra-firm,
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intra-industry or intra-country (Narula, 2004). Institution building, capacity building, policy making and investment making are the four pillars of general development (Carayannis et al., 2006). All experiences of successful catching-up and sometimes overtaking incumbent leaders have involved institution building and policy measures affecting technological imitation, the organisation of industries, trade patterns and intellectual property rights (Cimoli et al., 2007). Historic cases of catching-up have several features in common (Mazzoleni and Nelson, 2007): All successful cases of accumulation of technological capabilities have relied extensively on cross-border flows of people. Active government support for industrial development, involving various forms of protection, and direct and indirect subsidy. Countries involved in catch-up operated with intellectual property rights that did not restrict seriously the ability of their companies to replicate technologies developed and used in advanced countries. In the process of growth corporations become structures of their own distinctly shaped by the institutional frameworks they emerge out of (Asheim and Herstad, 2003a). Organisations are formal structures that are consciously created and have an explicit purpose. Institutions are sets of common habits, norms, routines, established practices, rules or laws that regulate the relations and interactions between individuals, groups and organisations (Edquist and Johnson, 1997; in Chaminade and Edquist, 2006). Non-market institutions are part of the socio-economic tissue and their role goes beyond the guaranteeing of property rights: they provide the governance structure for many activities that can not be carried out efficiently by the market, influence and restraint the behaviour of economic agents and their relationships. Policies and other activities of institutional development affect the technological capacities of organisations and their learning, their economic profitability and how they relate themselves with other organisations and with non-market institutions. Institutions and policies can act to encourage technological learning in several areas (Cimoli et al., 2007): Opportunities for scientific and technological innovation: scientific policies, frontier technological projects. Learning and technological capabilities: education and training policies. Industry support: FDI, competitiveness-enhancing and business legal framework. Capabilities of economic agents in terms of technological knowledge absorption: private R&D support policies. Economic signalling and incentives: price, foreign trade and IPR regulations. Selection mechanisms: competition and antitrust policies, funding mechanisms. Patterns of information distribution and interaction between different types of agents: governance of labour, products and financial markets. It is important to note that globalisation has had several impacts on national economies, presented in Table 2-9.

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Table 2-9 Globalisation of innovation - implications for national economies


Implications for the national economy Categories Inward flows Outward flows Expansion of the market and areas of influence. Maintenance of national technological advantages Tendency towards convergence/divergence Limited but significant economic convergence (GDP per capita). Technological divergence across countries

International Low learning in consumption exploitation of goods. Medium learning in capital nationally produced goods and equipment innovations

Missing technological opportunities for the internal market. Acquisition of technological and Global generation of managerial capabilities. Increased Strengthening of the innovations by dependence on the strategic choices competitive position of MNEs of foreign firms national firms. Tappi9ng into the expertise of host locations

Increasing regional/local divergence both in economic and innovation variables

Global technoscientific collaborations

Increase in techno-scientific flows. For developed countries, diffusion of their knowledge; for developing countries, acquisition of knowledge and learning opportunities

Technological convergence across countries

An innovation system should carry activities related to the provision of knowledge inputs in the innovation process (1,2), demand-side factors (3,4), provision of constituents of innovation system (5-7), and provision of support services for innovating firms (8-10) (Chaminade and Edquist, 2006): 1. Provision of research and development, creating new knowledge. 2. Competence building in the labour force to be used in innovation and R&D activities (education, training, and creation of human capital, production and reproduction skills, individual learning). 3. Formation of new product markets. 4. Articulation of quality requirements emanating from the demand side with regard to new products. 5. Creating and changing organisations needed for the development of new fields of innovation. 6. Provision (creation, change, abolition) of institutions (IPR laws, tax laws, environmental laws, R&D investment routines) that influence innovating organisations and innovation processes by providing incentives or obstacles to innovation. 7. Networking through markets and other mechanisms (interactive learning between organisations) to integrate new knowledge elements developed in the IS and coming from outside with elements already available in the innovating firms. 8. Incubating activities.
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9. Financing of innovation processes and other activities that commercialisation of knowledge and its adoption. 10. Provision of consultancy services of relevance for innovation processes.

can

facilitate

When the price mechanism is unable to provide all the information markets need, markets are unable to set the right incentives to move in the right direction, which calls for governance mechanisms at the microeconomic level and economic policy at the system level to provide the necessary coordination (Antonelli, 2002). Public intervention is justified when the market mechanism and firms fail to achieve the objectives formulated, originating a problem whose causes, amongst others, may be inappropriate or missing functions, organisations, institutions and links between them. At the same time, the state must have the ability to solve or mitigate the problem (Edquist, 2001). Typical system problems are related to learning, exploration/exploitation and variety/selection trade-off (excess of variety with weak selection processes or tough selection with little variety generation), appropriability traps, dynamic complementarities failures in the form of poor connections of nodes (network), infrastructure provision and investment, transition, lock-in, formal (regulations and laws) and tacit rules (social and political culture) and capability (Malerba, 1997, in Cusmano, 2000; Chaminade and Edquist, 2006). The term problem is proposed rather than the term failure as innovation is path dependent and there are not optimal conditions of innovation as they are unknown (Chaminade and Edquist, 2006).

2.24 Functions of public policy in innovation processes


Systems count on several factors to achieve their goals, such as infrastructure, innovation programmes, technological modernisation programmes, incubators of technology-based enterprises programmes, industrial clusters and value chain systems, technology parks and technopolis and national industry policy programmes (Scheel, 2002). Public policies should enhance the market provision of one of more of these factors and are also essential to promote linkages between the different elements of absorptive capacity and to create the opportunities for economic actors to absorb and internalise spillovers (Narula, 2004). Governments play an important role as facilitators of technological learning in three ways (Calestous and Lee, 2005). Through the market mechanism, dealing with supply and demand of technological development, creating explicit links between market and non-market institutions so that learning practices become institutionalised into structured relationships between market and non-market institutions. Creation of technology flows - transfer of foreign technologies, domestic diffusion of foreign technologies, and indigenous R&D effort to innovate through an integrated
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approach to industrial, science, technology and innovation policies to link the critical elements of acquisition, absorption and generation of technologies to the marketplace. Strengthening the variety of learning institutions (firms, universities, government) through community development organisations and government procurement of technology.

Public policies have six main functions, each one related to one or more resource requirements: sufficient knowledge base, financial and human resources, market identification by firms, a sufficient number and variety of actors, networks among various types of actors (industry, government, university, professional bodies) and institutions (market conditions, regulations, supporting organisations). Some of the specific functions of public policies are to ascertain the existence of a sufficient knowledge base, create transparent incentives to reinforce positive forces or to overcome negative forces, promote entrepreneurial experiments, create markets or guarantee appropriate market conditions, create or augment resources and promote positive externalities (Carlsson, 2006). Governments must: nourish, protect and harvest the knowledge commons through investment, regulations, establishing market mechanisms and restructuring institutions governing IP; exploit new waves by encouraging inventiveness, developing coherent institutions that privilege innovation and flexibility and developing new regimes of production and consumption through better linkages of science, business and creativity; and, prepare communities for participation in the knowledge economy establishing access to services required for participation in knowledge-based economies and investing in social capital formation (Hearn and Rooney, 2002).

2.25 Innovation policy


Innovation policy is concerned with stimulating, guiding and monitoring knowledge-based activities within a political jurisdiction whose goals are economic, although they may be stated in broad welfare terms; its instruments are programmes and institutions, as well as ideas. As such, policy is a process, not a product (De la Mothe, 2003). Innovation policy is public action that influences the development of technical change and other kinds of innovations (product and process) whose objectives are determined in a political process; it includes elements of R&D policy, infrastructure policy, regional policy, education policy and public action influencing innovations from the demand side (Edquist, 2001; Chaminade and Edquist, 2006). A single strategy does not exist (Archibugi and Iammarino, 1999) but three approaches to policy can be identified (Barros de Castro, 2002): The first approach has its reference in the notion of market failures, to be corrected through industrial policy. The second one originates from frustration with the development of nations, regions and sectors, and gathers up efforts aiming at the (quickly) surmounting of accumulated
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backwardness. The last refers to contexts in which companies are (or begin to be) able to compete via innovation. In this case, R&D, design and marketing gain increasing importance and the policies role is to support companies in diverse ways, so they can make use of these competitive weapons.

The second and third approaches focus on the transformation of the economy, though the changes sought are different in each of them: second emphasises sectoral patterns and regularities, whereas the third emphasises the firms specificities focusing in their growth potential and aims at cultivating the difference among firms, in terms of competitive advantage, and shifts the decision-making process from the sector to the firm-level; it also acknowledges the existence of decision coordination and knowledge gaps, which are to be targeted (Barros de Castro, 2002). The government tasks in science, technology and innovation policy include (OECD, 2007): Setting framework conditions conducive to innovation: well-functioning markets, sound corporate governance and financial institutions, legal protection of IPR and setting of technological standards. The latter two may have a more direct effect on innovation. Developing and implementing policies to encourage science, technology and innovation in the presence of market or systemic failures, such as provision of financial support for R&D. The main forms of selective policies permitted pertain to skill formation, technology support and financing of innovation, promotion and targeting of FDI, infrastructure development for information technology, and general subsidies that do not affect trade performance (Calestous and Lee, 2005). The strategies followed by developing countries in terms of public policies are defined in three typologies (Archibugi and Pietrobelli, 2003): International exploitation of technology produced on a national basis to achieve lower foreign dependency and fill technology gaps and increase learning relevant to national industry through the promotion of collaborations between national firms and leading firms in the field and incentives to selected FDI in the country and to their learning-enhancing modes of operation. Examples of these policies are Malaysia, Thailand, Philippines, Mexico and China that have become part of international networks and South Korea and Taiwan that have built up competitive capabilities in domestic enterprises, through massive efforts to build an endogenous technological capacity, and spawned their own international networks. Global generation of innovations to obtain competitive supply prices of technology-intensive products and IPR at fair conditions and using transnational companies (TNC) to enhance national technological capabilities through local technological activities and dissemination of TNCs expertise locally. Its instruments are negotiations on imports with foreign firms, multilateral agreements on intellectual
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property rights (IPR) and licenses, upgrading S&T infrastructures and institutions, supply of qualified workforce, monitoring the technological strategies and location choices of TNCs. Some countries have preferred a strategy of industrial development based on national firms (South Korea, Taiwan) while others (Malaysia, Thailand, Philippines, Mexico, China) have encouraged foreign firms to operate in the country trying to use them to acquire productive, managerial and technological expertise. However, in several cases, this policy has not been linked to technology policy to build local technical competencies. In other cases, a network of local firms imitating TNCs has been generated, calling for a policy that fosters externalities and spillovers. Global technological collaborations target the use of the foreign academy community to upgrade the scientific competence of the nation and allow it to become a junction of technical and industrial information and apply knowledge to production. This typology uses scientific exchange programmes, student flows to developed countries, incentives to international scientific projects, participation in international S&T organisations, developing infrastructures for techno-collaborations (scientific parks, consortia, etc.), promoting university/industry linkages and their international reach and participating to international organisations for technical and industrial collaborations. This strategy requires policies that promote local firms and research centres as well as training of human resources in advanced countries.

The first challenge of new industrial policy must be to build and to strengthen industrial capabilities in terms of advanced administrative competence, information and flexibility (Calestous and Lee, 2005). Furthermore, support policies will have to focus on supporting the development of sectoral infrastructures, training and research systems. Successful public programmes need to be free to learn what works and what does not and need to be designed to evolve in response to emerging patterns of development of technological capabilities in the private sector. Decentralisation is important so the reallocation of resources and refocus of efforts is done as perceptions of problems and opportunities change (Mazzoleni and Nelson, 2007). As learning builds on trust and social capital (Lam and Lundvall, 2004) the KE needs a harmonious policy and institutional environment, a consistent regulatory framework and a plausible business environment to promote innovation. The private and financial sectors must act as enabler, catalyst and accelerator of bottom-up, entrepreneurial activities coupled with top-down creative and realistic innovation policies. Public-private partnerships thus become central (Carayannis et al., 2006). Of vital importance in the application of public policies in science and technology is the central role of public agencies and universities in the generation of new technological paradigms, the use of incentives to encourage private actors to overcome technological gaps and the use of the market as a selection tool, the concurrent use of catching-up policies with policies to prevent rent-seeking behaviours and the incorporation of new technological paradigms in the economic structure of public policies (Cimoli et al., 2007). Policies have to target inputs involved in the creation and commercialisation of knowledge (basic and applied research, investments in general education and advanced technical specialities and training and upgrading of the skills levels of workers), creating the environments facilitating the creation and commercialisation of
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knowledge coupled with policies targeting the deficiency of venture capital needed to support potential entrepreneurs and policies that increase the flexibility of the labour force and provide access to R&D of universities and national research institutes (Audretsch and Thurik, 2000). Governments need to act as a careful facilitator of interactions between universities and industry through changes in existing norms and procedures and the creation of support institutions for universities, policies and organisations that increase pathways of interaction between academy, government and industry (Calestous and Lee, 2005). Policies have to network all parts of the system while preserving their specialised functions through support for core mission, support for convergence and support for networking (Georghiu, 2006). The development of technology policy must take into account several critical points. Policies have to devise bridging institutions to deal with various forms of technology transfer transactions as well as consider a systems integrator who can collect technological packages available from a combination of sources, on behalf of the recipient company, to enable and assure effective technology transfer. Technology transfer policies design and application has to be flexible to cope with the constant modifications of technology, to address a wide variety of firm types and needs and to raise awareness and permit potential users to explore and evaluate technologies against their own particular criteria of adoption with the explicit objective of encouraging the learning processes of good technology transfer practice. Policy measures need to include a promotion and diffusion component and facilities to encourage continuing interaction and exchange between players (user/producer interaction in the process innovation and re-innovation), covering the post-adoption period as well as promote and facilitate adoption and understanding of the cultural determinants underlying the success or failure of technology transfer. Finally, policy has to consider the positive and negative aspects of a particular pattern of innovation (technological trajectory): in the positive sense, it offers an accelerator effect to policy makers, encouraging transfer of particular technologies across the population of firms; the negative aspect is that the trajectory can become too narrowly defined and may be inappropriate for particular types of firms (Bessant and Rush, 1995). Public policy must used cautiously as qualifications of the labour force, the R&D commitments and the established institutional environment (knowledge infrastructure, capital suppliers, and government) are unlikely to be compatible with the new requirements of major innovations. This is due to the match of institutions with the requirements of a specific trajectory (Boschma, 1996). Therefore, rapid learning and forgetting constitute success in the current market economy; to get the two to match and support each other becomes a prerequisite for economic success for firms and the national economy (Lam and Lundvall, 2004). The functions of intellectual property institutions are to draw a precise definition of rights and the objects to which exclusivity is guaranteed and to make those rights enforceable and to exclude effectively all non-authorised agents from the use of relevant resources (Foray, 2004). Policy makers have to ensure intellectual property rights sufficiently strong to provide an incentive for innovation yet not so strong they unduly inhibit the diffusion of knowledge (Brinkley, 2006): inclusion must be coordinated and managed to avoid free riding (Antonelli, 2002). IPR respond to the tensions between the necessity of rewarding innovators, guaranteeing
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exclusive rights on intangibles, and favouring the diffusion of innovation, through disclosure of technical knowledge and know-how embodied in innovations (Cimoli and Primi, 2007). To encourage innovation and unlock local capital, individuals and corporations need to feel that their research is protected; where IPR have been violated, compensation must be provided. However, overly protective systems could have a negative impact on creativity (Calestous and Lee, 2005). Industrial property rights include patents, plant variety protection, industrial design, and integrated circuit design (Foray, 2004). The patent is a property title that is valid in time (duration), geographic space (range), and the world of objects (scope). In exchange for patent rights, the inventor must publicly divulge technical details on the new knowledge (Foray, 2004). Patents serve as indicators of what is freely available and what is proprietary in given fields of science and knowledge, favour or discourage the entrance in given research fields and constitute reputation signals between firms and negotiation instruments in legal and business issues (Cimoli and Primi, 2007). Patents have several advantages: they provide a solution to the public good problem, allow disclosure of related information while protecting against imitation, create transferable rights that help to structure complex transactions that also concern unpatented knowledge and are means to signal and assess the future value of technological efforts of their owners. However, they also have some disadvantages: inconsistencies in the system and inappropriateness inevitable emerge, the protection afforded is neither automatic nor free and their effectiveness depends on the quality of the legal environment (Foray, 2004). In the case of environment-related technologies, it has been found that stringent environmental regulations supplemented by a strong NIS are a crucial driver of export performance in the field of energy technologies as a consequence of the intensity of research activities of exporters, a strong technological specialisation and the existence of knowledge infrastructure that shapes the effectiveness of a creative response to a change in external conditions (Constantini and Crespi, 2007).

