Innovation Processes

Oxford Handbooks Online

Innovation Processes
Keith Pavitt
The Oxford Handbook of Innovation
Edited by Jan Fagerberg and David C. Mowery

Print Publication Date: Jan 2006

Subject: Business and Management, Innovation, Organizational Theory and Behaviour
Online Publication Date: Sep 2009 DOI: 10.1093/oxfordhb/9780199286805.003.0004

Abstract and Keywords

This article is concerned with innovation processes within firms, focusing mainly on
innovation within large corporations in advanced countries. It draws on empirical studies
of innovation processes, bearing in mind the difficulties for generalization posed by the
highly contingent nature of innovation. It presents a short introduction to the many
theories and empirical studies of innovation and suggests a simple framework for
disaggregating the many innovation activities which take place at the firm level. Three
broad, overlapping subprocesses of innovation are identified: the production of
knowledge; the transformation of knowledge into artifacts—which mean products,
systems, processes, and service; and the continuous matching of the latter to market
needs and demands. This article examines key aspects of each of these three
subprocesses, showing how each has evolved historically and why they pose such difficult
problems for innovation-related managers, entrepreneurs, researchers, and workers.

Keywords: innovation processes, empirical studies, products, systems, processes, service

4.1 Introduction1
THIS chapter concerns innovation processes within firms, focusing mainly on innovation
within large corporations in advanced countries.2 What do we know about the historical
evolution of these innovation processes and about the key challenges facing “innovation
managers” within modern industrial corporations?3 The chapter draws on empirical
studies of innovation processes, bearing in mind the difficulties for generalization posed
by the highly contingent nature of innovation. Section 4.2 presents a short introduction to
the many theories and empirical studies of innovation4 and suggests a simple framework
for disaggregating the many innovation activities which take place at the firm level. Three
broad, overlapping subprocesses (not stages) of innovation are identified: the production
of knowledge; the transformation of knowledge into artifacts—by which we mean
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Innovation Processes

products, systems, processes, and services; and the continuous matching of the latter to
market needs and demands.5 Sections 4.3 through 4.5 examine key aspects of each of
these three subprocesses, showing how each has evolved historically and why they pose
such difficult problems for innovation-related managers, entrepreneurs, researchers, and
workers. The chapter identifies these management difficulties and points to some of the
strategies firms have deployed to meet these challenges.

(p. 87) 4.2 Corporate Innovation Processes

Since there is more than one process of innovation, there is no easy way to organize this
chapter. Innovation processes differ in many respects according to the economic sector,
field of knowledge, type of innovation, historical period and country concerned. They also
vary with the size of the firm, its corporate strategy or strategies, and its prior experience
with innovation. In other words, innovation processes are “contingent.”6 These difficulties
are compounded by the fact that there is no widely accepted theory of firm-level
processes of innovation that satisfactorily integrates the cognitive, organizational, and
economic dimensions of innovation processes in firms. Economists tend to concentrate on
the economic incentives for, and the effects of, innovation (largely ignoring what happens
in between). Organizational specialists focus on the structural and procedural correlates
of innovative activities and processes, sociologists on their social determinants and
consequences. Managerial specialists address the practices most likely to lead to
competitive success, psychologists may examine the phenomenon of creativity or the
ways in which people's vision is restricted to one or other set of opportunities. Rich
accounts and data resources have come from these and other lines of work over the past
decades. Empirical evidence and theoretical understanding have been amassed by
historians, from survey researchers and those concerned with bibliometrics, patenting,
and other quantifiable dimensions of innovation. A growing number of “innovation
studies” shows little allegiance to any particular discipline, and widely disparate theories
and methods coexist in relevant journals and handbooks.

Joseph Schumpeter is considered a pioneer in the economic analysis of innovation, having

concentrated more effort on this topic than any other economist in the first half of the
twentieth century. His insights have guided the subsequent development of the field, and
helped to explicate the vital role of innovation in growth and competitiveness. But
Schumpeter's early work in particular (see Fagerberg 2003; Fagerberg, Ch. 1 in this
volume), stressed the role of individuals, rather than organizations, in the innovation
process, highlighting the character and determination of outstanding individuals, and
defining innovations as “Acts of Will” rather than “Acts of Intellect.” His interpretation
reflected the nature of the evidence available to him at the time. As the authors of the
SAPPHO study (Rothwell et al. 1974) found, the vast majority of earlier studies of
successful and unsuccessful innovation were personal memoirs and anecdotes of the
exploits of individual scientists, inventors or managers and contained little or no
systematic comparison or analysis. Project SAPPHO and many similar, subsequent studies
were in part attempts to overcome the “individualist” bias of personal memoirs. They set
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Innovation Processes

out to examine a wider set of organizational factors, as well as the skills and experience
of a wider range of individuals participating in each innovation.

(p. 88)

In order to understand this rich but potentially confusing mosaic of knowledge about
innovation processes, I suggest the following general framework:

(1) Innovation processes involve the exploration and exploitation of opportunities for
new or improved products, processes or services, based either on an advance in
technical practice (“know-how”), or a change in market demand, or a combination of
the two. Innovation is therefore essentially a matching process. The classic paper on
this subject is Mowery and Rosenberg (1979).
(2) Innovation is inherently uncertain, given the impossibility of predicting
accurately the cost and performance of a new artifact, and the reaction of users to it.
It therefore inevitably involves processes of learning through either experimentation
(trial and error) or improved understanding (theory). Some (but not all) of this
learning is firm-specific. The processes of competition in capitalist markets thus
involve purposive experimentation through competition among alternative products,
systems, processes, and services and the technical and organizational processes that
deliver them.

In organizing the evidence, it is useful to divide innovation into three, partially

overlapping processes, consistent with the two features described above.7 Each process is
closely associated with contributions from particular academic disciplines. Each process
also has undergone major historical transformations as the process of innovation has
evolved.

• The production of scientific and technological knowledge: a major trend, since the
industrial revolution, has been for the production of scientific and technological
knowledge to have become increasingly specialized, by discipline, by function and by
institution. History and social studies of science, technology and business have
contributed significantly to our understanding of this transformation.
• The translation of knowledge into working artifacts: in spite of the explosive growth
in scientific knowledge in recent years, theory remains an insufficient guide to
technological practice. This reflects an underlying trend for growing complexity of
technological artifacts,8 and in the knowledge bases underpinning them. Technological
and business history have made major contributions here as have the cognitive
sciences more recently.
• Responding to and influencing market demand: this involves a continual process of
matching working artifacts with users' requirements. The nature and extent of the
opportunities to transform technological knowledge into useful artifacts vary amongst
fields and over time, and determine in part the nature of products, users and methods
of production. In the competitive capitalist system, corporate technological and
organizational practices co-evolve with markets. Social change and innovations in

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Innovation Processes

marketing and market research have contributed to complex problems and equally
complex solutions to the challenge of matching technological opportunities with
market needs and organizational practices. These (p. 89) processes are central
concerns of scholars in management, economics and marketing studies.

