Searching for Innovation in Market and Transition Economies: Evidence Across Europe

The extant innovation literature has recognized for a long time that a firm's innovation performance does not only depend on internal research and development (R&D) activities but instead on a skilled bundling of internal and external knowledge resources. In fact, many firms have opened up their innovation processes and deliberately searched for external knowledge from sources such as customers, suppliers, competitors or universities. The search strategy, providing firms with a mechanism to learn and their organizational knowledge bases to evolve, has been found to substantially impact innovation performance. Although this organization-focused approach has successfully opened the black box of how firms deploy knowledge resources to innovate, it risks neglecting relevant characteristics of the environment in which a firm operates. On the contrary, the institutional approach, advocated by researchers analyzing national systems of innovation, suggests that each country has unique characteristics in terms of organizations and institutional infrastructures for innovation which determine innovativeness. Such infrastructure could for example be universities and research institutes generating and diffusing new technological knowledge or, in a broader view, industrial relations, legal frameworks, or a society's customs and culture. The institutional approach thus stresses the contingencies affecting innovation performance of firms but overlooks differences in firms' knowledge and innovation capabilities. While the organizational knowledge base of an innovating firm is certainly important, recent contributions have acknowledged that firm strategies are influenced by the particular institutional context. Institutional differences are probably nowhere more pronounced than between developed market economies and former command economies which have been in transition since the fall of the "iron curtain" in 1989 and the collapse of the Soviet Union in 1991. In this paper, we consider the interaction between organizations and institutions. The objective is to shed new light on the importance of the institutional context of developed Western European market economies and transition economies from Central and Eastern Europe (CEE) for a firm's search and innovation behavior. The empirical part of this research is based on the third Community Innovation Survey (CIS-3), providing insights into the innovation processes of firms from ten European countries using a latent class methodology. The data provide the unique opportunity to compare search strategies from the developed market economies Belgium, Germany, Spain, Greece and Portugal with the transition economies Lithuania, Estonia, Hungary as well as the Czech and Slovak Republics. Our results show that search strategies differ considerably between established market and transition economies. Moreover, search in transition economies is characterized by much more variety. However, in these countries management capacity is a particularly scarce resource which is why focused search strategies turn out to be most successful. We derive targeted management and policy recommendations as we obtain finegrained input-output relationships for different institutional infrastructures and different search patterns.

Sofka, Wolfgang and Christoph Grimpe (2009), Searching for Innovation in Market and Transition Economies: Evidence Across Europe, ZEW Discussion Paper No. 09-061, Mannheim, published in: Best Papers Proceedings.