1

Innovation in the New ICT Ecosystem:

How New Knowledge is Endogenously Created in the ICT Sector

Martin FransmanProfessor of Economics and Founder-Director Institute for

Japanese-European Technology Studies

University of Edinburgh

2

The challenge facing Europe

1. European companies face increasing competitive pressure through globalised markets from the US on the one hand, and Japan, Korea, China and India on the other.

2. The only viable response is innovation i.e. the creation of new knowledge relating to products, processes, forms of organisation, and markets (Schumpeter’s definition).

3. The low cost option is ruled out by China and India.

3

How is new knowledge endogenously created in the ICT Sector? Paradoxically, even Schumpeter does not provide an answer

• Even Schumpeter, the scholar on innovation par excellence, does not tell us how innovation happens.

• He does tell us what innovation is (i.e. new products, new processes and technologies, new forms of organisation, and new markets).

• He does tell us who the agents of innovation are (i.e. entrepreneurs).

• He does tell us about the effects of innovation (i.e. creation-destruction).

• And he does distinguish innovation from related events (such as invention, uncertain financing of innovation, and diffusion).

• But he does not tell us how innovations happen.

4

How is new knowledge endogenously created in the ICT Sector?

1. One important way (though not the only way) is through the symbiotic interactions between the creators and users of this knowledge. (von Hippel has developed this insight)

2. Other ways include basic or longer term research, where there is no immediate user, in universities and corporate R&D labs, and exogenous change coming from other sectors.

3. But, who are the main creators and users of knowledge in the ICT Sector?

5

How do they fit together as creators and users of knowledge?

6

The Creators and Users of Knowledge in the ICT Sector

At a high level of aggregation there are 4 groups of players who create and use knowledge.

(1) networked element providers

(2) network operators

(3) platform, content & applications providers

(4) final consumers

[NOTE: The first 3 are intermediate consumers.]

7

FinancialMarkets Regulation

Layer 1

Output of innovative goods and services (from all three layers)

A Simplified Model of the New ICT Ecosystem

Cont. & App. Providers

Converged Networks

Finalconsumer

StandardisationGlobal trade

Global trade

Layer 3

Layer 2

Networked elements

8

ICT Companies in the FT Top 500 from the US, Japan, Europe and East Asia (Korea, Taiwan and China), 2006

Layer Total number of companies

Number of companies by region

III 9US 6Japan 2Europe 1

II 18US 5Japan 3Europe 8East Asia 2

I 29US 12Japan 9Europe 6East Asia 2

Source : M. Fransman (copyright), calculated from FT Top 500, 2006

9

There are 6 symbiotic relationships between these four players

2NETWORK

OPERATORS

3PLATFORM,CONTENT &

APPLICATIONSPROVIDERS

1NETWORKED

ELEMENTPROVIDERS

4CONSUMERS

Relationship

1Relationship

5

Relationship

6

Relat. 4

Relat. 2

Relationship

3

10

6 symbiotic relationships in the New ICT Ecosystem

3. PLATFORM, CONTENT & APPLICATIONS PROVIDERS

2. NETWORK OPERATORS

1. NETWORKED ELEMENT PROVIDERS

CONSUMERS

CONSUMERS

CONSUMERS

4

1

2

3

5 6

11

3 Flows within the Symbiotic Relationships

1. Financial flow, emerging from the buyer-seller relationship.

This creates financial incentives for knowledge-creation.

2. Information flow, as creators and users get to know more about each other.

3. Material flow, as the creators provide inputs (atoms or bits) for their users.

12

Old and New Symbiotic Relationships

The ‘Old’ ICT Symbiotic Relationships (i.e. pre-Internet)

Relationships 1, 4 and 6(In telecoms until circa-1980: a closed innovation system)

The ‘New’ ICT Symbiotic Relationships(i.e. post-Internet)

Relationships 2, 3 and 5(An open innovation system, with low-cost entry for

existing and new firms)

13

Examples of Symbiotic RelationshipsExample 1

• Symbiotic Relationship 1 between telecoms operators and their network element suppliers.