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CHAPTER III SOLAR ENERGY: BENCHMARKING MEXICO AND CHINA

3.1 International landscape of the sector (solar energy)


3.1.1 Solar energy
The sun provides about 100,000 terawatts (TW) to the Earth, which is approximately ten thousand times greater than the worlds present rate of energy consumption at 14 TW (Grtzel, 2007). On technology is solar thermal photovoltaics (STPV) started in the early 1960s. Theoretically, conversion efficiency has been found to be 85.4% but in practice the expected efficiencies are 20%-30%. In such systems, the sunlight is absorbed by an emitter and re-emitted as thermal radiation before illumination of PV cells. There are three technologies of STPV: solar concentrators based on Fresnel lens, which do not provide the maximum performance possible but have low price and still can reach high concentrations; conical module that allows the use of flat emitters; and, cylindrical systems consisting of several stacked modules and where the cooling is easier and it is more suitable for use in hybrid solar/fuel powered systems. Other systems are hybrid solar fuel/powered systems where the fuelled part of the system allows operation during the night and a high temperature emitter in a vacuum bulb can be used; hybrid system with PV conversion (lighting) for a visible part and TPV for an infrared part of the solar spectrum can be created, which has the ability to decrease solar electricity cost in comparison with non-concentrated photovoltaics (Andreev et al., 2007). Photovoltaic (PV) cells are another technology that could meet the needs of energy by covering 0.5% of the Earths surface with PV installations that achieve a conversion efficiency of 10%. The top and bottom layers of a PV device are made of a n-doped and p-doped silicon, where the charge of the mobile carriers is negative or positive, respectively. The p-doped silicon is made by doping traces of an electron-poor element (gallium) into pure silicon; n-doped silicon is made by doping with an electron-rich element (phosphorus). When the two materials contact each other spontaneous electrons and holes transfer across the junction produces an excess of positive charge on the opposite p-doped side. The resulting electric field plays a vital role in the photovoltaic energy conversion process. Absorption of sunlight generates electron-hole pairs by promoting electrons from the valence band to the conduction band of the silicon. Electrons are minority carriers in the p-type silicon and holes are minority carriers in the n-type material. Their lifetime is short as they recombine within microseconds with the oppositely-charged majority carriers. The electric field helps to collect the photo-induced carriers because it attracts the minority carriers across the junction generating a net photocurrent. As there is no photocurrent in
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the absence of a field, the maximum photovoltage that can be attained by the device equals the potential difference that is set up in the dark at the p-n-junction, which for silicon is about 0.7 V (Grtzel, 2007). PV cells have evolved along three generations, whose technical characteristics widely differ.
Table 3-1 Generations of PV cells
Generation I Main features Single crystal Poly-cristalline (silicon) Low cost, thin films Amorphous silicon Thin-film silicion Dye sensitised nanocrystalline cells (DSC) Organic PV (molecular and polymeric) Conversion efficiency above 33% in AM 1.5 sunlight Multi-gap tandem cells Single crystal Carrier multiplication cells Mid-band PV Quantum dot solar cells

II

III

Source: Grtzel, 2007, p. 125

Solid-state junction devices based on crystalline or amorphous silicon have 94% of market share, benefiting from the experience and material availability generated by the semiconductor industry and their mature state of technical development. The cost of photovoltaic electric production is between 0.25-0.62 US$ per kWh; however, to be competitive with fossil fuels costs should come down below 0.05US$/kWh. A major dilemma facing the PV industry is the shortage of raw materials and price increase (between $300-400/kg) due to a surging demand from the PV industry and the increased efficiencies of the chip industry, resulting in less waste (Grtzel, 2007; Little, 2008). Second generation thin-film PV cells are made of copper-indium-selenium and cadmium-tellurium, along with amorphous silicon, whose market share is around 5%. Their major constraints are the scarcity of indium, tellurium and selenium and the high toxicity of cadmium, their low efficiencies (amorphous silicon solar cells: 5%-7%) and performance degradation. Furthermore, the need for high vacuum production methods makes them expensive on a dollar/peak watt basis. Other type of second-generation PV cells are mesoscopic solar cells that employ films composed of a network of organic and inorganic semiconductor particles of mesoscopic (2-50 nm) size, forming junctions of very high contact area, whose prototype is the dye-sensitised solar cell (DSC), which accomplishes optical absorption and charge separation by combining a light absorbing material (sensitiser) with a wide band-gap semiconductor of mesoscopic morphology mimicking the process of natural photosynthesis. These cells can be manufactured without expensive and energy-intensive high temperature and high vacuum
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processes and are compatible with various supporting materials and can be produced in a variety of presentations and appearances. Their conversion efficiencies have exceeded 11% and offer a way to convert solar energy directly into a chemical fuel through photoelectrochemical cells to generate hydrogen via solar photolysis (Grtzel, 2007). Third generation PV cells are based on charge carrier multiplication: several excitons can be produced from the absorption of a single photon by very small semiconductor particles (quantum dots) via impact ionisation if the photon energy is several times higher than the semiconductor band gap. This type of cells faces the challenge of finding ways to collect the excitons before they recombine. The efficiency of multi-junction cells based on III/IV generation semiconductors has progressed beyond 30% although the efficiencies reached with commercial solar cell modules are significantly lower due to losses incurred during scale up. The cost of these devices is high, limiting their application to space and solar concentrators. In the latter case, sunlight is concentrated several hundred times by a mirror before striking the photovoltaic device. However, solar concentrators need to track the sun and work well only with direct sunlight in the absence of haze (Grtzel, 2007). Solar-based renewable energies differ in their costs and the required technologies, as summarised in table 3-2.
Table 3-2 Status of selected renewable energies - characteristics and costs
Technology Typical characteristics Cell type and efficiency: single crystal 17%, polycrystalline 15%, amorphous silicion 10%, thin film 9-12% Peak capacity: 2-5 kW peak Type (plant size): Trough (50-500 MW), tower (10-20 MW), dish (-) Type: evacuated tube, flat plate; size: 2-5 sq m (household), 20-200 sq m (multi-family), 0.5-2 MWth (district System size: 20-100 W Typical energy costs (US cents kW/h) 20-80 01/12/2018 2-20 (household) 1-15 (multifamily) 1-8 (district heating) 40-60

Solar PV (module) Rooftop solar PV Concentrating solar thermal power Solar hot water/heating Solar home system

Notes: Costs include system design, sitting and resource availability Costs under best conditions Costs exclude subsidies or policy incentives Source: REN21, 2008, p. 14

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3.1.2 Solar energy in the world


Global solar energy demand has grown at about 25% over the past 15 years (Marigo, 2001). Grid-connected solar PV had a 50% annual increase in cumulative installed capacity in 2006 and 2007 to an estimated 7.7 GW (1.5 million homes with rooftop solar PV). Rooftop solar heat collectors provide hot water to nearly 50 million households worldwide with existing capacity increased by 19% in 2006 to reach 105 GWth globally, more than 70% of it in developing countries (REN21, 2008). In 2004, the production of solar cells and modules was 1195 MW with Japan producing half of the worlds output (Marigo, 2001). In 2006, it was 2.5 GW in 2006, up 40% from 1.8 GW in 2005. The top 5 PV producers in 2006 were Sharp (Japan), Q-cells (Germany), Kyocera (Japan), Suntech (China) and Sanyo (Japan), which together accounted for almost half of global production. Chinas production (370 MW) surpassed US production (200 MW) for the first time in 2006. Thin-film PV gained acceptance as mainstream technology in 2006/2007 due to manufacturing maturity, lower production costs and its advantage in terms of silicon feedstock: it requires just one hundredth as much silicon as conventional cells (REN21, 2008). In 2007, $148.4 billion dollars were raised for sustainable energy, an increase of 60% over 2006. Total financial transactions in sustainable energy, including acquisitions, amounted $204.9 billion. Public market investment more than doubled, from $10.5 billion in 2006 to $23.4 billion in 2007. Early stage venture capital investment surged 112% to $2 billion in 2007. Solar energy attracted the most venture capital/private equity investment in 2007, $3.7 billion, for new technologies and for manufacturing capacity expansion. Financing of sustainable energy assets grew by 61% in 2007 to $108 billion, most of it for new generation projects. Solar investment was subsidy-driven, with Germany remaining the dominant market for new capacity. Total transactions in China and India grew significantly, to $10.8 billion in China and $2.3 billion in India, suggesting a shift away from manufacturing to generation capacity (Boyle et al., 2008). R&D spending on clean energy and energy efficiency was $16.9 billion in 2007, including corporate R&D of $9.8 billion, and government R&D of $7.1 billion. Europe and Middle East saw the more corporate R&D activity, followed by America and then Asia. Asian governments (India, China, and Japan) invested heavily in R&D. The US and UK host the most clean energy incubators, often supported by public funding. Solar is the single most incubated technology, with a bias towards service companies, disruptive technologies and large-scale generation such as solar thermal electricity generation (STEG). There is a continuing shift in investment from developed to developing countries, with its share of new investment growing from 13% ($1.8 billion) in 2004 to 23% ($26 billion) in 2007, an expansion of 14 times. China, India, and Brazil accounted for 82% of this investment (Boyle et al., 2008).

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Wuhan University of Technology

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Table 3-3 Top five countries in renewable energies


Annual amounts for 2006 #1 #2 #3 #4 #5 New capacity investment Germany China United States Spain Japan Solar PV added (grid-tied) Germany Japan United States Spain South Korea Solar hot water added China Germany Turkey India Austria Existing capacity as of 2006 Renewables power capacity China Germany United States Spain India Solar PV (grid-connected) Germany Japan United States Spain Netherlands/Italy Solar hot water China Turkey Germany Japan Israel Source: REN21, 2008, p. 8

3.2 The evolution of the sector in Mexico and China


3.2.1 Solar energy in China
China is the worlds second largest energy consumer and its third largest oil importer. Between 2000 and 2006 Chinas energy consumption rose 77.3% (Boyle et al., 2008). China is the leading renewable energy producer in the world in terms of installed generating capacity (The Climate Group, 2008) and ranks second in the world, behind Germany, as investor, exceeding US$12 billion in 2007 (Martinot and Li, 2008; The Climate Group, 2008). Solar energy in China is abundant. The average mean solar irradiation per day is over 4 kWh/m2 with more than 3000 sunshine hours per annum in Western China. The average solar radiation exceeds 600 kJ/cm2 over two-thirds of the countrys area. The annual solar energy absorption in China is equivalent to 17 tera tonnes of coal equivalent (Projekt-Consult, 2007; Chang et al., 2008). China experiences the highest levels of solar radiation between April and June, with Lhasa, rmqi and Beijing having the highest rates (Zhou et al., 2006). China is the fifth largest producer of silicon solar cell and modules, growing by more than 70% annually since 2000, exporting more than 80% of its production to Germany and the US. China increased its solar cell and module production capacity from 14 MW in 2003 to over 64 MW in 2004 (Marigo, 2007), 80 MW in 2006 (Martinot and Li, 2008) and 820 MW by the end of 2007, second only to Japan (The Climate Group, 2008). Research and development of photovoltaic in China dates back to 1958, began to enter into the application stage in the 1970s with the first pilot space and terrestrial applications and was commercialised until the mid 1980s. (Marigo, 2007; Martinot and Li, 2008). The manufacturing base was established in the late 1970s with plants of PV monocrystalline silicon cells with modified production lines for solar cell production in Ningbo, Kunming, and Kaifeng. During the 1980s three other companies were established in Beijing, Qinhuangdao and Harbin, the latter
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producing amorphous silicon. The industry was made of state-owned companies, with the whole production line or key equipment imported from US. From these firms, only the ones in Ningbo, Kunming and Harbin are still producing solar cells and modules, under different ownership (Marigo, 2007). Since 1993, the output of domestic crystalline silicon solar cells soared 20-30% annually (Chang et al., 2008). Since the early 2000s new companies emerged under private/public ownership, either domestic, joint-ventures (JV) or foreign-invested, with key production equipment still imported and driven by global market demand (Marigo, 2007). From 1999 to 2005, the Capacity Building for the Rapid Commercialisation of Renewable Energy programme was implemented by United Nations Development Programme (UNDP), assisted with Global Environment Facilitys (GEF) funds and financial support from the Australian and Dutch governments. The programme was aimed at establishing commercial industrial sectors in the field of renewable energies. The Chinese Renewable Energies Industries Association was established within the scope of the project as an intermediary between the government and industry to bring national and international project developers and investors together. The Renewable Energy Development Project has been supported by the World Bank and GEF since 2001 to develop the market for photovoltaic technologies and verify the potential for commercial development of wind power in coastal areas. Within the photovoltaic component of the project, local solar companies are receiving financial and institutional assistance to enable them to procure, install and maintain 300,000 to 400,000 solar home systems with a total capacity of 10 MWp to be sold in rural regions with a subsidy of US$1.5 per Wp sold (Projekt-Consult, 2007). China has 7.89 million m2 of solar heaters, 240,000 solar stoves, 5.37 million m2 of passive solar greenhouses and 11 MW of solar PV cells (Chang et al., 2008). Renewable energy in China is being driven by the governments efforts to reduce its dependence on oil imports and meet its soaring energy demand. In recent years, sustainable energy investment in China has been largely for manufacturing expansion as an export industry. During 2007, investment in capacity increased by 91% to $10.8 billion, most of it for new wind capacity. China has established itself as an important exporter of solar modules as companies address quality issues and gradually win the confidence of foreign manufacturers. China is the largest manufacturer and market for solar water heaters (Boyle et al., 2008).

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Wuhan University of Technology

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Table 3-4 Installed renewable energy capacity and targets, China


2007 capacity Hydro Wind Solar PV Solar water heating Biomass power Biogas Biomass solid fuel Bioethanol Biodiesel Geothermal Marine 145 GW 6 GW 100 MW 130 thousand sq meters 3 GW 9.9 billion cubic meters n/a 1.6 million liters 1.19 million liters 32 MW n/a 2020 National Development and Reform Commission target 300 GW 30 GW 1.8 GW 300 thousand sq meters 30 GW 44 billion cubic meters 50 thousand tonnes 12.7 billion liters 2.4 billion liters 12 thousand toe 100 MW

Source: New Energy Finance, NDRC in Boyle et al., 2008, p. 52

Chinas technical achievements in solar energy are similar to those of western countries, as presented in table 3-5.
Table 3-5 Conversion Efficiency, China and the world
Solar cells developed in laboratories in China and the world China Category Efficiency (%) Area (cm2) Silicon Mono-Si cell 20.4 4 Poly-Si cell 16 4 Si (Thin-film) 13.6 1 III-V cells GaAs (crystalline) 21.9 1 Thin film chalcogenides CIGS (cell) 12.1 1 CdTe (cell) 13.36 0.5 Amorphous Si Si (amorphous) 8.6 100 Commercial solar PV module Category Efficiency (%) 14 China Module (model and dimensions Suntech STP175S-24/Ab, 1580 x 808 x 50 mm Suntech STP060-12/Nb, 995 x 453 x 30 mm Soltech PVS 60-24, 1549 x 787 mm World Module (model and Efficiency (%) dimensions 14.2 Sharp NT-185-U1, 1575 x 826 x 46 mm Sharp ND-167U1, 1328 x 1004 x 46 mm RWE Schott Solar Asithru-30-SG, 1000 x 600 mm World Area (cm2) 4 1.002 4.017 3.91 1.05 1.032 1.07

Efficiency (%) 24.70.5 20.30.5 16.60.4 25.10.8 18.40.5 16.50.5 9.50.3

Mono-Si module

Poly-Si module

13

12.6

a-Si

Source: REDP, Green et al., in Marigo, 2007, p. 148


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In the PV sector, China has more than 400 manufacturers (The Climate Group, 2008) with more than 15 major solar cell manufacturers employing over 20,000 people in 2006. Leading producers are Suntech, China Sunergy, Jiangsu Linyang, Ningbo, Baoding Tianwei Yingli, Trina Solar, Wuxi Shangde Solar Energy Power, Nanjing CEEG PV Tech (with the largest PV production facility in China), Yingli Solar and Solarfun (Projekt-Consult, 2007; Martinot and Li, 2008). Chinas six largest PV manufacturers, most of which did not exist ten years ago, had a total market value of over US$15 billion in July 2008. In 2007, Chinas share of the global solar PV was 18%, from 1% in 2003. Four Chinese companies already have market capitalisations over US$2 billion: Suntech Power Holdings, LDK Solar, JA Solar Holdings and Yingli Solar; the rate of growth of these and other companies has been greater than 100% per year, largely fuelled by growing international demand from Germany, Spain and the US rather than by domestic policies. One challenge for the sector is that only 0.08 GW of solar photovoltaic power has been installed so far in China despite of high levels of manufacturing for export (The Climate Group, 2008). The value chain of the solar PV in China ranges from wafer to cell production, module assembly and PV systems installation; however. It is unbalanced and a fairly high capacity in module assembly outweighs a very limited production in solar wafers (Marigo, 2007).

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Wuhan University of Technology

Masters Degree Thesis

Table 3-6 China: Main PV producers along the value chain


Producer CSI Solar Technologies Emei Semiconductor Materials Factory Hope Industry and Trade Co. Kyocera (Tianjin) Solar Energy Co. LDK Solar Hi-Tech Co., Ltd. Luoyang Zhonggui Material Co., Ltd. Nanjing PV-Tech Co. Ningbo Solar Electric Power Co. Ningjin Songgong Semiconductor Co. Shanghai Solar Energy S&T Co. Shanghai Topsola Group Shenzhen Jiawei Industries Co. Shenzhen Nenglian Electronic Co. Sichuan Xinguang Silicon Technology Co., Ltd. Soltech Corp. Suntech Power Co. Tianjin Jinneng Solar Cell Co. Tianwei Yingli New Energy Resources Co. Xi'an Rew Co. Xinri Silicion Materials Co. Yunnan Tianda Photovoltaic Co. Zhejiang Sino-Italian Photovoltaic Co. Zhong Lian Solar Technology Ltd. Co. Other Source: Marigo, 2007, p. 150 6 10 0.5 2 1 2 17 1 6.5 30 30 6 15 30 Product types and yearly production capacity (2005) Silicon feedstock Wafers (MWp) Cells (MWp) Modules (MWp) (tonnes) Mono-Si Poly-Si Mono-Si Poly-Si Mono-Si Poly-Si A-Si 15 20 4 12 75 20 30 1 50 10 10 30 2 2 1260 120 5 80 10 8 10 50 50 4

Chinas PV industry depends almost entirely on imports of silicon feedstock due to limited production capacity (less than 200 tonnes/year) almost entirely devoted to the integrated circuit industry. Between 30 and 40 tonnes of domestic silicon feedstock are sold to the domestic PV industry, translating into 3 to 5 MW of crystalline silicon solar cell production. There are fewer than 10 mono and polycrystalline wafer manufacturers, with a total capacity of 71.5 MW by mid-2005, unable to meet local demand because of limited production capacity and because less
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Wuhan University of Technology

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than 20% (between 15 and 20 MW) of their wafers are for the internal market as the bulk of the production (Ningjin Songgong Semiconductor Company) is exported mainly to Japan or are vertically integrated along the production chain (Ningbo Solar Electric Power and Tianwei Yingli New Energy Resources). Ningbo Solars capacity of mono crystalline wafer is 1 MW, whereas Tianwei Yingli has 75 MW of polycrystalline solar wafers. Other two companies, Jinggong Solar and Changzhou Trina Solar Energy Co., Ltd. have capacity of 10 MW and 25 MW, respectively. Cell production surged from 64 MW in 2004 to a probable 257 MW in 2005 due to expansion plans undertaken and the emergence of Nanjing PV-tech, Co. Module production has lots of producers with less than 5 MW of production capacity due to the low level of skills required at this stage. Total production reached nearly 300 MW by the end of 2005. The largest module producers are Suntech, with a capacity of 80 MW, and Tianwei Yingli, with a new line of 100-MW capacity. The price of domestic modules at the end of 2004 was about 25-30 RMB/Wp. To remain competitive, Chinese solar PV manufacturers have expanded production capacity to respond to rising demand; have reduced costs and increased value added through engagement in more profitable areas where more advanced technological capabilities, product design and marketing skills are crucial; have invested more than 10% of their annual turnover to R&D activities; have obtained international certifications; and, have established links with universities and research institutes (Marigo, 2007). Regarding solar water heating (SWH), China is the global leader, with the European Union taking a second place well behind Chinas position (Martinot and Li, 2008; REN21, 2008). Over 10% of Chinese homes use solar water heaters with a domestic market value of US$2.6 million in 2006, representing more than 60% of the global market (REN21, 2008).
1.9% 0.2% 1.1% 1.2% 1.7%

2.1%

3.6% 4.5%

6.3%

12.8% 64.6%

China European Union Turkey Japan Israel Brazil United States Australia India South Africa Other

Source: REN21 (2008), p. 12 Graph 3-1 Solar hot water/heating capacity existing, selected countries, 2006

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3.9%

0.4%

0.8% 0.8% 1.2%

1.5% 1.9% 2.7%

11.6%

China European Union Turkey India Brazil Israel Japan Australia United Stated Other

75.2%

Source: REN21 (2008), p. 13 Graph 3-2 Solar hot water/heating added capacity, selected countries, 2006 The industry employs over 600,000 people in China, is worth over US$2 billion per year and has grown at annual rates of 20% (The Climate Group, 2008) with more than 10,000 companies (Li and Hu, 2005). The development of the industry started in the 1980s, initially focused on low-income families in the countryside with a simple technology. In the 1990s, the market developed into three types of SWH: evacuated tube SWH, flat plate SWH, and combined storage SWH (the most simple and primitive type of collector), with the former aimed at higher-income inhabitants. Annual production grew to 13 million square meters in 2004 from 0.5 million in 1991, with an annual average growth surpassing 28.5%. At the end of 2004, annual sales of SWH were 12 million square meters with an annual production of US$1.4 billion making Chinas cumulative installations over 60 million square meters, more than 70% of the total world market, providing 7.2 million tonnes of coal equivalent (12% of Chinas renewable energy) and reducing around 12 million tonnes of CO2 emissions. That year, the evacuated tube collector market share was 88%, 11% for flat plate share and 1% for combined storage collectors (Li and Hu, 2005). In 2006, 100 million square meters were reached (Martinot and Li, 2008). New installations in 2006, 10.5 GWth, accounted for 80% of all the solar-thermal capacity added in the world (Projekt-Consult, 2007). The industry is fragmented, with only a few major players, and lacks strong technology and economic underpinning. However, several household appliance manufacturers have entered the market: Haier, Ocma, Huati. The largest solar hot water manufacturer in the world is Himin Group with more than 50,000 employees and production over one million solar hot water systems annually, most of them for the domestic market (Martinot and Li, 2008). The main drivers for the rapid development of SWH are that it can satisfy daily hot water demands, is reliable and at a reasonable price that competes with electricity and gas (Li and Hu, 2005) due to falling costs because of low-cost labour, cheap materials and competition among a large number of domestic solar companies; Chinese firms produce at costs that are from one-fifth to one-eighth of costs in US and Europe (Martinot and Li, 2008).

