Economic specialization and diversification at the country and regional level : introducing a conceptual framework to study innovation policy logics

Full Terms & Conditions of access and use can be found at http://www.tandfonline.com/action/journalInformation?journalCode=ceps20 European Planning Studies ISSN: 0965-4313 (Print) 1469-5944 (Online) Journal homepage: http://www.tandfonline.com/loi/ceps20 Economic specialization and diversification at the country and regional level: introducing a conceptual framework to study innovation policy logics Yuzhuo Cai, Roger Normann, Rómulo Pinheiro & Markku Sotarauta To cite this article: Yuzhuo Cai, Roger Normann, Rómulo Pinheiro & Markku Sotarauta (2018) Economic specialization and diversification at the country and regional level: introducing a conceptual framework to study innovation policy logics, European Planning Studies, 26:12, 2407-2426, DOI: 10.1080/09654313.2018.1529142 To link to this article: https://doi.org/10.1080/09654313.2018.1529142 © 2018 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 09 Oct 2018. Submit your article to this journal Article views: 593 View Crossmark data Economic specialization and diversification at the country and regional level: introducing a conceptual framework to study innovation policy logics Yuzhuo Cai a , Roger Normann b , Rómulo Pinheiro c and Markku Sotarauta a a Faculty of Management, University of Tampere, Tampere, Finland; b Department of Working Life and Innovation, University of Agder, Agder, Norway; c Department of Political Science and Management, University of Agder, Agder, Norway ABSTRACT While there has been a shared understanding that innovation policy is about rendering institutional change, there has been an emerging interest in identifying the institutional logics underlying innovation policy. To date, few studies have attempted to conceptualise these logics. This paper develops a novel conceptual framework for understanding innovation policy logics based on seminal contributions from organizational and economic theory. The framework distinguishes four logics, namely, specialized exploitation, diversified exploitation, specialized exploration, and diversified exploration. It is illustrated in the empirical analysis of innovation policies and development on both national and regional levels in Norway and Finland. The findings reveal that in both countries there is a movement towards increasingly diversified innovation strategies, despite differences in logics underpinning the policies. ARTICLE HISTORY Received 6 November 2017 Revised 24 August 2018 Accepted 21 September 2018 KEYWORDS Innovation policy; institutional logics; specialization; diversification; Finland; Norway There has been a burgeoning interest in bringing the institutional theory perspective into studies of innovation systems, focusing, for example, on the institutional context (Cai, 2015; Leydesdorff,2002), agency and institutional change (Benneworth, Pinheiro, & Karlsen, 2017; Isaksen, Jakobsen, Njøs, & Normann, 2018; Sotarauta & Pulkkinen, 2011), the dynamic interplay between institutions and organizations (Edquist & Johnson, 1997), and the effects of institutional constellations on technology innovation (Sánchez-Barrioluengo, 2014). All these studies imply that the success of a given innovation system depends on the appropriate institutional context. In most cases the introduction of an innovation system often challenges traditional legislations, norms and routines locally. Innovation policy is considered crucial in determining the direction of innovation system development, and bringing about institutional change (Cai, Pugh, & Liu, 2017). Nevertheless, few studies to date have attempted to conduct institutional analysis of innovation policy, especially from the institutional logics perspective. We believe that the understanding of the underlying institutional logics of innovation policy (hereafter we © 2018 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way. CONTACT Yuzhuo Cai yuzhuo.cai@uta.fiFaculty of Management, University of Tampere, Tampere, Finland EUROPEAN PLANNING STUDIES 2018, VOL. 26, NO. 12, 2407–2426 https://doi.org/10.1080/09654313.2018.1529142 simply call it ‘innovation policy logics’) helps to account for the effects of innovation policy at the level of the national innovation system. In an effort to address this research gap, we develop a conceptual framework for identifying innovation policy logics and for discussing their manifestations at the innovation system level. We demonstrate the conceptual framework by using two Nordic countries, Finland and Norway, as cases in point. In the early 1990s, Finland was among the first countries in the world, if not the first, to adopt the concept of a national innovation system to frame its science and technology policies (Lundvall, Johnson, Andersen, & Dalum, 