NEW TECHNOLOGY-BASED FIRMS IN THE EVOLUTION OF A TECHNOLOGICAL FIELD
—THE CASE OF BIOMATERIALSAnnika Rickne, Department of Industrial Dynamics, Chalmers University of Technology
ABSTRACT
THE NEW
TECHNOLOGY-BASED FIRM IN ECONOMIC GROWTH
ANALYTICAL
FRAMEWORK AND METHODOLOGICAL APPROACH
PERFORMANCE ASSESSED
CONNECTIVITY IN THE
GROWTH PROCESS
DISCUSSION
TABLE 1
TABLE 2
TABLE 3
TABLE 4
TABLE 5
TABLE 6
FIGURE
CONTACT
REFERENCES
The purpose of this paper is to penetrate how new firms develop within an innovation system. We have investigated empirical evidence from companies in Sweden, Ohio and Massachusetts involved with the technological field of biomaterials; a technology which shows indications of becoming a high growth area. We find connectivity to other firms and organizations to be influential to acquire the resources crucial for growth and development. Moreover, our empirical findings point to strong spatial relevance. It is clear that a well functioning innovation system needs all type of actors, as well as a strong regional base. The three regions vary in their access to partners, the pattern of connectivity differs, and the performance outcome also differs.
THE NEW TECHNOLOGY-BASED FIRM IN ECONOMIC GROWTH
A dominant driver of economic growth is technological change. New scientific or technological knowledge creates opportunities, which reshape existing knowledge fields, innovation systems and industries, or give rise to the evolution of new ones. Such technological change can be explored and reaped by a number of different individuals and organizations: universities, old firms, new firms etc. The purpose of this paper is to capture, not how older companies are restructured and change technological direction, or how old industries are transformed, but how new companies take advantage of technological opportunities and grow. These new ventures are, for good and bad, enclosed in a technological and institutional setting—an innovation system—which adds to the opportunity set of the individual firm, yet simultaneously constrains its behavior. The features of a particular innovation system (technological regime, institutions, networks, actors and competence exchange) influence the emergence of new firms, as well as their behavior and growth. Thus, the new firms grow as an integral part of an innovation system, co-evolving with the system and it that way also influencing its formation.
The reason for placing the empirical focus on the new technology-based firm is twofold. First, technological competence can, directly or indirectly, be exploited through the new firm and, thus, this type of firm can be a crucial part in forming the new system. Secondly, the lack of well performing new firms is said to be an ‘Achilles heel’ for the Swedish economy (as for many other economies) and thorough analysis of the phenomenon is therefore of importance. Therefore, our aim is to analyze new firm growth and development within a system context, thereby enlarging the understanding of how new ventures and new systems co-evolve, and explain each others pattern of evolution.
As suggested by the definition of a technological system, the system itself as well as its actors emerge through profound interplay between individuals, companies and organizations, where competence is exchanged and recombined in iterative loops. Our purpose is to understand exactly how the new technology-based firms have emerged and grown as an integral part of a technological system. Therefore, we analyze their connectivity to the surrounding environment, i.e. we set out to understand the specifics of the networks, why and in what form (how) companies and organizations interact, with whom the NTBF engage, and what type of resources is exchanged through this link. Our aim is to observe the mechanisms which influence and control firm growth and development within the technological system.
Thus, we will analyze the performance of the new firms in the regions, and examine whether the key characteristics of the regional innovation systems, in particular the patterns of connectivity, may assist in giving the explanation of this performance. To answer these questions we investigate empirical evidence from three regional parts of the biomaterials system. Biomaterials are, in this study, defined to be synthetic or biologic materials which are to be used to treat, enhance or replace human functions. Our natural point of departure is Sweden, and we wanted to compare with two types of regions; one where the industry structure looks like Sweden and we therefore could expect that similar issues and problems would come to focus, and one where evolution processes in general is said to be well functioning. To be able to keep national specific traits somewhat constant, we selected two states in the USA, namely Massachusetts and Ohio.
