1) The analytical framework of National Systems of Innovation is built upon two prominent economic theories: evolutionary theory and institutional theory. 2) Evolutionary economics views innovation as an evolutionary and social process and sees the economy as an ever-changing non-equilibrium system shaped by internal transformations. 3) Schumpeter was a leading proponent of evolutionary economics and viewed entrepreneurship and technological innovation as the main drivers of economic development and change through a process of "creative destruction".

1. The evolutionary
core of National
Systems of
Innovation
By:
Dr. Lilian K. Lihasi

2. Presentation Outline

3. 1. Overview of NSI Concept

4. Overview of NSI contd…

5. 2. The Analytical Framework of NSI
 At the very core of the thinking
behind the analytical framework of
NSI are two prominent branches of
economic theories (Hauknes,1999,
p. 1)
1. Evolutionary theory
2. Institutional theory
The systems of innovation literature, built
on evolutionary theories of economic and
technological change, conceptualize
innovation as an evolutionary & social
process at the same time (Edquist, 2004)
The institutional theorists define
institutions as "systematic patterns of
shared expectations, taken-for-granted
assumptions, accepted norms and
routines of interaction that have
profound effects on shaping the
motivations and behaviour of
interconnected social actors" (Chang,
1994, p.84; for more detailed account
on institutional theories from various
perspectives, see DiMaggio, 1998;
DiMaggio and Powell, 1991; Dosi and
Coriat, 1998

6. The Evolutionary School of Economics
 There has been a growing interest
in “evolutionary” ideas among
economists over the last 2 decades
- New professional associations & a
journal, Journal for Evolutionary
Economics
 Austrian economist, Joseph
Schumpeter was the leading
academic protagonist for an
“evolutionary” approach to long-run
economic development
Most economists believed that
differences in development levels across
countries were to be explained by
differences in the amount of
accumulated capital per worker (Solow,
1956, Fagerberg, 1994)
From the 1960s, the focus on
technology as the driving force of growth
and development has received
increasing support (Abramovitz 1986).
 This view was, consistent with the
perspective on growth developed
by Joseph Schumpeter
(Schumpeter, 1934, 1943)

7. Understanding the Evolutionary School
 The foundations of the evolutionary models were laid down in the seminal
work of Nelson and Winter (Nelson & Winter, 1982)
 Evolutionary economics is part of mainstream economics & heterodox
school of economic thought that is inspired by evolutionary biology
 It looks at the economy as an evolutionary system, but not a system
constantly in or tending toward equilibrium
 Its focus is on the non-equilibrium processes that transform the economy
from within and their implications
 Like mainstream economics, it stresses complex interdependencies,
competition, growth, structural change, & resource constraints; But differs
in the approaches which are used to analyze these phenomena

9. The Evolutionary School contd….
 To better understand evolutionary economics, it is key to distinguish
between these three levels, and the corresponding, often only implicit,
assumptions
 Evolutionary economics proposes that economic processes evolve and
are determined both by individuals and society as a whole.
 It shuns the rational choice theory of traditional economics, arguing that
psychological factors are key drivers of the economy.
 Economists in this field seek to explain economic behavior and progress
in relation to evolution and evolutionary human instincts
 Most agree that technological advance has a positive impact on economic
development

10. Three levels of scientific reasoning

11. Evolutionary Economists’ Perspective on Economic
Growth & Technological Development
 Recent evolutionary theorizing on economic growth and technological
change was borne out of a growing dissatisfaction with the empirical
performance of the orthodox neoclassical approach to economic growth
(Mulder et al., 2001; Lundvall, 1998).
 The key criticisms labelled against the neoclassical theory are that:
i. the traditional economic growth theories are built upon too much stylised, stripped
down, abstract assumptions, and thus treat economic growth as something of "a
smooth process involving a continuous tendency to return to an equilibrium state"
(Mulder, 200 5, p. 28 )
ii. In the neoclassical growth models technological progress is assumed to be
exogenous, and given, thereby neglecting the very force underpinning the
observable reality of an uneven economic growth (Mulder et al., 2001).