I now discuss the implications of change over time in the structure and nature of each of
these features of innovation processes. Such change presents considerable challenges to
the modern innovation manager and to the corporation as a whole.

4.3 The Production of Scientific and

Technological Knowledge
All the improvements in machinery, however, have by no means been the
inventions of those who had occasion to use the machines. Many … have been
made by the makers of the machines, when to make them became the business of
a peculiar trade: and some by… those who are called philosophers, or men of
speculation, whose trade is not to do anything but to observe everything: and who,
upon that account are often capable of combining together the powers of the most
distant and dissimilar objects…. Like every other employment … it is subdivided
into a number of different branches, each of which affords occupation to a
peculiar tribe or class of philosophers; and this subdivision of employment in
philosophy, as well as in every other business, improves dexterity and saves time.
(Smith 1937 (orig. 1776): 8, my italics)

Adam Smith's identification of the benefits of specialization in the production of

knowledge has been amply confirmed by experience. Professional education, the
establishment of laboratories, and improvements in techniques of measurement and
experimentation have increased the efficiency of discovery, invention, and innovation.
Increasingly difficult problems can be tackled and solved.9 New and useful fields of
knowledge have been developed, punctuated by the periodic emergence of fields with
rapid rates of technological advance and offering rich opportunities for commercial
exploitation. For example, progress in such activities as metal cutting and forming, or the
use of new power sources, has been informed by and has drawn upon physics, chemistry,
and biology, as well as a variety of related engineering disciplines. Today, the coordination
of increasing specialization remains a fundamental task of the large corporation.

Three forms of corporate specialization have developed in parallel. First is the

development in large manufacturing firms of R&D laboratories specialized in the
production of knowledge for commercial exploitation. Second is the development of a
myriad of small firms providing continuous improvements in specialized producers'
goods. A third trend of specialization is the changing “division of labor” between private
knowledge developed and applied in business firms, and public (p. 90) knowledge
developed and disseminated by universities and similar institutions. Taken together, all
these forms of specialization have combined to make a heterogeneous and path-

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Innovation Processes

dependent pattern of technical change that places great demands on corporations for
coordination of processes within their boundaries and between these organizations and
others external to the firm. These processes of change, examined below in more detail,
have intensified and broadened the challenges facing managers, “intrapreneurs,” and
entire corporations.10

4.3.1 Functional Specialization and Integration: Industrial R&D

Laboratories

A major source of innovation in the twentieth century was the industrial R&D laboratory,
which remains important in the twenty-first century. It emerged first in Germany in the
chemical industry and in the USA in the electrical industry, for two reasons. It was part of
the more general process of functional specialization of the large manufacturing firm
(Mowery 1995; see also the chapter by Bruland and Mowery in this volume), which itself
emerged from the exploitation of economies of scale and speed made possible by radical
innovations in materials processing and forming, and in power sources (Chandler 1977).
But the industrial research laboratory also provided these firms with a means for
exploiting the rich veins of useful knowledge emerging from fundamental advances in
chemistry and physics. In addition, these new in-house laboratories served as a
“monitoring post” for established firms seeking to acquire new technologies from other
firms.

Mowery (1995) has shown for the USA that a growing proportion of industrial R&D in the
twentieth century was integrated within large manufacturing firms, rather than in
independent companies. Until about 10 years ago, business-funded R&D in all OECD
countries was almost exclusively performed within innovating firms (not only
manufacturing firms, since telecommunications and some other services have long
undertaken R&D). Mowery explained this lack of vertical disintegration by the difficulties
of writing contracts for an activity whose output is uncertain and idiosyncratic, and
pointed out that integration of R&D within the firm reflected important operating
advantages as well. Thus competitive advantage can be gained by the effective
combination of specialized and often tacit knowledge across functional boundaries, within
the individual firm. Accumulated firm-specific experience is very important.11

A robust conclusion emerging from research on innovation processes is that one of the
most important factors differentiating successful from unsuccessful innovation has been
the degree of collaboration and feedback between product design and other corporate
functions, especially manufacturing and marketing within the firm (Rothwell 1992). Many
product designs turn out to be technically difficult (even (p. 91) impossible) to
manufacture, and/or fail to take into account often elementary user requirements (Forrest
1991).

From a corporate strategy perspective, the importance of such intrafirm collaboration has
increased the importance of cross-functional integration spanning departmental
boundaries. Japanese automobile firms pioneered the use of “heavyweight” project

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Innovation Processes

managers, empowered to control resources across the firm, reporting directly to the
senior management team at the same level as the departmental manager (Clark and
Fujimoto 1992). These project managers were in turn linked to innovation processes
within customers and key suppliers, enabling fast, project-based innovation. These
“heavyweight” project managers occasionally clash with functional bosses, some of whom
are unwilling to “give up” control over their resources and object to project-led
management. Many large firms now provide formal training in project management to
their professional project manager, covering such issues as management of fast-moving
project teams responsible for integrating research outputs, conceptual and detailed
design, and various engineering functions, while at the same time responding to changing
or emerging customer requirements during the production process.

Many writers stress the importance of personal contacts and exchanges across functions
within the firm to deal with tacit elements of both product design and its successful
transfer to manufacture and market. There is no perfect or foolproof process for ensuring
effective coordination. Indeed, so called “best practice” can be positively harmful when
its application is taken too far. Excessive use of “heavyweight” project managers can lead
to the loss of such benefits from integration as economies of scale, and cost reductions
from the use of common components (e.g. in automobile development; see Leonard-
Barton 1995). Firms can find it hard to decide what to do with a heavyweight product
manager (and the associated staff) when a product development is failing. Failure to
grasp this difficult nettle can lead to the problem of “escalation” or an inability to
terminate a failing project.12 Managing the trade-offs between project and functional
management, and overcoming the inherent difficulties in project-based management,
present major difficulties to senior technology managers.

4.3.2 Technological Convergence and Vertical Disintegration in

Production Techniques

Even in industries with heavy investments in product innovation, however, some “vertical
disintegration” (outsourcing of specific activities to supplier firms) in manufacturing
process innovation has occurred since the nineteenth century, often stimulated by
technological advances. Rosenberg (1976) highlighted the emergence of specialized
machine tool firms in the nineteenth-century US economy as a (p. 92) result of advances
in metal cutting and metal-forming techniques that produced technological
“convergence” in operations that were common to a number of manufacturing processes.
For example, boring accurate circular holes in metal was an operation common to the
making both of small arms and of sewing machines. Although the skills associated with
such machining operations were often craft-based and tacit, their outputs could be
codified and standardized. The demand for such common operations grew sufficiently
that markets for machines to perform them became large enough to sustain the growth of
specialized firms who designed and made such machines. Large manufacturing
customers could therefore buy machines that incorporated the latest improvements

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Innovation Processes

(drawing on the feedback from many users) and were far superior to what they could do
by themselves.

