Absorbing Innovation by Australian Enterprises: The Role of Absorptive Capacity

Report on the Project for the Department of Industry, Tourism and Resources

Don Scott-Kemmis Alan J. Jones Erik Arnold

Chaiwat Chitravas Deepak Sardana

2 April 2007

The material contained in this document constitutes Commonwealth copyright. You may download, display, print, reproduce and distribute this material for your personal, non-commercial use or use within your organisation, provided you include an acknowledgement of the source and the authors. Any reproduction or distribution of a significant portion of the document must contain this notice. All other rights are reserved. Requests for further authorisation should be directed to the: Commonwealth Copyright Administration Copyright Law Branch Attorney-General's Department Robert Garran Offices National Circuit BARTON ACT 2600

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Absorbing Innovation by Australian Enterprises: The Role of Absorptive Capacity

Table of Contents

Table of Contents _________________________________________ii

Executive Summary _______________________________________v What is Absorptive Capacity? _______________________________________________ vii The Components of Absorptive Capacity ___________________________________ viii Case Studies of Absorptive Capacity in Australia _____________________________ix Policies to Strengthen Absorptive Capacity___________________________________ix Recommendations___________________________________________________________ x

1. Background to the Report _______________________________1

2. What is Absorptive Capacity and Why is it Important? _________2 2.1 Introduction __________________________________________________________ 2 2.2 Two Common Fallacies ________________________________________________ 4 2.3 The Rise of Distributed Innovation ____________________________________ 5 2.4 What is Knowledge? __________________________________________________ 6 2.5 Where do Firms Acquire Knowledge From? ____________________________ 8

3. Frameworks for Understanding Absorptive Capacity __________10 3.1 The Core Absorptive Capacity Literature ______________________________ 10

3.1.1 Defining Absorptive Capacity _________________________________________________ 11 3.1.2 Sources of Absorptive Capacity _______________________________________________ 12 3.1.3 Types of Knowledge and Absorptive Capacity ___________________________________ 13 3.1.4 Measuring Absorptive Capacity _______________________________________________ 14 3.1.5 How is Absorptive Capacity Developed? ________________________________________ 15 3.1.6 Organisational Structure and Absorptive Capacity _______________________________ 15 3.1.7 Organisational Scope and Absorptive Capacity __________________________________ 16 3.1.8 Change in the Knowledge Environment and Absorptive Capacity___________________ 16 3.1.9 Organisational Learning and Absorptive Capacity ________________________________ 17 3.1.10 Inter-organisational Learning and Absorptive Capacity _________________________ 17 3.1.11 Innovation, Management and Absorptive Capacity ____________________________ 18 3.1.12 Recent Research on Absorptive Capacity_____________________________________ 18

3.2 Other Relevant Perspectives _________________________________________ 22 3.2.1 Identifying the Literature Relevant to Absorptive Capacity __________________________ 22 3.2.2 Spillovers, Diffusion and Knowledge Transfer ___________________________________ 23 3.2.3 Dynamic Capabilities and the Resource-Based View of the Firm ___________________ 24 Dynamic Capabilities _______________________________________________________________ 24 3.2.4 Innovation Management _____________________________________________________ 29 3.2.5 Firm Learning, Organisational Learning and Knowledge Management ______________ 30 Organisational Learning_____________________________________________________________ 31 Knowledge Management ____________________________________________________________ 33 3.2.6 Collaboration and Networking ________________________________________________ 33 3.2.7. Accessing External Technology _____________________________________________ 34 3.2.8 Learning and Absorptive Capacity in SMEs _____________________________________ 35 3.2.9 Barriers to Change and Learning in SMEs ______________________________________ 40

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3.2.10 International and Inter-firm Technology Transfer _____________________________ 41 3.2.11 Technological Capability Development in Industrialising Economies______________ 42 3.2.12 Conclusions______________________________________________________________ 43

4. Frameworks for Assessing Absorptive Capacity ______________45 4.1 Absorptive Capacity: Models of the Components ______________________ 45

Case Study Survey Instrument _______________________________________________________ 49 4.2 Case Study Questions ________________________________________________ 49 A Proposed Survey Questionnaire ___________________________________________ 52

Table 4.6 The Draft Questionnaire_________________________________________________ 55

5. Prior Relevant Research in Australia ______________________61 5.1 Introduction _________________________________________________________ 61 5.2 Recent Studies of Innovation in Australian Industry __________________ 62 5.3 Oslo Manual Based Innovation Surveys in Australia ___________________ 64 5.4 Standards Australia and Knowledge Management ____________________ 65

6. Case Studies of Absorptive Capacity _______________________67 6.1 Summary of Case Studies Concerning Absorptive Capacity Study______ 67 6.2 Overview of the Case Studies_________________________________________ 67 6.3 Discussion of the Findings from the Case Studies _____________________ 71

Human Capital and Other Resources__________________________________________________ 71 Intensity of Learning _______________________________________________________________ 72 Organisational Factors ______________________________________________________________ 73 Codification of Knowledge___________________________________________________________ 75 Other_____________________________________________________________________________ 75 A Point on Absorptive Capacity_______________________________________________________ 75

6.4 The Australian Findings - Comparisons with the Literature ____________ 76 6.4.1 Comparisons with the Technopolis Study of Ireland _____________________________ 78

6.5. The Case Studies_____________________________________________________ 79 CEA Technologies Pty Ltd, ACT ______________________________________________________ 79 Clonakilla Wines Pty Ltd_____________________________________________________________ 86 Institute of Drug Technology Australia Limited _________________________________________ 90 Lochard Pty Ltd____________________________________________________________________ 96 Textor Technologies Pty Ltd ________________________________________________________ 102 Malloch Digital Design (MDD) _______________________________________________________ 109 Benthic Geotech Pty Ltd ___________________________________________________________ 113 Clover Corporation Limited _________________________________________________________ 118

7. Frameworks for Policies to Support Absorptive Capacity ______124 7.1 The Challenge for Strengthening Absorptive Capacity________________ 124 7.2 Promoting Innovation in SMEs: Policy Rationales ____________________ 126 7.3 Frameworks for Policy ______________________________________________ 129 7.4 Absorptive Capacity Development-Related Programs at the State Level 136 7.5 Absorptive Capacity Support Options – Potential Intervention Points 139 7.6 Conclusions _________________________________________________________ 142

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8. Policies that Promote Absorptive Capacity _________________143 8.1 Introduction ________________________________________________________ 143 8.2 Insights into Relevant Policy Experience in Australia ________________ 145 8.3 Extending the Study to Other Countries _____________________________ 147 8.4 Assessing the Eleven Most Relevant European National Support Programs for Absorptive Capacity__________________________________________ 148

8.4.1 The UK __________________________________________________________________ 149 8.4.2 Norway __________________________________________________________________ 152 8.4.3 The Netherlands __________________________________________________________ 153 8.4.4 Denmark_________________________________________________________________ 155 8.4.5 Finland __________________________________________________________________ 155 8.4.6 France ___________________________________________________________________ 156 8.4.7 Germany _________________________________________________________________ 157 8.4.8 European Union Initiatives__________________________________________________ 158 8.4.9 Some Relevant Programs from Outside Europe ________________________________ 160

8.5 Characteristics of Successful Programs ______________________________ 165

9. Conclusions ________________________________________174 Key Findings_______________________________________________________________ 174 The Case Studies of Absorptive Capacity in Australia _______________________ 181 Policies to Strengthen Absorptive Capacity_________________________________ 183 Characteristics of Successful Programs ____________________________________ 183 Recommendations_________________________________________________________ 185

10. Selected References __________________________________188

APPENDICES ___________________________________________192

Appendix 1 ____________________________________________193 Characteristics of Innovation in Australia: 2005 ABS Innovation Survey ____ 193

Appendix 2 ____________________________________________200 Instrument Descriptions ___________________________________________________ 200

Appendix 3 Indicative Stocktake of Programs Related to Absorptive Capacity at the State level in Australia _______________________229

Appendix 4 COMPREHENSIVE BIBLIOGRAPHY _______________248

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Executive Summary The Department of Industry, Tourism and Resources commissioned Don Scott-Kemmis and Associates to undertake a study of the role of absorptive capacity in Australian industry, to prepare ten case studies of Australian firms and to review the approaches of other countries to supporting the development of absorptive capacity in industry.

Key Findings Increasing competitive pressure is both raising the importance of innovation and driving firms to become more specialized, and as a consequence firms must increasingly look outside for new knowledge. These same pressures are also driving firms to increase the level of collaboration with other firms and with research organisations. Increasingly, the processes of learning and innovation involve a great deal of interaction with other firms (customers, suppliers) and sometimes, but usually much less often, research organisations. Hence, knowledge and capability is distributed. It is not possible for firms to hold in-house all of the knowledge and capability required and hence how they build the relationships to access this distributed knowledge and capability is a key issue for management.

A firm’s absorptive capacity (AC) refers to its capacity to recognise, acquire, assimilate, transform, and exploit knowledge from external sources. A key aspect of absorptive capacity is the recognition of an opportunity arising from new knowledge about, eg technology, customer’s needs, and market trends. That recognition often requires a strong prior basis of knowledge. But this recognition is of little value unless it is allied with effective strategies and implementation capabilities.

Lane et al (2006) define AC as:

a firm’s ability to utilize externally held knowledge through three sequential processes:

(1) recognizing and understanding potentially valuable new knowledge outside the firm through exploratory learning,

(2) assimilating valuable new knowledge through transformative learning, &

(3) using the assimilated knowledge to create new knowledge and commercial outputs through exploitative learning.

The foundations of AC are a firm’s knowledge resources (prior knowledge), structure and organisation (including routines, culture, communication patterns) and external linkages. However, these foundations need to be relevant to a firm’s specific context and directions and brought into focus by a firm’s strategic intent.

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Firms develop AC as a result of explicit measures (such as hiring trained staff, establishing R&D activities/organisations, developing alliances) and as a by-product of their activities (particularly the more intense learning experiences associated with problem solving, innovation and collaboration). Consequently, firms develop absorptive capacity in an evolutionary way over time and within a specific organisational and knowledge context. For that reason scientific knowledge is not a public good, as only some individuals and organisations are capable of using it. Firms can more easily add to knowledge and diversify in areas in which they already have a knowledge base. Firms face particular challenges in external knowledge acquisition where:

they have few linkages with the firms or organisations from which they seek to acquire knowledge;

the fields of knowledge and innovation are new to the firm; and the pace of change in technology is rapid and unpredictable.

The more that firms face such challenges the more that the strengthening of AC will require purposeful strategies and sustained investments, and often organisational and managerial innovations, to raise the capacity to learn and innovate. Knowledge that is relevant for innovation includes both codified (know what) and tacit (know how) knowledge, although the former is becoming relatively more important. Mechanisms that are suitable for acquiring one of these types of knowledge may not be as effective for the other. Carrying out R&D, hiring qualified staff, developing links into knowledge networks, and attending conferences (etc) will facilitate the acquisition of codified knowledge. Firms learn from other firms most effectively when the partners are similar in terms of structure, human resource policies and knowledge bases. In the wider field of innovation, issues concerning the identification and assessment of relevant new knowledge, managing the collaboration and the acquisition of knowledge (eg through R&D, licenses, public domain sources) and integrating existing and new knowledge and developing capabilities for managing these processes, are extensively researched. Hence, there is a substantial overlap between the literature explicitly concerned with absorptive capacity and the wider innovation literature. There is increasing interest in more effectively managing knowledge, learning and innovation. This is leading to a greater understanding of these issues and also to a widening range of tools to assist the management of knowledge, learning and innovation. Absorptive capacity is a part of a firm’s innovation capabilities and hence its development is a dimension of innovation management.

Only a small proportion of SMEs are dynamic in terms of innovation and growth. Without the capabilities to absorb and use knowledge, membership of a network is of little value. Cluster-based inter-firm links may not always play a major role in firm’s knowledge acquisition.

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Firms with more qualified managers tend to invest more in training and establish more external links. Absorptive capacity is a functional concept, and in practice it is based on an interdependent foundation of capabilities, structures, routines and policies, and is largely situation-specific. For this reason it is not possible to develop a set of reliable standard indicators of absorptive capacity. Internationally, there is an extensive and increasing range of programs aimed at reducing barriers to capability development, innovation and growth in SMEs. These initiatives are influenced by the perception that SMEs play a vital role in innovation systems but that significant market failures limit their development.

A diverse range of instruments are used and there is increasing interest in evaluating these programs and in developing international initiatives to share experience in SME program design and implementation.

SMEs tend not to see government agencies as credible assistance delivery mechanisms.

Our review of selected successful programs suggests a set of functional criteria for a program focused on strengthening absorptive capacity in SMEs, which would include:

be focused on the more innovation-active SMEs commited to growth;

be located near to firms, be linked into local networks, and be integrated into national information and support networks;

have a strong emphasis on developing innovation capabilities, along with technological and market knowledge, but in association with a specific development objective, usually linked to an innovation project;

have a requirement that the SMEs contribute a significant share of overall costs;

provide access to a broad spectrum of credible experienced professional advisory services;

facilitate the development of linkages to local, national, and international information sources, service providers, potential business partners and research organisations;

have a broad portfolio of services (eg., advice, finance, networking) but a flexible delivery customised to the needs of the SME; and

delivery through capable experts who work with the firm to develop an effective and sustained combination of objective performance assessment and flexible delivery of services.

What is Absorptive Capacity? “Absorptive capacity” is a term introduced by Cohen and Levinthal in 1990 to describe a company’s “ability to recognise the value of new, external information (knowledge)1, assimilate it, and apply it to commercial ends”.

1 It is clear from their paper that Cohen and Levinthal used information and knowledge interchangeably.

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Absorptive capacity and innovation capacity are closely intertwined; interdependent rather than substitutes. Absorptive capacity is essentially a dimension of innovation capacity - concerned with identifying, assessing, acquiring and integrating external knowledge - and only has relevance in the context of a coherent overall innovation strategy and capability. What is important to note is that the nature of change in the globalised, specialised and knowledge-based economy, is increasing the importance of this dimension. The Components of Absorptive Capacity Absorptive capacity is a functional concept, and may involve quite different capabilities and processes in different companies and sectors. The main components of what enables a company to have absorptive capacity are its:

Knowledge base – which provides the capability to identify, communicate, understand and assess new knowledge and information;

Internal organisation and processes – which motivate, direct and organise people and resources, and share and integrate knowledge;

External links and mechanisms – which create channels for communication and relationships for collaboration; and

Strategies – which provide direction, coherence and drive for knowledge acquisition and its use.

The core literature (reviewed in Sections 2 and 3.1) underlines the growing role of knowledge and the learning processes in companies, and recognises the changing patterns of knowledge generation, distribution and application in industry. More significantly, it addresses how new knowledge is managed throughout a company’s operations and leads to commercial gains. In a review of this literature Lane et al have revised the definition of absorptive capacity as a company’s ability to use external knowledge through three sequential processes:

(1) Exploratory learning - recognising and understanding potentially valuable new knowledge outside the firm;

(2) Transformative learning - assimilating valuable new knowledge; and (3) Exploitative learning - using the assimilated knowledge to create

new knowledge and commercial outputs. A wide ranging review of the literature provided the basis to develop an overall framework for surveys of absorptive capacity and using this framework to develop a questionnaire for a set of case studies (Section 4). The literature shows that there are many types of external knowledge and many learning processes that are relevant for strategy and innovation and that all parts of a company can be involved in recognising, assessing, acquiring and applying external knowledge. In addition, the literature demonstrates that by and large firms develop their absorptive capacity in an evolutionary way, through a combination of explicit measures and as a by-product of problem solving and individual initiatives that become incorporated into enterprise structures and routines. For that reason the process of developing absorptive capacity is highly path dependent – and every firm has a different path. One consequence of that is that major change in the path of evolution, due, for example, to new technologies, is particularly difficult to manage.

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Several strands of this literature have been reviewed to draw out different perspectives and approaches relevant to the focus of this report in Section 3.2. This includes:

work on how firms learn from external sources; how innovation links to the role of individuals, their personal motivations, and their

role as gatekeepers and mentors; and the role of absorptive capacity in overall innovation management and capability

development. Case Studies of Absorptive Capacity in Australia 10 SMEs representing a range of industry sectors were selected for interview as case studies. The case studies demonstrate the importance of prior knowledge and active management in absorbing new knowledge from external sources. They indicate a strong role of suppliers and customers in knowledge flows – a finding consistent that of the Oslo Manual-Based Innovation Surveys. There is also a plethora of mechanisms for disseminating knowledge within the company for its exploitation – the most common being the multiple (rotating) team approach applied to specific project modules, with responsibility for overall outcomes being diffused amongst the staff. Our case studies show that the evolution of business models (organisational innovation) often requires that firms access external knowledge to build new capabilities, and this type of innovation can be as important to sustaining competitiveness as technological innovation. Overall, the case studies suggest the importance of trained human resources as a major element in both establishing and building absorptive capacity. The case studies emphasise the importance of staff retention and reward schemes as mechanisms for retaining tacit knowledge, but explicit data on how regulatory requirements can drive the codification of knowledge does not appear to have been previously discussed in the literature. While knowledge sources and approaches to sourcing knowledge may vary, it is the flexibility and receptivity of all the people in a company that contributes significantly to a high absorptive capacity. Our case studies support the broad findings of international studies on innovation in SMEs. Effective innovation management, good managerial and technological capabilities, a strong strategic intent, a commitment to upgrading and extensive external networking are common characteristics of successful firms. While there are no recipes for effective innovation management and each firm must develop the approaches and routines that work in their particular situation, there are many useful guides for managers. Policies to Strengthen Absorptive Capacity It is increasingly recognised that the patterns of change in advanced economies are increasing the role of SMEs, particularly knowledge-intensive SMEs, but also increasing the importance of their capacities to innovate. It is widely recognised that these developments strengthen the case for intervention to support capability development and knowledge acquisition in SMEs. Much innovation in products, marketing and organisation in fast moving and in service sectors is relatively quickly copied by other firms. Market failures arise from the diversity of SME needs and their

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incapacity to both express clear demands and to assess the benefit of potential suppliers. Market failure also arises because it requires (technical and managerial) knowledge to identify, assess, acquire and benefit from new knowledge and hence firms often require support to move back onto a virtuous cycle of upgrading. As much innovation in SMEs is not R&D intensive, the provision of support services for knowledge acquisition and implementation is one of the few practicable means of subsidising innovative effort in such firms. These issues are of particular importance in Australia because SMEs account for a relatively high proportion of R&D. The available evidence from Australia and internationally is that management capabilities in SMEs are limited and that managing significant changes in direction into unfamiliar areas is particularly difficult. Australia has not yet responded adequately to the changing demands on SMEs arising from technological change and increasingly global markets, and the growing role of knowledge intensive SMEs. There is a gap in the support services. Unlike many countries Australia does not have an agency focused on technology transfer to, and capability (including importantly management) development in, SMEs. There has historically also been a relatively low orientation to export markets in manufacturing and services. In response to these changes many other OECD countries have introduced a diverse range of policies and instruments, and modified existing programs, to strengthen absorptive capacity and promote knowledge acquisition and application. These policies and programs include components of mainstream innovation policies and components of broader SME development policies. Section 7 provides an overview of both the rationale for these policies and the range and specific objectives of the instruments that are used. Section 8 provides a comprehensive characterisation of absorptive capacity-related programs in several countries, and detailed information on several particular programs that appear to have been highly effective. Very few of these programs are specifically targeted at strengthening absorptive capacity, although many are focused on relevant aspects, such as linkages with the knowledge infrastructure, access to expertise, employment of graduates etc. In comparison with other countries Australian innovation programs have tended to focus on R&D and commercialisation, resulting in a relative focus on new firms and on specific projects. Consequently, there is not a coherent set of programs focused on enhancing absorptive capacity and through this the innovation capabilities of established SMEs. Recommendations As emphasised by the Productivity Commission’s recent Report on Public Support for Science and Innovation:

“High quality human capital is fundamental to the innovation system. A highly skilled workforce not only provides Australia with the capability to pursue scientific knowledge and undertake research and development type activities, but also to utilise and adapt innovation flowing from research and development undertaken in other countries.”

The available evidence points to the growing importance of innovation capability and particularly the capacity to identify, assess, acquire, absorb and use external knowledge, but as this study has shown, our understanding of the role and limitations of absorptive capacity in Australian firms is limited. It is also evident that human capital and its organisation dominates any discussion of absorptive capacity.

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Given this, Recommendations 1 and 2 are aimed at building the ability of firms to grow and understand absorptive capacity through the people within exisiting firms, and to gain a broader understanding of absorptive capacity across all firms. This knowledge will then lead to the broader actions outlined in Recommendations 3 and 4. Thus, our first recommendation arises from the observation in the 10 Case Studies that it may prove worthwhile to Benchmark ‘absorptive capacity’ in firms. This would be most useful where it enabled firms to benchmark themselves against others in their sector. It would be possible to include some questions from the ABS Innovation Survey in such benchmarking, which would enable a strong comparative basis, linked to performance. This could include the development of a web-based systematic on-line diagnostic and benchmarking framework, which could be used by firms independently or in association with consultants as the basis for developing an in-house absorptive capacity and innovation management development program. With appropriate confidentiality guarantees, the use of the on-line service would also generate information and firms’ assessments of their strengths and weaknesses and hence provide an ongoing source of information. These diagnostic and benchmarking tools could be linked to on-line guides to addressing the specific issues identified as well as guides to relevant service providers in Australia. Recommendation 1 Develop a Benchmarking and diagnostic program for firms operating in selected sectors to enable firms to assess themselves against high performers and to develop capability development strategies. Our second recommendation is intended to assess absorptive capacity in a broader range of firms than was possible through the present study using only 10 case studies. That assessment should extend to addressing the issue of weaknesses in managing major shifts in orientation, capabilities and strategies in established SMEs. We thus recommend undertaking a survey, particularly of the more innovative SMEs in Australia employing more than 10 people, to identify weaknesses in absorptive capacity and other barriers related to innovation and strategic change involving major redevelopment of capabilities. The design and the interpretation of such a survey should also be informed by a review of the results of the ABS Innovation Survey, and prior studies on innovation in Australian industry. Recommendation 2

Undertake a survey of a representative sample of companies across a range of sectors, particularly of the more innovative SMEs in Australia to identify any weaknesses in absorptive capacity and other barriers to innovation and strategic change. The SMEs surveyed to employ not less than 10 and up to 200 people. As this report has shown most other countries operate programs and organisations designed to combine a range of services, to be local (ie., linked into SME networks) and to focus on

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developing the capabilities of firms. They have not sought to have their research organisations meet this need. Most SMEs do not have long term capability development strategies and hence capability development is in large part a by-product of growth (eg., by hiring new staff), interaction around day to day activities (eg., with customers), problem solving and innovation. For this reason it is valuable to use programs/centres focused on firm development to deliver initiatives that stimulate and assist firms to respond to specific challenges, eg regulations regarding environmental emissions or product and process safety, export development. Our third recommendation is the suggestion for DITR to undertake, in the light of the results of the detailed survey (Recommendation 2), an in-depth review of several absorptive capacity-related programs in other countries that appear to be relevant to Australia. These include:

an Innovative SME Centre support program to co-fund regional or sectoral initiatives to strengthen absorptive capacity, innovation management and networking in the more innovation-oriented SMEs;

an SME innovation-focused procurement program modeled on the US SBIR program; and

a program to promote greater interaction between SMEs and between SMEs and research organisations, modeled on such programs as the Swedish VINST or the British Business Links and Business Fellowships programs.

In regard to Recommendation 1, Standards Australia have developed a set of high quality and working guides to knowledge management in firms. The 2006 – 2008 Strategic Business Plan of the Coordination Group of Standard Australia’s Knowledge Management Committee proposes a work program involving similar initiatives leading to guides in Innovation Management, Sustainability, and Foresight. This work deserves sustained support and the outcomes warrant extensive promotion. The guides should also be the basis for on-line interactive support tools for firms. Thus Recommedation 4. Recommendation 4

Support the work of Standards Australia’s Knowledge Management Committee and promote and leverage off the outcomes of its work.

Recommendation 3

In the light of the results of the detailed survey and related review, and in consultation with other stakeholders, undertake:

a focused assessment of a selected range of absorptive capacity-related programs in other countries that are effective in their context and may be relevant to the Australian context. This assessment to recognise that very few of these international programs specifically target absorptive capacity; and

an assessment of the scope to improve existing programs to better target strengthening absorptive capacity and assisting external knowledge acquisition.

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1. Background to the Report This Report responds to the Department Industry, Tourism and Resource’s request for a study of absorptive capacity in Australian industry, including ten case studies of firms. The overall study was undertaken in December-January 2006 - 2007. The overall approach to the project has involved five inter-related elements:

1. A review of literature specifically addressing the concept of absorptive capacity, and largely building on the pioneering work of Cohen and Levinthal (1990).