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Wuhan University of Technology

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The development of SWH in China faces two main challenges: mass production is not as advanced as in other countries and building integrated SWH systems. The first case is due to the difference in production processes used by different manufacturers and low requirements to enter the market, which makes it difficult to realise an advantage of economies of scale of production. The second problem stems because most SWH products are bought and installed by the user, which can affect the function and aesthetics of buildings and the system (Li and Hu, 2005).

3.2.2 Solar energy in Mexico


Mexico has high average solar irradiation rates, at 5 kWh/m2 per day. Across 70% of the country, irradiation is higher than 17 MJ/m2d and in some parts even above 19 MJ/m2d. Total installed photovoltaic capacity was 18.7 MW by the end of 2005 with the majority distributed among off-grid applications in the domestic (14 MW) and non-domestic sectors (4.7 MW) (Projekt-Consult, 2007). The development of PV started in the 1970s when Mexico created a programme to provide rural schools with TV sets powered by electricity from photoelectric cells. The programme used cells manufactured in Mexico by the Centro de Investigacin y Estudios Avanzados (Cinvestav-IPN). However, it did not result in the development of a market for the technology (Altomonte et al., 2004). The government has set a target of 8% of the countrys power generation (excluding hydro) coming from renewable sources by 2012. Transmission availability is a major barrier to development, along with a lack of incentives for developers and a clear regulatory framework to encourage investors (Boyle et al., 2008). In the case of SWH, the estimated collector area installed was 842,000 m2 at the end of 2006 (Projekt-Consult, 2007). In Mexico there are over 50 companies that distribute and/or manufacture SWH with 20 companies in Mexico City and the surrounding area. Two types of SWH are used: of plastic to generate lower water temperatures, covered or uncovered by glass, very often to heat swimming pools (around 25C); and, equipment made from copper, aluminium, and glass tubes made to generate temperatures more than 30C for large-scale use, often covered with glass or plastic (Mallet, 2007). Research, development and analysis in the field of renewable energies are performed in several universities (Ramrez et al., 2000): Energy Research Centre (UNAM) Electrical Research Centre Centre of Research and Advanced Studies (IPN) University Energy Programme (UNAM) Mexican Petroleum Institute Institute of Physics (UNAM)
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Wuhan University of Technology

Masters Degree Thesis

Institute of Engineering (UNAM) Metropolitan Autonomous University National Commission for Energy Saving Occidental Technological Institute for Higher Studies

However technical, economic, financial and institutional obstacles, as well as regulatory barriers impede the adoption of renewable energies (Altomonte et al., 2004). The research community involved in solar energy, small but strong, is out of touch with the realities and needs of the population and universities are better linked with other foreign universities than with the local private sector, government, and users. Moreover, existent networks are closed (Mallet, 2007).

3.3 Sectoral public policy in Mexico and China


3.3.1 Innovation policy
Since the 1980s, the national governments in several countries in Asia and Latin America implemented reforms in their economic systems with every region following different paths, presented in table 3-7.

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Wuhan University of Technology

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Table 3-7 Divergence in national systems of innovation in the 1980s and 1990s
East Asia Expanding universal education system with high participation in tertiary education and with high proportion of engineering graduates Rapid growth of scientific and technical activities at enterprise level, specially R&D Progressive integration of production, design, marketing and research activities within the firm Import of technology typically combined with local initiatives in technical change and at later stages rapidly rising levels of R&D Industrial R&D rises typically to more than 50% of all R&D Development of strong science-technology infrastructure and at later stages good linkages with industrial R&D High levels of investment and high inflow of Japanese investment and technology. Strong influence of Japanese models of management and networking organisation Heavy investment in advanced telecommunications infrastructure Strong and fast-growing electronic industries with high exports and extensive user feedback from international markets Patterns of specialisation favouring commodities with high income elasticity Growing participation in international technology networks and agreements Rather sophisticated policy efforts aimed at fostering technological learning and generalising rent-seeking even under regimes of protection of domestic markets (until 80s) Latin America Deteriorating education system with proportionately few output of engineers Slow growth, stagnation or decline of enterprise-level R&D and other learning activities Weakening of both R&D or decline of enterprise marketing Transfer of technology but weak enterprise-level R&D and little integration with technology transfer Industrial R&D typically remains at less than 25% of total R&D Weakening of science-technology infrastructure and poor linkages with industry Decline in foreign investment and low level of international networking in technology Slow development of modern telecommunications Weak electronic industries with low exports and little learning by international marketing Specialisation in low income elasticity goods Low level of international networking in technology From generalised protection with little anti rentseeking safeguards to wild market regimes with little learning incentives

Source: Freeman, 1995, p. 13; Castaldi et al., 2004, p. 48

3.3.1.1 Innovation policy in China Since 1978 two main periods can be identify in the evolution of Chinas innovation: partially market-driven spin-offs (1978-2005) and endogenous innovation with enterprises as the main driving force. The first period moved from a central-planning model to be partially market-driven, allowing companies to spin-off from research institutes to improve the direct link between research institutes and commercial enterprises. A series of reforms were implemented: research institutes were encouraged to look for funding from enterprises (1985), R&D institutes were merged into commercial enterprises (1987), the Torch Programme was launched to spin-off companies from research institutes (1988) and individual R&D institutes were changed into production entities (1990). Innovation was mostly driven by public research institutes although the transition had a negative impact as innovation teams became production teams and lost the innovation sustainability and research institutes easily became extended engineering enterprises. The beginning of the second period was the issue in 2006 of the National Guideline on
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Wuhan University of Technology

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Medium- and Long-term Programme for Science and Technology Development (2006-2020), where endogenous innovation was put forward as a strategic element of sustainable and harmonious development to change China from the worlds manufacturing centre to a world-class innovation centre. Enterprises are given a central role as the main body for the propagation of innovation with increased efforts to enforce protection of IP through existing rules and regulations and the encouragement of private investment in R&D and involvement to take part in national R&D projects (Boutellier et al., 2008). Along with these periods, the Chinese innovation policy followed several stages since 1975: Incubation phase (1975-1978). Firms and universities were not linked to government and public labs, learning was achieved through self-reflection and criticism and the focus of policy was the removal of conceptual and ideological barriers to science and technology development. The funding instrument was direct public institutional support (OECD, 2007). Experimentation phase (1978-1985). There was a shift in strategic priorities from increasing production capacity in heavy industry to modernising Chinas agriculture, science and technology, industry and military (Four Modernisations), reflected in a change in the modes of learning and changes in policies affecting the development of human capital: revival of education and research systems and requirement of technology transfer agreements as a condition for capital equipment purchases from developed countries. FDI became explicitly recognised as a means of achieving the objective of technological learning (Xie and White, 2006). The type of learning was constituted by learning-by-doing bottom-up experimental reforms. Policy addressed the lack of links between universities and firms and funding channels were relaxed. At this stage the National Key Technologies R&D Programme and State Key Laboratory Programme were launched (OECD, 2007). The government transferred a great quantity of scientific and technological innovations to the economic field (Chen et al., 2006). Structural reform of the S&T system (1985-1995). Emphasis was given to the combination of civil and defence technologies and high-tech policy became critical with the government declaring several science and technology laws that created a good environment (Chen et al., 2006). The reform sought to overcome the separation of R&D from industrial activity with learning taking place by designing and implementing top-down systemic institutional reforms. The first large public competitive support programmes were launched with a focus to reform public research organisations, universities and the management of human resources in public research institutions. In 1985, technology markets were created and institutes were given some degree of autonomy in hiring personnel, engaging in contract projects, and in the acceptance and use of contractual fees while subsidies from the government were reduced. However, as technology markets yielded few results, in 1987 reform policy began to promote the merge of R&D institutes into existing enterprises or enterprise groups. The reforms introduced elements of competition and market discipline whose main achievements were increased reliance of public research organisation on non-governmental funding and growing share of R&D funded and performed by the enterprise sector. In the early 1990s, reform policy included the change of individual R&D institutes into production entities
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Wuhan University of Technology

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(Gu and Lundvall, 2006; OECD, 2007). Deepening of the S&T reform (1995-2005). The emphasis was shifted to the localisation of value-added activities as a means of modernising, with inward FDI becoming a major channel for technological learning (Xie and White, 2006). Learning from international good practices is accelerated. S&T policies focused on engineering and implementing a systemic shift to an enterprise-centred innovation system while fostering firms innovation capabilities and commercialisation of technology. There is further differentiation of the public support system through the launch of new programmes and the emergence of new publicly sponsored funding channels, such as venture capital (OECD, 2007). In 1999, a programme was launched to encourage technological innovation of SMEs (Chen et al., 2006). By 2001, some 1,200 industrial technology R&D institutes had re-registered their business type: more than 300 were merger cases, more than 600 have changed to become profitable firms in themselves, and a few had entered into a university (Gu and Lundvall, 2006). Funding for R&D began to grow exponentially since 1997, more in terms of business expenditure than in terms of government expenditure (Zhou and Leydesdoff, 2006). Firm-centred (2005+). The fundamental change is from firm and national strategies based on imitation of technology to strategies based on creating proprietary and competitively valuable resources and capabilities with a clear policy of nurturing Chinese firms to be competitive abroad and domestically through the development of capabilities to create their own technologies with growing inward and outward investment linked to the establishment of R&D centres in China and abroad by Chinese firms and MNCs (Xie and White, 2006) and enterprises becoming the main body of innovation, decision, development, investment and risk-taking. A large scale of R&D institutions are transformed into enterprises, non-profit organisations, and intermediary organisations or merged into universities. The government began to emphasise IP and declared several laws in the matter (Chen et al., 2006). Learning shifts towards endogenous institutional learning and evidence-based policy making, including international benchmarking. In 2006 the Medium- to Long-term Strategic Plan for the Development of Science and Technology was adopted, focusing primarily on achieving three strategic objectives: building an innovation-based economy by fostering indigenous innovation capability; fostering an enterprise-centred technology innovation system and enhancing the innovation capabilities of Chinese firms; and, achieving major breakthroughs in targeted strategic areas of technological development and basic research. Moreover, a new policy package was announced in late 2006 covering four broad categories: enhancing R&D financing through public funding, tax incentives for S&T, and support for the development of financial-market funding channels; promoting innovation through improved framework conditions (IPR, technology standards, infrastructure construction); enriching S&T human resources; and, introducing a new evaluation system and increasing public coordination to improve the management of public R&D (OECD, 2007).

The governance of the S&T system, in which the Ministry of Science and Technology plays a prominent role providing support to university-related R&D, science parks and human resource
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development, has the following important features (OECD, 2007): The State Council Steering Group for Science, Technology and Education is a top-level coordination mechanism, which meets two to four times a year to deal with strategic issues. A number of ministerial agencies play a direct role in designing and implementing S&T and innovation policies: National Development and Reform Commission, Chinese Academy of Sciences (conducts research and promotes innovation through the Knowledge Innovation Programme), Chinese Academy of Engineering (provides policy advise), Ministry of Information Industry, Ministry of Agriculture, National Science Foundation of China (funds basic research). A number of other ministerial agencies, notably the Ministry of Finance and the Ministry of Commerce, have significant influence on S&T and innovation policies providing tax reliefs to exports of high-tech products and preferential treatment to FDI in high-tech sectors, while others, such as the Ministry of Personnel (attracts overseas Chinese scholars and manages post-doc programmes) and the State IP Office (defines policy on patents and other IPR issues), also exert an important, indirect influence. The existing governance structure suffers from the lack of a coordinating body with the status to coordinate all key policy issues.

State Councuil State Council Steering Committee of S&T and Education

National Development and Reform Commission

COSTIND

Other Ministeries

MOC

MOF

MOST

MOE

CAS

CAE

MOP

State IP Office

Innovation Fund for Small Technology -based firms

Productivity Promotion Centre

NSFC

Research programme

Research institutions

National S&T Programme

Universities

Research institutions

Regional S&T Administration

Research institutions Regional S&T Programmes

Research institutions with enterprises

Source: OECD, 2005, p. 54; Schwaag and Breidne, 2007, p. 157 Fig. 3-1 Public governance of S&T and innovation in China: institutional profile

The elaboration of Chinese S&T and innovation policy has focused on achieving the following objectives: promoting basic research in selected scientific fields with perceived potential impact on social progress and economic development; research and development on new technologies in selected high-technology areas of national priority; technology innovation and commercialisation; support for the construction of infrastructure for scientific research; and, development of human resources in S&T and rewards for S&T excellence. In each policy area, the government uses a
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set of instruments to support the policy objective (OECD, 2007): Support for basic research consists of various programmes: National Science Foundation programmes and 973 programmes; the reform of public research institutions and the various programmes for HRST; CAS Hundred Talents Programme, NSFC National Distinguished Young Scholars Programme. Support for high technology R&D consists mainly of the High Technology R&D Programme (863 Programme) and the National Key technology R&D Programme. Support for technology innovation and commercialisation includes programmes for the development of new products (National New Product Programme) and those for the construction of infrastructure for technology transfer and commercialisation (Torch Programme, Spark Programme, S&T Achievement Dissemination Programme). Related support measures include the Technical Innovation Fund for Small and Medium-sized S&T Firms, and provisions for tax incentives, venture capital. Support for the construction of infrastructure for scientific research consists of the National Key Laboratories Programme and the MOST programmes for the construction of platforms for sharing research facilities such as large research equipment, biological resources, S&T literature and R&D databases, and a network for scientific research. Development of HRST and rewards for S&T excellence: New Century Talents Training Programme, University Young Scholar Award. The mechanisms, programmes and institutions deployed as part of Chinas technological innovation policy since the early stages of the reform process are (Chen et al., 2006): Key Technology R&D Programme (1982) to encourage research in key technologies. State Key Laboratories Programme (1984) to support selected laboratories at public or private facilities. Resolution on the Reform of Science and Technology System (1985) to adopt flexible system on R&D management and reform institutes to be market-oriented. Sparkle Programme (1986) to promote basic research in agriculture. National Natural Science Foundation of China (1986) to support basic research through direct funding of the projects. Torch Programme (1988) focused on high-tech commercialisation and the establishment of high-tech zones. National New Product Programme (1988) to compile an annual list of new and high technology products and fund them selectively through the provision of grants and interest subsidies. National Science and Technology Achievement Spreading Programme (1990) to promote the commercialisation of technology-based products. National Engineering Technology Research Centre Programme (1991) focused on technology transfer, commercialisation of research products as well as the granting of greater autonomy to research institutes. National Basic Research Priorities Climbing Programme (1991) to promote basic research. Science and Technology Law (1993) to reform the S&T system and promote technology transfer.
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Ninth Five-year Plan (1995) focused on the commercialisation and promotion of high-tech and basic research. Super 863 Programme (1996) devoted to the commercialisation of breakthroughs in key areas. Key Basic Science R&D Programme (1997) to support basic science research. Innovation Fund for Small Technology-based Firms (1999) to support the establishment of newly technology-based firms.

The current S&T policy in China in framed in Chinas National Programme 2006-2020 for the Development of Science and Technology in the Medium and Long Term whose more important aspects are to increase R&D expenditures as a share of GDP, to strengthen domestic innovative capacity reducing dependence on foreign technology and to make enterprises and the business sector the central driving force of the innovation process. Important features are the aim to strengthen independent innovation trough the establishment of domestic technology platforms, to lead development in new technology areas to provide China a greater role in setting standards, the introduction of tax incentives to encourage companies to invest in R&D and to establish R&D activities abroad. The Programme places priorities on energy, water supply, and environmental technologies and recognises that IPR and standards will strengthen Chinas competitiveness. The ultimate goals to achieve are to develop technologies related to energy and water resources and environmental protection, master core technologies in information technology and production technology, catch up with the most advanced nations in selected areas within biotechnology, raise the pace of development in space and aviation technology, as well as oceanology, and strengthen basic and strategic research. The plan outlines concrete areas of responsibility and policies to be led and implemented by relevant departments of the Central Government (Schwaag and Breidne, 2007).