The chapter is structured as follows. We outline the analytical framework where the NTBF is seen as an integral part of a technology specific innovation system. Methodological considerations, including how to delineate a system, are also discussed. Next, two supplementing measurements are used to capture the current state of these, mostly young, firms, and firm development and the role of connectivity is analyzed. Finally, conclusions are drawn as whether these patterns of development and the characteristics of the regional innovation systems may aid in the explanation of performance.
ANALYTICAL FRAMEWORK AND METHODOLOGICAL APPROACH
New technology-based firms can be viewed as “concentrations of technological and economic competencies, attached to their environment through a range of technology intensive links” (Autio, 1995, p. 126). As the name implies, a new technology-based firm (hence NTBF) is a company which in some sense is new, and have a strong technological focus, in other words, they are (relatively) new firms having technological competence as a dominant variable affecting their competitive advantage. Some of these firms will work with new technologies, being a part of the entrepreneurial activity following a technological discontinuity. These firms are active in shaping new industries; new technological systems. Others have found a niche in a much more mature industry, but may still be part of a reconfiguring process. In this particular paper, the NTBFs are firms that are established to explore opportunities within a specific technology; biomaterials, which then is their technological base. The newness means that the company is a new entity. Our operationalization is to include all new entities, i.e. even when it is an older company’s efforts to enter the technological field which takes the form of a new firm.
In order to understand how new companies take advantage of technological opportunities and grow, we think it is necessary to view the new firms in the context in which they operate. There is a range of authors taking a system perspective on the innovation process, some placing emphasis on national or regional features of the system, and some on sectoral differences (Freeman, 1987; Porter, 1990; Lundvall, 1992; Saxenian, 1994; Enright, 1994; Breschi and Malerba, 1995). In all the different approaches to systems of innovation, cumulative learning and the social context is at the heart of the framework.
National systems of innovation focus on the fact that specialization in countries depends on their specific, path-dependent, knowledge base. The institutional set-up, as well as the networks in which knowledge flows, will affect the way learning comes about. With the concept of technological system, Carlsson and Stankiewicz (1991) argue that, in addition to the spatial importance, the nature of the technology itself has a strong explanatory power. Technological systems may be viewed as innovation systems which vary with respect not only to their institutional infrastructure and the networks involved, but also with respect to their technological characteristics. An underlying technological regime implies a set of opportunities and restrictions for the participants of that technological system. The other elements of the system (networks, competence, institutions, organizations) provide determinants of how these opportunities will be grasped.
The technological system, portrayed from the perspective of a single NTBF, includes: other NTBFs; large technology-based firms; universities; individual researchers; public organizations such as technology policy bodies of the state; other organizations (such as bridging organizations); the capital market, users and individual people. Each of these actors may be linked to one another in a number of different ways, diffusing competence and tangible resources and learning from each other. The links which explain the process of evolution consist largely of flows of information, knowledge and competence. The innovative performance of firms in the system is seen as a result of a collective effort, in addition to the individual one (Saxenian, 1994). The character of the system may strongly influence the individual firms establishment, development and growth. For example, the degree to which the NTBF is embedded in one or several networks significantly affects its behavior. The emphasis on networking organization, i.e. to rely more heavily on external sources instead of having vertically integrated companies, gives opportunities for the new firm. Access to a particular network may support the firm through provision of resources, such as knowledge, components, more contacts, capital or guidance in a certain technological direction. Also, the new firm may benefit from other companies experiences or resource accumulation. On the other hand, the network may also lock the new firm into disadvantageous paths of development, e.g. when the other companies in the network have chosen to pursue technological opportunities with less potential.
We have in this study encountered a number of methodological issues. First, we needed to decide the level of analysis of the study; technology, product or industry. The system boundaries, the actors involved, the networks and institutions, and even the questions we are able to explore, may vary depending on the level of analysis chosen. As we are interested in the process of evolution a technological focus gives us the possibility to study competence diffusion and its effects, independent of specific industries. Thus, in this study, the system consists of all those actors, as well as those institutions, networks and competencies related to the biomaterials technologies; i.e. the system is defined by a competence field.
Our second issue was how to determine the boundaries of the system, i.e. which exact technologies we were to include in the biomaterials field. As competence fields overlap and intertwine, and thereby change over time, such a delineation will always be arbitrary, and only be valid for a certain time period. New sub-technologies are invented, and complementary technologies are closing in. We took the common definition of biomaterials as a starting point, verifying inclusion of individual sub-technologies with experts of the field.