Similar processes of technological convergence and vertical disintegration have been

common features of twentieth-century capitalist development (see Table 4.1). New
opportunities have emerged from breakthroughs that have created applications spanning
multiple product groups. Examples include: materials shaping and forming, properties of
materials, common stages of continuous processes, storage and manipulation of
information for controlling various business functions such as manufacturing operations
and design.

Lundvall (1988) and other writers show that the links between the (often small) firms
providing these specialized production inputs and their (mainly large) customers are
often “relational” rather than arm's-length, and include considerable exchange of
information and personnel related to the development, operation and improvement of the
specialized inputs. Managing the outsourcing of these critical inputs has become a major
challenge to managers of large firms (Quinn 2000). For (p. 93) example, logistics and ICT
systems often differ between component suppliers and integrator companies, creating
serious (albeit often technically simple) problems for communication and transactions
among these firms. More fundamentally, the choice of which activities to outsource and
which to retain in-house defines the “core competence” of the modern corporation,
molding the boundaries of the firm (Hamel and Prahalad 1994; Davies et al. 2001).

Table 4.1 Examples of technological convergence and vertical disintegration

Underlying technological Technological Vertical

advance convergence disintegration

Metal cutting & forming Production operations Machine Tool Makers

Chemistry & metallurgy Materials analysis & Contract Research

testing

Chemical engineering Process control Instrument Makers

Plant Contractors

Computing Design CAD Producers

Repeat operations Robots Makers

New Materials Building Prototypes Rapid Prototyping

Firms

ICT Application software Knowledge-Intensive

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Innovation Processes

Production systems Business Services

Contract manufacture

4.3.3 Industrial Linkages with Universities

As innovative activities in business firms have become more professionalized, and

university research more specialized, universities now play an important role in providing
the trained researchers for firms in some sectors to perform their innovative activities. At
the same time, firms have found it important to have effective processes in order to
benefit from progress in those longer-term research programs in universities in fields
that have possible impacts on their current and future activities.

The range of interactions between firms and universities is considerable. At one extreme,
there is something close to the so-called (but relatively rare) “linear model.” Here,
fundamental research by a university scientist leads to a discovery, its practical
importance is recognized by a business firm, which may collaborate with the university
scientist in order to exploit it. This happens most often in science-based industries
including the chemical, biotechnology, and pharmaceutical sectors, where the focus is on
the discovery of interesting and useful synthetic molecules.

At the other extreme, the provision of trained researchers, familiar with the latest
research techniques and integrated in international research networks, is important to
firms. It is ranked by many industrialists as the greatest benefit provided by universities
(Martin and Salter 1996). Thus, even if university research in mechanical engineering has
fewer direct applications than research in chemistry, it still provides mechanical
engineers trained (for example) in those simulation and modelling techniques that are
increasingly important in the design and development of automobiles and aero-engines.

In between are a variety of other, often complementary, processes which have to be

managed in order to link university research with industrial innovation, including direct
industrial funding of university research, university-based consultants, and exchanges of
research personnel. Three common features of university–firm links emerge from the
literature.

(1) The importance of personal and often informal contacts. Informal relationships
give practitioners entry points into the academic world, people who they can ask
about where the important developments lie and who the relevant people are. Such
relationships give researchers insight into the (p. 94) problems that are confronting
industry, how the leading edge of corporate practice is developing, and so on. The
informal relationships can result in formal outputs that can in turn trigger more
informal contacts. For instance, industrial publications in the scientific literature can
be seen as signals to the wider academic community of fields and problems of
industrial interest that would benefit from more intense personal exchanges (Hicks
1995).

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Innovation Processes

(2) Much university research that is useful to industrialists also is valued by

academics. Some academics erect a demarcation between industrially relevant
applied work and more fundamental research, and such a demarcation may apply to
the work of some university groups playing a role in technology transfer to local
businesses. But it does not apply to a good deal of more advanced research activities.
US-based studies by Mansfield (1995) and Narin et al. (1997) suggest that a high
proportion of industrially significant research is publicly funded, performed in the
academically prestigious research universities, and published in high quality
academic journals.
(3) The practical benefits of most university research emerge from processes that
are roundabout and indirect. Probably the most frequent contribution is the
provision of graduates trained by leading researchers, and often conversant with
emergent research methods and approaches. Such individuals can be “carriers” of
new theoretical insights, new techniques and observations, and new skills, all of
which industrial firms find difficult to provide themselves. Over time, they will turn
these capabilities to solving the problems that their employers face—or provide
support by means of forming spin-offs or joining consultancies that provide
innovation-supporting services to industrial clients.

Over the past twenty years, governments have begun to expect greater direct usefulness
from university research. Often this has been supported by empirically questionable
assumptions and theories,13 or an incomplete understanding of the indirect benefits
actually valued by industrialists. For entirely different reasons, certain fields of university
research—many fields of biotechnology and some of software and related activities—now
provide an increasing stream of inventions with potential industrial application. These are
reflected in increases in university licensing activity, in university-founded spin-off firms,
and increases in private funding of university research. In Chapter 8, Mowery and
Sampat discuss the nature and implications of these recent developments.

These university–industry relationships can be extremely difficult for firms to manage.14

Managers often complain that universities operate on extended “time lines” with little
regard for the urgent deadlines of business. Therefore, they argue, universities should
not be placed on the critical path of any important projects. Universities, in turn,
sometimes find themselves in the invidious position of being viewed as a low-cost
performer of industrial projects, often with the encouragement of government and
research council programs of “technology transfer.” At worst, (p. 95) these programs may
focus on the short-term needs of industry at the expense of the long term quality of
universities' basic research, graduate training, and support for experimentation and
critical questioning (Salter et al. 2000). Such technology transfer programs often are
based, implicitly or explicitly, on a version of the linear model of innovation in which
universities (and other public sector organizations) perform the science/basic research,
which generates innovations “for” industry to take up in its engineering, manufacturing,
and marketing.

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4.3.4 Heterogeneity in Innovation Processes

These characteristics of industrial innovation contribute to inter-industry heterogeneity in

the structure and management of the processes of innovation, as well as change over
time in the identities of the major actors in these processes. The dominant sources of
technical change in the twentieth century were—and still are—largemanufacturing firms
exploiting different fields of specialized knowledge, with in-house R&D laboratories,
together with a myriad of small firms providing specialized producer goods. Over time,
the mix of firms and technologies has changed, reflecting the appearance of innovative
opportunities generated by the different rates of growth of knowledge in various
specialized fields. These characteristics and heterogeneity have major implications for
the study of innovation processes.

