You are on page 1of 20

Research Policy 32 (2003) 751–770

Sectoral patterns of small firm innovation,


networking and proximity
Mark S. Freel∗
Department of Management Studies, Centre for Entrepreneurship, University of Aberdeen,
Edward Wright Building, Old Aberdeen AB24 3QY, UK
Received 28 September 2001; received in revised form 4 April 2002; accepted 5 June 2002

Abstract
Drawing upon a sample of 597 small and medium-sized manufacturing firms, this article investigates the extent to which
cooperation for innovation is associated with firm-level product and process ‘innovativeness’ and, where collaborative rela-
tionships are reported, the factors which influence their spatial distribution. With respect to the former issue, the data suggests
considerable variety of association across Pavitt’s [Research Policy 13 (1994) 343] sectoral taxonomy and innovation type.
However, the data also indicates the need for caution when developing network strategies or policies: the evidence presented
here is unequivocal in noting that innovation is neither a necessary nor less a sufficient condition for innovation. Moreover,
internal resources often act as complements to, or indeed appears to negate the need for, external resources. With regards to the
spatial distribution of firm linkages, it appears that increasing firms size and export propensity are positively associated with
external linkages at a higher spatial level. Moreover, the spatial reach of innovation-related linkages is also likely to be greater
for firms reporting the introduction of relatively novel innovations (i.e. products or processes which are new to the industry).
In contrast, smaller firms and firms engaged in incremental product innovations appear more likely to be locally embedded.
© 2002 Elsevier Science B.V. All rights reserved.
Keywords: Innovation; Small firms; External linkages; Embeddedness

1. Introduction innovation may no longer be understood as the out-


come of independent decision-making at the level
Following the work of Lundvall (1995), a consen- of the firm, but rather must be viewed as an itera-
sus has emerged which holds that ‘. . . interactive tive, cumulative and cooperative phenomenon, which
learning and collective entrepreneurship are funda- incorporates more than simple phased dyadic or bi-
mental to the process of innovation’ (Lundvall, 1995, lateral interactions between users, industry and the
p. 9). This view marks a significant shift from the science base (such as those in envisaged by the classic
traditional view of innovation as a linear process Kline and Rosenberg (1986) chain-link model) (de la
spanning technology development activities and new Mothe and Paquet, 1998). That is, since innovation
product introduction (initiated by either scientific dis- involves the cumulative or path dependent creation
covery (‘science-push innovation’) or market demand of new knowledge, or novel recombination of exist-
(‘demand-pull innovation’)). In this new conception, ing knowledge, innovation is essentially concerned
with learning. Learning, in its turn, is largely a social
∗ Tel.: +44-1224-274357; fax: +44-1224-273843. process—most especially in the context of the transfer
E-mail address: m.s.freel@abdn.ac.uk (M.S. Freel). and accumulation of tacit knowledge (Polanyi, 1966;

0048-7333/02/$ – see front matter © 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 0 4 8 - 7 3 3 3 ( 0 2 ) 0 0 0 8 4 - 7
752 M.S. Freel / Research Policy 32 (2003) 751–770

Howells, 1995)—and is likely to involve considerably increasing division of labour among organisations as
more than two actors. Accordingly, any innovation a first principle compelling collaboration or interac-
system is liable to be socially embedded in such a way tion (Sternberg, 2000). That is, increasing uncertainty,
that the innovativeness of individual firms will be in- associated with changing technology and global com-
fluenced by socially specific, and extra-organisational, petition, has encouraged many firms (and, indeed,
factors such as the infrastructure of financial in- many nations) to concentrate on fewer and fewer core
stitutions, labour markets, policy and provision of competencies, relying upon trade, or cooperation, for
workforce training, mechanisms governing the sup- others (Archibugi et al., 1999). This effective disin-
port of business start-ups and development, attitudes tegration of the vertical value chain has been taken
and policy concerned with science and technology as evidence of a move from hierarchical governance
and the potency and pervasiveness of inter-firm and structures (based upon threat and coercion) to network
firm–institutional interaction (Dosi, 1999). It is this governance structures (based up reciprocity and trust)
final issue, the role of external innovation-related co- (Nelson, 2000). In contrast to the pre-eminence of
operation, which this current paper seeks to address. Fordist and Taylorist practices during the immediate
Drawing upon data from a new survey of ‘Northern post-war period, the efficient organisation of produc-
British’ SMEs, the paper is able to investigate the tion is increasingly associated with vertical disinte-
nature of associations between a variety of poten- gration and flexibility (Hansen, 1990; Lawson, 1999).
tial collaboration partners, the geographic location of Fundamentally, however, the conclusion one is asked
these partners and the innovativeness of individual to reach, is that ‘. . . a high level of cooperation and
firms. communication typically affects innovation activities
positively’ (Arndt and Sternberg, 2000, p. 467).
In this regard, the instrumental benefits of inter-firm
2. Innovation and networking or inter-organisational collaboration are thought to re-
volve around the amelioration of internal resource con-
Academics and policy makers rarely understate straints or competency gaps. In other words, a firm’s
the importance of industrial innovation. In a world capacity for innovation will inevitably be enhanced
where such consensuses are rare, the common view by the extended knowledge base, and cost and risk
holds that, ‘[i]n all highly-industrialised nations the sharing, offered through extensive linkages with ex-
long-term growth of business and (thus) of regions ternal agency (e.g. suppliers, customers, competitors,
[and, one may safely assume, nations] stems from universities, public agencies and so on) (see Rothwell
their ability to continually develop and produce in- (1991) and Freel (2000) for a more detailed discus-
novative products’ (Sternberg, 2000, p. 391). Indeed, sion). This view, that no firm may function efficiently
Chris Freeman, the doyen of innovation theorists, as an island entire of itself, has become somewhat ax-
goes further; suggesting that ‘. . . not to innovate is to iomatic and has, in its turn, considerably influenced
die’ (Freeman and Soete, 1997, p. 266). Whilst one European industrial policy. For instance, amongst its
may quibble about the appropriateness of such im- principal conclusions, the most recent UK Competi-
peratives, it is nonetheless clear that innovations, of tiveness White Paper noted that:
varying scale and scope, positively impact upon the
Firms may have to collaborate and network more,
performance of firms in aggregate and, by implication,
particularly on new technologies, and strengthen
economies (Geroski and Machin, 1992, 1993). Yet, the
their links to the science and engineering base, shar-
dominant network theory of innovation, in its many
ing equipment and often people. (DTI, 1998, p. 29)
incarnations (cf. Håkansson, 1987; Maillat, 1995;
Florida, 1995; Baptista and Swann, 1998; Cooke and Indeed, casual observation would suggest that UK
Morgan, 1998; Oughton and Whittam, 1997), holds competitiveness policy, throughout the 1990s, has
that individual firms are seldom capable of innovating been premised, to a greater extent, upon the belief
independently, and never innovate in a vacuum. that there exist inadequate linkages between firms,
Frequently, advocates of network approaches to in- and between industry and the science base (Oughton,
novation induced economic development highlight an 1997).
M.S. Freel / Research Policy 32 (2003) 751–770 753

