Regional Innovation System and Industrial

Cluster: Its Concept, Policy Issues and

Implementation Strategies

Joung Hae Seo

Professor
School of Business Administration
Kyungpook National University
Daegu, Korea
johseo@knu.ac.kr

National Workshop on “Sub-national Innovation Systems and Technology

Building Policies to Enhance Competitive of SMEs”
27-30 October, 2006, Beijing, China
 1. Introduction

Background

knowledge, learning and innovation are the most important factors for
competitiveness in the globalizing and knowledge-based economy
exploitation of unique competencies and resources

paying more and more attention to regions as designated sites of innovation

and competitiveness in the globalizing economy
the rapid economic growth of networked SMEs in industrial districts in the ‘Third Italy’

the exemplar industrial system of Silicon Valley

other examples of successful regional clustering in most developed as well as
developing economies

scientists and policy makers conceptualized the RIS and cluster

There were many arguments regarding the regional innovation system and cluster

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 1. Introduction

Objective

There were little arguments about the role of firm in the regional innovation system,
even though the firm play the pivotal roles in building and efficient RIS

To examine the role of firm and the agenda in the regional innovation system

Contents

Theoretical background of regional innovation system and cluster

Public policy for regional innovation system and cluster

The role of the firm in building a regional innovation system

Concluding remarks

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 2. Theoretical Background of RIS and Cluster

2.1 Modern Innovation Theory and Innovation System

The concept of innovation

something new
a new combination (Schumpeter)
invention, first introduction, commercialization (Freeman)
the innovation process is more important rather than the innovation itself

Innovation system
firms rarely innovate in isolation but in networks of production
system approach to innovation : innovations are carried out through a network of
various actors underpinned by an institutional framework
dynamic and complex interaction : ability to generate innovations does not only
depend on how individual actors (firms, universities, organizations, research
institutes, governmental institutions, etc) perform, but also on how they interact
as parts of a system

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 2. Theoretical Background of RIS and Cluster

2.1 Modern Innovation Theory and Innovation System

Two essential dimensions of innovation

the interaction between different agents in the innovation chain
innovation process are institutionally embedded in the institutional setting

interdependency hypothesis of innovation (Christian DeBresson, 1996)

innovations tend to cluster in economic network with a high level of forward and
backward economic and technological linkages
the probability of innovation strongly depends on the number and variety of
supplier and user linkages between firm and industries and between business and
knowledge institutes
the variety of information and competencies by dense suppliers and users networks
will produce more possibilities to recombine factors

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 2. Theoretical Background of RIS and Cluster

2.2 From National Innovation System to Regional Innovation System

NIS approach in innovation system

the performance of national economies cannot be explained only in terms of
strategies and performances of firms
rather than other factors and actors such as inter-organization networks, financial
and legal institutions, technical agencies and research infrastructures, educational and
training systems, innovation policies, etc. play a vital role in favoring the generation
and diffusion of knowledge

Missing links in NIS

focusing mainly upon NIS means that several important regional phenomena that
facilitate innovation processes are ignored or not observed
the region or local became more important than the nation
innovation systems are most easily observed at the regional level
Informal routines and norms that are specific to each region are argued to play an
essential role in the behavior of firms and the form of collaboration between them

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 2. Theoretical Background of RIS and Cluster

2.2 From National Innovation System to Regional Innovation System

Concept of regional innovation system

the notion of regional system of innovation (RSI) has emerged as a territorially-focused
perspective of analysis from the broader concept of IS
RIS may be defined as the localized network of actors and institutions
in the public and private sectors whose activities and interactions generate,
import, modify and diffuse new technologies

Two subsystems in the RIS

the regional production structure or knowledge exploitation subsystem
the regional supportive infrastructure or knowledge generation (and diffusion)
subsystem

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 2. Theoretical Background of RIS and Cluster

2.3 Regional Innovation System and Cluster

The key features of RIS

RIS has two key features : firms in the regional core cluster, an institutional infrastructure
clusters and RIS are indeed closely related
clustered firms enjoy advantages in terms of innovation performance through processes
of localized learning
clusters and RIS may co-exist in the same territory and the regional innovation system
may in fact contain several clusters
the presence of industrial cluster is seem as a key attribute in RIS
cluster-based policies can be beneficial to economic development

From industrial districts to industrial cluster

the concept of industrial cluster was developed from industrial district
industrial districts are important not just because of their shared labor pools,
opportunities for greater specialization, and knowledge spillovers, but also because
of the social and cultural interactions that they allow the trust, shared customs,
and social ties, so called the ‘social capital’

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 2. Theoretical Background of RIS and Cluster

2.3 Regional Innovation System and Cluster

The concept of cluster

M. Porter (1990) : a geographically proximate group of interconnected companies
and associated institutions in a particular field, linked by commonalities and
complementarities.
networks of production of strongly interdependent firms (including specialized
suppliers), knowledge producing agents (universities, research institutes, engineering
companies), bridging institutions (brokers, consultants) and customers, linked to each
other in a value adding production chain

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 3. Public Policy for RIS and Cluster