We wanted to include all new firms developing any of the biomaterials sub-technologies, independent of in which biomedical application the technology was used. To trace all actors in the system we took three measures. First, we identified possible applications and searched through industry directories to find companies active in each application. The use of biomaterials was verified by written business plans, expert interviews or direct company contact. Secondly, we interviewed biomaterials firms as well as associations and asked them to point to further actors. Thirdly, we identified some of the most important researchers in biomaterials, and identified firms citing their key patents. Again verification of their actual activity was needed.
There are two reasons to the choice of applying the method of, rather time consuming, comparative cases. First, a technological system is global, and one regional portion of this global system can only give a limited illustration. Therefore, three regional systems, making up a great portion of the NTBFs within biomaterials, will give us a much better understanding of the general mechanisms involved in evolution. Secondly, the comparison of the regions offer us a gauge which to refer to. We can then compare mechanisms leading to different performance and draw conclusions for policy. Thus, we chose to perform in-depth studies of three geographical regions or, as we may call them, three regional technological systems.
We performed interviews with the new firms, but also with partners, financiers, researchers, etc. (see Table 1). A semi-structured guide, with closed as well as open-ended questions, led us in the discussions. The interviews have varied from 1, 5–5 hours, going in depth into the company development. In small companies one face-to-face interview, supplemented with secondary company information and additional telephone conversation, was judge sufficient, while further interviews was needed in the larger companies.
As we are interested in how new companies take advantage of technological opportunities and grow, we want to know the magnitude of the phenomena per see as well as its change over time. The biomaterials system as well as the companies we are interested in are rather young, and timing is one important parameter for success. Therefore, there are two dimensions of performance we would like to assess; the size of phenomena and timing. None of these measurements can alone describe the performance, but combined they give a better, and more multifaceted illustration of how the companies, and the regions, have succeeded so far.
First, the size and growth of the phenomena is measured by the stock of firms over time, the employment per capita and the employment per firm. Secondly, we have two measures of timing. The year of establishment reflects when the firms in the three regions commenced its commercialization efforts. As the companies within the biomaterials field struggle with a lengthy period of technology and product development, in tandem with an often extended period of clinical trials before regulatory approval is granted, many companies do still not have a product to sell to end customers. To evaluate the development stage of the firms we measure their closeness to market (the share of firms with a product on the market in 1998). Our perception is that the more companies that have reached the market with a product, the better the region performs, as products presented to the customers will bring sales which may further spur development and growth.
During the period 1978–1998, in total 30 firms have been established to explore biomaterials technologies in Massachusetts (Table 2). Sweden has performed almost at the same level with 25 companies born, while Ohio lags with only 18 companies. Measured in relative terms (per capita) Massachusetts lead is even more evident, with 5,0 established firms per million inhabitants, while Sweden has 2,9 and Ohio falls behind with 1,6 firms/ M people. As we will discuss in greater detail below, this may mean that the region of Massachusetts has specific features in its innovation system which are supportive to entrepreneurship and development in this technological field, and that the other two regions lack some important traits in their innovation systems.
Measuring the stock of firms over time, it is clear that difference still is valid with Massachusetts and Sweden having had the highest of number of firms over the years (Figure 1). Firm formation began in late 1970s, and the late 80s and early 90s have witnessed the highest natality, and Massachusetts seem to keep the pace up. Somewhat worrying, Sweden, but also Ohio, have trailed off during the latter years. This is also the period in Ohio when several companies have either failed, been acquired and fully integrated with its new owner or moved out from the region thereby reducing the number of entities.
The biomedical sector is one of the industries which display a large degree of division of labor, with many companies outsourcing activities. In the extreme case, especially new innovative firms can function as virtual organizations with few employees but with an extensive network organization, and in general the firm size tend to be smaller in knowledge intensive industries than in manufacturing based industries. Therefore, the number of employees alone does not reflect the magnitude of activity in the firms, but is useful in combination with other measurements. Companies in Massachusetts have in 1998 an average larger size than their Swedish or Ohio counterparts; 135 employees/ firm versus 115 and 75 (Table 2). Accordingly, the total employment of the region is highest in Massachusetts with almost 600 employees/M capita, as compared to 154 vs. 198 employees/M capita, in Ohio and Sweden respectively.
