Innovation and Inter-firm Linkages: Implications for Policy

This article discusses the implications for competition, innovation and learning of different forms of inter-firm linkage, ways to govern them, different "generic systems" of innovation, and government policy. It employs a transformed theory of transactions that can deal with innovation and learning, and brings in trust next to opportunism. For learning and innovation it takes the resource/competence perspective, supported by a theory of knowledge developed in earlier publications. This theory implies the notion of “external economy of cognitive scope”: people and firms need outside sources of cognition and competence to complement their own. That is the fundamental reason why inter-firm linkages are important, especially for innovation. In order to produce high added value and novelty, by utilizing the opportunities of complementary competencies, firms need to make relation-specific investments which creates risks of “hold-up” and “spill-over”. Building on earlier work, the article identifies different instruments for the control of those risks. It identifies two “generic” kinds of innovation systems, in terms of the mix of instruments for relational governance, and discusses their merits and flaws with respect to quality of products, diffusion, incremental and radical innovation. One is close to practices in continental Europe and Japan. Another is close to Anglo-American practice. There is a certain tendency for the first to gravitate to the second. The article warns about the dangers involved, and explores a possible “third way”.