«Heidi Wiig and Michelle Wood R-01 • What Comprises a Regional Innovation System? An 1995 Empirical Study Heidi Wiig and Michelle Wood STEP ...»
3.1 Industrial base of the region As noted above, in 1994 1128 companies were registered in Møre and Romsdal. Of these, by stripping out non-relevant firms or those no longer in business, 824 firms (representing 100% of manufacturing industry) formed the sample base for our survey of the 'regional innovation system' (see appending section for outline of methodology). Using our primary data together with information from elsewhere28 the industrial structure is shown to be dominated by small, even micro companies, since only about 100 companies in Møre and Romsdal employ 50 or more whilst nearly 700 companies have less than 10 employees. However, when comparing this with the national pattern, it is noted that the average company size in Møre and Romsdal is in fact somewhat larger than in the rest of Norway. The share of companies in manufacturing, where the average company size is larger than in other economic sectors, also exceeds the national average. Thus, of all the 19 counties of Norway, Møre and Romsdal has the largest share of employees involved in manufacturing (see Table 1) and employment is to a large extent concentrated in a few industries, some of which are key to the national economy. These are:29
1) Manufacturing of fabricated metal products, machinery and equipment (ISIC 38), of which ship and boat-building (ISIC 3841) is the dominant;
2) Manufacture of wood and wood products, including furniture (ISIC 33), of which manufacture of furniture and fixtures (ISIC 332) accounts for around 80%; and
3) Food manufacturing (ISIC 311-312), of which canning, preserving and processing of fish (ISIC 3114) accounts for 40-50%.
More specifically, at present roughly 40% of those employed in manufacture in Møre and Romsdal31 work in manufacturing fabricated metal products, where ship and boat-building, and manufacture of components and fixtures for ships and boats dominates. This industry has meanwhile experienced thorough restructuring and rationalisation which has left waning demand for labour despite satisfactory levels both of orders and profits. The furniture manufacturing industry in Møre and Romsdal now accounts for about half the sector nationally and was developed by individual entrepreneurs as a spin-off from traditional locally-organised wood working activities. Today, the furniture industry is highly automated, and its intensive use of technology has made it competitive both nationally and internationally. Despite this, only a relatively small share of production is exported.
Finally, fish processing, together with the outfitting of the fishing fleet, may be viewed as an extension of the traditional base of activities that grew up around fishing. Modernisation of the region's industries may be described as a combination of local and international processes. While the fish industry is relatively conventional in the catching and processing of fish, for example, this can involve considerable technical upgrading which improves traditional technology; there has been important progress in research institutions which provides new possibilities for the industry.
However, as yet, the fish industry has been unable to use these new inventions to their full potential.32 The fishing and the fish-processing industries employ about 7% of the working population, spread amongst numerous, closely linked, small and medium-sized companies.
This is slightly less than the total number of firms in the region as we took out some nonmanufacturing firms (retail and construction firms (6)) and the remainder were not allocated an ISIC code. See appendix for fuller picture of sampling procedure.
Møre and Romsdal fylkeskommune (1993) Årsmelding 1993 (Annual report 1993). Nærings- og miljøavdeling.
Hernes G. og Trondsen (1986) T. 'Fast i fisken? Fiskerinæringens markedsmuligheter, styringsproblemer og innovasjonsevne' (The fish industries market opportunities, steering problems and innovation capabilities). FAFO, Oslo, June 1986.
What Comprises a Regional Innovation System? An Empirical Study 11
3.2 Economic links and innovation How important is the region as an economic environment in input-output terms? It is evident from the survey results that there is a strongly focused economic base within Møre and Romsdal in terms of its importance as a market for firms' products, firms' links with key customers and as a source of supply for other firms. Customers within the region account for 61% of total sales and over half (53%) of the firms have their main customer in the region, trading mainly with industrial customers rather than supplying to final consumer markets. In addition, 34% of firms have their main supplier in Møre and Romsdal. These links are supported by the fact that the most important general regional factor affecting firms`activities in the region is presence of major customers or presence to markets (Figure 3). This would imply a degree of local linkage formation in the form of 'clusters'33 or ‘regional production networks’ particularly in the key sectors outlined above.
0% 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % (Source: STEP-Group survey of Møre and Romsdal) Innovation inputs and innovation-related expenditures The survey evidence suggests that many firms are innovative in that they have expenditure on innovation activities, where 62% (n=249) of firms said they have some form of innovation cost (i.e. expenditure on innovation activities), although only 83 firms actually gave a distribution of total innovation costs (Figure 4). As shown in the figure, R&D expenditure (representing more basic or ’pure’ research) accounts for only 12% of total innovation costs, whereas more applied work (the development side of R&D), such as trial production and product start up (33% of total innovation costs), account for the majority of costs. In turn, developmental work and purchasing of products and licenses are also key areas of innovation costs.
This suggests that regardless of firm, R&D expenditure on the whole represents a relatively small element of the innovation process for firms in Møre and Romsdal, Porter M (1990) op cit.
12 STEP rapport / report R-01/1995 indicating that incremental innovations through learning by doing and learning by using are important in manufacturing industry in Møre and Romsdal. This (probably) reflects many small entrepreneurial firms in the region.
(Source: STEP-Group survey of Møre and Romsdal) Firms also provided data regarding research employment. Of the 61 firms responding to this, only 26 registered full-time research positions indicating that overall these firms have very few employees specifically engaged in R&D. These results are not surprising given that the majority of firms are SMEs, which often have limited resources directly for R&D expenditure and employment.