• Given the increasingly specialized and professionalized nature of the knowledge on

which they are based, manufacturing firms are path-dependent. Where they search for
the future is heavily conditioned by what they have learned to do in the past.15 As we
shall see below, path-dependency reflects the conservatism of professional and
functional groups. It also results from cognitive limits in individuals' knowledge about
technologies, markets, and the opportunities presented by developments in each. Thus,
for example, it is difficult if not impossible to convert a traditional textile firm into one
making and selling semiconductors. The recent experience of Vivendi suggests it may
also be difficult to transform a national water company into an international ICT and
media giant, however enthusiastic some managers and financiers were about this.
• Firms that specialize in different products and related technological fields are likely
to stress different features of innovation processes, reflecting the nature of the fields
of knowledge on which they depend. Thus, for contemporary automobile firms,
effective feedback between product design and manufacture is more important than
feedback between product design and university research. For a pharmaceutical firm,
the reverse is likely to be the case. These patterns reflect the direct usefulness of
university research in the field, and other factors, such as the complexity of
manufacturing processes. Users are likely to be an important source of innovations for
small innovating firms providing producer goods; but users' (p. 96) role in innovation is
likely to be low where large firms are selling to a mass market of users who lack
strong technological capabilities (e.g. many consumer products).
• Innovation processes will differ greatly between large and small firms in other
respects. Innovations in large firms involve a larger number of people in specialized
functions, with shifting responsibilities over time. Innovation processes in large firms
are also more likely to involve recognizable procedures, whether formal or informal. In
small firms, there are fewer resources to apply to such issues. Decisions related to the
recognition of opportunities, the allocation of resources, and the coordination of
functional activities, are more likely to reflect the competencies and behavior of senior
managers.16

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Innovation Processes

The heterogeneity and contingent nature of innovation means that there can be no simple
“best practice” innovation model for firms or managers to follow. Each firm proceeds on
the basis of its prior experience and the technological trajectories evident in the specific
industry or product group. But the lack of global “best practices” should not be taken to
mean that innovation strategy does not matter, nor that good management cannot make a
difference to firms' productivity, market share, or profitability.

4.4 Transformation of Knowledge into Working

Artifacts
Scientific advances enable the creation of artifacts of increasing complexity, embodying
an increasing number of subsystems and components, and drawing on a broadening
range of fields of specialized knowledge. This increasing system complexity is one
consequence of the growing specialization in knowledge production. It has resulted in
both better understanding of cause–effect relationships, and better and cheaper methods
of experimentation. These advances have reduced the costs of technological search,
enabling greater complexity in terms of the number of components, parts or molecules
that can be successfully embodied in a new product or service. Developments within ICT
are accelerating this trend: digitalization opens options for more complex systems, and
simulation techniques reduce the costs of experimentation (Pavitt and Steinmueller
2001).

Managers involved in transforming S&T knowledge into products, systems, and services
need to be aware of four sets of specific trends in their industries. These are: (a)
technology trajectories and scientific theories; (b) where relevant, governmentfunded
R&D programs; (c) systems integration; and (d) techniques and approaches to managing
uncertainty. I deal with each of these issues below.

(p. 97)

4.4.1 Keeping Technological Practice (not too far) ahead of Scientific

Theory

In spite of the spectacular increases in scientific knowledge over the past 200 years,
theory remains an insufficient guide to technological practice. This is partly because of
the increasing complexity of physical artifacts and the knowledge bases that underpin
them. The importance of practice is reflected in the continuing dominance in industrial
R&D laboratories of development activities—the design, building and testing of specific
artifacts—compared to research in fields on which they are based. Constant (2000)
describes this as technology advancing through the recursive practices of scientists and
engineers, involving “alternate phases of selection and of corroboration by use…. The
result is strongly corroborated foundational knowledge: knowledge that is implicated in
an immense number and variety of designs embodied in an even larger population of

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Innovation Processes

devices, artifacts, and practices, that is used recursively to produce new knowledge” (p.
221).

Continuous innovation requires constant improvement in methods of technological

search, but technical complexity cannot run too far ahead of scientific understanding.17
The feedbacks in both directions—between improvements in scientific understanding and
improvements in technical performance—have been well documented by historians and
others in areas such as aerodynamics and thermodynamics.18 Mahdi (2002) has recently
developed a taxonomy of technological search that depends on three factors: (1) the
degree to which technological problems can be decomposed into simpler sub-tasks; (2)
the level of understanding of cause–effect relations; and (3) the costs of experimentation
with possible solutions.

Advances in the technologies of measurement and manipulation of the increasingly small,

are a major source of improvements in technological search. This has been the case in the
past few decades in molecular biology and materials, both of which have opened major
new opportunities for technical change.19 ICT can also reduce the costs of search and
selection. Major advances in large-scale computing and simulation technology have
reduced the costs of exploring alternative technical configurations, and have created
opportunities for increasingly complex systems made possible through the digitalization
of data of all sorts (Pavitt and Steinmueller 2001). Innovation managers and engineers
involved in transforming knowledge into working artifacts today need to be aware of
specialized ICT trends in their own industries, as well as new measurement and
manipulation techniques elsewhere that themselves frequently involve the application of
advanced ICTs.

Nightingale (2000) has shown that these mechanisms have radically changed
experimental techniques in the pharmaceutical industry during the past ten years. There
has been a shift towards more fundamental science, for example, linking biochemical
mechanisms to the expression of genes; and there has been a much greater use of
simulations (involving models, extensive data banks, etc.) to conduct (p. 98) virtual
experiments complementary to real ones. A third related development has been the use of
high throughput screening techniques.20

4.4.2 Government-Funded Programs

Technological activities directly financed by governments have sometimes been of major

importance in opening and exploiting innovative opportunities. Successes include ICT in
the USA, where military-related programs played a major role in the early development of
computers, semiconductors, software, and the Internet. Military programs have also had
important technological spin-offs into civil aviation in the USA, while governments in
Japan and France have successfully supported the development of high-speed trains. But
there have also been many disappointments. Policies to support the development of
civilian nuclear power have on the whole not been successful, nor have those for the
support of high-volume, low-cost residential construction (See Eads and Nelson 1971, as

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Innovation Processes

well as the case studies in Nelson 1982). More recently, policies to encourage the
development of renewable energy technologies have met with mixed success. And
controversy surrounds the achievements of a whole series of EU programs.

Since the 1980s government programs for “pre-competitive” collaborative R&D in Europe
(e.g. ESPRIT and Eureka), the USA (e.g. Sematech) and Japan (e.g. the 5G ICOT
Program) have proliferated. Thus, most major firms are presented with opportunities for
participation in such programs. Firms require methods for evaluating their potential
contribution to corporate goals, the financial and organizational costs of participating,
the risks involved in not participating, and the ways in which government programs can
complement or fit into the overall corporate strategy (Floyd 1997).

It is difficult to generalize from the recent history of government support for industrial
innovation. All such programs involve technical lobbies successfully putting pressure on
governments for financial support, often in fields related closely to military applications,
or (often large-scale) infrastructure, such as transport, energy, housing, and
communications. This process can lead to neglect of commercial constraints and to
premature commitments to particular designs. Economists highlight the opportunity costs
of these programs; but government support can also speed up critical technological
learning at a time when purely private markets are not ready to take the risks. The early
development of ICT in the USA suggests the importance of diversity and experimentation
in government support for technological progress. But would this have worked for the
development of high-speed trains, where the costs of experiments are much higher and
technical change is more incremental? And, as we shall see in the next section, everyone
makes mistaken assumptions about future developments in a complex and fast-changing
world.

