25Jul/160

Interview with Martin FRANSMAN : the Innovation Ecosystem

DWEJ102_FRANSMAN

"Mobile dynamics: the path to 5G"
DigiWorld Economic Journal n°102

Interview with Martin FRANSMAN
Professor of economics, Founder-director of the Institute for Japanese-European Technology Studies, University of Edinburgh, United Kingdo

Conducted by Anders HENTEN Aalborg University, Balllerup, Denmark

 

More information on DigiWorld Economic Journal No. 102 "What do you really mean by 5G from a technology perspective? on our website

 

DW Economic Journal: What do you mean by an "Innovation Ecosystem"?

Martin FRANSMAN: By an "Innovation Ecosystem" I mean a group of players who through their symbiotic interactions (both cooperative and competitive) make innovation happen and, by so doing, coevolve over time.

How may the idea of an Innovation Ecosystem be applied?

The key point to bear in mind is that an "Innovation Ecosystem" is not an observable object. Rather it is a conceptual construct which serves a particular purpose. This important point requires some elaboration.

As Edith PENROSE has pointed out, "a "firm is by no means an unambiguous clear-cut entity; it is not an observable object physically separable from other objects, and it is difficult to define except with reference to what it does or what is done within it". She goes on to observe that "Herein lies a potential source of confusion" [1]. The same is true of an "Innovation Ecosystem".

This becomes clear in reflecting on my definition of an Innovation Ecosystem as a group of players who make innovation happen. This raises the question of which players should be included in the ecosystem and which excluded. This is the question of the appropriate boundary of the Innovation Ecosystem being conceived. How far "back" is it necessary to go in conceiving of an Innovation Ecosystem?

If we are using the concept of Innovation Ecosystems to understand how innovation happens in the Mobile Telecommunications sector, for example, where should this boundary be drawn? It may be readily agreed that players such as final consumers, telecoms operators, telecoms equipment suppliers, and regulators should be included in the ecosystem. And for some purposes this definition may suffice. However, if the purpose is to understand the main determinants of the innovation process in this sector the net should obviously be considerably widened to include, for instance, universities and government research institutes who not only do relevant research but also provide important training. Other players may also merit inclusion in order to achieve the purpose.

This example makes it clear that an appropriate conceptualisation of an Innovation Ecosystem depends on the purposes and questions asked in the investigation. But complications may go even further than this. For example, even if different analysts can agree on the purposes and questions they may differ regarding which players should necessarily be included.

In view of problems such as these it is necessary to exercise more caution than is usually done in defining an innovation ecosystem. At the very least it is important to make explicitly clear the purposes and questions that are being pursued as well as the reasons for particular boundary decisions.

What in your view is the difference between an "Innovation System" and an "Innovation Ecosystem" and why did you choose to use the latter concept in your work?

The literature on innovation in this area tends to fall into two groups. The Innovation System Group, which is more homogeneous, is made up primarily of heterodox economists such as Chris FREEMAN, Dick NELSON and Stan METCALFE. They all acknowledge intellectual inspiration from the work of Joseph SCHUMPETER. Having originally trained as economists they all came to believe that the various approaches to economic growth adopted by mainstream economics do not provide a sufficiently robust explanation of how economic growth happens and why different countries often exhibit different growth patterns. They also share a common belief that innovation is the most important driver of economic growth and that mainstream economics does not have an adequate understanding of how innovation happens and who makes it happen. The concept of an "Innovation System", originally proposed by Chris FREEMAN in his book on Japan [2], is put forward as an alternative way of explaining growth. Central to this concept, and explicit in their definitions of "innovation system", is the role played by institutions understood not only in the Douglass NORTH sense of rules of the game but also as non-firm determinants that help (and perhaps hinder) innovation and therefore economic growth.