In each region there are only a few companies which have grown to medium-size companies of more than 200 employees (5–8%), while the bulk still are small. The small size may be a result of the fact that several of the biomaterials applications are still in an early phase of development, and market penetration has not yet fully taken off. Looking at the next size range of firms, 100–200 employees, we note that Massachusetts is in the lead with 5 firms (0,8/M capita), Ohio comes far behind with 2 firms (0,2/M capita), and the Swedish situation is even worse as there no companies in this size span. Noteworthy, the few medium-sized companies contribute with over 60–70 % of the employment. It therefore seems crucial for a region to be able to nurture growth. As noted, Massachusetts is clearly successful. While Sweden performs slightly better than Ohio as regards employees per capita, Ohio has on the other hand larger firms.
In 1990, 17 firms had been established within biomaterials in each of the regions Sweden and Massachusetts, which implies an earlier timing into the general biomaterials field. In our case, the two regions with the most companies, Massachusetts and Sweden, also have the highest percentage of firms with a product on the market in 1998; 56 vs. 57 %. In this respect Ohio thus lags in performance, with only 40% of the firms selling products to customers.
In summary, Massachusetts is a well performing region in all the dimensions we penetrated. As for Sweden, the rate of establishment is good as is their market entry, while the Swedish companies stay smaller that their American counterparts. It is noteworthy that independent of region only some firms have grown to become mid-sized, but these have contributed largely to employment. The relative lack of growing companies in Sweden is therefore somewhat worrying. Ohio is the geographical area coming out last in the comparison, with fewer firms, less employment per capita and less market entry.
CONNECTIVITY IN THE GROWTH PROCESS
Technological Source and Exploration
In this section we will analyze the connectivity at the time of establishment, i.e. the origin of the technological opportunities as well as of the firms. Table 3 reveals the patterns regarding from which source the initial invention has come, and which type of actor explored it, i.e. placed the technological opportunity in a company setting for further commercialization. Due to the science based character of biomaterials, universities, medical schools and hospitals have played an immensely crucial role in the formation of the biomaterials field, where the inceptive technology emanate from such research groups in 61–89 % of the firms. The population of biomaterials firms is thus, to a large degree, university spinn-outs. In addition to company collaboration this research has been financed mainly by public sources, and science and educational policy have been instrumental in forming the prerequisites for the evolution of the biomaterials system. Without doubt the largest source of inventions, its importance nevertheless varies between the regions, with Ohio and Sweden having a larger share of its new firms based on university research. Phrased differently, Massachusetts perhaps has a somewhat wider spectra from which to find technological discoveries to explore.
Universities and medical schools have, however, at least three functions in this innovation system. One in creating technological opportunities, but also, as so much of the initial technology comes from university or hospital settings, the process of transferring the technology to a new firm needs to be smooth. A second function for universities is to educate competent people whom can start companies, be employed in the new ventures or push the research frontier even further in a university setting. Finally, researchers may contribute to the biomaterials companies’ development and growth. Accordingly, the existence of a critical mass of high quality universities with highly educated researchers is of greatest importance, and in all three regions there are prominent universities and medical schools, even though the American regions have a stronger resource base.
The second largest source of initial technology, is that developed within an older, already existing company. Such development may form the basis for a new company, a corporate spin-off (Lindholm, 1994). The difference between the regions is clear, with Massachusetts providing the largest set of biomedical companies (more that 600 firms related to biotechnology only) which may spin-out firms, while Ohio has more biomedical companies that Sweden (422 versus 230). Within this population we only find spin-offs from other biomaterials NTBFs, in Massachusetts. This is presumably dependent on timing, where Massachusetts was early, but also on the fact that the Massachusetts based companies in some cases have split at an early stage, into two companies focusing on different applications, i.e. a form of company diversification taking place at a fairly young age.