Regardless of the sway held, recent empirical extra-regional links, one is, nonetheless, given to
work by Oerlemans et al. (1998, p. 300) sug- understand that the ‘district’ has geographic bound-
gests an important caveat to the foregoing; that the aries. The models of regional economic development,
network view of innovation ‘. . . overemphasises which have arisen subsequently:
an inter-organisational approach to organisational
. . . emphasise the spatial organisation of the mar-
processes’. In our haste to embrace the importance of
ket by different players (firms essentially), the
external linkages in facilitating firm-level innovation,
inter-relation between these players and, eventu-
there may be a tendency to neglect the contribution
ally, the diffusion of economic growth from a given
made by internal resources. Yet, in most industries,
set of players to the rest of the geographic area.
the greater part of innovation effort is made by firms
(Andréosso-O’Callaghan, 2000, pp. 70–71)
themselves (Nelson, 2000) and occurs within firms
themselves. As Dosi notes, quite emphatically, firms Even in their larger conception (i.e. incorporat-
require ‘. . . substantial in-house capacity in order ing interactions between cultural, social, political
to recognize, evaluate, negotiate, and finally adapt and economic actors), these conventional models of
the technology potentially available from others’ organisational and economic development require
(Dosi, 1988, p. 1132; see also, Cohen and Levinthal, implicit spatial/geographic boundaries and are, in this
1989, 1990). In other words, the interactivity of the sense, closed systems. The central issue, as Howells
innovation process refers to collaborations and iter- (1999) records, is that: ‘Studies indicate to a lesser
ations involving individuals and departments within or greater extent a typical distance decay function in
the firms as well as to, more occasionally, external communication’ (p. 83).
co-operations with other organisations and institutions Yet, proximity is not simply a spatial phenomenon.
(Freel, 2002). This former point is often neglected. Whilst, historically, physical barriers (such as oceans,
Though this is not to suggest the Håkanssonian mountains or deserts) made it difficult for individu-
(1987) view that ‘. . . the company is interlocked als to learn about opportunities or share in first mover
with others—it is not a free and independent unit’, advantages, one may reasonably anticipate that recent
is in any sense erroneous. Merely, that the notion of developments in ICT will have significantly reduced
‘interlocking’ does not necessarily imply cooperation, this ‘tyranny of distance’. Indeed, in the modern global
in any robust sense, between companies. economy, politically inspired borders between coun-
tries and regions may create regulatory hurdles that
serve to constrain the flow of goods, services and,
3. Proximity and networking crucially, information (Brown and Butler, 1993). As
Staber (1997, p. 59) notes, whilst ‘[g]eographic prox-
In terms of the role of spatial proximity in facil- imity is important to the extent that it facilitates infor-
itating inter-firm (and firm–institution) collaboration mation exchange and mutual adjustment’, information
and information exchange, much of the impetus is not the only commodity and proximity may also be
has been provided by the conceptual developments defined socially—and, indeed, in terms of technology,
stemming from the ‘new industrial districts’ litera- organisation or institutional framework (see Kirat and
ture and the success enjoyed by empirical exemplars Lung, 1999). Thus, the relevant organisational popu-
such as the ‘Third Italy’ (see for example, Brusco, lation may, more appropriately be defined as ‘. . . a
1982; Becattini, 1978, 1990; Bianchi, 1990). This set of organisations similar in their structures and pro-
literature defines innovation networks, to a greater cesses and in their relations with actors in their envi-
extent, spatially—viz. ‘. . . a territorial agglomeration ronment, but with no theoretical limit placed on the
of small firms, normally specialised by product type, territorial location of populations’ (Staber, 1997, p. 59;
product components or process phases, held together tense changed).
by inter-personal links, by common “social culture” This is not to suggest that spatial proximity is of
amongst the workers, entrepreneurs and politicians no importance in influencing the level of interaction
and enveloped by an “industrial atmosphere” . . . ’ between economic actors. Indeed, with respect to uni-
(Bianchi, 1998, p. 96). Whilst not explicitly precluding versity linkages, Freel (2000) notes the importance
754 M.S. Freel / Research Policy 32 (2003) 751–770

of personal contacts, with adjacent firms, in the dif- upon its gradual and cumulative aspects . . . Almost
fusion of knowledge (see also Acs et al., 1994). all innovations reflect already existing knowledge,
However, it is likely that there is an inverse relation- combined in new ways’ (Lundvall, 1995, p. 8). Ac-
ship between cognitive proximity (and, relatedly, the cordingly, much of this knowledge is likely to be
extent to which the knowledge involved is tacit or available, and much of the learning will take place,
codifiable) and the importance of spatial proximity. internally. Where internal knowledge deficiencies are
Nooteboom’s (1999) notion of ‘cognitive proximity’ identified and external know-how is required, one
draws on both Granovetter’s (1982) ‘strength of weak may reasonable propose that, more often than not, or-
ties’ and Cohen and Levinthal’s (1990) ‘absorptive ganisational and institutional proximities will play a
capacity’. In this way ‘cognitively distant’ knowl- more significant role, than spatial proximity, in defin-
edge has ‘the advantage of yielding more novelty or ing the nature of external articulation. Organisational
‘non-redundance’, but understanding may be compli- proximity, for instance, relies upon commonalities in
cated by a lack of shared experience. In particular, ‘. . . the representations and structures which agents
when knowledge is tacit, strong ties, based on en- use as a benchmark in order to define both their
during and intensive interaction, may be needed’ routines and strategic practices’ (Kirat and Lung,
(Nooteboom, 1999, p. 140). Simplistically, following 1999, p. 30). To the extent that organisational prox-
Cohen and Levinthal (1990), knowledge is considered imity arises ‘. . . between organisations connected
cumulative and more difficult in novel domains. In by a relationship of either economic or finan-
this sense we are viewing the transfer of knowledge cial dependence/interdependence’ (Kirat and Lung,
between organisations as a process of ‘learning by 1999, p. 30), intra-industry links are liable to dom-
interacting’ (Lundvall, 1995)—as distinct from the inate inter-industry links. Institutional proximity, by
‘learning by doing’ (Arrow, 1962) and ‘learning by contrast, implies a degree of congruence between, and
using’ (Rosenberg, 1982). Accordingly, ‘. . . the more acceptance of the legitimacy of, the institutional in-
complex the learning process, the more interactions frastructure in which agents operate. And, in turn, the
it probably requires’ (Johnson and Lundvall, 1993, impact the institutional framework has upon the devel-
p. 75) and, presumably, the more necessary spatial opment of cognitive models. If the innovation process
proximity becomes—in facilitating frequency of di- requires ‘. . . the development of cognitive models
rect interaction. To restate, if the requisite knowledge which are both coherent and shared’ (Kirat and Lung,
is cognitively distant from the firm’s internal knowl- 1999, p. 28) (in terms of structure rather than content)
edge base (which, in turn, determines its ‘absorptive we might anticipate firms embedded within similar in-
capacity’) then spatial proximity becomes important stitutional frameworks (political, financial, economic,
in assisting effective knowledge transfer. The reverse cultural) to be more readily disposed to collaboration.
is also likely to hold and, while the potential impact In addition to the influence of various proximities,
of spatial proximity is unlikely to tend to zero, in the recent evidence has pointed to the influence of firm
presence of cognitively proximate (in the sense of size and product market on the spatial distribution
shared frames of reference, experiences and mental of innovation-related external linkages (Arndt and
models), highly-targeted (to the needs and concerns Sternberg, 2000; Kaufmann and Todtling, 2000).
of the firm) and codifiable information, its impact Specifically, these studies suggest a positive relation-
upon the innovation process diminishes. ship between firm size and export intensity and the
However, it is likely that, for the majority or firms, geographic reach of search and collaboration activ-
the knowledge that is required for innovation will be ities. In other words, it appears that, in aggregate,
relatively cognitively proximate. Such firms invari- smaller firms are more spatially embedded than larger
ably occupy mature industries and are, at best, char- firms and non-exporters are more embedded than ex-
acterised by a flow of incremental, rather than radical, porters. Thus, integration within local networks may
innovations (Karlsson and Olsson, 1998)—which not be the outcome of conscious decision-making, on
build immediately upon their current state-of-the-art. the part of the firm (or, relatedly, any attempt at some
As Lundvall insists, ‘[t]he first step in recognizing form of optimisation), but rather may indicate either
innovation as a ubiquitous phenomenon is to focus resource limitations, which constrain the reach of firm
M.S. Freel / Research Policy 32 (2003) 751–770 755

