Social networks and innovation

Schumpeter (1954) claimed that economic sociology, along with economic history, economic statistics and economic theory, is a fundamental field of economics.

He argued against viewing individuals as ‘mere clotheslines on which to hang propositions of economic logic’ (Schumpeter 1954, p. 854). Consequently, tak-ing the heterogeneous and bounded rational character of agents into account and understanding the crucial role of their interactions for innovation is at the core of Neo-Schumpeterian research approaches (Hanusch and Pyka 2007b). Innovation is considered to be an interactive and cumulative learning process (Lundvall 1992; Pyka 1999) in which multiple agents from public and private institutions (e.g. companies, employees, clients, researchers, state workers) exchange infor-mation and learn from each other. Despite the general perception of entrepreneurs being individual heroes, they are deeply embedded and need to create social net-works (e.g. Grebel et al. 2003; Dahl and Sorenson 2009). Furthermore, innovation and creative destruction processes change the economic system and the modes of interactions and the roles of the different agents. Three key network-related issues in Neo-Schumpeterian research are social capital and entrepreneurship, innova-tion networks and commuting entrepreneurs.

5.2.1 Social capital and entrepreneurship

Social capital is a key resource in people’s agency and their capacity to engage in entrepreneurial action. Entrepreneurs need to form and draw upon social networks to have access to critical factors such as information, finance, initial demand and social backing (Aldrich and Zimmer 1986; Johannison 1988; Hoang and Antoncic 2003; Casson and Della Giusta 2007). Strong ties (Coleman 1988, 1990) such as kinship and networks of close friends are essential for an individual’s success in underdeveloped settings and for any venture undertaken. In developing coun-tries, access to finance and the initial step of distribution are both often achieved through close family members and friends. It is only in the later stages, once the entrepreneurs are successful, that the importance of market interaction with unfa-miliar customers becomes apparent.

Social networks affect the perceived desirability and feasibility of entrepre-neurial action. The desire and ability of individuals to introduce novelties into the local production system depend on their own skills and intrinsic motivation, as well as on their social network (Liñán and Santos 2007). The desires and occupa-tional activities of family members, friends and other social contacts influence the preferences and activities of the individuals, for example their desire for agency.

If people have more entrepreneurial friends, they also tend to be more active, owing to a higher perceived desirability and feasibility of entrepreneurial action (e.g. Liñán and Santos 2007). The embeddedness of entrepreneurs does not just appear in economic space, but also in public and social space. For example, the capacity for building up networks of support and action is essential for the suc-cess of social entrepreneurs (Bornstein 2004). Social entrepreneurs introduce new

structures, coordination and networks which empower other people and lead to new capabilities and choices for individuals (e.g. for healthcare, education or production).

5.2.2 Innovation networks

Social capital is also one of the main ingredients of innovation networks, and hence of interactive learning, innovation and structural change. This applies to R&D collaboration in global frontier research, as well as to local teams and inter-actions between, for instance, micro-entrepreneurs, microfinance institutions and consultants trying to introduce changes into the local environment. Innovation net-works affect human development in multiple ways, such as through the creation of knowledge, new products, services and occupations and by causing changes in the economic structure and organization.

Modern innovation research identifies innovation as a collective and cumula-tive process (Freeman 1987; Lundvall 1988; Pyka 1999; Pyka et al. 2007; Pyka and Scharnhorst 2009). An agent’s network of contacts determines the informa-tion that agent (e.g. an individual, a company or a community) can access, use, diffuse and recombine. For this reason, networks are crucial for learning, entrepre-neurship and innovation (Grebel et al. 2003). It is worth noting that Schumpeter (1912) did not use the word ‘innovation’ in his theory of economic development but referred to new combinations leading to new products, processes, markets, organizations and inputs. This definition and wording goes hand in hand with other influential work in classical political economy as well as work in evolution-ary economics that highlight that innovation and development are typically built upon previous experiences and knowledge of the agents (List 1841; Nelson and Winter 1982). Neo-Schumpeterian economics and complexity research highlights the fact that technological and economic development follows evolutionary paths within complex systems in which multiple agents interact, learn from each other, cooperate and compete (Nelson and Winter 1982; David 1985; Dosi et al. 1988;

Arthur 1994, 1999). In an increasingly complex world, no single individual or firm is able to keep track of all the different types of technological advances, existing problems and solutions, but must draw upon networks of specialised part-ners (Pyka 2002). This is the case for global companies, but it is also important for people at the local level. The underlying argument is that interaction and mutual learning allow actors to discover new combinations of existing knowledge, find new solutions to known problems and identify new areas and markets for techno-logical advance (Schumpeter 1912).

Regarding innovation in less developed regions, the focus has been on the importance of endogenous technological capability upgrading and the proper absorption of external knowledge (e.g. Rabellotti and Schmitz 1999;

Juma et al. 2001; Vázquez-Barquero 2002). Both external and internal linkages matter and need to be fostered to promote sustainable endogenous development and fruitful embeddedness in national and global systems. Technology transfer from industrialized to developing countries can be a useful factor for economic

development, but is not enough alone and can even lead to structural dependence and underdevelopment if no proper endogenous technological upgrading takes place (Myrdal 1957; Patel 1974). The awareness of missing knowledge and the local absorptive capacity must be advanced through applied learning-by-doing, using and solving activities (Arocena and Sutz 2005; Evers et al. 2006). Often it is precisely the awareness of missing knowledge and critical problems that allows us to advance. If technological products are just considered black boxes (e.g. donated computers for poor communities, a hydraulic water pump installed by external agents) without the local population having any knowledge about the processes, usage and possible problems with the product – any type of difficulty – will cause further demand for external help or the obsolescence of the imported artefacts.