2. A review of literature relevant to understanding the processes of knowledge acquisition in industrial enterprises. A range of analytical and normative literature addresses the role of knowledge in innovation and change. This review seeks largely to characterize these different fields and assess their potential contribution to understanding absorptive capacity. This review also touches on relevant prior studies in Australia.

3. The development of a parsimonious framework for analyzing absorptive capacity to be the basis for the final two components of the project.

4. The conduct of a preliminary analysis of the nature and role of absorptive capacity in Australian industry through ten case studies, and the development of an instrument for further case studies or surveys of absorptive capacity.

5. A review of policies that countries comparable to Australia have developed to support the development of absorptive capacity in industry.

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2. What is Absorptive Capacity and Why is it

Important? 2.1 Introduction Recognizing that a great deal of innovation results from using knowledge from elsewhere rather than from invention, Cohen and Levinthal (1989, 1990) introduced the term “absorptive capacity” to refer to firms’ capabilities to manage the acquisition of knowledge “the ability of a firm to recognise the value of new, external information2, assimilate it, and apply it to commercial ends.”..and hence..” a firm “needs prior related knowledge to assimilate and use new knowledge”(1990) Absorptive capacity is a concept that does a great deal of ‘work’ in studies of innovation and competitiveness. It has been seen as a key contributor to a wide range of organisational outcomes (Van den Bosch, 2003):

Competitive advantage, financial performance, transfer of best practice, knowledge flows within the firm and knowledge transfers;

Expectation formation, proactive strategy, strategic renewal, diversification and organisational adaptation;

Innovative performance and new product development; Organisational learning in alliances and international joint venture performance; and New wealth creation and entrepreneurial wealth.

The effective use of knowledge is the central driver of the competitiveness of firms – as implied in the term the ‘knowledge economy’. Hence, innovation in general, and the generation, acquisition, integration and application of knowledge in particular, are key issues for managers. While the more prescriptive versions of the ‘learning organisation’ and ‘knowledge management’ have all the attributes of fads, they signal the rising significance of the challenge of managing knowledge, and, even more significantly, managing learning3. It is not only the extent to which competitive positions are based on knowledge that is important, it is also the fact that the knowledge that underpins innovation is changing rapidly and is increasingly complex. As the competitive pressure on firms also grows in increasingly global markets, they are driven to greater specialization. The corollary of specialization in this context is inter-dependence and collaboration. There is no doubt that information technology is a driver of these changes, an enabler of collaboration and an exemplar of a highly networked industry. A firm’s capabilities for innovation are embodied in its people, facilities and organisation, and its links to the capabilities of organisations outside the firm. In the context of rapid change what is equally important are the processes through which the capabilities within firms are upgraded. While this may be through purposive learning (eg through training or R&D) a great deal of learning is the result day to day production, interaction and problem solving.4

2 It is clear from their paper that Cohen and Levinthal used information and knowledge interchangeably. 3 For example, K Nonaka, ‘The knowledge creating company,’ Harvard Business Review, Nov-Dec 1991 4 For a recent review see Lazonick, W. (2005) The Innovative Firm. In Fagerberg, J., Mowery, D. and Nelson, R.l (Eds) The Oxford Handbook of Innovation. OUP.

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Firms acquire information and knowledge (ie learn) by several pathways, in particular: experience, experimentation or acquisition. A firm learns as a result of the challenges it faces, and hence the problems it aims to solve. To a large extent a firm chooses those challenges. It does so through its efforts to identify opportunities and threats in the external environment, which form triggers for action, and through its strategies for innovation and growth. Consequently, a firm chooses its learning path and in most cases that path is closely linked to its competitive strategy and the specific problems that must be addressed. The extent of learning will be shaped by the requirements for new knowledge and capability to address those challenges, the quality of the firm’s internal learning mechanisms and the opportunities for knowledge acquisition in the external environment. The process of problem solving and learning also shapes the development of not only the firm’s knowledge but also its learning mechanisms (organisational arrangements, balance of capabilities in teams, external links to firms and research organisations, routines). The development of stronger (ie more effective for those circumstances) learning mechanisms is not an automatic by-product of problem solving and collaboration. As with the accumulation of knowledge in general, firms can be more or less aware, purposive and reflective and so the accumulation of learning about learning is also influenced by explicit management policies and the extent to which a firm develops an overarching set of shared values and beliefs. One important aspect of such policies is their role in knowledge diffusion or distribution within the firm. Those problem solving processes also contribute to the firm’s awareness of its own resources and those available to it. That knowledge, those learning mechanisms and that awareness contribute to a firm’s capacity to learn and solve problems, but particularly those within the field of its experience – ie to a large extent the development of knowledge and learning capacity are both path dependent. The capacity for major strategic change, ie to change the path of learning, in the context of major shifts in technology or markets, or strategic redirection, is a higher order learning capacity. In this case a firm must build new capabilities and perhaps develop new learning mechanisms and new external linkages. This is often challenging because the development of capabilities, routines and effective external relationships is linked to experience and the evolutionary processes of incremental learning. Hence, what forms a firm’s capacities to learn is highly situational, not codified and not the result of a systematic plan. So, while experience is a vital source of know-how, a high level of dependence on experience may lock a firm into a ‘competency trap’5 The level, nature and effectiveness of learning and innovation in firms is significantly shaped by the local industrial and social environment. For example, the availability of highly trained human resources, the existence of world class research providers and the role of leading edge users have played key role in the development of regions such as Cambridge, UK and Silicon Valley. Recognising the growing role of innovation, governments have introduced policies to support innovation and also sought frameworks to guide policy making in this area. However, the characteristics of firms, industries and economies are not timeless or context-free. Any innovation-related policy based on a universal abstract model of firms is likely to inappropriate if not misleading: “..the social characteristics of the innovative firm have varied markedly over time and across institutional environments. To study the innovative firm in abstraction from the particular social conditions that enable it to generate higher quality, lower cost products is to forego an

5 Tidd, J. (2000) The Competence Cycle: Translating Knowledge into New Processes, Products and Services. In Tidd, J.(Ed.) From Knowledge Management to Strategic Competence. London: Imperial College Press.

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understanding of why it became innovative in the first place and how its innovative capabilities may be rendered obsolete. …The types of organisational integration that result in innovation vary across industries and institutional environments as well as over time. The hierarchical and functional divisions of labour that, when integrated into learning organisations, generated innovation in the past cannot necessarily be expected to do so in the future when faced with changes in technology, markets and competition…The prevailing social conditions of innovative enterprise provide the context for [the firm’s] learning processes, shaping the types of learning that are attempted, the extent to which these processes are sustained, and the ways in which people interact, both cognitively and behaviourally. The influence of the social context….can vary dramatically across industries and institutional environments as well as over time. A theory of innovative enterprise must be based on an understanding of comparative-historical experience that is broad and deep enough to evoke confidence that the assumptions …capture the essence of the reality to which the theory purports to be relevant.’’ (Lazonick (2005) p50-1) The structure of industry, the organisation of firms and the innovation process itself is changing. One of the most important aspects of those changes concern the growing level of interdependence and consequently the extent to which innovation is systemic. Before we discuss that issue it is worth discussing two common fallacies that arise from over-reliance on simplistic theoretical models of economic change. 2.2 Two Common Fallacies Where the frameworks for innovation and industrial policy are derived from economic models there is a risk that policy is based on unrealistic assumptions regarding the processes of capability development and innovation. Two such assumptions are particularly misleading. First, there is a tendency in some abstract models to equate knowledge with information and to consider that all firms have automatic awareness of and equal access to ‘knowledge’. However, what firms perceive and understand is related to what they already know6. Firms develop their knowledge base and capacities for learning in an evolutionary way. However, where there are major shifts in the knowledge base in a sector, firms (particularly SMEs) may face difficult adjustments. These difficulties arise due to ‘competence traps’ and cognitive failures (where firms lack the prior knowledge to adequately assess the significance of new knowledge7. Second, the concepts of technology diffusion and knowledge spillovers suggests a process of absorption of external knowledge analogous with the process of a sponge absorbing water. The acquisition of external knowledge is often less costly and risky than developing such knowledge in-house. In that sense ‘follower’ firms and organisations do absorb knowledge. This theoretical perspective has sometimes been used to support an extreme position suggesting that a firm or country can free-ride on external knowledge. But history shows that the process of diffusion/acquisition is not one of passive absorption. A high level of technological and managerial capability is required to identify, assess, acquire, integrate and adapt knowledge8.

6 Levitt, B. & March, J.G (1988).Organisational Learning. Annual Review of Sociology 14: 319-338 7 Tripsas, M. & Gavetti, G. (2000) Capabilities, cognition, and inertia: evidence from digital imaging. Strategic Management Journal Volume 21, Issue 10-11 , Pages 1147 - 1161 8 Hall, B (2005) Innovation and Diffusion. in Fagerberg, J. et al The Oxford Handbook of Innovation. OUP. And Fagerberg, J. & Godinho M. (2005) Innovation and Catching-Up in Fagerberg, J. op cit

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2.3 The Rise of Distributed Innovation As technologies become more complex and individuals and firms become more specialized in mastering narrow areas of technology, so the capabilities to innovate at the technology systems level are increasingly embodied in groups, firms and networks of firms – ie are distributed. Coordination of these dispersed actors is then a key role of markets, supply chains, standards, and a wide range of networks and associations of different types. The extent of inter-organisational collaboration, through research consortia, joint ventures, alliances, or market-based contracts, has increased steadily over the past 30 years. Close collaboration is not a transitory stage on the path to merger. For example, a US National Research Council study found that, across a range of sectors, firms had significantly increased their reliance on external sources of knowledge, particularly research organisations, and had increased collaboration with competitors and customers9. As a consequence, the diversity of organisational actors and relationships in innovation processes is increasing- particularly in sectors where technological change is rapid. Extensive collaboration and a diverse range of networks tend to be characteristics of high research intensity firms and successful innovators. Whether formal or informal, inter-organisational links enable knowledge and information flows, resource sharing and access to specialized assets: “..as the commercialization of knowledge has assumed greater importance in economic growth, collaboration across organisational boundaries has become more commonplace.” 10 . Industries continue to evolve away from vertical integration toward production networks11. It is apparent from the literature that large firms are increasingly outsourcing activities that can be carried out more efficiently by another firm and hence increasingly purchasing components and services from other firms. The development of standardization and the growth of IT and the internet have been powerful enablers of this trend (Horn, 2005) – see Figure 2.1. In the case of Australia, there has been a trend toward an increased specialization in the knowledge intensive services components of the value chain. In parallel, and often closely linked to the production ecosystem, an extended knowledge eco-system appears to be evolving. Hence, we see a growth in research collaboration, licensing, strategic alliances, industry funding of public sector research. Hence, interdependence among firms in production and innovation is increasing. Consequently, knowledge flows between firms are increasingly important as are the capabilities to manage collaboration12.

9 Mowery D. (1999). America’s Industrial Resurgence? An Overview. In US Industry in 2000: Studies in Competitive Performance. Washington, DC: National Academy Press. 10 Powell, W. & Grodal, S. (2005) Networks of Innovators. In Fagerberg, J., Mowery, D. and Nelson, R.l (Eds) The Oxford Handbook of Innovation. OUP. 11 Langlois, R.N. (2003) The Vanishing Hand: The Changing Dynamics of Industrial Capitalism. Industrial and Corporate Change, Volume 12, Number 2, pp. 351-385 12 IBM (2006) Expanding the Innovation Horizon Global CEO Study 2006. http://www.ibm.com/ibm/ideasfromibm/us/enterprise/mar27/global_innovation.html

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Figure 2.1 The Development of Specialisation in Industry

Horn, (2005). 2.4 What is Knowledge? Any discussion of knowledge transfer is shaped by the underlying concept of knowledge, and in particular, whether that conception tends to focus on knowledge as information, which can be specified, stored and transmitted, or whether it emphasizes knowledge as competency to act on the world. The former is typically termed codified, formal, explicit or ‘know what’ and ‘know why’ knowledge and is generally acquired through formal education, reading, conferences etc. The latter is typically termed implicit, tacit or ‘know how’ and ‘know who’ knowledge, and it is generally learnt through experience or close contact with its application. It also tends to be more localized in its relevance – ie linked to a region, technology, sector or firm. However, it is widely recognised that in practice these two types of knowledge are often inter-dependent and much of the knowledge that firms work with involves combinations of both. Nevertheless, these two broad types of knowledge do involve different types of learning. Jensen, et al (2004)13 usefully distinguish between the approaches to acquiring codified and tacit knowledge. They suggest that the approach to learning codified knowledge depends on explicit know-why and hence they note: 13 Absorptive Capacity, Forms of Knowledge and Economic Development / Jensen, Morten Berg ; Johnson, Bjørn Harold ; Lorenz, Edward ; Lundvall, Bengt-Åke. 2nd Globelics International Conference: Innovation Systems and Development: Emerging Opportunities and Challenges, October 16-20, 2004, Beijing, Kina. 2004. http://scholar.google.com/scholar?hl=en&lr=&q=cache:B_9bQCWYC2UJ:www.idefi.cnrs.fr/wpap/WP-GREDEG-2004-2.pdf+jensen+lundvall+absorptive+capacity 8 Jan. 2007

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“The R&D-departments in big firms play a key role….Specific R&D- projects will often be triggered by practice (problems with a product, new user needs, problems with producing) but almost immediately attempts will be made to restate the problem in an explicit and codified form. The R&D-department will start going through its earlier work as well as looking for insights that can be drawn from outside sources. In order to communicate with scientists and scientific institutions outside it will be necessary to make knowledge explicit and translate the problem into a formal scientific code. While the process of searching is going on there will be a need for interaction with and feed-back from the potential users of the outcome of the process and here intermediate results will need to be presented in a language that the potential users can understand. But all through the process documenting results in a codified form remains important. It is not sufficient that the single scientist keeps results in his own memory as tacit knowledge. Often the project involves teamwork where single results are needed as building blocks for other members in the team. At the end of the process – if it is successful - a transfer of the results within the organisation or across organisational borders will call for documentation as well. “ However, in the case of knowledge closely linked to practice and often localized, the effective modes of learning (and transfer) involve arrangements and relationships that enable learning by doing and interacting. Jensen, et al (2004) state that this mode of learning: “…is characterised by on-going changes that continuously confront employees with new problems. Finding solutions to these problems enhances the skills of the employees and extend their repertoires...When the process is complex…it will involve interaction within and between teams and it may result in new shared routines for the organisation. As the whole organisation gets more insight in the actual working of the system it might find more efficient ways to organize work and solve problems.” As this tacit, practice-related, knowledge is embodied in people and routines, firms may seek to codify it in order to retain and diffuse it. However, individuals may be reluctant to fully participate in such demanding processes and codification is both unlikely to capture the complexity of reality and likely to be rapidly obsolete in a turbulent environment. Because of this complexity and uncertainty, and hence the risks of misunderstanding and misinterpretation in knowledge transfer, firms can be seen as ‘sense making devices’ that reduce this risk. However, some researchers argue that a strong emphasis on routines for tacit knowledge transfer tends to reinforce an inward looking and conservative orientation. They suggest that efforts to develop codification and, related to this, a preference for market-based arrangements for knowledge acquisition will help ensure greater openness to new knowledge14. Vinding’s work on innovation in SMEs in ‘low tech’ sectors in Denmark found that firms that developed their competencies through hiring academically trained staff and also built collaboration with research organisations were relatively strong performers in innovation.15 Jensen et al (2004) comment on this finding: “Our interpretation of this result is that as competition becomes intensified in traditional sectors, reflecting the entrance of new competitors from all over the globe, it is no longer sufficient to base competitiveness on know-how and [tacit learning routines]. Firms that

14 See Thorpe et al (2005) 15 Vinding, L. (2006) Absorptive capacity and innovative performance: A human capital approach. Economics of Innovation and New Technology. Volume 15, Number 4-5. 507 - 517

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succeed in connecting more systematically to sources of codified knowledge may be able to find new solutions and develop new products that make them less sensitive to price competition. This is one reason why a strategy that gives more attention to codification and documentation of knowledge inside SMEs in traditional sectors may offer substantial pay off. Another reason is the increasing division of labour at the global level where value chains often are dominated by big [research focused] firms. Increasingly the survival and growth of SMEs in manufacturing as in services that are sub-contractors to big international firms will depend on their capacity to document what they can do and how they do it. Mastering codified knowledge becomes increasingly important.” Nevertheless, there is abundant evidence that innovation is characterised by interaction, uncertainty and a diverse range of approaches to learning and searching. Approaches to developing better ‘learning organisations’ recognise the role of interaction within and between firms, and hence the need to combine learning related to codified knowledge and learning related to tacit knowledge. Drawing on a major survey in Denmark, Jensen et al (2004) find evidence that firms that combined a strong approach to codified learning (eg by hiring qualified staff, undertaking R&D and developing links to knowledge organisations) and also developed strong approaches to tacit/ activity-related learning (eg by reducing hierachies, promoting multi-functional teams, and other processes to promote continuous learning) excelled in product innovation. 2.5 Where do Firms Acquire Knowledge From? Innovation surveys based on the Oslo Manual have been conducted in many countries. These provide insights into the sources that firms may use to provide inputs to their innovation. A consistent finding across countries is that firms rely on internal sources and other firms, notably suppliers and customers, as the main sources for knowledge – see Table 2.1, which summarises information across Europe for the period 1998 to 2000. It shows that universities were important sources of information for innovation for only about 4% of manufacturing firms and 6% of service firms. An analysis of the Innovation Survey in Australia found a strong relationship between firms’ R&D intensity and the level of importance attached to links with universities16. Similarly, Arundel et al found that large research intensive firms in Europe tend to have relatively much more extensive and substantial links with the public sector research base than is the average across industry17. Laursen and Salter, analyzing UK innovation survey data found a strong relationship between a firm’s use of universities and its employment of graduates and researchers18 The Innovation Surveys also provide useful information on the characteristics of firms that are relatively more innovative. For example, a detailed study of the UK Innovation Survey found that a strong positive relationship between a company’s expenditure on innovation and the number of its external relationships for accessing information19. One analysis of the

16 Yencken, J. and Gillin, M.2001) Sources of ideas and knowledge for innovatory small companies: Australian and Eurostat CIS2 innovation survey data analysed by industry sector and enterprise size. Innovation: Management, Policy & Practice 4 (1-3): 147-160 17 A Arundel, G van de Paal and L Soete, Pace Report: Innovation Strategies of Europe’s Largest Firms: Results of the PACE Survey for Information Sources, Public Research, Protection of Innovations and Government Programmes, Final Report, Maastricht: MERIT, University of Limburg, 1995 18 Keld Laursen and Ammon Salter, ‘Searching high and low; What types of firms use universities as a source of innovation?, DRUID Working Paper No 03-16, Copenhagen Business School, 2003 19 Bruce Tether and Peter Swann, ‘Sourcing Science: The use by industry of the science base for innovation; evidence from the UK’s innovation survey,’ CRIC, University of Manchester and UMIST, 8 August 2003 (mimeo)

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recent Community Innovation Survey(CIS3)20 concluded that innovativeness was related to firms’:

Cooperativeness, both in working with universities and with other companies Employment of skilled personnel Spending on R&D Investment in equipment

Table 2.1.: Main Sources of Information for Innovation in the EU, 1998-2000

Industry Services

Percentage of enterprises with innovation activity indicating that selected sources were of high importance

Enterprises with innovation activity (Absolute figures)

Percentage of enterprises with innovation activity indicating that selected sources were of high importance

Enterprises with innovation activity (Absolute figures) All Small Med. Large All Small Med. Large

Within the enterprise 47 663 37 32 40 70 28 638 40 37 41 69

Other enterprises in the group

8 776 7 3 10 28 9 662 13 9 23 38

Suppliers 25 336 19 19 17 29 14 014 20 19 19 29 Customers 34 456 27 22 32 51 22 079 31 32 25 37 Competitors 13 801 11 9 13 21 9 978 14 14 13 22 Universities, HEIs

5 122 4 3 4 11 4 269 6 6 6 6

Govt./ non profit research institutes

3 491 3 2 3 7 2 098 3 3 4 3

Conferences, meetings, journals

11 399 9 8 9 15 10 660 15 15 15 18

Fairs & exhibitions 22 697 17 17 18 20 9 956 14 15 9 10

Source: Paul Crowley, Sources and resources for EU innovation, Statistics in Focus: Science and Technology, Theme 9-5/2004

20 Marion Frenz, Jonathan Michie and Christine Oughton, ‘Co-operation and innovation: evidence from the Community Innovation Survey,’ paper presented at the Schumpeter Conference, University of Bocconi, 2004. See also Arnold, et al Making Best Use of Technological Knowledge: A Study of the Absorptive Capacity of Irish SMEs. Technopolis Nov. 2004.

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3. Frameworks for Understanding Absorptive Capacity21 3.1 The Core Absorptive Capacity Literature22 Recognizing that a great deal of innovation results from using knowledge from elsewhere rather than from invention, Cohen and Levinthal (1989, 1990) introduced the term “absorptive capacity” (AC) to refer to firms’ capabilities and knowledge to manage the acquisition of knowledge “the ability of a firm to recognise the value of new, external information23, assimilate it, and apply it to commercial ends.”..and hence..” a firm “needs prior related knowledge to assimilate and use new knowledge”(1990) But their use of the term focused on the role of R&D as a mechanism for knowledge acquisition, and they saw the process of ‘absorptive capacity’ as a component of a firm’s learning capabilities- see Figure 3.1. The concept of AC expanded over a sequence of three papers by Cohen and Levinthal (1989, 1990 and 1994) but in all three the primary mechanism for generating AC was R&D. However, over time the concept has evolved to refer to a wider set of processes involved in the acquisition and implementation of knowledge and information. Figure 3.1: The Cohen & Levinthal ‘Model’ of Absorptive Capacity

Lane, Koka and Pathak (2006) have reviewed almost 300 papers that have cited Cohen and Levinthal (1990) in the period up to mid 2002. They find that the majority of these papers use the term AC in an unexamined way: ‘almost 80% of the literature cites the construct in a ritual way, with little or no discussion.” (p841) According to Lane, Koka and Pathak (2006) much of the literature citing the work of Cohen and Levinthal identifies AC with the base of prior knowledge in the firm. When operationalising the AC concept many of these studies, perhaps not surprisingly in view of the origins of the term, take a narrow focus and use R&D expenditure as a proxy for the

21 The concept of absorptive capacity has been applied at the level of a business unit, firm, region, and nation, and has been analysed from different perspectives. Hence, the concept of is both multi-level (individual, branch, firm, industry, cluster, nation) and multidisciplinary (Van Den Bosch et al (2003). Here we focus on the application of the concept at the level of the firm. 22 Major recent reviews are those of Lane Koka and Pathak (2006) Van Den Bosch et al (2003), 23 It is clear from their paper that Cohen and Levinthal used information and knowledge interchangeably.

R&D Knowledge accumulation

External Knowledge

Internal Organisation

Absorptive Capacity

Knowledge Acquisition

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prior knowledge base. However, several papers take a wider approach and this leads to the use of a variety of indicators depending on whether AC is considered to be:

a resource – particularly prior knowledge: age of firm, size of firm; or a capability – particularly organisational learning capability: knowledge sharing

routines; motivation. 3.1.1 Defining Absorptive Capacity Lane, Koka and Pathak (2006) found that: “….only four studies have attempted to expand and elaborate on [the original Cohen and Levinthal] definition [and]...the focus of these studies has been to move absorptive capacity away from an exclusively R&D focus to a broader dynamic capability perspective. (p845). For example Dyer and Singh (1998) focus on the quality of the relationship between firms that enables knowledge exchange and joint learning. Lane and Lubatkin (1998) also focus on inter-firm knowledge flows and stress the role of both cognitive and organisational and cultural proximity in enabling effective interaction. Van den Bosch et al. (1999) take this approach one step further by noting that the firms may interact with a range of other firms and organisations and the knowledge environment may be stable or turbulent – and that the effective organisation for absorptive capacity will vary with the context and hence that a firm needs to co-evolve with its environment. Most reseachers, including Lane and Lubatkin (1998) and Van Den Bosch et al (2003) have retained the focus on the three components of absorptive capacity defined by Cohan and Levinthal, ie: • Identification; • Assimilation; and • Application. However, Zahra and George (2002) focus on the internal dynamics of absorptive capacity and include in the concept organisational routines and processes by which firms operate and manage knowledge, identifying four components: (1) acquisition; (2) assimilation; (3) transformation (‘a firms’ capability to develop and refine the routines that facilitate

combining existing knowledge and the newly acquired and assimilated knowledge.” (p190); and

(4) exploitation. They also propose that it is useful to characterize two broad components (or states) of absorptive capacity: potential (the external knowledge that a firm could acquire and utilize) and realized (the external knowledge that a firm has acquired and utilized). Table 3.1: Potential and Realized Absorptive Capacity

Potential AC Realized AC (1) acquisition; (2) assimilation;

(3) transformation; (4) exploitation.