search processes, or development stage, which sees et al., 1998).1 Accordingly, the current analysis sets
the firm serve a largely, and initially, localised market. aside service firms and focuses upon manufacturing
In either instance, the features of a firm’s innovation firms in isolation.
process or the pervasiveness of some ‘local’ institu- Specifically, 5200 small and medium-sized (FTEs
tional innovation system may have limited influence <500) manufacturing firms were surveyed, gener-
on the spatial composition of its external linkages. ating 597 usable responses (i.e. a 11.5% response
In light of these emerging tensions in the literature, rate). As Fig. 1 illustrates, the sample is stratified in
the object here is to address a number of related em- such a way as to under-represent the smallest firms
pirical questions: (one to nine employees) and over-represent larger
SMEs. Surveys of micro-firms tend to report lower
Question 1a: To what extent is the innovation per-
response rates and, in the case of innovation related
formance of firms associated with articulation (be-
surveys, poorer data quality (see Cosh et al., 1998).
yond simple transaction relationships) with external
Undoubtedly, this deliberate skew impacts upon the
agency? The following question, offering a variety
‘representativeness’ of the current sample. The chief
of potential collaboration partners, was used to de-
consequence is likely to be an over-estimate of the
termine the presence of ‘linkages’: ‘Did your firm
level of innovation within the population. However,
co-operate with other firms or organisations for
it is not anticipated that this ‘bias’ will greatly impact
innovation related activity (including marketing,
upon the analysis presented below.
training, etc.) and/or technology transfer during
With regards to the relative sectoral distribution of
the last 3 years?’
sample firms, Fig. 2 indicates an over-surveying of
Question 1b: What is the relative importance of
textile and clothing firms and firms involved in the
various potential collaboration partners?
manufacture of wood and paper products (SIC (92)
Question 1c: What is the relative importance of
Divisions 17–19 and 20–21, respectively)—relative to
external linkages and internal resources?
the pertinent population. By contrast, printing and pub-
Question 1d: How do these issues differ across
lishing firms and manufacturing firms not elsewhere
sectoral groupings?
specified (NES) are significantly under-represented
Question 2: Where innovation-related external link-
in the sample (SIC (92) Divisions 22 and 36–37, re-
ages are reported, to what extent are they clustered
spectively). In all other SIC (92) divisions, the sample
locally and what factors determine their spatial
reasonably represents the population—though, in the
distribution?
case of food and beverages, not the UK. The decision
to over-survey firms in the identified sectors was made
4. Data with reference to recognised regional industrial clus-
ters (DTI, 2001a). Over-representation of some sectors
4.1. Sample necessarily leads to under-representation of others.
Accordingly, the decision was made to under-survey
The data presented here was collected as part of printing and publishing firms—since many of these
a ‘Survey of Enterprise in Scotland and Northern are de facto business service providers—and manu-
England’. This original survey, administered during facturing firms ‘not elsewhere specified’—as a result
April and May of 2001, sought to gain a better un- of the ambiguity inherent at the two-digit level. Whilst
derstanding of the state of (small and medium-sized) stratification of the sample, in this manner, will in-
enterprise within the UK, sufficiently removed from evitably distort aggregate observations, one does not
the thrall of the dominant, core economy of London anticipate that the legitimacy of the analysis presented
and the Southeast. To this end, the original sample in Section 5 will be greatly compromised.
frame included both manufacturing and service firms. 1 Although this is not to imply that service firms merely play
However, that the nature of innovation (at the heart
a passive role [as users] in the process of technological develop-
of the current paper) varies substantially and sys- ment. Simply, that to lump service firms and manufacturing firms
tematically between manufacturing and service firms together, for the purposes of analysis, is to ignore the various
is fairly well established (see for example, Hoffman dynamics in play.
756 M.S. Freel / Research Policy 32 (2003) 751–770

Fig. 1. Relative size distribution of sample firms.

5. Empirical analysis equivocal, recent academic opinion runs counter to


the established Schumpeterian or Galbraithian view
5.1. Modelling innovation (that increased market concentration and, relatedly,
increased firm size act as necessary stimuli to in-
In investigating the extent to which external link- novation) and holds instead that, subject to sectoral
ages (as defined earlier) are positively associated with variations, small firms may, in fact, be more innova-
firm-level innovative performance, the current paper tion intensive than large firms (Acs and Audretsch,
follows the established practice (see Geroski, 1990; 1987, 1988). Therefore, adopting a very general view
Feldman, 1994; Love and Roper, 1999, 2001; of innovation, one might anticipate that younger and
Oerlemans et al., 2001) of modelling innovation out- smaller firms report proportionately higher levels
put using a modified knowledge production function of innovation than their older and larger peers. As
approach. In this way ‘. . . innovation output depends Table 1 indicates, innovation has been defined using
on the presence and volume of innovation resources an absolute and output-based measure. In the esti-
and the utilisation of these internal and external re- mations firms are classed as innovators only if they
sources in the innovation process’ (Oerlemans et al., record the introduction of, at least one, new product
2001, p. 9): or process, which is new, not only to the firm but also,
to the industry. In this way, minor product or process
INNi = β1 RDi + β2 TECHi + β3 QSEi improvements or mere competitor imitation are ex-
+β4 CUSTi + β5 SUPPi + β6 COMPi cluded. However, the degree of novelty implied by this
measure is relative. One would anticipate that, in the
+β7 UNIi + β8 PUBi + ε
bulk of mature industries, such product and process
In addition, the analysis reported later on incor- innovations would, nevertheless, build closely upon
porates two moderating variables: age (measured in the firm’s current technological state-of-the-art. This
years) and firm size (full-time equivalent employ- position is also in line with the view of innovation as a
ees). On the whole, one may reasonably suggest that commercial endeavour rather than a purely technolog-
younger firms are less likely to have established rou- ical endeavour and accords with the observation that
tines, technology or products and are less likely to oc- bulk of commercially significant innovations in man-
cupy mature or traditional industries. Moreover, with ufacturing are technologically incremental rather than
regards firm size, whilst the evidence is decidedly radical (Audretsch, 1995; Love and Roper, 1999).
M.S. Freel / Research Policy 32 (2003) 751–770
Fig. 2. Relative sectoral distribution of sample firms.

757
758 M.S. Freel / Research Policy 32 (2003) 751–770

Table 1
Variables used in logit equations
Definition of Variables

INN Binary dummies of product and process innovation; firm introduced at least one product or process
new to the industry ‘during the last 3 years’ coded 1, otherwise, coded 0
RD A series of binary dummies of research and development expenditure as a proportion of sales turnover;
categories are 1–5%, 6–10%, 11–20% and >20%; no R&D spend is treated as the reference group
TECH Proportion of workforce (FTEs) classed a technicians
QSE Proportion of workforce (FTEs) classed as technologists or scientists
CUST Binary dummy of customer focused innovation networking; if firm cooperated with a customer for
innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
SUPP Binary dummy of supplier focused innovation networking; if firm cooperated with a supplier for
innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
COMP Binary dummy of competitor focused innovation networking; if firm cooperated with a competitor
for innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
UNI Binary dummy of university focused innovation networking; if firm cooperated with a university for
innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
PUB Binary dummy of public sector focused innovation networking; if firm cooperated with a public
agency (e.g. UK government offices, EU, enterprise companies/agencies, etc.) for innovation-related
activities ‘during the last 3 years’ coded 1, otherwise, coded 0

Finally, sectoral variations relating to innovation 5.2. Anticipated sectoral variations


are fairly well established. For instance, it is known
that industrial sectors vary in terms of the sources, Prior to detailing the results of the analysis, it seems
paces and rates of technological change (Pavitt, 1984). prudent to outline a priori anticipations of sectoral
Moreover, ‘[b]ecause sectoral patterns of technologi- variations in external and internal resources usage.
cal innovation are different, one may expect that firms
in specific sectors use specific internal and external re- 5.2.1. Supplier-dominated firms
sources in order to innovate successfully’ (Oerlemans The innovation focus of such firms is thought,
et al., 1998, p. 302). That is, sectoral variations are largely, to be concentrated on cost reducing pro-
likely, in their turn, to modulate the requirement for cess technologies to meet the demands of highly
firms to be engaged in innovation networks and, re- price-sensitive customers. However, given the gener-
latedly, the extent and character of such networking. ally weak in-house R&D and engineering capabilities,
In attempting to control for ‘sectoral noise’, the cur- suppliers are the likely source of new or improved
rent paper adopts Pavitt’s (1984) classic taxonomy, process technologies. Notwithstanding the relative
‘supplier-dominated’ firms, ‘production-intensive’ emphasis on process innovation, Pavitt (1984) sug-
firms, and ‘science-based’ firms. In his paper, Pavitt gests that general sources of technology (including
further disaggregates production-intensive firms into those which lead to product innovations) are liable to
‘scale-intensive’ and ‘specialist suppliers’. However, include, in addition to suppliers, government financed
since the current study is exclusively concerned research extension services and, less frequently, large
with SMEs (less than 250 full-time employees), it users. On the whole, however, given the greater
is likely that the majority of firms classed (at the propensity to sell to myriad end users, or through
two-digit SIC (92) level) as scale-intensive will be distribution agents, one would not anticipate a sig-
de facto suppliers of components, sub-assemblies nificant role for customers. Competitor collaboration,
and equipment to genuinely scale-intensive firms. of the ‘Third Italy’ type, may be present; though
Consequently, the models estimated in Section 5.2, this is hope more than anticipation. Finally, since
recombine these sub-categories for the purposes supplier-dominated firms are believed to ‘make only
of analysis. a minor contribution to their process and product
M.S. Freel / Research Policy 32 (2003) 751–770 759

technology’ (Pavitt, 1984, p. 356) one would antici- technology is largely developed in-house or sourced
pate a limited association between internal resources from suppliers, whilst product technology is extended
and innovation. internally ‘. . . based upon the rapid development
of the underlying sciences in the universities and
5.2.2. Production-intensive firms elsewhere’ (Pavitt, 1984, p. 362). This suggests a role
Given the earlier contention that, in the current for universities in product innovation and suppliers
sample, these firms are largely de facto suppliers to in process innovation, which complement extensive
genuinely scale-intensive firms, and the relative focus in-house capabilities. Innovation-related collaboration
on product innovation, one would anticipate a posi- with customers, competitors and (quasi-) government
tive association between innovativeness and customer agencies is likely to be limited.
collaboration—at least in the case of product innova-
tion. In contrast, suppliers and the public knowledge 5.3. Analysis
infrastructure are liable to play a limited role. Some
competitor collaboration may be present as a result Estimation of the models, suggested in Section 5.2,
of supply chain dicta or management. Finally, in line takes the form of eight logit equations, employing
with Pavitt’s observations, one might expect in-house ‘new [to the industry] product introduction’ (Table 2)
capabilities to make a significant contribution to both and ‘new [to the industry] process introduction’
product and process innovations. (Table 3) as binary dependent variables. On the whole,
the models seem to have a number of satisfactory prop-
5.2.3. Science-based firms erties. For instance, various tests for multi-collinearity
The innovation focus of many science-based firms (using correlation matrices, and multiway frequency
is a balance between products and processes. Process analysis (Tabachnik and Fidell, 2001)) suggest

