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TECHNOLOGICAL INNOVATION AND THEORIES
OF REGIONAL DEVELOPMENT
by
Matthew A. Zook
March 17, 1997
Inside Field Statement
Department of City and Regional Planning
University of California-Berkeley
Committee:
Prof. AnnaLee Saxenian, ChairProf. Manuel Castells
Prof. Michael Teitz
Table of Contents
Introduction and Overview
Traditional Theories of Regional Development
Location Theory / Agglomeration
Disequilibrium / Cumulative Causation
Growth Poles
A Brief Review on Theories of Technological Innovation
Insights of Schumpeter and SolowCreation and Diffusion of Innovation
Integrating Innovation into Theories of Regional Development
Structural Theories
Product/profit cycleLong Cycles/Waves
mailto:zook@socrates.berkeley.edumailto:zook@socrates.berkeley.eduhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Intro%23Introhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Traditional%23Traditionalhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Review%23Reviewhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#integrating%23integratingmailto:zook@socrates.berkeley.eduhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Intro%23Introhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Traditional%23Traditionalhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Review%23Reviewhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#integrating%23integrating -
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Path Dependency
Restructuring of Production and Labor Systems
Role of Manufacturing and ServicesDivision of Labor
Flexible Specialization, New Industrial Spaces, and Institutions
Regulation School and Flexible ProductionNew Industrial Spaces
Institutions and Embeddedness
Conclusion: Emerging Debates
Introduction and Overview
Technological innovation and regional development are two closely intertwined processes
that shape and support the other. Although both originate from economics, they have been
separated for most of the 20th century. Classic economic thinkers such as Ricardorecognized the role of technology, albeit he saw diminishing returns to agriculture and
capital formation as more important, and Marxs theory placed technological innovation as
one of the prime movers in capitalist development. Regrettably early theories of regionaldevelopment, e.g., location theory, followed Ricardos lead and treated technological
innovation as secondary in relation to other conditions, such as labor to capital ratios.
Location theory strove for optimal resource allocation and ceteris paribus assumedunchanging technology that was freely available and instantly adapted by firms and
countries. The process of invention becoming innovation and diffusing simply was not
reflected in this model.
Instead, location theory focused on transportation costs. More complex models of locationemerged with Isards work on a general equilibrium model of industrial location but were
immediately confronted by two important critiques. The first was a critique of the
assumption of balanced growth and the price-equalization mechanism that would result insimilar development across regions. Hirschmans thesis on unbalanced growth and
Perrouxs concepts of growth poles in economic space were important trends in this
critique.
The second critique grew out of the exclusion of innovation in traditional location theory.Based and inspired by the work of Schumpeter who posited that innovation was the source
of economic expansion, this trend based in the field of economics began looking seriously
at the role of innovation in growth. Later scholars continued Schumpeters work and at theemergence of Isards general equilibrium model were able to argue forcibly that
technological change was a major determinant in increasing industrial output. The work on
the economics of innovation has continued to the present with debates on whether
innovation is driven by market-demand or technology-supply; the nature of innovativefirms and regions, and how innovation if diffused between firms and regions.
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each industrial sector would have a transportation minimization point that could be shifted
to take advantage of labor cost differentiation and/or agglomeration benefits. Webers
model assumed perfect competition which in turn would spatially distribute industryaccording to the three levels of costs. Hotelling (1929) argued that this perfect competition
ignored the monopolistic characteristics enjoyed by firms close to markets who could have
competitive advantage to more distant competitors due to lower transportation costs. Thus,firms would choose to locate to maximize their quasi-monopolistic market which would
result in a sub-optimal solution for society and contrasted with what was predicted by
perfect competition models.
Lsch (1954, 1975) and Christaller (1933) extended the theory of market size to explainindustrial location as a product of monopolistic markets for products. In order to locate, a
firm needs a threshold market size that can support its production. When the market size
increases other firms may enter the market to compete for customers. Different industrialsectors have differing market size thresholds but these markets overlap and influence one
another through agglomeration. What emerges is a static honeycomb market structure in
which each firms market area is packed next to neighboring firms that maintains anequilibrium through readjustment of market size if an individual firms reach expands or
contracts.
The theories thus far discussed were the origins of the discipline of regional science
exemplified in the work of Isard (1956, 1982) who built sophisticated models of regionalindustrial growth with multiple interrelated factors. One example of this increasing
sophistication, is Isards unification of Webers production and transportation costs in the
recognition that firms might assume greater transportation expenses if the location lowers
the overall production costs. However, Isards attempt to construct a general equilibriummodel for industrial location was criticized for assuming that regions have a natural
tendency to equilibrate, for its inability to reflect the unique histories of regions, and for itsexclusion of non-quantifiable factors, such as technological change.