Zahra and George (2002) Several researchers have emphasized the role of strategic intent, or an orientation to action, as a key factor in absorptive capacity. Liao et al (2003) found from the survey of firms that

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in addition to acquisition of new knowledge the more innovative firms also were more strongly committed to act on opportunities. Similarly, Minbaeva et al (2003), and Zahra and George (2002), stress the role of motivation, in addition to ability, in absorbing external knowledge24. 3.1.2 Sources of Absorptive Capacity The three major, but also necessarily interdependent, determinants of absorptive capacity are considered to be:

1. R&D activity; 2. Prior knowledge and skill; and 3. Organisational structures and human resource management practices (Schmidt,

2005). The cumulative and path dependent nature of AC was recognised by Cohen and Levinthal (1990). While there are many sources of absorptive capacity, there is a strong interaction between the existing knowledge base of a firm and external knowledge sources. The role of scientists and engineers in enabling firms to link to external knowledge sources, and of ‘gatekeepers’ who identify and facilitate the absorption of knowledge from outside the firm, has been identified in a great deal of prior research (see Schmidt, 2005). Firms may accumulate knowledge as a result of carrying out R&D, by less formal processes of problem solving, and by hiring trained personnel. Cohen and Levinthal (1990) recognised that the internal mechanisms of a firm, as well as the specific prior skill and knowledge of its members, underpinned absorptive capacity. Van den Bosch et al (2003) has reviewed several empirical studies of absorptive capacity identifying what the authors see as the ‘antecedents’ of absorptive capacity- Table 3.2. Table 3.2: Antecedents of Absorptive Capacity

Level of Analysis

Examples of Antecedents Illustrative References

a unit’s R&D intensity Tsai (2001) knowledge flow configuration (horizontal versus vertical)

Van Wijk et al. (2001 Intrafirm level

prior related knowledge and similarity of attributes

Gupta and Govindarajan (2000)

prior related knowledge and internal mechanisms Cohen & Levinthal (1990)

prior related knowledge, organisational form, combinative capabilities

Van den Bosch et al. (1999)

Firm level

linkages with external sources, knowledge and structure complementarity and experience

Zahra & George (2001)

Interfirm level specific type of new knowledge; similarity of compensation practices and organisational structures; familiarity with organisational problems

Lane & Lubatkin (1998)

Source: Van den Bosch, 2003.

24 Minbaeva, D., Pedersen, T., Bjorkman, I., Fey, C. F., and Park, H. J. (2003) MNC knowledge transfer, subsidiary absorptive capacity, and HRM. Journal of International Business Studies 34(6), 586.

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Drawing on these and other recent studies that seek to examine more closely the relevant dimensions of those ‘internal mechanisms’, Van den Bosch et al (2003) distinguish between ‘organisational form’ and ‘combinative capabilities’ – see Figure 3.2. Considering the firm to be a type of distributed organisational knowledge system, these internal mechanisms connect and integrate the parts of this ‘system’. They distinguish three types of combinative capabilities: systems capabilities, coordination capabilities and socialization capabilities:

Systems capabilities refer to the procedures and routines used to integrate explicit knowledge;

Coordination capabilities are based on relations between teams and team members, eg communication patterns;

Socialization capabilities refers to shared ideology and paradigms that enable joint action under tacitly understood rules. (Van den Bosch, et al , 2003).

Figure 3.2: Absorptive Capacity: Antecedents and Outcome

Derived from Van den Bosch, 2003. Van den Bosch et al (1999) applied this model in a detailed case study of firms changing from traditional manufacturing to IT based production. They found that organisational form and combinative capabilities interact, and that socialization capabilities and organisational form can be difficult to change in ways that enhance the scope and flexibility dimensions of absorptive capacity. As absorptive capacity is significantly based on prior relevant knowledge and its development is usually a by-product of firms’ efforts to solve problems in the normal course of business, its development is hence highly path-dependent. However, when firms seek to acquire knowledge not closely related to the existing knowledge base, far more purposeful and managed efforts to build absorptive capacity will be necessary (Cohen & Levinthal, 1990). 3.1.3 Types of Knowledge and Absorptive Capacity In their review of studies citing the Cohen and Levinthal papers, Lane, Koka and Pathak (2006) identify a line of conceptual development concerned with the significance of types of knowledge. In particular they identify three knowledge characteristics that have been discussed in the literature:

Knowledge content – in particular the importance of similarities in cognitive structures; Tacitness – knowledge that consists of implicit and non-codifiable skills and know how

is likely to be embedded in specific people and in routines within a firm and hence is

Combinative capabilities- synthesise, integrate and apply current and acquired knowledge

Organisational form: matrix, functional, network

Level of prior knowledge (distributed internal knowledge system)

Absorptive Capacity

Path of exploitation or exploration

Expectation formation

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likely to be more difficult to transfer and absorb (Kogut and Zander, 1992; Nonaka, 1994); and

Complexity – as knowledge becomes more complex firms need to absorb a greater range of ‘component’ and ‘architectural’ knowledge (see Henderson, 1996)

While greater cognitive distance, tacitness and complexity creates challenges for acquisition, the corollary of this analysis is that firms with knowledge bases similar to the areas of knowledge they seek to master and with comparable levels of complexity will be better able to absorb knowledge (van den Bosch et al, 1999). Similarly, firms with established links with those organisations that seek to learn from (through direct links or networks) will be better able to manage acquisition (Meyer-Krahmer and Meyer-Krahmer, 1998). Conversely, and as noted above, firms that change their learning path, as a result of strategic choice or shifts in the knowledge base of their industry, may face a very challenging process of re-orienting their learning mechanisms. A useful example of changing a learning path and hence renovating absorptive capacity is that of Toyota in addressing the growing role of electronics in the automotive sector. Toyota came to see that electronics was growing from a component level issue into a pervasive architectural issue. As a result it decided that it needed to develop a core competence in electronics and could not afford to continue to rely on the competence of their suppliers25. "Electronics’ share of the total value added in automobile production is rising rapidly. Currently, electronic parts make up about 10% of an average vehicle’s total production cost (more in upscale models); Toyota engineers estimate that this will soon rise to 30%....Toyota had to build absorptive capacity: a base of electronics knowledge from which rapid learning of leading-edge developments could proceed….The creation of such absorptive capacity was critical both to Toyota’s ability to design and produce automotive electronics on its own and to manage its alliances with Denso and other partners effectively…Toyota needed to create absorptive capacity on its own, both to deal with increased asymmetry of knowledge and bargaining power in its relationship with Denso and to better use a technology that was increasingly critical to and increasingly embedded in auto design and production….Toyota’s purpose was to lay the foundation—create the absorptive capacity—for a massive program of learning. Modern automotive electronics is an architectural innovation, one far afield from Toyota’s extant repertoire of competencies." (p687-9) 3.1.4 Measuring Absorptive Capacity Because ‘absorptive capacity’ is a broad and inclusive concept this creates challenges for measurement. Typically researchers have used such proxies as R&D expenditure (or intensity) or other attributes considered to signal capacity such as organisational structure or human resources (Schmidt, 2005; Vinding, 2000). The concept of absorptive capacity has not been developed in a way that would enable benchmarking, either to guide managers’ investment in developing appropriate levels of absorptive capacity, or to enable international comparison Bessant et al (2005). Indeed, the appropriateness of a level of nature of absorptive capacity depends to the specific situation and strategy of the firm. However, it would be possible and useful, to develop a generic framework from which firms could develop a customised approach for assessing their absorptive capacity for their circumstances. 25 Ahmadjian, C. L.; Lincoln, J. R. (2001) Keiretsu, Governance, and Learning: Case Studies in Change from the Japanese Automotive Industry. Organisation Science 12 (6): : 683-701

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3.1.5 How is Absorptive Capacity Developed? The inclusiveness of the concept has also created challenges for research on the development of absorptive capacity (a gap recognised in the literature -eg Schmidt, 2005, Lane, et al, 2002), and hence also for well grounded normative guides on how firms can build absorptive capacity. Schmidt (2005) has sought to address this challenge for systematic empirical research by using the data from the German (Oslo Manual) Innovation Survey and focusing on those firms that have introduced innovations based on external knowledge, arguing that such firms have demonstrated that that they have the capacity to exploit external knowledge and hence have this component of absorptive capacity – and one would expect to also have other components of absorptive capacity, viz capacities to identify and assimilate knowledge. His conclusions suggest26 that overall absorptive capacity is enhanced by firm policies to involve all staff in innovation and by the development of a stock of knowledge through R&D (but not current R&D expenditure levels), but that the role of different mechanisms varies with different types of knowledge acquisition:

knowledge acquisition from research organisations is facilitated by the share of highly qualified staff and by more or less formal internal knowledge sharing mechanisms (such as seminars and workshops);

intra-industry knowledge flows are not influenced by R&D intensity and are also not facilitated by formal support among departments, but rather by informal networking; and

knowledge acquisition from inter-industry sources was not related to the share of employees with higher education nor R&D intensity or firm size.

These findings suggest that R&D expenditure contributes in the long run to build absorptive capacity and to capacities to absorb knowledge from ‘scientific’ sources. Schmidt (2005) suggests that as there are differences in the absorptive capacity for tacit and codified knowledgem, current R&D is less relevant in the short term for the more ‘exploitative’ absorptive capacity from business (ie intra and inter-industry) sources. 3.1.6 Organisational Structure and Absorptive Capacity Cohen and Levinthal (1990) discussed the role of a firm’s routines that enable the diffusion of knowledge (sharing, communication) between individuals within the firm. Daghfous (2004) stressed the role that organisational culture can play in providing incentives for knowledge sharing. Schmidt (2005) cites other studies that have identified multi-specialist work groups, job rotation, and other specific human resource management pratices as approaches that promote knowledge sharing. According to Lane, Koka & Pathak (2006) several subsequent papers have focused on specific organisational characteristics that facilitate such diffusion, for example: cross functional teams and formal integration mechanisms (like task forces). Van den Bosch, et al (1999) argue that: “the scope, flexibility, and efficiency of knowledge assimilation vary, depending on whether the organisation has a functional, divisional, or matrix organisational structure.” (Van den Bosch, 2003; Lane, Koka & Pathak, 2006, p847). Van den Bosch (2003d) define these dimensions as:

26 More detailed and specifically designed surveys would be required to explore these relationships.

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Efficiency refers to the ‘activities, procedures and routines’ that firms use to identify, assimilate and exploit new knowledge. This dimension focuses on cost benefits that arise from economies of scale and the exploitation of an existing knowledge base.

Scope is associated with the breadth of knowledge a firm draws upon.

Flexibility refers to the extent to which a firm can ‘access additional, and reconfigure existing knowledge’.

However, as discussed above, because what enables absorptive capacity varies from firm to firm (and hence is not context free) and multipartite (ie many structural and behavioural elements constitute the capacity) and not fully specified, few studies have taken a systematic empirical approach to analyzing the organisational attributes that support absorptive capacity. 3.1.7 Organisational Scope and Absorptive Capacity Many studies of the evolution of firms and of the success of diversification have concluded that there is a high degree of path dependency in knowledge acquisition - ie firms can more easily add to the knowledge and diversify in areas in which they already have a knowledge base (eg Kim & Kogut, 1996). According to Lane, Koka & Pathak (2006) many authors have extended this perspective to analyse, for example, the relative performance of firms following mergers and acquisitions, or the role of joint ventures and strategic alliances when firms enter unfamiliar markets or sectors. An additional perspective in this area is the concept of option creation – ie by building a broader knowledge base (through R&D or acquisitions ) firms maintain a broader absorptive capacity and hence a greater preparedness to respond to change. However, Vermeulen and Barkema (2002) and Lei and Hitt (1995) provide a cautionary note, reminding us that knowledge acquisition and assimilation takes time and substantial effort and rapid diversifications risk undermining the coherence of those processes. Cohen and Levinthal recognised the path dependent nature of absorptive capacity, and Van Wijk et al (2001) have taken this further, usefully distinguishing a depth and breadth dimension of absorptive capacity:

Depth refers to absorptive capacity that facilitates further knowledge acquisition in the same domain- a process that is likely to become more efficient with specialization and hence the exploitation of existing strengths, linkages, routines and communication patterns; and

Breadth – refers to the absorption of new knowledge in other domains and hence relates also to the scope dimension of absorptive capacity (Van den Bosch, 1999) and is an aspect of exploration.

3.1.8 Change in the Knowledge Environment and Absorptive Capacity In a relatively stable knowledge environment firms focus on the sequential strengthening of their knowledge resources, the maintenance of external links for knowledge acquisition and the exploitation of those knowledge resources. However, in more turbulent environments there is less likely to be a pattern of internal communication and a set of external links that are appropriate for new avenues of learning. It is also more likely in such a turbulent and uncertain context that diversity and decentralization will be more effective than centralized

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management of learning or uniform knowledge structures. In such an environment the ‘flexibility’ dimension defined by Van den Bosch (2003) becomes vital, and the tensions between ‘depth’ and ‘breadth’, as defined by Van Wijk et al (2001), become challenging.

Table 3.3: Types of Knowledge environments, Focus of Knowledge Absorption, and Requirements Regarding Three Dimensions of Knowledge Absorption

Types of Knowledge Environment: Focus of

Knowledge Requirements Regarding Absorption on: Three Dimensions of Knowledge Absorption:

Efficiency Scope Flexibility (1) Stable knowledge environment, example: Mature single industry

Exploitation H L L

(2) Turbulent knowledge Environment. Example: Emerging industrial complex

Exploration L H H

H: high; L: low . Source: Van den Bosch et al (2003) 3.1.9 Organisational Learning and Absorptive Capacity The very extensive literature that discusses different aspects of organisational learning and technological capability development has developed in parallel with the line of work that has followed the Cohen & Levinthal papers. This literature identifies, inter alia, the role of purposive strategy, focused effort, the intensity of effort, the organisation of learning and the role of external links in the effectiveness of learning (for example Kim and Lee, 2002). However, Lane, Koka & Pathak (2006) conclude that there has been little empirical analysis of the relationship between absorptive capacity and organisational learning. It follows from the nature of path dependency that absorptive capacity will be higher and organisational learning more effective where a firm already has a relevant knowledge base (Autio, Sapienza & Almeida, 2000). For example, several researchers have found that effective interaction with research organisations generally requires a prior knowledge base of an appropriately high level and relevant type (eg Schmidt, 2005). Schilling (2002) shows that a failure to invest in learning can lock a firm out of new technologies, due to a lack of absorptive capacity. 3.1.10 Inter-organisational Learning and Absorptive Capacity There is abundant evidence that the role of inter-firm collaboration in innovation is significant and increasing (see Section 2.3). Not surprisingly the analysis of inter-organisation knowledge flows has attracted growing attention. For example, Lane and Lubatkin (1998) have analysed the importance of knowledge similarity for effective learning but sufficient dissimilarity to provide a potential for learning. Similarly, Dyer and Singh (1998) (among many others27) have shown the role of complementarity in successful alliance relationships. Again, apart from similarities in knowledge, similarities in organisation, culture and compensation have been shown to contribute to inter-firm knowledge flows (Lane, Koka & Pathak, 2006).

27 A list of some relevant research is in Lane, Koka & Pathak (2006).

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The increasing complexity and the rate of change, of the knowledge base in many industries is a critical challenge for many firms. These challenges are leading many firms to become more specialized and to develop a wider range of external links, both in terms of a specific division of labour (and hence interdependence) in an value chain and but also more diffuse links for access to new knowledge and ideas (Powell, Koput & Smith-Doerr, 1996). The critical point here is that in more turbulent environments many firms must invest in boundary spanning links and alliances that enable them to strengthen their absorptive capacity (for example, Steensma & Corley, 2000). However, according to Lane, Koka & Pathak (2006), few of these studies of learning through networking have analysed the capabilities that constitute absorptive capacity, but rather assumed that membership of a network or location in a high tech region implied higher absorptive capacity. They remind us that, without the capabilities to absorb and use knowledge, membership of a network is of little value. According to Bessant et al (2005) a number of studies have sought to characterize the commonalities (shared language, culture, background knowledge etc) between the people and organisation of the source and recipient, as these have been shown to influence to effectiveness of knowledge transfer28. Lane & Lubatkin (1998) found that firms learn from other firms most effectively when the partners are similar in terms of structure, human resource policies and knowledge bases. 3.1.11 Innovation, Management and Absorptive Capacity Many studies have discussed the relationship between innovation and absorptive capacity and in particular the extent to which absorptive capacity contributes to effective innovation, and how learning from innovation strengthens absorptive capacity (for example Helfat, 1997). In turbulent environments, where new types of knowledge may become important and the value of investment in specific areas of knowledge is uncertain, it is likely that innovation a greater breadth of knowledge through loosely related knowledge domains will be most relevant (Van den Bosch et al ,1999). While the strong feedback loop from prior knowledge, to identifying and assessing the strategic implications of new knowledge, to proactive strategies, is well recognised, this interaction has not been extensively studied (see eg Calori, et al, 1994). More surprisingly, perhaps, nor has the relationship between managerial intentionality (to influence the level of absorptive capacity) and subsequent levels of absorptive capacity (Sanchez, 2001). 3.1.12 Recent Research on Absorptive Capacity In perhaps the most comprehensive review to date Lane, Koka & Pathak (2006) conclude that there has been limited research into the interactions between a firm’s absorptive capacity and its organisational structure and its internal knowledge types. They argue that few researchers have either extended the ‘absorptive capacity’ construct or undertaken sound empirical research to test the relationships. They comment that:

28 Bessant, J. Phelps, B. & Adams, R. (2005) A Review Of The Literature Addressing The Role Of External Knowledge and Expertise At Key Stages Of Business Growth And Development. Final Report Cranfield School Of Management.

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“…most of the empirical studies have identified absorptive capacity with knowledge content. Not only has the evidence underlying such operationalization been inconsistent but it has drawn the focus away from the processes underlying the creation, development, management, and exploitation of new knowledge….few researchers have directly examined the relationship between absorptive capacity and organisational learning, organisation scope, and knowledge. Instead, most have used it to support arguments implicitly—in essence treating it as an off-the-shelf, general-purpose concept.” (p851) They identify five assumptions that have contributed to the limited development of this line of analysis: “Each of the above assumptions, independently and jointly, has directly contributed to the rapid growth of a research stream that is largely non-cumulative, despite having a relatively narrow context. Focusing research on R&D-related contexts has straitjacketed absorptive capacity, constraining it to technology-intensive firms. This understates the learning that occurs in other parts of the organisation, as well as the interplay of technology and organisational processes that are critical for firm performance. Thus, researchers have focused on the knowledge recognition and acquisition dimension but have ignored the assimilation and exploitation dimensions. Researchers have insights into the types of knowledge that matter for R&D-related absorptive capacity but know little about the processes by which absorptive capacity can be developed, managed, and exploited. ….[an] important consequence of the reification of absorptive capacity is that it threatens the validity of the existing studies. .. The pervasiveness and importance of these validity concerns lead us to wonder what we really do know about absorptive capacity.” (p854-5) This leads Lane et al to propose a new definition of Absorptive Capacity:

Absorptive capacity is a firm’s ability to utilize externally held knowledge through three sequential processes:

(1) recognizing and understanding potentially valuable new knowledge outside the firm through exploratory learning,

(2) assimilating valuable new knowledge through transformative learning, and

(3) using the assimilated knowledge to create new knowledge and commercial outputs through exploitative learning. (p856)

Table 3.4: Limiting Assumptions in the Literature on Absorptive Capacity.

Absorptive capacity is relevant only to R&D-related contexts.

Most empirical research in this literature has operationalized AC as R&D intensity, as did Cohen and Levinthal (although their discussion of the concept was much broader) and hence limited the generalizability of the concept. One consequence of this focus is that few studies have analysed the role of AC in: ‘the acquisition, assimilation, and commercial application of other types of business-related knowledge, including managerial techniques, marketing expertise, and manufacturing know-how.”( Lane, Koka & Pathak (2006: 852).

Firms develop absorptive capacity in response to the existence of valuable external knowledge.

For Cohen and Levinthal the existence of external knowledge is not a sufficient condition for a firm to develop AC, and they noted the role of a range of industry factors (such as demand, appropriation, spillovers) in shaping incentives to invest in building absorptive capacity.

Relevant prior knowledge equals

Lane, Koka & Pathak (2006) argue that:”the focus on R&D and knowledge acquisition also has led to an overemphasis on being able to

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absorptive capacity understand the technological or scientific knowledge the firm needs to acquire at the expense of the process knowledge needed to assimilate and apply it….. the focus on the content of a firm’s prior knowledge has led to an overemphasis on tangible outcomes of absorptive capacity, such as inventions and innovations, at the expense of less concrete outputs, such as process knowledge, which can be of greater importance to the firm over the long run.” (p852) It is likely that this focus has led to a lack of interest in research on the management of absorptive capacity. Lane, Koka & Pathak (2006) conclude that: “Future research needs to develop actionable recommendations concerning the process and policies that firms should use to develop and manage absorptive capacity in R&D and non-R&D contexts.” (p853)

A firm’s competitive advantage is based on Ricardian rents rather than efficiency rents.

A great deal of research has focused on how firms control access to knowledge (from which they can then extract rents) rather than how knowledge and other resources are used in a firm to create unique capabilities/competencies. A focus on knowledge content has led to less interest in how capabilities (for learning, assimilating, applying) are developed.

Absorptive capacity resides in the firm alone.

Absorptive capacity depends vitally on the role of individuals, their personal knowledge, mental models and how they:’ scan the knowledge environment, bring the knowledge into the firm, and exploit the knowledge in products, processes, and services… it is the firm’s individual members who add the creativity needed to help the firm uniquely create value from new knowledge’ (p854).

Source: Lane, Koka & Pathak (2006)

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3.3: A Process Model of Absorptive Capacity, Its Antecedents, and Its Outcomes

Adapted from Lane, Koka & Pathak, 2006

Acquire new external knowledge

Firm Strategies (drive the focus of recognition &

understanding of assimilation and of application)

Characteristics of Learning Relationships – drive the ease of understanding Learning mechanisms: licensing, training, alliances

Environmental Conditions: drive the incentives to develop AC

Characteristics of internal and external knowledge drive the depth & breadth of understanding

Firm Performance

Commercial Outputs (products, services, IP)

Recognise & understand new external knowledge (exploratory learning)

Assimilate external knowledge (trans -formative Learning)

Apply assimilated external knowledge (exploitative learning)

Kn Base Networks, clusters, SIS

Knowledge Outputs- scientific, technical, organizational Codified & tacit

Characteristics of the Firm member’s mental models – drive the creativity of recognition, assimilation and application

Characteristics of the Firm’s structures and processes- drive the efficiency & effectiveness of assimilation & application [routines]

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3.2 Other Relevant Perspectives 3.2.1 Identifying the Literature Relevant to Absorptive Capacity A very large and diverse range of literature is relevant to the issues associated with absorptive capacity and firm learning. As absorptive capacity is multi-level there is also a range of literature at the individual, group, cluster and national level – which we largely ignore for the present study. The main lines that this wider literature addresses are:

Spillovers, Diffusion and Knowledge Transfer Dynamic Capabilities and the Resource Based View of the Firm Innovation Management Accessing External Technology Research- Industry Interaction Innovation and Change in SMEs Organisational Learning Firm Learning Technological Learning in Latecomer Firms Knowledge Management Networks and Clusters Learning through Strategic Alliances. National Absorptive Capacity

While there are many commonalities across this vast literature there are also important differences in objective, context and theoretical points of departure, as indicated in Figure 3.4 Through the course of the study we have attempted to ‘map’ the literature in terms of the following characteristics:

Central question or problem addressed – what is it trying to understand;

Key assumptions – what are the assumptions that are made about what is in scope and what is not tested;

Key concepts – what is the framework or model of the world that is used and what are the concepts that do the heavy lifting in those frameworks;

Central dynamic proposed/explored– What are the relationships among the important variables in the model; and

Relevance to Absorptive Capacity management and policy and research.

Our primary purpose in doing so is to provide a more systematic foundation for understanding the role, and the constituents, of absorptive capacity. This foundation is necessary for undertaking further empirical research, for interpreting existing empirical research and for informing the assessment of possible measures to support absorptive capacity in firms.