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Table 3-8 China's Long Term S&T Plan: Areas of responsibility and total number of supporting policies by department
Leading department Number of supporting policies Areas of responsibility Venture Capital Strengthening of innovation in SMEs Industrial technology policy Strengthening public venture capital funds Independent innovation capabilities Financial policies to support or encourage innovation in enterprises Public procurement Incubators and science parks Measure for supporting research and application of significant technologies Popularising science Universities Attracting overseas talent Tax incentives to encourage innovation in enterprises Increasing education of personnel in scientific fields Encouraging return of overseas Chinese

National Development and Reform Commission

29

Ministry of Finance

21

Ministry of Science and Technology Ministry of Education Ministry of Finance, State Administration of Taxation Ministry of Personnel Ministry of Commerce China Banking Regulatory Commission China Insurance Regulatory Commission State-owned Assets Supervision and Administration Commission Ministry of Information Industry China Development Bank Export-Import Bank of China General Administration of Customs

17

9 4 4 2 2 2 2 1 1 1 1

Regulations on investing insurance funds in venture capital enterprises Innovation and S&T management in State-owned enterprises

Soft loans to enterprises in national high tech fields Instruments for supporting the development of high techn enterprises

Source: State Council of the People's Republic of China in Schwaag and Breidne, 2007, p. 155

Universities are a key knowledge infrastructure and the central pillar of Chinese industry-science relationships being very active on all areas of technology diffusion and commercialisation through university science and technology (S&T) parks and incubators with a share of more than 10% of the total contract value in the technology market in 2004; the number of firms in technology business incubators (TBI) reached almost 40,000 in 2005, many of which were spin-offs from publicly-funded research. In 2003, business-funded R&D expenditure accounted for 36% of total R&D expenditure in the higher education sector. At the same time, higher education institutions and industrial enterprises jointly participate in a broad range of national S&T programmes supported by the government and many R&D centres established in China by foreign firms are estimated to be joint units with universities or research firms. Since 2000, university-backed venture capital firms have emerged in major scientific universities such as
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Tsinghua, Shanghai Jiatong, Fudan, and so on (OECD, 2007). Universities and research institutes diversification into manufacturing has taken place in three fundamental ways: spinning off part of their organisation as a new venture, transforming an internal institute as a licensed entity in a technology development zone while remaining part of the organisation, or supporting individuals to leave to start a new venture (Liu and White, 2001). The protection of IP in China is of good quality through rigorous examination process at a reasonable cost (10% of the total cost of patents for the G-8 countries), which makes China one of the most advanced countries in the field. To enforce the law, there is a specialised Court in IP that makes it easier to litigate and reduce costs. Importantly, local companies and universities have realised that through the invention and global patenting of new technologies they can set the standard and decide to whom license their developments (Atun et al, 2007). However, Infringement of IPR remains a concern as enforcement is weak: both judicial and administrative decisions are difficult to enforce due to the lack of appropriate infrastructure and mechanisms as well as of manpower (OECD, 2007).

3.3.1.2 Innovation policy in Mexico

One major consequence of the New Economic Model (NEM) in Latin America is the attenuation of the role of government in promoting the proactive process of industrial upgrading, due to unreasonable expectations from the liberalization of FDI for industrial development, which has led to failure to sustain absorptive capacity and is the root of the inability to sequence FDI and domestic capacity in tandem. Moreover, institutions continue to remain largely independent and national, making difficult the insertion of Latin America in the global context (Narula, 2002). Another consequence is the de-verticalisation in sectors that compete with cheaper and better imported products, broking down local networks and the related processes of knowledge diffusion with an increase of production in natural resources and maquila industries and a decline in industries producing engineering and knowledge-intensive products. This has entailed the destruction of human capital and domestic technological capabilities and their replacement with capital-embodied technologies and with foreign-supplied R&D and engineering services. These patterns of production specialisation are strongly biased against domestic knowledge generation with active participation in the globalisation of production but limited in the globalised scientific and technological activities (Castaldi et al., 2004). Regional R&D efforts are poor, concentrated in the export sectors and focused on the modernisation of production processes and product quality. Furthermore, the strategies are set out by global MNEs with a substitution of local technological resources by greater integration with imported inputs, stronger linkages with foreign engineering services and institutions, inhibiting local networks between firms and institutions to produce knowledge (Aboites and Cimoli, 2002). Mexico invests only 0.4% of its GDP in S&T (Gonzlez-Brambila, 2008) with the public sector providing 52.9%, the private sector 38.9% and universities 8.3%. The country also faces lack of resources, low degree of involvement of the private sector and weak coordination and organisation among the system stakeholders (Solleiro et al., 2007).
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The beginning of the S&T system in Mexico dates back to around 1930 with the creation of the National Institutes of Health. In 1960, the National Institute for Scientific Research was created to broaden the scope of the S&T effort through funding of scholarships. In the 1970s, it became the National Council for Science and Technology (Conacyt), which began to award research grants. Because the S&T system was financed by the government, the economic crisis in the 1980s caused a brain drain as a result of expenditure cuts. To counterbalance this trend, the National System of Researchers was created in 1984 to provide compensations to prolific researchers, besides their normal salaries. With changes in economic policy at the end of the 1980s, the system had to adapt to the new conditions of open competition and economic openness and a Mexican Programme to Support Science was established with funds from the government and the World Bank to support advanced research and, to a lesser extend, to support technological and innovation activities. It was not until 1998 that a system of fiscal incentives for private S&T was enacted. During these years, private contribution to gross expenditures in research and development amounted between 15-20% of the nations total (Gonzlez-Brambila, 2008). The institutional S&T structure is shaped by the National Council for Science and Technology acting as coordinator and promoter of scientific and technological activities. The main entities executing scientific research and technological development are the SEP-CONACYT research centres and the sectoral research centres that depend on annually-located federal budgets for their operation. The private sector is a minor participant and only large companies have their own R&D centres. One of the principal policy instruments is the Science and Technology Act whose aim is to coordinate efforts in S&T. The government has provided for several strategic areas: computer science, electronic data processing, biotechnology, communications, materials, construction, petrochemistry, manufacturing process and design, natural resources, water issues, technology transfer and regional, urban and rural development. However, the government has failed to provide specific intervention instruments relying only on mixed funds (federal government-states) and sectoral funds (federal government-state secretariats) to finance S&T research and development-related activities. The innovation policy is centralised with the execution of R&D performed basically by research centres and universities. At the aggregate level, Mexicos technology strategy is characterised by specialisation in exporting industries, subsidiaries of multinationals, where outsourcing and inter-business cooperation is more important than strategic alliances with research centres and universities (Solleiro et al., 2007). The specific programmes in place to foster innovation are (Gonzlez-Brambila, 2008): Fiscal incentives, supporting 30% of the firms total value of R&D benefiting mainly large firms and local operations of MNEs, whose share of resources has amounted to 82% of the total. 30% of the granted funds have supported the automotive sector and firms like General Motors, Volkswagen, Ford, Nissan, and Daimler Chrysler and 85% of the resources were awarded to the 5 richest states (45% to Mexico City alone). The use of resources is mainly to pay for labour costs (34%), followed by machinery, equipment and instruments (21%) and prototypes and consulting services (10% each). Sectoral fund operated by Conacyt and the Ministry of Economy to support technological innovation at SMEs by enhancing the collaboration between academy and industry or by
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boosting alliances among large firms and SMEs covering at most 50% of the project. AVANCE programme with three modalities: Last Mile, Entrepreneurs Fund and Warranty Fund. Last Mile provides resources to support the last stage of the innovation process; the Entrepreneurs Fund gives complementary resources in the form of venture capital and is managed through Nafin; the Warranty Fund gives an endorsement to firms to obtain commercial bank loans.

It is important to note that the countrys IPR framework lacks of incentives for the upgrading of technological capabilities in the Mexican system, reinforcing adverse mechanisms for the diffusion of innovation within the system. The basic flows (resident and non-resident applications) show a gap with a stagnation/contraction in the flow of applications from residents (Aboites and Cimoli, 2002).

3.3.2 Policy relevant to the sector


To promote renewable energies many countries have established different types of policies to make it attractive for private investment and affordable to end consumers. Different countries grant renewable energies a different weigh in their national strategies so there is a wide range of strategies used by different countries, as shown in Table 3-9.

Table 3-9 Public policy in renewable energy


Sales tax, energy tax, excise tax, VAT reduction Tradable renewable energy certificate Energy production payments or tax credits Public competitive bidding Public investment, loans or financing Renewable portfolio standard Capital subsidies, grants or rebates Investment or other tax credits Feed-in tariff Net metering

France Germany Japan United Kingdom United States China Mexico

Source: REN21, 2008, p 23, 24

3.3.2.1 China

China has several laws regulating environmental issues, of which the most important are (Geng
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et al., 2007): Constitution of the Peoples Republic of China Law of Environmental Protection promulgated in draft form in 1979 and passed and implemented in 1989. Cleaner Production Promotion Law of 2002 that promotes cleaner production at the company level and encourages broad cleaner production efforts at the inter-firm and regional level. In the case of PV, only state-supported system suppliers enjoy public-sector promotion and loans are rare (Projekt-Consult, 2007); subsidies or any other benefit policy to SWH enterprises or end-users are non existent (Li and Hu, 2005). The Central Government supports R&D in renewable energy through the NDRC and the MOST; the latter being responsible for the 863 programme, aimed at supporting R&D in high-technology, and the 973 programme, meant to support basic research. During 2001-2005, MOST provided 50-60 million RMB (5.2-6.2 million euros) for PV research, development and demonstration projects. The strategic approach for PV R&D in China focuses mainly on the materials used in PV cells and in the accompanying manufacturing process. However, China is apparently not trying to integrate the R&D effort in a broader strategy regarding energy policy and market deployment (Marigo, 2007). The MOST, the State Development and Planning Commission and the State Economic and Trade Commission set up the Programme on New and Renewable Energy Development in China 1996-2010; one of its objectives is to reach 4.67 tonnes of coal equivalent (TCE) of solar energy in 2010. They also have launched a photovoltaic programme (Sunlight Programme) to upgrade the countrys manufacturing capacity of polycrystalline and other advanced silicon technologies, to establish large-scale PV and PV/hybrid village power demonstration systems and home-PV projects for remote areas and to initiate grid-connected PV projects (Chang et al., 2003). Financial support to environment-friendly initiatives has come through national funds, international development agencies (United Nations Environmental Programme, Asian Development Bank) and even international corporations (Geng et al., 2007). Policy promoting renewable energy was given new impetus with the Beijing Declaration of Renewable Energy for Sustainable Development formulated in 2005 (Projekt-Consult, 2007). In 2006, China enacted its Renewable Energy Law giving specific incentives for renewable energy development (including preferential grid access, subsidies and tax breaks) and setting targets of renewable energy (Projekt-Consult, 2007; Boyle et al., 2008). In September 2007, the Medium-to-Long-Term Development Plan for Renewable Energy set out new targets in renewable energies (Boyle et al., 2008

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6% 9% Hydro Biomass Wind Rural household biogas Solar

9%

10% 66%

Source: Boyle et al. (2008), p. 53 Graph 3-3 Chinese Government renewable energy new investment forecast by sector, 2006-2020; billions of dollars at 2006 prices China installed capacity for solar PV has been driven by off-grid applications with some government programmes playing an important role (Marigo, 2007). 1996-2010. Brightness Programme to provide 100 W per person to approximately 23 million people with de-centralised energy systems based on solar and wind (Marigo, 2007), instituted by the State Development and Planning Commission (Chang et al., 2003). 2002-2004. Township Electrification Programme (part of Brightness Programme) to provide PV-, wind- and small-hydro-based rural electrification with subsidies of 208 million Euro on the capital cost of equipment in 7 western provinces with a total installed PV capacity about 20 MWp (Marigo, 2007). 2006. Village Electrification Programme (follow-up of Township Electrification Programme) to provide electrification to 20,000 villages in western China with a total budget of 2 million Euro and an expected installed capacity of 300 MWp (Marigo, 2007). 2006. On-grid roof-top plans in some municipalities with subsidy on installation equipment (Marigo, 2007). On-grid PV on Gobi desert: feasibility study for 8 MWp to be installed (Marigo, 2007). PV for 2008 Beijing Olympic Games: Road lamps, lawn lighting facilities, lamps for public lavatories and irrigation (Marigo, 2007). GEF/World Bank Renewable Energy Development Programme to support the installation of 200,000 PV solar home systems by private firms and to strengthen the institutional capacity, business skills and project management in the field of renewable energy in China (Chang et al., 2003). Since 2000, the national government has established national SWH testing centres with the support of international cooperation projects. Despite that of the 12 national SWH standards in 2004 only one national standard and one national industrial standard addressed their design, instalment and evaluation, SWH companies constantly pay attention to product R&D and quality
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control and have started to establish their own SWH testing centres. A Chinese certification system was approved and launched in 2005 (Li and Hu, 2005). In 2006 a new building code was introduced, requiring all new buildings to reduce energy consumption by 50% (65% in cities like Beijing and Shanghai) and one of the worlds most comprehensive mandatory energy efficiency standards and labels for home appliances was developed, avoiding the construction of 27 GW of power generation capacity by 2020 (The Climate Group, 2008).

3.3.2.2 Mexico

A lack of priority status for renewable forms of energy and the existence of separated regulations have hampered their widespread use. Major constraints are the monopolistic positions of the state suppliers and the statutory obligation to purchase or produce at minimum costs and, if possible, only from secure sources. An advisory board on the use of renewable energy sources was set up in 1997, with members from major government and non-government institutions, overseen and coordinated by the National Energy Saving Commission in conjunction with the National Association for Solar Energy. In 2001 the Regulatory Authority for Energy published special rules relating to renewable forms of energy requiring the Federal Commission of Electricity to give priority and provide facilities to this type of energy. Since the beginning of 2005, there has been the possibility of accelerated depreciation of up to 100% in the first year for investment in renewable energy projects; however, the plants must remain in operation for at least five years and serve productive purposes. The same year, a Law on Renewable Energy was adopted in the House of Congress but has not been approved by the Senate, impeding its publication and application (Projekt-Consult, 2007). Since April 2005, a project to promote renewable forms of energy has been in operation, involving the establishment of an efficient and self-sustaining market in cooperation with the government and the private sector, following several lines of action such as development of policies and strategies with initial priority in biofuels, consultancy on the legislative and regulatory framework and market and project development, initially focusing in solar thermal water heating. The project is primarily operated by Secretariat of Energy, the Regulatory Authority for Energy, the National Energy Saving Commission and the Secretariat of the Environment. In April 2006, a new security provision was issued in Mexico City requiring all new built and radically refurbished buildings in use for commercial purposes to meet at least 30% of their energy needs for water heating from solar energy; to facilitate this, the local government offers tax incentives (Projekt-Consult, 2007). Other policies and programmes, either government- or private sector-supported, are a national test lab in the University of Guanajuato to test solar water heaters under the voluntary standard NMX-ES-2001-NORMEX-2005 for solar water heaters; the project to implement the use of renewable energy in agriculture operated by the Ministry of Agriculture; and, the pilot project by the National Commission of Housing to install solar water heaters in testing places with the participation of real estate developers. However, because these programmes are not integrated in
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a national strategy, since 2007, the Federal Government has been promoting the use of solar water heaters in residential, business and agricultural projects through the Programme for the Promotion of Solar Water Heaters (PROCALSOL), scheduled to cover the period 2007-2012 and administered by the Secretariat of Energy and the National Energy Saving Commission with the cooperation and assistance of the National Association for Solar Energy and German Technical Cooperation Association (GTZ). The academic and private sector also participated in its design. The objective is to have 1800,000 m2 of solar water heaters in 2012 with a main focus in new constructions and buildings and a marginal interest in existent facilities. Five lines of action are considered: regulation, economic incentives to users, strengthening of supply, information and management. The regulation strategy seeks to develop standards to ensure a uniform quality of the equipment and minimum levels of performance as well as the training of human resources to install the equipments and the implementation of regulations compelling the installation of solar water heaters. The programme considers the possibility of accelerated depreciation of the equipment, only applicable to tax-payers, the establishment of credit schemes to finance the application of the technology by the private, commercial and agricultural sectors and the promotion of housing with solar water heaters through mortgages with favourable conditions. The strengthening of supply line of action covers the certification of design, manufacturing, installation and service firms coupled with the establishment of a quality seal to certify equipments; support for small and medium-size firms that use, manufacture and install equipments and promote the exchange of technology and information between technology developers, manufacturers and installers. The information component of the programme is aimed at diffusing the technology with end-users. Finally, the management action is focused analyse the outcomes of the programme and propose correcting measures when the goals are not attained (SENER-CONA, 2007).

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CHAPTER IV EMPIRICAL STUDY: CASE ANALYSES OF FIRM-LEVEL INNOVATION AND NETWORKING STRATEGIES

4.1 Suntech
Suntech Power, the worlds largest manufacturer of solar modules and third largest manufacturer of PV cells, was founded in September 2001. Its first project was to design an intelligent controller PV system, completed in 2003. Then, the company received certification from the International Energy Commission to enter the markets of Europe and the US. Suntech entered the New York Stock Exchange in 2005 raising funds that were used to make investments in technology development and new production facilities in China and to acquire competitor companies to build its own technical expertise. Its goal is to be the worlds lowest-cost solar producer. In August 2005, it announced the acquisition of Japans largest PV module manufacturer, MSK. Its last important project was the supply of the PV modules for the Bird Nest Stadium in Beijing.

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Table 4-1 Suntech's selected financial data


Net revenues (in thousands) PV modules PV cells PV system integrations Total Net income Gross margin Operating margin Net margin Products sold (MW) PV modules PV cells Total Average selling price ($ per Watt) PV modules PV cells Cash flows (in thousands) Net cash provided by (used in) operating activities Net cash used in investing activities Net cash provided by financing activities Net increase (decrease) 2003 $4,104 $9,741 $43 $13,888 $925 19.4% 5.4% 6.7% 2004 $77,898 $7,331 $58 $85,287 $19,757 29.5% 23.5% 23.2% 2005 $170,129 $54,653 $1,218 $226,000 $30,628 30.3% 18.9% 13.5% 2006 $471,916 $124,626 $2,328 $598,870 $106,002 24.9% 17.2% 17.7% 2007 $1,331,653 $13,725 $2,884 $1,348,262 $171,275 20.3% 12.7% 12.7%

1.5 4.9 6.4

25.9 3.6 29.5

49.8 17.9 67.7

121.1 38.5 159.6

358.8 4.5 363.3

2.77 1.99 2005 $22,622 -$31,120 $348,096 $340,202

3.01 2.02 2006 -$168,878 -$134,781 $172,678 -$133,794

3.42 3.05 2007 -$9,073 -$240,888 $547,058 $295,436

3.89 3.23

3.72 3.06

Source: Suntech Annual Report 2007 p. 20, 21

Suntech specialises in the production of solar modules, thin film solar cells and building-integrated photovoltaic cells (BIPV). The firm has production sites in Wuxi, Luoyang, Shenzhen, Nagano and Shanghai, with a total capacity of 360 MW annually.