Disequilibrium / Cumulative Causation
In an attempt to correct the shortcomings of Isards model of the location theory school
(due in part to the shrinking percentage of transportation costs in the overall production
costs) and to critique neo-classical theories of comparative advantage, a school of thoughtfocused on disequilibrium emerged. Chinitz (1961) calls for a recognition that the actions
of one industry can have significant impact on other regional industries through its
purchasing or internalizing of distribution activities and other services. Rather than seeing
spatial distribution as transitory and equalized through the price system, Myrdal (1957) andHirschman (1958) argued that region-specific external economies persist through
cumulative causation and polarization effects. Kaldor (1970) asserts that the difference
between regions efficiency wage, i.e., the combination of labor productivity and moneywage, feeds into the process of cumulative causation. Regions that had acquired stocks of
factor inputs and external economies were at a decided advantage for future growth.
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However, one of the most vexing problems for both equilibrium and disequilibrium models
was their inability to explain growth satisfactory. Regardless of the two theories
conflicting ideas of how this growth was distributed, both tended to treat growth as anexogenous factor which could equalize or polarize regions. One technique for explaining
growth is the theory of the pole of development that was first voiced by Perroux.
Growth Poles
Perroux (1950, 1970, 1988) based his ideas on the theory of active units which assumesthat under certain conditions actors have the capacity to change their environment. The
state of general equilibrium that Isard highlighted was viewed by Perroux as a momentary
state at best that quickly segues into a new situation. Perroux set his poles of developmentin economic space, as opposed to physical space, and conceptualized these poles as centers
of the most intense economic activity. The poles were linked to other sectors with varying
degrees of strength determined by proximity in economic space. Thus, a pole of
development can produce polarization in leading sectors with corresponding growth
consequences for close or distant sectors.
Although Perroux set his poles in the abstract notion of economic space, regional
development theorists, such as Friedmann (1966, 1972), applied these theories directly to
physical space with the concept of growth poles. However, as Peattie (1987) illustratesthese growth poles generally created disappointing results. Heightened expectations of the
benefits of growth poles, over-estimations of external economies and governmental politics
affected the ability of governmental sponsored growth poles to turn lagging regions intoleaders. Gore (1984) critiques the growth pole development strategies put forth by
Friedman for confusing place prosperity with people prosperity. Gore argues that by
presenting spatial relationships as a technically rational lens of analysis one actually masks
crucial social relationships.
Connected to the idea of sector growth poles was the debate between export versus import-
substitution theories of regional development. Although a large segment of this debate
took place in the arena of import substituting industrialization (ISI) in developing countriesKay (1989), Hirschman (1968), Hunt (1989), it was also germane to growth of regions in
general. For example, Innis (1930) provides a striking example of how Canadas reliance
on the export production of fur had large repercussions on transportation infrastructure,governmental and business institutions and its relationship with other countries.
In a classic regional development debate on exports, North (1975) contends that all regions
grow from exports that provide the income from which internally-focused markets in goods
and services can develop. North based his argument on the history of the PacificNorthwest which appears to support his theory. Tiebout (1975) argued that Norths
export-base argument is the exception rather than the rule and undervalues the role of
domestic oriented industries that play a pivotal role in supporting the export sector. Whilethe debates around growth poles and export/import models greatly enhanced the ability of
regional theories to explain the growth of regions there still remained a black box around
innovation. Perroux implicitly recognized and Berry (1972) explicitly argued that firms
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innovations provided the impetus for a pole of development that could spread to other
firms. However, it was left to another set of scholars operating parallel to the regional
theorists to tackle the issue of the source, nature and role of innovation.
A Brief Review on Theories of Technological Innovation
The previous section ended with an assertion that innovation is a key component inregional development and essential in explaining patterns of growth. The equilibrium and
disequilibrium theories outlined so far fall short in unpacking the black box of innovation
which puts them in good stead with most of their contemporaries in economics. AlthoughAdam Smith emphasized the role of innovation and Marx saw changing systems of
production as the key component to controlling relations of production, most economists in
the first half of the 20th century were content to treat innovation as exogenous factorwithout explaining it. This section will trace the theoretical history of those who attempted
to analysis this concept.