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3.2.2 Spillovers, Diffusion and Knowledge Transfer In most developed economies the great majority of business sector R&D is carried out by a relatively small proportion of firms. Similarly, a small proportion of firms (almost entirely also R&D intensive firms) account for the majority of links with public sector research organisations. Even in non-R&D intensive sectors typically only a small proportion of the firms in an industry are innovation leaders pioneering major innovations that are new to the world or new to the sector. The majority of firms are ‘followers’ and benefit from the diffusion of knowledge throughout the economy – often termed as spillovers from R&D and innovation. However, as noted in Section 2, the terms ‘diffusion’ and ‘spillover’ are in important respects misleading. First, they imply that an innovation diffuses through an economy much as a molecule diffuses through water. However, we know that diffusion more often involves the incorporation of knowledge into existing knowledge structures and of technologies into existing technological systems- and that these processes involve active learning and problem solving, and often significant innovation. For example, the diffusion of the integrated circuit has involved the continuous redesign of virtually every electronic device. Hence, diffusion involves complex processes of interaction involving inter alia, technological opportunity, firm capabilities, and market conditions. Second, firms are not passive recipients in these complex processes but active and differentiated agents. Not only are there capabilities to acquire, absorb and implement new knowledge important, but so also is their strategic intelligence to recognise the significance of new knowledge, and their strategic intent – their commitment to coherent growth strategies. The processes of diffusion and spillovers are hence diverse and complex. In the case of small firms, knowledge and new technologies typically ‘diffuse’ through:

Suppliers and customers – eg along supply chains; Hiring of experienced and trained staff; and New firm generation – most new technology based ventures are intended or

unintended spin-offs from larger firms.

Types of knowledge in Scope

All types Technological Scientific Non-technological

Objective of Learning

Inform Strategy Catch up Incremental

Innovation Radical Innovation

Context for Learning

SMEs SME-SME

interaction ICT diffusion Supply chain MNC- Local firm MNC-Subsidiary Cluster/Sector International

technology transfer From Customers

Mechanism of Learning

All Industry - Research Licensing Alliances Collaboration Networks

Figure 3.4.: Characterising the Different Orientation of the Literature Relevant to Understanding Absorptive Capacity:

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There is also a substantial literature concerned with spillovers to local firms from the activities of MNCs29. Some of this literature is reviewed in Arnold et al (2004) who conclude that recent research shows that the level of spillover depends on their being a relatively narrow gap between the complexity of the technology in the MNC and the capabilities of the domestic firms and on strong linkages among domestic firms such that knowledge diffuses more widely in an economy. 3.2.3 Dynamic Capabilities and the Resource-Based View of the Firm The recognition that the competitive performance of firms derives in large part from their specific physical, human and knowledge resources underpins the resources-based view of the firm. The approach was developed in response to the mismatch between the reality of firms as active agents of change in the economy and the concept of the firm in neo-classical economic frameworks. The resource-based view of the firm (RBV) emphasizes that firms are heterogeneous in their resources and capabilities. These differences in resources are important because many key assets cannot be readily purchased and knowledge (in particular) does not diffuse readily. These resource endowments (or firm specific assets) are ‘sticky’ because such resources are often not readily tradeable (eg due to tacitness) and the development of new distinctive resources is complex and takes time and investment. Schulze (1994) characterises two schools of thought in the RBV literature: the structural/content stream and the process/capability stream. Researchers in the structural/content stream focus on the possession of unique resources (particularly knowledge) as the key source of a firm’s competitiveness (Barney, 1986; Peteraf, 1993). Competition, from this perspective, focuses on controlling access to these resources. Within the process/capability stream there is a greater emphasis on the use of resources in firms, and in particular on how resources (including knowledge) are combined to develop new competencies and knowledge (Lane, Koka & Pathak (2006) Dynamic Capabilities Taking the RBV as a starting point, Teece, Pisano and Shuen (1997) focus on how firms build competitive advantage, through learning and the management of knowledge, in turbulent sectors with innovation-based competition. They introduce the concept of ‘dynamic capabilities’ where: “The term ‘dynamic’ refers to the capacity to renew competences so as to achieve congruence with the changing business environment; certain innovative responses are required when time-to-market and timing are critical, the rate of technological change is rapid, and the nature of future competition and markets difficult to determine. The term ‘capabilities’ emphasizes the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organisational skills, resources, and functional competences to match the requirements of a changing environment.” (p515).

29 Sourafel Girma and Holger Görg, Foreign direct investment, spillovers and absorptive capacity: Evidence from quantile regressions, IIIS Discussion Paper, No.1 / July 2003; Yuko Kinoshita, Technology Spillovers through Foreign Direct Investment, CERGE-EI Working Paper No. 39/1998 Holger Görg, and David Greenaway, Much Ado About Nothing? Do Domestic Firms Really Benefit from Foreign Investment?, CEPR Discussion Papers 3485, C.E.P.R. Discussion Papers, 2002; M. Blomström and A. Kokko, Multinational Corporations and Spillovers, Journal of Economic Surveys , Vol.12, No. 3, July, pp. 247-277, 1998

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They recognise the role of path dependence in competence development, such that existing competences (the result of past choices) shape the options open to the firm and hence firms make “long term, quasi-irreversible commitments to certain domains of competence.’ They define dynamic capabilities as a firm’s: “ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. Dynamic capabilities thus reflect an organisation’s ability to achieve innovative forms of competitive advantage given path dependencies and market positions.” (p516) Teece, Pisano and Shuen propose that the competitive advantage of a firm depends on its managerial and organisational processes, shaped by its asset position and the avenues of development (paths) open to it. Hence, they define the three key building blocks of dynamic capabilities in terms of:

Processes - managerial and organisational processes, routines or patterns of learning – these processes, which are frequently a key source of differential performance, are often interdependent such that change in one dimension requires change in others.- this may be why radical technological change, which requires new approaches to organizing and learning, can often be particularly challenging to incumbents;

Positions – ‘the specific endowments of technology, intellectual property, complementary assets, customer base, and its external relations with suppliers and complementors’; and

Paths – the strategic options open to the firm and the role of increasing returns and dependencies.

A key point to understand in Teece, Pisano and Shuen’s approach to dynamic capabilities is that, while competences and capabilities (and thus competitive advantage) rest on processes shaped by positions and paths: “competences can provide competitive advantage and generate rents only if they are based on a collection of routines, skills and complementary assets that are difficult to imitate.” (p524). A further point relevant to the issue of absorptive capacity is the recognition that replication and transfer of competences becomes more difficult the less codified is the knowledge – ie a simple transfer of information is only possible where all relevant knowledge is codified. This means that competences and capabilities, and the routines underlying them, are usually difficult to replicate – and sometimes difficult to even specify clearly. These concepts, summarized in Figure 3.5 have been widely influential and in our view they provide a substantial step toward a conceptually stronger framework for an analysis of absorptive capacity. This framework has stimulated a good deal of work seeking to more fully specify the nature of dynamic capabilities. However, the approach has been criticized for limitations at what could be considered the two ‘ends’ of the framework:

In the short term there is clearly a good deal of ‘design space’ available to firms within the scope of the capabilities/ resources they have. Clearly adaptation, creativity and application are not fully determined by a firm’s resources. Some firms, and particularly smaller firms, have a good deal of ‘agility’ that enables them to respond over the short term within the scope of the capabilities.

In the longer run, and particularly in the context of radical change, firms need to

renovate not only their strategies but the very architecture of their dynamic

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capabilities – ie they need to re-build their dynamic capabilities. This involves an explicit strategy for developing dynamic capabilities, which we term Strategic Dynamic Capabilities, a dimension that is not addressed in the original work of Teece, Pisano and Shuen (1997). We emphasize this aspect because of the increasing importance of developing, in a more turbulent knowledge environment, explicit strategies for developing relevant absorptive capacity/dynamic capabilities.

We have illustrated this broader view in Figure 3.6 This issue of explicit approaches to building dynamic capabilities appears to be a concern addressed by Daghfous (2004). He argues that organisational innovation is a continuous process because the areas requiring knowledge are also ever changing. New technologies, new management approaches and other causes of continuous change in an organisations internal and external environment are constantly emerging, and this in turn trigger the need for organisations to manage their knowledge base. Daghfous argues that a firms’ ability to acquire, assimilate and profitably use new knowledge intensive practices are of themselves organisational innovations. “Knowledge is not enough – a firm needs to have the tools to exploit and appropriate this knowledge embedded in new organisational innovations”. Daghfous recommends mechanisms by which firms may develop absorptive capacity through organisational improvements:

Companies should be committed to the goal of enhancing and leveraging their knowledge by investing in resources, in learning programs, and by enhancing the knowledge of their own employees;

Firms should encourage employees to communicate across functional boundaries – to brainstorm new product ideas;

Firms need a true commitment from top management to create a learning organisation;

Organisations should promote a culture that is open to change;

Physical and virtual knowledge market places should be used so that employees can communicate on these issues;

Knowledge sharing should be included as a criterion of performance evaluation; and

Internal seminars and workshops should be used for sharing knowledge throughout the firm.

Figure 3.5: Dynamic Capabilities Dimensions Components of Dynamic Capabilities

Coordination & integration

Coordination of internal activities in eg product development, Coordination with suppliers and customers

Learning Interaction, communication and collaboration among individuals Organisational knowledge resides in new patterns of activity – routines or

organisational arrangements

Processes

Reconfiguration of a firms asset structure Identifying and assessing the triggers for change Benchmarking to identify superior practice Change management capability

Positions Tangible and intangible Assets:

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Specialized plant and equipment Specialized and difficult to trade knowledge assets Reputation Relational assets Cash reserves/ access to finance Internal and external structural assets, governance arrangements Institutional assets – sectoral, regional and national innovation systems

Paths Accumulation of specific assets in the context of time-dependent learning

processes and increasing returns Technological opportunity arising from advances in knowledge in relation to

firm’s position Figure 3.6.: Strategic Dynamic Capabilities and Dynamic Capabilities.

A Useful Example of Building and Applying Dynamic Capabilities Verona and Ravasi (2003) provide an excellent example of the renovation of capabilities in a firm – and in so doing show the close links between the concepts of ‘absorptive capacity’ and ‘dynamic capabilities’30. These dynamic capabilities are underpinned by the human resources, physical resources, structure and systems and by the culture of the firm – but they are the result of prior experience through the accumulation of decisions and actions taken to solve problems in complex and uncertain situations. The firm, a producer of advanced hearing aids, had begun to lose market share due to slow product innovation and a failure to take full advantage of new digital technology. The firm’s dynamic capabilities were not able to sustain the rate or the type of innovation necessary for sustained competitiveness in a context of new technologies and increased competition. As a result of this situation the firm introduced over a period of years major changes in their approach to managing innovation – ie built new dynamic capabilities. What is striking is the extent of organisational innovation involved, as outlined by Verona and Ravasi, who argue that high levels of innovation required the deep renovation and close integration of three processes (Figure 3.7 and Table 3.5): 30 Verona, G. and Ravasi, D. (2003) Unbundling dynamic capabilities: an exploratory study of continuous product innovation. Industrial and Corporate Change 12(3): 577-606.

Resources Physical, financial, property, relational and human resources

Capabilities The ability to perform a set of activities to produce an outcome

Agility The ability to respond to short term shifts in the competitive context by modifying activities and outputs in the context of existing capabilities and resources.

Strategic Dynamic Capabilities Those resources that enable firms to create new options for new paths of knowledge accumulation. For example, the development of new relationships (which may take time and investment) in order to open new learning mechanisms; the formation of corporate ventures to create learning platforms. This is essentially the construction or new dynamic capabilities

Dynamic Capabilities The routines, strategies & relationships that enable firms to renovate their resources – ie to learn.

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knowledge creation and absorption- commitment to investment in learning from

the frontier of new knowledge, assessing technological and commercial applications and ensuring effective absorption of new knowledge from external sources;

knowledge integration- creating and managing a context that stimulates latent and dispersed knowledge resources; and

knowledge reconfiguration- structures and routines that enable knowledge resources (patterns of knowledge integration) to be recombined to address new opportunities. Hence, this system, which is open to dispersed individual contributions, enables the continuous reorganisation of resources that may lead to substantial change in strategies and products.

This organisational innovation resulted in a “…..loosely coupled architecture based on the absence of permanent formal structures, multiple and evolving relational patterns, and an open and informal culture…[which ensured]…co-ordination despite ample individual freedom..”31

Figure 3.7: Dynamic Capabilities: Interaction among the Key Processes

This case study illustrates very clearly that knowledge in the firm is not simply an asset that can be mobilized as needed. We see that in large part knowledge is held by individuals and that the acquisition and integration of knowledge is not simply the transmission of an asset, as in a market-based transaction. Acquisition of knowledge from the scientific world involved the development of personal and organisational relationships shaped by the institution of science and hence by the culture and values of that institution. Similarly, the continuous generation and assessment of ideas, and the formation of largely self organizing project teams, recognised the roles of individuals and of social relations in highly uncertain processes of innovation. These dimensions of learning and of dynamic capabilities are not sufficiently recognised in Teece et al (1997).

31 Verona, G. and Ravasi, D. (2003) Unbundling dynamic capabilities: an exploratory study of continuous product innovation. Industrial and Corporate Change 12(3): 577-606. p598

Continuous Innovation

Knowledge Integration

Knowledge Creation

Knowledge Absorption

Knowledge Reconfiguration: changing division

of labour and micro-level

organisation

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Table 3.5: Building Blocks of Dynamic Capabilities at Opticon

Dimensions of Capability

Actors Physical Resources

Structures & Systems

Culture

Knowledge Creation and Absorption

Graduate researchers Long term relationships with patients Close collab’n with intern’l researchers

Separate research facility Comprehensive library resources

Research centre has autonomy over its research budget Scientists at the research centre focus on basic research

Orientation to scientific rather than applied research Unrestricted exploration of research issues Open approach to scientific community – open sharing of knowlege

Knowledge Integration-

Technical experts loosely linked with professional areas Employees with eclectic skills able to work in an unconventional environment

New workplace layout – open office, meeting points Mobile workstations; Easily accessible electronic archive

Cross functional teams Competence centres ‘multi-job system Self participation in projects

Openess to creativity Absence of departmental identification Interaction and dialogue encouraged.

Knowledge Re-configuration

Motivated employees Experienced senior managers

Flexible workplace design

Absence of departments Development group Continuous collection and assessment of proposals; Free allocation of time & skills; Centralized allocation of financial resources

Openness to individual proposals & creativity Broad involvement the strategic process

Source: Derived from Verona and Ravasi (2003) 3.2.4 Innovation Management The extensive literature on innovation at the firm level stresses the role of a firm’s resources (physical assets, human resources, intellectual property, internal ‘routines’ and external links) in enabling competitive performance. In the context of relentless competition the role of learning in continuously upgrading resources is a vital mechanism – and hence a great deal of attention has been focused on the processes of learning. For many (particularly larger and ‘high tech’) firms a central mechanism of learning is through R&D. But this is only one mechanism and in smaller firms and less high tech sectors learning through other mechanisms may be more important (eg learning from customers, suppliers, competitors, new staff, problem solving etc). The concept of routines (the ways of deciding, organizing

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and doing that firms develop over time to coordinate the mobilization, integration and development of resources) plays a central in theories of effective innovation management32. While firms are the central actors in the innovation process, external interactions (eg alliances, networks) play a crucial role. The significance of interactions among firms and between firms and research organisations, and the role of a diverse range of institutions (eg public policies, social conventions and values) in shaping goals and incentives, has led to the concept of innovation systems. The initial concept of innovation systems did not emphasize a spatial dimension to the patterns of interaction and institutional development, but more recently there has been a strong emphasis on regional innovation systems33. The RBV has had a strong influence on the frameworks for recent approaches to innovation management. One important foundation of those frameworks concerns the processes through which firms search for new knowledge. The processes through which organisations learn are characterized by cumulativeness. Firms search for new knowledge from the basis of the knowledge they already have – ie they search ‘locally’ (Nelson & Winter, 1982), Firms cannot effectively identify and assess all options in their search for new technologies for their products and processes. Nor can they hope to easily master a new area of technology unrelated to their existing knowledge base. Helfat (1997) analysed the sources of oil firms’ capability to enter new technology areas. She found that firms that had previously undertaken R&D in areas of technology related to the new technologies had accumulated complementary assets, in the form of knowledge and physical plant, that enabled them to more rapidly respond to changes in the external environment (in this case rising oil prices and alternative technologies). These complementary assets were primarily knowledge and plant that either enabled the firms to more rapidly undertake effective R&D in the new technologies, or enabled the firm to more effectively commercialise the outcome of their R&D. Helfat argues that organisational and technological knowledge acquisition is cumulative. 3.2.5 Firm Learning, Organisational Learning and Knowledge

Management 34 Many authors have characterized different types of knowledge and drawn out the implications of these differences for the processes of learning. One such characterization, by Lundvall and Johnson35, identifies

four types:

32 Tidd, J., Bessant, J. and Pavitt, K. (2005) Managing Innovation. Integrating Technological, Market and Organisational Change. Wiley. Fagerberg, J., Mowery, D. and Nelson, R. (2005) The Oxford Handbook of Innovation. Oxford University Press. Dosi, G. (1988) The Nature of the Innovative Process. In G. Dosi et al (eds) Technical Change and Economic Theory. Pinter: London:221-238. Dosi, G., Nelson, Rl and Winter S. (eds) The Nature and Dynamics of Organisational Capabilities. Oxford University Press. Oxford. Becker, M. (2004) Organisational Routines: a review of the literature. Industrial and Corporate Change 13(4): 643-677. 33 Asheim, B. and Gertler, M. The Geography of Innovation: Regional Innovation Systems. In Fagerberg, J., Mowery, D. and Nelson, R.(eds) (2005) The Oxford Handbook of Innovation. Oxford University Press 34 K Nonaka, ‘The knowledge creating company,’ Harvard Business Review, Nov-Dec 1991.; Easterby-Smith, M. and M. A. Lyles (editors). (2003). The Blackwell Handbook of Organisational Learning and Knowledge Management, Oxford, Blackwell Publishing 34 Cited in Arnold, et al 2004m p16 35 Cited in Arnold, et al 2004m p16

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Know what - which involves the transfer of codified information as facts

Know why - which involves understanding basic principles, rules and ideas

Know how - which involves direct experience

Know who - which requires direct contact between individuals, the ability to communicate and form relations of trust.

While ‘know what’ and to some extent ‘know why’ can be readily transferred between individuals and groups (if the share the same underlying knowledge base) this is not the case with ‘know how’ and ‘know who’ which generally requires much closer inter-personal interaction. Arnold et al (2004) make the point that codification of knowledge facilitates both the management and transfer of knowledge. However, the capacity to absorb codified knowledge may require the prior development of tacit knowledge, as well as the prior acquisition of codified knowledge. To that extent, scientific knowledge is not a public good, as only some individuals and organisations are capable of using it. There is an extensive literature that addresses the question of how firms develop the capabilities that underpin all of the functions from routine production to innovation. Summarising a range of studies Malerba has identified six major mechanisms of learning at the firm level36:

Learning by searching, refers to the generation of new knowledge achieved through formalised search activities such as R&D.

Learning by doing, refers to the accumulation of knowledge gained through carrying on repetitively the same kind of activities.

Learning by using, refers to learning through the utilisation of products.

Learning from advances in science and technology, refers to the absorption of new developments in science and technology.

Learning from inter-industry spillovers, refers to the activities of competitors and other firms in the same industry.

Learning by interacting, refers to ‘horizontal’ or ‘vertical’ forms of interaction with other sources of knowledge such as cooperations with other firms.

All of these mechanism are, or can be, incorporated in the Dynamic Capabilities/ Absorptive Learning framework. Organisational Learning A key issue for organisational theory is how organisations learn and adapt to their environment and a distinct literature has developed around the concept of organisational learning37. Organisations (or individuals or groups) learn to modify behaviour where there is a gap between actual and expected outcomes (single loop learning). In double loop learning they question their approach to learning (ie their policies, frameworks, organisational

36 F. Malerba, Learning by Firms and Incremental Technical Change, Economic Journal, 102/1992, pp.845-859 37 Henrich R., Greve,( 2003) Organisational Learning from Performance Feedback Cambridge University Press; Sutton, R. J. & Pfeffer, Jeffrey Published (2000) The Knowing-Doing Gap: how smart companies turn knowledge into action. Harvard Business School Press; Choo & Bontis, N (Eds) (2002)Strategic Management of Intellectual Capital and Organisational Knowledge Oxford University Press; Argote, Linda (1999) Boston: Kluwer Academic,. Organisational Learning: Creating, Retaining, and Transferring Knowledge.

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structures) in order to improve the learning process itself38. As discussed above tacit and codified knowledge have different characteristics and also different learning processes. Nonaka and Takeuchi (1995) have developed a model of organisational learning which recognises these differences and identifies processes (‘externalization’) that can transform the tacit knowledge of experienced personnel into codified knowledge, in principle then more widely available in the organisation, and ‘internalisation’ through which employees internalize an organisation’s procedures and formal operational requirements 39. In this model ‘socialization’ processes facilitate the sharing of tacit knowledge and ‘combination’ processes facilitate the diffusion of codified knowledge.

The term ‘the learning organisation’, a prescriptive framework for management, is perhaps most strongly associated with the influential work of Peter Senge in the Fifth Discipline.40 The approaches to organisational learning tend to emphasize either the experiential or the cognitive processes of learning. In the former firms develop their capabilities in response to feedback from their environment in a process of adaptation (Cyert and March, 1963)41. In the latter, prior knowledge and mental models of individuals shape the identification and interpretation of new knowledge (Argyris and Schon, 1978; Senge (1990)42. These experience-related and cognitive processes are well integrated in the framework of Zollo and Winter(2002), which emphasizes the role of planned approaches to knowledge articulation and codification as a deliberate learning mechanism.43 Access to knowledge is vital for organisations to renovate their competencies and remain competitive. Exposure to other ideas, approaches and ways of thinking often simulates firms initiate paths of learning and action through which the firm selects, assesses and integrates new knowledge into their resources. Focusing on the internal characteristics of firms that contribute to absorptive capacity, Jones draws attention to the roles of gatekeepers, boundary spanners and change agents. 44 These roles contribute to both inter-organisational and intra-organisational knowledge flows, and more broadly to the capacities to acquire, assimilate, transform and exploit knowledge. It is increasingly recognised that for established firms, including SMEs, breaking the established path, re-learning how to learn and embarking on a phase of exploration is necessary for strategic renewal, but managerially challenging45.

38 Argyris, C. and Schon, D. (1978). Organisational Learning: A theory of action perspective, Addison-Wesley, Reading MA, 1978. 39 Nonaka, I. and Takeuchi, H. (1995), The Knowledge Creating Company, Oxford University Press, New York, 1995 40 Senge P. (1990) The Fifth Discipline: The Art and Practice of the Learning, New York. Currency Press 41 Cyert, R. and J. March (1963). A Behavioral Theory of the Firm. Englewood Cliffs, NJ., Prentice-Hall. 42 Argyris, C. and D. Schon (1978). Organisational Learning: A Theory of Action Perspective. Reading, MA., Addison-Wesley; Senge, P. M. (1990). The Fifth Discipline: The Art and Practice of the Learning Organisation. London.,Century Books. 43 Zollo, M. and Winter, S. (2002) Deliberate Learning and the Evolution of Dynamic Capabilities. Organisation Science 13(3): 339-351 44 Jones, O. (2006) Developing Absorptive Capacity in Mature Organisations: The Change Agent’s Role. Management Learning. 45 Jones, O. (2006) Developing Absorptive Capacity in Mature Organisations: The Change Agent’s Role. Management Learning.

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Knowledge Management46 If knowledge or intellectual capital is a key asset of an organisation then its acquisition, management and measurement are important issues. Knowledge Management refers to a range of organisational practices for identifying, storing and disseminating knowledge across an organisation. Not surprisingly the Knowledge Management field is increasingly linked with the use of IT for ‘knowledge’ storage, searching and transfer – for example databases, expert systems, corporate intranents, blogs, and software to facilitate collaboration. Knowledge management has developed as a functional area of organisations in which specialists are employed. It is also a new field of research and disciplinary development with a variety of schools, each with a different emphasis. 3.2.6 Collaboration and Networking Networks and external links have a key role in alerting firms to change in their external environment, including the existence, relevance and accessibility of knowledge – and in providing channels for the acquisition of new information and knowledge. There is a great deal of evidence that a characteristic of more innovative and dynamic firms is that they have more external links47. As ICT greatly facilitates communication and hence the breadth, flexibility and rapidity of networking this has been one of the important dimensions of the impact of ICT on innovation - for example, Gray, (2006; 2003); Corso, et al (2003). Arnold et al (2004) draw attention to the concept ‘Knowledge Value Collectives’ (KVCs), developed by Bozeman and Rogers

to describe the set of people and institutions that work

with a related set of knowledge48. They comment that KVCs are situations where knowledge production is an explicit part of the community’s activity, and that individuals join such collectives with a variety of motives including factors such as a desire to ‘play’ within groups of individuals with similar interests as well as the more obvious resource-based motivations, such as access to infrastructures, building skills and solving technical problems. They suggest that KVCs are one of the building blocks of innovation systems, and that policy for absorptive capacity should include measures to foster the growth of such collectives. This is an important point and reminds us again, as noted in Section 2, that firms are social organisations and they operate in networks and through relationships that are socially shaped. If we reduce the concept of a firm, or the analysis of an innovation system, simply to an economic model we risk losing important dimensions of what shapes their performance. Based on their review of literature on networking in innovation, which focuses on ‘high tech’ sectors, Powell and Grodal suggest that there is often a virtuous circle with active firms developing external collaboration (through which they have access to diverse sources of information and capability), learning from experience to better manage such links, collaboration improving internal innovation performance, which attracts other firms into collaborations, and so on49. They note, however, that some forms of knowledge transfer may require relatively close links. Drawing on a number of empirical studies they argue that (particularly tacit) knowledge exchange may be difficult where two organisations have

46 See: Knowledge Management Online Open Source KM http://www.knowledge-management-online.com/; 47 Freeman, C. and L. Soete (1997) The Economics of Industrial Innovation, Pinter: London 48 Barry Bozeman and Juan Rogers, ‘A churn model of scientific knowledge: Internet researchers as a knowledge value collective,’ Research Policy, Vol 31, 2002, pp 769 – 794 49 Powell, W. & Grodal, S. (2005) Networks of Innovators. In Fagerberg, J., Mowery, D. and Nelson, R.l (Eds) The Oxford Handbook of Innovation. OUP.