The Innovation Ecosystem literature, in contrast, is far more heterogeneous. It tends to come from scholars with a background in business studies. A notable example is the iconic book by IANSITI & LEVIEN from Harvard Business School, The Keystone Advantage: what the new dynamics of business ecosystems mean for strategy, innovation, and sustainability. A central concern in this literature is the cooperative networks created by complementary businesses which both individually and jointly create value for customers. The common belief (whether tacit or explicit) is that the truth lies in the constellation of businesses, rather than in individual businesses taken alone. This has important implications for dealing with topics such as business strategy and sustainability.

In contrast, my own use of the terms "ecosystem" and "innovation ecosystem" is inspired not so much by business behaviour as by the example of biological ecosystems with their populations of interacting organisms and species. As Alfred MARSHALL, the nineteenth century economist said, "The Mecca of the economist lies in economic biology rather than in economic dynamics" [3]. This analogy, however, should not be pushed too far and I insist that the basic unit that makes up the "players" in my ecosystem are purposive and conscious individuals whose decisions and actions imply necessary complications such as beliefs, mistakes, and expectations which are not pre-determined in any meaningful sense of this word. Whilst there is significant overlap between my "ecosystem" and the concepts of Innovation System and Innovation Ecosystem perhaps the main difference is the emphasis I give to the dilemmas involved in interacting individuals, albeit in populations, understanding and acting in the uncertain world that is ours.

Can the concept of Innovation Ecosystem contribute to our understanding of leadership in an area such as mobile telecommunications?

The first problem in answering this question is to agree on what should be understood in this context by "leadership". Both countries and companies may lead, the former, for example, in performance of infrastructure and services, and the latter, for instance, in terms of indicators such as revenue growth, market capitalisation, and market share.

Having agreed on who leads the next problem is to explain why this leader has been able to lead. It is here that the concept of an Innovation Ecosystem as defined earlier potentially becomes useful. Let us take several examples to illustrate.

The first example is the lead by "Europe" in 2G mobile. Not only were the main European telecoms operators able to introduce world-leading 2G mobile infrastructure and services, the key European mobile equipment providers, notably Ericsson and Nokia, were able to become globally dominant players. Why did this happen?

Whilst the answer to this question clearly necessitates that we understand the strengths (and also weaknesses) of these two groups of company players there were other important determinants without which their global leadership would have been, if not impossible, then far less likely. These include, notably, the prior establishment of an agreed Nordic mobile set of standards and systems initially meant to facilitate inter-country mobile communications within the Nordic region as well as the establishment and functioning of a set of European institutions that enabled the emergence of GSM standards. These events required the interventions of other players, including policy-makers, regulators, and researchers. By following this kind of reasoning we will be able to identify both the relevant players and the ecosystem of symbiotic interactions that facilitated the eventual global success of GSM.

The second example is the remarkable rise of Huawei as a leading player not only in telecoms equipment but also, more recently, in smartphones. Once again, a key part of the explanation must involve an account of the emerging capability inside this company to successfully innovate. This success was dramatically illustrated by the successful entry of this company as a supplier to some of Europe's major telecoms operators in the face of very strong and long-standing competition from the key European telecoms equipment providers. Crucially, this entry depended not only on a Chinese comparative advantage-based cost benefit but also on the ability of Huawei to address some of the important problems expressed by the operators.

But reflection soon reveals that there is more to this success story than only what happened within Huawei. Also significant was Huawei's membership of the Chinese Innovation Ecosystem. Although at first a Chinese outsider that depended as much on other emerging countries as it did on the poorer Chinese regions for sale of its equipment, Huawei, with adept leadership, soon developed sufficiently strong capabilities to become a domestic supplier of growing importance able to both contribute to and benefit from the rapid growth of China and its telecoms infrastructure. Fleshing this story out requires an account of the key players (including, for instance, Chinese universities and other organisations) in the Chinese Innovation Ecosystem whose interactions made important contributions.