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PV cells value chain

Solar grade polysilicon Ingots and wafers Solar cells Solar modules Distribution, system integration

Source: Based on interview with Suntech

Fig. 4-1 Suntech core business

Suntech has engaged in several initiatives to reduce costs so to become the worlds leader in the sector by providing grid parity solar solutions; grid parity means that solar energy costs the same as electricity fed from the grid. These initiatives are based on a) rapid growth and the exploitation of the economies of scale derived, b) procurement of raw materials at competitive costs and a c) consistent strategy to attain high efficiency in its product line through low cost technology. The first strategy consists of rapid capacity expansion and penetration into key markets to generate and benefit from increasing economies of scale; the strategy is supported by virtual vertical integration and financial flexibility to take advantage of opportunities as they arise.

1200 1000 1000 800 MW 600 400 200 60 0 2004 2005 2006 2007 2008 150 540

270

Source: Suntech Annual Report 2008 Graph 4-1 Suntechs year-end PV cell production capacity
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2005
ROW 46% US 1% Germany 45%

2006
ROW 33% Spain US 21% 3% Germany 43%

ROW US 8% 6%

2007

Spain 35%

Germany 51%

Spain 8%

Source: Suntech Annual Report 2008

Graph 4-2 Suntech geographic coverage

The procurement-of-raw-material strategy is focused on silicon, which counts for up to 80% of total costs. The goal is to secure a constant access to silicon at the lowest possible price while controlling for quality in terms of Suntechs customers demand through long-term, multi-year contracts with suppliers. The last strategy seeks to improve the efficiency of its product line and to control manufacturing and installation costs. In this area, Suntech has developed the Pluto technology to increase the conversion efficiency of its products and relies on the improvement of its process technology and equipment design to depend less on foreign, expensive technology and expertise. The challenges Suntech perceives at the industry level are, from the supply side, technical problems to increase the efficiency of the equipments to compete with fossil fuels. The solar industry became competitive when oil prices were beyond the 100-dollar threshold but now it has to face low prices: the challenge is to manufacture more efficient modules so that as they are able to provide more output the manufacturer can get a premium price. In the same line, the installation of the modules poses technical issues that must be solved so that every customer can get customised products meeting his requirements. The challenges from the demand side have become acute during 2008 as a consequence of the world economic slow down, where the main markets (USA, Europe and Japan) have reduced their consumption and the housing market has plummeted in several countries, which is reflected in dropping sales and fierce competition
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within the sector. Suntech faces these external challenges by developing solutions to scale the efficiency of its products, by signing long-term supply contracts with raw material suppliers and jointly designing production lines to achieve higher productivity and less waste in the manufacturing process. Its current target is to achieve 20% energy conversion efficiency. To face the slowing demand from international markets Suntech is deepening its efforts to reduce its costs and increase its productivity to attract customers. A particular issue Suntech has to deal with in the US market is the preference for local, US-made products, over foreign products, and particularly China-made ones. For this reason Suntech has acquired California-based EI Solutions to serve these customers as a local firm. Opportunities for Suntech come from the decreasing cost of silicon and the development of the Pluto technology, which combined enable the firm to produce modules that provide higher outputs at lower costs. As these equipments require the same manufacturing and installation materials as conventional modules and their output is higher, Suntech can differentiate from its competitors: more output at the same cost than competitors, which translates into lower cost per unit of electricity produced.

4.1.1 Innovation
Core competences

Top management

Face-to-face interactions KM systems Employee involvement

Strategy and vision: innovate to be leader

Strategic Business Units Innovation Third parties

Needs and trends Customers Training Business and technical advice Outsourcing Strategic alliances

Market Source: Interview with Suntech

Fig. 4-2 Innovation at Suntech

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Innovation plays a fundamental role in Suntechs business strategy as the means to achieve marker leadership through the development of the firms core competences based on the attainment of the most innovative, cutting-edge solar technology. In particular, the role of innovation at the strategy-level is to know the customers needs to adapt Suntechs technological solutions to meet their needs and requirements; in some cases, even involving third-party generated technologies that increase the value of Suntechs own. Suntech is well aware of the importance of failure for the exploration of new technologies and one important path-setting element in the innovation process in terms of which technologies are worth to invest and which ones are to be divested based in their practical outcomes. To avoid that failure becomes a constraint in the firms growth by draining funds and other strategic resources, Suntech has set clear directives on how long to invest in a particular innovation that might not be providing the expected outcomes (2-3 years at the most). Moreover, Suntech gives importance to interactions with other parties as the firm can learn from their failures to avoid making the same mistakes. Innovation is fully embraced and supported by top management: its CEO and founder, Dr. Shi, is a leading scientist in the solar energy field and 4 out of 7 members of its senior management team are also prominent experts in the PV industry with extensive research experience. Innovation at Suntech is aimed at differentiate it from the competitors through the provision of customised solutions to its customer. The generation and sharing of knowledge in and outside the firm becomes a major element of the firms strategy. First, knowledge is generated through internal R&D efforts and the information gathered from its interactions with customers, suppliers and other related entities, such as universities; Suntech values employees who are able to provide innovative solutions to meet the customers requirements and/or improve the internal operations of the firm. Then, knowledge sharing with internal employees and key partners is the second major concern so that it can be translated into improved products for customers and better decision-making to adapt the firm to changes in the market. All departments are involved in innovation and top managers have an important input in terms not only of strategy but also in terms of R&D experience and technological knowledge, due to their extensive experience in the field. The integration and coordination of the innovation process is performed by a member of the top managing team. Its execution is performed through interactions between R&D, marketing, sales, procurement and manufacturing where R&D integrates the input generated by the other strategic areas with its own and third-parties input. R&D closely interacts with manufacturing to deploy lab-generated technologies in mass production processes and adapt them when necessary, as well as to develop technological solutions based on the feedback provided by manufacturing. R&D, sales and marketing departments interact with customers to understand their needs, evaluate their experience with Suntechs products and provide them with customised technological solutions based on their feedback. R&D, manufacturing and procurement interact with suppliers through the provision of technological blueprints, quality control initiatives at the suppliers facilities, provision of technological and business-strategy related advice and training to improve their performance and quality of their raw materials while maintaining or reducing their costs. In some cases, Suntech
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invests in other firms, existing suppliers or start-ups, possessing or developing technologies that could complement Suntechs core competences and technological assets. Suntechs own R&D activities are devoted to improve existent products and to develop new technologies. Its has 241 R&D staff, which includes 130 global PV experts from China and abroad led by Dr. Stuart Wenham, who has previous research experience in Australias New South Wales University. Moreover, members of the R&D hold at least master degrees and many of them are Ph.D. with extensive research experience. Part of its R&D activities focus in the design of domestic alternatives to costly equipment used in the production of solar modules, which coupled with quality management practices, has allowed Suntech to attain worldwide leadership in its sector. Another area of development, where Dr. Shi is a leading scientist with 11 patents, is thin film technology solar cells. In its relationships with customers, Suntech pays important attention to the role of its sales force as a generator of solutions and feedback source to the R&D department. The information generated by the marketing and sales department is stored and distributed to all employees so that they can make decisions and propose new ideas based on the customers experience with Suntechs technology. The processes of knowledge transfer and communication is done through face-to-face interactions in meetings and training sessions that involve all internal departments and reach even beyond Suntechs boundaries and the use of the most advanced telecommunication technologies to allow for cooperation between people located in different places. Suntech deploys some of its employees at its suppliers facilities to provide them with training and advice to improve their products quality and reduce their costs so that Suntechs value chain can increase the value delivered to its customers. Suntech has partnered with international institutions to develop new technological solutions to achieve grid parity and become competitive. For instance, in cooperation with the New South Wales University and using the latters PERL technology (with the worlds record of conversion efficiency of 24.7%), Suntech has developed and patented the Pluto technology that reaches conversion efficiencies of 18% in monocrystalline PV cells and 17% in polycrystalline PV cells in mass production, reducing the cost of production while providing higher efficiency and energy output with savings in space utilisation and installation costs, compared with the average 16.4% of the standard mono-PV cell. From all these innovation activities, Suntech is able to generate technology that has to be managed in accordance with its corporate goals. In the first place, Suntech protects its core technologies through an extensive use of the patent system. Second, the firm accesses new technologies complementing its strengths and core competences through licensing from other firms or the investment in new technological start-ups with promising technologies that can be incorporated to Suntechs technological portfolio. In the case of technologies outside Suntechs core competences or R&D capabilities, the firm outsources its development to universities and research institutes in China and abroad to access complementary competence not available internally, remaining the sole proprietor of the technological outcome.
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4.1.2 Networking
As Suntech main line of business focuses on PV module production, it requires stable and strong relationships with upstream and downstream partners. These relationships are important as Suntech can get access to resources, competences and technology not available in the market or at better conditions than if they were acquired in the market.

Upstream

Downstream

Secure supply Control quality Get lower prices Access complementary resources and capabilities

Improve the environment Adjust technology to market demands Develop new applications and markets

Suntech

Long-term procurement contracts Investment Technological cooperation

Market prospection

Source: Interview with Suntech

Fig. 4-3 Upstream and downstream networking at Suntech

Suntech builds upstream relationships to ensure consistent supply, high quality, low price and to leverage its partners strengths and experience to more quickly and cost-efficiently develop technological solutions. The technological component of external upstream relationships is also important as Suntech can strength its core competences by the adoption, adaptation and further development of external technologies. Suntech also develops strong ties with customers and other external organisations to collectively contribute to the environment and help reduce the effects of climate change as well as to detect market trends to customise its products and adjust its technology to market demands and to develop new applications and markets for its own developments. To network with third parties, Suntech has deployed a wide array of instruments and processes that can fit with different actors in different circumstances. In its relationships with its supplier base, Suntech recurs to three main strategies: long-term market transactions (procurement contracts), investment and technological cooperation. In the first case, Suntech agrees to procure
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raw materials at prices and quantities negotiated with a given supplier from the time of contract signing, covering several years. Under this scheme, Suntech ensures a continuous supply of raw materials at preferential prices, lower than those that could be obtained through spot market transactions, and can monitor and influence its suppliers operations to ensure a constant quality of the materials and promote initiatives that can improve its suppliers output. For instance, Suntech signed a supply contract with MEMC to procure raw materials for ten years beginning in 2006. A second contract was signed in 2007 with Hoku to ensure 10 year-supply of polysilicon beginning in mid-2009, followed by contracts with Renesola and Asia Silicon Co., Ltd., to source wafers, high purity polysilicon, polysilicon and silicon wafers over several years. Through investment, Suntech can upgrade its suppliers capabilities and invest in technologies developed externally to improve its own operations. This strategy has been important to develop a strong supplier base in China to substitute for more expensive, foreign acquired technology and raw materials. For instance, Suntech invested in Hoku Scientific to strengthen its partnership with Hoku and support the latters polysilicon plant development. In the case of technological cooperation, Suntech works with upstream suppliers, customers, distributors and technology-developing institutions, such as universities, by outsourcing technology development, licensing agreements, technology transfer to and from external parties and accessing to technological capabilities not available internally, such as human resources and technology infrastructure. In 2007, Suntech joined with Open Energy to manufacture and market building-integrated photovoltaic (BIPV) products, with Akeena Solar to manufacture the latters Andalay solar panels and with Lumeta to manufacture the latters line of roof integrated photovoltaic products. In 2008, previous alliances expanded to cover new products: Akeena Solar licensed its new solar panel technology to Suntech for international distribution. In the case of its relationships with technology-generating institutions, Suntech conjointly developed the Pluto technology with Australias University of New South Wales, by which Suntech gained access to qualified human resources, advanced research facilities and equipment. In its relationships with its customers, Suntech interacts directly and through its network of distributors. Although sales and marketing are directly responsible for servicing customers, other areas can intervene in their domains of expertise when it is required such as in the case when technological skills and expertise are needed. Sales and marketing are responsible for collecting data and information about their customers needs and their experience with Suntechs products. These data are stored in company-wide information systems and shared through face-to-face interactions so that different areas within the company and upstream partners in the value chain can respond to changes in the market. In particular, Suntech can leverage its R&D capacity to develop customised solutions for every customer. Suntechs design divisions in Japan and the US act as market prospectors, collecting information on the needs of these market customers and designing solutions according to Suntechs capabilities. This process is supported by Suntechs China headquarters through sales, marketing, R&D, procurement and manufacturing to provide with integral solutions beginning from the conception of a product design to its physical delivery to the customer. So far, the approach of Suntech is to identify the needs of its customers and provide them with designs and products to meet their requirements rather than using customer designed products. The only exceptions are Suntechs alliances with companies that have developed a unique technology as in the case of Akeena Solar and Lumeta.
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4.1.3 Impact of government policy

Protectionism

Constraints Deterrence of demand Networking strategy

Public policy

Suntech corporate strategy

Firm-growth supporting infrastructure

Innovation strategy

Opportunities

Market creation

Technology development

Source: Interview with Suntech Fig. 4-4 Impact of public policy in Suntechs strategy

As Suntech operates in several countries, it is subject to different policies that impose constraints and provide opportunities for growth. In the case of its target markets, divergent policies related to the promotion of renewable energies have influenced Suntechs innovation and networking strategies. The case of the US is a particularly illustrative example. The American market has been the least developed, as compared with leading markets in Europe and Japan, in part due to a discouraging government policy addressing environment challenges such as the rejection of the Kyoto protocol by the Bush administration and its consequent impact in the demand for renewable energy. Contrary to what happens in Europe or Japan, where subsidies for renewable energy are in place, in the US there is no federal policy in the matter and policies are at the state level, such as in California, creating different challenges for the development of the market. This situation has pushed Suntech to make innovation a core component of its corporate strategy as the attainment of grid-parity is necessary to be able to penetrate the market: only if renewable energy costs the same as fuel-based energy, customers will be willing to adopt it independently of the environmental policy in force. As for the firm networking strategy, the US also has affected its strategic choice. Given the widening gap in the US trade balance with China, there have been voices asking for protectionist measures. This poses a challenge to companies that, like Suntech, have made China its manufacturing base. Therefore, Suntech forges close alliances with local distributors to appeal customers and to keep current on the market development in terms of public policy and customers needs as well as merges with local firms to get access to the market as a local firm
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and acquire new technologies. An example of the latter strategy is the acquisition of local American companies (MMA Renewable Ventures and EI Solutions). In other markets, Suntech has also engaged in relationships with third parties to benefit from complementary technologies, resources and capabilities. Examples of these relationships are in Japan through the acquisition of MSK to get access to design capabilities and in Australia through its cooperation in research with New South Wales University, whose most salient outcome is the Pluto technology. Where the impact of public policy has been more important for Suntech is in China. The firm chose to establish its manufacturing there not only because of the Chinese advantage in production costs but rather because of the availability of policies that would enable the firm to gain competitiveness and become leader in its sector. The main reason for the election are: availability of skilled labour force, the existence of an environment promoting and supporting innovation in high technology and the existence of a network of firms and organisations with complementary assets, resources and technologies that can be used by Suntech. The availability of qualified human resources in China is guaranteed by the public and private investment in their formation and training, ensuring a constant supply as required by high-tech firms like Suntech. As the operation of machinery to manufacture solar cells and modules requires basic technical knowledge, the large pool of individuals with at least high school education makes possible for Suntech to recruit and train them as plant operators benefiting by cost reduction in training as it requires less time and resources as they are capable of understanding the operation of the firms technology. Moreover, the availability of sufficient bachelor and master degree graduates also makes possible for Suntech to locally recruit supervisors and other plant and operations middle managers at competitive costs. Another government policy important for Suntech, in terms of human resources availability, is the attraction of overseas Chinese with the skills, experience and background needed to locally perform world-class R&D, which makes possible to generate proprietary technology to substitute for expensive, foreign technology without compromising the competitiveness of the firm in the long term. In the second aspect, the existence of public policies promoting the investment in high-technology through the provision of basic infrastructure, access to resources and technology has played an important role for Suntech. The facilities granted to Chinese nationals with working experience and formation abroad to start their firms enabled Dr. Shi to focus his efforts in the development of Suntechs technology, without dispersing his attention to excessive paperwork and bureaucracy. The availability of efficient communication and transportation means to move raw materials, finished products and people with knowledge as needed, has made possible to benefit from Suntechs links with external parties to increase their strengths and overcome their weaknesses so to provide customers with customised solutions at competitive costs. The existence of policies enabling the acquisition of technologies not available locally and the integration of local suppliers in the value chain also has played an important role as Suntech
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has been able to access the most advanced technologies and competences and secure access to local resources complying with international standards thanks to the existence of industries with complementary technologies and capabilities to Suntechs. The existence of local universities, technology-generating institutions and firms has played a crucial role for the growth of the firm. Without these supporting organisations, it would have been more difficult and expensive for Suntech to replace foreign technology and to access other firms resources and competences. In particular, the existence of explicit government plans to support the generation of new technologies, such as renewable energy, has played an important role in the creation of the necessary scientific infrastructure, the development of local technological capabilities and the formation of human resources, which can be accessed by Suntech at competitive costs.

4.2 Himin Group


Himin Group is a privately-run joint-stock group, which has become the largest solar water heater and vacuum tube manufacturer of the world as well as an industrial solar cluster integrating R&D, test, manufacture and marketing of solar photoelectric and solar thermal products, solar vacuum collector tubes, solar energy building and Winpin-saving glass. Himin was founded in 1995 by Dr. Huang Ming, a senior engineer with previous experience in the Petroleum Drilling of the Ministry of Geology and Mineral Resources in Dezhou, Shandong. Himin holds more than 300 patents: class interference film coating for solar thermal utilisation, solar energy high temperature generation, heating, refrigeration, seawater desalt, building energy saving. The firm has more than 10 branch institutes worldwide with factories, business, engineering, R&D and formation centres. It also participates in several national science and technology programmes in China. It has a production capacity of 1 million solar water heaters per year in its 6-factory complex in Dezhou, which consists of 50 fully automated production lines. The Dezhou complex includes facilities for the production of water heaters, vacuum tubes, energy-conserving glass and photovoltaic products and it is an important cluster for the development of solar technology in China. One of the most important achievements of Himin is that it has relied on its own proprietary production-line technology. Dr. Huang has developed the Sustainable Triple Recycling Model of Renewable Energy as the blueprint of Himin corporate strategy. This model considers several internal and external actions and actors that influence the development of the solar sector.