Table 2
Logit models of the probability of introducing new (to industry) products
Independent variables Pavitt (1984) sectors

Total sample Supplier-dominated Production-intensive Science-based

Age 0.00 (0.011) 0.00 (0.004) −0.001 (0.042) −0.002 (0.070)


Size (FTEs) 0.008 (19.913)a 0.014 (5.362)b 0.009 (14.335)a 0.008 (2.658)c
R&D expenditure
1–5% of turnover 0.707 (10.618)a 1.705 (6.357)b 0.638 (5.618)b 0.017 (0.001)
6–10% of turnover 0.622 (2.867)c 1.954 (3.984)b 0.199 (0.137) 1.009 (1.621)
11–20% of turnover 1.272 (6.317)b 2.918 (4.552)b 0.578 (0.770) 1.597 (1.377)
>20% of turnover 0.683 (1.707) 2.107 (2.824)c 0.298 (0.149) 0.745 (0.293)
Percentage of technicians 1.701 (4.292)b 2.490 (2.103) 1.300 (1.233) 1.612 (0.542)
Percentage of QSEs 1.565 (2.122) −6.015 (0.107) 7.099 (3.261)c 2.097 (1.585)
Customer links 0.565 (5.735)b −0.075 (0.013) 0.869 (8.590)a 0.177 (0.027)
Supplier links −0.046 (0.036) 1.322 (3.990)b −0.252 (0.674) −0.217 (0.092)
Competitor links −0.053 (0.031) 1.088 (1.616) −0.147 (0.153) −0.357 (0.195)
University links 0.230 (0.416) −9.808 (0.071) 0.010 (0.001) 2.065 (3.202)c
Public sector links 0.534 (3.846)b −0.455 (0.368) 0.910 (7.362)a −1.185 (1.401)
Nagelkerke R2 0.192 0.400 0.230 0.227
−2 log-likelihood 629.874 98.064 390.275 107.921
(χ2 )d 80.664a 34.468a 62.679a 17.095
N 528 98 337 93
a Significant at 1% level.
b Significant at 5% level.
c Significant at 10% level.
d Full model vs. constant only model. Figures in parentheses are Wald χ2 -test statistics.
760 M.S. Freel / Research Policy 32 (2003) 751–770

Table 3
Logit models of the probability of introducing new (to industry) processes
Independent variables Pavitt (1984) sectors

Total sample Supplier-dominated Production-intensive Science-based

Age 0.001 (0.023) −0.002 (0.018) −0.001 (0.047) 0.008 (0.724)


Size (FTEs) 0.004 (4.852)b 0.009 (2.585)c 0.003 (1.720) 0.009 (3.162)c
R&D expenditure
1–5% of turnover 1.031 (11.337)a 0.922 (0.974) 1.501 (13.754)a −0.201 (0.065)
6–10% of turnover 0.042 (0.006) −1.206 (0.203) 0.158 (0.034) −0.746 (0.374)
11–20% of turnover 1.359 (5.912)b 1.773 (1.352) 1.489 (3.895)b 0.995 (0.485)
>20% of turnover 0.952 (2.183) 11.837 (0.028) 1.266 (1.824) −6.214 (0.033)
Percentage of technicians 2.275 (6.134)b 0.133 (0.002) 3.791 (8.862)a −1.421 (0.139)
Percentage of QSEs −1.430 (0.474) −111.890 (0.267) −0.072 (0.000) −2.897 (0.638)
Customer links −0.087 (0.079) −22.020 (0.052) 0.502 (1.804) −1.336 (1.361)
Supplier links 0.689 (5.220)b 1.968 (3.084)c 0.559 (2.255) 0.730 (0.666)
Competitor links −0.320 (0.758) 0.864 (0.262) −0.437 (0.955) −0.730 (0.406)
University links 0.929 (5.606)b 21.309 (0.002) 0.540 (1.458) 2.500 (2.919)c
Public sector links 0.051 (0.022) −10.942 (0.016) 0.287 (0.496) −0.897 (0.466)
Nagelkerke R2 0.142 0.498 0.210 0.263
−2 log-likelihood 418.321 43.050 260.713 68.585
(χ2 )d 45.571a 29.555a 44.889a 15.656
N 522 97 335 90
a Significant at 1% level.
b Significant at 5% level.
c Significant at 10% level.
d Full model vs. constant only model. Figures in parentheses are Wald χ2 -test statistics.

little problem in this respect. Moreover, as the data in . . . identifies re-innovation opportunities, new uses
Tables 2 and 3 indicates, the models appear reasonable and new users’ (Shaw, 1991, p. 127; tense changed).
predictors of ‘innovativeness’ for all but science-based Moreover, it is commonly accepted that there is scope
firms (see later). With reference to the moderating for considerable gain through involving the user in
variables identified before; innovators seem, on the the product design and development processes. In
whole, to be larger than non-innovators, which runs the context of the current study, such gains are be-
counter to the stated expectations. However, given lieved to be principally three-fold (see Gardiner and
the definition of innovation employed and the sectors Rothwell, 1985): firstly, firms may be able to supple-
that dominate the sample, this is perhaps less remark- ment their internal design and development activities
able than if one were investigating innovation inten- by accessing the technical and managerial skills res-
sity in less mature, embryonic industries (Acs and ident within their customers; secondly, user involve-
Audretsch, 1987). In contrast, firm age appears to ment is likely to be the ideal way to establish the
have no impact upon the ‘innovativeness’ of firms. optimum price/performance combination and, conse-
Addressing product innovation, in the first instance, quently, the optimum specification; finally, involving
and turning to specifics, the all-sample model indi- the user in the product design and development stages
cates significant positive associations between the is likely to reduce the post-delivery learning required
firm’s innovation-related cooperation with customers on their part (and accordingly, this may result in strong
and public (and quasi-public) sector agencies and in- demonstration effects, attracting other customers and
novative performance. Collaboration with customers accelerating the innovation acceptance process). With
for product innovation underpins von Hippel’s (1978) regards to public sector linkages, the data may pro-
‘Customer-Active’ innovation paradigm (CAP), vide some legitimating evidence with regards to the
wherein ‘continuous user–manufacturer interaction role of public agencies as network facilitators: in
M.S. Freel / Research Policy 32 (2003) 751–770 761