However, when the people have knowledge of the constitution and the functioning of the product and processes, they may be able to innovate and adapt the products and services to local needs themselves (Arocena and Sutz 2005). Therefore access of individuals to knowledge and how they are embedded in social networks are critical. Most case studies on endogenous development, local clusters and inno-vation systems in less advanced countries mention the crucial role of interactive learning, but tend to concentrate on agglomeration effects and the local top-down institutional setups (e.g. Cassiolato et al. 2003). Studies on agricultural innovation in less advanced regions have focused mostly on the qualitative aspects of spe-cific cases and technologies, or on the institutional aspects at the national/sectoral level (Omamo and Lynam 2003; Hall et al. 2006; World Bank 2006, 2008). Only recently have local structural features and the embeddedness of heterogeneous agents within networks of techno-economic relations received more attention (Giuliani and Bell 2005; Monge et al. 2008; Arora 2009; Spielman et al. 2011).

Within clusters there is typically no ‘free floating knowledge in the air’ available to everyone (e.g. Breschi and Lissoni 2001), but the agents have significantly diverse and unequally distributed access to knowledge and absorptive capacities (Giuliani and Bell 2005). Especially in developing countries there is often a large gap between the technological capabilities and network contacts of medium and large enterprises on the one hand and small entrepreneurs and smallholder farmers on the other. Owing to the very limited resources and absorptive capacities of the agents in underdeveloped settings, linkages and information exchanges between advanced and less advanced agents are rather scarce; therefore one key issue in any attempt to foster development in such settings is the promotion of educa-tion and infrastructure for those agents with fewer network contacts and lower absorptive capacities. However, a better understanding of the innovative behav-iour and social embeddedness of micro-entrepreneurs is also necessary, as is an understanding of how novelties are introduced in less advanced regions and how innovation can contribute to and is driven by human agency.

5.2.3 Knowledge circulation through commuting entrepreneurs

An inspiring approach towards promoting economic win-win situations and inter-active learning between individuals from industrialized and developing countries

is visible in the so-called commuting entrepreneurs. The international networks of migrants, often called diaspora networks, referring to, for example, the network of Chinese migrants around the world, can provide critical resources such as infor-mation, finance, housing, social backing support and remittances (The Economist 2011). They can also be a major source of knowledge flow and contribute to inter-cultural integration. They can furthermore lead to positive effects not just for the rich industrialized centres of the global economy (like Europe or North America), but can also be beneficial for developing countries (like China and India).

Saxenian (2006) discusses the old core/periphery model of economic develop-ment with an approach which is new in regards to the role of individuals who transfer competences from the core to the periphery regions, whom she labelled

‘commuting entrepreneurs’. Knowledge transfers take place in innovation net-works spawned between the core and the periphery by these individuals and their economic engagement in both regions. Commuting entrepreneurs immigrate to core regions to be academically trained and to create their first business and social networks in core regions. Later in their career they either stay in the core regions or return to their home regions in the periphery. In both cases they trigger the development of prolific network structures for knowledge and socioeconomic transactions and thereby significantly push development in the home regions.

They can contribute to transfer of technological knowledge into their regions, contribute to structural change and economic competitiveness, create jobs and promote social innovations. Most importantly, commuting entrepreneurs and diaspora networks can contribute to the reduction of economic and technological inequality between different countries in the global economy.

In the traditional core/periphery model, new technologies emerge in highly industrialized core countries that combine their highly skilled workforces and high per capita incomes to develop new markets for innovations. The success in periphery countries strongly depends on these achievements, in a trickling-down fashion. These regions are destined to remain followers because cutting-edge skills remain in the companies and universities in the core. In contrast to the established core/periphery model of economic development, Saxenian’s approach has to be considered as being much more appropriate to the contemporary sit-uation, reflecting the changed conditions characteristic of knowledge-based economies, namely cheap transportation costs and easy coordination over long distances by means of modern information and communication technologies.

The network organization of knowledge-based economies strongly contributes to the mutual transfer of knowledge and competences, thereby positively con-tributing to a knowledge-driven catching-up by the periphery regions. There has been considerable discussion on the role of foreign direct investment and how to attract MNEs (e.g. Dachs and Pyka 2009) to periphery regions so that they can benefit from knowledge spillovers and thereby trigger economic develop-ment in these regions. Saxenian (2006) shows that commuting entrepreneurs can play an even more pronounced role in the catching-up processes, compared with MNEs. In the past, technologies typically started diffusing to periphery regions only after they achieved a certain maturity. With increasing knowledge intensity

and transformations of the world economy, commuting entrepreneurs can clearly mitigate this delaying mechanism and support an increasing number of regions worldwide in managing catching-up processes more successfully.

5.3 Summary of positive and negative effects of social