Follow the pipelines

Sami Mahroum.

While it might be too early to say what the impact might be in the long run, it is fair to say that so far much of the spending has not yielded any visible results.

The problem is that governments are adopting a purely nationally oriented strategies for the “rescue”of what is truly a transnational economic system.

The subsequent meetings of G20, G8, IMF, etc have failed to bring about a true transnational response to a transnational problem. For the real problem lies more at the industrial level and less at the level of national economies. The economic problems of London and New York are linked to the troubles of the finance industry, just like the problems of Trollhattan (Sweden) and Detroit are linked the automotive industry, and the problems of Dubai and Barcelona are linked to the construction industry.

Rescue should be industry-specific and transnational

Today, the suppliers of any good or service no longer own or control all parts of the value chain, but work collaboratively with other businesses locally and internationally to plan and coordinate activities to deliver goods and services. Supply chains have become more complex, with a shift to greater trade for intermediate products and services between enterprises and countries. For each  troubled industrial sector, the resuce plans need to recognise the economic geography of its value chains, that is, the main suppliers, sources of knowledge, information, skills, finance, and so on.

National innovation systems are the local components of transnational value-chains. This is what the literature on innovation systems have been telling us for decades if not for a century already. Innovation, production and value creation are activities organised around networks of supply chains.

The idea that innovation is an activity organised around networks of interlinked players and processes is not new – it goes back to the times of the German economist Friedrich List (1841). In the 1980s, it was popularised by the work of Christofer Freeman (University of Sussex) and Richard Nelson (Columbia University) on national systems of innovation, which led an enormous literature on the basis of this concept.

Most of these seminal pieces of work tried to capture how value creation takes place in a systematic way within national bounadaries. Yet the rapid globalisation of the world economy that has followed has opened a new discussion: How national are innovation  and value-creation systems at all?

This question is very much relevant to the current responses to the global economic crisis. Most governments plans are national in scope and focus. But the routes an idea, a technique or a discovery takes  into the market are diverse and can go through multiple geographies often stretching beyond national boundaries.

A new innovation does not always happen through co-located production lines between two neigbhouring firms, nor between a local university and a firm, and increasingly not even within the boundaries of one firm. Innovation and value creation often involve numerous people and organisations scattered around many places. These may be remote from each other, but be connected through virtual supply chains –suppliers, users, intermediate-brokers and specialist knowledge providers – and are often transnational.  Many producers (for example in the IT, automotive or retail industries) rely on foreign suppliers to supply intermediate products and services. The array of goods selected for production at home already often reflects the positions of local firms and their relative advantage within global supply chains.

Innovation activities cannot be entirely localised

So it is pointless for governments to try domesticate all the components of value creation within their national boundaries. This is particularly true for small and medium-sized countries. If a country is good at popping out new discoveries and ideas but bad at exploiting them locally, then its best choice is to team up with partners in another countries to help exploit its discoveries on a massive scale.

Innovation policies should support the capacities needed to be competitive within global value chains. The obsession with all-encompassing national and regional innovation systems that seek to function as localised factories of innovation is doomed to failure. They have not worked in the past and there is no reasons to believe that they will work in the future. Instead focus on what you can do best within an innovation system that is intrinsically global.

During economic crises international supply chains become threatened and many cease to exist. This is particularly true for high-risk activities such as innovation. The current economic crisis poses serious threats to many supply chains underpinning innovation systems across the OECD.  For example, in the UK 89 per cent of firms are engaged in supply-chain business-to-business trade. Most of these are small firms facing serious liquidity problems.

Policymakers in different countries need to work together to identify areas of intervention along various industrial value chains. They need to understand transnational business-to-business networks, identify areas of strengths and weaknesses – and act accordingly. The result: governments in different countries will intervene in different ways according to the role their industries play in particular global value chains.

International supply-chains are also sources of new knowledge and learning, not only of technical expertise, but also knowledge of foreign markets, critical business contacts and international partners.

So governments should refrain from adopting a purely local approach to what is in reality a global problem with local spillovers. Protectionistic trade, investment or immigration policies will slow down the prospect of quick recovery and threaten many businesses whose competitiveness is drawn from their international learning. Unless governments collaborate along transnational value-chains, the current economic crisis may destroy the fabric of their national innovation systems.

Dr Sami Mahroum is a Visiting Reader at Birkbeck College, London, and a Senior Research Affiliate of the International Organisation for Knowledge Development and Enterprise Development (IKED), Malmo, Sweden. Until recently, Sami was a Research Director at NESTA in London, UK.

Disclaimer: The opinions expressed in the paper are those of the author alone.