Given that the opportunities can come from different sources, who is it that explores these possibilities and form new firms? We find that (see Table 3) in all three regions the majority of the company formations are brought about by the researcher, even though in Massachusetts this dominance is not at all so clear. Instead, in Massachusetts many different mechanisms for start-up are prevalent, and there is a frequent involvement of a venture capital company or a business angel, while this mechanism is not at all present in Sweden. As already noted, the older firms in Sweden to a larger extent explore biomaterials technology through spin-offs.
Technology and Market Related Resources Needed for Growth
As stated, the evolution a technological field takes place through an interactive process where firms and organizations exchange competence and learn from one another. The specific needs of the emerging technology and new actors, stipulates what is required by the innovation system, and thus, the characteristics of the innovation system give the framework to the evolution through its set-up of actors, its institutions, its competence and its networks. In the following sections we will discuss two issues, 1) we analyze connectivity in the growth process, focusing mainly on technology, market and financing, and 2) discuss differences in the patterns of the regions.
In the biomedical field most firms are, especially in early stages, dependent on external sourcing of core resources. As we will see, there are many types of resources that are exchanged in the networks formed between the NTBF and its environment; financing, technology, market related resources, management, people, credibility and extended networks. These resources can be transferred as artifacts or as more tacit knowledge. For example, technological resources may have the form of a component, a patented technology or accumulated technological experience, and market resources may mean access to a specific market through distribution channels or customer directories, or tacit knowledge on how the market functions and what product it desires. There are also different types of technology. To acquire technology from an external source may mean to get technological ideas, the initial base of the company, supplementing technology helping to refine or expand the possible application, physical artifacts as components or products or process technology.
Not unexpectedly, in all three regions cooperation with researchers turns out to be a very important well of technological ideas, supplementing technology, guidance and practical experience throughout the development process (Table 4). This can partly be explained by the nature of the innovation process. The development of a biomedical device or a drug, requires a deep interaction with the users, both surgeons or other physicians and the patients to understand exact patients needs as well to test and discuss design, concept or materials. Furthermore, in this segment of compelling regulations, high quality clinical trials are of uttermost importance. Often international multi-center studies are required, and the firm cannot have the competence or facilities to perform these trials in-house, but needs to collaborate with researchers of high esteem.
The parent firms and the older/larger firms are also very influential to continued technological development (ideas, technology and artifacts) as well as learning about the market. Connections are set up through e.g. co-development projects, licensing agreements or ownership changes. From Table 4 it is evident that NTBFs in all regions connect to other companies to acquire these types of resources. Interestingly though, while Massachusetts’ firms are the most well connected to older companies, there is little technological interaction with owners. Swedish firms, on the other hand, source much technology from their parents. Company cooperation is especially important for reaching the market (distribution channel), and even though Massachusetts and Ohio may be expected to have a better situation due to more regional companies to cooperate with, Sweden compares well in this respect. Through networks to other small, innovative, companies the NTBF may gain access to ideas and to supplementing technological development. We see that in Ohio and Massachusetts these horizontal collaborations are transferring more resources. Finally, in the USA, the Venture capital company provide initial as well as further ideas and supplementing technology, and can also supply insight to customer needs and through its wide network connect the NTBF to customers. We will discuss financing in more depth in the next section.
Financial Resources Needed for Growth
To the new firms, having technology as a central feature of their existence, the functioning of the capital market, i.e. all the actors that may provide the NTBF with financial assets for its establishment and development, presumably matters a great deal. In this wide meaning, not only the traditional actors of capital markets: banks, managers of capital funds etc., may be of importance for the provision of capital to the NTBF, but also customers, acquirers, governmental bodies, etc.
We found that the perceived ease of finding capital varies between the regions, where in Massachusetts over 70% claim it is easy, while in Ohio and Sweden only 15–20% claim it is, easy most say it is moderately hard while 15–20% say financing has provided a large obstacle. Thus, there is in fact a rather stunning difference in perception on this matter. The need of capital can, as have already been mentioned, be solved in a number of ways. Our empirical evidence shows that all the NTBFs use several different sources of financing during their lifetime, each firm using 2-6 sources. Due to the science based character of the field, grants from government or bridging organizations have been influential in all three regions (Table 5). However, while Massachusetts by far is the American state receiving most health related federal R&D funding, in biomaterials only 26% of the companies obtained such financing (note that there is no funding from bridging organizations in Massachusetts) obtained while the other two regions have relied more on government and bridging organizations. In Sweden this source is most important in initial phases, but several companies in Ohio receive, and perhaps remain dependent on, some government financing throughout their product development efforts. Most researchers and young firms interviewed, state that so far there has been little lack of government financing, but there are in the United States signs that some of the federal sources will be decreased.