2011; Sharif, 2006), and it operationalized it in the spirit of emerging conceptual frameworks and recommendations (see Sotarauta, 2012). Also in Norway, innovation policy gradually emerged as a policy concept with a distinct content emphasizing the distinction and transition from linear to interactive modes of innovation. New concepts such as regional innovation system, learning regions, learning economy, triple-helix emerging in academic circles the latter part of the 1990s was soon thereafter manifested as experimental later in more institutionalized innovation policy programmes such as cluster programmes and centres of excellence. Further, the two cases provide contrasting innovation policy approaches within the context of a shared Nordic socio-economic welfare model. In so doing, to construct and test the conceptual framework, we address the following research question: ‘What are the underlying institutional logics underpinning national and regional innovation policies in Norway and Finland?’The first part of the article focuses on policy at the national level, whereas the manifestations and effects observed, constituting the second part of the article, are assessed at the regional level, by discussing two case regions (one in each country) that illustrate the dilemmas and trade-offs facing policy makers. 1. Analytical framework 1.1. Conceptual points of departure Before our analytical framework is presented, a clarification of two key concepts (building blocks for the framework) underpinning the paper is warranted, namely: institutional logics and innovation policy. 1.2. Institutional logics The concept of institutional logics was first introduced by Alford and Friedland (1985). Thornton (2004b) and colleagues have further elaborated the concept and developed it into a more nuanced theoretical approach to conduct institutional analysis The institutional logics perspective sees institutionalization as a process of reconciling different institutional logics and draws particular attention to institutional compatibility and the role of agency in the process of institutional changes or the institutionalization of innovation. One pervasive argument is that multiple and contending logics provide the dynamic for potential change in both organizations and societies (Thornton, Ocasio, & Lounsbury, 2012). Drawing on Friedland and Alford (1991) and Thornton (2004a), Thornton et al. (2012) propose seven institutional logics to understand western societies, namely; the state, the market, the family, religion, the professions, the corporation and the community. These 2408 Y. CAI ET AL. logics have been largely used in empirical studies on societal and organizational issues in a variety of fields (e.g. Cai & Zheng, 2016; Greenwood, Díaz, Li, & Lorente, 2009), but rarely when it comes to innovation policy. In innovation studies, scholars often expand the range of institutional logics or use other kinds of logics, for instance, the three logics of market, network and hierarchy as applied in the study by Lazer, Mergel, Ziniel, Esterling, and Neblo (2011) on how decentralized systems deal with innovation, and/or the seven logics aligned with the ideal Triple Helix system identified by Cai (2015). Despite their differences, all these studies tend to share a basic understanding of institutional logic as ‘a set of material practices and symbolic constructions’that constitute the organizing principle of an institutional order and are ‘available to organisations and individuals to elaborate’(Friedland & Alford, 1991, p. 248). Given the research question posed at the onset, in this paper we use key insights from the institutional logics perspective as a means of interpreting the prevailing rationales underpinning innovation policy in Norway and Finland. In both countries, the institutional order of the state is rather prevalent, yet national policy also takes into consideration a variety of stakeholder interests and demands in the form of a corporate-pluralistic model (Olsen, 1988). These include, but are not limited to, firms, knowledge-intensive organizations such as universities and regional actors across the public and private sectors (Normann & Pinheiro, 2018). Needless to say, and as is the case with most European nations, Norway and Finland have in recent decades resorted to both the market as well as network arrangements as a means of addressing critical issues pertaining to national and regional policy making –in the innovation realm and elsewhere. 