International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 76 (2011)

EuroJournals Publishing, Inc. 2011
http://www.internationalresearchjournaloffinanceandeconomics.com

Components of Innovation Ecosystems:

A Cross-Country Study
Birol Mercan
Economics Department, Konya University
Ankara Caddesi 74, Karatay,Konya,Turkey
E-mail: birolmercan@hotmail.com
Tel: +90 332 235 61 00
Deniz Gkta
Economics Department, Konya University
Ankara Caddesi 74, Karatay, Konya, Turkey
E-mail:d.goktas@gmail.com
Tel: +90 532 604 1954
Abstract
Recently, innovation ecosystems approach is an emerging approach because
systems of innovation approach have not made a distinction between innovation events and
innovation structure. An ecosystem is a biological term which refers an environment
consisting of all the organisms living in a particular area, as well as all the nonliving,
physical components of the environment with which the organisms interact, such as air,
soil, water and sunlight. An innovation ecosystem consists of economic agents and
economic relations as well as the non-economic parts such as technology, institutions,
sociological interactions and the culture. Non-economic components or innovation
structure can enable idea making, introducing innovation and diffusion of them. A highly
developed innovation ecosystem helps participants to operate beyond firm boundaries,
enable to transformation of knowledge into innovation.
In this study innovation ecosystems are analyzing in three components. First
component of the ecosystem is state of cluster development. Cluster is geographic
concentration of interconnected firms, suppliers and institutions in a particular industry.
One of the objectives of clusters is driving innovation in that industry. Clusters
enablecumulative knowledge formation. Furthermore clustering firms extract qualified
labor. Cluster development has strongly positive effect on innovation events. Universityindustry collaboration is second component of an innovation ecosystem. Developing R&D
cooperation between university and industry is expected to increase innovation output.
Culture to innovate is another structural component that is expected to foster innovative
activity. Skilled and educated labor force and high skill migration can be indicators for
state of innovation culture. Objective of this paper is to explain the effects and magnitude
of effects of components above on innovation making based on Global Innovation Index
dataset.

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Keywords: Innovation ecosystems, clustering, innovation culture.

JEL Classification Codes: 031, 033

1. Introduction
Innovation has become a more influential pattern of economic growth as the flourish of Information
Communication Technologies and (ICT) which comes along with process of globalization. Thus the
factors enable innovation making attract interest in economics literature. Innovation making depends
on institutional and cultural factors as well as technology and investments. The quality of institutional
environment and interactions among institutions positively affect the innovation making. Cultural
amenities like openness to new ideas contribute innovative activities. During 1990s the innovation
systems approach was suggested to explain institutional and social framework that influence innovative
activities. Systems approach also takes the technological and economic dimensions of innovative
change into account. Once the systematic nature of innovation is clarified, then characterizing,
understanding and influencing innovation process will be possible. This will help to derive policy
implications. Lundvall(1992) and Nelson(1993) raised the national innovation systems model.
Cooke(1992) and Braczyk(1993) criticized this kind of generalized model, and they emphasize
regional factors, so regional innovation systems emerged. In line with Neo-Schumpeterian thought
Malerba(2002) emphasized the importance of sectoral interactions and informal networks in the
evolution of industries. Innovation making is endogenous in the sectoral level. Theoretical arguments
and empirical designs of Neo-Schumpeterian approach develop sectoral innovations systems.
The system approach does not explain the relationship between innovation event and innovative
structure. Due to the static nature of innovation systems model, innovation which has a dynamic nature
should have been analyzed in a convenient framework. Thus ecosystem approach which is been
inspired from biology is theorized. Ecosystems and ecologies are the concepts that describe
evolutionary features of the interactions between individuals, their relationships with innovative
activities and their relations with the environment in which they operate.
Innovation systems are derived from Freeman, Lundvall(1992) and Nelson(1993) national
systems insight. Institutions in the systems can be intervened and exogenously influenced by policy
actions. However ecosystems endogenous structures which are evolving with market conditions.