Most NTBFs are heavily connected to other companies when it comes to financing, either owners or partners. Such links may have the form of cooperation or of a sale of either technology, a product (distribution license) or the firm itself (partly or fully). The parent companies may provide initial financing, but may also, as in Sweden, be a long-term financier. The product development is in Massachusetts continuously supported by a number of actors, where large companies and VC firms stand out. With this type of products, development of the specific application is often done in cooperation with the partner who will handle distribution, and firms in all regions source much financing from older firms.
While Sweden and Ohio rely much on private savings in combination with R&D services to other companies, these sources are of minor importance in Massachusetts. Instead, in this state the largest amounts of initial financing are brought by Venture capital firms, which over the early years is at least twice as important in Massachusetts as in the other regions. Indeed, the venture capital sources for health care related technologies were in 1997 $190 million in this region.
Thus, regarding the structure of the capital markets for young biomaterials companies we found that the NTBFs acquires financing from many different types of sources, and the type of source differs between the regions, as well as over time. However, the capital market may have two functions for the NTBF. Firstly, what financial assets will do is to absorb risk and buy learning-time. For the NTBF to be able to engage in development projects, not giving return on investment for quite some time, it is naturally essential to have quite large capital resources. Secondly, even though these firms are competence intensive, this does not imply that they do not face the traditional disadvantages of small firms with lack of e.g. managerial competence. Consequently, this means that the financier need to be competent, not only in the evaluation of investment objects and risk assessment, but also able to provide other competence based resources: management, technological guiding or give access to a valuable network. In our study, we note that there are some financial sources which gives access to the money only: personal savings or loans; public offering or limited partnership; sale of technology license or a business line. However, some other financing options also induce transfer of competence or resources. This means that a lack in certain types of financial sources, may also lead to difficulties in finding other resources.
Our empirical findings (Table 6) show that bridging organizations, especially in Ohio, give administrative support, functions as a discussion partner whom gives guidance and even management and also provides an expanded network. As all types of company cooperation (parent firm, owner or other company) independent of location, transfer credibility, technology, market access, network, and it is positive to have access to more than one form of company to cooperate with. Firms in Massachusetts and Ohio gain access to market, supplementing technology and also credibility and a larger network through cooperation with other larger/older firms (e.g. by selling a distribution license). Indeed, Massachusetts based firms source technology from all three types of partners, while that is not true in the other regions. While Swedish NTBFs rely more on the parent firm, which seem to provide more of management, administrative support, facilities and equipment than the other types of partners, this may be an insufficient strategy of resource acquisition. Venture capital companies and business angels render management, administrative support, a larger network, and to some extent also technology to the American NTBFs. The NTBFs in Sweden have not been financed by VC money to the same extent as their American counterparts and will therefore not have the same advantages.
We conclude that the structure of the capital market for biomaterials firms consists of a number of different actors, and in the three regions these sources have different emphasis. Even though there are substitution mechanisms in that the individual company to some extent can compensate for lack of one particular source of financing, depending on the competence of the capital providers there may be consequences beyond the financial dimension. The different financiers bring different resources into the NTBF, and a diversity of actors on the capital market seem to ensure greater competence transfer.
Indeed, the NTBFs are part of an evolving innovation system, and our analysis clearly show the importance of connectivity in the evolution of this system. Given the specific needs of the emerging technology and its new actors, and the analysis of competence transfer to the new firm, we ask what an innovation system should look like to be able to explore and foster science based innovations. We have seen that technological and market related as well as financial resources are conveyed by several types of companies and organizations, and it is clear that a well functioning innovation system needs all type of actors. However, the regions differs in their access to such partners, and, perhaps as a result, the pattern of connectivity differs.