the ‘. . . encouragement of networking relationships expectations: accepting the presumed focus upon per-
between firms to establish collective economies of formance improving product innovation, rather than
scale’ (Oughton and Whittam, 1997). Regardless, cost reducing process innovation, there is likely to be
the all-sample observations paint a superficially en- scope for customers to play a key role in product de-
couraging picture of the potential contribution that sign and specification activities. The latter observation
collaboration with public agency may play in facili- (i.e. a strong positive association between product in-
tating innovation. However, it is important to note the novativeness and cooperation with the public sector)
significant role played by internal resources: product is less anticipated. However, it may reflect a deter-
innovation appears to be positively associated with mination, on the part of government, to develop the
the employment of technicians and with research and innovativeness of lower tier suppliers as a means to
development expenditure—up to a point. This issue strengthening supply chains and improving compet-
of ‘up to a point’ is interesting, perhaps suggesting itiveness (DTI, 2001b). Significantly, these external
some form of decreasing returns to R&D investment linkages appear to be complemented by internal re-
at the firm level. However, this would be to endorse sources, in the form of (limited) R&D expenditure and
the conventional economics view of R&D: namely, employment of QSEs. Finally, as with the all-sample
that it generates only one output—new information or model, there are no statistical relationships between
knowledge (frequently embodied in physical artefacts, firm-level innovativeness and cooperative ventures
such as new or improved products). Following Cohen involving competitors, universities or suppliers.
and Levinthal (1989, 1990) this is generally believed With respect to the final sectoral grouping,
to be an erroneous position, though the finding is, in science-based firms, the data in Table 2 indicate only
itself, intriguing. a weak significant association between product inno-
Finally, indeed crucially, notwithstanding the pos- vation and university collaboration: firm size apart,
itive observations noted for customers and the public no other significant relationships are observed. That
sector, innovation-related cooperation with suppli- product innovation in science-based firms is positively
ers, competitors or universities does not appear to be associated with university cooperative ventures is as
linked to the product innovativeness of sample firms anticipated. Indeed, the absence of observed statistical
in aggregate. associations between innovativeness and customers,
With regards to expected sectoral variations: the competitor, supplier or public sector collaboration
positive relationship with external cooperation (in- may also be in line with expectations. However, lack
volving customers and public sector agencies) does of observed statistical relationships with R&D expen-
not appear to hold across Pavitt’s taxonomy. For diture or the employment of QSEs is more remark-
instance, in the case of ‘supplier-dominated’ firms, able and runs counter to both intuition and empirical
and largely in line with expectations, only supplier precedent. Moreover, in this instance, the model itself
collaboration is positively associated with product in- does not appear to be an effective predictor of product
novation. Moreover, this appears to be complemented innovativeness (in the absence of statistical signifi-
by in-house R&D expenditure (of any magnitude). cance). This observation may suggest some source of
Conversely, there is no statistical relationship between firm heterogeneity beyond that captured by the regres-
the product innovativeness of supplier-dominated sors. It may be that the manner in which resources
firms and collaboration with customers, universities, are developed, extended or combined (i.e. transfor-
competitors or the public sector. mation activities, see Håkansson (1987)) is of greater
Perhaps unsurprisingly, given their predominance import than simply the volume and type of resource
in the current sample, the pattern of observations for input. Unfortunately, measurement of such transfor-
production-intensive firms is similar to that noted for mation activities is beyond the scope of the current
the all-sample estimations. In particular, with respect study.
to innovation-related cooperation, one notes positive Turning, next, to process innovation (Table 3):
associations between product innovativeness and col- Perhaps unsurprisingly, the observed statistical asso-
laborative linkages with customers and with the public ciations between the introduction of a (new to the in-
sector. The former observation is in line with stated dustry) process innovation and external collaboration
762 M.S. Freel / Research Policy 32 (2003) 751–770

varies markedly from those recorded for product inno- their own process technology’ (Pavitt, 1984, p. 359).
vation. For instance, and with regards to the all-sample Accordingly, the significant positive observations in-
model in the first instance, innovation-related cooper- volving R&D expenditure and technical employment
ation with customers or public sector agencies is no are as anticipated: in this instance, in-house resources
longer significantly associated with innovativeness. appear to play a greater role.
Conversely, one observes statistically significant rela- Finally, with respect to science-based firms, similar
tionships relating to supplier and university collabora- observations are noted for both product and process
tion. Undoubtedly, there is a comfortable logic in this innovation. That is, significant correlations between
reversal. To suggest that suppliers and customers have innovativeness and university collaboration and in-
greater roles to play in process and product innovation novativeness and firm size only (both significant at
respectively is likely to be uncontroversial and, in this the margin). Furthermore, the model is, again, a poor
sense, is reassuring. The association involving univer- predictor of new process introduction. Consequently,
sity collaboration and firm-level process innovation one is, once again, tempted to suggest the existence
is also encouraging and may indicate the greater of some form of firm heterogeneity not captured by
role that universities play in addressing the imme- the regressors: perhaps signalling the importance of
diate concerns of industry than is often thought. As varied transformation activities, rather than the mere
Nelson (2000) asserts, ‘[t]o a much greater extent than presence of heterogeneous resources.
commonly realized, university research programmes On the whole, the empirical data indicates a
are not undifferentiated parts of a national innova- number of relevant considerations. In the first in-
tion system broadly defined, but rather are keyed stance, one might be tempted to suggest that, in
into particular technologies and particular industries’ general, the data denotes a positive association be-
(p. 13). Crucially, one also notes the complemen- tween innovation-related cooperation and firm-level
tary correlations between process innovativeness and innovativeness—i.e. networks matter. However, this
internal resources; proxied by firm size, R&D expen- is misleading and any statement must, more appropri-
diture (to a point) and the employment of technically ately, be couched in conditional terms. That is, certain
qualified staff. types of cooperation are associated with specific types
Notwithstanding this general picture, the data also of innovation, involving certain firms, in certain sec-
indicate considerable sectoral variations. In line with tors. Conversely, many sources of innovation-related
expectations, successful new process introduction by collaboration are not correlated with specific types of
supplier-dominated firms is strongly associated with firm-level innovativeness, in certain sectors—indeed,
supplier cooperation. Given presumptions of poorer competitor cooperation is not associated with either
in-house R &D and engineering facility, in such firms, product or process innovativeness in any sectoral
the absence of significant observations linking inter- category. Clearly, blanket collaboration imperatives
nal resources and process innovation is also as an- overstate the case and misunderstand the various
ticipated. Speculating from the discussion of product dynamics at work. Moreover, the models presented
innovation given earlier, it may be that where R&D is indicate the frequent importance of internal resources,
present within supplier-dominated firms, it is directed as either a complement to, or a substitute for, exter-
towards product innovation, with significant process nal collaboration. As noted earlier, in most industries
innovation largely driven by equipment suppliers. the greater part of innovation effort is made by firms
For the bulk of the current sample, the production- themselves (Nelson, 2000) and occurs within firms
intensive firms, Table 3 indicates no statistical themselves. Indeed, even in circumstances where the
relationships between successful new process intro- requirement for collaborative effort is identified, it is
duction and external innovation-related collaboration. thought essential that firms have developed internal
Again, this is largely in line with expectations. Whilst competencies which facilitate the effective recogni-
the analogous model for product innovation suggested tion, appraisal, negotiation and assimilation of ex-
a positive statistical association involving customer ternal expertise (Dosi, 1988). Only rarely will firms
(and public sector) collaboration, these firms are be mere passive receptors of exogenous technology
thought to ‘. . . produce a relatively high proportion of (broadly defined).
M.S. Freel / Research Policy 32 (2003) 751–770 763

Finally, there is some indication (at least in the case all cooperative ventures reported occurred along the
of science-based firms) that the standard knowledge value chain. This accords with our earlier discussion
production function approach may not accurately rep- regarding the nature of technological, organisational
resent firm-level innovation—or proxy firm-level in- and institutional proximities. That is, for most firms,
novation processes. In other words, innovation outputs occupying relatively mature industries and engaged
are not merely the sum of innovation inputs but, rather, in technologically incremental innovations, the infor-
are likely to also be a function of the activities through mation shared, or exchanged, in relationships with
which the resource inputs are transformed. Standard customers and suppliers is likely to be relatively cog-
approaches, such as that reported here, may not ade- nitively proximate and be facilitated by organisational
quately capture these underlying dynamics. (in the sense of similarities in routines, strategies
In addition to the conditions noted earlier, a fur- and governance) and, within the UK (and perhaps
ther, central, caveat must be added. As Fig. 3 clearly Europe), institutional (in the sense of similarities in
demonstrates, a great many firms were engaged in institutional infrastructure) proximities. This appears
no innovation-related external collaboration dur- to hold equally for science-based firms. In other
ing the period investigated by the survey. And yet words, irrespective of sectoral classification, and the
many of them appear to have successfully innovated implications for innovation this implies, relatively
nonetheless (e.g. 31.3% of firms with no external few horizontal, competitor links, or extra-industry
links recorded the introduction of a product new to links were reported. This is in contrast with the si-
the industry; though this is compared with 50.4% multaneous competition–collaboration expectations
of firms with at least one innovation-related link). of much of the ‘new industrial districts’ literature
To rephrase, networking (in the sense of cooperation (see for example, Oughton and Whittam, 1997) and
adopted here) cannot be considered either a neces- the science-industry interactivity aspirations of public
sary, nor less a sufficient condition for innovation policy (Etzkowitz and Leydesdorff, 2000) and may
and it may be that, within both the academy and suggest that the frequency of contact implied by mar-
the polity, the tendency to overstate the impact of ket relations may prove a more robust basis for the de-
networks persists. Furthermore, the vast majority of velopment of trust and cooperation under uncertainty.

Fig. 3. Proportion of firms with innovation-related external linkages.