2. Innovation Systems Approach and its Evolution

Friedrich List (1841) is intuitively pioneering of the national innovation systems approach theorists.
The main concern of Lists arguments is Germanys industries lagged situation behind the UK
industries and his priority is Germanys take off. List proposed a policy set which aimed at fostering
industrialization and economic growth. He also coined the infant industry argument. His strategies
include learning and adopting new technologies.
In 1990s the differences between innovative performances of developed countries questioned
and the idea of the innovation systems was adopted in order to explain these differences. The cross
country differences are the results of differences in accumulation of capital, economic development,
technology and formation of institutions or interactions among the institutions. (Metcalfe,2008:435)
Level of interaction among institutions differs among countries and they determine the amount
of knowledge creation, diffusion rate of the knowledge, its transformation to innovation and expansion
of the innovation.
Innovation systems are the structures in which small and large sized enterprises, universities,
public organizations interact in order to produce knowledge and develop new technologies in a region
or a country. The interactions can have technological, commercial, legal, social and financial aspects.
This interaction aims at developing new technologies, protecting them, and financing new projects and
regulating. (Metcalfe,2008:435)

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Freeman(1987) defines innovations systems as the networks of public and private organizations
whose operations and interactions adopt new technologies.
Lundvall (1992) definition emphasizes the elements and networks that interact and produce
useful knowledge in a country. Organizations are embedded in a much wider socio economic-system in
which cultural and political effects as well as the economic policies enable to determine scale, direction
and the relative success of innovative activities.(Freeman, 2002:194)
According to Nelson (1993) Innovation systems are the set of interacted national firms which
determine the innovative performance of the country. (OECD; 1997)
Nelson(1993) emphasizes the results of empirical works whereas Lundvall (1992) made a
theoretical approach based on interactive learning and user production interaction. (OECD, 1997)
Definitions of the innovation systems stress the components or elements of the system and
relations among these components. Main components of Innovation systems are public or private
organizations and institutions. Edquist(2005) mentions institutions like sets of common habits, norms,
routines, established practices, rules or laws that regulate the relations and interactions between
individuals, groups and organizations. Edquist(2005) describes organizations as actors and institutions
as rules of the game. An Innovation System has a performing and achieving function. According to
Edquist (2005) enabling developing, diffusing and using innovations is the main function of the
system. Activities in a system influence development, diffusion and the use of innovations.
(Edquist,2005: 182) Innovation has a systemic nature that means firms do not make innovations
solitarily, but in collaboration and interdependence with other organizations and institutions. The
behavior of organizations is also affected by institutions such as-laws, rules; norms and routines
stimulate incentives or create impediments to innovate. These organizations and institutions are the
components of the systems for the production and commercialization of the knowledge. (Edquist,
2005:182)
Edquist (2005) proposes a general definition of innovation systems: all important economic,
political, social, organizational, institutional and other factors that influence the development, diffusion
and the use of innovations.
Edquist (2005) specifies six strengths of the innovations systems. First of all,the system
approach places innovation and learning processes at the center of focus. Thus innovation becomes an
endogenous factor. Secondly systems approach adopts a holistic and interdisciplinary perspective.
Thirdly, it employs historical and evolutionary perspectives so that it has no optimality. Forth, this
approach emphasizes interdependence and non-linearity. Innovation activities do not only depend on
elements but also depend on relations between elements. Other strength is that it encompasses both
product and process innovations and their subcategories. Lastly, systems approach let the role of
institutions.
Edquist (2005) also discusses the three weakness of the systems approach. Firstly, the concept
of institution has ambiguity in definitions. Nelson and Rosenberg (1993) use institutions as different
kind of organizations, but according to Lundvall (1992) the term refers to rules of the
game.(Edquist,2005:186) Second weakness of the innovation systems is that its boundaries are not well
defined. There is no clear guide what should be included on the system and what should be excluded.
Thirdly, innovation systems are not formal theories because they do not suggest causal relationships
among components.
An innovation ecosystem has a dynamic nature compared with static nature of innovation
systems. An ecosystem is ever changing structure which is guided by new wants and new
circumstances. Innovation process cannot be influenced by discretionary policies; it needs division of
labor between public and private organizations. Ecosystems let small enterprises be more operative.
Embraer, Brazilian aircraft producer, is an interesting example for innovation development
process. The company was founded for military purposes but then it developed high engineering skills
to design and produce regional passenger aircrafts. Clustering of suppliers and technological
organizations in the regions emerge and Embraer divert the supplier components. The rise of the