1.3. Innovation policy Innovation policy can generally be defined as a means through which governments at different levels set priorities and define approaches to foster innovation and economic growth (Howells, 2005). It builds upon previous policy areas that introduced many of the themes which characterize it today (Lester & Sotarauta, 2012; Nauwelears & Wintjes, 2003). A recent iteration within innovation policy studies is that of ‘broad based innovation policy’(Edquist, Luukkonen, & Sotarauta, 2009) as a systematic phenomenon (Smith, 2000). The former improves upon traditional R&D based approaches by incorporating non-technological innovations as policy targets (Arnkil, Järvensivu, Koski, & Piirainen, 2010). This, in turn, has led to a recent inclination to comprehend of understanding innovation policy as a ‘policy mix’, implying ‘a focus on the interactions and interdependencies between different policies as they affect the extent to which intended policy outcomes are achieved’(Flanagan, Uyarra, & Laranja, 2011, p. 702). In recent decades, there has been a growing realization that national innovation policies must be supplemented with regional innovation policies. Regional innovation policies are specifically aimed at creating development trajectories based on specificcapabilities, characteristics and the needs of regional and local industries (Asheim et al., 2006; Tödtling & Trippl, 2005). Regions may also have different configurations of regional innovation systems differing in their capacity to initiate new industrial growth paths (Isaksen & Trippl, 2016). For instance, smart specialization policies (Foray, 2015; Foray, David, & Hall, 2011) may be considered a policy strategy aimed at developing regions based on the transformation of the existing economic structures through R&D and innovation EUROPEAN PLANNING STUDIES 2409 through the specific prioritization of given technologies or industries based on informed assessments of regional needs and opportunities. Acknowledging the characteristics mentioned above, we conceive of innovation policies ‘as those governmental policies and programmes, on various levels and in different fields, which could either intentionally or by coincidence enhance enabling conditions of the innovation systems of the region’, (Cai et al., 2017, p. 240). 1.4. Innovation policy logics: towards a new framework In this section, we develop an analytical framework to understand the institutional logics underpinning innovation policy in Norway and Finland. Policy can be driven by different sets of institutional logics (Heiskanen, Kivisaari, Lovio, & Mickwitz, 2009; Jørgensen, 2012; Richardson, 2006). Hence, institutional logics are here understood as ‘broader cultural rules and beliefs that structure cognitive ideas and guide decision-making as well as the behaviour of actors in the policy field’(Jørgensen, 2012, p. 247). When investigating innovation policy design, we distinguish between two broader strategic approaches. One approach focuses on the balance between ‘specialization’and ‘diversification’, and the other on the interplay between ‘exploration’versus ‘exploitation’. When combined, these constitute four quadrants representing four distinct innovation policy logics, each with their own rationale and intended and unintended effects. The strategies of exploration and exploitation are based on James G. March (1991), who stresses the importance of achieving a balance between the exploration of new possibilities, through risk-taking, play, discovery, innovation, etc., and the exploitation of old certainties in the form of refinement, choice, selection, implementation, etc., when discussing the critical aspect of organizational adaptation to changing realities in the context of learning. Although March’s(1991) focus is on the organizational level, the two logics of exploration and exploitation respectively reflect different aspects of the ‘adaptability’and ‘learning’ nature of innovation policy design (Edquist, 2011). According to James G. March (1991, p. 71). ‘Adaptive systems that engage in exploration to the exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many of its benefits’ (March, 1991,p. 71). They exhibit too many undeveloped new ideas and too little distinctive competence. Conversely, systems that engage in exploitation to the exclusion of exploration are likely to find themselves trapped in suboptimal stable equilibria. As a result, maintaining an appropriate balance between exploration and exploitation is a primary factor in system survival and prosperity. The strategies of specialization and diversification reflect different conceptions of the optimal level at which to leverage resources and boost economic growth (Imbs & Wacziarg, 2003; Kaulich, 2012a;Neffke, Henning, & Boschma, 2011). The rationale underlying industrial specialization mainly follows the theory of Ricardo (1971), which considers that when a county or region specializes in certain goods and services in which they have comparative advantage by way of resource endowments and/or superior value added techniques, the allocation of resources becomes more efficient, thus enabling overall welfare improvements (Kaulich, 2012a; Krugman, Obstfeld, & Melitz, 2015). The assumption underpinning (industrial) diversification is mainly based on the work of Nobel laureate Simon Kuznets (1971, p. 87), who states that: ‘[a] country’s economic growth may be 2410 Y. CAI ET AL. defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population […]’(Figure 1). The four types of innovation policy logics are permeated in specific rationales (meansends rationality) and result into multiple effects on innovation practices, both intended and unintended (Table 1). 