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different cultures, and that in some cases established alliances develop a common language and shared mental models (‘wider bandwidth’) that facilitates knowledge transfer. 3.2.7. Accessing External Technology Slowinski et al (2000) surveyed 22 firms to assess their approach to identifying, accessing and evaluating external knowledge. They found that: “With the exception of pharmaceutical and electronics industries, we found that most companies did not have a structured/organized external technology acquisition effort. Companies were mainly in the early stages of creating an organized approach and were exploring,searching, piloting and reorganizing their efforts to incorporate external technology into internal technology development activities.” (p29-30) However they also found that the effective management of technology acquisition, and developing competencies for that purpose, was generally seen as being increasingly important. Table 3.6, which summarises Slowinski’s findings regarding the management of technology acquisition, also identifies management issues and tools that are also relevant to absorptive capacity.

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Table 3.6: Managing the Acquisition of External Technology Issues in Managing Technolgy

Acquisition Tools for Managing Technolgy

Acquisition Understanding Technology Needs

Needs in relation to strategic plans Required performance characteristics IP positions Complementary internal capabilities required to translate external knowledge into commercial outcomes

Technology roadmapping Gap analysis Competitive analysis. Requirement for people from different functional areas to participate in a thorough assessment.

Identifying External Technology

There are many approaches and these tend to differ across industry sectors.

Patent and literature searches Public research sector networks Technology brokers Dedicated technology intelligence groups or individuals with internal dissemination systems. Formation of intra-corporate knowledge groups Generation of open roadmaps to communicate needs

Evaluation & Assessment of Technology Leads

Need for strong internal expertise to evaluate value and the internal resources needed to use it. NIH can be a major barrier in the assessment The disclosure process often needs to be progressed in stages

Cross functional teams for assessment Objective criteria for assessment

Valuation of the technology

Valuation is particularly difficult for early stage technologies. Valuation should take into account the costs to modify, improve and implement the technology.

IP-related valuation tools include: IP asset valuation

Developing a Technology Agreement

The structure of agreements varies widely both due to the nature of the relationship and the preferences of the partners

Licensing Collaboration Alliance Framework™

Metrics for Measuring Success

Wide diversity and few satisfactory systems. Metrics must be credible within the organisation, tailored to the audience; include inputs from all stakeholders

Few developed generic tools

Source: Slowinski et al (2000) 3.2.8 Learning and Absorptive Capacity in SMEs The changing role of SMEs in production, innovation and employment has led to a greater focus on their role in knowledge generation and transfer. A recent review supported by the UK Economic and Social Research Council’s Evolution of Business Knowledge Programme provides a useful assessment of a diverse range of literature on the evolution of knowledge in SMEs50. Thorpe et al (2005) note that many authors distinguish between know how (or informal or tacit knowledge) and know what (or formal or codified knowledge) and observe that the

50 Thorpe,R. Holt, R. Macpherson, A. and Pittaway, L. (2005) Studying the Evolution of Knowledge Within Small and Medium-Sized Firms: A Systematic Review. Warwick Business School.

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former is particularly closely associated with people and activities. However, knowledge in organisations, and in the wider environment accessed by firms, is embedded in institutions of one form or another: ‘..what is known becomes, in part, a function of institutionalized practices whose path dependencies and historically conceived world views configure what counts as a valid knowledge asset..’ (p35). This conceptualization of knowledge in institutionalized practices is implicit in the concept of routines. It is also fundamental in the literature on ‘communities of practice’51 which emphasizes the extent to which ‘….people learn by becoming immersed in the legitimizing discourse and activities of the community…’. (Thorpe et al, 2005. p37). According to Thorpe et al (2005) the ‘communities of practice’ perspective also suggests that packages of new codified knowledge are unlikely to be implemented until they are adapted to specific locations and applications through such communities. They also suggest that forms of lock-in can occur when existing routines are reinforced when change requires new approaches- and hence that ‘communities’ can be a force for restriction and control, as well as a source for increasing understanding. These developments in organisational knowledge research have moved the focus away from questions of the acquisition and exploitation of knowledge assets by isolated and hierarchically organized firms to a relational perspective which ”..’situates knowledge and knowledge management squarely within social and political systems of meanings’ (Swan & Scarborough, 2001:921)” (Thorpe et al, 2005). Having and accessing knowledge is often critically important for SMEs, where responsiveness and flexibility may be a key source of competitiveness. However, all SMEs are not the same. Thorpe et al (2005s) cite a number of studies that found a significant difference in learning strategies between entrepreneurs and non-entrepreneurs, where the latter are concerned with learning activities that assign, divide and adjust (essentially within in the scope of existing knowledge) whereas entrepreneurs were more concerned with animating, designing and learning (ie essentially with processes of discovery). The studies suggested that entrepreneurs were more prepared to adapt both their knowledge and their learning strategies to the context, to question their practices and to consult wider information sources. These interactions with wider sources are important for two reasons. First, identifying and understanding an opportunity requires relevant knowledge, which may be acquired through interaction – although the entrepreneur will require the cognitive foundations to grasp the significance of that knowledge. Second, knowledge is increasingly dispersed across people, and communities, amongst whom there are a plethora of often conflicting expectations concerning the exploitation of that knowledge, the role of the individual entrepreneur is one of bringing into focus a specific nexus of relations that can be acknowledged as an opportunity. It is the way the entrepreneur orchestrates such relations – rather than how they might rationally analyze likely business costs – that configures how knowledge is acted upon in terms of founding organisational routines.” (Thorpe et al, 2005, p63). Several recent studies of learning and innovation in SMEs stress the role of the entrepreneur/managers in creating the mechanisms (‘spaces’, routines, organisational arrangements, permission to experiment) that facilitate knowledge sharing and integration. This is because the knowledge of individuals is of limited value unless its use also mobilizes the resources of others. This capacity (labeled by Bessant et al, 200152) as agility) also involves the ability to creatively reconfigure both problems and possible solutions rather than

51 Brown, J. S. and Duguid, P. (1991) 'Organisational Learning and Communities of Practice: Toward a Unified View of Working, Learning and Innovation', Organisations Science, 2 (1): 40-57.;Wenger, E. (2000) 'Communities of Practice and Social Learning Systems', Organisation, 7 (2): 225-246.;Wenger, E.C. and Snyder, W.M. (2000) 'Communities of Practice: the Organisational Frontier', Harvard Business Review, 78: 139-145 52 Bessant, J., Francis, D., Meredith, S., Kaplinsky, R and Brown, S. (2001) 'Developing manufacturing agility in SMEs' International Journal of Technology Management, 22 (1,2,3): 28-54

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rely on a fixed retinue of responses (Thorpe et al , 2005). However, these and other studies recognise that a high level of relevant knowledge must exist in the SME to support decision making and knowledge absorption: “The kind of knowledge that is of most use to SMEs is the kind of knowledge most firmly embedded within the experience, insight and intuition of knowledgeable people….The message is that it is the personal forms of knowledge that are of most use to SMEs, that this form of knowledge is held within the experiential ambit of key individuals, and that in order to benefit from this knowledge the entrepreneur or manager needs to maintain intimate links with the knowledge – either through co-ownership structures of being skilled in themselves.” (Thorpe, et al, 2005). Some of the studies of SME knowledge resources use the conceptual framework of ‘absorptive capacity’. A particularly useful recent study is that of Liao et al (2003) who analyzed the absorptive capacity of 107 growth-oriented SMEs in the US 53. According to Thorpe et al (2005), the study found that: “SMEs communal interaction was vital in order to better expose the organisational routines to alternative ways of doing things. This exposure would then better justify investment decisions in the routines by which accumulated experience is stored, transferred and transformed as knowledge; the validity and authority of the knowledge informing the prevailing expectations within the firm would be better assured because of its being seen to work elsewhere. A concern with absorptive capacity reflects awareness that what is known is a combination of being exposed to new information and being willing and able to act upon it. The assumption is that the greater the absorptive capacity of an SME, the more its people are able to recognise opportunities in pro-active rather than re-active ways. Liao et al (2003) find that high levels of responsiveness (acting upon knowledge acquired) are associated with: firstly, a capacity for external knowledge acquisition (active listening) and internal knowledge dissemination; secondly, a pro-active strategy of new opportunity exploration as opposed to exploiting existing ones; and, finally, exposure to a turbulent business environment within which strong internal dissemination routines act as a kind of operational and strategic tether.” (p67) On the basis of this and other studies, Thorpe et al (2005) conclude that, rather than focusing on strong internal knowledge routines, it is the external linkages, and an awareness of the external institutional environment, that are important for SMEs, particularly for growth oriented firms and firms in turbulent environments: “Hence if it exists, an SME’s absorptive capacity is not so much a stable, unit-based competency as a function of the social network they hold in place, and held in place by. The knowledge routines are invariably externally influenced and configured both creation and use, the implication being that to be concerned with knowledge is to be concerned with extent and quality of the external links (or social capital) within which an SME finds its role.” (Thorpe, et al, 2005; p68) Several studies of innovation in SMEs have emphasized both, the role of interactions with customers and suppliers as sources of knowledge for innovation, and the role of the SMEs knowledge capabilities for effective interaction with customers and suppliers (for example

53 Liao, J., Welsch, H. & Stoica, M. (2003) 'Organisational Absorptive Capacity and Responsiveness: an Empirical Investigation of Growth-Oriented SMEs', Entrepreneurship Theory& Practice, 28(1):63-85

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Hoffman et al, 1998)54 Interaction with customers, and particularly international customers, appears to be generally a stronger driver than interaction with suppliers. 55

We might expect that membership of tight knit clusters would facilitate knowledge acquisition by SMEs but Thorpe et al (2005) cite several studies which suggest that clusters were important for commercial links but were less important for learning than either internal capacities or extra-cluster linkages. Many studies discuss the role of organisational systems, processes and routines in supporting the internal and external interactions that enable the accumulation and distribution of knowledge. Social capital and network relations facilitate external links and internal routines enable acquisition, dissemination and sharing. Thorpe et al (2005) argue that SMEs must strike a balance between becoming competent in a specific area and continuing to remain competent in a changing market and competitive environment. They argue that in many cases, particularly for SMEs, the ability to build and reconfigure networks will be more important than the ability to accumulate knowledge internally, and hence social capital is particularly important. As indicated in Figure 3.8 , there appears to be trade offs between an orientation toward the efficient and effective exploitation of knowledge (more typically associated with larger firms or SMEs in a stable niche) and an orientation toward exploring for new knowledge and responding to the opportunities that may be identified. These overall findings are summarized on Figure 3.9, which suggests a virtuous circle through which an SME can replenish its knowledge assets while also reconfiguring both its internal routines and external linkages. The figure also suggests that while knowledge can be acquired through external links, its assimilation involves active processes of innovation and problem solving and reflection on experience. The figure also indicates several points and processes through which an SME can temporarily or more permanently move away from this virtuous circle, for example by avoiding the challenge of growth and innovation, failing to widen its external links, relying on proven routines or failing to invest in the development of new knowledge assets. In the organisational learning literature this balance dilemma, ie of developing organisational routines that stimulate creativity while supporting knowledge accumulation and application, is conceptualized in terms of developing generative, integrative and double loop learning. A key requirement for this balance is the capacity to reflect on (rather than only accumulate) experience in order to adapt and change routines for new challenges, but without losing the benefits that come with focus. Based on their review, Thorpe et al (1995) emphasise that that capacity is not simply located within a firm but is also shaped by networks and the external business and knowledge environment. They also suggest that the role of firms’ ‘external knowledge relations’ is increasing due to both the growth of outsourcing and the rate of technological change. Consequently, boundary spanning structures of communication, whether related to formal inter-firm relationships, value chain interactions or loose networks, have a key role in absorptive capacity.

54 Hoffman, K., Parejo, M., Bessant, J. and Perren, L. (1998) 'Small Firms, R & D, Technology and Innovation in the UK: a Literature Review', Technovation, 18 (1): 39-55 55 See for example: Bell, J., Crick, D. and Young, S. (2004) 'Small Firm Internationalization and Business Strategy: An Exploratory Study of `Knowledge-Intensive' and `Traditional' Manufacturing Firms in the UK', International Small Business Journal, 22 (1): 23-56; and Burpitt, W.J. and Rondinelli, D.A. (2000) 'Small Firms' Motivations for Exporting: to Earn and Learn?', Journal of Small Business Management, 38 (4): 1-14

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Figure 3.8 The Challenge of Balancing the Trade-Offs Between Wide Angle Exploration and Narrow Focus Exploitation.

Source: The Authors

Figure 3.9: Knowledge Acquisition in SMEs – a Virtuous Circle

Source: Authors based on Thorpe et al (1995) One of the important conclusions of the review is that a perspective focused on knowledge as an asset and set of routines is too narrow. Such a focus tends to support measures to

Orientation to Growth & Innovation - Strategic Intent

Active exploration through interaction

Network building & extension- deeper social capital

Knowledge recognition

Growth & re-investment in resources

Strong capabilities & active knowledge orientation & effective & flexible sharing routines

Innovation & Problem solving – stretching knowledge & routines

Reflection

Reflection

Reflection

Risk aversion & orientation to stability

Fixed routines, excessive formalization

‘lock-in’ & focus on exploitation

Rigid routines & lack of space for experimentation

Under-investment in new knowledge

EXTERNAL LINKAGES

CODIFIED LOOSE

EXPLORATION

EXPLOITATION

INTERNAL ROUTINES

WEAK & DIVERSE

STRONG & FOCUSSED

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consolidate links and routines and to codify knowledge. However, the review concludes that recent research suggests that the more innovative SMEs maintain a high level of flexibility in their external links and internal routines. This flexibility, however, is enabled by a high level of individual competences and diverse socially-embedded networks. Entrepreneurs who are active in seeking out different communities (cf ‘communities of practice’) are more likely to develop interactions that provide resources for reflecting on and changing current practices. While the entrepreneurs human capital is a unique resource for many SMEs, the personal knowledge of entrepreneurs and managers is best developed where situations provide the opportunity for both extension (eg through new challenges) and reflection (eg through interaction with others). 3.2.9 Barriers to Change and Learning in SMEs By drawing on a range of detailed studies, Gray (2006) shows that only a small proportion of SMEs are particularly dynamic in terms of innovation and growth. It is this ‘active entrepreneurial minority’ that is the particular focus for policy. The limited use of training needs assessments in SMEs leads to lack of demand for training, Gray (2006) found that the SMEs with higher growth and higher levels of innovation tend to be those with more highly qualified and younger managers. He also found that firms with more qualified managers tend to invest more in training and establish more external links. Corso et al., 2003 conclude that ICT can “play a key role in this process. By providing quick and easy access to external sources of knowledge and new and more intense communication channels with partner organisations, ICT can erase traditional constraints on SMEs innovation ability, while leveraging their flexibility and responsiveness”. The extensive literature on innovation and competitiveness in SMEs also provides useful frameworks for and insights into absorptive capacity. As summarized in Table 3.7 and Figure 3.10, a wide range of studies show that firm absorptive capacity:

Is often a by product of prior innovation and problem solving;

Is built on individuals investment in learning ie prior investment via training etc ;

Has a high degree of cumulativeness and path dependence; and

Depends on a firm’s ability to share knowledge and communicate internally.

Table 3.7: Factors that Promote and Impede Learning in SMEs

Negative Positive External Extreme competition

Lack of risk finance Limited supply of human resources

Competition ICT – for communication Networks Kn organisations and Good research industry interfaces

Internal Lack of strategic orientation to growth. Limited knowledge base Lack of training Lack of knowledge sharing Lack of investment in management development Size (Gray, 2006) (small firms are

Links with research and knowledge organisations Ability to identify and exploit opportunities Formal education relevant to the functional area Mechanism to provide awareness of what knowledge an organisation has and where it

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generally more resistant to training) is. Source: Authors 3.2.10 International and Inter-firm Technology Transfer There has been substantial interest in knowledge transfer to subsidiaries within multi national enterprises, eg Gupta and Govindarajan (2000) assessed the MNC subsidiaries’ absorptive capacity by focusing on the prior related knowledge of the subsidiaries. There have been many studies of knowledge flows in general and of absorptive capacity in particular, in the context of strategic alliances and joint ventures -see Van den Bosch et al 2003 and Inkpen and Dinur, 1998. A particular aspect of this area of research has been the role of asymmetries in absorptive capacity in joint venture or strategic alliance partners. There is an extensive literature on the international transfer of technology, both inter-firm, for example through licensing arrangements, and intra-firm, for example from parents to MNC subsidiaries. Many of these studies have identified a lack of absorptive capacity in the recipient firm as a major barrier to effective knowledge transfer. For example, Szulanski (1996) studied 122 cases of intra-firm knowledge and found that three particular factors were the major impediments to effective transfer56:

The level of tacitness (related to human skill or collective endeavour) or ambiguity of the knowledge;

Lack of ability to value, assimilate and apply new knowledge successfully (Szulanski termed this "absorptive capacity"); and

The quality of the relationship between the organisations – an arduous relationship, due to distance or poor relations is a major barrier in comparison with an ‘intimate’ relationship.

Other factors that influenced the level of success in knowledge transfer were:

The perceived value of the knowledge – ie whether it was considered proven;

The characteristics of the knowledge source – motivation to transfer

The recipients perception of the reliability or standing of the source;

The motivation of the recipient – preparedness to learn;

The effort of the recipient – preparedness to persist in learning and follow through (termed by Szulanski ‘retentive capacity’; and

The organisational context – ie whether structures and routines facilitate communication and focused effort.

56 Szulanski, G (1996) "Impediments To The Transfer of Best Practice Within the Firm" Strategic Management Journal, v. 17, Winter 1996, 27-44)

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Figure 3.10 Learning Drivers and Facilitators in SMEs

Source: The Authors 3.2.11 Technological Capability Development in Industrialising

Economies Unlike Cohen and Levinthal, who based their idea of augmenting firm absorptive capacity by largely investing in research and development (R&D) per se, an alternative way of increasing a firms’ absorptive capacity is through a deliberate, strategic learning effort (Kim, 1998; 1999). In explaining the learning processes at Hyundai Motor, Kim (1998) breaks down the absorptive capacity concept into two major elements: the prior knowledge base and the intensity of learning effort (considered the more important element57). Likewise, based on the innovation studies of latecomer firms in Southeast Asian countries, Berger (2005: 20) proposed two more elements of absorptive capacity: organisational factors (i.e. organisational structure, internal communication arrangement and managerial human resource management) and human capital (i.e. a firm’s employees and the quality of their education). Other scholars have also (to a varying degree) implicitly addressed the issue of absorptive capacity and its relationship to firm learning, innovation and the impact of policy (e.g. Dalitz, 2005; Giuliani and Bell, 2004; Kim, 1999; Magotsi-Motanya, 2005; Pavlou and El Sawy, 2005; Song and Shin, 2002; Wegloop, 1995)).

57 Kim (1998) added that even if the (latecomer) firm has low prior knowledge base, it could acquire the absorptive capacity it desired by exerting (and continuously maintain) the high level of learning effort. This was certainly the case of Hyundai Motor (Korea) during its early stages of development. Following the same argument, Criscuolo and Narula (2002: 6) stated “Absorptive capacity accumulates only if an effort [i.e. learning effort] to internalise the external knowledge is exerted and in particular if the prior knowledge has been applied to the solution of problems” [italics added].

Strategy Stretch goals

Knowledge base Formal education Experience Training Kn sharing

Organisation Routines IT systems Culture

External Linkages Formal and informal networks Collaboration

Focusing device In-house R&D Problems Customer need

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The antecedents and the outcomes of absorptive capacity (i.e. the firm’s capability to learn) are fundamentally influenced by a firm’s strategic intent (or their strategic organisational goals), which also includes the ability of a firm to form strategic alliances and networks with other firms and non-firm organisations. This strategic intent serves as the cornerstone for the firms’ learning strategies; it assists firms in trying to plan for consistent, well-aligned (and continuous) learning activities and to select appropriate learning mechanisms (Chitravas, 2006). Thus, we can see that a firms’ strategy, learning process and absorptive capacity are intimately linked; but that the potential to disaggregate absorptive capacity is also very complex, but is likely to be fruitful exercise since it would allow management researchers to obtain a greater understanding of the dynamics of absorptive capacity; and the ways to augment such capacity (e.g. through a management of firm’s dynamic capabilities (Teece and Pisano, 1994; Teece et al., 1997)) and thus enhance the firm’s ability to innovate and compete. Furthermore, it is likely that all of the absorptive capacity elements must be taken into account in a firm’s competitive learning strategy contexts; and that these elements are dynamic and will have particular significance for the sequencing of a firm’s dynamic learning capabilities and to simultaneously manage the evolving external linkages and collaboration, the changes within external industry, the changes within the policy and institutional environment, a firm’s internal learning activities,a firm’s learning mechanisms, and the stages in a firm’s capability development. 3.2.12 Conclusions The literature that is relevant to an understanding of absorptive capacity, and hence that can contribute to a sound foundation for surveys and policy, is extensive and expanding. This review has sought to focus on the core literature (which explicity addesses the concept of absorptive capacity) and to indicate the main concepts and approaches of the major related areas of recent research. While an extension of this review, to draw on a wider range of recent work, would ensure a deeper foundation for future policy, we can draw out several broad conclusions from this review:

The growth of recent studies underline the increasing interest in more effectively managing knowledge, learning and innovation, both at the firm level and above. This interest is leading both to greater understanding of these complex issues and also to a widening range of tools to assist the management of knowledge, learning and innovation. Absorptive capacity is a part of a firm’s innovation capabilities and hence its development is a dimension of innovation management.

The knowledge acquisition aspects of absorptive capacity have cognitive (prior knowledge), cultural (shared values) and structural (a division of labour enabling engagement) dimensions.

The processes of learning and innovation are systemic in that they involve the whole firm and are strongly shaped by overall strategic intent, culture and organisation of the firm. However, in many SMEs a small number of people and their (in large part personal) networks play a central role in innovation and absorptive capacity.

Increasingly, the processes of learning and innovation involve a great deal of interaction with other firms (customers, suppliers) and sometimes, but usually much less often, research organisations. Hence, knowledge and capability is distributed. It is not possible for firms to hold in-house all of the knowledge and capability required

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and hence how they build the relationships access this distributed knowledge and capability is a key issue.

Firms learn (acquire information, knowledge and capability) through a wide range of pathways. Formal R&D and particularly direct transfers of technology from research organisations, are minor sources for most firms. The increasing pace of change requires more active and purposive development of learning mechanisms an more effective management of learning processes.

A key aspect of absorptive capacity is the recognition of an opportunity arising from new knowledge about, eg technology, customer’s needs, market trends. That recognition often requires a strong prior basis of knowledge.

But this recognition is of little value unless it is allied with strategic intent and implementation capabilties.

As learning depends to a large extent on a prior knowledge base (to provide absorptive capacity), and because a great deal of learning is a by-product of innovaition and problem solving around a firms existing products, processes and customers, knowledge and capability development is cumulative, following an evolutionary path.

This is also true of the mechanisms (or dynamic capabilities) through which firms learn – ie the organisation of R&D, the development of collaboration and alliances, the organisation of product development, the approach to training. These mechanism that support learning and innovation tend to evolve over time based on experience and the copying of industry models or recipes. Purposively building a new architecture of learning and innovation is particularly challenging. We are currently in a phase of quite active experimentation with new models for learning and innovation, eg open innovation, corporate ventures, strategic alliances.

Knowledge is only partly codified and to that extent is inseparable from individuals, and the role of individuals is often closely related to the networks through which they learn. Hence, knowledge is not simply an asset that firms store and trade.