12. Evolutionary Perspective on Technological
Development
This can be summarized as follows:
1. Innovative efforts are characterized by varying degrees of appropriability
and uncertainty about the technical and commercial outcomes (Dosi et al.,
1990).
 recognize the important role played by a firm or firms as a prime locus of innovation
within a national innovation system
 how firms can best leverage uncertainty inherent in an innovative activity, how firms
can continue to profit from their innovations
2. Technology embodies a certain degree of tacit knowledge that is local and
cumulative (Kogut and Zander, 1993; Nonaka 1994)

13. Evolutionary Perspective on TD contd….
3. Innovations typically result from search and learning processes of
individuals/ organizations, & in turn knowledge building and problem-
solving activities are ingrained in organizational or behavioural routines
This dimension of technological development now features prominently in national
innovation systems literature
4. Technologies develop along relatively ordered trajectories within the
boundaries of the organizations and technological paradigms as a result
of characteristics 1-3 discussed
According to Dosi et al. (1990), technological paradigms, refer to "...a collective
framework that determines the R&D practice and the pattern of technological
development on the basis of a dominant design of an artefact..." Consequently,
"...technologies may well get locked-in to paradigms, implying a certain degree of path
dependency and irreversibility

14. Thorstein Veblen & Evolutionary Economics

15. Schumpeter and Evolutionary Economics

16. Schumpeterian perspective
 The evolutionary view, taken together, can be said to exemplify a
Schumpeterian perspective on economic growth and technological
progress (Hauknes, 1999; Mulder et al., 2001; Nelson, 1995 ).
 Despite his own reservations about applying principles of evolutionary
biology into economics, Joseph Schumpeter is considered to be one of
the founding fathers of evolutionary economics
 His model of creative destruction described the essential nature of
capitalism as a relentless drive towards progress, expanding on Veblen’s
early observations
 Argument - human entrepreneurs are the main drivers of economic
development and that markets are cyclical, moving up and down, as
companies constantly compete to find solutions to benefit mankind

17. Schumpeter’s Perspective & Darwinism

18. Schumpeter’s Perspective & Darwinism
 He wanted to develop a theory about economic evolution as a
complement (not substitute) to the static equilibrium theory developed by
Walras and others
 With evolution Schumpeter meant qualitative, economic change brought
about through innovation
“The changes in the economic process brought about by innovation, together with all
their effects, and the response to them by the economic system, we shall designate by
the term Economic Evolution” (Schumpeter 1939, vol. I, p. 86
 Schumpeter’s Approach may be seen as an amalgam of the main
approaches he encountered as a student in Vienna around the turn of the
century, namely Marxism - He was heavily influenced by the dynamic
vision that he found in Marx’s works

19. Schumpeter Perspective on Development
 Despite being among the first who lay out the clear concept of innovation,
his views on the topic changed over time
 He described development as historical process of structural changes,
substantially driven by innovation which he divided into five types:
1) Launch of a new product or a new species of already known product;
2) Application of new methods of production or sales of a product (not yet proven in the
industry);
3) Opening of a new market (the market for which a branch of the industry was not yet
represented);
4) Acquiring of new sources of supply of raw material or semi-finished goods;
5) New industry structure such as the creation or destruction of a monopoly position

20. Schumpeterian Economics

21. Schumpeter’s Approach
 Schumpeter is lumped together with Marx & the neoclassicals
 He is criticized for underestimating the role of creation of novelty/ variety
in social evolution
 However, Fergerberg (2002) argues that, it is certainly not correct that he
overlooked the role of continuing novelty in economic evolution
 Schumpeter took from:
i. Marx - the dynamic outlook
ii. The historical school - the emphasis on historical specificity (with respect to
technology, industry/sector, institutions and so on)
iii. The neoclassicals - the need for a micro-based approach, in which evolution is
explained through the interaction of individual actors, rather than through some
metaphysical force that works its way through history

