Margrethe Vestager, the EU’s competition com- missioner, issued charges against Google yester- day over concerns that its search engine was biased in favour of the company’s own shopping services. Google denies that it is breaching anti- trust rules.
Whilst the focus on shopping was narrower than some complainants against Google had hoped, Ms Vestager said the case could lay the groundwork for tackling other areas where Google derives money from advertising, such as travel agencies and map- ping. “If an infringement is proven, a case focusing on comparison shopping could potentially establish a broader precedent for enforcing EU competition rules in other instances of Google favouring its own services,” she said.
Ms Vestager said Google could remedy the EU’s con- cerns with “future-proof” principles that set out fair- ness in the way searches worked.
“To be clear, we would not want to interfere with Google’s design choices or how its algorithms work.”
In this respect, Ms Vestager appears to be aiming at a broader solution to the complaints against Google than her predecessor, Joaquín Almunia. In his third attempted settlement with the company Mr Almunia focused on page layout and the display of products and services from Google’s rivals.
Given the stakes for Google’s business model, Gary Reback, a Silicon Valley lawyer who has represented several of its rivals said: “You should expect Google to fight this tooth and nail. It’s going to affect nearly everything they do on the monetisable side of search.”
Shopping was the first area in which the commission received a complaint over Google’s conduct, from the British price comparison site, Foundem. The complaints have since snowballed to include online travel services such as Expedia, as well as large groups including Microsoft, and French and German publishers.
Google now has 10 weeks to respond and allay the commission’s concerns. It also has a right to a hear- ing in the coming months, normally attended by national representatives, in which all the main argu- ments can be aired.
If Google’s defence is unsuccessful, it faces a fine.
Theoretically this could be as much as 10 per cent of the previous year’s turnover, some $66bn in 2014, but lawyers do not expect any potential penalty from the commission to be anywhere near as high as the pos- sible maximum.
Google said, in an internal email sent before Ms Vestager’s announcement: “We have a very strong case, with especially good arguments when it comes to better services for consumers and increased competition.”
Source: Oliver, C. and Waters, R. (2015), www.ft.com 16 April.
© The Financial Times Limited 2015. All Rights Reserved.
National scientific capacity and R&D offshoring
Clearly all governments would wish for their countries to be world leaders in fields of science to help attract industry and R&D to its shores. The past decade has seen an increase in R&D offshoring partly for low labour costs and partly to access new knowledge. Recent research by Thomson (2013) suggests firms offshore and source technology from less technologically advanced nations to access niche skills.
The impact of the economic crisis on innovation
Economic crises cause companies to reduce their investment, including investment in innovation where returns are uncertain and long-term. This has been confirmed by the 2008–13 financial crisis, which has substantially reduced the willingness of firms to invest in innovation. However, the reduction in investment has not been uniform across companies and a few even increased their innovation expenditures, such as Toyota and Volkswagen. Research by Archibugi et al. (2013) on European firms shows that before the crisis, incumbent firms were more likely to expand their innovation investment, whilst, after the crisis, a few small enterprises and new entrants are ready to ‘swim against the stream’ by expanding their innovative-related expenditures.
Fostering innovation in the United States and Japan
Although local characteristics also play a very significant role in the innovation pro- cess, the overall tendencies of nations and nation states are linked to success on a very local level. Whilst some states, such as Japan, provided extensive support and subsidies to promote industrial innovation, others, such as the United States, have aimed to create positive effects in the economy by letting the market achieve the most efficient allocation of resources with minimal possible intervention. The so- called Chicago School paradigm for promoting competitiveness and innovation, which created a belief in the free market to maximise innovation and productivity (Rosenthal, 1993), has, for more than two decades, been the dominant perspective in the United States. At this instance, we can cite the impact on the industry of pub- lic R&D with such expected transformative effects as provided by the internet’s later commercial application, initially a military project initiated by the state. In fact, the United States is leading the way in performing half of the world’s basic research, making most of the seminal discoveries, thanks to the trillion-dollar investment in US universities and government laboratories.
In the case of more interventionist states, incentives were provided either as direct support (e.g. subsidies, location provision, etc.) or in the form of gover- nance, assuming a coordinating and leading role in the management of innovation projects. In this instance, governance refers to the efforts at creating cohesion and complementarity, which are directed to the realisation of a joint objective that is deemed to be mutually beneficial to the various parties involved. A good example of the latter was the role played by the Japanese state in bringing universities, state organisations (primarily the Ministry of International Trade and Industry (MITI)), sector organisations and business enterprises together for research on the
How national states can facilitate innovation
development of the Trinitron television (a technology that dominated home elec- tronics for more than two decades) with financial support attached. Although the Japanese model has come under severe criticism, particularly by Porter et al.
