Innovation prone and innovation averse societies: economic performance in Europe.

Introduction

In a world which has undergone serious technological change in recent decades, having the capacity to generate advanced technology and information, or having a quick access to both of them, is increasingly regarded as the "single most important force driving the secular process of economic growth" (Breshnahan and Trajtenberg 1992: 1). Technology has improved at such a rate that it has become the basic catalyst of economic growth. Nations with the highest technological capacity seem to be taking greater advantages of the new economic opportunities related to changes in production methods and market demand. Hence, nations investing heavily in the development of technology are considered to be bound to grow at a greater pace than neighboring countries, not only because of the high returns related to this type technology but also because of the multiplier effects and the external and agglomeration economies generated by innovation centers, and their greater capacity to assimilate technological spillovers.

But the passage from research and development to innovation and then to actual economic performance is not always smooth and easy. Although many empirical analyses have highlighted the strong association between investment in technology and in R&D, and increases in productivity and growth (Romer 1990; Grossman and Helpman 1991; Lichtenberg 1992; Eaton and Kortum 1995), the same analyses also underline that the relationship is far from perfect. Some areas outperform in economic terms their investment in R&D and their innovation capacity, while others find it difficult to make a successful link between technology and growth.

Many factors purely related to investment in R&D determine the ability of any space to transform technology into innovation and finally into growth enhancing economic activity. The type of R&D investment conducted or the applied or general nature of the R&D activities are among those technology related factors. However, the capacity to transform R&D investment into economic growth and the easy or difficult assimilation of innovation in any space are also the result of outside factors. Local social, institutional, and political structures have been pointed out by numerous researchers working on regions (Markusen 1987; Rodriguez-Pose 1998), and especially by those working on the development problems of the Italian Mezzogiorno (Botazzi 1990; Dioguardi 1991; Trigilia 1992; Putnam 1993), as some of the key elements which condition the genesis and assimilation of innovation and its transformation into economic growth. Different social, political, and institutional conditions lead to different reactions to innovation and to the development of what can be defined as innovation prone and innovation averse societies, that is, areas which exhibit stronger (in the case of innovation prone) or weaker (in the case of innovation averse) than expected economic growth relative to their R&D activity.

This paper addresses some of these issues at the regional level in Western Europe, focusing, after a theoretical analysis, on the relationship between R&D and economic growth. The main question is whether it is worthwhile for individual regions across Europe to invest resources in R&D. Data limitations at the regional level allow this paper to concentrate only on the link between R&D and growth,(1) without providing a direct regional index of innovation. The second half of the paper deals with the macro social factors which contribute to magnify or dilute the connection between R&D effort and growth and which thus lead to the formation of innovation prone and innovation averse societies in Europe. Lack of data also prevents the paper from wandering outside the social realm in order to assess the role played by other important noneconomic factors, such as regional institutional and political factors in the genesis and transformation of R&D activity into economic growth.

The Transformation of R&D into Productive Activity

Although there is little discrepancy surrounding the idea of technology as the engine of economic growth (Breshnahan 1986; Trajtenberg 1990), there is less consensus on the spatial impact of R&D on the genesis of growth promoting activities, especially at a subnational level. The question often asked is whether it pays to invest in R&D, especially in the case of relatively small areas or regions.

From a Schumpeterian point of view there is a positive answer to that question. It is argued that the returns of every nation's or region's R&D effort tend to be positively associated with the amount of resources devoted to improve technology, and benefit from strong cumulative effects (Scherer 1982; Dosi 1988; van de Klundert and Smulders 1997). There are, however, strong threshold effects linked to an area's R&D effort. The larger the effort, the larger the expected return. Hence, from this perspective, investment and employment in R&D are likely to encourage the development of economic activities in large territorial units where a critical mass of R&D can easily be reached, and fundamentally within the framework of national innovation systems. As Audretsch and Feldman put it, "the empirical link between knowledge inputs with innovative output is apparently stronger as the unit of observation becomes increasingly aggregated [...] The most innovative countries, such as the United States, Japan and Germany, also tend to invest a lot in R&D" (1997: 2). In contrast, a reduced R&D effort in smaller territorial units - such as most western European regions - may not yield the expected returns.

Territorially speaking the expected local returns of investment in R&D may be further jeopardized by the mobility of knowledge derived from R&D, that is, by the genesis of spillovers (Jaffe 1986, 1989). Technological advances tend to be generated in areas with the greatest concentration of R&D activity, be it in the form of private company research, government funded programs, or research conducted by universities (Keeble 1988; Malecki 1991). However, once developed, R&D related innovation becomes spatially footloose, especially in an increasingly open economy that knows fewer technological and legal barriers than it did a few decades ago (Leung and Wu 1995). The existence and importance of technology spillovers is well documented at an international level (Lichtenberg 1992; Coe and Helpman 1993; Park 1995). Collectively, spillovers imply that investing capital and human resources in R&D in any part of the world leads to greater global economic activity.

When research spillovers begin to operate, firms in areas with little or no R&D activities can, in theory, benefit from technological progress - provided they belong to the adequate industrial and communication networks - as much as firms located in areas where innovation is generated. There is thus a risk of free-riding. However, the mobility of technology and innovation is far from being costless and territorially even. Since the diffusion of technological spillovers is often achieved as a result of the existence of research and economic networks, in order to benefit from the spread of innovation, regions still need to host the necessary research centers and the adequate research personnel capable of linking to those networks (Audretsch and Feldman 1996a; de Bondt 1996; Engelbrecht 1997). As a result, the transaction costs of transmitting tacit knowledge rise along with distance (Audretsch and Feldman 1996a, 1996b). Thus, the general view is that the impact of spillovers is greatest in areas with a strong concentration of R&D facilities, larger firms conducting R&D activities, and higher investment (van de Klundert and Smulders 1997). The transmission of tacit knowledge in these areas then leads to the genesis of self-reinforcing virtuous circles of accumulation and to the creation of multiplier effects (Smulders and van de Klundert 1995; Verspagen 1997). In contrast, the capacity of most areas to benefit from technological spillovers generated in distant locations may be limited. Hence the possibility of free-riding, which might deter individual firms and different tiers of government from engaging economic and human resources in R&D related activities, is, to a certain extent, compensated by the costs of benefiting from spillovers.

Nevertheless, from an individual psychological point of view, the temptation to free-ride often remains stronger than the costs associated with assimilating technological spillovers. This factor may push individual firms or territories to reduce their investment in R&D. Incentives to free-ride are strongest at the subnational level, since the transaction costs associated with the assimilation of spillovers are perceived to be less important and the generally limited size of the local R&D effort and the lower expected returns associated with it make it almost a necessity. The degree of integration of regional economies within a nation is far greater than that of nations in the world economy, and, in theory, the mobility of innovation is amplified and its transaction costs reduced within the framework of an open national economy. Therefore, why should a local firm or a local or regional government spend time and effort on R&D, when similar results could be achieved by poaching others' technological innovations?

In addition to size and the existence of spillovers, a third factor that may jeopardize investment in R&D by subnational territorial units are the problems linked to the appropriability of technical innovation (Harabi 1995; Storper 1995). As Storper (1995) underlines, technology and the innovations linked to technology are non-rival and non-excludable goods, and therefore difficult to appropriate. Although the most usual ways to appropriate the returns of R&D are patents, secrecy, lead time, and making imitation more difficult for competitors (Harabi 1995), these forms of appropriability are regarded as highly imperfect, especially when research (as is often the case in many European regions) is conducted by public research centers or universities. In fact, the use of patents is often considered to be one of the least effective means of appropriability of innovation (Harabi …