• While the suppliers do most of the R&D, the operators provide both the investment and user-knowledge feedback (see data at end).

Example 2

• Symbiotic Relationship 3 between content & applications providers and final customers.

• E.g. web 2.0 relationships where the consumer is also an innovator and information provider.

Example 3

• Symbiotic Relationships 1 & 6 Japan’s overly innovative mobile phone makers who are not internationally competitive

• Who provide functionalities such as: digital broadcast (“One Seg”), camera and video, wireless LAN, high-speed data communication, IC credit payment.

14

Mobile Handset Makers: Market Share

Leading mobile handset makersMarket share based on numbers sold (%)

Q4 2007 Q4 2006

Nokia 40.4 Nokia 36.2

Samsung 13.4 Motorola 21.5

Motorola 11.9 Samsung 11.3

Sony Ericsson 9.0 Sony Ericsson 9.0

LG 7.1 LG 6.3

RIM (Blackberry) 1.2 Sagem 1.5

ZTE 1.2 Sharp 1.3

Sharp 1.0 Kyocera 0.7

Kyocera 0.7 BenQ 0.7

Apple (iPhone) 0.6 Bird 0.7

15

Symbiosis – example 4

Apple’s iPhone

• Symbiotic relationship 4, between network element

providers and final consumers (e.g. great

design)

• and symbiotic relationship 1, between

network element providers and telecoms operators (e.g. AT&T)

16

The Environmental Context of the Knowledge-Creating Symbiotic Relationships

• Knowledge is always created locally within specific contexts (e.g. Antonelli (2008).

• There are 4 sets of influences on the symbiotic relationships, as shown in the next slide.

17

Symbiosis is Environmental Context-dependent

6Symbiotic

Relationships

COMPETITION

FINANCIALINSTITUTIONS

REGULATION&

COMPETITION LAW

OTHERINSTITUTIONS

e.g. legalstandardisation

universities

18

The Innovation Opportunity

1. The set of factors identified in the previous slides define opportunities for innovation.

But, will they be constructed as opportunities or not, and who will see them?

2. It is precisely here that the Schumpeterian Entrepreneur enters, whether through a small firm or a large, established company.

3. A key issue is the incentives that the system provides the entrepreneur (e.g. Metcalfe (2004), Baumol et al (2007)

19

4 Implications for Government Policy-Makers

1. They should establish prioritised outcome objectives for their national ICT systems.

2. They should establish performance indicators in the prioritised areas and use them to benchmark their system against a) the global leaders and b) several comparable countries.

3. On the basis of the indicators they should identify the strengths and weaknesses of their national system.

4. They should propose action to be taken by identified players in the national system to improve performance. (Governments will differ in terms of what they think can and should be done.)

All the information in 1-4 should be made public and subject to analysis and debate.

20

3 Implications for Regulators

1. A better understanding of the innovation/knowledge-creating process will allow regulators to take a more dynamic approach, complementing their often static regulatory tools.

Antonelli (2007): “Regulators should care for the dynamic properties of the economic systems they want to regulate….The dynamics of the system can be understood and analysed only when the localized context of action – and innovation – of each agent, both on the demand and the supply side, is taken into account.” (Communications & Strategies, No.68, 2007, p.15.)

2. Regulators have correctly emphasised competition and acted against the abuse of significant market power. However, although competition is an important component of innovation, competition is not sufficient to produce internationally-competitive innovation. Institutions and entrepreneurship are also necessary.

3. Regulators should try and take greater account of innovation dynamics in making their regulations.

21

Problems regarding governance by telecoms regulators

The Dominant Regulatory Paradigm in Telecoms (DRPT)

• The mindset of telecoms regulators has been shaped by neoclassical economic theory which teaches that social welfare is maximised under conditions of intense competition (i.e. perfect competition).

• Accordingly, regulators have seen the creation of competitive conditions as one of their main tasks.

• A major focus has been on bottleneck infrastructure where significant market power (SMP) and dominance may be exercised. This has justified ex ante, sector-specific regulation.