2. Innovation policy logics in Norway and Finland In this section we provide empirical insights on how the dominant innovation policy logics in Norway and Finland have manifested themselves both at the national and regional Figure 1. Institutional logics in innovation policy. Source: authors, applying (Kaulich, 2012b; March, 1991; Ricardo, 1971). Table 1. Innovation policy logics: rationales and effects. Innovation policy logics Rationale Effects Specialized exploitation Excel at making use of existing resources, knowledge and technology Intended: Continuity. Unintended: Lock-in (concentration) Diversified exploitation Excel at making use of a multiplicity of related resources, knowledge and technology Intended: Moderate levels of change (gradual). Unintended: Reduced resilience Specialized exploration Excel at introducing new knowledge and technology around selected areas Intended: Moderate to high levels of change (new and old elements combined). Unintended: Hybridization Diversified exploration Excel at introducing new elements across a multiplicity of knowledge and technology areas Intended: Radical change (disruption with past). Unintended: Lack of focus (dispersion) Source: Authors own. EUROPEAN PLANNING STUDIES 2411 levels. Norway has over the last four decades developed into one of the most specialized economies in the OECD area, while Finland has developed into one of the most diversified economies. In both 2000 and 2010 Norway was the second most specialized economy in the OECD area, while Finland ranked among the most diversified ones (OECD, 2013). This picture has not emerged at random, but it is a consequence of both deliberate political process and market exploitation of emerging opportunities. Important for understanding the innovation policy logics in the two countries is their industrial structure. Finland and Norway represent almost opposite ends of the spectrum among the top tier advanced OECD economies. Whereas Norway is among the top ten exporters of primary goods in the world, Finland is a top ten exporter of manufactured goods (OECD, 2013). Finland produces a wide range of manufactured goods to the international market place, while Norway is one of the world’s leading producers of petroleum and gas. In 2014, close to 60 percent of Norwegian exports were linked to petroleum-related products (Simoes & Hidalgo, 2017). As shown in more detail below, there is a distinct innovation policy logic driving and reinforcing a specialized economy in Norway in contrast to a more diversified economy in Finland. This is apparent if we view how the two countries utilize their Research and Development (R&D) resources (Figure 2). Figure 2 shows that in Finland large firms, particularly those in non-resources based and high-tech manufacturing industries, contribute significantly to domestic R&D expenditures. By contrast, services, primary and resource based industries and SMEs are the main contributors to Norway’s Gross domestic expenditure on R&D (GERD). In 2014, Figure 2. Structural composition of business R&D –in 2013 (IPP, 2017). 2412 Y. CAI ET AL. GERD as a percentage of the Gross Domestic Product (GDP) was 1.71 in Norway and almost twice that (3.17) in Finland. Between 2009 and 2014, GERD’s annual growth rate was + 2.3 percent for Norway and -2.78 for Finland. As regards publicly financed GERD as a percentage of GDP, in 2013 Norway had 0.77 while the value for Finland was -0.5; with the growth rate in the period 2008–2013 being + 2.38 percent for Norway and -0.5 percent for Finland (IPP, 2017). The data also reveals an overall decline in the growth of R&D investments in both countries. In 2012 Norway spent roughly NOK 48 billion (equivalent to 4.8 billion Euros as of 18 July 2018,) on R&D investments, with the business sector accounting for 44 per cent of the total and the higher education and the institute sectors contributing with roughly 25% each. In 2013, R&D expenditure in Finland totalled 6.7 billion Euros, with the share of the business sector being 69% (Statistics Finland, 2017), 25% more than in Norway. Expenditure peaked in 2011 (Euro 7.2 billion in total), and has been decreasing since, below Euro 6 billion during 2016. The data shows that after the 2008 financial crisis both the public and the private sectors in Finland experienced a dramatic cut in R&D expenditures (The Research Council of Norway, 2015). Following