Policies To Stimulate Innovation May Need To Be Industry-Specific

What kinds of firms drive innovation – small ones or big ones? It all depends on the industry, according to new research by Stefano Breschi, Franco Malerba and Luigi Orsenigo, published in the latest issue of the Economic Journal. Having analysed the innovative activities of 18,000 British, German and Italian firms for a period of over 12 years, they find that there are two quite distinct types of innovation, which result from the nature of the technology in the industries in which the firms operate:

  • Widening, where small new firms can enter the industry and continuously disrupt the current ways of production, thus wiping out the profits associated with previous innovations. Good examples here are internet and biotechnology firms, but there are others, including industrial machinery, mechanical engineering and instruments.
  • Deepening, where large established firms innovate persistently and tend to dominate their industries for a very long time. Examples here include pharmaceuticals, consumer electronics, mainframe computers, aerospace, chemicals, vehicles and engines.

The results also reveal that Italy and (to a lesser extent) the UK have a more turbulent and less stable population of innovative firms (consistent with widening) than Germany. They indicate that widening takes place in industries with the following characteristics:

  • Low degree of Cumulativeness – that is, the extent to which a technological advance can be built on.
  • Low degree of Appropriability – that is, how easily the innovation can be protected/patented against imitation.
  • High degree of Applied Knowledge – that is, the extent to which knowledge is targeted at specific applications
  • Deepening, in contrast, takes place in industries with these characteristics:
  • High degree of Cumulativeness.
  • High degree of Appropriability.
  • High degree of Generic Knowledge – that is, knowledge is of a broad nature, such as the basic sciences.

For corporate strategists, the general implication of this research is that the nature of the industry they are in constrains the set of strategies that can be profitably pursued. For policy-makers, the message is that the rationale and effectiveness of policies – such as intellectual property rights, antitrust or other measures intended to stimulate innovation – may be radically different in different types of industry.

''Technological Regimes and Schumpeterian Patterns of Innovation'' by Stefano Breschi, Franco Malerba and Luigi Orsenigo is published in the April 2000 issue of the Economic Journal. The authors are at the Università Bocconi, Milan.