(2000), as a result of the recent economic slowdown, the weaknesses mainly attributed to the lack of concern for strategy in Japanese companies and being stuck in between two competitive strategies of cost and quality, as well as low profitability, the success of the model has been long acknowledged (see, for instance, Johnson, 1982). In the case of innovation, governance requires the estab- lishment of a proper framework for the smooth flow of knowledge between uni- versities, state institutions, private sector organisations and corporations until the end result takes some form of a marketable commodity. In this framework, whilst some economies are better placed with innovation capabilities, some are at a dis- advantage because of their characteristics.
The concept of ‘developmental states’ is used to show the way in which some states achieved a major transformation of the economy and society. At the other end of the spectrum there are the ‘predatory states’, which capture most of the funds in the economy and reallocate them in the form of rents to a small group of the popu- lation, thus impeding the growth potential in the state (Evans, 1989). This develop- ment was found in particular to be a major characteristic of some east Asian states, especially the so-called Tigers of Korea, Taiwan, Singapore and Hong Kong (Castells, 1992). Although such states were not immune to corruption, fraud and other forms of inefficiency, they brought about major changes in the economy, par- ticularly in upgrading the potential of the industry from imitation towards innova- tion and technology development, which is by no means an easy task.
Pause for thought
Is it true that in a developed market economy the role of the state is a minor one?
Why is it not surprising that many consumer products such as in-car satellite navigational guidance, mobile telephones and computers have their origins in defence research?
?
Triple Helix of university–industry–government relationships that drives innovation
University research and research-related activities contribute in many important ways to modern economies: notably through increased productivity of applied R&D in industry due to university-developed new knowledge and technical know-how;
provision of highly valued human capital embodied in staff and students; develop- ment of equipment and instrumentation used by industry in production and research;
and creation of concepts and prototypes for new products and processes, which may have some unexpected and large social and economic impacts. Major discoveries emanating from academic and/or publicly funded research have had enormous global economic and social impacts that are obvious but difficult to predict and quantify (e.g., Google, the World Wide Web, nanotechnologies, etc.). Roessner et al.
(2013) offers quantitative evidence that the economic impact of university research and technology transfer activities is significant.
Lundvall (1988) first introduced the concept of ‘national systems of innovation’ by elaborating on Christopher Freeman’s (1987) study entitled Technology, Policy, and Economic Performance: Lessons from Japan. In Freeman’s study he argued that Western nations could learn from Japan’s experience in the coordination, at the national level, of S&T policies orchestrated by the Japanese Ministry of Trade and Industry (MITI). More recently, the Japanese economy has not been viewed with much admiration. Nonetheless, the Japanese model or system knew what was expected tech- nologically in order to meet (economic) demands and (political) objectives. In this inte- grative model, university–industry–government relations were synchronised at the national level. Similarly, the Triple Helix of university–industry–government relation- ships initiated in the 1990s by Etzkowitz and Leydesdorff (1995), interprets the shift from a dominating industry–government dyad in the Industrial Society to a growing triadic relationship between university–industry–government in the Knowledge Society.
The Triple Helix thesis is that the potential for innovation and economic development in a Knowledge Society lies in a more prominent role for the university. Specifically regarding the production, transfer and application of knowledge.
Emerging technologies can be expected to be more diversified and their life cycles are likely to become shorter than before. According to Ivanova and Leydesdorff (2014), government policy makers need to take account of a shift from the produc- tion of material objects to the production of innovative technologies.
Figure 2.2 Triple Helix of university–industry–government relationships that drives innovation Universities
Industry students
researchers Develops entrepreneurs Creates technology
Technical training and education Creates partnerships
Delivers educated people to economy
R&D funding Capital
Market knowledge Technical training and education
Creates partnerships
R&D funding Research grants
State incentive programmes Quality of life
Ease of doing business professors
regional national
venture capital supply chains start-ups
multinational firms local
Government
Waves of innovation and growth: historical overview
The right business environment is key to innovation
Schumpeter preached technology as the engine of growth but also noted that to invest in technology there had to be spare resources and long time-horizons. So the business environment must give the right signals to the business units for them to invest in such operations. In this regard, not only does macroeconomic stability play a significant role, but also the availability of quick (short-term) returns and oppor- tunistic trends needs to be suppressed so that the money can flow into basic research and R&D. Likewise, the approach of business would differ if it faced strong (exter- nal or internal) competition. A protected domestic market more often than not amounts to signalling to business units that they should seek monopolistic or oli- gopolistic returns by not making enough investment into new product development or even product improvement.