4.4.3 Multi-Technology Firms, Modularization and Systems

(p. 99)

Integration

In addition to increasingly complex artifacts, specialization in knowledge production has

increased the range of fields of knowledge that contribute to the design of each product.
Compare the original mechanical loom with the many fields of specialized knowledge—
electrical, aerodynamic, software, materials—that are now embodied in the contemporary
design. Or observe the way in which modern automobiles increasingly integrate plastic
and other new materials, as well as electronic and software control systems.

Firms designing these increasingly complex products find it difficult to master advances
in all the fields that they embody. Hence the growing importance of modular product
architectures, where component interfaces are standardized, and interdependencies
amongst components are decoupled. This enables the outsourcing of design and
production of components and subsystems, within the constraints of overall product (or
system) architecture.

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Innovation Processes

Technological convergence has also provided opportunities for further vertical

disintegration between product design and manufacture. Sturgeon (1999), for example,
describes recent growth in contract manufacturing in electronics, in which specialized
firms take over product design from other firms, and assume responsibility for detailed
engineering and manufacture. The technological convergence here is based on increasing
automation of routine operations (e.g. component insertion), and on growing use of
standard software tools.

Contract manufacturing is growing in other industries as well,21 giving rise to “modular

production networks.” These modules are defined by distinct breaks in the value chain at
points where information regarding product specifications can be highly formalized. This
occurs within functionally specialized value chain nodes, where activities tend to be
highly integrated and based on tacit linkages. Between these nodes linkages depend on
the transfer of codified information.

At first sight, these recent changes might appear to point to a neatly specialized system
for the production of innovations, with product and systems designers, their
subcontractors for components and subsystems, and their manufacturers, working
together through arm's-length market relations—a trend foreseen by Sturgeon (1999).
But this neglects the consequences of important distinctions that need to be made
between the properties of artifacts, the knowledge on which they are based, and the
degree to which such knowledge can be transformed into codified information
(Granstrand et al. 1997).

Briefly stated, the development and production of increasingly complex artifacts are, as
we have seen, based on the integration of an increasing number of fields of specialized
knowledge. These fields advance at different speeds and their progress cannot be tracked
solely by monitoring codified information. The division of labour between companies in
production thus cannot be mirrored by an equivalent (p. 100) division of labour in
knowledge (Brusoni et al. 2001). Some overlap between companies in knowledge
competencies is necessary to deal with the transfer of tacit knowledge, to manage
unforeseen consequences of systemic complexity, and to resolve imbalances between
components that are liable to result from their uneven rates of technical change.
Similarly arm's-length relations between firms will not be as effective as forms of “loose
coupling” with periodic bouts of integration, when systems architectures and the tasks of
component suppliers are redefined by firms specializing increasingly in systems design
and integration.

4.4.4 “Managing” Uncertainty?

Specialized R&D and related activities in business firms have become institutionalized
and predictable sources of discoveries, inventions, innovations, and improvements.
However, the process of innovation is complex, involving many variables whose
properties and interactions (and economic usefulness) are understood imperfectly. As a
consequence, firms are not able to explain fully and predict accurately either the

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Innovation Processes

technical performance of major innovations, or their acceptability to potential users (or in

some cases even who the potential users are). They cannot accurately predict the
technical and commercial outcomes of their own innovative activities, nor those of other
firms.22 On average, research scientists and engineers tend to be over-optimistic about
the costs, benefits, and time periods of their proposed projects, and about market
demand for the products resulting from them. But there is typically great variation in the
ratio of ex post outcomes to ex ante estimates of investment or profit within any corporate
portfolio of projects (Freeman 1982; Mansfield 1995). Indeed, commercially unsuccessful
projects often account for a disproportionate share of corporate R&D spending (Griliches
1990).

Business firms (and others) rarely are capable of defining the full array of possible uses
that may emerge for their innovations, especially radical ones. Examples of inaccurate
predictions about what turned out later to be spectacularly successful technologies and
innovations are legion. Early twentieth-century pioneers of radio communication
conceived it as a system of point-to-point communications, particularly between naval
vessels—it was only much later that the much larger market for mass radio
communications was recognized. After World War II, the founder of IBM foresaw a world
market for computers in single figures. For the more recent period between the 1960s
and the 1980s, Schnaars and Berenson (1986) concluded that only about half the major
new product families announced in the USA turned out to be commercially successful.
The recent experience of inaccurate forecasts of the potential markets for various
generations of the mobile phone, and various functions associated with these (the
unexpected success of text messaging, for instance) is equally instructive.

(p. 101)

Corporate managers therefore face severe difficulties in deciding how to deal with
innovative activities, which have some of the elements of conventional investment
activities, but for which severe uncertainty means that continuous feedback from the
market, past experience and experimentation are essential. In practice, top-down
corporate visions can be a poor guide to innovation strategies. Ericsson's success in
opening up mobile telephony began with initiatives from middle-level technical
management, rather than from the top. In the academic and business literatures, the
failures of top-down visions are easily forgotten and the successes oversimplified. For
example, Prahalad and Hamel (1990) tell the story of Canon's successful diversification
from optics and precision mechanics into electronics technology, and from cameras into
photocopying and computer peripheral products; but they ignore the firm's failed
diversification into recording products and electronic calculators (Sandoz 1997).

The broad differences between search and selection activities have been recognized for a
long time—in practice, with the distinction between corporate and divisional R&D
activities; and in theory with the distinction between “knowledge building” and “strategic
positioning” on the one hand, and “business investment” on the other (Mitchell and
Hamilton, 1988). However, as the recent history of corporate R&D shows, maintaining

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Innovation Processes

balance and linkages between the two is not an easy task. Briefly stated, there is no one
best way of evaluating the costs and benefits of corporate R&D expenditures ex ante.
Rule-based systems fail, because they inevitably simplify, and may therefore neglect what
turn out to be important factors in a complex system. Judgement-based systems fail,
because of the impossibility of quickly distinguishing good judgement from good luck.
One consequence is periodic swings in fashions and management practices. These often
reflect struggles for influence between financially trained managers, who tend to prefer
rule-based systems, and those who are technically trained and prefer to rely on technical
judgements.

4.5 Matching of Artifacts, Organizational

Practices and Market Demand
The matching of products, processes, systems, and services (and organizational practices)
with actual and potential market demand is a major responsibility for managers
overseeing innovation in the successful corporation. The corporation (p. 102) builds on its
accumulated knowledge of product and process technologies, of organizational practices,
and of users' needs to carry out this function. Responding to (and creating) market needs
and demands, as well as matching organizational practices with technological
opportunities, involves dealing with disruptive change. This disruptive change interacts
with one of the negative consequences of specialization: namely, the potential for tribal
warfare over the old and the new between specialized functions and disciplines within the
firm.