the 2008 crisis, R&D expenditures in Norway increased, but almost exclusively in the public sector. Even after the cuts, R&D expenditures in Finland are twice as large as in Norway. This is indicative in Norwegian industry of a lack of reliance on formal R&D for stimulating in-house innovation (Fagerberg, Mowery, & Verspagen, 2009). It is also illustrative of a more general picture where, as a Northern European economy, Finland is characterized by an industrial structure dominated by high and medium-high technologies and with a strong level of specialization within ICT. In Finland, the historical role of Nokia has been crucial in economic development and R&D expenditures in general and specifically in ICT. During its heyday in 2001, Nokia held a 40% share of the world’s mobile phone market, accounting for 4% of Finnish GDP. Further, Nokia alone accounted for approximately one third of the total Finnish R&D expenditure and for roughly half of business R&D (Ali-Yrkkö & Hermans, 2002). As Ali-Yrkkö and Hermans (2002) observe, if Nokia’s share were removed from the national figures, Finland’s R&D spending in 2001 would have been 2.4% of GDP; only slightly above the European average. R&D expenditure might not be synonymous with innovation activity. This can be seen in the case of Finland and also Sweden. Since the 1990s two of the strongest so-called ‘R&D nations’in the world, Sweden and Finland, have invested heavily in R&D, but have shown fairly low levels of commercially successful innovations. This phenomenon is known as the ‘Nordic paradox’(Bitard, Edquist, Hommen, & Richne, 2008). For its part, Norway represents a situation reminiscent of a ‘reversed Nordic paradox’with strong GDP growth but significantly lower investments in R&D, far behind Finland and the average for both the EU and OECD areas. The main reason for Norway’s reversed Nordic paradox is that Norway’s industrial structure is characterized by high valueadded in industries with low R&D intensity, most notably around natural resources such as gas and oil as well as fisheries (Forskningsrådet, 2014). In contrast to its Nordic counterparts, Norway lacks leading international high-tech firms. Some of the leading Finnish firms and industrial sectors are acknowledged for their innovativeness and global competitiveness. EUROPEAN PLANNING STUDIES 2413 More generally, some of the differences between the Finnish and Norwegian economies are illustrative of some of the features associated with the STI (Science, Technology, Innovation) and DUI (Doing, Using, Interacting) modes of innovation respect. STI is ‘explicit’ (e.g. scientific) knowledge, capable of being written down and thus transferred easily from one context to another. Following Järvinen (2007), STI and DUI modes corresponds to an attempt, at the national policy level, for finding an adequate balance between formal R&D processes to produce explicit and codified knowledge and processes focusing on learning form informal interaction within and between firms resulting in competence development (Isaksen & Karlsen, 2010; Järvinen, 2007). Norway’s innovation approach relies typically more on DUI (Fagerberg et al., 2009) when compared to Finland which is more STI oriented (Lemola, 2007). Norway and Finland are among the leading nations in terms of human resources, with the proportion of the population with a higher education degree being above average for both the OECD and the EU (OECD, 2017a). What is more, Norway has a high and rising proportion of researchers in the population, and in Finland the share of R&D employment has for some time been the highest among the OECD countries (High-tech statistics – employment, 2016). In recent decades both countries have experienced a marked growth in the number of doctorates (The Research Council of Norway, 2015). Recent studies show that Norwegian adults have a fairly high level of basic skills (OECD, 2014), yet there is still a difference when compared to Finland, where the adult population is at the top across all categories; reading, writing and problem solving (The Research Council of Norway, 2015). In international comparisons of innovation (IUS/EIS), Norway typically ranks below among the leading innovation countries in Europe, alongside Denmark, Germany and Sweden. The reason for this is as showed in Figure 1, related to the industrial structure in Norway where Norwegian firms typically are less research intensive and on average more characterized by DUI modes of innovation than their Finnish counterparts. Norwegian firms are typically on average only slightly less innovative than the Finnish firms but much less R&D-intensive, a tendency that is strengthen by Finland having more large firms with formal R&D-capacity than Norway. 