The next chapter explores the organisational characteristics that need to be in place for innovation to occur. From the preceding discussion one can already begin to see what these characteristics might be.
Waves of innovation and growth: historical overview
When we investigate the history of capitalist development, there is a pattern of economic growth. The work of Kondratieff and Schumpeter has been influential in identifying the major stages of this development. The five waves, or growth cycles, are identified in Figure 2.3. This highlights that technological developments and innovations have a strong spatial dimension; however, leadership in one wave is not necessarily maintained in the succeeding waves. So one can observe shifts in the geography of innovation through time. The leaders of the first wave were Britain, France and Belgium. The second wave brought new players into the game, namely the United States and Germany. Wave three saw the strengthening of the positions of the United States and Germany. In wave four, Japan and Sweden joined the
Figure 2.3 Kondratieff waves of growth and their main features Recession
EarlyK1 mechanisation
Steam powerK2 and railway
Electrical andK3 heavy engineering
FordismK4 K5 Information and
communication
Depression
Recovery Prosperity
1770s–80s
Economic activity
1830s–40s 1880s–90s 1930s–40s 1980s–90s
?
technology and innovation race. More recently, in wave five, Taiwan and South Korea are becoming key players in the global economy.
In these Kondratieff waves of growth, the capitalist economy grew on the basis of major innovations in product, process and organisation with accompanying shifts in the social arena. Kuhn’s theory on the nature of scientific revolutions has been justi- fied: each wave comes to an end due to its major shortcomings and the successive wave fundamentally restructures and improves those weaknesses. Each major phase of innovation produced a ‘star’ industry or industry branch, which seemed to affect the way the economy was organised. The leap forward provided by such industry(ies) resulted in a major transformation of the economy and economic relations – given that other factors, such as demand, finance, industrial and social conditions, were favourable. Products, processes and organisations created by technological develop- ment became universal and cheaply available to a vast population, which, in turn, created the economic shift. These Kondratieff waves took place in the order of early mechanisation, steam power and railways, electrical and heavy engineering,
‘Fordism’ (i.e. use of mass-production methods) and information and communica- tion. The last of these waves is currently under way with what is now termed the information revolution. Almost every day we are presented with a number of new ways in which we can do business, search for information, communicate and socialise with other people or carry out our bank operations. This means that the new developments deeply affect not only economic relations but also our private (home and relations) and work (public) spheres.
In the very first Kondratieff wave, the rise of the factory and mechanisation in textiles was only part of the story. The need to produce in greater quantities to start serving the growing overseas markets with the improved transport methods now available was complemented by the abundance of finance with the money flowing in from the colonies, particularly the United States. Universally and cheaply avail- able input (i.e. cotton), improving nationwide transport infrastructure (with rising investment in canals and roads by landlords), the advent of the so-called adventur- ers (now widely recognised as entrepreneurs), pools of labour available for employ- ment in some local markets, the growing education infrastructure, the role played by academic and scientific societies and the attitude of the state towards manufac- turing interests were the other complementary factors affecting change (Freeman and Soete, 1997).
With the decline of the previous techno-economic paradigm, the next one starts to take shape with features that offer solutions to the weaknesses of the earlier phase. As Marx (1972) foresaw, capitalism has always found a way of reproducing itself with changes in the way factors of production were organised. For instance, the organisational characteristics have changed from the first through to the fifth wave, and the early emphasis on individual entrepreneurs has given way to small firms, then to the monopolists, oligopolists and cartels of the third wave, centralised TNCs (transnational corporations) of the fourth wave and, finally, to the so-called network type, flexible organisations of the information age (see Table 2.1 for an overview of the waves of growth).