Innovation outputs The innovation activities of firms in Møre and Romsdal have significantly interindustry variations and it should be noted that innovations are not only confined to 'high technology' industries. Given that the industrial base in Møre and Romsdal is based on more traditional industries such as wood products and food products (especially fish) illustrates the persistent importance of innovation in these sectors.
There is evidence to show that many firms are innovative in that they introduce new and altered products34. Wood products have a larger proportion of altered products (67%) than unaltered products in their turnover, and in these terms is far more innovative than chemicals which often is regarded as a 'high-technology' industry.
'Metal products, machinery and equipment' and 'Food, beverages and tobacco' also have a proportion of altered products in sales (Figure 5).
The main indicator of innovation output was: the proportion of the firms’s sales generated by product innovations introduced in the market within the last three years. Product innovations or 'new' products are understood here to mean either significantly altered products or slightly altered products.
What Comprises a Regional Innovation System? An Empirical Study 13 Figure 5. Share of turnover accounted for by unaltered, slightly altered and significantly altered products, by industry (n=252), 1994 Other manufacturing industries
Fishing, sealing, whaling 0% 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % (Source: STEP-Group survey of Møre and Romsdal) There are important geographic patterns to innovation within Møre and Romsdal. For example in terms of proportion of new products in sales, one of the three main fogderi, Sunnmøre, has the largest share; which may be largely because of the fact that lack of access to risk capital is less of a problem for firms in Sunnmøre than for the other two sub-regions of Nordmøre and Romsdal.
Obstacles to innovation On the basis of this evidence, it is suggested that strong trade links or networking between firms based in Møre and Romsdal may be seen as a potential for interaction or cooperation for innovation activities. According to Tödtling, for example, since networks exists at various spatial levels, geographical proximity, good communication networks, a common cultural background and a well developed infrastructure act as a catalyst for the utilisation of regional innovation potentials35.
But when focusing on such issues in the context of Møre and Romsdal, such links between firms are not evident. In fact, the most important obstacle to firms' innovation is their fear of imitation of their products or risks associated with being the first to innovate (Figure 6), this holds especially for small firms. This is further supported by the fact that firms see the presence of related firms of little importance to their activities, (see Figure 3 above) here again especially for the small firms and the lack of cooperation possibilities is not seen as an obstacle to innovation (Figure 6).
0% 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % (Source: STEP-Group survey of Møre and Romsdal) There are differences, in terms of size of firm, as to how they perceive lack of cooperation possibilities where larger firms see it less of a problem than smaller firms. Such factors are more directly related to internal firm strategy rather than those based on regional factors, although if there are a number of similar or competing firms in the region then the fear of imitation through, for example, loss of information due to spatial proximity between competing firms has an important regional dimension. This issue is highly relevant given the predominance of small firms in the sample which are often less able to support or finance risky innovation activities, indicated by the high response to high costs as a restrictive factor for innovation (Figure 6). This also reinforces existing evidence from other studies concerning the particular constraints to innovation faced by SMEs.
In addition, although previous research emphasises the importance of user-supplier interaction for innovation36 this not borne out by the evidence for Møre and Romsdal.
Several firms are, in fact, dependent on one main customer (23% of firms rely on their main customer for more than 50% of sales), but the innovation potentials of such 'customer dependent' firms are lower (14% of innovation in sales) than those that are non-dependent (17%). Although the difference is not great it does suggest that strong economic links with key customers does not necessarily have a positive effect on innovation, it shows ‘the weakness of strong ties’37, whereby such firms undertake a subcontract role and are 'tied in' to supply customers with specific components or materials; as such they may have little requirement to innovate.
see, for example, Lundvall B-A. (1988) ’Innovation as an interactive process: from user-producer interaction to the national system of innovation’ in Dosi et al (eds) Technical Change and Economic Theory, 349-369 Grabher, G. (1993). 'The weakness of strong ties. The lock-in of regional development in Ruhr area' in Grabher, G. (ed.) The embedded firm. On the socioeconomics of industrial networks, Routledge, London/ New York, p1-31 What Comprises a Regional Innovation System? An Empirical Study 15 However, cooperation for innovation between the firm and its main customer is not evident, suggesting a dependent supplier characterised by low technical skills, producing only ordered components, which has a strong price competition because the customer has many related suppliers.38 Overall, firms in Møre and Romsdal have strong trading links to the region; the goods that are sold are mostly low-technology but innovative, and most products are traded with industrial customers, rather than supplying final consumer markets.
Firms are innovative and the fear of imitation suggests that there is high competition between firms in the region. There are historical evidence of entrepreneural skills in the region, and there are spatial differences in Møre and Romsdal when it comes to innovation, where the innovative regions have less problem with finding risk capital for their innovation activity. However, the results also indicate that too strong economic dependencies between firms does not necessarily promote innovation linkages between firms.
3.3 Role of external links Given the increasing awareness of globalisation39, expansion of export markets and emphasis on external technological collaboration40, the importance of external links to regional innovation has been emphasised. As such, firms' links both elsewhere in Norway and outside of the country were also examined in this study.
Firstly, in terms of extra-regional trade links, 40% of the total sales of Møre and Romsdal industry are outside the region (Figure 7); the smallest firms (less then 10 employees) export only 14% of their sales, and for largest firms, 58% of sales is exported (dominated by the EU market).
Figure 7. Sales from companies in Møre and Romsdal to different markets (n=350).
(Figures in millions of Norwegian Krone)
(Source: STEP-Group survey of Møre and Romsdal) Asheim, B.T. and A. Isaksen (1995), “Spesialiserte produksjonsområder mellom globalisering og lokalisering.” In Olberg, D. (red), “Endringer i arbeidslivets organisering”. Oslo: FAFO. Comming.