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Innovation Systems in Financial Crisis: Technological Dynamics, Industrial Structure and Business Cycles

Periodic Reporting for period 1 - cRISys (Innovation Systems in Financial Crisis: Technological Dynamics, Industrial Structure and Business Cycles)

Reporting period: 2015-07-01 to 2017-06-30

The project explored the geographical structure and temporal dynamics of technological knowledge flows between regional innovation systems in Europe by mapping, measuring and modelling interregional networks that correspond to three types of technological knowledge: Universal – a codifiable, disembodied, non-contextual, public good-type of knowledge with strong society-wide spillovers, resulting from basic research and typically contained in scientific publications; instrumental – a codifiable and disembodied, but contextual, and private good-type of knowledge, resulting from applied research, and typically appropriated by means of patenting; and organisational – a little codifiable and highly contextual knowledge, embodied in organisation structures, and owned and exploited as a private asset.

The project investigated the impact of the financial crisis on the technological dynamics of regional innovation systems in the European periphery, their technology gaps and their technological convergence, by examining the effects of the crisis on the three types of interregional knowledge networks, in which these innovation systems are embedded.

Finally, it drew normative conclusions for the design of effective industrial and RTDI policies applicable to the crisis-ridden EU periphery.
[1] Formulation of the theoretical framework

> Extensive literature reviews in the fields of economic geography of innovation; history and theories of business cycles and financial crises; advanced modelling methods (including social network analysis, agent-based, and stock-flow consistent modelling); heterodox economic theories (post Keynesian, evolutionary, neo-Schumpeterian, institutional economics, and structuralist economics and political economy of development).

> Extension of the ‘systemic’ theoretical framework in two directions:

>> Critique of the neoclassical research programme in economics, and identification of epistemological principles of a post-neoclassical, ‘progressive’ research programme that will bridge the gap between evolutionary, institutionalist, neo-Schumpeterian, and (post) Keynesian research programmes. The output is a working paper titled “Neoclassical reductions, emergence and the systemic research programme in economics”.

>> Understanding financial crisis as a structural feature of the political economy of peripheral countries, related to their insertion in the global division of labour, and to the technological divide itself. The output is a working paper titled “Financial crises and the debt regime from Latin America to Southern Europe”.

[2] Data collection and curation

> Cleaning and harmonisation, geo-referencing and ‘regionalisation’, and record linking across various databases. The output is the main relational database of the project.

[3] Descriptive statistics and social network analysis

> Including the calculation of network topology metrics of interregional knowledge networks of patent co-inventors in EPO applications; forward and backward patent citations in EPO applications; co-authors in academic publications; research partners in FP 5, 6 and 7 projects; joint ventures and strategic alliances of private firms. The output is a draft paper titled “Interregional knowledge networks in Europe before and during the crisis”.

[3] Econometric modelling

> Exploration of the role of relational capital and of spatial and network effects in the generation and diffusion of technological knowledge. The output is a working paper titled “Knowledge production in relational space”.

> Analysis of the effects of the crisis on regional innovation systems in Europe, in particular on their technology gaps and their prospects for technological convergence. The outcome is a draft paper titled “Regional innovation systems in crisis: Creative or just plain destruction?”.

[5] Agent-based modelling

> Conception, design and implementation of an agent-based model (ABM) of an innovation system embedded in an economy with money and credit subject to financial crises, in order to explore the link between technological innovation and business cycles. This task is subject to ongoing research.
The project successfully mapped, measured and analysed knowledge networks corresponding to flows of the three types of technological knowledge, and elucidated their core-periphery structure and their temporal dynamics using novel econometric methods. It also examined the impact of financial crisis on the position of regional innovation systems in them, their technology gaps and their technological convergence process. Some progress was also made in producing a generic ABM model of an innovation system and running simulations based on synthetic data, but its completion is deferred to near future research.

All three types of knowledge networks exhibit small-world and core-periphery structures at both the European and national levels. Those of the universal type are more ‘egalitarian’ in terms of geographical dispersion and less determined by interregional income differences. The North-South divide in these networks is weak. Their temporal evolution does not exhibit significant topological shifts, even with the outbreak of the crisis. By contrast, networks of the instrumental and organisational types exhibit significant spatial dependence and a pronounced North-South divide. Their cores consist of predominantly Northern regions with robust industrial bases. These networks evolve in the direction of increasing ‘extensification’ of their division of labour, and the financial crisis increased their segregation along the North-South divide.

During the Great Recession, the expansion of the world technology frontier has decelerated, while the distance of peripheral innovation systems in Europe from this frontier has increased. This implies that the overall technological convergence process in the EU periphery has decelerated or even reversed. The crisis seems to have brought about a new geographical division of labour in the production of technological knowledge of instrumental type, which deepens the technological divide and reinforces technological dependence of the periphery from the core. This in turn reproduces macroeconomic imbalances in the periphery, e.g. through the balance of payments.

These findings have significant policy, and hence societal, implications in the context of post-crisis EU policy discourse on the future of the ERA, the Innovation Union, and Europe 2020 growth strategy. They point to the fact that increasing public R&D expenditure in peripheral innovation systems, which is typically directed to academic research, and hence to the production of universal type of knowledge, may have little effect on growth and techo-economic convergence in the European periphery if it is not part of an articulated industrial strategy that also reinforces the production of instrumental and organisational types of knowledge – the types that foster economic growth in a knowledge economy. This also means that unless industrial capacities are strengthened in the economies of the European periphery, the universal knowledge produced there will not be appropriated locally and will not generate the desirable economic effects.
Choropleth map of eigenvector centralities of interregional joint ventures network
Choropleth map of eigenvector centralities of interregional patent co-invention network