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Energy saving & environment protection social concern

Production and transportation service

Guidance & promotion

Government support Social concern

3 Science popularisation Industry Enlightment Experiencing marketing Market initiating Network building Brand image 1

Enterprise original investment

Profits

Industrial system capacity building

Disseminate enterprise mission Represent industry image

Source: Dr. Huang speech at the 14th UN Conference on Sustainable Development (Material provided by Himin)

Fig. 4-5 Sustainable Triple Recycling Model of Renewable Energy

The initial strategy is to create awareness in the society about the environmental challenges and the benefits of renewable energies to address them. In this stage, the role of marketing is important as it is the vehicle by which the company gets its message across and gathers information on customers needs, which is used to provide them with adequate solutions. This initial strategy leads to creation of market demand for renewable energy. In this stage, the building of networks and the creation of a positive brand image is important to enlarge the initial market and boost its growth rate as new customers can be appealed and the created relationships strengthen the firms core capabilities. Only when market is created and the products are sold can Himin be profitable. To ensure the sustainable growth of the firm, part of the profits is recycled (reinvested) in the implementation of the initial strategy, which will then create new demand and make possible new relationships and better brand image, reinforcing the generation of profits. Other portion of the profits is invested in the firms own technology development and capacity building to strengthen its position as leader in the market with reliable, high-performing products. These investments make possible to the firm to provide customers with solutions meeting their needs, enlarging the existing market and improving its brand image, pushing profits up. Once the market exists, the relationships are in place and the brand image is positive, their interplay creates social concern for the environment, calling for the creation of a new development framework more conscious of the conservation of nature and where governments are expected to support it. With the support of governments, the concern of society and the action of firms, the awareness of environmental issues increases, reinforcing Himins initial strategy and starting the process over to create a self-feeding virtuous circle that makes possible the long term growth of the firm and the industry. The largest challenge for Himin is the poor quality of many solar water heaters in China, which makes customers doubt about the efficiency and reliability of the technology. The reason is that
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Wuhan University of Technology

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with hundreds of manufacturers engaged in price wars, many of them cut costs to be able to compete based on low prices; to do so, they provide customers with substandard products that once installed fail to deliver their promised benefits. Himin sees this challenge as an opportunity because it knows that helping customers to differentiate between different types and qualities of solar water heaters will help it to appeal quality-conscious customers and differentiate itself from other competitors. To turn this challenge into an opportunity, Himin deploys an integral strategy comprising demonstration sites, participation in nation-wide government science and technology programmes and extensive public relations actions that link the company with governments, international organisations, non-government organisations and other firms. Through these actions, Himin aims at creating markets for its technologies while at the same time gaining exposure as a reliable technology creator. Another important challenge is the internationalisation of the firm. Despite of its being the largest manufacturer in the world and exporting to countries in all continents, most of its sales are still devoted to the national market (China). Although the size of the market, in terms of population and of demand of energy, is attractive and can sustain the growth of the company, Himin realises that attaining global leadership passes through not being dependent on any single market. Therefore, the company has engaged in continuous and active exchanges with firms and other organisations in the international arena. An important asset in its internationalisation is the scientific prestige of its founder and his network of personal contacts with industry, academy and political leaders in several countries, which can open the doors in new markets and with new business partners.

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Wuhan University of Technology

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4.2.1 Innovation

Top management

Marketing

R&D

Production

Market is the polaris of innovation

Market needs

Himin solutions

Third firms

R&D institutes

Universities

Zero distance Source: Interview with Himin

Fig. 4-6 Innovation at Himin

Himin sees itself as generator of innovations, developing its own product and manufacturing technologies not to depend on copying or acquiring others. As a consequence, the use and creation of knowledge in Himin is vital. The innovation strategy of the firm is defined by the top management and includes feedback and contributions from different areas based on information gathered on market needs and trends. Its implementation is holistic with all the departments having clear responsibilities over particular strategic actions whose supervision is conjointly performed by the department(s) involved and the top management. The philosophy of the top management is that everyone, no matter its position or activity, has the chance to innovate and be creative. Top managers promote their employees creativity, providing them with resources and incentives to encourage them to explore new solutions to meet its customers demands. To Himin innovation has no limits although it must be prudentially implemented not to affect the long-term sustainability of the firm. One example of company-wide innovation are the demonstration sites where engineers, sales and marketing staff work in close cooperation with each other to obtain first-hand information on customers needs, which is used in later processes of product and technology innovation. The innovation process is supported by a knowledge management system, under the direct supervision of the top management, conceived and designed to collect, analyse and store all the knowledge created by the employees and make it accessible to all of them. The importance for Himin of such a system is that uniformity is ensured as procedures can be followed in the same way no matter who performs them and that the ideas and innovations generated internally and gathered from external parties can be stored to increase the stock available for employees to use
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Wuhan University of Technology

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in their daily activities. The benefit of the knowledge management system to Himin is that employees can learn from previous experiences, failures and successes, to perform their tasks with minimum errors and to attain higher levels of productivity. The system also allows for time and cost savings in training new employees as well as non-routine decision-making that requires specific knowledge and abilities. R&D at Himin is an important part of innovation and is one of its most important assets. Dr. Huang is a recognised scientist in the field and he is personally involved with its R&D team. The members of R&D hold at least Master Degrees but most of them have Ph.D. degrees from Chinese and foreign universities. Moreover, some of the members of its R&D department are also members of the Chinese Academy of Sciences. Besides the traditional R&D labs and facilities, the R&D department has full access to the production lines so that they can closely interact with the operators and experience first-hand the problems of their newly developed technologies during their scaling up for mass production. To Himin, the needs of the market are the measure of innovation. Himin encourages a zero distance view of innovation: zero distance between high technology in lab and large-scale production, and between large-scale production and market demand, to provide value to customers through technology to meet their demands and needs of energy. To ensure this zero distance, staff from different areas interacts with customers in Himins demonstration sites. In these places, end-users can test the technology themselves and become familiar with Himins solutions. These demonstration sites are jointly managed by several units of Himin, such R&D, marketing, sales and production. From the users feedback gathered at these demonstration sites and through other available means at the marketing department (customer service, distribution network), every area has information to conjointly improve the existent products and design new solutions to meet the needs as stated by the customers and observed first-hand. This user-involvement in Himin innovation process is very important as it is the key to the company strategy of zero distance (between the needs of the market and the technology). Innovations need not to be technically impressive to provide the highest value to customers. Indeed, Himin prefers this kind of innovations over technically advanced solutions that have little value for the market. However, Himin is also aware of the opportunities of solar energy and thrives to develop the most advanced and efficient technology to realise them. Himin also works with external parties, in China and abroad, and integrates them in its innovation strategy. Himin takes part in several national (China) science and technology programmes: four 863 projects, one Torch plan project, one Double Highness project and one Excellence project. Through these programmes, Himin works in close cooperation with the Chinese Academy of Sciences, universities and other firms in China in the development of new solar technologies. For instance, in partnership with the Chinese Academy of Science, Himin runs the Chinese Academy of Sciences Himin Solar Energy Laboratory, whose research direction is solar thermal power generation and solar energy building technology. Himins international innovation links cover institutions in Germany, Australia, Spain and the US, with whom it has agreements to jointly develop and test new technology as well as technology licensing agreements where the involved parties can get access to each others physical facilities, human
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Wuhan University of Technology

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resources and technology. For instance, Himin is in partnership with the University of Sydney to manufacture its vacuum tubes using the technology developed by the university. This innovation network has allowed Himin to form an independent intellectual property system, diminishing its dependence on foreign, imported technology as it can directly tap talents at the worlds most important institutions to develop its own technological solutions at competitive costs. An important element of its innovation strategy is the creation of the solar cluster in Dezhou, Himin-China Solar Valley, to attract other firms to create an integrated solar-value chain, from the conception and design of products to its manufacturing and delivery to end-users. An important aspect of this cluster is the integration of third parties that can provide technology and expertise. An example of these efforts is the current construction of the World Renewable Energy Resources University in Dezhou, conceived to train the human resources needed by the cluster, to perform advanced research in the field and to provide new paths of development for the solar sector. The cluster is composed of manufacture and logistics centres, R&D and testing centres, scientific popularisation and education centre, international conference and communication centre and a tourism centre. The benefits of its open approach to innovation are multiple: Himin gets access to technology, research facilities, human resources and cutting-edge scientific knowledge to complement its internal capabilities at a lower cost than it would be whether Himin decided to develop its own independent infrastructure. An additional benefit is that the company can speed its innovation processes while reducing costs, as its local R&D staff can exchange knowledge, information and experience with other colleagues in different institutions to avoid the repetition of already existing research and to prevent failures. On the other hand, Himin gets its technology tested in different environments and settings so it can improve and adapt it to different market needs and conditions. However, without an appropriate management of the intellectual property generated by these interactions, Himin would face difficulties in safeguarding its own technology. Himin adopts a policy of patenting its most important technological developments and licensing third parties technology through technology transfer agreements. In the latter case, Himin obtains licenses for technologies developed in the lab and develops them for mass production. In this process of adaptation to mass production is where Himin creates and designs production lines that make possible the use of the technology in manufacturing processes. Therefore, to avoid claims and disputes over ownership of resulting developments, Himin has a legal strategy to ensure that all its potential developments on the technology are covered and protected in the technology transfer agreements to avoid future litigations. Sometimes, in particular when in comes to its participation in national programmes, Himin licenses its own technology to other firms and institutions who can further develop it. In these cases, Himin retains the intellectual property of every new application or further development and licenses it to these third parties for non-exclusive use during the time scheduled for the specific programme(s).

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One of the major failures of Himin related to innovation took place in 2000 when galvanised steel was substituted by conventional steel in the production of the frames for solar water heaters to secure a greener product; galvanised steel production uses more energy and causes more pollution than conventional steel. However, after several months in operation, several thousands of heaters rusted and Himin had to recall them, with costs amounting around 60 million yuan. This massive recall was due to the fact that Himin had not previously tested the new material under normal working conditions before the commercialisation of the product. Based on this experience, Himin built its own testing centre to thoroughly test all products and raw materials in the hardest working conditions before launching them to the market to avoid future problems. Moreover, the company confirmed its approach to discard those innovations having negative impacts in the products quality after being tested in the lab.

4.2.2 Networking

Universities Third firms Government R&D institutes

S&T programmes

Solar energy projects

R&D

Production

Customers

Marketing

Top management

Organisations

Demonstration sites Museum

International Conferences Source: Interview with Himin Fig. 4-7 Networking strategy at Himin

The dissemination of renewable energy in the society is important to Himin as this creates the necessary conditions for the development of new markets; interacting with other parties is an important element of its corporate strategy, not only to develop new technologies and find new markets, but also to create consciousness on the problems related and derived from the use of fossil fuels. Therefore, Himin is devoted to develop close relationships with customers, other firms in the industry, its suppliers, government and social groups to develop new technologies, to participate in the creation of programmes to solve current problems, to spread the benefits and advantages of solar energy and to get information on the needs of customers to develop
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technological solutions to meet them. The company is engaged in several actions to create external awareness of the renewable energy, the firm and its activities, which comprise advertising campaigns, demonstration sites, a museum devoted to solar energy, and application of solar energy in functional buildings such as the firms headquarters. The importance of networking is recognised, practiced and encouraged by the top management, Himins founder and CEO, Dr. Huang, is the first person in the company to actively collaborate and exchange ideas and experiences with other individuals and organisations in the field. For instance, he has been Industrial Vice-President of the International Solar Energy Society and representative at the 10th and 11th National Peoples Congress in China. In 2006 and 2008, Dr. Huang was invited by the United Nations (UN) to the 14th UN Conference on Sustainable Development and the UN Asia-Pacific Business Forum, respectively, as distinguished speaker to introduce the China model for the sustainable development of the solar energy. All departments in the company as responsible for forging close relationships with other organisations and are given the resources and incentives to do so. For instance, Himin works in specific projects with third parties by creating multi-disciplinary teams made of members of its various internal units, such as R&D, production, marketing, to provide a holistic approach, which is important to keep consistency with its zero-distance philosophy. Part of their employees assessment includes specific items measuring the time they invest in forging productive relationships with other people in their departments, other departments at Himin and external parties and how much they contribute to the exchange of information and experience in these relationships and how they use them to create new knowledge and opportunities for the company. The relationships between Himin and its suppliers and distributors are designed to ensure that they contribute to meet the customers needs. In the first case, Himin has established long-term relationships with suppliers that can provide high quality products at reasonable prices and lead times. To guarantee that, Himin first tests the suppliers products according to its standards, which are stricter than national ones and only when a supplier passes them satisfactorily, it will engage in long-term relationships providing them with a continuous demand for their products and the possibility of improving their existing practices and technologies. In the case of distributors, Himin is engaged in continuous training programmes to ensure a uniform service to customers and for them to act as interface between the market and the company through market trends data collection and analysis, which is passed to Himin to strategise to meet the changes in the market. At the local level, Himin works closely with other firms, the national (Chinese) government and the academic sector, in particular the Chinese Academy of Sciences, through several government-backed science and technology programmes. Within the framework of these programmes, Himins R&D and production departments work closely with scientists at the Chinese Academy of Science, national universities and other firms to develop and improve existent solar technologies. Some of the technologies developed in the lab are tested by Himin in
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a mass production environment. On the other hand, some technologies developed by Himin are improved by external experts and new competencies and resources are made available to Himin such as R&D physical and human resources. In consequence, Himin has been able to improve its own technology as well as to transfer its expertise in the marketing of high technology solar products to researchers so that the new products respond to the needs of the market. One of the projects currently in process is a 1.5 MW solar thermal power station, designed by the Chinese Academy of Sciences, whose construction has started in Beijing to supply the Chinese capital with clean energy. The plant is expected to generate up to 2.7 million kWh of electricity per year to power at least 30,000 households, eliminating 2,300 tonnes of carbon dioxide emissions. In some cases, the outcomes of the programmes where Himin participates influence government policies in the form of laws, regulations and standards. For instance, at the initiative of Dr. Huang, the Renewable Energy Law of the Peoples Republic of China was legislated in 2005 to take effect in 2006. At the international level, Himin takes active part in the International Solar Cities Congress (ISCC), held every two years, which gathers academics and professionals in the sector to discuss solar technologies, education, culture and so on to improve energy policies, update energy technologies and concepts through ideas exchanges. Himin is organising the 4th ISCC, which will take place in Dezhou in 2010. At the industry level, Himin is teaming with enterprises in the US, the government of Baden and firms and a research centre in Germany, as well as other Chinese firms to build the World Renewable Energy Resources University in Dezhou with a co-investment totalling 0.5 billion yuan to be completed in 2010. Besides interacting with other players in the industry, Himin also seeks to forge close relationships with the society through an important public relations effort. Through demonstration sites the firm gets close to its final customers to get first-hand feedback on the performance if its technology in an end-user setting. Furthermore, different areas of the company gain direct experience and information on the needs of the market, which is used at later stages to design, produce and improve new and existing technologies to meet the demand. In its headquarters at Dezhou, Himin runs a museum devoted to renewable energies, a high-tech garden and a demonstration zone. These facilities are created with the purpose of supporting the diffusion of renewable energies by demonstrating their feasibility in real-world operation conditions. The management of such a complex relationship network calls for new skills and processes at Himin. Therefore, Himin continuously is training its employees to develop their social skills to complement their technical skills and be able to establish new relationships and benefit from them. Besides training, Himin encourages its employees to devote some of their time to know and interact with people in other internal departments so that every employee is familiar with other areas responsibilities and how everybodys work impacts positively or negatively the overall performance of the firm. Participation in multidisciplinary teams to solve specific problems and carry out projects is an important element of internal interactions. At the external level, employees also spend time working in projects with other organisations personnel. Through these projects, Himins employees visit these counterparts facilities and Himin hosts its
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partners personnel, as well. These interactions allow for a direct transfer of knowledge and expertise in the field as well as reducing times and costs of technology development through this pooling of resources.

4.2.3 Impact of government policy

Innovation strategy

Education

Provision of skilled labour force Networking strategy

Public policy

Infrastructure and support policies

Access to resources, capabilities and markets

Himin

National science and technology programmes

Involvement of private sector

Source: Interview with Himin

Fig. 4-8 Public policy and Himin strategy

Himin is aware of the importance that government policy plays in addressing the challenges posed by global warming and the diffusion of renewable energy. However, its perception is that the government is only one of the various society members that must play a role in this issue: other members of the social tissue must be proactive in seeking participation and make their contributions to the solution of the environmental challenges. In particular, Himin agrees that the government can never play a role of trying to solve all problems and perform all tasks in a society. Their view is that the government must provide the society with the adequate framework and incentives so that every member can perform its tasks in the most efficient way. To Himin, the public policies in place have greatly influenced and facilitated its innovation and networking strategies. It is recognised that what has been achieved so far would have been more difficult and costly were the policies not been as supportive. Three specific policies have been important: availability of human resources, the existence of a supporting environment and the focus of national science and technology programmes to give more responsibility to firms to innovate. A fourth policy has been influenced somehow by Dr. Huangs membership to the National Peoples Congress: a proactive policy to develop the renewable energy sector in the
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country. The availability of qualified human resources is very important to Himin. It identifies two specific policies in this area: abundant supply of labour with technical education and government policies to attract overseas Chinese. The constant supply in large amounts of skilled-technical human resources, graduated from public universities and technical institutes, diminishes training costs and increases labour productivity when coupled with investments in technology. In the second line of action, Himin considers that the policies the government has in place to encourage Chinese nationals who have studied or worked abroad to come back to China are important because their availability in the local labour market provides local firms with the same experience and knowledge available in developed countries, which helps them to improve their competitiveness to international standards and practices. The existence of research institutions and universities and the availability of physical infrastructure to access raw materials and markets have been important to support the growth of Himin. Without the existence of local universities and research institutes with strong technological capabilities and open to cooperate with private firms, Himin would have had to invest large amounts in developing comprehensive R&D facilities to develop its own technology. Fortunately, the closeness of both parties cultures, in terms of openness, and the complementary of their technological capabilities, has made possible to cooperate in the development of local technology at competitive costs and reduced development times, maximising their investments in physical R&D infrastructure and human resources. The availability of efficient communication and transport infrastructures makes possible to Himin to stay in close contact with its suppliers, distributors and other parties as well as to move raw materials, finished products and resources along its value chain. An important government policy that has played a major role for Himin is the change in focus in the development of national science and technology programmes where the private sector is encouraged to take part. This change has made possible the realisation of Himins networking strategy as it as been able to participate in several national science and technology projects. Once linked to other organisations, its capacity to innovate has been increased as more resources can be deployed and a larger knowledge base is accessible to its employees. A second important outcome is that the technology developed by Himin can be improved through the interactions within these programmes as other parties have different resources and capabilities to explore new technological possibilities. However, in the particular case of Himin, through its proactive approach to link itself with other parties, the firm has been able to influence somehow the public policy in the field of renewable energy development as the National Peoples Congress passed the Renewable Energy Law, proposed by Dr. Huang. This law and the policies designed to make China an important player in the field of renewable energy will further increase the capabilities of firms like Himin and have an impact in the future development of the whole sector in country.