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Embraer seems like a development of innovation system. However, the firm outsources 95 % of its
supplies from the international aviation market and purchases the low technology intensive inputs from
local suppliers. Thus the innovation systems approach does not explain the success of the firm. Profits
yield 38 % of total revenues. Because of the inadequacy of local aircraft industry, the firm incorporates
an engineering office in the US for skill transferring. The company was privatized in 1994, and a
French aircraft producer acquire 20 % share in exchange for high technology transfer. Despite being a
national company, Embraer took part in international production system and it embodied many
innovation systems. (Metcalfe&Ramlogan,2008:436)
Along with global division of labor, many observations reveal that innovation process become
internationalized. Nevertheless, the emphases on national innovation systems are question of fact.
National innovation systems approach is constructed on the idea that national nature of components
such as institutions, language, common norms and national nature of relations such as education policy
and technological policy. However the production of knowledge has a universal or subnational
character since earliest days of scientific research. Scientific knowledge requires collaboration beyond
the national borders. Basic technological knowledge is similar, but applied technological knowledge is
diffused slowly so it has narrower area, it is protected and it has a national character. Globalization
reduces the actual effect of the national strategies, because production systems are becoming a part of
international division of labor and they are diverted by multinational companies.
(Metcalfe&Ramlogan, 2008:437)

3. The Innovation Ecosystems

Biological ecosystem is a concept that refersthe community of interacted living organisms, the
environment which they inhabit and the organisms interactions with this environment. Living species
are the main components of an ecosystem, but non-living components such as mineral ions, water and
external conditions such as climate, temperature are supporting the living species. Biological
components include representatives from various trophic levels; primary producers, macro consumers
that eat other organisms and micro consumers that dismantle the organism after their extinction.
(Moore, 1996:37)
In a biological ecosystem species interact with other species and with the environment which
they inhabit. Inorganic environment provides feasible conditions for their feeding, nestling and
reproducing. Species diversity is possible under favorable ecosystem conditions.
Moore (1996) proposes an analogy between biological world and business world, and he coined
the terms business ecosystems. Economic community, which is composed by interacted individuals
and organizations, constituted business ecosystem. Economic community produces value and services
for consumers who are also component of ecosystem. Participant organisms are suppliers,
manufacturers, rivals and other actors. Over time, they co-evolve their capabilities and roles, and tend
to align themselves with the directions set by one or more central companies. (Moore,1996:37)
Suppliers act like the producer plants in trophic relations of the ecosystem. Macro consumers
are customers who purchase final goods. This point makes a distinction between innovation systems
and ecosystems. Ecosystem, take the demand side of innovative process into account which innovation
system does not focus on.
Ecology is branch which studies living organisms and their interaction with the environment
they inhabit. (Papaioannou,Wield&Chataway,2007:4) Ecosystem thrives through the adaptation of
organisms in the surrounding environment. Ecosystems have internal dynamics that regenerate the
interactions between organisms and the environment.
Business ecology consists of profit seeking enterprises, universities and other public and private
organizations which accumulate and manage the flow of information. Depending on the character of
the knowledge production, these organizations share tasks. There exhibits a division of labor within

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and among Universities, enterprises, private organizations and public institutions.

(Papaioannou,Wield,&Chataway, 2007:4)
Innovation ecosystems evolve from national innovation systems models. Innovation systems
can be governed by the policies that affect the institutions. Innovation ecosystems are dynamic
structures, cannot be determinately governed by public policies, but they evolve according to changing
market conditions.
Neo-Evolutionary economists Metcalfe and Ramlogan(2008)define knowledge and innovation
ecology converges the concept of ecosystem. According to them knowledge or a innovation ecology is
a set of individuals who are repositories and generators of existing or new knowledge.
(Metcalfe&Ramlogan, 2007:441) Principle actors are profit seeking organizations, universities and
other public and private public research and knowledge based consultancies.
The proponents of innovation ecologies maintain that innovative structure is embedded in
market process while proponentsof innovation systems emphasize non-market aspects like role of
institutions. Although the relationship between innovation and market process can not be denied, the
idea of innovation is completely market driven will be assertive. (Papaioannou, Wield&Chataway,
2007:8-9)
Global Innovation Index, which has been constructed by World Economic Forum and INSEAD
business school, make a distinction between innovation event and innovative structure by analyzing
innovation inputs and innovation outputs separately. The data for Index is collected 132 countries and
they rank according to their innovation indexes. Global Innovation Index describes five main
innovative structures: 1. Institutions, 2. Human Capital 3. ICT Infrastructure, 4.Market sophistication
and 5.Business sophistication. Innovation ecosystem is mentioned under business sophistication along
with the other pillars, intramural innovative environment and openness to international competition.
According the GII, determinants of an innovation ecosystem are development of clustering, universityindustry collaboration and culture to innovate.
The data for the ecosystem determinants are obtained from the report of GII 2009-2010
Database. The GII report which compares cross country innovative performances has been prepared
since the year 2007 according to surveys hold in individual countries. The determinants of innovation
ecosystem, stated in the report, are taken as independent variables. Clust variable refers to the level of
cluster development, which takes values between 1 and 7. The development indicator increases with
the value increases. Second independent variable is indicator of university industry collaboration. The
uni values differ from 1 to 7, and 7 means highest collaboration, the value 1 means lower collaboration.
Another independent variable is perception about culture to innovate which is abbreviated as cult. If
the cult takes the value 1, that means less developed culture to innovate, and respectively increases to
7.
Innovation input index, prepared by GII, is used as dependent variable. We run regression on
world sample of 110 countries and European sub-sample of 32 countries. Because of the missing or
non-available data, 22 countries from GII report excluded. European subsample is composed of
themembers European Union, the European Economic Area countries and potential members of
European Union which have common norms and similarities through various levels of economic
integrations. Thus European subsample defined by culture rather than geography. The subsample
contains 27 members of the EU, three candidate countries, Norway and Switzerland.
Early predictions suggest that when innovation output variable becomes dependent variable, all
independents variables are expected to have positive signs. When the regression is run for global
sample of 110 countries, all independent variables have positive signs, but only university-industry
collaboration is statistically significant at 1 % level. In the European subsample, university industry
collaboration is significant at 1 % level. However, culture variable has a negative sign but insignificant
in the subsample. Another simple regression model is run for the European subsample, because of the
cultural similarities within sample culture variable is omitted. When culture is omitted, universityindustry collaboration and cluster development have positive effect on innovation output.