From the point of view of the large or old firm, the NTBF can be used as a means to enter the technology/market (quicker, cheaper or with less risk) as the large company can a) source technology from NTBFs, b) source distribution licenses from/ or cooperate with NTBF, and financially support the development, c) acquire NTBFs, d) take minority position in NTBF to be prepared if the technology proves viable. This means that the larger companies are often very interested in cooperation with the new firms. As the NTBF relies on external resources to grow it will most probably benefit from partners being located in the region. Massachusetts show a promising structure with many biomedical, and in particular biotechnology, companies in the region, and pharmaceutical companies close by in e.g. New Jersey. The other American region, Ohio, have fewer biomedical companies, and the NTBFs in our sample claim to somewhat lack networks to the large clusters of biomedical companies which mainly are situated on the East and West coasts as well as in Minnesota. In Sweden, there is a large extent of cooperation between the new companies and their older counterparts, but there are fewer companies to team up with. It is a small country and its companies cannot be active in all technological fields but must specialize. Naturally, partners could be sought outside the nation, and indeed that is not seldom the case. However, regional networks are important and self-reinforcing, and the practical search process actually seem to have some spatial limitations.
Following different firms’ expansion or contraction there will be a rotation of people between companies. As most biomedical companies seek to hire people with industrial experience to bring their competence on customers, regulations and company cooperation into the firm, also the labor market is improved by the presence of many biomedical companies. In addition, employment in new start-ups may be risky, and the proximity to other feasible employers reduces the personal uncertainty. Consistently, the NTBFs in Massachusetts has little problem in finding people with the right profile, while Ohio NTBFs find it harder to recruit in the region as there are few other companies which can ensure new jobs if the new firm fail, and thus it is hard to find inventive people with business experience.
As pointed out earlier, the NTBFs source financing from a number of actors. We state that it is crucial with a diversified, competent and patient capital market able to provide financing in all stages of firm development. Is this type of capital market present in the three regions? As we just discussed, there are some differences when it comes to older firms, and Massachusetts is perhaps the region with the most complete set up of such financiers, even though the parent firms in Sweden take on a large responsibility. The set-up of Venture capital firms is also important, and the actual financing reported is well reflected by the number of actors where Massachusetts have many companies located within the region and several from other regions wanting to explore the technological opportunities created in this state. Sweden and Ohio lags, but there has lately been signs of an increase of the number of Venture Capital actors in Sweden, while the lack of financing has made two firms in our sample to move out of Ohio.
The rather large differences in types of financial sources used by the new firms in the three regions leads us to two conclusion. First, the NTBFs seem to compensate for lack of one source of financing, and instead turn to other means. Secondly, a diversity of financiers also imply a diversity of resources transferred. Thus, there need to be, not only sufficient amounts of financing for the different development stages, but also a variety of different types of sources. Indeed, the behavior of the NTBF may be related to the types of financial sources available. For example, if the company does not access venture capital it cannot go for the high risk/ long term products but must have intermediate products that generates cash earlier. In turn, this may give a region a lower risk profile, but possibly also with a lower technological and market potential. The pattern may be self-reinforcing in the respect that technologies with lower potential does not attract new risk capital to the region.
At first glance it is not evident that these components of an innovation system must be located in the region. However, our empirical findings point to strong spatial relevance, a strong geographical clustering. As pointed out in a number of earlier studies, the new firms in Massachusetts are located mainly around the Boston/Cambridge area; the Route 128 area, due to the closeness to the universities. These universities contain the origin of the firms, and technology and competence are continuously sourced from universities and medical schools. Both in Massachusetts and Sweden, most firms have its technological fountainhead within the region. The pattern is different in Ohio, with fewer of the NTBFs having their technological cradle from the region’s own research base.
With clustering of new ventures around the universities, the other parts of system follow. This is where venture capital firms as well as large firms locate. In Massachusetts this has become a positive spiral, with more firms and competence moving into the cluster. In the biomaterials field the clustering in Massachusetts is even more obvious with several companies moving closer to the universities in Cambridge. In Ohio, however, the initial spark of cluster formation—the university providing technological opportunities and entrepreneurship—is still flickering. Sweden, display more of a clustering, both around universities, but also around some of the large biomedical companies.