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Besides the positive impacts of public policy, Himin recognises some constraints: the lack of specifically trained human resources and the absence of strict quality standards for solar water heaters. In the first case, Himin realises that though there is an abundant supply of personnel with technology-related education, there is a lack of personnel with education on renewable energies, which implies that firms have to experience learning curves for newly-recruited personnel until they become familiar with the technology. To counterbalance this, Himin with other partners has committed itself to establish a university specifically devoted to renewable energies to provide the industry with the needed human resources. In the second case, although there are standards in China that regulate the quality of solar water heaters, they are not as strict as the ones Himin uses for its own products. Thus, many local suppliers of solar water heaters are providing low quality products and are affecting the reputation of the sector as a whole in the eyes of the customers, which impedes the realisation of its maximum growth potential.

4.3 Cal-o-rex
Cal-o-rex is one of the two firms of the water heater division of the Mexican conglomerate Grupo Industrial Saltillo (GIS), which also has interests in the construction and automotive sectors. GIS was founded in the decade of 1920 starting as manufacturer of metallic products. Its water heater division was started in 1957 producing fuelled-water heaters under the Cinsa brand. Cal-o-rex started operations in 1948 as a local company supplying fuelled-water heaters. In 1967, Cal-o-rex was merged by American Standard, which provided access to state-of-the-art technology and capital that made Cal-o-rex the leader in Mexico. In 2000, Cal-o-rex was acquired by GIS. However, Cal-o-rex is maintained as a separate division from Cinsa.

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Construction

Automotive

Vitromex Cinsa Cal-o-rex FluidaNet Santa Anita En Casa Grupo Industrial Saltillo

Cinfunsa

Services and Human Resources

ASGIS

Source: Own elaboration with information provided by GIS

Fig. 4-9 Cal-o-rex within Grupo Industrial Saltillo (GIS)

Table 4-2 Grupo Industrial Saltillo's selected financial data


Net sales (millions of MXP) Net revenues (millions of MXP) Cash (millions of MXP) Operating margin Net sales (millions of dollars) Net revenues (millions of dollars) Cash (millions of dollars) 2003 $6,635 $243 $1,337 11.1% $442 $16 $89 2004 $7,601 $484 $1,240 8.2% $507 $32 $83 2005 $7,637 $93 $1,047 1.9% $509 $6 $70 2006 $8,762 $227 $1,220 4.1% $584 $15 $81 2007 $8,824 $364 $665 2.5% $588 $24 $44

Source: Grupo Industrial Saltillo Annual Report 2007 p. 25 Note: Conversion to US dollars has been made with an exchange rate of 15 MXP per dollar

The industry main challenge is the low market penetration of solar water heaters in Mexico. Despite of its geographical conditions and size of the internal market, the customers prefer fossil fuels-based heaters as they ignore the possibilities of solar technology and due to the high initial acquisition costs. In the first case, although there has been research in solar energy in the country for several years, there is an information gap where the mass of customers remains ignorant of the benefits and applications of solar energy, resulting from the low average schooling of the population, an inadequate selection of target audience and the intermittent efforts of firms to communicate with end-users. This has resulted in a lack of trust of potential buyers in the efficiency of the technology. As for the acquisition costs, two main aspects of the local environment must be considered. First, the average income level of the population is low, with around 50% of the population at or below the poverty line, and the ubiquitous trend of self-construction in the country. In the latter case, most of the people do not rely on professional
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services of engineers, architects or construction companies to build their houses. This situation is worsened by the concentration of the residential housing market in few large cities and the lack of access to credit for house acquisition due to high interest rates. Consequently, people engage in self-construction projects, which are gradual (the house is not built at once but in stages) and use low-cost materials available locally. Moreover, in the supply side there are not enough technicians with the knowledge and experience in the technology, which leads to poor results due to inadequate installations. At the firm level, Cal-o-rex faces two main challenges: lack of adequate distribution and service channels and financial constraints to further develop the technology. In the first case, most of the installers are not familiar with the technology and in many cases the equipment is installed either by novice installers or the end-users themselves, which causes underperforming and leads to customer dissatisfaction. Moreover, most of the distributors are not service-focused and when customers have complaints about the product, they act as gatekeepers preventing Cal-o-rex access to this information. To remediate this situation, Cal-o-rex has in place training programmes but efforts have not reached its whole universe of resellers. The second challenge is of financial nature as GIS has been negatively affected in its derivative operations as a consequence of the global economic crisis and the devaluation of the Mexican Peso, increasing its dollar-nominated debt, which is coupled with a fall in demand in its key North American markets. This has led to the reduction of available funds to finance the operations of the firm, increasing the budget constraints for the groups activities.

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4.3.1 Innovation

Strategic blueprints GIS Advice ASGIS Technology transfer American Standard agreements Advice and training GIS R&D centre Technology development

Cal-o-rex Direction of New Business Development

Patents Utility designs Trademarks and brands Industrial secrets

Innovations

Source: Interview with Cal-o-rex Fig. 4-10 Innovation at Cal-o-rex

The approach of GIS to innovation is mixed: on one side the conglomerate seeks to develop its own technology, when self-development is advantageous in terms of cost and time, through its own R&D centre (Centro de Investigacin y Desarrollo de Tecnologa). On the other hand, for technologies already available or where the investments would be large, GIS relies on transfer agreements with the owners of the technology. For instance, Cal-o-rex has licensed technology from US firm American Standard for the manufacture of various types of water heaters. GIS strategy in its water heater business is based on the development of low-cost products new to the market to face the intense competition. The company mainly relies on external licensing of advanced technologies and their internal development to upgrade the groups capabilities in design and mass production. Although the group has a central R&D centre, each subsidiary establishes its own goals related to innovation, following the groups top management objectives for growth, market participation and so on. The innovation strategy at Cal-o-rex is decided internally, following general strategic lines set by GIS administration board. The strategy-setting process at GIS involves the conglomerates top management as well as the General Managers of the groups subsidiaries. These general strategic lines establish the goals to be met by each subsidiary; for instance, in terms of sales and market share increases, cost reductions and available funds for investment to each subsidiary. Each subsidiary is given entire responsibility to design its operational plans and organise and deploy the necessary resources to implement them, within the defined strategic lines.

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Internally, innovation strategies are responsibility of a member of Cal-o-rex top management, whose functional adscription is the Direction of New Business Development. This functional design increases contact with the General Manager and other top management members, ensuring full support to the implementation of various innovation strategies and an adequate coordination with other functional departments. This direction is responsible for prospecting new applications for the firms products as well as identifying new markets and technologies that can improve, enlarge and complement the firms current business. To perform its tasks, this direction works closely with the firms General Manager and other directions, such as Finance, Operations, Marketing and Human Resources, to foresee potential business areas and identify trends in the market to design and implement the needed strategic changes. To develop and implement its strategies, Cal-o-rex is supported by another subsidiary firm of GIS, ASGIS, whose mission is to support and ensure that GIS different subsidiaries strategies and operational plans are in line with the groups strategic lines. ASGIS provides training and consultancy services on different areas, such as management, legal, strategic planning, finance, human resources, information technology, public relations and supply chain management. To fulfil its mission, ASGIS has highly specialised human resources, with extensive experience and education. ASGIS staff is in close contact with the different subsidiaries departments in its areas of expertise to advice and train them as well as to develop and perform specific projects, such as the implementation of group-wide quality systems, information technology projects, to mention some. The interactions between ASGIS and the groups subsidiaries take place through the deployment of ASGIS personnel at the subsidiaries to perform specific tasks or to train the subsidiaries staff in specific areas. The firm also acts as advisor for the groups top management team to design strategies and set targets for the different subsidiaries based on its experience on the field, its assessment of the subsidiary and the information generated in relation with the trends in the market. To support the planning, implementation and control of its strategies, GIS has in place an Enterprise Resource Planning (ERP) platform that allows different business units to automate their internal processes and have real-time access to information to make informed decisions and strategise. To ensure a centralised management of the system and the consolidation of all the data and knowledge generate, this platform is under the direct supervision of GIS top managers through its subsidiary ASGIS. The ERP platform includes an electronic exchange board where people in different areas can work on specific projects, share information, seek and provide advice and store all the information generated, which can be accessed by different business units to increase the knowledge base of the group and make strategic and routine decisions. In 2000, GIS established its own R&D. In this centre, engineers work in the development of technologies in the various sectors where the group has interests. One important function of the centre is the adoption and adaptation of technologies licensed from international companies with whom GIS subsidiaries have strategic alliances for technology transfer, production and commercialisation. Some members of the centre hold master degrees, although they are a minority, in engineering and science-related areas.

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GIS relies on extensive use of intellectual property to protect its own innovations. The main instruments are patents, utility designs and trade marks. GIS extensively uses technology transfer agreements to secure and guarantee access to the needed technologies, as they are developed by its partners, within specific limits legally defined by contracts signed when the strategic alliances were formalised. GIS has designed ASGIS as the subsidiary responsible of managing the groups intellectual assets to ensure a centralised control of these important assets.

4.3.2 Networking
Private sector universities and R&D

GIS ASGIS

GIS R&D centre

American Standard

Cal-o-rex

Industry organisations Public universities and R&D Government Strong relationship

Weak relationship

Source: Interview with Cal-orex Fig. 4-11 Networking strategy at Cal-o-rex

Cal-o-rex is part of an industrial conglomerate with interests in several industries, which has important impacts for the firm. In the first place, GIS also owns a second water heater manufacturer, Cinsa, which was the original business unit of the conglomerate in the sector and a direct competitor to Cal-o-rex until GIS acquired Cal-o-rex from American Standard in 2000. Both subsidiaries are operated separately, each one with its own brands, assets and factories. However, both firms often pool their physical, financial and human resources into specific projects. Morever, Cal-o-rex, as well as other GIS subsidiaries, can get access to the conglomerate wider pool of resources, such as GIS R&D centre or the specialised consultancy and training services of ASGIS. Thanks to this access to resources, the development and manufacturing of solar water heaters by Cal-o-rex and Cinsa, with assistance from GIS R&D centre and American Standard, was faster and the costs of research were diminished, as they were split among different firms, than if the technology had been developed as a single company. At the group level, Cal-o-rex has also benefited from the implementation of a group-wide ERP
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and ISO quality systems and continuous support and assistance of the groups own R&D centre and ASGIS. Cal-o-rex has continued its relationship with its previous owner, American Standard, to source technology to upgrade its operations and develop new products. This technology transfer is part of a wider cooperation agreement by which American Standard gets lower costs in labour-intensive stages of its production process and Cal-o-rex gets access to technology and international markets, although under American Standards brands. Through American Standard, Cal-o-rex gets access to American universities and research institutes, although these relationships are rather indirect. GIS has agreements with its suppliers to access to raw materials under preferential terms due to its large amount of purchases. Besides these traditional market relationships, GIS has partnered with a government-owned development bank, Nacional Financiera (NAFIN), to improve its Mexican suppliers collection processes related to their operations with GIS as well as to provide them fiscal and legal advice and training through ASGIS and ASGIS partnerships with local universities and professional organisations. Through this scheme, GIS also transfers technologies to its suppliers either by providing advice through ASGIS or selling them technical equipment, which is acquired from the equipment suppliers in preferential terms due to GIS reputation, purchasing and negotiating power. GIS counts on ASGIS to centralise the cooperation between the group and universities and research institutes for aspects related with professional advice and training and through GIS R&D centre for technology-related issues of interest for the conglomerate. However, every subsidiary also forges external relationships in their areas of interest. Most of the relationships with universities and research institutes are to train the firms personnel and seek advice in specific matters. These relationships are mainly targeted to private universities as their culture and practices are closer to the needs of the private sector. With respect to relationships to develop or transfer technology, they also target the private-run universities and research institutes as they are more open to these relationships and they have state-of-the-art technologies and advanced technological practices. When the technologies and capabilities are not found in the private-funded research sector, Cal-o-rex establishes relationships with public universities and research institutes. However, these relationships tend to be of limited nature as there are several obstacles and few incentives. One of the first obstacles is that the research in the field of solar energy, as well as the related technology and equipment, is not so advanced in Mexico as in other countries. Moreover, the mindset of the researchers in these institutions does not fit the needs of the private sector as local science production is far from the requirements of local firms. Another obstacle is the excessive paperwork needed to formalise relationships with public universities and research institutes and the incertitude over the ownership of any discoveries that might arise. Cal-o-rex also has important interactions with other firms and organisation through its membership to several chambers of industry. These formalised relationships seek to improve the
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conditions to run their businesses in Mexico as well as to exchange information and experiences through specific forums organised within the chambers. However, as the members of these chambers have distinct backgrounds, interests and come from different sectors, it is difficult to establish strong relationships to perform projects of interest for Cal-o-rex. Although there is a National Association of Solar Energy (Mexico), Cal-o-rex is not a member due to its being excessively focused in academic and diffusion issues. The interaction of Cal-o-rex with the association is limited to some specific projects where both participate such as the Programme for the Promotion of Solar Water Heaters implemented by the Secretariat of Energy.

4.3.3 Impact of government policy


Public policies have had favourable impacts through tax cuts for R&D performed by the private sector and the inclusion of different sectors in the formulation of national plans for renewable energy development. However, other policies have been rather negative: lack of qualified human resources, the expensive paperwork required to comply with government regulations in several areas, the deficient infrastructure available and the legal restrictions to invest in energy-related sectors. GIS R&D centre is registered at the National Council for Science and Technology (Conacyt), which entitles it to benefit from reimbursement of R&D expenditures, amounting 30% of the total project. In the period between 2005 and 2008, GIS has benefited of this scheme, amounting nearly MXP$ 164 million (US$ 10931,032.13 at an exchange rate of MXP$ 15 per US dollar). However, these fiscal policies are not enough to encourage private sector investment in R&D; additional policies are needed. For instance, rapid depreciation of fixed assets, whether devoted to R&D or not, and transparent access to public universities and R&D organisations so that firms can complement and upgrade their existing capabilities.

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Table 4-3 Fiscal reductions to Grupo Industrial Saltillo (Mexican Pesos)


Year 2008 Company Calentadores de Amrica Calentadores de Amrica Calentadores de Amrica Grupo Calorex Grupo Calorex Grupo Calorex Grupo Calorex Calentadores Cinsa Calentadores Cinsa Grupo Calorex Grupo Calorex Grupo Calorex Grupo Calorex Grupo Calorex Grupo Calorex Grupo Calorex Calentadores Cinsa Grupo Calorex Grupo Calorex Grupo Calorex Grupo Calorex Grupo Calorex Project code CAM0007314M8-2008-1 CAM0007314M8-2008-2 CAM0007314M8-2008-3 GCA0007314S9-2007-1 GCA0007314S9-2007-2 GCA0007314S9-2007-3 GCA0007314S9-2007-4 CCI9802199I1-2006-1 CCI9802199I1-2006-2 GCA0007314S9-2006-1 GCA0007314S9-2006-2 GCA0007314S9-2006-3 GCA0007314S9-2006-4 GCA0007314S9-2006-5 GCA0007314S9-2006-6 GCA0007314S9-2006-7 CCI9802199I1-2005-1 GCA0007314S9-2005-1 GCA0007314S9-2005-2 GCA0007314S9-2005-3 GCA0007314S9-2005-4 GCA0007314S9-2005-5 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Amount of government support 77,587,386.00 360,366.36 79,331,791.00 942,617.54 376,984.63 248,877.43 1,235,398.89 77,441.64 252,832.99 143,516.25 99,429.01 223,412.63 528,373.29 700,225.25 95,498.53 896,913.78 469,946.41 229,879.16 59,929.86 22,227.23 23,728.00 58,706.02 163,965,481.90

2007

2006

2005

Source: Official Gazette February 27, 2009; March 3, 2008; March 5 and 15, 2007; March 23, 2006

A second favourable impact of public policy is the change in focus taken by the government in the formulation of national programmes. In 2007, Cal-o-rex as well as other firms, universities and international organisations (GTZ) took part in the design of the Programme for the Promotion of Solar Water Heaters (PROCALSOL) leaded by the Secretary of Energy and the National Energy Saving Commission. Through this change, different sectors were able to voice their opinions and take active part in the design of public policies. Moreover, closer links were facilitated as the industry, the academy and the public sector became aware of the realities of their counterparts and started closer interactions between them during the design phase of the programme. In the case of policies that have impacted negatively the firms strategies in innovation and networking, these are related to education, public administration, infrastructure and regulation of the energy sector. Cal-o-rex, as many other companies in the country, faces a shortage of qualified personnel to support its innovation strategies. Particularly acute is the reduced number of graduates in science and engineering available in the labour market. A second problem related with the availability of qualified labour is that it is concentrated mainly in the three largest metropolitan areas of the country. Moreover, in most cases their qualifications and skills are not in the degree and quality needed to support the growth of high-tech industries. To solve this problem Cal-o-rex recruits preferably graduates from private universities who are better skilled than their public universities counterparts. However, their numbers are reduced and thus firms can not sustain
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continuously their innovation strategies. In the case of the staff in charge of operational aspects at the firm, their educational levels are even lower, junior high school in the best case, and their qualifications and skills make it necessary to spend resources and time in retraining them once theyre hired, which affects the productivity of the firm. Besides the lack of skilled labour force, Cal-o-rex has to face several constraints posed by public policy in other areas. For instance, the absence of an integral approach to promote innovation makes difficult and more expensive to develop an independent technology platform due to the lack of specialised human resources, policies targeted at the development of the sector and access to organisations that can complement the firms capabilities and resources. In other areas, there is no long-term strategy from part of the government, which makes difficult to firms to plan for the future and commit the necessary investments as the policies very often change from one year to another. Moreover, access to public administration services and the compliance with existing laws and regulations require too much paperwork, which increases the costs of doing business as personnel and resources are distracted from most productive activities at the firm. The available physical infrastructure in the country is insufficient and has diminished its quality over the years, increasing costs and times to reach customers and source raw materials and affecting the scheduling of the firms operations involving external inputs. The most important bottlenecks in this area are high costs in telecommunication services needed to connect with external parties, the poor transport infrastructure to mobilise physical resources, the excessive paperwork needed to import the technology and raw materials, with the accompanying costs and time, and the lack of state-of-the-art technology and research organisations in the country to complement and upgrade Cal-o-rex existing capabilities and resources. Finally, the laws that regulate the energy sector in Mexico prevent private firms to participate in power generation and distribution. In consequence, firms can not develop their capabilities in solar energy beyond small-scale applications. Due to the fact that power generation is a state monopoly, firms find few incentives for innovation in this area or even to develop existing technologies as the potential benefits to the firm, in terms of market penetration and development or self-use for power generation, would be hardly realised as the involved costs would outweigh them. Moreover, although firms could develop technology to supply the state firms in the sector, the latters bidding processes are not clear and slow, which makes investments in the field uncertain.