It is particularly challenging for SMEs to maintain a process not only of continuous improving performance but also of continuously upgrading their knowledge and learning mechanisms. Scarce resources and managerial attention are constantly drawn to the problems of the short term and there is rarely the luxury of a division of labour allowing a group to focus on the longer term. Networks and external support agencies can help SMEs to re-focus on longer term strategic issues.

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4. Frameworks for Assessing Absorptive Capacity This Section draws on the review in Section 3 in order to develop a robust framework for a survey of absorptive capacity in Australian industry. 4.1 Absorptive Capacity: Models of the Components The model of the development of absorptive capacity that can be derived form the original work of Cohen and Levinthal (1990) focuses on the role of learning in the context of R&D projects – Figure 4.1.

Figure 4.1: The Development of Absorptive Capacity in the Cohen & Levinthal Framework

Derived from on Lane, Koka & Pathak (2006) A study carried out for Forfas by the firm Technopolis (Arnold et al (2004)) stressed the key role in innovation of the re-use of the existing stock of knowledge, most of which is external to the firm, as well as new knowledge. The constant cycle of innovation, imitation of innovations, the diffusion of knowledge and the search for new innovation-based opportunities is a central dynamic in capitalism. It is often assumed that the capabilities required to use old knowledge are less demanding than those required for generating new knowledge – but the key argument of Cohen and Levinthal’s 1989 paper (Innovation and Learning: the Two Faces of R&D) was that both draw on the same capabilities, and hence that carrying out R&D also develops capabilities to more effectively absorb knowledge from elsewhere. The approach to the study by Technopolis focused on the ingredients of absorptive capacity. The study proposed that absorptive capacity includes at least the following capacities (Table 4.1):

Human capital, especially in the form of graduates, and especially scientists and engineers; but also in the form of middle-level competences in the work force;

Ability to network with external sources of knowledge and other resources;

Organisation and routines; and

Learning processes.

Technological Opportunity Available knowledge Significance

Commercial Opportunity Market growth Market power

Appropriability Low IP constraints

Demand for Learning Relevance Complexity Knowledge proximity

R&D Investment

Absorptive Capacity

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Table 4.1: Absorptive Capacity Components- Summary of Findings by Technopolis

Component of Absorptive Capacity

Findings from a survey of Irish Firms

Human capital Scientists and engineers, Managers, Technicians, Skilled workers

A key foundation in firms

Networking to access external sources of knowledge and other resources

Widely used but a low level input Limited use for continuous or specialized monitoring

Organisation and routines Few firms had well developed routines for planning technology acquisitions, identifying innovation opportunities, or realizing the value of external knowledge.

Learning processes Routines within the firm Arnold et al (2005) Arnold et al (2005) characterize these as the capacities which underpin the knowledge acquisition process, as shown in Figure 4.2 Figure 4.2: Absorptive Capacity: The Firm as a Search Engine

Source: Arnold, et al,, 2004 Among the major findings from firm level interviews by Arnold et al (2004) were that: “Successful (growing) firms were more likely to be in the service sectors than manufacturing, did more product (but not process) innovation and had better qualified, more dedicated human resources for innovation. They had higher technological capabilities (in the sense of ability to adopt, adapt and change technology) than slower-growing firms, and therefore higher absorptive capacity. They tended to network more and were more likely to have received financial support for innovation. They used more formal or structured processes to capture and exploit innovation opportunities. The evidence from the survey, then, provides a strong endorsement of the central messages of the literature about absorptive capacity. In particular, it underlines the importance of appropriate human resources and the benefits of deliberate management of innovation… [but] innovation actions appeared often to be taking

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place in isolation from important external networks and knowledge, resulting in ‘safe’ incremental innovation, often through related-product diversification. Links with higher education were poor and relationships often characterised by mistrust. There appears to be regular contact between many of the businesses and [Enterprise Ireland], and funding is available for business growth and training, but there appears to be a missing element of awareness, mentoring and motivation that could be applied to businesses to build on the absorptive capacity present.” (piii) This finding resonates with the findings of the literature review in Section 3 in relation to strategic intent and coherence. The components of capability need to complement each other to form a coherent capability and such capability only has meaning in the context of strategic intent – ie that the firm is an active learner motivated by strategic objectives. Hence in constructing a framework for assessing absorptive capacity the strategic dimension does need to be integrated, as in Figure 4.2. Figure 4.2: Four Basic Dimensions of Absorptive Capacity

Source: The Authors It would useful to integrate the concept of absorptive capacity with the broader framework of dynamic capabilities. We also propose that, particularly in the case of SMEs, the concept of a virtuous learning cycle provides an additional dynamic dimension. There are four particularly important reasons for this integration:

a firm’s capacities for identifying, assessing, acquiring and applying external knowledge and information will be inextricably interwoven with their overall capabilities for learning and innovation;

the integration of the three frameworks enables us to develop an approach which more closely links learning with firm level strategies;

the integrated framework has a dimension concerned with the explicit development and redevelopment of capacities for learning; and

Knowledge base Familiarity Cognitive link

External Links Alignment (structure, culture, knowledge) (gatekeepers, boundary spanners,

Internal Organisation& Communication Structure Routines Roles (gatekeepers, boundary spanners, change agents)

Strategy Vision Justification/rationale Motivation Coherence Focusing devices

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The virtuous cycle framework emphasizes both the role of increasing returns and the key role of firms’ social capital.

An initial integration of these frameworks, for the purpose of developing a survey and case study approach, is set out in Table 4.2. Table 4.2: Absorptive Capacity and Dynamic Capabilities

Capabilities Specific Absorptive Capacities or Enablers

Strategic Dynamic Capabilities

The perspectives, strategies and capabilities to develop new Dynamic Capabilities

Strategic intent – orientation to action Dynamic Capabilities

Paths Capacities for strategic assessment External triggers for change Knowledge re-use Cognitive distance

Positions Current knowledge base Role of key individuals Physical facilities Complementary assets – value chain position Customer relationships IP & licenses External links Alliances Networks

Processes Management of links and acquisition R&D, training and hiring approaches Routines and competencies for awareness, assessment, acquisition,

integration, distribution, application Codification routines Managing change to leverage off new knowledge and manage

integration with existing capacities Firms internal complementary assets – in particular its ability to

capture the benefits of new knowledge through the capability to re-configure, produce and market.

Cultural and organisations distance from external organisations Processes for reflecting on experience Balance of the trade-offs between exploitation and exploration

External factors that influence the cost & benefits of Kn acquisition

Industry dynamics – barriers to entry Spatial distance from external organisations Market growth Rate of change in knowledge Complexity of knowledge

This framework provides the foundation for developing instruments for assessing firm level absorptive capacity in Australian industry. We have developed these instruments in two steps: an instrument for broad surveys; and a more detailed instrument (a questionnaire guide) for detailed firm level studies.

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Case Study Survey Instrument The analysis of ‘absorptive capacity’ is complicated by the ambiguity and diversity of its definitions, antecedants and outcomes.’58 Absorptive capacity is a functional concept, and in practice it is based on an interdependent foundation of capabilities, structures, routines and policies, and is largely situation-specific. For this reason it is not possible to develop a set of reliable standard indicators of absorptive capacity across industry in general. Nevertheless, it is possible to develop some indicators that provide broad guidance. These are set out in Table 4.3 and such a list could be further developed as a very basic set of indicators. Table 4.3: Survey Instrument: Broad Indicators of Absorptive Capacity Activities Capabilities Structures/organisationInternal R&D

Innovation expenditure Turnover from new products Licensing-in Seminars Intra-net Training Formal scanning Job rotation

Human resources: qualifications

Gatekeepers R& D Branch/centre Cross functional teams

Local/National Collaboration Networking Conferences Secondments

Ability to network effectively

Strategic Alliances Formal collaboration

International Collaboration Networking Conferences

Strategic Alliances Formal collaboration

4.2 Case Study Questions Table 4.4 sets out the questions used for the pilot case studies, based on the approach in Arnold et al (2004), (which itself drew on previous surveys), and on our preliminary literature review. From the two Pilot interviews we developed an improved framework which addressed some broader questions based on Table 4.4. On the basis of a review of the pilot studies and further work on the conceptual framework we developed a questionnaire as a guide for a proposed broader survey on absorptive capacity, Table 4.6. Table 4.4 BASIC QUESTIONS FOR THE PILOT INTERVIEWS CONCERNING ABSORPTIVE CAPACITY OPENING STATEMENT: Our interest is basically in how your firm is able to identify and assess the potential new technological and/or non-technological opportunities that may be available in order for it to remain competitive; and how you do this? In simple terms: How does your firm learn? 58 Zahra & George (2002) p 185

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And: What is the significance of external knowledge to your firm? Our starting point is to ask you for a background and profile of existing capabilities within your firm, eg.,

does management have prior experience in this industry? are you innovative – evidence?

And then to go on to ask: how do you currently assess what’s going on in your industry?

• can you assess your existing capabilities and judge what else you may need to enhance those capabilities in the future?

• what types of human resources do you have available to you, including management?

• what kinds of other resources might be important in your ability to build capabilities in new areas?

• how does your firm address the issues of further education for staff? how do you identify new opportunities – the mechanisms and people involved?

• how do you acquire new knowledge (learning)? • what mechanisms and pathways do you employ?

how do you identify and use external sources of knowledge? • what linkages exist between your firm and external sources of knowledge? • how do you evaluate the new knowledge/information?

how does your firm go about assimilating, integrating, and applying new knowledge into existing operations? how do you organise taking the new idea/knowledge through the firm’s processes to a commercial outcome?

• how do you then implement the uptake of the new knowledge? • how do you develop and capitalise on new capabilities?

what mechanisms, including government programs enable you develop your capacity as a firm to learn? what are the main impediments to your firm in taking on and developing new ideas into products, processes or services?

________________________________________________________________ There are many related issues to these fundamental questions that we also like to explore:

1. Have you ever found that you are being left behind and what did you do about it? 2. Have there been instances where you decided it wasn’t worth trying to build new capabilities? 3. How do you ensure that the learning becomes embedded in the firm and not only in a few

people? 4. Has your firm increased its degree of specialisation over time and if so why?

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Table 4.5: Framework for the Firm Interviews: What do we want to know? The Firm

Size Growth Goals for growth, diversification, Management and Governance – how are decisions made Export activity Level of Tech focus – product range Level of Turbulence/ rate of change HR structure Internal Organisation – R&D division R level and organisation D level and organisation Networking- purposiveness, width, depth Innovativeness? Benchmark Innovation Management against industry best practice Constraints on the rate of innovation Level of return on innovation – what shapes this.

Firm Strategies How to undertake strategic assessment of new technologies, relevant knowledge, what is

happening the industry and so identify opportunities /paths for the firm to grow and compete

How to decide what capabilities to develop and where to learn from. The significance of external knowledge, for: strategy; innovation; other change

Building Capabilities for Learning from Outside the Firm What types of knowledge are important for strategy/ for innovation What are the challenges faced in effectively learning from other firms or organisations? Mechanisms and pathways for learning from outside the firm What enables the firm to identify opportunities for innovation arising from new knowledge? What are the components of that capability. What enables the firm to learn / acquire new knowledge to support innovation? What are the components of that capability. What enables the firm to incorporate new knowledge into innovation What are the components of that capability. How do you ensure that the learning becomes embedded in the firm and not only in a few

people?

Limitations/ Discontinuity What limits the rate of learning/capability development in your case? [size, marketing

capability, production capability rate of change, research intensity/amount; human resources, linkages….]

How it deals with situations where it doesn’t have the capabilities or mechanisms to learn and acquire new knowledge- but must build them (ie more or less double loop learning).

What government policies or programs influence your capability development?

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A Proposed Survey Questionnaire

There is little doubt that as the pace of change increases and industrial activity becomes more knowledge intensive, effective innovation management becomes a more critical capability in firms. Even the largest and most capable firms find innovation management a challenge. The 2006 IBM Global CEO Innovation Survey stressed the increasing importance of innovation and of collaboration for corporate growth. The CEOs surveyed identified a widespread capability-related gap between importance and performance in relation to:

integrating corporate and innovation strategies;

managing collaboration for innovation; and

strengthening and leveraging the innovation capabilities of the overall organisation. These challenges will be no less important for smaller firms, even if their management may be less complex. As the capabilities for such aspects of management are becoming more important it becomes increasingly important to assess whether there are gaps in the level of such capability in industry. The information derived from current surveys, such as the Oslo Manual-based Innovation Survey, provides a very limited insight into innovation management capabilities in Australian industry. It also provides little information on the relationships between strategy, capability and performance at the firm level. It would nevertheless be worthwhile to explore a more detailed analysis of this survey data and perhaps, through ABS databases, link this survey data with other relevant firm-level data. By way of example, the South Australian government, in the context of an overall review of their innovation support programs and recognizing the limitations of the ABS Innovation Survey, have commissioned a detailed survey of innovation activities in 1000 SA firms. In order to provide a methodological basis for a possible national survey we have developed a questionnaire, based on the experience of the current project. Further refinements to the questions resulted from two sources: • first, the elaboration of the important components contributing to the absorptive

capacity of a company as identified in our expanding view of the literature; and • second, the nature of the discussions held with the case study companies. This

discussion enabled identification of components that are not easily revealed through simple questionnaire style approaches.

We stress that the initial questions (not a questionnaire) we developed for the pilot study (Table 4.4) enabled us to explore some of main the components of absorptive capacity within the selected group of firms, through personal question and answer sessions that were later supplemented with historical data on the firm. Another critical element was to request, at the opening of each interview, that the respondents draw a timeline concerning the firm’s performance and significant innovative events. This enabled us to obtain an overview of the dynamic processes in the firm in developing its absorptive capacity. This approach followed the pilot phase of the study, and proved particularly critical in understanding the absorptive capacity and the processes of its formation in a firm. The absorption capacity framework for the study (Table 4.5) also evolved during the interview phase of the study and each aspect of the study was accordingly modified as the

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study progressed, including the emphasis of the questions to the firms’ management, which were evolving to a questionnaire-type format. The discussions with firms provided the advantage that the complex and easily misunderstood question of “absorptive capacity” was never directly addressed and some of the data collected comprised objective facts about the company as well as some discussion on issues, especially on how the company was organised in its assimilation of new knowledge, and in knowledge implementation into new products, processes or services. Thus a general anatomy of the individual firm was deduced from the main components of absorptive capacity, which are shown as the section headings of each of the case studies, and from this a subjective assessment of the firm’s absorptive capacity followed. The section headings (and general coverage) are: • prior knowledge (prior experience and learning from external sources, effective

leadership); • human resource capabilities (derived from training, hiring, R&D, problem solving,

appropriate structures and incentives, etc); • knowledge acquisition channels (reading relevant journals, attending conferences,

trade shows, linking with sources of knowledge, including networks and alliances, etc); • organisational factors (internal mechanisms for knowledge dissemination, capture

and application, ‘routines’ for knowledge sharing, cross-functional teams, effective communication (shared goals, values, culture, knowledge, structures), job rotation, mentoring, quality assurance, functional alliances, and approaches to IP);

• codification of knowledge (how knowledge is embedded in the company, revisited and re-used, staff retention rates (for tacit knowledge), record keeping to comply with external regulation, mode of retaining documented information); and

• external assistance provided for capability building (eg., government support) The questionnaire we developed is based on the literature and the experiences of answers provided to the questions addressed in the current project. The questionnaire also has some inevitable overlap with Oslo-Manual based Innovation Survey questionnaires, but it is substantially expanded to probe the critical components of absorptive capacity. Many of these components are human resource based – but counting the numbers and distribution of human resource does not adequately cover the issues that impinge on absorptive capacity. These issues are much more associated with organisational aspects within the firm. Unfortunately, the nature of any questionnaire prevents adequate exploration of the dynamics of a process like absorptive capacity, and this will in our view, need to be explored by other mechanisms such as historical records, and/or in selected discussions with the firm. In any event, the absorptive capacity of any chosen firm must be assessed from the components probed in the questionnaire. We note that absorptive capacity is a functional concept, and in the final analysis it may prove necessary to supplement the questionnaire with face-to-face interviews with the founder, CEO or senior management representative of a firm, who also has experience cocerning the evolution of the firm. Ideally, the latter needs to be a person who is fully engaged with the history of the firm and the hallmarks of the firm‘s innovation, growth, developments and strategies over the course of its entire history. In addition, several of the current questions on the form presented in this report (Table 4.6) are designed to elicit responses through discussion since the complexity of the topic cannot be addressed with simple yes/no or weighted answers arising in an average postal-type survey. Further, the Australian case studies suggest that micro-businesses provide atypical outcomes in this context, since many of these are overwhelmed by the dominant influences of the

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owner-managers across all aspects of the business. Therefore, we suggest that any planned survey only consider SMEs employing 10 or more persons. If the questionnaire we have designed is considered as a draft, then a number of these elements could be the subject of further testing and adaptation to better suit the specific objectives of a survey. The appropriate sample size will depend on the purpose of the survey. If the objective is systematic assessment of absorptive capacity (and hence also necessarily innovation management) capabilities in Australian industry with an allied objective of relating capability levels to performance, a large and carefully structured sample will be required. We also suggest that at least 20% of the sample is “interviewed” face-to-face using the detailed questionnaire, with the remainder approached by telephone interview. We stress that a useful starting point is a timeline of significant developments in the firm, since this provides some elements to probe the dynamics of absorptive capacity formation.

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Table 4.6 The Draft Questionnaire 1. About the Firm 1a name of firm? 1b how many years has this firm operated

under this name?

1c is the firm owner-managed, or a subsidiary

1d head office location 1e total number of employees 1f location of employees 1g main products and/or services of the

firm

1h are any future new products or services on-line?

1i estimated turnover per annum (optional)

1j average growth rate per annum 1k exports as a % sales 1l name and position of respondent 2. About Products, Processes and Services

Yes No 2a has the firm introduced any new or significantly improved

products, processes or services in the last 3 -5 years? Products/services Processes

2b what triggered this introduction? A problem? or An opportunity?

2c how were the new products, processes or services developed? Mainly internally (within your firm or group)? By your firm in cooperation with research institutions? By your firm in cooperation with other firms? Mainly externally (by other firms or research institutions)?

2d has the firm had a history of introducing new products, processes and services, at what frequency and why?

Discussion

2e roughly what proportion of current sales comes from products introduced in the last 3- 5 years? (%)

2f are the firm’s competitors largely local, or international? 3. The Firm’s Human Resources Please estimate the number of people (percentage) in the company that have: no formal qualifications

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a Trade certificate qualification, but not a degree. qualifications as technicians, but not a degree (a Diploma or Certificate)

a non-scientific or technical BSc or BA degree, but not a higher degree

a BSc or BA in science or engineering, but not a higher degree a higher degree (masters or doctorate) how many of the above are dedicated in-house R&D personnel? how many others might participate in R&D, especially development? does the entrepreneur/management in charge of operations have prior experience in this industry? (elaborate)

4. Ongoing Staff Training 4a. Does your company provide any training courses, either in-house (on-the-

job) or formal (off-the-job)? Yes No in-house formal

4b. Approximately how many days per person per year does your company

devote to formal (off-the-job) training for the following employee levels? (If nil – blank)

# of person days

shop floor middle management – including marketing technical staff/graduates top management other (please specify) 5. Identifying Technological and Non-technological Opportunities 5a. What mechanisms does your firm use to identify technological and non-

technological opportunities (to keep up-to-date)? Yes No the Internet information from suppliers customer advice attendance at exhibitions/trade fairs trade magazines professional bodies industry/trade associations consultants technology network(s) formal links with specific universities formal links with specific research organisations

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subscribe to a monitoring service employ new graduate staff with special skills other (Please specify)

6. Cooperating with Others 6a. Does the firm cooperate with other organisations Yes No other firms CSIRO ANSTO AIMS DSTO o rDMO universities or other higher education institutes intermediate suppliers of knowledge (please identify) eg., technical/scientific consultant, business/management consultants, etc

dedicated test facilities/laboratory (not covered by above agencies)

suppliers customers and clients in joint marketing and distribution arrangements in joint manufacturing arrangements in licensing your IP to other firms 6b Has your firm purchased or used any of those services in the last 3 - 5 years?

(If the answer is yes, inside (In) or outside (Out) Australia ? Yes No university or other higher education institutes research organisations dedicated test facility/laboratories (not covered by above) technical/scientific consultant business/management consultant 6c Is your firm a member of an industry association or an industry network? Yes No a trade or industry association (eg., AIG, AIIA, AEEMA, etc) a formal business network with other firms a technology network with other firms an organised cluster of firms with like interests (possibly regional).

if you are a member of a technology network, or cluster, is a university or other research institution involved?

6d Has your firm hosted students or new graduates from colleges to do

placements or projects in the past 3 - 5 years (eg., TCS)?

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Yes No if yes, how were the students supported financially? government grant? from the research institution? by the firm?

7. Organisational Issues 7a. How is the flow of new ideas organised within the firm? Yes No serendipity? specific person(s) (gatekeeper(s)) in the firm responsible for monitoring technological and/or non-technological opportunities (eg., via the trade press, competitors new products; patents; licences, trade shows, etc)?

formal mechanisms to accumulate new knowledge through in-house R&D - utilising R&D personnel

formal mechanisms involving outsourced R&D - coordinated by internal R&D personnel

formal mechanisms to accumulate knowledge from external sources utilising R&D trained people or others (please specify)

informal mechanisms whereby any staff member can “pick up” new knowledge from a variety of sources, and disseminate it in the firm with a view to affirmative action.

how is incoming “new knowledge” disseminated within the firm (regardless of source) for affirmative action? Discussion:

how involved/committed is Top Management in decisions to take new directions

are marketing department personnel involved in these decisions? has the firm taken any new radical changes in direction in the last 3 – 5 years that were not driven by technology (eg., moving from manufacturing to service provision)?

8. Has your firm adopted a new business model during the years of its

operation. If so when and why YES NO New Business Model If Yes - When? (year only) If Yes - Why?

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9. Success Factors for the Business 9a. How important is each of the following factors to the success of your

business? (Rating scale high, reasonably high, moderate, reasonably low, low).

9b. (As an aside: how do think your firm rates compared to your international competitors? – “h” for high, “l” for low).

9a 9b high r/high mod r/lo

w low h/l

meeting customer needs by introducing new or improved products/services

attracting new customers with new or improved products/services

expanding the customer base for existing products/services

introducing new and improved processes introducing new organisational and management approaches to the business

sourcing new technologies applying new technologies, eg., ICT/Other complying with new regulation or legislative obligations, eg., environmental, therapeutic, etc.

improving the productivity of the business at existing staffing levels

improving the efficiency of (or replacing) the machinery and equipment

protecting your knowledge/IP acquiring the IP of others co-operating with others (customers, suppliers, research institutions, etc)

accessing sources of finance improving your technological understanding of your products, processes and services

achieving quality certification (eg ISO 9000, supplier approval, ISO 14000)

10. Transmitting Ideas within the Firm 10a. Which of the following statements appears most applicable to your firm?

(those that are not relevant leave blank) high r/hig

h mod r/low low

formal mechanisms, such as quality systems, are used to help the workforce to improve processes or products

have a suggestions box scheme for product and process improvements

suggestions are regularly considered by

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management for implementation those whose suggestions are taken up receive a financial reward

management meets regularly to discuss our company strategy

future innovation strategies are kept in secret and not publicly disclosed

the firm documents its strategy in a business plan each year

new products or processes form part of the firm’s business plan.

the plan includes detailed specifications for employing qualified people (eg x graduates, y technicians, z craftsmen, etc.

we have adopted an open book approach to management

11. Impediments 11a. What are the main factors that hamper your firm in attempting to develop

new products, processes and services? high r/hig

h mod r/low low

direct costs too high lack of finance (investment capital) excessive economic risk shortage of skilled personnel to implement government regulation inability to secure strategic partnership(s) other (please specify) 12. Public Support

12a. Has your company received any public financial support for product or

process development activities in the past 3 - 5 years from the Commonwealth or State Governments?

Yes No if yes (Please specify – scheme and approx $ value of support):

has the public support resulted in your building new capabilities within the firm?

Do you have any other comments concerning your firm’s ability to seek and manage knowledge for innovation activities; and/or the kind of support you think the Government could provide to assist in these processes? Thank you for your participation.