Networks are built on personal relationships, and such personal networks are often initiated at the time of education or early employment. Our interviews show that the contacts established during this period are kept throughout the entire career. As many people in this sample tend to stay in the region where they were educated, the regional character of the network is further reinforced. This is also illustrated by the fact that respondents find it difficult to enter a network in a new region, e.g. to source people from a specific university where the company does not have previous contacts. There is a large path dependency in connections, as firms often build on earlier relationships to acquire resources into the firm, or to find guidance in a particular issue.
We perceive that there are three important dimensions to the network; the density (critical mass), the strength of the links, and the geographical concentration. Geographical clustering lead to that the needed resources, be it competent people, capital or idea, are all available at close distance. Secondly, it gives possibilities for synergy between technological fields. In Massachusetts, where the companies as well as the research organizations are located within a small spatial area, closely related technological development have taken place, e.g. within the field of artificial skin or drug delivery. In contrast, Ohio display no such phenomena. Today, Massachusetts has a widespread network with clearly defined nodes emanating from a number of researchers. Sweden display a large degree of connectivity at the research level, and firms are aware of each other and are often cooperating. Overall, however, the picture in Sweden is more scattered when it comes to technological fields. Noteworthy, even in the pride of the Swedish biomaterials system, titanium-based implants, the concentration may be too weak, leading to firms possibly choosing to move to a more focused region. In Ohio it is in contrast rather loosely connected with few clear nodes.
A characterization of the three regions thus show that Massachusetts is a well functioning system, where all needed components are present locally. The system display a high degree of connectivity, regionally as well as nationally. There are plenty of evidence of increasing returns, furthering strengthening the system, but also with possible lock-in effects. In this region the technological field has truly been developed into a cluster. Ohio could be characterized as an incomplete system. The components are fewer or weaker. The are not as many or strong links in the network, which means that the firms and organizations act more as individual entities, which happen to be located in the same region, than as thriving on each others competence or learning from each others experience. Externalities are not as obvious. In this region the system has not taken the form of a cluster. The reasons can be sought in lack of infrastructure, in the set up of actors. Several actors express a smaller supply of regional technological opportunities, and lack of role models paving the way for new firm formation. In addition, there is a lower presence of Venture capital as well as biomedical companies. The network seem to be suffering from too few arenas where competence can be exchanged. Incompleteness in the Swedish system have over time included a lack of venture capital firms, some lack of partners and scarcity of role models. However, encouraging signs have been noted, with e.g. a rapid increase on the capital market.
Consequential, to policy makers the pertinent issue is then how a strong regional system can be created and maintained, as well as how other regional parts of the technological system may be exploited. We would like to point to some important findings from our analysis. First, the example of biomaterials illustrate that innovation is a collective effort, where a company uses a network of actors from which it acquire a variety of resources, and concurrently diffuses its own competencies and ideas. Innovation is a learning activity, and this learning process is supported by connectivity and complex network interactions. Thus, even though there to some extent exists substituting mechanisms, most parts of the system needs to be present for the sum to be well functioning. Therefore, the performance of an innovation system must be assessed both by how well individual actors perform, but also to what extent they connect and for a cluster, and, finally, by how well the infrastructure supports innovative activity and exploration of technological opportunities. We conclude, and confirm, that the system is the correct unit of analysis to understand issues of innovation.
Secondly, many of the crucial connectivity processes seem to take place within a regional arena. The region as an entity of analysis is thereby crucial when understanding innovation, and there need to be a regional dimension to policy. Even though there are strong path dependencies to a region, where the natural set up of actors (e.g. the proximity to a university) is one determinant, and where earlier policy decisions matter, several measures can be taken to enhance the regional base and move into a more prosperous avenue. Thirdly, each regional section of a technological system does not necessary need to contain all components or links, but it may connect to other clusters and exploit them (Porter, 1990).
Finally, we may point to four factors enhancing the self-reinforcement of science based technological systems in any particular region. These factors should possibly be subject to policy measures.
CONTACT: Annika Rickne, Department of Industrial Dynamics, Chalmers University of Technology, 412 96 Gothenburg, Sweden; (T) +46-31-7721197; (F) +46-31-7721237; anri@mot.chalmers.se
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1999 by Babson College. All rights reserved. Last updated March 2000.