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Table.1:

Determinants of innovation ecosystems

Number of Obs.

Global Sample

110

0.68

European Subsample

32

0,79

European Subsample

32

0,77

Constant
0.001
(0.0068 )
0.3132
(0.3032)
0.4824
(0.282)

Clust
0.1287
(1.665)
0.1280
(0.1032)
0.1740
(1.751)

Uni
0.5813
(5.034)
0.7010
(0.1802)
0.4878
(4.990)

Cult
0.0420
(0.1221)
-0.113
(0.0809)
__

3.1. Cluster Development and Innovation

Porter (1998) defines clusters as geographical concentration of specialized suppliers, service
providers,organizations like universities, commercial unions and interconnected enterprises which they
compete against each other and at the same time they collaborate in a specific industry and related
industries.
Member organizations engage in price competition and product differentiation, but they
cooperate in acquiring supplies, gaining research and development. Universities help other agents of
cluster enhancing new knowledge and technology, business associations try to createafavorable
business environment. Clustering also bring new advantages in case of attracting qualified labor.
Clusters are interrelated industry groups. A cluster has two components. They are organizations
in the clusters and their relations with each other. Interrelated organization groups are close to each
other, thus geographical proximity is one of the key feature of a cluster.
Connections among organizations can be vertical like seller buyer relations or horizontal like
providers of similar services, users of similar supplies and users of similar technologies. These
connections include useful social relations and social networks as well. Geographical proximity causes
easier communication and value creation through networks.
Level of cluster development depends on means the strength of interconnections among private
enterprisers which are the living organisms of innovation ecosystem. Level of cluster development is
measured by Global Innovation Index 2009-2010 for 132 countries.
Figure 1: The Relationship between Innovation and Clustering in Global Sample

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There is a positive relationship between innovation index and the level of cluster development.
R^2 value for these two variables is found 0.67. R sq for European subsample is 0.77. Hence
correlation for European subsample seems stronger. Here is positive correlation between these
variables but this relation is not statistically significant.
Figure 2: The Relationship between Innovation and Clustering in European Sample

There are two outlier countries in the European subsample. Italy with a high cluster indicator
but low level of innovation output, whereas Iceland has low cluster development with a high
innovative output.
3.2. University-Industry Collaboration
The traditional function of universities is providing qualified labor for private and public sectors. Thus
increasing human capital and teaching are understood as role of universities in innovation process.
Leading by universities in United States, universities have been adapting research and
development skills besides teaching skills. Etzkowitz(2003) uses triple helix concept to describe role of
universities in the innovation process. Three components of the helix are university, government and
industry. A DNA molecule has a dual helix but DNA of innovation has a triple helix. According to
triple helix approach, industry is the component in which productive activities happen, on the other
hand government guarantees stable interactions and exchange relations through setting the rules of
contracts. Mission of university in the triple helix is improving new knowledge and technology that are
inputs of a knowledge society.
University industry collaboration and innovation output are positively correlated. Moreover this
relationship is statistically significant for both global sample and European subsample.