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5. Prior Relevant Research in Australia 5.1 Introduction This section aims to show that the issues discussed in the above review of research are closely related to the issues raised both in research on innovation and in policy discussions in Australia. The discussion of research and reports is brief indicative and selective. The issues raised in this study have been long standing themes of policy debates, although the particular focus of concern or terminology has been, for example, research industry links, technology transfer, export capability, technology diffusion, effective uptake of new technology, R&D investment levels, innovation or change management, and SME survival and growth. In relation to SMEs, a recent Senate Employment , Workplace Relations and Education References Committee report on “Small business employment” noted that: “Small business owners and service providers also told the committee that, despite being highly skilled and capable in many areas, many proprietors lack the business management skills they need to compete effectively in today's more competitive, deregulated environment. The lack of these skills is a major cause of under-performance, business failure and untapped potential in the small business sector. This is not a new finding, or one confined to Australia: the need to improve the business management skills of small business owners has been identified by almost all small business reports and studies over the past twenty-five years in Australia and other OECD countries. Governments at all levels and from both major parties have acknowledged this need to varying degrees and there have been many worthwhile developments and initiatives. But it is clear that current initiatives fall short of providing the level, quality and type of business development support that would allow small business to reach its full potential and the committee has made a number of associated recommendations. There is also need for a greater focus on developing a more skilled small business workforce.” 59 The Senate Committee went on to emphasise the problem of inadequate management skills in smaller firms and how these weaknesses lead on to a range of other constraints on development. Drawing on earlier work by Kearns, and by the Bureau of Industry Economics, the report finds that the preference of small firms for highly relevant, low cost, ‘just in time’ training makes the provision of services difficult for the formal training providers. The Kearns report concludes: “This focus on short-term tactical learning, while necessary, is an impediment to the development of a culture in Australian small business that encourages learning, skill, enterprise and innovation. It reflects vestiges of a low skill/low learning culture perhaps relevant to an industrial society, but not appropriate to the high skill/strategic learning requirements of the knowledge society” 60

59 Employment , Workplace Relations and Education References Committee, Australian Senate “Small business employment” Commonwealth of Australia, 2003, pp. xix-xx 60 Kearns, A. 2002, Are two worlds colliding? The provision of training and learning resources for small business, NCVER, Leabrook, SA. p52 http://www.ncver.edu.au/research/proj/nr1003.pdf

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5.2 Recent Studies of Innovation in Australian Industry The Prime Minister’s Science Engineering and Innovation Council undertook, through an independent working group, a study of Australian Technology-Based SME’s resulting in a final report in March 200561. The report emphasized the importance of SMEs for economic development. The report acknowledged that a small proportion of SMEs account for the majority of export activity. In fact, using data from three years of the ABS’s Business Longitudinal Survey McMahon (2000) had found that only a small proportion of Australian manufacturing SMEs (5%) grew at over 10% per annum and the great majority (approximately 70%) grew their sales at less than 5% per annum and did not aspire to faster growth. Using this data he found that there was a strong and persistent relationship between growth, exporting and innovation62. While the earlier report of the Working Group had emphasized the role of innovation, business and export capability in firms the final report emphasized the role of government export support programs and their improved integration and orientation to technology-based SMEs. The Karpin Report of 1995 had stressed the increasing challenges of international competition and the importance of raising the strength of management in Australian firms63. Rogers (2004) using ABS data for 1994-1997, found a relationship between the level of innovative activity and the level of management training. He also found a relationship (particularly for smaller firms, but not always for larger firms) between innovation activity and the extent of networking64. In discussing the findings from a set of case studies of 30 innovative (if not R&D–intensive) firms Thorburn and Langdale (2003) comment that many were aware of the challenges of knowledge management and innovation in increasingly competitive markets, and were concerned with how best to organise for effective learning and innovation. While few had links with public sector research organisations, interaction with customers and business networking were key mechanisms for both stimulating change and accessing information. The study also found that: “The main difficulties that constituted barriers to innovation were those of growing a small business, obtaining finance, finding staff, marketing overseas and relying too much on the founder. Knowledge management also proved to be an increasing challenge for firms. In particular, firms’ abilities to turn what is in employees’ heads (tacit knowledge) into formal knowledge (e.g., written production manuals) that could be accessed by others in the firm, proved to be a major issues.”65

61 Working Group Report (2005s) Growing Technology Based SMEs. Prime Ministers Science, Engineering and Innovation Council. . See also Department of Industry, Tourism and Resources (2004) Technology-Based SMEs. Special Report. Sensis Business Index. 62 McMahon, R. (2000) Growth, Exporting and Innovation in Manufacturing SMEs: Evidence from Australia’s Business Longitudinal Survey. Research Paper Series: 00-10. School of Commerce. Flinders University of South Australia. 63 Karpin, D. (1995) Enterprising Nation.: reviewing Australia’s managers to meet the challenges of the Asia Pacific Century. AGPS. 64Rogers M. (2004) Networks, Firm Size and Innovation Small Business Economics. 22(2): 141-153. The role of networking of various types has been a theme of many studies of innovation in Australia, for example: Australia Manufacturing Council, 1994, The Wealth of Ideas:How Linkages Help Sustain Innovation and Growth, Australian Manufacturing Council. 65 Thorburn, L & Langdale, J. (2003) Embracing Change. Case Studies On How Australian Firms Use Incremental Innovation To Support Growth. Prepared for Science and Innovation Mapping Study. Department of Industry, Tourism and Resources. p.6

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Many studies have found that firms usually have to strengthen their knowledge, management and organisation before they can realize the potential of their investments in ICT to drive improvements in productivity, flexibility and innovation. In the Australian context several studies have demonstrated the role of internal firm capabilities (ie absorptive capacities) in the application of ICT. For example Howard (2005) found that:

“…ICT is a significant enabler of product, process and business model innovation within the manufacturing sector [and] also enables innovation in contractual relationships, alliances and partnerships between manufacturing companies and specialist ICT providers, and with customers and suppliers. [The] clever use and incorporation of ICT becomes a differentiator. [But] Effective executive managers in manufacturing businesses require an appreciation of the process improvement, product enhancement and market development possibilities enabled by ICT. Non-ICT manufacturing firms can gain competitive advantage from ICT..[but the key factors for gaining those benefits] ..relate to the way ICT is used in combination with other technologies and in the way in which it is applied and managed.

Overseas supplied enterprise software often requires further investments in, and developments of, specialised plant based intelligence systems and process execution systems in order for it to achieve its full potential in industry and business specific operating environments.

Industry–university cooperative and collaborative research centres and institutes in the manufacturing arena play a significant role in supporting this hidden ICT use. The research outputs of many centres are ICT software, hardware, tools and products designed for adoption in manufacturing processes.

SMEs, which constitute a significant proportion of Australian manufacturing, face additional challenges in sourcing specialised ICT capability. These include framing appropriate ICT project specifications and finding trusted suppliers and service providers in a highly competitive market that has few barriers to entry.” 66

A recent report by the Australian Business Foundation echoes the themes of the studies discussed above. The report discusses the many pathways through which firms acquire the knowledge and capability that support innovation: “Innovation comes from learning, experimentation and recombination or re-use of knowledge such as in design, prototyping and trial production, rather than from the discovery of new technical or scientific principles. The installation and operation of new machinery and equipment is knowledge-creating, because it results in new capabilities. Similarly, firms can purchase licences to use protected knowledge created or discovered by others, or can explore and learn about markets and consumer preferences by investing in market research and other intelligence-gathering exercises. Furthermore, firms can gain the benefit of new knowledge through their association with others, eg. personnel movements, inter-firm cooperation, strategic alliances, links to professional and regulatory bodies and so

66 Howard, J. (2005f) Digital Factories: the Hidden Revolution in Australian Manufacturing. A Study Commissioned by the Department of Communications, Information Technology and the Arts. http://www.dcita.gov.au/communications_for_business/industry_development/ict_in_australian_manufacturing/digital_factories_the_hidden_revolution_in_australian_manufacturing. P1-4.

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on. In reality, the knowledge underpinning innovation capabilities in firms is rarely based on direct research and development, but comes from learning by doing, learning by using technology and equipment and learning by interacting with others.”67 And hence that: “The learning capabilities, which underpin innovation performance, depend primarily on the creation and maintenance of intangible assets: human capital, skills, new organisational forms, improved monitoring and understanding of markets, and so on. These in turn require the commitment of resources - to training, research and development, product design, organisation skills and specific production capabilities. This kind of resource commitment is investment in the strict sense - that is, it involves the use of finance in the present period or periods to create assets which will deliver benefits over future time periods.”68 The ABF report emphasises two conclusions. First, that innovative capability in a firm must be coupled with strong overall business competence to that a firm can follow through to effective production, marketing and customer support. Second, that the knowledge infrastructure and innovation support policy in Australia focuses on R&D, frontier technologies and the commercialization of new knowledge, which is of quite limited relevance to the majority of innovation in the majority of Australian firms. The report proposes a major reform of the knowledge infrastructure. 5.3 Oslo Manual Based Innovation Surveys in Australia The 2005 Innovation Survey provides much useful information on innovation in Australian industry and while careful disaggregated analysis would be valuable, the available aggregate data does provide some general insights. We summarise these below, indicating the supporting tables:

Expenditure on R&D accounts for, on average, only 20% of Australian firms’ expenditure on innovation69. As we would expect this proportion to vary significantly, the level of R&D expenditure in a firm or sector is not a reliable indicator or innovation effort.

Almost 30% of small firms (5-19 employees) and over 50% of the larger firms, innovated over the 2004-5 period- Table App.1.1.

More firms have introduced organisational and managerial innovations than innovation in products or processes -Table App.1.2.

Innovation activity appears to have increased markedly over the 2002-2005 period, particularly in smaller firms and in mining, wholesale trade and ‘accommodation, cafes and restaurants’ –Table App.1.3.

The overwhelming majority of innovations are new to the business only and have already been introduced elsewhere. Only about 15% of goods and services innovations were new to Australia and about 8% were new to the world – Table App.1.4. This underlines the extent to which firms can learn from the experience of other firms.

About one in five businesses developed their new product or service with another business or organisation and in a further 10% of cases the development was largely

67The Australian Business Foundation. (2006) Innovation and the Knowledge Economy in Australia. ABF p iv. 68 Op cit p24 69 ABS (2005) Innovation in Australian Businesses. 8158.0 2

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carried out in another firm or organisation. In the case of process innovations the level of dependence or interdependence on other organisations was even higher (about one in three firms) – Table App.1.5.

Innovating firms see the direct costs of innovation (cited by about one in three firms) as the major barrier to innovation, followed by the lack of skilled staff (about one in four) and thirdly government regulations and standards, and better placed competitors (about 1 in 5). About 27% of innovating firms saw no barriers to innovation -Table App.1.6.

There were many drivers or innovation. The primary drivers of innovation were clearly commercial – improving productivity, reducing costs, increasing revenue, but one of the most important drivers for firms of all sizes was increasing responsiveness to customer needs – Table App.1.7.

About a third of the larger firms and one in four of the smallest firms engaged in some form of collaboration or which the most frequent was for marketing and distribution. Conversely, over 70% of firms did not engage in collaboration – Table 8. However, the majority of collaboration (about 70%) was for innovation-related purposes. Most innovation-related collaboration was with firms in the same group or with customers, suppliers and competitors- Table App.1.9.

Market sources (customers, suppliers, competitors, consultants) were also the major external source of ideas for innovation (Table App.1.10). Larger firms made relatively greater use of institutions (eg CSIRO, universities). More detailed information on sourcing is available from the 2003 Innovation Survey - Table App.1.11.

Table App.1.12 (A & B) shows that the relative importance of sources varies significantly across industries, eg 24% of mining firms identify Government agencies as an important source of ideas or information for innovation, whereas only 8.2% of manufacturing firms consider that this is an important source. Almost 18% of Communication Services firms consider ‘universities and other higher education’ organisations as important sources, but only 6.4% of manufacturing firms do.

Small firms (5-19 employees) much more limited use of institutional sources and of consultants than larger firms. Overall the use of institutional sources, consultants and conferences increases with size- Table App.1.13.

Firms acquire knowledge or ability primarily through employing new staff (45% of firms), the acquisition of new equipment or technology (47%) and the use of consultants (41%) – Table App.1.14.

In acquiring knowledge or abilities from universities and research organisations the employment of graduates and of consultancy services were the primary mechanisms – Table App.1.15.

5.4 Standards Australia and Knowledge Management Standards Australia have developed a guide to Knowledge Management in firms, with a shorter version available for SMEs70. These guides are particularly valuable initiatives and are based on extensive consultation with industry associations, experts and potential users. They have resulted in practical and high quality guides for firms. The frameworks used in these publications are consistent with the frameworks discussed in this report. For example, Table 5.1 shows a basic set of ‘knowledge ecosystem’ elements that the guides use as the 70 Standards Australia. (2005) Knowledge Management: A guide. AS 5037-2005. Success through Knowledge. A Guide for Small Business. HB 190-2006. Standards Australia. (2006) Success through Knowledge. A Guide for Small Business. HB 190-2006.

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organizing framework for approaches to mapping, building and operationalising flexible approaches to knowledge management. The approach aims to assist firms to identify gaps in their management of knowledge and to assess possible enablers that they could use to improve their approach. These publications contain an extensive set of questions designed to assess strengths and weaknesses in firms’ knowledge management. Similar questions may also be useful in a survey of absorptive capacity. Table 5.1: The Knowledge Ecosystem: Mapping, Identifying Knowledge Gaps and Relevant Enablers Knowledge ecosystem elements

Questions to assess strengths and gaps Knowledge gaps Possible Enablers

[see Table] Organisational outcomes

Strategic intent

Context

Culture

People

Process

Technology Content

Table 5.2: Enablers for Knowledge Management

After action reviews Narrative management Business process mapping & redesign Networks and communities Champions and advocates Physical environment Communities of interest Play theory Communities of practice Reflection Critical incident technique Rewards and recognition Document management Social network analysis Environmental scanning Storytelling Information auditing Strategic conversations Knowledge auditing Taxonomy and thesauri Leadership Technologies for communication & knowledge

sharing Learning and development Technologies for discovery and creation Leveraging information repositories Technologies for managing repositories Meetings and ‘share fairs’ Mentoring and coaching

Source: Standards Australia. (2006) Success through Knowledge. A Guide for Small Business. HB 190-2006.

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6. Case Studies of Absorptive Capacity

6.1 Summary of Case Studies Concerning Absorptive Capacity Study

The sample of firms selected for the case studies is shown in Table 6.1. Table 6.1 Case Study Firms

Firm Sector Start Date

# Employees

Turnover $ millions

Relative AC

Page #

CEA Technologies, ACT

Defence Electronics

1983 225 50 - 70 H 79

Clonakilla Wines, NSW

Food & Beverage

1971 4 - 5 - M 86

IDT, VIC

Pharmaceuticals 1975 140 25 H 90

Lochard Pty Ltd, VIC

Airport Services

1990 90 20 H 96

Ego Pharmaceuticals, VIC

Health Skin Care

1953 150 50 H -

Textor Technologies, VIC

Textiles (non-woven)

2000 36 13.7 M 102

Malloch Digital Design, ACT

Electronics Security

1985 4.5 0.8 L 109

Benthic Geotech, NSW

Mining Services 1997 15 - 18 9 H 113

Clover Corporation, NSW

Food Ingredients Nutrition

1988 < 100 23 H 118

Retriever Communications, NSW

Communications 1995 25 - M -

Of the above firms, two (Ego Pharmaceuticals and Retriever Communications) observed that the discussions of their absortive capacity had potentially revealed too many details about their competitive strategies. Consequently these firms requested that the detailed reviews not be publicly released. We note that an earlier industry profile has been published on Ego Pharmaceuticals.71 6.2 Overview of the Case Studies The ten companies interviewed for the case studies were selected to cover a broad range of industry sectors as shown in the Summary Table in Section 6.1. The demographics of these companies are summarised in Figure 6.1. Half of the companies are privately owned (CEA, Clonakilla, Ego, MDD and Retriever) and thus not listed on the Australian Stock Exchange, 71 Jones, A. J., Industry Profile: Ego Pharmaceuticals Pty Ltd, Chemistry in Australia, Vol 73 (11), December 2006, p14-16

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and 2 of the companies effectively remain micro businesses (Clonakilla and MDD) from the perspective of the number of employees (red columns). The remainder are small to medium sized enterprises, and as Figure 6.1 shows there is a good correlation between the number of employees and the reported turnover (blue diamonds) for all but 2 of the businesses who preferred not to disclose the latter information.

Figure 6.1: Demographics of Companies Concerning Absorptive Capacity

0

50

100

150

200

250

Ego Clonakilla IDT CEA MDD Clover Lochard Retriever BGT Textor

Company/Foundation Year

# Em

ploy

ees

0

10

20

30

40

50

60

70

Turn

over

$ m

illio

s

1953 1971 1975 1983 1985 1988 1990 1995 1997 2000

Blue diamonds - turnover (RHS axis) not supplied by two private companies. Red bars - the number of employees (LHS axis) In terms of years of operation, 1 company (Ego) has been in operation for over 50 years; 2 over 30 years (Clonakilla and IDT) – although for the wine company Clonakilla production did not occur for 5 years because of the maturity of the grapes; 2 over 20 years (CEA and MDD) both operating in Canberra; 3 over 10 years (Clover, Lochard and Retriever) one of these being a subsidiary of a large diverse Australian company; and one less than 10 years (Textor), although the latter resulted from a management buyout of a local subsidiary of its UK owner that had operated in Australia for 40 years. Table 6.2 provides a summary of the findings arising under the components of absorptive capacity identified by the headings employed in the Case Studies. Table 6.2: Summary of Findings Regarding the Components of Absorptive Capacity from the Case Studies used in this Study Component of Absorptive Capacity

Findings from the 10 Case Studies

Prior Experience All the companies had benefited from employing people with prior relevant experience as senior executives and/or on the Board of the companies.

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(Often this experience came from working in large multinationals often in totally different but complementary fields).

Evidence of Innovation All the companies provided evidence of innovative activities at some time in their history and in most cases exhibited the continuous introduction of new products, processes and services. Innovation in 3 companies (IDT, Lochard, and Textor) was dominated by changes in their adopted business models (organisational innovation), and another (Retriever) had recently moved in this direction.

Resources Human Capital

Training

Other Resources

Seven of the ten companies employ professionals in their required areas of activity, and even where this involves research professionals emphasis is placed on commercial development as opposed to research. Only 3 companies used specialist consultants. Limited attention to training is paid by 50% of the companies interviewed. Reward and incentive schemes are more evident in those companies that provide training. All of the companies appear well equipped for their respective specialist activities, and growth is evident in facilities and technology acquisitions. In some cases new resource requirements have been induced by changes in the business model adopted.

Intensity of Learning Knowledge Acquisition –

Internal activities

Knowledge Acquisition – External

Networking

There is a general strong emphasis on senior management keeping up to date through reading the latest specialist area trade journals and other relevant literature; attendance at trade shows; and participation in relevant conferences. In several cases this intelligence gathering primarily resides in one or two people (eg., CEA, Ego and Clover), but in others a somewhat broader staff base is employed (eg., IDT and Retriever). The solely “one-man” approach is largely the province of the micro-enterprises (eg., Clonakilla and MDD), though in the latter case “brainstorming” with all staff is commonly used. Brainstorming is used in the Team situations in CEA, IDT, Lochard, but more particularly in the open book operations of Textor. There are a number of firms who suggest “informal associations” with a number of research institutions. Only 4 companies (Lochard, Textor, Benthic and Clover) identified formal linkages both past and present with research institutions, including formal contracts. Customers and suppliers of new technology (often components) were identified by 7 of the companies (CEA, IDT, Lochard, Ego, Textor, Benthic, Retriever) as one of their main sources of external knowledge. A prime example of Networking is found in the Joint Industry Project (JIP) identified by Benthic, which had enabled that fledgling company to effectively set an Industry Standard based on one of their components. In addition, the Networking with the large pharmaceutical companies provided to IDT through Medicines Australia is clearly significant. Otherwise the term “networking” invoked views about personal networks with other companies within the industry sector in which the

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interviewed company was working. In general, little credence was given to Industry Associations as a source of new knowledge.

Organisational Factors Integration/transfer

Evaluation

Exploitation

Quality and Configuration

Alliances

Intellectual property

Three dominant views stand out. First, building the capabilities to create technology independency (eg., CEA and Retriever). Second, building development team structures that shield individuals from the total project but involve expert teams in new development work, sometimes with rotating membership (eg., notably CEA and IDT, Benthic, and the “One Team” approaches in MDD and Textor). Third, absorbing external experts, sometimes initially through consultancy (eg., Lochard, CEA), and acquisition (Lochard). All the companies fostered embedding new knowledge into their companies through maintaining high levels of accessible documentation within the company (especially noted in CEA and IDT). New projects have short life cycles, about 3 months before moving on. Testing procedures vary with sector, eg., USFDA for IDT, the Australia TGA for health products. The final judgements are made by the customers. Several of the companies interviewed have developed strong market positions in their field of endeavour (notably: Lochard, Ego, CEA, Clonakilla, MDD, Benthic, Textor), and continue to develop this by product changes or changes in their business models to build new capabilities and exploit new areas (eg., IDT, Lochard, Retriever). Response to international standards is commonplace, including ISO 9000, TGA and USFDA Good Manufactring Practice (GMP) approvals, USFDA GRAS approval, setting world standard with their products (Lochard, Benthic, Clonakilla) and internal testing as a matter of routine prior to product release. Only one of the companies interviewed had never formed any form of alliance (Clonakilla). The majority of companies had multiple alliances and considered this as an important mechanism not only for enhancing the order book, but also for knowledge and personnel exchanges. Only two of the companies (Benthic and Clover) employed formal patents to protect their IP, several used Trade Marks (Ego and Clonakilla). The majority operated on ‘secrecy’ as their main form of protection. As IDT pointed out their whole operation is highly dependent on non-disclosure and patents held by clients are the subtle element that drives this.

Codification of Knowledge There is a strong adherence to maintaining detailed records of all knowledge intensive activities in 9 of the companies interviewed in the form of project note books, on-line records and data logs. Accessibility of these records to ‘third’ parties to trigger reinvestigation or absorb into new projects is also commonplace. The Team approach used by many is the mechanism of embedding the knowledge in the firm, and minimising losses when individuals move on. The discipline is strongest in IDT where USFDA approvals require certification of all records and at Ego where internal auditing minimises any problems which might arise in a new product launch. The “open book” approach by Textor demands access to records by everyone in the company. The exception, Clonakilla operates

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on the basis of learning by demonstration. Impediments to Building Capabilities

Only the two micro-businesses (Clonakilla and MDD) identified access to capital as a major impediment to their growth, although Clover suggested that matching funds for 50:50 grant applications might be subsidised through repayable loans. Other impediments identified tended to be company specific, although at least two suggestions arising may be generic, namely the availability to find suitable mentors to assist firms in growth, the availability of skilled personnel and enhancing the global flow of such people, especially in software and electronics, and the control of the bureaucracies in regulatory authorities that sometimes appear as having power unto themselves. Only one company was unable to identify any impediments.

6.3 Discussion of the Findings from the Case Studies In what follows we have expanded on the contents of Table 6.2, but with reference to the individual case study companies and the main headings which represent the major components of absorptive capacity as used in the Case Studies. Human Capital and Other Resources The majority of companies (7) have a high proportion of staff members holding high level qualifications in the sciences and engineering. Clearly, the electronic engineering and software engineering professions dominate in CEA, Lochard, MDD and Retriever, and in three cases scientific personnel dominate (IDT, Ego and Benthic), although IDT has the higher demand for highly qualified research personnel who are generally instructed to focus on commercial development not research per se; and Benthic personnel are largely geoscientists. In addition, Clover needs to be mentioned in the context of research personnel, although their R&D activities are dominated by external linkages. With that in mind it is of interest that IDT, Ego and Clover emphasise the importance of GMP systems and procedures in their manufacturing plants, and in staff training. Only 3 companies specifically described engaging specialist consultants to supplement their in-house activities, and in Benthic’s case these consultants/contractors form a major part of their offshore activity. About half of the firms interviewed appear to pay very limited attention to the training of their personnel. Four firms are quite small or are really just commencing operations (Clonakilla, MDD, Textor and Benthic), and one, Clover Corporation, really exists to coordinate R&D activity and manufacturing joint ventures. Management training appears to be neglected by all the companies, and several were quite enthusiastic about limiting the loss of their engineers into management. The companies that are most supportive of specialist training for their employees to operate incentives schemes. For example, CEA supports staff doing external electronic’s training courses at NICTA, and many in-house specialist courses are offered at the company. IDT provides courses on GMP systems and procedures, Lochard ensures that staff receive training in IT and project management, Ego offers induction courses, GMP systems and procedures, and training in their products and their applications. Retriever has their young electronics development engineers attend postgraduate courses at a neighbouring university. Awards, performance pay, share options and profit sharing among employees were featured by CEA, Lochard, Ego, and Textor.