3. Dominant innovation policy logics 3.1. Norway: in search of a diversification approach In the 1990s, Norway was already highly specialized in the petroleum sector. Domestic innovation policy measures since then seem, by and large, to have strengthened and reinforced existing specializations (‘specialised exploitation logic’). An indication of this is that basic research efforts are still concentrated around national industrial specializations; economic areas where Norway is strongest industrially. When we compare scientific publications from Norway to those produced in other countries, we can observe a very strong specialization in geoscience and related subjects (The Research Council of Norway, 2015), which is closely associated with oil and gas operations. This reflects an innovation policy orientation aimed at exploiting existing resources and knowledge bases and, thus has the direct effect of increasing the country’s overall economic specialization profile. The development of the national innovation system in Norway has therefore been 2414 Y. CAI ET AL. specialization and/or external shocks like energy crisis, company failures, etc. (Boschma, 2015). This national posture could, in part, be a function of the strategic emphasis across Europe (EU level) towards a strategy of ‘smart specialisation’(European Commission, 2014), which tends to prioritize entrepreneurial discovery processes and thus smart diversification (Männistö, 2015). 5. Conclusion Thisstudyaddstotheliteratureoninnovationpoliciesbyspecificallyfocusingoninstitutional logicsprovidingpolicieswitha meaninganddirection.Itintroducesa stylizedconceptualframework to study the institutional logics underlying innovation policies. Conversely, it contributes to the institutional logics literature by exploring the important but understudied link between institutional logics and innovation policies. We join earlier studies that call for a more nuanced understanding of diversification/specialization, policy contents and policy processes as well as path development (Flanagan et al., 2011; Isaksen & Trippl, 2016). Most importantly, this study links institutions into the literature of national and regional innovation policies that has been criticized for not being able to operationalize institutions in a robust manner. This is important, as, in innovation studies, institutions are more often than not studied more instrumentally than what is the case in sociology or political sciences, for example. This may be a combined result of more pragmatic ambitions and the abstract nature of institutional theory (Rodríguez-Pose, 2013). The conceptual framework introduced in this paper may prove useful in future endeavours to shed additional light on the ways institutions frame the policy logics, and how, in turn, innovation policy is constrained and/or enabled by institutional logics. It can also serve as a useful analytical tool to compare innovation policies and practices across nations and regions. However, one should be cautious when applying the framework in empirical analysis to avoid simply associating one specific innovation policy logic with a country or region in a given period. This could indeed be the fact, but in many cases there are mixed and even competing logics underlying the debates of innovation policymaking as demonstrated in the paper, especial in the case of Finland. Note 1. In 2018 the Finnish Trade Promotion Organization (Finpro) and Tekes were merged, and the new organization was named Business Finland. Acknowledgements Earlier versions of this paper were presented at the 4S Annual Meeting, S&T policies: the evolution of agendas and of governance practices, Denver USA, in November 2015 and the EU-SPRI Conference: Exploring New Avenues for Innovation and Research Policies, Lund, Sweden, in June 2016. We are grateful for all comments and feedback. Disclosure statement No potential conflict of interest was reported by the authors. EUROPEAN PLANNING STUDIES 2421 Funding This research is a part of the project ‘Exploring the role of VRI in regional innovation system formation and new path development’funded by the Research Council of Norway [grant number 233788] in the Programme for Regional R&D and Innovation (VRI ). With regard to Finland, this work was also supported by a grant from the Nordic Green Growth Research and Innovation Programme in cooperation with NordForsk, Nordic Innovation and Nordic Energy Research [grant number 83130]. ORCID Yuzhuo Cai http://orcid.org/0000-0002-7934-3828 Markku Sotarauta http://orcid.org/0000-0001-6603-6370 References Alford, R., & Friedland, R. (1985). Powers of theory: Capitalism, the state, and democracy. Cambridge: Cambridge University Press. Ali-Yrkkö, J., & Hermans, R. (2002). Nokia in the Finnish innovation system ETLA (Discussion Paper No. 811). Helsinki: The Research Institute of the Finnish Economy (ETLA). Arnkil, R., Järvensivu, A., Koski, P., & Piirainen, T. 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