3.1 Cluster-based approach in Building the RIS

A strong interest in promoting clusters is evident in recent public policy initiatives

there are two approach to public policy, ie, cluster-based approach and traditional
sectoral approach
Traditional Sectoral Approach
to focus on horizontal relations and competitive interdependence (relation between
direct competitors with similar activities and operating in the same product markets)
Innovations are strongly stimulated by the horizontal struggle between competitors
operating on the same product markets
can be criticized for its limited scope
Cluster-based Approach
to focus at the importance of vertical relationships between dissimilar firms and
symbiotic interdependence based on synergism
vertical relations between suppliers, main producers and users are also very important
for creating innovations
the concept of networking
Public policy initiatives
Support for cluster-based policies is now viewed as an essential part of regional policy
The main task of the policy maker is to facilitate the networking process and to create
an institutional setting

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 3. Public Policy for RIS and Cluster

3.2 Factors for the Development of Cluster and RIS

Porter attributes the competitive success of firms within a cluster to

the following set of factors
demand conditions, related and supporting industries, firm strategy, structure
and rivalry, factor conditions, public policy, the role of chance

Clusters are highly individualistic and emerge through the unique interplay
of a variety of factors such as;
the presence of functioning networks and partnerships, a strong innovation base,
the existence of a strong skills base, an adequate physical infrastructure,
the presence of large firms, a strong entrepreneurial culture, access to source
of finance, business support services

As the cluster develops over time, different components of the cluster

are also attracted for different reasons and the strength of particular factors
may change

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 3. Public Policy for RIS and Cluster

3.3 Top down Approach versus Bottom up Approach in Policy Making

Top down approach in policy making

government sets national priorities, formulates a challenging view for the future
and decides on the actors to be involved in the clustering
after having set and initiated the national priorities, the clustering process further
is a market-led process without much government interference
be seen in some of Nordic and developing countries

Bottom up approach in policy making

to focus on fostering dynamic market functioning and removing market imperfections
and the starting point lies in market-induced initiatives with the government acting
as a facilitator and moderator national priorities
be seen in USA, UK and The Netherlands

United Kingdom in the cluster based policy adopted the RIS approach

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 4. The Role of The Firm in Building a RIS

4.1 Common Principles for the Success of RIS

The presence of leader who has the clear vision for RIS
the foremost thing in building the successful RIS lies in leadership of innovative agent
who will become the leader of RIS
Continuous support for the expansion of network from long horizon
to build the successful RIS, the networks which initiated early stage have to be
self-reproductive
only when the infrastructure for the expansion of these networks was fully supported,
the networks will be active, as a result the RIS could succeed
A proactive commitment based on a trust
if the innovative agent who participates in the RIS does not act on the basis of reciprocal
principle and trust, it is rarely possible for him to induce the proactive commitment
Interactive learning through the sharing of relational knowledge
in order to facilitate the interactive learning, the relational knowledge in the RIS have to
be shared among the participants from the complementary perspective each other
The circulation of success and social approval of failure
to build up the RIS successfully, it is necessary to build the virtuous circle of success
social climate that the right and fair failure would be approved by business society,
which could foster the entrepreneurship

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 4. The Role of The Firm in Building a RIS

4.2 Sharing the Basic Thinking

Philosophy and vision

the leader have to hold the vision like ‘creation’, ‘linkage’ and ‘fusion’, and those visions
have to be shared between the participants
the participants have to hold the positive thinking, such as making the success stories,
approving and appraising others, making the strength from the weakness or the
opportunities from the threats

Autonomy and participation

only when the participants make the regional innovation system by themselves with
autonomy, the RIS could get the driving engine.
the participation in the ‘proposal and winner’ method brings to the consensus building
and network expansion as well as to enhance the interactive and collective learning
In the participation process, it is critical to set the fair competition rules such as a
democratic procedure and equality for opportunities
Competition and evaluation
regional innovation system like other institution also evolves by natural selection
process
there is severe competition and rigorous evaluation in the evolution of RIS

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 4. The Role of The Firm in Building a RIS

4.3 Building the Corporate Innovation System

To build the technological innovation system of an established large firm

to establish a new technological innovation system in a large established firm,
the firm has to disintegrate the vertically integrated organizational structure and
decentralize main functions horizontally
this organization structure characterized as specialization in the firm level and
diversity in the industry level could decrease the R&D burdens and shorten the
development time, furthermore enhance the possibilities of relational linkage

To build the innovation system focused on linkage

to link a large company and SMEs
to reinforce the linkage among large firms
to build the global innovation system

To shape the virtuous-based view of the firm as a culture

firms in the regional innovation system have to be ethical
the market have to generate the spontaneous order based on the rules of justice such
transparency, objectivity, and fairness in the transaction which result in the social trust
other stake holders such as labor union, NGO, citizens also have to constitute the
virtuous-based view of the firm

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 5. Concluding Remarks

RIS and Cluster Policy Initiative

NIS Æ RIS Æ Cluster
industrial district Æ Cluster
RIS policy have to focus on clustering
Cluster policy have to base on RIS perspective
Top down Æ Bottom up

The role of the firm

keep in mind the common principles for the success of RIS
to share the basic thinking
to build the corporate innovation system

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