Insights of Schumpeter and Solow
The notable exception to this rule was Schumpeter (1928, 1939) who saw innovations as
perpetual gales of creative destruction that were essential forces driving growth rates in acapitalist system. Schumpeters thinking evolved over his lifetime to the extent that some
scholars have differentiated his early thinking where innovation was largely dependent on
exceptional individuals willing to take on exceptional hazards as an act of will, i.e.,entrepreneurs, from his later thinking that recognized the role of large corporations in
organizing and supporting innovation. This resulted in his emphasis on the role of
oligopolies in innovation and which later was falsely viewed as the main contribution of hiswork. (Freeman, 1994)
Schumpeter (1928) pointed to the discontinuous and disruptive nature of technological
change in capitalism that brings the inseparable combination of short-term instability and
long-term growth. He was not a technological determinist but recognized the social andorganization forces that played key roles in his cyclical process of industrial change.
Schumpeter argued that entrepreneurs, who could be independent inventors or R&D
engineers in large corporations, created the opportunity for new profits with theirinnovations. In turn, groups of imitators attracted by super-profits would start a wave of
investment that would erode the profit margin for the innovation. However, before the
economy could equilibrate a new innovation or set of innovations, conceptualized by
Schumpeter as Kondratiev cycles, would emerge to begin the business cycle over again.
For all his insight on the role of innovation, Schumpeter still did not really explain the
source of innovation. He was able to point to its importance and its role in timing
economic cycles but did not address its source. This rather interestingly allowed
Keynesian economics to argue that levels of investment were the cause of innovation. Itwas not until the 1960s that economists would begin again to search for the source of
innovation. The importance of innovation was highlighted by researchers like Abramovitz
(1956) and Solow (1957) who were able to demonstrate how little neo-classical economics
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was able to explain. Based on data on the United States economy from 1909-49, Solow
showed that only 12.5 percent of the increase of per capita output could be traced to
increased use of capital. This left a surprisingly large 87.5 percent residual that Solowattributed to technical change.
Romer (1986, 1994) echoes Solows observation and continued the call for innovationtheorists to internalize the process of innovation within their models. To this end, the work
on innovation that emerged from the base set by Schumpeter has been concentrated on thecreation of innovation and its subsequent diffusion between firms, industries, and regions.
Creation and Diffusion of Innovation
The first step in understanding the source of innovation is to understand the relationship
between research and development (R&D), invention and innovation as defined byFreeman (1982). R&D is a method that uses knowledge based in science or craft to create
a new product, process or method of organization. An invention is an idea or model for a
new process or product that can be patented. Finally, an innovation is a commercial viableuse of an invention. One of the most difficult aspects of innovation research is that
innovations vary from small incremental steps to radical changes. Radical innovations are
more attention grabbing but incremental changes can prove just as crucial in the long run.
Therefore, because innovation can be incremental or radical; involve a process or product;and is highly correlated with changes in organizational structure, attempts to empirically
measure it are extremely problematic. Counting patents, expenditures on R&D, and firm
size are at best proxies for innovation that can provide some insight but should not beviewed as truly representative (Freeman, 1994).
Freeman argues that starting in the 19th century the nature of R&D has shifted from craft
orientation to a more science based approach characterized by greater complexity ofinventions and innovations as well as an increasing division of labor between R&D andproduction. Science plays a role in providing trained personnel for R&D rather than
through published papers. Using this definition of innovation and assuming that the
majority of innovation comes from firms, economists during the 60s and 70s engaged indebates on the force that drove this innovation. Schmooklers (1966) study of chronology
of inventions in major industries argued that market demand rather than scientific
discovery was the stimulus for invention. Although Schmookler concentrated on inventionand not directly on commercially successful innovations, his study provided a theoretical
justification of a market-pull model where innovation was based on the demand of the
market. Although popular in neo-classical economics for its reliance on market
explanations, the market-pull explanation was shown to have weak empirical backing.
Mowery and Rosenbergs (1979) review of empirical studies on the relation between
market-demand and innovation provided a convincing repudiation of a linear process of
innovation driven by the market. Although there have been arguments for a technology-push model of innovation, the current theories of innovation also reject a linear supply
model. Von Hippel (1988) asserts that in fact the source of innovation varies greatly with
some originating from users, others coming from suppliers, and some emanating from
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manufacturers. Mowery (1983) showed that firms developed internal systems of R&D
because of the short-comings of market distribution of information as well for reasons of
secrecy and competitive advantage. Gort and Kleepers (1982) study suggests that there isno equilibrium number of firms in the market of a new product and the entry of firms
depends on profit expectations and the ability to capitalize on information and innovations
not proprietary to existing firms in the market. Pavitt (1984) identified four major types ofinnovating firms in manufacturing: 1) Supplier dominated sectors which have mainly
process innovations such as textiles; 2) Specialized supply sectors which have product
innovations that are the inputs of other industries such as engineering equipment; 3) Scale-intensive sectors with both product and process innovation through capital intensive
investments and 4) Science-based sectors that are directly linked to new scientific
discoveries such as the electronics industry. As Dosi (1988) argues, the economic
incentives for firms in different industrial sectors vary greatly.