4.5.1 Matching Technology and Organizational Practices with Market

Needs

Chandler (1977) has shown that the rise in the USA at the end of the nineteenth century
of the large, multi-unit firm, and of the coordinating function of professional middle
managers, depended critically on the development of the railroads, coal, the telegraph,
and continuous flow production. Similarly, the later development of the multidivisional
firm reflected in part the major opportunities for product diversification in the chemical
industry opened up by breakthroughs in synthetic organic chemistry. Although it is
commonplace today to argue that technologies and organizational practices do, or should,
co-evolve with market demands, there is some risk of “technological determinism” in
Chandler's argument that this process largely involves the adaptation of corporate
organizational practices to emerging market needs and technological opportunities.

Technical advances often precede organizational and market advances, among other
reasons because of the firmer knowledge base and lower costs of experimentation
associated with technical, as opposed to market or organizational, innovation. This does
not mean that technology imposes one organizational “best way” or even a clear strategy
towards the marketplace. Variety in the characteristics of technologies, their continuous
change and uncertain applications also produces variety and experimentation in
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Innovation Processes

organizational and marketing practices. But this variety and change does not mean that
“anything goes” in either organizational or marketing terms. It may be practically
impossible for a firm that wishes to remain competitive to resist making use of new
technologies and knowledge in its own future product and process development—unless
it wishes to become a niche producer like the manufacturers of clockwork watches and
analogue record players. But moving into new technologies without appropriate changes
in terms of skills and training, divisions of labour and interrelations between parts of the
organization, can be even more costly. Or consider the firm's investment decisions. A firm
applying conventional cost–benefit analysis and strict cost controls to all of these
decisions will not prosper in the long term in a competitive market governed by (p. 103)
the exploitation of a rich, varied and rapidly advancing body of technological
knowledge.23

The empirical literature summarized in the first two columns in Table 4.2 highlights the
organizational and marketing practices that must be made consistent with key features of
technologies:

• External linkages with potential customers, and with the important sources of
knowledge and skills.
• Internal linkages in the key functional interfaces for experimentation and learning.
• The centralization of resource allocation and monitoring activities needs to be
consonant with the costs of technological and market experimentation.

Table 4.2 Matching corporate technology and organizational practices with

market needs and demands

Corporate Matching Dangers in radical

technology organizational and technological change
→ marketing practices
→

Inherent characteristics

1. Richness of 1a. Allocating 1a. Greater opportunities

opportunities resources for not matched by resources
exploring options for exploring options
1b. Matching 1b. Matching opportunities
technologies with missed in the marketplace
product markets

2. Costs of specific 2. Degree of 2. Reduced cost of

experiments centralization in experiments not matched
decision making by decentralization or
market testing

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Innovation Processes

Supporting skills and networks

1. Specific sources 1. Participation in 1. Difficulties in

of external specific professional recognizing & joining new
knowledge knowledge networks knowledge networks

2. Accumulated 2. Learning and 2a. Difficulties in

knowledge of improving in key recognizing & responding
specific customers' functions and across to new customers'
demands, key functional demands, distribution
distribution interfaces channels, production
channels, methods, supply chains
production methods, 2b. Difficulties in
supply chains. recognizing new key
functional interfaces

3. Skill and 3. Anticipating and 3. Scepticism and

Expertise Base organizing for the resistance from established
necessary or potentially obsolescent
communication and professional and functional
gatekeeper skills groups

(p. 104)

• Criteria for resource allocation need to be consonant with levels of technological and
market opportunity.
• Alignment of professional groups, who possess power and control, with fields of
future opportunity.

The richness of the technological and market opportunities and the scale of technical
experiments should determine the appropriate share of resources allocated to
technological search, as well as the degree of centralization and fluidity in organization
structures. Supporting skills and networks will define the specific competencies to be
accumulated, professional networks to be joined and key functions and functional
interfaces within and across which learning must take place within the firm.

The particular circumstances of the individual firm and project will obviously define the
basic skills required for commercial innovation. But the discussion in this chapter leads to
a clear-cut conclusion: in addition to specialist skills, “gatekeeper” skills and general
communication skills now are more important almost everywhere. People who are
capable of communicating across organizational barriers, disciplinary barriers, and
professional barriers can be invaluable. In very small firms it may be satisfactory for one
or two key individuals to possess the unique combination of required skills. In larger

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Innovation Processes

firms, the specific requirements may be hard to anticipate. There is no single managerial
planning prescription.

Differences amongst technologies are reflected in differences in organizational and

marketing practices. For example, both pharmaceutical and consumer electronics firms
see rich technological and market opportunities, and thus devote substantial resources to
technological search. The much higher costs of experimentation in pharmaceuticals mean
that drug firms tend to have centralized and formal procedures for launching new
products, whilst in consumer electronics the situation is more likely to be decentralized
and informal. Similarly, as already mentioned, both pharmaceutical and automobile
companies have centralized decision structures, but the former stress interfaces between
corporate R&D and public research in biomedical fields, whilst the latter concentrate on
links between R&D and production.

4.5.2 Coping with Radical Change

The past 200 years have seen periodic step-jumps in technological understanding and
performance in specific fields. During the past several decades, these discontinuous
advances have been more often than not based on major scientific breakthroughs.
“Radical” innovations have reduced considerably the costs of key economic inputs, and
have therefore been widely adopted and become the catalysts for major structural
changes in the economy. They include steam power, electricity, (p. 105) motorization,
synthetic materials, and radio communications (Freeman and Louçã 2001). The most
celebrated contemporary example, of course, is the massive and continuing reductions in
the costs of storing, manipulating, and transmitting information brought about by
improvements in ICT.

Each wave of radically new technologies has been associated with the growth of firms
that have mastered the new technologies and have pioneered in the development and
commercialization of related products, processes, and services. In the current jargon of
corporate strategy, these firms have developed core competencies in the new
technologies, which have become a distinctive and sustainable competitive advantage.

Ever since Schumpeter associated the advent of revolutionary technologies with “waves
of creative destruction,” there has been debate about the relative role of incumbent large
firms and new entrants in exploiting them. Over the past twenty years, most of the
analytical writing has been stacked against incumbents, although recent empirical
studies point to evidence in favour of both (Methe et al. 1996). Over time, the weight of
the argument has shifted somewhat away from emphasis on the difficulties facing
incumbents in mastering new fields of technological knowledge (Cooper and Schendel
1976; Tushman and Anderson 1986; Utterback 1994).

More recent work has emphasized the difficulties faced by incumbent firms that must
adapt established organizational practices to seize the opportunities opened by
revolutionary technological changes. Examples include the organizational consequences
of changes in product architectures (Henderson and Clark 1990), resistance from groups
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Innovation Processes

with established competencies (Leonard-Barton 1995; Tripsas and Gavetti 2000), and the
unexpected emergence of new markets (Christensen 1997; Levinthal 1998).