According to Linstone and Devezas (2012), the pattern of basic innovation clus- tering associated with Kondratieff long wave theory raises questions when we con- sider the fourth downswing. There is increasing concern expressed that we may be facing innovation starvation or innovation stagnation. Amongst the questions: Is the internet a cluster of one? Or should the smartphone, iPad, Facebook, iCloud, etc. be
Waves of innovation and growth: historical overview Table 2.1 Characteristics of the five waves of growth
Wave 1 Wave 2 Wave 3 Wave 4 Wave 5
Main branches Textiles
Textile machinery Iron working Water power Pottery
Steam engines Steamships Machine tools Iron and steel Railway equipment
Electrical engineering Electrical machinery Cable and wire Heavy engineering Steel ships Heavy chemicals
Automobiles Trucks/tractors/
planes
Consumer durables Process plant Synthetic materials Petrochemicals
Computers Electronic capital goods
Telecommunications Robotics
Information services Universal and
cheap key factors Cotton Coal, iron Steel; electricity Oil; plastics Gas; oil;
microelectronics Infrastructure Trunk canals
Turnpike roads Railways
Shipping Electricity supply and distribution Limitations of iron as an engineering material (strength, durability, precision, etc.) overcome by steel and alloys;
limitations of steam engine overcome by unit and group electrical machinery, power tools, permitting layout improvement and capital saving;
standardisation
Highways;
airports/airlines Limitations of batch production overcome by flow processes and assembly line; full standardisation and replaceability of components and materials; universal availability and cheapening of mass consumption goods
Digital networks;
satellites Inflexibility of dedicated assembly line and process plant overcome by flexible manufacturing systems, networking and economies of scope; electronic control systems and networking provide for necessitated flexibility
Limitations of previous technoeconomic paradigm;
solutions
Limitations of scale, process control and mechanisation in
‘putting out’
system; solutions offered through mechanisation and factory organisation towards productivity and profitability
Limitations of water power:
inflexibility of location, scale of production, reliability;
solutions offered through steam engine and transport system
Emergence of giant firms, cartels, trusts, mergers;
regulation of or state ownership of natural monopolies;
concentration of finance and banking capital; emergence of middle
management
Oligopolistic competition; TNCs;
‘arm’s-length’
subcontracting or vertical integration;
bureaucratic control and bureaucratisation
Networks of large and small firms based increasingly on computers; trust- based networks with close cooperation in technology, quality control, training and production planning (e.g. JIT)
Organisation of
firms Individual
entrepreneurs and small firms (<100 employees);
partnership between technical innovators and financial circles
Small firms dominate but large firms and large markets emerge;
limited liability and joint stock companies emerge
Germany, United States, Britain, France, Belgium, The Netherlands, Switzerland
United States, Germany, other EU, Japan, Switzerland, other EFTA, Canada, Australia
Japan, United States, Canada, Germany, Sweden, other EU and EFTA, Taiwan, Korea
➔
considered basic rather than improvement innovations as well because of their huge societal impact? The invention phase took place from 1960 to 1984, the basic inno- vation phase from 1984 to 1995, and the diffusion phase beginning in 1995. Is the internet a cluster of one? If not, what are other components of this cluster? Does the consumerisation of information technology (IT), exemplified by the Macintosh, iPod, iPhone, iPad, iCloud, and apps like iTunes that revolutionised the music indus- try qualify as a series of basic innovations together with the internet or do they constitute improvement innovations that will drive the 5th K-wave upswing? The argument for considering these and other innovations, such as network enablers Facebook, Linked-In, e-commerce, and the worldwide web as basic is reinforced, as social media, supported by wireless connectivity and cloud computing, are now opening up an entirely new approach to individual entrepreneurial activities.
Wave 1 Wave 2 Wave 3 Wave 4 Wave 5
Geographical
focus Britain, France,
Belgium Britain, France, Belgium, Germany, United States
Note: EFTA, European Free Trade Association; JIT, just-in-time; TNC, transnational corporation.
Source: Reproduced and adapted from Dicken, P. (1998) Global Shift: Transforming the World Economy, Paul Chapman, London (a Sage Publications company); Freeman, C. and Soete, L. (1997) The Economics of Industrial Innovation, 3rd edn, Pinter, London (Cengage Learning Services Ltd).
Table 2.1 Characteristics of the five waves of growth (continued)
Pause for thought
The Kondratieff theory suggests that networks constitute a key organisational attribute to the current wave of economic growth. Does this mean it is not possible for a firm to be innovative on its own?
?
Fostering innovation in ‘late-industrialising’ countries
We have already noted that there is no guarantee for continued technological lead- ership. The geography of innovation has shown regional, national or local varia- tions in time. One proof in this regard has been the case of south-east Asia. Although the late developers followed more or less similar paths towards industrialisation, some managed significant achievements, particularly in the attitude of the private sector to innovation and technology development (for example, Taiwan, Malaysia and Korea). Almost all latecomers started with the exports of basic commodities and, through the application of a mix of policies in different periods, they aimed for industrialisation. When innovation is considered, the focus of entrepreneurs and businesses was initially on imitative production (so-called ‘reverse engineering’) in relatively unsophisticated industries. Hobday et al. (2004) have illustrated that Korean firms have adopted a policy of ‘copy and develop’, which has taken them to the technological frontier in industries from automotive to telecommunications.