22. Schumpeter and Marxian Argument
 Schumpeter also took from Marx the idea that capitalist evolution is driven
by technological competition between firms
Marx had suggested that the main way for capitalist firms to keep competitive was to
increase productivity by introducing new and more efficient machinery
Firms that succeeded in introducing new & more efficient technology would see their
competitive position improved. But those who failed would be unprofitable and,
eventually, driven out of the market
 For the aggregate economy this would imply that capital accumulation and
rising productivity would go hand in hand

23. Schumpeter & Marxian Argument contd…
 Schumpeter essentially adapted Marx’s argument and made it the centre-
piece of his exposition of the evolutionary dynamics
“But in capitalist reality as distinguished from its textbook picture, it is not that kind of
competition that counts but the competition from the new commodity, the new
technology, the new source of supply, the new type of organization (…) - competition
which commands a decisive cost or quality advantage and which strikes not at the
margins of the profits and the outputs of the existing firms but at their foundations and
their very lives. ” (Schumpeter 1943, p. 84)
 Schumpeter extended the Marxian argument by introducing a broader
notion and clear concept of innovation.
While Marx limited the analysis to mechanization ( process innovation), Schumpeter
included a number of other elements (Schumpeter 1934, 1943)

24. Schumpeter & Marxian Approach contd…

25. 3. The Evolutionary Aspect of NSI

26. Assumptions forming the core
of NSI concept
1. Elements of knowledge important for economic
performance are localized and cannot easily moved
from one place to another
2. Important elements of knowledge are embodied in the
minds and bodies of agents, in routines of firms and in
relationships between people and organizations

27. Assumptions contd……..
3. Learning and innovation is best understood as the outcome
of interaction. Perhaps the most basic characteristic of the
innovation system approach is that it is ‘interactionist
4. Interactive learning is a socially embedded process and that
therefore a purely economic analysis is insufficient
5. Learning and innovation are strongly interconnected (but
not identical) processes

28. Assumptions contd……..
6. National systems differ in terms of specialization
both in production and trade and in terms of knowledge
base
7. National systems are systemic in the sense that the
different elements are interdependent and that
interrelationships matter for innovation performance

29. 4. The Learning Economy

30. Learning Economy contd…
 Lundvall (2016) puts Interactive learning and innovation at the centre of
economic analysis. This is based on the assumptions that:
1. Knowledge is the most fundamental resource in modern economy and
learning the most important process is learning
2. Learning is predominantly an interactive, and therefore a socially
embedded process, that can not be understood without considering its
institutional and cultural context
Lundvall's work (1998) has been influential in stressing "the specificity and
interconnectedness of societal institutions bearing on the processes of interactive
learning and innovation" (Archibugi et al., 1999; Hauk ne s, 1999).

31. The Learning Economy contd….

32. The Learning Economy contd….

33. Innovation and Modes of Learning
 Adam Smith identified and distinguished two different modes of innovation
for the advancement of knowledge and technology
1) DUI-mode of learning - by doing, using and interacting
2) STI-mode of learning - refers to science-based research processes
 The modes of innovation are highly complementary, however, the
distinction between the two is useful when defining the borders of the
innovation system
 Marshall refers DUI to industrial districts where the focus is on experience-
based learning, and STI to the national system of research
 STI perspectives capture processes linking science & technology to
innovation

34. Innovation & Modes of Learning contd…

35. Learning as ‘interactionist‘ process

36. Learning as an Interactionist Process contd…

37. Learning as an interactionist Process contd….

38. Interconnectedness of learning & innovation

39. Interaction & feedback as root to innovation

40. 5. Summary

41. Summary contd…

42. 6. References
http://www.jstor.org/stable/23599563

43. Reference contd…
http://www.jstor.org/stable/j.ctt1hj9zjd.9
https://doi.org/10.1007/s00191-008-0107-7