The third example is the central role of the US in smartphone developments. Here too a discussion is needed of the key telecoms operators and equipment providers as well as other important players such as policy-makers, regulators, university and other research organisations. But also of crucial importance is the direction taken by the evolution of the mobile telecoms sector itself. More specifically it is also important to understand the convergence of the mobile telephone and the computing subsectors that, until the advent of the smartphone with its own operating system, were largely distinct. This convergence gave a huge opportunity to the US that had always dominated the field of computing from its origins. Once the phone became in effect a computer that added many other functionalities US players, incumbents and new entrants, were able to leverage the superior computing capabilities that they and their ecosystem possessed in this area.  This was also a significant contributor to US dominance.

As these three examples illustrate, the idea of Innovation Ecosystems can make a significant contribution to our ability to understand and explain these cases of leadership. However, the conceptual caveats mentioned in the answer to the first question must be kept in mind in deploying this idea.

Does the idea of Innovation Ecosystems have any positive implications for a European attempt to regain global leadership in the field of mobile telecommunications?

We must be careful not to slip into the voluntaristic error, i.e. "create the correct Innovation Ecosystem and all will be well!". The reason is that there are always some given constraints that remain binding. Examples are the historically inherited stock of capabilities, whether one's own or those of competitors; the given institutional framework; etc. One apposite example is the demise of Nokia as one of the global mobile industry's foremost pioneers and leaders.

From my personal discussions with some of Nokia's most important leaders I have no doubt that in its last years the company and its key decision-makers had an excellent understanding of what here is called the idea of an Innovation Ecosystem. Indeed, many of the company's key documents, both private and public, were formulated using the terminology of Innovation Ecosystems. There is every reason to suppose that this made both thinking and strategy formulation in Nokia better than it would have been without these conceptualisations.

However, the fact of the matter, sadly and regretfully, was that Nokia was significantly constrained by its historical path-dependence. More specifically, the company was substantially impeded by the Symbian operating system that it had inherited from the pre-computerised smartphone past. Not only did this operating system have defects from the point of view of application development, a key requirement for competitiveness, relative to the operating systems of the main competitors it suffered important shortcomings. No amount of perceptive Ecosystems thinking could, in the time required by competition, suffice to stay the company's threat of execution at the hands of unforgiving market forces. The same goes for the company's new leaders brought in to try and stay this execution.

The Nokia example has important implications for policy-making that uses the concept of Innovation Ecosystems. The main lesson, to repeat, is to avoid voluntaristic errors by coming to better understand what can, and what cannot, be changed by purposeful action.

How useful is the idea of Company Innovation Ecosystems?

Paradoxically, very little scholarly work has been done on how innovation happens, and who makes it happen, within purposefully created Company Innovation Ecosystems. Even the book by IANSITI & LEVIEN referred to earlier, despite the word "innovation" in its subtitle, does not delve into these questions, preferring to devote only a little attention to the incentive to create organisational innovation that benefits the business network/ecosystem as a whole. Accordingly, these questions unfortunately remain unaddressed.

The "open innovation" literature does not do justice to these questions either. Although the issue of innovation players outside the focal firm is explicitly addressed the questions of how all the players in the company's Innovation Ecosystem make innovation happen and who can and should make it happen are not discussed. Yet these questions are crucial for any company or other organisation wanting to improve performance through innovation.

What kind of guidance can be given to the leaders of companies who would like to make use of the idea of Company Innovation Ecosystems in order to improve their performance? This question is currently occupying a good deal of my attention.

 


[1] PENROSE, E. T. (1959), The Theory of the Growth of the Firm, Basil BLACKWELL, Oxford, p. 10.
[2] FREEMAN, C. (1987), Technology Policy and Economic Performance: Lessons from Japan, PINTER, London.
[3] MARSHALL, A. (1962), Principles of Economics, Macmillan, London, p. xii.Martin FRANSMAN is Professor of Economics in the School of Economics at the University of Edinburgh. He is the author of numerous books and articles including The New ICT Ecosystem: Implications for Policy and Regulation (Cambridge University Press) which won the Joseph Schumpeter Prize.

 More information on DigiWorld Economic Journal No. 102 "What do you really mean by 5G from a technology perspective? on our website

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