764 M.S. Freel / Research Policy 32 (2003) 751–770

5.4. Innovation and embeddedness increasing bureaucracy, one may propose that rela-
tively managerialist firms are likely to suffer from
The second question identified in the early less flexibility and be less attractive, as innovation
parts of the paper concerned the spatial partners, to firms operating in national or international
distribution of external, innovation-related linkages. markets. Alternatively, greater managerial resource
Specifically, where linkages were reported, to what may suggest a concomitant ability to more fully ex-
extent were these clustered spatially? To this end, ploit local knowledge. However, in the absence of
Table 4 reports the results of a multiple-discriminant richer, ‘firm-specific’ data, one may merely conjec-
analysis2 with groupings based on the highest spa- ture upon the nature of causality—though, again, the
tial level of innovation-related links (i.e. ‘local’, finding is intriguing. In contrast to the negative effects
‘regional’, ‘UK’ and ‘overseas’). Interpretation of the of managerialism, though not supported by the uni-
functions relies largely upon consideration of the cor- variate ANOVA, the multivariate data from function
relations between individual predictors variables and 1 indicates a significant positive association between
the respective functions (in effect, factor loadings)— the proportion of technicians in the workforce and the
supported by the results of univariate ANOVAs for presence of extended spatial linkages. In other words,
each variable. Whilst consensus is lacking with re- firms that recorded, at least one, innovation-related
gards to the interpretation of loadings, a common overseas cooperative venture, are also likely to record
‘rule of thumb’ suggests that correlations in excess a higher proportion of technicians in the workforce
of 0.33 (i.e. 10% of variance) may be considered than are firms with national or regional linkages only
eligible for interpretation whilst lower ones may who, in turn, record higher proportions of technicians
not (Tabachnik and Fidell, 2001). Accordingly, the than locally embedded firms). This finding may sim-
following discussion adopts this convention. ply reflect the converse of the negative impact (on the
As the data indicates, the three functions gener- spatial reach of cooperation) observed in the presence
ated are effective predictors of group membership of high levels of management. However, a high pro-
(P = 0.002; see also Fig. 4). In particular, larger portion of technically qualified staff may also hint at
firms and firms with a higher export intensity are sig- a more developed absorptive capacity, which extends
nificantly more likely to have overseas links, whilst the reach (both in distance and scope) of the firm’s
smaller firms are more likely to be locally embedded cooperative potential. However, again in the absence
(see Table 4). As noted earlier, this is in accordance of richer firm-specific data, this remains conjecture.
with other recent studies demonstrating the impor- With regards to the effect that type and scope of
tance of firm resources, development stage and market innovation have on the spatial distribution of external
orientation in determining the spatial distribution of articulation, the data from the current study suggests
innovation-related collaboration. The importance of a significant positive relationship between novelty
internal resources is further underscored by the sig- and reach. That is, the proportion of firms engaged in
nificant negative impact noted for the proportionate relatively novel innovation (introducing products or
employment of managers and professionals. That is, processes which are new to the industry)3 increases as
a relatively higher proportion of staff designated as one progresses through the spatial groupings. By con-
either managers or professionals appears to be associ- trast, the proportion of firms engaged in incremental
ated with a higher degree of local embeddedness. This product innovation only (introducing products new to
finding is somewhat counter-intuitive—one would ex- the firm but not to the industry) appears inversely re-
pect the presence of significant managerial resource lated to the spatial categories contrived. Incremental
to positively impact upon the firm’s ability to interact process innovation appears to have no impact upon
with geographically distant organisations. However, the spatial distribution of innovation-related linkages.
treating higher levels of management as a proxy for To rephrase, novel innovators (product and process)
3 Type of innovation is coded using four binary dummy variables;
2 Initial estimations incorporated sector dummy variables relating firms cannot be classified as both novel and incremental innovators
to Pavitt’s taxonomy. However, these did not prove significant, for either products or processes—in both instances ‘no innovation’
and, indeed reduced the discriminating power of the functions. is the excluded category.
M.S. Freel / Research Policy 32 (2003) 751–770 765

Table 4
Discriminant functions of the spatial distribution of cooperative ventures
Predictor variables Correlations of predictor variables with discriminant functions

1 2 3 Univariate F(3, 248)

Firm age 0.010 0.406 0.275 1.426


Size (FTEs) 0.437 0.023 −0.052 2.256a
R&D expenditure 0.282 0.118 0.125 1.084
Percentage of technicians 0.330 0.003 0.116 1.326
Percentage of QSEs 0.232 −0.158 −0.213 0.959
Percentage of professionals/managers −0.445 0.352 −0.233 3.390b
Export (as % of T/O) 0.573 0.568 0.113 6.217c
Novel products 0.488 −0.032 0.288 3.080b
Incremental products −0.368 0.396 −0.272 2.957b
Novel processes 0.070 0.005 0.834 2.313a
Incremental processes 0.083 0.028 −0.192 0.205
Canonical R 0.355 0.284 0.196
Eigen value 0.145 0.088 0.040
Function Wilk’s lambda χ2 d.f. Significance

1–3 0.772 61.866 33 0.002c


2–3 0.884 29.522 20 0.078a
3 0.962 9.348 9 0.406
Predictor variables Group means and proportions

Local Regional UK Overseas

Firm Age 42.07 26.95 36.73 41.07


Size (FTEs) 42.40 62.44 52.60 80.20
R&D expenditure (%) 11.9 14.0 15.0 23.2
Percentage of technicians 0.0271 0.0485 0.0443 0.0664
Percentage of QSEs 0.0076 0.0281 0.0142 0.0253
Percentage of professionals/managers 0.3226 0.1918 0.2071 0.1738
Export (as % of T/O) 0.070 0.046 0.054 0.174
Novel products (%) 33.3 47.4 48.8 62.3
Incremental products (%) 42.9 21.1 22.5 20.3
Novel processes (%) 14.3 12.3 28.8 23.2
Incremental processes (%) 38.1 40.4 35.0 40.6
N 42 57 80 69
NB: 300 firms had no innovation links.
a Significant at 10% level.
b Significant at 5% level.
c Significant at 1% level.

appear more likely to have collaborative partners lo- example, suggests that the local environment is of
cated at a higher (i.e. more geographically distant) little importance for firms developing incremental
spatial level than do incremental innovators (product innovations, since resources required for this kind of
only). Whilst there is some empirical precedent for innovation are easily found within the firm. By con-
this result (Kaufmann and Todtling, 2000; Koschatzky, trast, the local environment is key to the successful
2000), it is, in general, somewhat counter-intuitive development of novel innovations. The more novel
and, indeed, runs counter to accepted wisdom. The the innovation the more important spatial proximity
‘milieux innovators’ approach (see for example, becomes. The data presented here fails to support this
Maillat, 1991, 1995; Maillat and Lecoq, 1992) for thesis. Moreover, R&D expenditure, as an alternative
766 M.S. Freel / Research Policy 32 (2003) 751–770

Fig. 4. Function at group centroids.

proxy for novelty of innovation, does not appear to more complexity than one might infer from policy
effect the spatial distribution of innovation-related pronouncements, such as that noted in the recent UK
linkages. Competitiveness White Paper (DTI, 1998) (quoted
earlier), which may reasonably be paraphrased as:
‘Networks are good, more networks are better’. More-
6. Concluding remarks over, it is imperative that one does not neglect the
relationship between innovativeness (in both products
Employing a sample of 597 small manufacturing and processes) and the presence of extensive internal
firms, this paper sought to explore two central issues: resources. Here again, the data from the current study
the degree of association between external linkages indicate considerable sectoral variation and variation
and firm-level innovation performance, on the one by innovation type—largely in line with expectations.
hand, and the extent to which such linkages were However, looking simplistically at the all-sample
clustered spatially, on the other. To this end, the em- models, R&D expenditure and technical employment
pirical analysis presented here indicates a number of were strongly positively associated with successful
interesting results. novel product and process introduction at the firm
In the first instance, with regards to the former level. There can be little doubt that internal resources
issue, one notes a highly-varied pattern of associ- frequently act as complement to, and more occasion-
ation across Pavitt’s sectoral taxonomy and across ally a substitute for, extramurally sourced technology.
innovation type. The corollary, which may be drawn For science-based firms, where no statistical associa-
from this, is that ‘networks’ (in the sense used here) tions relating to internal resources were observed, the
are not homogeneous or homogeneously good. The models, themselves, were found to be poor predictors
influence of various types of innovation-related coop- of ‘innovativeness’—suggesting some source of firm
erative networking is likely to differ depending, inter heterogeneity not captured by the regressors, perhaps
alia, upon the availability of internal competencies, in the form of internal transformation activities.
the type of user, the balance between product and Moreover, and placing these specific remarks to
process innovation and, relatedly, the underlying tech- one side, the sample data suggests a further, more fun-
nology trajectory (including issues of appropriability damental issue, which should give pause for thought.
and cumulativeness). Thus, pointing to considerably Though, clearly, the network approach to innovation—
M.S. Freel / Research Policy 32 (2003) 751–770 767