Dosi (1982, 1988) extends this argument by defining a system consisting of technological
paradigms that are patterns for solutions based on selected principles of natural science
and technological trajectories that determine the spread of innovations based in aparticular paradigm. Another way of expressing this is that technological paradigms are
radical innovations that necessitate changes in the wider institutional context and
technological trajectories are incremental technological progress. Nelson and Winter
(1982) use a similar conception, the technological regime where innovation and growth areevolutionary (past decisions combine with current cost to set up routines for firms to
proceed) and incremental (because of cost and uncertainty of new knowledge). Nelson and
Winter argue that firms choose a trajectory on the basis of their selection environmentwhich includes market demand and non-market intersectoral variations in the institutions of
innovation (R&D, government support, etc.). Each individual firms decision in turn
shapes its market sector which affects the nature and routinized behavior of their
competitors. Their formulation makes a link between the macro analysis of what isoccurring at the market, regional or national level and the study of innovation generation at
the micro or firm level.
Another model for the creation and diffusion of innovation is based on the linkagesbetween sectors in the generation and modification of innovations similar to Nelson and
Winters (1982) selection environment. The flow of information between sectors and the
ability to adapt new innovation to a firms own environment is emphasized. Cohen andZysman (1987) pointed to this interlinkage as a vital component of a regions or countrys
competitiveness. However, there is no magic formula that will guarantee that a firms new
invention will become a commercially viable innovation. As Rosenberg (1982) argues that
being the first to produce a product does not guarantee that you will be the winner andinventions that have lain unused for years may suddenly be found to be profitable
innovations as circumstances evolve.
Innovation diffusion is influenced by a number of factors such as industrial structure, firm
strategy and governmental policy. Hagerstrand (1967) modeled diffusion by building upthe random patterns that emerged from numerous independent decision-makers reaching
their own conclusions about what to do. Arrow (1962) argued that firms acquire new
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innovation through actually experimentation with new technologies, i.e., learning by
doing. Manfields (1961) econometric analysis suggests that the rate of imitation was
correlated with relatively low sizes of investment and large expected profits. Freeman(1982) suggests that a good understanding of users needs is critical for a firm to become a
successful innovator. Rosenberg (1982) echoes this sentiment by describing diffusion as a
cumulative and interactive process between users and suppliers of a new innovation.
In conclusion, this review of the literature of the economics of innovation is remarkable inits contrast to the equilibrium and disequilibrium models of early regional development
theories. Rather than a general model recent innovation literature such as Romer (1994)
suggests an endogenous dynamic of innovation that is highly dependent on the specificitiesof a sector or regions technological capability, history, firm characteristics and the
incremental nature of much of the innovation process. Romer notes these types of qualities
are notoriously hard to quantify but in order to understand innovation and its impact onregional development they are characteristics that need to be used.
Integrating Innovation into Theories of Regional Development
This section picks up the history of regional development in the seventies when the world
underwent a process of complex change. This transformation was greatly influenced by a
new cluster of technological innovation centered on the use of microelectronics in anumber of products and production processes. These innovations had a great impact on
regional economies and theories of regional development which applied the insights of
Schumpeter and other thinkers on innovation to regional development.
The first section looks at arguments that attempt to incorporate innovation into structuralpatterns of the capitalist system. The second looks at the work on the restructuring of
production and the increasing presence of the service sector. The last section deals with thedebates revolving around the idea that a new form of industrial structure is emerging that is
measurably different from those that have come before.
Structural Theories
The next section outlines three of the most direct applications of theories of innovation to
regional development. In contrast to traditional location theories, product/profit cycle, long
waves, and path dependency rely directly on the phenomenon of innovation.
Product/profit cycle
Vernon (1966) developed a product cycle theory based on trading patterns in the United
States to explain the distribution of economic activities. Product cycle is based on the idea
that a product passes through several stages in its production life from an early innovationwhere high levels of skilled inputs are required to a growing standardization that lends
itself to mass production. Thus, in the early phase of its life the production of a product
will be located in a region that is equipped with highly skilled labor and gradually be
shifted to low-wage national or international regions when its production stabilizes.