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Figure 3: The Relationship between Innovation and University-industry Collaboration in Global Sample

"!

The simple regression model which is run for 110 countries exhibits a significant positive
relationship. R2 value of the global sample is 0.67, whereas R2 of the European subsample is 0.75.
Figure 4: The Relationship between Innovation and University-industry Collaboration in European Sample

3.3. Culture to Innovate

Besides of natural,structural and organizational factors culture or components of culture influence the
use of nature, social etiquette, technology development and the organization of knowledge.The cultural
effects transmit economy and innovative activity, respectively. Culture influences economy at least
three ways. Firstly, economic systems are legal, moral and morphological formations which prevails
customs and traditions. Second, culture in a narrower sense directly influences the acceptance of the
economic order. It is assumed that functioning and stability of an economy derives from the
congruence between the implemented structural and economic order prevailing in a society.

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Organizational formations and cultural environment must be compatible. Thirdly, particular elements
in a culture accelerate economic progress. (Hlscher,2006:65-66)
Cultural factors play an important role innovation making. Openness of the culture contributes
in to innovation making. Social model, combined with specific features of businesses, manifests itself
as a culture of an organization. (Blttel-Mink, 2006:165)
Culture can be understood as a residual category, the only explanation for the innovative action
is used when structural and institutional factors no longer sufficient to explain. This would be the case
where regions and nations face similar structural and institutional factors, they develop different styles
of innovation. Although, Bavaria and Baden-Wrttemberg have, they adopted different innovation
systems. This case fits Institutional and evolutionary approaches (Blttel-Mink, 2006:168)
Japan and Germany differ mainly in terms to temporal aspects and dominant form of economic
coordination. Japan transformed into an industrial country after World War II. Group coordination or
associate coordination is a form of economic coordination, which can be explained by examining
socio-cultural factors and history of economic coordination, technology and development. The success
or failure of two systems of innovation can depend on both structural (market share of large
enterprises) and institutional (excessive resources of the Japan Banking system and lack of coherence
between training system and labor market in Germany) ,but it can be mostly explained by sociocultural factors like consensus orientation, veiled acceptance, motivation problems and culture of
compromise that prevent the willingness to make radical innovations. (Blttel-Mink, 2006:169)
The effect of culture on innovation is firstly inspired in writings of Friedrich List. According to
List, present development levels of the countries are the results of actions of previous generations such
as inventions and novelties. Accumulation of these practices created the intellectual capital of todays
world. Productivity of nations depends on heritage from former generations and contributions of the
present generations. (Freeman, Soete,1997: 339-340)
Beyond the accumulation of past improvements, culture to innovate is also shaped by present
interactions. Culture to innovate embodies consumers, consumer demand as well as producers of the
ecosystem. Because of not easily measurable, it is difficult to detect cultures effect on innovation and
magnitude of this effect. Global Innovation Index creates an index based on surveys to detect the effect
of culture, but it should be considered that surveys may produce biased results. The survey results may
reflect subjectivity and pessimism about self-culture.
Figure 5: The Relationship between Innovation and Culture Global Sample

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R2 for the simple regression between innovation output and innovation culture is 0.52.
According the simple regression parameters innovative culture has a positive effect on innovation
output at 1 % significance level. R2 for European subsample is 0.48.
Figure 6: The Relationship between Innovation and Culture Collaboration in European Sample

"

"

4. Conclusion
In a biological ecosystem living species have interactions and altogether are interacted with inorganic
environment in which they live. Businesses and enterprises as like the living organisms have
interactions with other enterprises and the social cultural environment in which they operate.
Enterprises cluster in particular spaces of the ecosystem. Clustering enhances upstream and
downstream relations and those results as strong interactions. Theoretically, as level of cluster
development increases, due to the interactions innovation output increases. In our study this causation
is not supported by the regressions in global sample and European subsample.However simple
correlations between these two variables indicate strong relationships.
The strength of university-industry collaboration is the most important dimension of an
innovation ecosystem. Universities are generally assumed not for profit organizations. The interaction
between universities and for profit industries accelerates innovation making. This hypothesis is
supported by both simple regressions and simple correlation between university-industry collaboration
and innovation output.
Culture to innovate has been increasingly attracted more attention in innovation studies. In our
paper, there is a positive but insignificant relationship between level of innovation culture and
innovation output. Surveys which are aimed to detect culture to innovate may create biased data,
because of the subjectivity of responders. New approaches to detect the culture to innovate should be
proposed.

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