Contrary to a widespread assumption, the nature and directions of radical new

technological opportunities are easily recognized by the technically qualified: for
example, miniaturization, compression, and digitalization are key trajectories in ICT. The
result in this case is that a growing number of large firms, in a growing number of
industries, are now technically active in ICT (Granstrand et al. 1997; Mendonçã 2000).
However, the difficult, costly and uncertain task is that of combining radically new
technical competencies with existing technical competencies and organizational
practices, many of which may be threatened or must be changed in order to exploit
potential market opportunities. Experimentation and diversity therefore are necessary for
exploration of the directions and implications of radical technological changes, but also
for assessing the implications of these changes for products, markets and organizational
practices.

The third column of Table 4.2 identifies some reasons why such experiments may fail in
incumbent firms. Some are a consequence of the need to modify competencies or
organizational practices; and some of the inevitable uncertainties in the early stages of
radically new technologies. The likelihood that established firms will fail increases with
the number of practices and competencies that need to be changed. (p. 106) Here a
comparison between the conclusions of two recent industry studies is instructive. Klepper
and Simons (2000) have shown that firms already established in making radios were
subsequently the most successful in the newly developing colour TV market. On the other
hand, Holbrook and his colleagues (2000) have shown that none of the firms established
in designing and making thermionic valves was subsequently successful in
semiconductors.

With the benefit of hindsight, we can see that success in semiconductors required more
changes in technological competencies, organizational practices, and market
experimentation amongst incumbents, than did success in colour TV. The valve firms
required new competencies and networks in quantum physics, a much stronger interface
between product design and very demanding manufacturing technology, and the ability to
deal with new sorts of customers (computer makers and the military, in addition to
consumer electronics firms). For the radio firms, the shift to color TV required basically
the same technological competencies, augmented by well-known screen technologies.
Otherwise, the customers and distribution channels remained unchanged, as did the key
networks and linkages both inside and outside the firm.

According to Chandler's (1997: 76) so-called “continuity” thesis, the population of

incumbent large firms has remained stable in recent times, because of their accumulated
skills and resources in adopting new technologies and adapting to them. This thesis has
been challenged by Louçã and Mendonçã (1999) and by Freeman and Louçã (2001: 340–
55), who argue that, on the contrary, a cohort of new large firms continues to join the
population of incumbent large firms with each new wave of technical change. Only a

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Innovation Processes

minority of the largest firms was able to remain at the top through several waves. This
suggests that the micro-level evidence considered in this Section, especially the factors
listed in the third (right-hand) column of Table 4.2, have had significant consequences for
the evolution of industry structure.24 Radical technological change, and the success or
failure of incumbent firms in adapting to it, thus may have important consequences for
structural change in the economy as a whole.

Firms in the vanguard of developing and exploiting radically new technologies must be
distinguished from the more numerous firms who adopt and integrate the new
technologies with their current activities. For these firms, in-house competencies in the
new technologies are background: in other words, necessary for the effective adoption of
advances made outside the firm. Paradoxically, the very fact that radically new
technologies allow step-jump reductions in the costs of a key input simultaneously makes
their adoption a competitive imperative and an unlikely source for sustained competitive
advantage among adopting firms. For example, in the past many factories had no choice
but to adopt coal and steam—and later electricity—as a source of power, given their cost
and other advantages. The same is true today for many ICT-based management practices.
But in neither case were these revolutionary advances by themselves a source of
sustainable competitive (p. 107) advantage for the adopting firms. Much of the emphasis
by writers on corporate strategy—like Barney (1991) and Porter (1996)—on the
importance of establishing a distinctive and sustainable advantage accordingly does not,
and cannot, apply to the major transformations now inevitably happening in many
companies through the adoption of ICT. Their framework can help understand CISCO (a
major US supplier of equipment for the Internet), but does not help much with TESCO (a
major UK supermarket chain, increasingly using the Internet).

4.5.3 Tribal Warfare

In his enumeration of the potential advantages of increasing specialization in knowledge

production, Adam Smith describes the various scientific disciplines as “tribes.” Certainly
an important element in contemporary processes of innovation is “tribal” conflict
between different professional groups with specialized knowledge. Some such conflicts
have been touched upon above: financial versus technological competencies in the
evaluation of R&D programs; technical versus marketing competencies in product
development. But perhaps the most important is the potential resistance of a company's
current top managers and technical staff (rooted in the successes of the past), to the
introduction of new specialized competencies and methods, reflecting potential
opportunities for tomorrow.

The difficulties in introducing the new, in the face of the tried and tested old, were spelled
out long ago:

It must be considered that there is nothing more difficult to carry out, nor more
doubtful of success, nor more dangerous to handle, than to initiate a new order of
things. For the reformer has enemies in all those who profit from the old order of

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things, and only lukewarm defenders in all those who would profit by the new
order, this lukewarmness arising partly from fear of their adversaries … and partly
from the incredulity of mankind, who do not truly believe in anything new until
they have had actual experience of it. Thus it arises that on every opportunity for
attacking the reformer, his opponents do so with the zeal of partisans, the others
only defend him half-heartedly. (Machiavelli 1950: 21–2)

Well-documented contemporary examples of this process include IBM's early reluctance to enter
the personal computer market and Polaroid's early commitment but subsequent failure to
develop a business based on digital imaging (Tripsas and Gavetti 2000). In both cases, a
company with the technical resources to develop the new technology, failed to do so, due to
resistance and scepticism from the established power structures. In these cases, it can plausibly
be argued that yesterday's “core competencies,” became today's “core rigidities” (Leonard-
Barton 1995).
But the new does not always turn out to be better than the old. Conservative resistances
in oil companies to investments in nuclear power in the 1970s turn out to have been
largely justified. So, more recently, was scepticism about the dot.com (p. 108) boom. And
in the light of IBM's subsequent success in systems integration and software, resistance
to heavy commitment to the PC could yet be seen as beneficial in the longer run. This is
what makes decision making about radical innovations so difficult. The political battle for
influence often involves one-sided and distorted analyses, reflecting the interests of
specific disciplines and functions. Crucial factors and key uncertainties may be ignored,
consciously or otherwise. The successes and failures only become clear well after the
smoke of battle has cleared.

For today's corporate manager there can be no simple tools or model to neutralize the
uneasy, politicized task of dealing with radical innovations. Good judgement, experience,
trial and error learning remain the only feasible “toolkit” available to today's innovative
corporations.