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Vernon argued that in order to understand a regions economic vitality, one had to look at
what stage in the product cycle its industries were rather than whether they belonged to
innovative sectors.
Although Vernons theories were in line with cumulative causation, later studies, Nelson
and Rees (1979) and Krumme and Hayter (1975), used the lens of product cycle analysis toargue that regions were on a convergence trajectory. Markusen (1985) took a third path
with her reformation of product cycle theory into profit cycle theory in which firmslocation production facilities in an effort to maximize profits. Markusens profit cycle
argued for a generic tendency of rapid growth, followed normalcy and then decline which
could be influenced by oligopolies to the determinant of regional economic health.Markusen argued that industrial development is no longer synonymous with regional
development and that industrial oligopolies could retard the spread of innovation.
However, product/profit cycle models have come under critique for being too deterministic
and excessively linear. Vernon (1979) later argued that the increased geographical reach of
firms and changes in the national markets of industrialized countries was eroding theapplicability of product cycle theory. Storper (1985) argues that cycle theory over-
generalizes a process that occurred only in a few industries after W.W.II and ignores thepotential of firms to do continuous innovation.
Long Cycles/Waves
Another school of regional development thought influenced by innovation is based on the
idea that capitalist development is not a linear process but a cyclical series of waves.Kondratiev (1935) was the first scholar to identify regularly occurring structural cycles
although he did not implicitly identify technology as the cause. It was Schumpeter (1939)
who first argued that a cycle of technological creative destruction was responsible forcyclical trends in capitalism. He also identified three waves based respectively on 1)textiles 2) railroads and steel, and 3) the electrical and automotive industries. Later
authors, such as Hall (1985), have identified a fourth wave based on aerospace and have
speculated on a fifth wave based on microelectronics.
Mensch (1979) tried to document the phenomenon of innovation clusters and argued thatdepression encourages radical innovations and innovation cycles peak at the end of each
Kondratiev cycle. Mensch argues that firms undertake innovative activity when they are
unable to generate profits from older product with saturated markets. Rosenberg andFrischtak (1983) critique Mensch for his classification and dating of innovation, a quandary
common to all scholars of innovation, and argue that an economic downturn would make
firms more cautious about committing resources aimed at long-term benefits. They alsofault long-wave proponents for non-specificity in identifying the causal links between
innovation, investment and growth and the problem of measuring the effect of innovations
that is mediated by diffusion rates and incremental improvements. Other critiques of longwaves have argued that it is overly technologically deterministic (Freeman, 1982) and/or
that it has missed the importance of incremental innovation and the process of cumulative
or evolutionary innovative process. (Rosenberg, 1982)
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Path Dependency
In the late 1980s a new set of neo-classical economists has rediscovered geography and
have attempted to include space in their economic models. These path dependencytheorists contrast the preordained spatial ordering envisioned by the Location School with
their model of a historically dependent trajectory with multiple possible outcomes. Whilerecognizing that the cumulative causation school did address the effects of history on
regional development, theorists such as Krugman (1995), argue that until recentlyeconomists did not have the proper techniques to rigorously model the effects of increasing
returns to scale. Arthur (1988) and Krugman (1991) provide models of regional
development in which outcomes are not preordained but dependent on the historical chancesiting of the first firm in an industry. This provides a lock-in, i.e., the QWERTY principle,
to this location that encourages further growth there. This lock-in effect and unbalanced
sectoral rates of technological progress are the basis for Williamsons (1980) account ofUS regional inequality.
Martin and Sunley (1996) provide a critical assessment of the path dependency school ingeneral and of Krugman in particular. In the effort to provide rigorous mathematical
formulations of geographical economics, Krugman and Arthur have the standard failings ofabstraction inherent to equilibrium analysis and deductive model building. More
importantly, Krugman is unable to adequately explain why successful regions can suddenly
go into decline or why some regions are more adept at withstanding external shocks. Sabel(1995) argues that path-dependency in technology is too deterministic in the range of
choices it allows economic actors. Sabel and Sabel and Zeitlin (1985) argue that actors
scan multiple strategies at both the local and super-local level to select a solution, often a
hybrid between technologies or processes, that best suits their needs.
Restructuring of Production and Labor Systems
This section concerns theories of the transformation of production and labor relations due
to product and process innovations the greatly affected the economy during the late 60s and
70s. Both the post-industrial debate and the New International Division of Labor debateare directly tied to the emergence of a new generation of innovation.