‘. . . that innovating firms are not islands of planned innovative firms. However, an important caveat would
co-ordination in a sea of market relations’ (Oerlemans be to note that ‘. . . while strength in “high-tech”
et al., 1998, p. 307)—is not without substance, one depends upon the availability of university trained
must include an important codicil; a great many of people, industry more generally requires a supply
the current sample firms appear to have successfully of literate, numerically competent, people in a wide
innovated without requiring ad hoc collaboration or range of functions outside R&D’ (Nelson, 2000,
articulation with any other organisations. Accord- p. 19). Following this, one of the persistent criti-
ingly, indeed crucially, it is likely ‘. . . that internal cisms of UK competition policy, and competitiveness,
strategies relying on the firms’ own capacities are relates to the paucity of technically skilled individ-
significantly more important than strategies involv- uals at intermediate levels (see Oughton, 1997). In
ing external partners’ (Kaufmann and Todtling, 2000, the current study, and with the exception of product
p. 33).4 Remarkably, 53% of science-based firms (i.e. innovation in production-intensive firms, it is the em-
those for whom external knowledge and external in- ployment of technicians, rather than QSEs, which is
teractive learning is considered particularly relevant), generally positively associated with ‘innovativeness’.
within the current sample, record no external collabo- Finally, with respect to the spatial distribution of
ration during the survey period. It seems external col- linkages, there is little evidence that these are clustered
laboration is, unequivocally, neither a necessary nor geographically (see also Fig. 5). This, however, does
less a sufficient condition for successful innovation. not imply that the nature of the innovation process
To reiterate, inferences from the current research co- does not impact upon the spatial distribution of inno-
incides with the observations of, inter alia, Arndt and vation partners. Rather, whilst the data provides fur-
Sternberg (2000) and Oerlemans et al. (1998); namely, ther supporting evidence regarding the role played by
that the economic network approach overstates the firm size and product markets (Arndt and Sternberg,
role of external factors in the innovation process. ‘[I]n 2000; Kaufmann and Todtling, 2000), it also indicates
most industries the lions share of innovation effort is a significant relationship between scope of innovation
made by firms themselves’ (Nelson, 2000, p. 13) and and the reach of linkages. Again, this, in itself, is
occurs within firms themselves. One is tempted to ac- not remarkable. The general view holds that the local
cept Oerlemans et al.’s (1998) contention that, in most environment, and the relative propinquity of innova-
instances, ‘. . . innovation is primarily a process built tion partners, is likely to be more important for novel
on internal capabilities’ (p. 308), which may, more innovators than for incremental innovators (Baptista
occasionally, be complemented by external agency. and Swann, 1998; Nooteboom, 1999). Yet, the current
Acceptance of this postulate has, at least, one sig- sample points to the opposite relationship. Novel in-
nificant implication. That is, since we know innovative novators (i.e. those introducing products or processes
activity to be largely incremental, building upon cur- new to the industry) are marked by the greater geo-
rent capabilities and prior experiences and involving graphical reach of their innovation networks, whilst
some tacit dimension (in the sense that it is facilitated incremental product innovators appear to be more
by ‘learning by doing’ or ‘learning by using’), and locally embedded. This may suggest that ‘. . . the
that tacit knowledge, in its turn, is essentially person probability that local ties can offer all complementary
embodied, then ‘. . . any firm level strategy for the resources is low’ (Oerlemans et al., 2001, p. 4). How-
development of knowledge must therefore be an em- ever, it also raises concerns over the appropriateness
ployment strategy’ (Smith, 2000, p. 89). As Nelson of cluster-driven network formation policies. The
(2000) noted from a series of case studies, the pres- UK’s experience of such policies, most clearly mani-
ence of education and training systems which ensured fest in the science-park phenomenon (cf. Garnsey and
a flow of individuals with the requisite knowledge and Cannon-Brookes, 1993; Westhead and Storey, 1995;
skills, was a distinguishing feature of those countries Westhead, 1997) has met with limited success.
that were able to beget and sustain competitive and Finally, it is worth noting that, while Cooke and
Morgan (1994) lament the conventional economics
4 The absence of more specific internal resources may also view of firms ‘. . . contextualised in terms of in-
account for the low ‘explanatory’ power of the models presented. dustries, sectors and markets’ (p. 25)—considered
768 M.S. Freel / Research Policy 32 (2003) 751–770

Fig. 5. Spatial distribution of innovation-related linkages.

‘spatially insensitive’—and suggest that the adoption at which an earlier draft of this paper was presented.
of a regional perspective would be more appropri- Finally, I am grateful for the constructive comments
ate (at least in the context of industrial innovation), of two anonymous reviewers. Nonetheless, any errors
the data from the current study serves, largely, to le- in analysis and interpretation remain my own.
gitimise the former in preference to the latter. That
is, vertical industry, sector and market links clearly
dominate (recall Fig. 2). Even in the great exemplars References
of agglomeration-based regional development (such
as Silicon Valley and the ‘Third Italy’), clusters are Acs, Z., Audretsch, D., 1987. Innovation, market structure and firm
size. The Review of Economics and Statistics 69, 567–574.
largely defined sectorally or, indeed, by product mar-
Acs, Z., Audretsch, D., 1988. Innovation in large and small firms:
kets and not by some abstruse notion of ‘high-tech’, an empirical analysis. The American Economic Review 78,
‘bio-tech’ or some such thing. It is essential that, in 678–690.
developing strategies to facilitate the creation of net- Acs, Z., FitzRoy, F., Smith, I., 1994. High-technology employment
works or strengthen a given innovation system, policy and university R&D spillovers: evidence from US cities.
Occasional paper no. 50. CIBER, University of Maryland.
pays sufficient heed to this premise.
Andréosso-O’Callaghan, B., 2000. Territory, research and
In closing it is important to note a limitation: the technology linkages—is the Shannon region a propitious
data employed here is cross-sectional (incorporating local system of innovation. Entrepreneurship and Regional
some limited retrospective reporting on the part of re- Development 12, 69–87.
spondents). Accordingly, any causal inferences drawn Archibugi, D., Howells, J., Michie, J., 1999. Innovation systems
must be treated with care. and policy in a global economy. In: Archibugi, D., Howells,
J., Michie, J. (Eds.), Innovation Policy in a Global Economy.
CUP, Cambridge, pp. 1–18.
Arndt, O., Sternberg, R., 2000. Do manufacturing firms profit from
Acknowledgements intra-regional innovation linkages? An empirical-based answer.
European Planning Studies 8, 465–485.
The data presented here was collected as a part of Arrow, K., 1962. The economic implications of learning by doing.
Review of Economic Studies 29, 155–173.
a survey of ‘Enterprise in Northern Britain’. Accord-
Audretsch, D., 1995. Innovation and Industry Evolution. MIT
ingly, I am grateful to the individuals and institutions Press, Cambridge, MA.
involved in this project. In addition, I am grateful to the Baptista, R., Swann, P., 1998. Do firms in clusters innovate more?
participants at the Fifth EUNIP conference in Vienna Research Policy 27, 525–540.
M.S. Freel / Research Policy 32 (2003) 751–770 769

