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Box 4: Economic theory in the light of innovation system analysis 

I see several fields of standard economic theory that could benefit from the analytical approach inherent in the concept 

of innovation system. New growth theory, new trade theory and the new regional economics all have moved toward 

recognising that knowledge and learning matters for economic performance. There are several other fields where we 

might envisage ‘new theory’. 

 The first is to develop a theory of the firm that takes into account that firms are more or less oriented toward dynamic 

competition depending on the context in which they operate. In a static context the allocation of given resources may 

become the major concern of management. In a context characterised by incremental change the focus will move 

toward adaptation and flexibility. If there are ample technological opportunities and unexploited internal capabilities 

Penrosian strategies of growth will be an important concern and if the knowledge base of the activities are changing 

there will be a need to focus on learning and competence building. Profit seeking firms will mix these strategies 

differently depending on context – including sector and national context.

  

Second, an important Schumpeterian issue is how resources – including financial resources are allocated to processes of 

innovation. This may refer to venture capital and entrepreneurship where there are important differences between for 

instance the US and Europe (O’Sullivan 2005). But it is also important to understand what takes place inside the 

borders of firms in this respect - both multidivisional and single firms. The explicit investment in R&D is one way to 

stimulate innovation (in the STI-mode). Without some degree of slack inside the organisation it would be difficult to 

mobilise the necessary resources to create something new (in the DUI-mode). Corporate governance differs across 

national systems and may have a major effect on to what degree time and other resources are accessible for innovation.  

Third a rethinking of markets is necessary since markets for new products must be seen as organised markets. The 

vertical division of labour and the limits of the firm will reflect not only production and transaction costs but also 

attempts to harvest benefits from interactive learning. Vertical integration may leave users and producers in a situation 

where the diversity of experiences that they may draw upon is reduced and thereby their capacity to develop product 

innovations may be hampered. 

Fourth, it has long been recognised that competition is a factor that affects innovation in a somewhat complex way. The 

pressure to engage in change may come from competition in product markets while successful innovations would ease 

the pressure at least temporarily. Cut-throat competition may result in a situation with too little slack and therefore get 

in the way for innovation. Richardson has made several interesting contributions to understand competition in sectors 

where there are rich technological opportunities. 

In a context of rapid change and knowledge-based competition we need to rethink some of the most basic concept in 

economics: The firm, the market and competition.