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CHAPTER V FINDINGS OF THE EMPIRICAL STUDY

5.1 Public policy in the sector


5.1.1 Government policies supporting/constraining sector development
From the three case studies we can identify several policies that affect and constrain the development of the solar industry. In some cases, the absence of an explicit policy is also a concern. We will follow the taxonomy of functions of an innovation system proposed by Chaminade and Edquist (2006) and outlined in section 2.23 to present our findings.

Function

China Abundant supply of skilled labour at competitive cost Local R&D infrastructure: universities and institutes

Mexico Labour without needed skills to support innovation strategies Local R&D infrastructure does not match industry needs

Provision of knowledge inputs in the innovation process

Early transformation of the S&T system (1980s) Demand side factors Integral national S&T plans and laws supporting firm integration in the sector and technology development and upgrading Strenghtening of local S&T infrastructure with a focus in the integration of private sector in the innovation process Long-term policy making with a growing emphasis in the integration of different parts of the S&T system

Late and incomplete transformation of the S&T system

Lack of a global, integrated strategy in the sector; constant policy changes

Provision of constitutents of innovation system

Marginalisation of private-sector involvement in the innovation process Unstable links between the constituents of the system

Provision of support services for innovating firms

No trace of incubation, financing or consultancy provisior policies in the development of the solar sector

Partial financing of innovation in the sector without clear outcomes in terms of innovation

Source: Own elaboration Fig. 5-1 Comparison of public policies in the solar sector in China and Mexico

The first function refers to the provision of knowledge inputs in the innovation process: provision of research and development and competence building in the labour force to be used in innovation and R&D activities. In China, Suntech and Himin agreed that their innovation strategies have been benefited by the abundant supply of skilled labour and the existence of a local R&D infrastructure with whom to network to speed their own innovation processes while reducing costs. To Himin the absence of specialised human resources in renewable energies has had a certain impact in terms of costs for training personnel in the field. To tackle this constraint the firm has embarked in the creation of a university specifically devoted to renewable energies in partnership with local and international partners. The picture for Cal-o-rex is distinct. First, the local labour force lacks the necessary skills to support any innovation strategy intended by the
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firm and the existent R&D infrastructure does not match the requirements of the industry and is not deemed to be a potential partner for innovation. With respect to demand-side factors (formation of new product markets and articulation of quality requirements for the products), in both countries we have observed the existence of policies to promote the use of renewable energies. However, Mexico is a latecomer compared to what has been already achieved by China. In the first place, China has already outlined specific policies, in the form of national S&T plans and laws, to generate its own technology in the field, to involve firms in the development of the industry and to promote the rational use of energy. On the contrary, although Mexico has started steps in the definition policies to tackle with the growth of the sector and the promotion of private-sector innovation, from the perspective of Cal-o-rex these policies are not framed in a global, integrated strategy and sometimes are not long-term focused, which poses a strong constraint for the development of firms. Referring to the aspect of articulation of quality requirements, China has in place compulsory standards for the industry to guarantee minimum quality levels for the products, although in the perception of Himin those standards are not so strict as they should be; on the contrary, Mexico has a standard of voluntary application for the industry, which might retard the upgrading of local producers in the absence of other incentives to do so. In relation with the provision of constituents of innovation system (creation and change of organisations needed, provision of institutions that influence innovation and networking through markets and other mechanisms) the picture is similar to the previous point. China has made a long way in this area, although the task is not completed, while Mexico has taken some steps in the same direction, though not framed in an overall strategy; China started a change in its S&T system in the 80s to integrate the private sector in the development of technology while Mexico remains locked in the initial stage with unconnected policies aimed at encouraging private sector involvement. Himin and Suntech can be thought of as a new type of Chinese firm, deeply involved in the generation of innovations in partnership with already existent S&T organisations at the local and international level that has strengthened their competitiveness in the international arena. The existence of long-term plans and policies with clear goals and actions enables the long-term planning in Himin and Suntech and allows for their involvement in areas of common interest with other organisations. Finally, the existence of local S&T infrastructure makes possible the realisation of Himins and Suntechs strategies to access external resources and capabilities complementary to theirs to explore new technological breakthroughs and achieve sustainable growth through the development of their own strong core competences. From the experience of Cal-o-rex, it is observed that policies are not long-term and stable which does not provide adequate signals for the private sector to take a more prominent role in innovation. Moreover, the existent S&T institutions, regulations and laws limit the networking strategies of the firm as the potential partners number is limited and their contributions to the firms strategies are not significant. Overall, these policies inhibit the development of a local solar industry. Regarding the provision of support services for innovating firms (incubating activities, financing of innovation processes and provision of consultancy services), we find that their influence in the
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development of the solar sector seems not to be strong based on the cases analysed. From the experience of Himin and Suntech, we can not identify any public policy related to any of these aspects and therefore it is not possible to identify their impact in the firms strategies and growth. In the case of Cal-o-rex, we have identified funding to private-sector innovation, through partial reimbursements, although in the access of data to measure the firms performance in innovation is not possible to derive any relationship. As for the other two activities, there is no evidence of public policy influencing them. In summary, we find that proactive public policy to create an adequate environment for the development of firms has nurtured the growth of the solar sector in China. To be effective, these policies have to be framed in a comprehensive, integral development strategy at the national level where distinct aspects and functions impacting innovation, firm development and growth are addressed. The case of Mexico, with unconnected policies and absence of proactive strategies to influence the evolution of the business environment, makes clear the constraints created to the development of the sector as firms do not find a propitious environment for the realisation of their strategies.

5.1.2 Public policy and the insertion of the national industry in the international context
It is found that public policy has indirect consequences in the internationalisation of firms. In the first place, when firms are able to build their capabilities locally, their position regarding potential international partners is stronger and the firm can further develop its strengths and add new capabilities. Suntech and Himin, embedded in a supporting environment that has allowed them to build strong R&D and innovation capabilities, have pursued their internationalisation linking with partners that have complementary capabilities and resources that strengthen theirs and have attained leadership in their markets. On the other hand, Cal-o-rex has not been able to build strong capabilities, in part due to the absence of local resources and capabilities, with the consequence that it has become dependent on foreign technologies and expertise; lacking strong innovation capabilities the firm is unable to appeal organisations with resources and capabilities that could boost its innovativeness. From the experience of Suntech in the US it is found that public policies of potentially protectionist nature or obstructing the development of a sector in target markets coupled with country-of-origin public policies nurturing the firms capabilities benefit firms as they have the incentive and skills to develop their core capabilities to overcome the constrains posed by such policies. Cal-o-rex makes a contrast as the firm has lower barriers to enter the American market due Mexicos membership to the North American Free Trade Agreement. Whereas Suntech has complemented its own capabilities and become stronger, Cal-o-rex has become dependant on its partners brand image and technology. Although this outcome is unintended, the experience of
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Suntech and Cal-o-rex in the same market shows that firms with innovation and networking strategies oriented to internal development of strong core competences, supported by business environments that enable firms the access to the needed capabilities and resources, are more likely to overcome any potential constraint in international markets of difficult access and strengthen their core capabilities; otherwise, firms are likely to become dependant on foreign partners to access markets and source technologies. It is important to note that in this research the individual impact of firm strategies and public policy in the success of Suntech in the US is not been measured.

5.2 Firm-level strategy


5.2.1 Innovation-through-networking strategy
The firms analysed have different approaches to innovation and networking. Suntech and Himin rely on self-development of technologies and capabilities and to linking to external partners to complement their efforts; Cal-o-rex relies on adopting available technologies and, in minor scale, developing its own.

Table 5-1 Patenting activity: Suntech, Himin and Cal-o-rex


Number of patents China Mexico World Intellectual Property Organisation European Union United States 9 0 62 3 0 208 0 0 0 0 0 1 0 0 0

Suntech Himin Cal-o-rex

Source: State Intellectual Property Office (PRC), IMPI (Mexico). World Intellectual Property Organisation, US Patent & Trademark Office and European Patent Office

Table 5-1 presents the firms output in terms of patents. As can be observed, Cal-o-rex performance is poor in this area with only one patent submitted and whose content is not related to solar energy but to fossil-fuelled water heaters. On the contrary, Suntech and Himin have an active patent activity. Moreover, several patents analysed registered both firms CEO as (co)-inventors. The difference in the firms production of innovations, as measured by number of patents, could be partially attributed to 1) the innovation strategy chosen by the firms (self-reliance versus innovation-adopting organisation) and 2) the mutual impact of the firms innovation and networking strategies (to complement core competences versus sourcing technologies and accessing markets). Suntech has chosen to develop its own capabilities by the inclusion of third parties
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complementary resources and capabilities either by direct acquisition, as in the case of firms in Japan and the United States; by investment, in the case of specific suppliers of raw materials; or by partnering, as in the case of New South Wales University to develop new technologies. In most of the cases, the firm seeks to secure access to important resources and capabilities that strengthen its core competences in innovation. Himin also has chosen to rely on its own developments complemented with strong relationships with external stakeholders, in particular with those supplying complementary resources, knowledge and technologies. Its approach is more holistic as the firm is taking proactive measures to get involved in all kinds of activities related to its area of expertise, not only to have direct inputs for innovation but also to make itself visible to potential partners, customers and the society. For instance, the firms CEO involvement in policy making through its membership to the National Peoples Congress or participation in international conferences or the firms continuous contact with end customers through different means to follow and anticipate market trends and needs. On the other hand, Cal-o-rex networking strategy is part of the firms nature though its impact on innovation is different as the firm does not rely on proprietary innovation; the firm seeks access to resources and capabilities not available locally to upgrade their own but, in the absence of incentives and resources to become an innovation-generating organisation, it has been locked in a dependent position in its relationships with external organisations, in particular those transferring technologies and providing access to international markets. These findings are summarised in Fig. 5-2
Public policy Strategic intent

Firm Networking Acquisition, investment, partnering to access resource and capabilities strengthening core competences

China

Development of local capabilities and organisations

Self-reliance, local development of core capabilities

Access to complementary resources, knowledge and technologies and visibility to potential partners and customers

Top management support and direct involvement

Multiple department deployment of innovation strategy under CEO direction

Mexico

Disintegrated system of innovation, lack of local capabilities

Access to resources and capabilities not available locally to upgrade firms own

Sourcing of knowledgeembodying technologies

Management support, involvement at the strategic level Source: Own elaboration

Top manager devoted specifically to innovation with participation of different departments

Fig. 5-2 Innovation-through-networking strategy in China and Mexico

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CHAPTER VI CONCLUSIONS
5.1 Public policy
The findings of the research confirm the importance of government policy in building an adequate environment for the development of the private sector (Edquist, 2001; Scheel, 2002; Asheim and Herstad, 2003a; Narula, 2004; Calestous and Lee, 2005; Carayannis et al., 2006; Carlsson, 2006; Chaminade and Edquist, 2006; Galanakis, 2006; Cimoli et al., 2007; Mazzoleni and Nelson, 2007). Suntech and Himin have benefited from government policies in education, scientific infrastructure building and encouragement of renewable energies, which does not mean that their success relies on public policies. On the contrary, their success is due to their strategic planning and deployment with public policy creating a supportive environment for their realisation, allowing both firms to focus in the development and upgrading of their core competences. In these cases, public policies have provided the necessary incentives to firms to link with those organisations who can complement their capabilities, as well as provided the necessary inputs in terms of capabilities (human resources), infrastructure (basic science and technology) and clear policy (long-term strategy) for the realisation of the firms innovation strategies. In conclusion, countries with supportive policies for the creation and development of local innovation capabilities and infrastructure and with policies that encourage and facilitate links among firms and organisations with complementary capabilities are more successful in nurturing high-technology industries than countries that rely only in market mechanisms.

6.2 Firm strategy


6.2.1 Innovation through networking
The present research provides evidence that firms must build and develop their own core capabilities first and then seek externally complementary resources and capabilities that can not be efficiently sourced through market transactions to strengthen them. Otherwise, as exemplified by Cal-o-rex, without strong core capabilities in innovation, firms are likely to become dependant on their partners. In conclusion, the impact of networking in the performance of firms seems to be more related to the firms own endowments than networking itself: firms with strong core competences are more likely to become better performers as the external links provide them with resources and capabilities that strengthen their core competences; on the contrary, firms without strong core competences become dependant on their partners.
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6.3 Implications for the development of the sector in Mexico


The experiences analysed provide useful insights on how Mexico could develop a local solar sector to exploit its geographical position and create its own capabilities in the field. The implications can be described in terms of changes in the science and technology system and policy. In the first case, it is necessary to address the issues related with local knowledge generation through the upgrading of the skills of the labour force to supply local firms with the needed human resources to pursue their innovation strategies; this upgrading of the quality of labour force can be attained through the increased training of students and professors in scientific disciplines. In this same line, an increase in the quality and quantity of research in the field is needed at the universities, in particular paying attention to the needs of the market and the industry at the local level. Policies in this area can include additional funding to research done by universities in partnership with private firms in promising areas and the promotion of internships of industry personnel at research labs and scientists at firms. At the same time, other policies should address the lack of linkages among the constituents of the system through policies and incentives enabling science-generating organisations and the private sector to forge close relationships to develop technology and complement resources and capabilities. The experience of China is illustrative with policies encouraging universities to complement their research budgets with private contributions, which has increased the participation of private firms in the innovation process. The figure of research consortia is needed to link public universities, the private sector and leading international organisations in the field to ensure the transfer, adoption and adaptation of state-of-the-art solar technologies from leading universities and institutions to build local capabilities. To encourage the creation of such research consortia, public funds could be provided on a competitive base to complement the resources provided by consortias participants. Additionally, a change in the evaluation of performance of researchers in public institutions is needed to include their participation in private-sector led projects and their efforts to transfer technologies from the science to the manufacturing sector. In the second case, changes in policy are needed at the macro-level to provide certitude to investors and firms for long-term planning and investments. The first issue at hand is to build an environment conducive to the creation of local industries in environment-related areas through the provision of clear laws and regulations, drafting of environment- and energy-efficiency standards and a further inclusion of the private and academic sector in the setting of public policy. The present research gives evidence that the formulation of long-term policies accompanied by regulations promoting the development of environmentally-friendly industries has played an important role for firms to develop their core competences as they can commit their efforts to and efficiently deploy their resources in long-term strategies.

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Knowledge generation

Reinforcement of scientific education to impact the supply of labour (quality and quantity) Increase of research quality and quantity through additional funding and exchanges university-industry

Increase in international competitiveness

Changes in S&T system

From sourcing technology to partnering for technology development

Research consortia including academy, industry and international partners Networking Change in promotion and evaluation systems at scientific institutions to encourage transfer of knowledge to industry Increase of innovation competence

Firms and industry Generation of policies matching needs of the market and industry

Integral long-term laws, regulations and standards Policy reform Inclusion of academy and private sector in policy-making Source: Own elaboration Fig. 6-1 Strategies for the development of the solar sector in Mexico

Long-term planning and strategy deployment

As shown in fig. 6-1, the impact of the proposed changes would be twofold. In the first case, firms would be able to increase their innovation competence and capabilities, which lead to a change in the motivation for partnering, from technology sourcing to technology development. As firms become more oriented to the development of technology, they will identify and develop those core competences where they have the highest returns and obtain the complementary competences and resources by partnering with organisations that possess them to reinforce their original core competences and have higher productivity in innovation. The second set of changes would lead to an environment more conducive to firms, which in turn would enable them to engage in long-term strategising and in consequence they will concentrate more in developing core competences than adapting to an excessively unstable environment derived from unclear and contradictory public policies.

6.4 Shortcomings
The study has analysed three particular cases, two firms in China and one in Mexico. In consequence, the findings are not to be considered descriptive of both countries solar sector as more firms need to be included to derive conclusions valid for the whole sector. Moreover, the research has used a qualitative approach, which falls short to detect true relationships in the analysis of data. The reason to choose such an approach is the lack of hard data to perform quantitative analyses to compare the three cases at hand.

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A second shortcoming is that only national firms, Chinese and Mexican, have been analysed. The design of the research did not considered foreign-invested firms with operations in the country as our purpose was to identify the impact of public policy on the development of the local solar industry. Another major shortcoming is that access to information was not the same in all companies so the results can not be fully comparable between them, especially due to the qualitative design of the research. When important gaps in the information existed they have been complemented with secondary sources such as firms annual reports, external publications referring to the firms activities and publications related to the solar sector.

6.5 Further directions of research


A possible direction of research is to conduct quantitative analyses on a larger sample of firms to measure the real impact of specific public policies in the firms innovation and networking strategies. This sample could include also foreign-invested firms to determine the outcomes of public policies in terms of a countrys attractiveness to foreign investors and measure the impact of public policy might have for each group: national- and foreign-invested firms. Other points to control would be firm size. Another area of research is to perform quantitative analyses on firms who practice open innovation and those who do not to compare their performance in terms of productivity, market share, growth and other quantitative measures to evaluate the impact of open innovation. A second analysis could be carried out to distinguish between firms that network themselves to complement and strengthen their core competences, as it is the case for Suntech and Himin, and those who network themselves but lack the internal core competences to be innovators and therefore become dependant of technology transfer from other sources, as is the case of Cal-o-rex, to measure the real impact of these distinct strategies on their performance.

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Wuhan University of Technology

Masters Degree Thesis

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Wuhan University of Technology

Masters Degree Thesis

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Wuhan University of Technology

Masters Degree Thesis

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Wuhan University of Technology

Masters Degree Thesis

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Wuhan University of Technology

Masters Degree Thesis

ACKNOWLEDGEMENTS
The cases studies were made possible thanks to the generosity of the Lic. Jorge Ferro, from Cal-o-rex, Ms. Rory Macpherson and Ms. Fang Yina, from Suntech, and Mr. Jiang Hongsheng, from Himin, who provided their valuable experience and comments.