Role of Manufacturing and Services
The two sides of the role of manufacturing and services debate are the post-industrial
position represented by Touraine and Bell and the primacy of manufacturing position
exemplified by Cohen and Zysman. The post-industrialist position argues that as aneconomy develops it shifts its main activities from the primary and secondary sectors to the
tertiary or service sector. Based on the empirical studies of Fisher and Clark and Kuznets,
post-industrial theorists like Touraine (1971) and Bell (1973) argue that a new society isemerging that is no longer fundamentally defined on the basis of industrial activity.
Knowledge and education gain new importance in both production and social conflicts that
are based on the control of information.
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The primacy of manufacturing camp argues that the post-industrial society is a myth and
that manufacturing continues to play an explicit and critical role in economies. Cohen and
Zysman (1987) argue that without manufacturing, high-wage service jobs would notdevelop and that shifts to a service economy are an indicator of a declining rather than
growing economy. The service sector is dependent on manufacturing for it existence and
any country that is content to offshore its production loses the strategic combination thatmakes it grow. In this way, Cohen and Zysmans strategic sectors are similar to Perrouxs
propulsive industries in that they are the pole around which an economy develops.
Castells (1989) added his own flavor to the post-industrial theory by arguing that a new
informational mode of development has emerged in which the "matter" that is beingworked upon is knowledge itself. The machines (hardware) have become less important
than what passes through them (software) and the main innovations are on processes rather
than products. These changes on processes have multiplier effects on society becauseprocesses enter into all spheres of human activities. As information rises in importance,
industrial processes do not so much decline as become periphery to the core of information
processing. This central core of information guides the production process and influencesthe consumption process through distribution networks. Sassen (1991) argues that an
expansion of producer services, i.e., services that are intermediate inputs and not final
consumption products, are redefining the nature and location of production systems.
Manufacturing continues to play an important role but it is increasingly subservient to thefinancial and producer services complex that is ultimately not concerned whether
manufacturing occurs locally, regionally, nationally, or internationally.
One of the biggest problems for the post-industrial school was that the classification of
services that included all economic activities besides manufacturing and primaryindustries. This coupled with a linear approach and inability to formulate precisely the
manner in which services drive an economy has weakened the post-industrial argument.However, the primacy of manufacturing approach is overly-subjective on its valuing ofservices and has data comparability problems with cross national comparisons between the
USA and Europe and Japan who have relatively higher proportions of manufacturing in
their economies. Finally, as Castells and Aoyama (1994) show that the paths ofdevelopment of various countries can be quite divergent and take many different forms.
Division of Labor
A necessary component to the restructuring of the production process are activities such as
mergers, plant relocation and rationalization of multi-plant production which as Bluestone
and Harrison (1982) argue has serious repercussions for labor relations. Massey (1979)define this process as de-industrialization characterized by a shift from sectoral
specialization to a division based on functional specialization in the overall production
system. The result of this division of labor has spatial implications for innovation-generation as regions gain or loss the ability to create innovation as function of control and
R&D are separated from production.
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Although division of labor has always existed, this expanding spatial component can be
directly tied to the emergence of new telecommunication technologies which enable firms
to operate across much vaster distances. Precipitated by the economic crisis of the 70s,Froebel, Heinrichs, and Kreye (1979) argue that the these processes and organizational
innovations allow the formation of a New International Division of Labor (NIDL). The
theory of NIDL asserts that the principle direction of technological change is towards theseparation between innovative functions and low-skilled production. Massey (1984)
argued that these new spatial structures of production were not just an outcome of
industrial restructuring but an integral part of the reproduction of society and it dominantrelations. Because Masseys theory is based in the industrial and spatial specifics of each
case she is reluctant to argue for one specific model but cautiously put forth examples of
how spatial hierarchies in managerial, production, and control can influence the
distribution of production. Shaiken (1984) echoes the sentiment that uses of newtechnological innovations do follow any set path but emerge through the interaction of
labor, management and technology.
More recently Sassen (1988, 1991, 1994) argues that as mass production facilities havedispersed the command and control functions of production have concentrated in cities.
Concurrently, immigrants enter the economy both through low-wage service jobs related to
the social reproduction of the members of the producer services and in the new
manufacturing sectors (as opposed to traditional mass production) so that capital canextract further concessions from labor. Thus, a more bifurcated society than had existed
under the regime of mass production emerges from these processes: a slowly increasing
group of elite, a shrinking middle class, and a burgeoning underclass.