4.6 Conclusions
Despite spectacular improvements in the scientific knowledge base, and slower but
steady improvements in organizational know-how, innovation processes are neither tidy,
nor easy to delineate or manage. Increasing specialization in the production of artifacts
and in knowledge has also increased levels of complexity—in artifacts themselves, in the
knowledge on which they are based, and in the organizational forms and practices for
their development and commercial exploitation. As a consequence—and contrary to some
of the predictions of Schumpeter (1962) and Penrose (1959):

• innovations—especially radical innovations—remain unpredictable in their technical

and commercial outcomes;
• technical entrepreneurship is not a general-purpose management skill; at a time of
radical breakthroughs and new opportunities it is in large part specific to a particular
technological field and often to a particular place;
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• major innovation decisions are a largely political process, often involving

professional groups advocating self-interested outcomes under conditions of
uncertainty (i.e. ignorance), rather than balanced and careful estimates of costs,
benefits and measurable risk.

As a consequence, established large firms have sometimes found it difficult to deal with
the radically new. In the future, they will confront new challenges. Increasing
complexities in products, systems and the underlying knowledge base are leading firms to
experiment with modular product architectures and greater use of ICTs and the
outsourcing of component design and production. Large innovating firms are therefore
likely to become less self-sufficient in their processes, not more so.

(p. 109)

Finally, increasing specialization in the production of artifacts, and their underlying

knowledge bases, has made innovative processes increasingly path-dependent. As a
consequence, several aspects of innovation processes are contingent on sector, firm, and
technology field. These include: the knowledge base underlying innovative opportunities;
the links between scientific theory and technological practice; possibilities for knowledge-
based diversification; methods of research budget allocation; degree of centralization;
and the critical skills, interfaces and networks that need to be developed. Only two
innovation processes remain generic: coordinating and integrating specialized
knowledge, and learning under conditions of uncertainty.

References
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Notes:

(*) Asterisked items are suggestions for further reading.

(1.) Keith Pavitt had prepared several drafts of this chapter, but passed away before
completing it. Amendments to the original have been made by Christopher Freeman,
Mike Hobday, Ian Miles, and the editors.

(2.) This chapter focuses mainly on large firms within the USA, Europe, and Japan. It does
not consider issues arising in connection with entrepreneurial attitudes and motivations,
such as their willingness to take risks (Drucker (1985) examines some of the links
between entrepreneurship and innovation, and Roberts (1991) and Oakey (1995) examine
the process of innovation within SMEs). For studies of innovation processes within firms

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Innovation Processes

based in the industrializing countries (or “latecomer firms”) see Hobday (1995), Kim
(1997), and Fagerberg and Godinho in this volume.

(3.) Arguably, “innovation managers” (in practice, if not formally identified by job title)
can be found at all levels of the firm (for an overview of innovation management in firms
see Tidd et al. 2001). Hamel (2000) examines “strategic innovation” (or innovation in
strategy approach) while Schonberger (1982) and Robinson (1991) deal with kaizen (or
continuous improvements) to current vintages of capital equipment and organization.

(4.) For critical assessments of firm-level models of innovation, ranging from the linear
model to chain-link models and more recent interactive/contingent models, see Rothwell
(1992), Forrest (1991) and Mahdi (2002).

(5.) The term “stages” is avoided here, as it implies linearity. Research has consistently
shown that the process of innovation within the firm is anything but linear (Kline and
Rosenberg 1986; Tidd et al. 2001; Van der Ven et al. 1999). The three sub-processes of
innovation, although distinctive, overlap considerably and often occur concurrently.

(6.) For a review of models of innovation and the importance of contingency, see Mahdi
(2002: ch. 2).

(7.) As noted earlier, most innovation processes are overlapping and intertwined, terms
like “stages” or “phases” impose an unrealistic linearity on the various innovation
processes.

(8.) Recall that by artifacts we mean services and systems as well as more tangible
material artifacts such as items of equipment.

(9.) The classic texts on this are Rosenberg (1974), Price (1984), and Mowery and
Rosenberg (1989).

(10.) See Pinchot (1997) for a discussion of the intrapreneur, that is, an innovator
operating within a large corporation.

(11.) See Georghiou et al. (1986).

(12.) For a discussion of escalation using examples from the UK stock exchange and other
major ICT project failures, see Flowers (1996). In the public sector, or state-dependent
industries, the problem can be acute. The experience of many countries that established
agencies to develop nuclear power, for instance, suggests that these are often extremely
difficult to restrain.

(13.) Three very different lines of argument have been mobilized over recent years. First
is the view that the output of university research is a free good available to everybody—as
assumed by orthodox economics. In contrast, a second view argues that publicly funded
university research is a form of conspicuous intellectual consumption reflecting
technological and economic achievements, but not contributing to them (as suggested by
Kealey 1996). A more nuanced argument is the “mode 2” claim that the locus of useful
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scientific discovery is moving from universities to “contexts of application” (as

persuasively argued, if somewhat overstated, by Gibbons et al. 1994).

(14.) Universities also face management challenges here, of course—not least in

reconciling the established structures of academic recognition with the contexts of
industrially relevant research.

(15.) Georghiou et al. (1986).

(16.) Community Innovation Survey data (see the chapter by Smith in this volume for
further discussion) are now beginning to provide us with systematic data on many
aspects of the innovative effort and sources of innovative ideas for firms of different types
and in different sectors.

(17.) For example, in the absence of theory and/or cheap methods for constructing and
testing prototypes, the costs of search and selection become prohibitively high—see
Martin (2000) on why Japanese swords did not improve over a period of more than 500
years.

(18.) See e.g. Rosenberg and Nelson (1994) on the origins of the engineering disciplines
in US universities.

(19.) A similar conclusion has been reached by Becker and Murphy (1992). They argue
that the degree of specialization in tasks is limited not by the extent of the market, as in
Smith's famous formulation, but by the costs of coordinating specialized activities. These
coordination costs are reduced by increases in general knowledge.

(20.) In addition, some prestigious academic institutions, such as Stanford University in

the USA, and the Ecole des Mines in Paris, are developing research programs in “bio-
informatics,” growing out of the challenges to the complex results of the Human Genome
project.

(21.) Sturgeon lists apparel and footwear, toys, data processing, offshore oil drilling,
home furnishings and lighting, semiconductor fabrication, food processing, automotive
parts, brewing, enterprise networking, and pharmaceuticals. In addition, Prencipe (1997)
demonstrates that outsourcing has increased in the production of aircraft engine
components.

(22.) Rosenberg (1994) has pointed out that in the nineteenth century, the Western Union
turned down an opportunity to purchase Bell's patent for the telephone, which it
regarded as an inferior product to the telegraph.

(23.) See e.g. the history of the UK General Electric Company under Arnold Weinstock
(Aris 1998).

(24.) Note also, the first point in this column (1a). This relates also to the attitude and
behavior of the financial system. Some recent work on financial capital has returned to
the original Schumpeterian emphasis on “credit creation” for the finance of innovation at
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various stages of the successive technological revolutions. These factors which affect the
growth, composition and fluctuation of demand and hence the influence of demand upon
innovation at the firm level are further considered in the chapters by Verspagen and
O'Sullivan in this volume.

Keith Pavitt

Keith Pavitt, Professor, SPRU, University of Sussex.

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