Becattini, G., 1978. The development of light industry in Tuscany. Freel, M., 2000. External linkages and product innovation in
Economic Notes 2–3, 53–78. small manufacturing firms. Entrepreneurship and Regional
Becattini, G., 1990. The Marshallian industrial district as a socio- Development 12, 245–266.
economic notion. In: Pyke, F., Becattini, G., Sengenberger, W. Freel, M., 2002. On regional innovation systems: illustrations from
(Eds.), Industrial Districts and Inter-Firm Co-operation in Italy. the West Midlands. Environment and Planning C: Government
International Institute for Labour Studies, Geneva. and Policy, in press.
Bianchi, G., 1990. Innovating in the local system of Freeman, C., Soete, L., 1997. The Economics of Industrial
small–medium-sized enterprises. Entrepreneurship and Regional Innovation, 3rd Edition. Pinter, London.
Development 2, 57–69. Gardiner, P., Rothwell, R., 1985. Invention, innovation,
Bianchi, G., 1998. Requiem for the Third Italy? Rise and fall re-innovation and the role of the user: a case study of British
of a too successful concept. Entrepreneurship and Regional hovercraft development. Technovation 3, 167–186.
Development 10, 93–116. Garnsey, E., Cannon-Brookes, A., 1993. The ‘Cambridge
Brown, B., Butler, J., 1993. Networks and entrepreneurial Phenomenon’ revisited: aggregate change among Cambridge
development: the shadow of borders. Entrepreneurship and high-technology companies since 1985. Entrepreneurship and
Regional Development 5, 101–116. Regional Development 5, 179–207.
Brusco, S., 1982. The Emilian model: productive decentralisation Geroski, P., 1990. Innovation, technological opportunity, and
and social integration. Cambridge Journal of Economics 6, 63– market structure. Oxford Economic Papers 42, 586–602.
82. Geroski, P., Machin, S., 1992. Do innovating firms outperform
Cohen, W., Levinthal, D., 1989. Innovation and learning: the two non-innovators? Business Strategy Review, Summer, 79–90.
faces of R&D. The Economic Journal 99, 569–596. Geroski, P., Machin, S., 1993. Innovation, profitability and growth
Cohen, W., Levinthal, D., 1990. Absorptive capacity: a new over the business cycle. Empirica 20, 35–50.
perspective on learning and innovation. Administrative Science Granovetter, M., 1982. The strength of weak ties: a network theory
Quarterly 35, 128–152. revisited. In: Marsden, P., Lin, N. (Eds.), Social Structure and
Cooke P., Morgan, K., 1994. The creative milieu: a regional Network Analysis. Sage, Beverly Hills, CA, pp. 105–130.
perspective on innovation. In: Dodgson, M., Rothwell, R. Håkansson, H., 1987. Product development in networks. In:
(Eds.), The Handbook of Industrial Innovation. Edward Elgar, Håkansson, H. (Ed.), Industrial Technological Development: A
Cheltenham, pp. 25–32. Network Approach. Croom Helm, London, pp. 84–127.
Cooke, P., Morgan, K., 1998. The Associational Economy: Firms, Hansen, N., 1990. Innovative regional milieux, small firms and
Regions and Innovation. Oxford University Press, Oxford. regional development: evidence from Mediterranean France.
Cosh, A., Hughes, A., Wood E., 1998. Innovation Surveys and Annals of Regional Science 24, 107–123.
Very Small Enterprises, WP 89. Centre for Business Research, Hoffman, K., Milady, P., Bessant, J., Perren, L., 1998. Small firms,
University of Cambridge. R&D, technology and innovation in the UK: a literature review.
de la Mothe, J., Paquet, G., 1998. National innovation systems, Technovation 18, 39–55.
‘real economies’ and instituted process. Small Business Howells, J., 1995. Tacit Knowledge and Technology Transfer, WP
Economics 11, 101–111. 16. Centre for Business Research, University of Cambridge.
Dosi, G., 1988. Sources, procedures and microeconomic effects Howells, J., 1999. Regional systems of innovation? In: Archibugi,
of innovation. Journal of Economic Literature 26, 1120–1171. D., Howells, J., Michie, J. (Eds.), Innovation Policy in a Global
Dosi, G., 1999. Some notes on national systems of innovation and Economy. CUP, Cambridge, pp. 67–93.
production, and their implications for economic analysis. In: Johnson, B., Lundvall, B., 1993. Catching-up and institutional
Archibugi, D., Howells, J., Michie, J. (Eds.), Innovation Policy learning under post-socialism. In: Hausner, J., Jessop, B.,
in a Global Economy. CUP, Cambridge, pp. 35–48. Neilsen, K. (Eds.), Institutional Frameworks of Market
DTI (Department of Trade and Industry), 1998. Our Competitive Economies. Avebury, Aldershot, pp. 68–86.
Future: Building the Knowledge Economy, White Paper, Cm Karlsson, C., Olsson, O., 1998. Product innovation in small and
4176. HMSO, London. large enterprises. Small Business Economics 10, 31–46.
DTI (Department of Trade and Industry), 2001a. Business Clusters Kaufmann, A., Todtling, F., 2000. Systems of innovation in
in the UK —A First Assessment. DTI, London. traditional industrial regions: the case of Styria in a comparative
DTI (Department of Trade and Industry), 2001b. The Department perspective. Regional Studies 34, 29–40.
of Trade and Industry Science and Innovation Strategy 2001. Kirat, T., Lung, Y., 1999. Innovation and proximity: territories
DTI, London. as loci of collective learning. European Urban and Regional
Etzkowitz, H., Leydesdorff, L., 2000. The dynamics of innovation: Studies 6, 27–38.
from National Systems and “Mode 2” to a Triple Helix of Kline, S., Rosenberg, N., 1986. An overview of innovation.
university–industry–government relations. Research Policy 29, In: Landua, R., Rosenberg, N. (Eds.), The Positive Sum
109–124. Strategy: Harnessing Technology for Economic Growth.
Feldman, M., 1994. Knowledge complementarity and innovation. National Academic Press, Washington, DC.
Small Business Economics 6, 363–372. Koschatzky, K., 2000. The Regionalisation of Innovation Policy
Florida, R., 1995. Towards the learning region. Futures 27, 527– in Germany—Theoretical Foundations and Recent Experience,
536. WP R1/2000. Fraunhofer ISIR.
770 M.S. Freel / Research Policy 32 (2003) 751–770

Lawson, C., 1999. Towards a competence theory of the region. Oughton, C., 1997. Competitiveness policy in the 1990s. Economic
Cambridge Journal of Economics 23, 151–166. Journal 107, 1486–1503.
Love, B., Roper, S., 1999. The determinants of innovation: R&D, Oughton, C., Whittam, G., 1997. Competition and co-operation
technology transfer and networking effects. Review of Industrial in the small firm sector. Scottish Journal of Political Economy
Organisation 15, 43–64. 44, 1–30.
Love, J., Roper, S., 2001. Location and network effects on Pavitt, K., 1984. Sectoral patterns of technical change: towards a
innovation success: evidence for UK, German and Irish taxonomy and a theory. Research Policy 13, 343–373.
manufacturing plants, German and Irish manufacturing plants. Polanyi, M., 1966. The Tacit Dimension. Routledge and Kegan
Research Policy 30, 643–662. Paul, London.
Lundvall, B., 1995. National Systems of Innovation: Towards a Rosenberg, N., 1982. Inside the Black Box: Technology and
Theory of Innovation and Interactive Learning. Pinter, London Economics. Cambridge University Press, Cambridge.
(first published in 1992). Rothwell, R., 1991. External networking and innovation in small
Maillat, D., 1991. Local dynamism, milieu and innovative and medium-sized manufacturing firms. Technovation 11, 93–
enterprises. In: Brotchie, J., Batty, H., Hall, P., Newton, 112.
P. (Eds.), Cities of the 21st Century. Longman, London, Shaw, B., 1991. Developing technological innovations within
pp. 265–274. networks. Entrepreneurship and Regional Development 3, 111–
Maillat, D., 1995. Territorial dynamic, innovative milieus and 128.
regional policy. Entrepreneurship and Regional Development 7, Staber, U., 1997. An ecological perspective on entrepreneurship in
157–165. industrial districts. Entrepreneurship and Regional Development
Maillat, D., Lecoq, B., 1992. New technologies and transformation 9, 45–64.
of regional structures in Europe: the role of the milieu. Sternberg, R., 2000. Innovation networks and regional
Entrepreneurship and Regional Development 4, pp. 1–20. development—evidence from the European Regional Innovation
Nelson, R., 2000. National innovation systems. In: Acs, Z., (Ed.), Survey (ERIS): theoretical concepts, methodological approach,
Regional Innovation, Knowledge and Global Change. Pinter, empirical basis and introduction to the theme issue. European
London, pp. 11–26. Planning Studies 8, 389–407.
Nooteboom, B., 1999. Innovation, learning and industrial Tabachnik, B., Fidell, L., 2001. Using Multivariate Statistics, 4th
organisation. Cambridge Journal of Economics 23, 127–150. Edition. Pearson, Needham Heights, MA.
Oerlemans, L., Meeus, M., Boekema, F., 1998. Do networks von Hippel, E., 1978. Successful industrial products from customer
matter for innovation? The usefulness of the economic network ideas. Journal of Marketing 42, 39–49.
approach in analysing innovation. Tijdschrift voor Economische Westhead, P., 1997. R&D ‘inputs’ and ‘outputs’ of technology-
en Sociale Geografie 89, 298–309. based firms located on and off Science Parks. R&D
Oerlemans, L., Meeus, M., Boekema, F., 2001. Firm clustering Management 27, 45–62.
and innovation: determinants and effects. Papers in Regional Westhead, P., Storey, D., 1995. Links between higher education
Science 80, 337–356. institutions and high-technology firms. OMEGA 23, 345–360.