Flexible Specialization, New Industrial Spaces, and Institutions
This section continues concentrates on the effect of innovations in the production and laborsystem based on the work outlined above. Although much of the work in the previous
section could be included here, the attempt of this section is to focus on more recenttheories that revolve principally around the new forms of industrial districts and
agglomerations. Also, in contrast to the de-industrialization and NIDL theories, this
sections arguments present a more optimistic view of the restructuring process.
Regulation School and Flexible Production
One school of thought that attempts to combine the unique character of every region withthe reconfiguration of production is the French Regulation School. In this effort they
define collective and individual behavior that supports the reproduction fundamental
relations, as modes of regulation. These modes of regulation support specific regimes ofaccumulation that consist of combinations of modes of production, organization and labor
reproduction. The dominant regime of accumulation from the 1920s to the early 1970s had
been the Fordist mass-production model. Theorists of the regulation school argue thatstarting in the 1960s the United States and other OECD countries have entered a new
regime of accumulation that has fundamentally altered the organizational, production and
consumption patterns of society. (Boyer, 1990) For this reason Regulation theory is often
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referred to as post-Fordist and in many ways was the precursor to the theories of flexible
manufacturing outlined in the next section. (Hirst and Zeitlin, 1991)
The great strength of regulation theory is that it allows for great flexibility in explanation ofeconomic growth processes and is not deterministic. However, this is also the source of
one of its strongest critiques, namely that it is description and not a theory and isanalytically weak. Others argue that the post-Fordism that regulationists see has not
actually become the dominant regime of accumulation or is simply an extension of theFordist division of labor. (Amin, 1994) (Kotz, 1990)
Emerging from the Regulation Schools thesis of a new regime of accumulation is the idea
of flexible specialization first developed by Brusco (1982) and then expanded upon byPiore and Sabels (1984) highly influential work. They argue that an industrial divide
occurs when the technological trajectory used in an economy is called into question. (In
this formulation Piore and Sabel use a much broader definition of technological trajectory
than Dosi.) However, the shift to a new technological trajectory is not based on an inherent
technical logic but rather the result of an implicit collective choice. (Sabel and Zeitlin,1985) The first industrial divide occurred in the 19th century when mass production
techniques displaced the previous system of craft production. Their contention is thatcurrently a second industrial divide is underway as mass production is replace by a system
termed flexible production, i.e., the use of general purpose capital and skilled labor to
produce a changing product line.
Flexible specialization argues that there is a reemergence of industrial districts, e.g., theThird Italy, similar to those first discussed by Alfred Weber in the 19th century. (Sabel,
1988) (Storper and Harrison, 1991) That is, agglomerations of industries in regions that are
highly interconnected and resemble a factory without walls. These districts are
characterized by numerous small firms, often started by former workers, who service small,specialized markets. Because they do not have the capital investment to enjoy economies
of scale, they concentrate on rapidly changing batch manufacturing. Companies acquireflexibility through short-term labor contracts and inter-firm cooperation that allow
production to expand or contract depending on demand. Labors position is maintained by
the need for skills and institutional processes that regulate labor relations. Thus, proximity
to other firms and institutions play an important role in determining a region's success withthe flexible production regime.
Flexible specialization has been critiqued as excessively optimistic in the progressive
nature of this system of production. In particular, Harrison (1994) argues that greater wage
insecurity and income differential have created a contingent work force that may persuadefirms to compete on the basis of low wages rather than the regional networks that helped to
create a productive atmosphere. Pollert (1988) critiques flexible specialization for an
ideological stance that is anti-labor and places the responsibility for economic recovery onrestructuring labor relations.
New Industrial Spaces
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The new industrial spaces argument, typified by Scott (1988a, 1988b, 1993) builds upon
the flexible specialization model with particular emphasis on transaction costs, and
economies of scale and scope. Transaction costs or the cost of economic transactionsdetermines whether firms choose a vertical or horizontal form of production. Scott sees
vertical disintegration as an important part of developing external economies of scale that
give increased flexibility to adjust to rapidly changing markets. The crisis of the 1970sincreased the diseconomies of scope (it was more expensive to produce under a system of
vertical integration) of large corporations and encouraged the growth of small firms. Scott
argues that it is the standardization of a commodity or service which determines thenecessity of spatial proximity to inputs and markets. The more irregular these are the more
a region can benefit from the disintegration of vertical firm structure which would further
attract innovative industries. In a nutshell, Scotts argues that the regime of flexible
accumulation can best be thought of as transactions-intensive agglomerations of humanlabor and social activity."
This idea of a new industrial space of innovative firms has introduced the idea of an
innovation milieu that brings Schumpeterian ideas of innovation into a verticallydisintegrated industrial space. Based on the compelling example of Silicon Valley, the idea
explored in these theories is that the flexibility of the new space would be symbiotic with
the creative destruction of innovation. Although Hall and Markusen (1985) and Castells
and Hall (1994) have explored the characteristics of milieu and the attempts to recreatethem it remains to be seen if these regional planning efforts can create the synergy
necessary for the benefits.
Institutions and Embeddedness
Crucial to the theories of the Regulation school, flexible production and new industrial
spaces is the concept and role of institutions and their embeddedness in society. For mostof this century, economists and regionalists have conceptualized the atomized individual or
firm operating in pure rational competitive environments. Social relations were discountedand did not enter the realm of analysis. Williamson (1975) was an early theorist who asked
when economic functions are performed by the market and within hierarchical firm
structures. His answer was that transactions that are uncertain, occur repeatedly, and
require substantial interaction are those which will take place within firms. Williamsonsaw these transactions as requiring a higher level of trust and accountability that only could
take place within a corporate internal structure.
Granovetter (1985) in his seminal article on embeddedness argued that these relations of
trust could and do appear within market transactions. He thinks that Williamson overstatesthe case for the power of hierarchies and argues that societal norms and expectations can
create a set of embedded institutions that provide a mechanism for trust to be applied to
complex market transactions. Recent work by Putnam (1993) on the efficacy of Italianregional governments provides an empirical example of the influence that society exerts of
the functioning of the state and market. Putnam uses a concept of social capital, i.e., the
sum of individual trust and community networks, which allows society to operate moreefficiently and act as a lubricant that reduces the transaction costs. Putnam argues that
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social capital can be built through networks of civic engagement and reciprocity. Through
these incremental actions an environment of social trust is formed which offers institutions
a more fertile and inviting civic society in which to grow. Sabel (1993) views trust as aprecondition of social life and therefore asks not how trust can come from mistrust but how
specific relations come to be viewed as trustworthy. Institutions operate best when they are
viewed as a self-managed process that emerges from direct experience. It is the incrementalchanges that allow institutions to adapt rather than a structure of centralized decision-
making that builds good institutions.
Saxenian (1988, 1994) applies the institutionalist approach to argue the case of the growth
or lack thereof in high tech industries in England, Boston and Silicon Valley. Herargument is that the regional based system of collective learning in Silicon Valley proved
superior to the highly autarkic organization corporate structures of Route 128 or the
governmental supported Cambridge, England high tech sector. Storper and Scott (1993)and Storper and Harrison (1991) also emphasize the important role that sets of institutions
play in determining how and where technology is adopted. Locke (1995) examines the
institutional networks in Italy and argues that successful industrialization relies on dense,egalitarian organizations of association.
Conclusion: Emerging Debates
The introduction of the role of innovation to theories of regional development has
strengthened our analytical ability and provided new insights to the changing nature of our
society. It is not necessary to believe in a deterministic structure like long waves to
recognize that the past twenty years has profoundly reshaped the economy and the role ofindividuals, regions and national governments. Romer (1993) argues that economics
needs a greater appreciation for the role of ideas, both revolutionary and incremental, in a
regions or nations development. Romer highlights the role of collective action andinstitutions in facilitating the use of ideas. Both Swanstron (1996) and Sabel (1996) echo
this concern for methods of governance as a critical component of development.
This focus on changing institutional structures is also held by Ohmae (1993) who argues
that we are witnessing the end of the nation-state and the birth of a new region state.Sassen (1996) suggests that innovations in telecommunications technology and global
financial markets have destabilized and transformed many of the institutions upon which
the concepts of sovereignty and governance are based. A large understanding gap existsaround the impact of the Internet on regional development especially its ability to extend
the distance across which meaningful interactions that build a dense institutional network
that can be the basis of social capital. Castells (1996) explores the way in which society isincreasingly polarized between the Net and the Self. Mitchell (1996) has found trends
towards agglomerations of Internet activity in urban centers which suggest a strengthening
of cumulative causation. Schonberger (1994) asserts that the emerging mode of production
is based on firms' ability to compress time which undermines Fordist techniques of spatialdecentralization.
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Whatever the outcome of these nascent ideas it is clear that regional development theory
has increased it complexity of analysis and consequently the richness of its findings.
Regions, firms and innovations all possess unique sets of characteristics that must berecognized rather than assumed or generalized away. However, this is not an excuse for
pure description without analysis. Theorists must simultaneously hold the paradoxical
notions of uniqueness of place and the implications for research beyond its specific sphere.
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