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It is significant that Textor operates using the “open book” approach to management and it is “Leadership”, as opposed to management that is emphasised by the senior executive. Consequently, Textor’s reward system involves profit sharing of 10% of the profits with employees, both as an incentive and a reward for improving the bottom line of the company. Learning on the job was seen as a viable training option at Clonakilla and at Textor. All of the companies appear well equipped for their respective specialist activities, and growth is evident in facilities and technology acquisitions. In the case of Lochard new resource requirements, a central computer facility, and in IDT new production facilities for handling pharmaceuticals from raw material right through to formulated consumer drugs have been brought about by the changes in the business model adopted. Nowhere is this more outstanding than at Textor where their production lines are dominated by new systems integrated fabric bonding systems and automation of their processes. Ego is another example that has made substantial recent investments in new plant and equipment, and while relatively modest the new storage facilities at Clonakilla are state-of-the-art. Intensity of Learning The acquisition of new knowledge by each individual company resides in most cases through one or two individuals in senior management who trawl the relevant literature in their specialist fields of interest. This was evident than in the case of CEA where the Technical Director was cited with esteemed praise. This approach was evident in Ego that boasts a long history sourcing new knowledge through its Managing and Scientific Directors, and at Textor, Clover and Retriever where it is the Managing Director that performs this task. It is, however, important to add that avid reading alone only achieves a portion of the knowledge accessed through the complimentary resources of attending trade shows, and participating in conferences and seminars in their areas of specialisation. To take IDT as an exemplar, in addition to accessing the main pharmaceutical news through SCRIPS, a number of staff members at IDT attend biotechnology conferences and trade shows. In addition IDT staff members frequently visit international companies, and also have the opportunity to network with some of those companies as members of Medicines Australia and the Pharmaceuticals Society of Australia. Thus informal networking with other firms, especially those in international locations emerges as a very important knowledge source to companies like CEA, IDT, Textor, and Clover. In Textor’s case the emphasis was related to the collective experience of the managers in industries from which textile manufacturers could learn, for example, in paper making. CEA also forwarded another view that ‘suppliers’, especially of electronic components could often be a source of new knowledge, and this mechanism benefited CEA, MDD, Lochard and Retriever. Apart from extensive documentation of the project work that then follows in most of the companies, several using the “team” approach then brainstorm the many new propositions down to something more practical for them. Lochard noted that Australians tend to think outside the square and knowledge application in Australia follows in a liberal way. In addition to the internal processes, the majority of firms source knowledge from external sources, although some of the associations are described as informal. For example, in the case of CEA its relationships with DSTO, CSIRO, ANU, and the appropriate CRCs are described as informal, but when examined in finer detail specific joint projects between the company and the DSTO and CSIRO were found, as well as technology licensing from an appropriate CRC.

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Strategic linkages with external sources of knowledge are also clearly identified as something that may be quite transitory – the collaborative relationships come and go depending on the demand specific knowledge by the company at any point in time. This, for example, Lochard can list a plethora of such linkages, but all may not be currently active. In contrast, four of the companies (Lochard, Textor, Benthic and Clover) have current formal linkages with external research agencies. In Lochard’s case DSTO, in Textors case with the CSIRO, in Benthic’s case with the ANU and in separate deals with 5 other research institutions, and in Clover’s case with the CSIRO and a substantial range of universities. To generalise on a comment by one participant, however: “how do you find out the best person to talk to” in some of the research organisations. An overwhelming source of external knowledge for many of the companies was identified in the form of the customer. This comes from the ability of the company to satisfy specific customer requirements through internal R&D, and is a characteristic shown in IDT, Benthic, Ego (through pharmacies) and Textor. More significant appears to be the role of the supplier in providing new technologies (often at the leading edge) to some of the companies, eg., CEA and Lochard; or new intermediate products, as in the case of Ego. The fact that IDT has as its main customers all of the top ten pharmaceutical houses and must meet their needs means that they have incredible access to new advances in their field through their customers. Only in the field of agriculture were the generic benefits of a central research agency considered as beneficial in offering new knowledge flows in the case of Clonakilla. In some specialist fields, company’s reported the absorption of knowledge through specialist consultancies (Ego, CEA, Lochard, and Benthic), but almost all ended up recruiting the appropriate people onto their own staff as demand for those skills rose. The benefits of industry networking were no better described than in the case of Benthic Geotech which had paid a significant investment in a Joint Industry Project that saw them toe-to-toe with several of the major oil companies. The project focussed on testing the sheer strength of deep water soft soils and presented an ideal opportunity for Benthic to run there specially developed “ball penetrometer”. The Benthic device demonstrated its worth and will probably form the basis for the industry standard in that field. Networking through significant international industry associations was considered a tremendous advantage by IDT, but a serious disadvantage by Retriever. Clover reported a network with other food companies to investigate diets for the aging which provide high nutritional benefits. Other company representatives spoke much more about their individual roles as drawing in information through their own personal and well established networks. Organisational Factors Having sourced the knowledge clearly the question that follows is how it is disseminated and applied in a company. The case studies provide a number of ways of carrying out these important processes, and many of these approaches were predicated on the notion of a company becoming more self-reliant in some areas of technology critical to their own being. CEA, Retriever, MDD, IDT and Textor offer examples of in-house developments that reduced their potential dependence on externally sources of technology. In Textor’s case two elements stand out – the first is their “open book” approach to sharing the responsibility of driving the company forward with all staff – which is effectively a team approach; the second is their approach to systems integration in building up state-of-the-art production processes that mimic those in industries outside of textiles, eg., paper manufacture. However, more generally embedding new ideas in many of the companies occurs through the use of Project Teams that address new projects as they come on-line, often employing

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rotating team membership, particularly with no single person carrying the responsibility for the entire project. Examples of this modus operandi are found in the case of CEA, IDT, Lochard, Ego, Benthic, Retriever and possibly MDD, although the latter small company only has one team. Embedding the new knowledge and ideas into the firm and not the individual is supported by the team approach, and more importantly detailed documentation of activities clearly occurs in 9 of the 10 cases. The accessibility of the documented information even in the case of failed projects is seen by most as a mechanism to re-use knowledge or to put it as Clover did, to “redefine the problem on the basis of experience”. The team approach and associated documentation are generally used to ensure that minimum losses of tacit knowledge occur when a person leaves the firm. The evaluation of activities carried out on the basis of knowledge being absorbed by the company is generally made as a consequence of positive customer response. Of course, further up the chain this involves adequate product testing, clinical trials, and even further back assessment of individual project outcomes before integration occurs with existing technologies in some cases in as little as 3 months. The point to be made about the short-term assessments is that any existing product composition may be better than a product containing a modification arising from a short-term project. Related to the consideration of evaluation mechanisms is the question of whether the company is able to exploit the new findings and how the company assesses the quality of the outcomes. For example in the case of Clonakilla a lot depends on the judgements made by the wine maker on whether he has made an acceptable wine. The stage that follows is to convince the market that this is a good wine, and it helps if the well known wine writers provide the appropriate accolades of quality or even superiority in this case. For some companies the ultimate test is not the final consumer, but rather the regulatory authorities that impose high standards on all new products. In the case of IDT this is the USFDA, for Ego the main hurdle is the Australian Therapeutics Goods Administration and similar bodies in the countries to which they export. For Clover it is the USFDA and the legislation pertaining to the generally accepted as safe (GRAS) categorisation. For all the companies where human consumption is a criterion Good Manufacturing Practice dominates their manufacturing practices (IDT, Ego, Clover’s joint ventures). In the case of Lochard and Benthic, these companies have either set the world standard or are about to do so, and this is only tested by their growing market shares. One of the more important findings from the case studies is the importance of alliances all through the value chain from knowledge acquisition to co-development and marketing of products. Only our wine company case study did not participate in any formal alliances, but all the other cases exhibit a plethora of multiple joint venture/alliance arrangements. Importantly, some of these relationships are transient or timely, and not necessarily enduring. As one company (Retriever) put it: partnering is a critical aspect of their business, although Retriever has not been lucky in managing several of its overseas alliances to date. In the case of IDT the alliance partners are their contractors represented by the big ten pharmaceutical houses, and a number of local organisations. This contrasts with Ego, where the distribution outlets for their products are managed by alliance partners since the most important driver in their business is market capture. In the case of CEA, their latest alliance partner, the US giant Northrop Grumman has taken a minority share in the company. On some occasions such alliances are informal as was the case between Benthic and Capsum in development the Benthic methane probe, and in other cases they may be in the form of memoranda for contractual supply (as in the case of MDD and KE Remote), or Textor and Kimberly Clark, that company’s main customer.

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Codification of Knowledge It has already been mentioned that with the exception of one, all the other companies described in this study codify their knowledge through all manner of accessible documentation within the company. In the case of IDT this discipline is a principle imposed upon the company in order for them to gain USFDA approval, and while none of the other companies work under such strictures, they nevertheless maintain records for revisiting with a view to redefining a task or re-using the knowledge gained at an earlier date. Other We refer to Table 6.2 to cover the information obtained from the interviews concerning impediments to capability development and views on government programs that can assist new capability development. The availability of capital only appears to be a problem for micro-businesses, and those companies operating in IT and communications technologies only perceive a future shortage of skills, rather than witnessing one today. The companies also perceive that R&D grants are the best way for them to assist in capability development, but one cannot help but deduce that this arises through the benefit of their existing experience and few if any think laterally about what alternative mechanisms might be available to them. Of the positive suggestions forthcoming we witnessed enthusiasm on the one hand for a Teaching Company Scheme type program, but on the other hand we witnessed an antipathy towards such a program based on the fact that the incoming “student” needed to be trained by the firm. The idea of using mentors to help build capability came from a company (Lochard) that had benefited from such an experience. A Point on Absorptive Capacity Two groups of companies emerge from a consideration of the data on these Australian Case Studies in terms of absorptive capacity: • Companies that are engaged in continuous improvements of products and services

whether through technological change or organisational change in the business models tend to exhibit a high receptivity to new knowledge, regardless of source, and hence they exhibit a high absorptive capacity.

• Companies that exhibit current signs of stress in their operations, or are attempting to recover from recent past stresses, tend to flounder in a number of aspects of their businesses, not least of which is the need for new knowledge, and exhibit low to medium absorptive capacity.

The exception to these generalisations appears to relate more to size than to sector. The micro-businesses we have studied appear to have low-medium absorptive capacities, but one of those cases, Clonakilla, the business is highly self-contained, highly successful, and more dependent on the art of wine making than its science. In the other micro-business, MDD, the lower absorptive capacity may be a function of size, but also may arise from the stress evident in their current operations, which appeared in moderate decline. The slightly larger operation, Retriever, exhibited some similar stresses. The above analysis is far too simplistic, since it is based only on judgemental criteria. There is a clear need to develop additional more precise indicators of absorptive capacity, which form the basis of the discussion in Section 6.4, and in refining a survey instrument for other companies.

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6.4 The Australian Findings - Comparisons with the Literature The literature shows that it is effective use of knowledge that is the central driver of competitiveness in individual companies. Thus, innovation in general, and the generation, acquisition, integration and application of knowledge in particular, are key issues for the management of companies. A company’s capabilities are embodied in its people, facilities and organisation, and its links to the capabilities of outside organisations. Companies acquire information and knowledge using multiple pathways, in particular those based on: experience, experimentation or acquisition. A company learns as a result of the challenges it faces, and hence the problems it aims to solve. In the present work our case studies suggest a distinction be made between micro-businesses (employing 5 people or lower) and the other small and medium sized businesses. Two of the ten businesses interviewed were micro-businesses and exhibited marked differences from the average in regard to the acquisition of knowledge and of their operational needs. The micro-businesses were dominated by their proprietor who shared his new ideas and information with all employees, but who often had a special edge that ensured a unique position for the proprietor. In one case in the wine industry the uniqueness involved an individual’s educated palette and sensitive “nose”. In the second case the proprietor came up with new imaginative concepts that might lead the company in a new direction, but capitalising on existing resources. In both cases their needs focussed on available finance, but for all the other case studies finance was not an issue. Concurrence with the literature for all the case studies is found in the context of the evolutionary processes of knowledge acquisition and development; and more importantly from the base of the prior knowledge that is embodied (in most of these cases) in the company’s management (Cohen and Levinthal). Our case studies also suggest that the prior knowledge can be in complementary fields as well as in the field of specialisation of the company. For example, the adoption of the approaches to automated paper manufacturing applied to the manufacture of non-woven fabrics as shown in the case of Textor. On the whole, however, the prior knowledge applies to strongly allied fields. The case studies also support the literature concerning the other sources of absorptive capacity. This is especially the case in the strong interaction between the existing knowledge base within the company and external knowledge sources. As noted by Schmidt (2005) we can readily identify the ‘gatekeepers’ who identify and facilitate the absorption of knowledge form outside the firm. In most of the case study firms the ‘gatekeeper’ role was provided by one or two people. Only in the case of IDT where the majority of staff are highly educated and disciplined researchers did this responsibility appear to be relatively widely shared. However, in IDT the stimulus for new knowledge acquisition was commercial opportunity rather than in-house R&D. The case studies emphasise the importance of the relationships between teams (IDT) and team members (CEA) and illustrate different approaches to achieve this. One approach is the use of ‘open book’ management (Textor) as a mechanism of addressing the common cause of being innovative and competitive across the entire staff team. A second approach involves the diffusion of responsibility for project success across a number of team members, not a single person (as best illustrated in the case studies of CEA and IDT). The literature draws a strong distinction between tacit knowledge and codified knowledge. In the case studies management in some firms sought to retain key staff and so minimise the

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loss of tacit knowledge when individuals leave. They used the team mechanisms to ensure that all knowledge is shared while also maintaining high staff retention rates. Added to this was the considerable importance attached to codifying knowledge in our case study examples (bar one – Clonakilla). Notwithstanding, we acknowledge that all knowledge cannot be codified, but some of the conditions of the regulatory authorities can apply significant restraints that impact on these processes as shown in the case of IDT, Ego and Clover; and perhaps equally as a condition in a joint venture between CEA and its partner/client Northrop Grumman. Codified knowledge in these case studies was a mechanism for revisiting project specifications and the re-use of recorded knowledge. The case studies also provide numerous examples of the relationship expressed by Zahra and George, concerning the distinction between ‘potential absorptive capacity’ and ‘realised absorptive capacity’. Nowhere is this more strongly illustrated than between the science-based company Clover Corporation, and the much stronger customer requirement-driven and output-oriented approach adopted by CEA. That is not to say that the science/engineering-base is unimportant to CEA, or the output orientation to Clover. However, it is clear that the science-based driver takes much longer to be realised even though its potential is recognised. While Schmidt’s paper is largely review based, he nevertheless sought to address the potential to enhance knowledge flows from external sources through having internal R&D capability. His overall findings suggest that R&D expenditure contributes in the long run to building absorptive capacity, and to the capability to absorb knowledge from ‘scientific’ sources, but it is less relevant in the short-term for the more ‘exploitative’ absorptive capacity from business sources. The present case studies support this thesis. Most of our case study firms are involved in exploiting short term knowledge (eg., CEA 3 month projects); and only 40% of our case study have long-term formal relationships with external research institutions. One of these (Benthic) is a relatively new spin-off from a university and is engaged with a radical new technology, which it is supplementing with and emerging technologies from the research institutions. These R&D linkages are particularly important to Clover Corporation, a company that involved in the development phase of introducing new nutritional products to the food and beverage sector. As shown in Section 3.2.2 there is a substantial literature on the contributions made by spillovers, diffusion and knowledge transfer. The present case studies are rich in illustrations of the importance of suppliers and customers to their innovation processes. None better than CEA or Ego in quite disparate fields that showed how suppliers can effectively bring about the creation of new products or the extensive modification of existing products; and in the case of CEA how the US Navy can affect the course of development of CEA’s already established AUSPAR project. The spillover benefits to local firms from MNC’s (Arnold) are illustrated in the case study of CEA and the customer input from its MNC customers and partners. Similarly in the case of IDT, all the major pharmaceutical houses have added to the absorptive capacity of IDT’s operations for a number of years through the process of supporting IDT in acquisitions of plant and equipment to meet their mutual needs. Thus, one of the most important findings in the present case studies is the significance in the evolutionary innovation process of a company’s preparedness to use new knowledge and develop new capabilities driven not by technology, but by a change in the business model adopted by the company. While the literature does address the fact that new knowledge is not restricted to the adoption of new technologies, there appear to be few concrete examples of changes in business models (as in the cases of Lochard, IDT, Textor and Retriever). In these Australian case studies the business model changes have been driven by efforts to address newly emerging market needs that require the development of new capabilities within the individual companies. For example, in Lochard’s case from technology

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development for data collection and analysis, to meeting customer service needs in distant and distributed locations, and on to centralising data collection and processing for 140 international airports in real time. Finally, it needs to be stressed that strategic alliances or joint ventures with foreign or local partners are significant for many of our case study firms, and although alliances have been identified as important in the literature, the magnitude of their importance to developing absorptive capacity and new capabilities; and their transitory nature has not received adequate attention. We note that managing such alliances is a critical part of the business operation, especially determining when it is appropriate to move on and find new alliance partners in a new area of endeavour. It is worth reflecting on the work of Daghfous concerning how to build the dynamic capabilities for absorptive capacity in a company. We suggest that the current 10 case studies provide excellent examples of: • Companies committed to the goal of enhancing and leveraging their knowledge by

investing in resources, in learning programs, and by enhancing the knowledge of their own employees to improve the capabilities of the company;

• Companies that encourage employees to communicate and brainstorm new product ideas;

• Companies with a true commitment at the level of top management involved in creating a learning organisation;

• Companies that manage knowledge flows through their operations;

• Companies that value sharing of new ideas from all staff, and that provide reward systems for its dissemination; and

• Companies that promote a culture of change.

6.4.1 Comparisons with the Technopolis Study of Ireland The current case studies suggest there is a good correlation between the ability of a business to expand and grow and its associated absorptive capacity, which appears higher in the innovative higher growth companies. However, our sample size and its selected dispersion over a range of sectors prevent any conclusions being drawn on the relative absorptive capacity of any given sector. On the other hand we would argue that the generally poor linkages between companies and research institutions does not appear to be a major deterrent to innovation, including significant new products generated in most of our firms, with the exception of Benthic (a relatively new start-up from a university environment) and Clover (deliberately set-up as a research coordinating organisation). It is not too surprising that such linkages are weak since this is shown in the ABS innovation survey (Table App.1.11) where the data reveal that small firms (5 - 19 employees) make limited use of institutional resources. The Irish study points to ‘networking’ as a major source of accessing external sources of knowledge and other resources. This appears to be an important facet in several of the Australian case studies, however, particularly operating at the level of individual management contacts in the cases of CEA and Textor. In contrast, the major international network in which Benthic participated was clearly a massive benefit to that company in their field of activity.

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The present case studies stress the strong role of strategic alliances between the local and overseas companies in enhancing the absorptive capacity of the Australian partner, and hopefully their co-partner. In common with the Irish study there appear to be a missing element of awareness, mentoring and motivation that could be applied to some businesses to build on the absorptive capacity that already appears to be present, but not fully capitalised upon in some of our case study businesses (eg., Retriever and internationalisation). 6.5. The Case Studies CEA Technologies Pty Ltd, ACT. Interview conducted with Mr David Gaul, co-Founder and President, December 2006. Short History including Prior Experience CEA Technologies was founded in Canberra in 1983 by two former officers of the Royal Australian Navy. Their prior experience in the Navy and as engineers with the Defence Science and Technology Organisation focussed them on the development of systems at the forefront of radar and communications technology for defence applications. From modest beginnings the company has grown to employ over 225 people, with a turnover of between $AUS 50 – 70 million per annum. Major boosts in growth have occurred over the last decade or so, especially following two key private institutional investments. The latter provided the opportunity for the firm to commercialise a substantial stock of stored intellectual capital. Very recently, CEA Technologies struck a strategic alliance with the US global defence and technology company Northrop Grumman, which involves the latter taking a minority share in CEA. Evidence of Innovation CEA Technologies has a history of innovation documented by the introduction of new products on an approximate cyclical basis of every 3 – 5 years since foundation, but especially over the past decade. This frequency of introducing new products or processes is largely a response to the market place – their innovation being mostly customer driven. The main customers of CEA are the Defence Departments of Australia, the USA, the United Arab Emirates, and Germany. In addition, suppliers of, for example, new chip technology can also often change everything. CEA is recognised by most of their suppliers as a leading-edge organisation and is provided with access to new developments at the β-level (not fully commercialised devices) to incorporate into their new product developments. The hallmarks of the company’s innovation include phased array radar technologies, continuous wave illuminators for ship self-defence, surveillance systems such as the modulated integrated radar surveillance system, integrated ship communication systems, a range of antennae, and software developments to back up many of these systems. Over the years the company has consolidated its activities in hardware and software developments for defence system radar. The innovation activities in CEA are backed up by a number of sophisticated R&D development teams with a strong emphasis on relatively short-term projects (characteristically 3 month completion milestones) each working in specialised fields. Such specialist teams undergo frequent rotations of team members and between projects, but each is used to develop and evaluate new technological opportunities. Central to the team approach is the company’s Technical Director (one of the founders of the company) who

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often instigates new activities. Considerable mentoring takes place within each team for the primary benefit of new comers to the organisation. Each innovation at CEA builds on the existing capabilities of the company, but as new capabilities are required these are brought in from external sources often in the form of new human resources. Human Capital/Other Resources

Human resources and training Over one-third of the company’s workforce are qualified engineers, which themselves fall into a number of sub-categories – digital, RF, software, mechanical, test, and service engineers, led by 2 principal engineers and 9 project managers, and backed by a team of over 50 support technical staff, trades persons, IT project support specialists, and 13 quality assurance staff (a more comprehensive breakdown is available if required). The rotating team approach to project development means that the interests of individuals are maintained at the highest level. The majority of employees are based in Canberra, with the facilities in Adelaide employing 8, those in Melbourne 4, with only a skeleton office operating in the USA engaging 1 person.

Innovation in HR management HR management in CEA is treated as seriously as technological innovation, and the HR teams sets its own innovative goals. For example, the HR team currently aims to identify career and non-career paths for all employees. This will ensure that good engineers are not absorbed into management, but rather kept in design and development as long as that complies with their own interests. In addition, CEA recently announced a pay rise across its entire engineering staff, a reaction to the current market and an attempt to ensure retention of valuable skills. Performance pay is also used by the company to reward individuals who implement innovative ideas and/or equipment into the company’s products. A company “suggestions box” also occasionally provides a source of ‘real gems’, but is more often used only in the housekeeping sense. David indicated that the suggestions box had led to the derivation of the company motto which encapsulates the essence of the company: “Solutions with Commitment” The reward system also applies in this context, where benefits are brought to the products.

Training Attendance by all staff to external formal training courses is encouraged, in both technical and management courses. The technical courses are currently led by NICTA. However, in-house specialist technical courses on radar design are provided by the Technical Director (Ian Croser), and there are frequent, but more casual courses run within team groups within the company, e.g., on the speciality area of antenna testing. The latter need was enhanced in 2003, when CEA expanded and installed a new state-of-the-art Antenna Test Facility (ATF), which included a purpose built anechoic test chamber for validation and calibration of CEA’s active phased array systems and other antenna development, testing and support requirements.

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Other resources A long standing approach adopted by CEA has been to rent or borrow equipment until it has become obvious that such equipment is an absolute necessity to the company. In addition, in the defence business, it is not unusual that the Commonwealth might acquire equipment, which is installed at a company site, as long as it is available for universal use, if required. CEA has benefited from such installations. Such equipment often proves to be a rich source of embedded knowledge to the employees of the company, since they can learn on the job using the latest equipment, and hence gain new expertise for their own benefit and that of the company. Intensity of Learning

Knowledge acquisition

Internal – The key to technological sourcing in CEA is undoubtedly through the Technical Director, Ian Croser. He is described as a man constantly seeking and sourcing new knowledge from technical books, trade magazines, the Internet, and many other sources; and especially in his interactions with other people in the electronics and defence business (see Networks). He puts forward ideas for development to the principal engineers, the project managers and the technical teams and vigorous open debates about what is to be progressed within the company can often ensue. When agreement is reached, teams are formed, and appropriate aspects of the projects progressed in the team environment. Notable in this approach is that no single team has responsibility for the whole system, but is focussed on addressing modular aspects of the project.

Company management has also developed a strong philosophy of “growing your

own” within the company. For example, the databus for CEA’s system boards was fully developed in the company to avoid using potentially sub-standard databus systems made by others. This approach has also provided CEA with more flexibility in the final design and application of their total systems.

In the early days it was also not uncommon for CEA to work with external consulting engineers in order to learn about some new capability, but overtime this resulted in absorbing that capability (and/or person) as the need continued. Today it is more common to engage the capability when the continuous need is identified.

External/Networking – CEA engages is a continuum of informal networks with the technical people in a range of R&D groups, including those in: DSTO, CSIRO, the ANU and other Australian universities, overseas laboratories, and appropriate CRCs (eg., Sensor Signal and Information Processing). Networking also embraces a large range of quite demanding international and local customers in the armed forces and Departments of Defence. These informal relationships can often be a source of ideas to be developed further in CEA’s own development team structure, while maintaining a link with the network sources.

Business networking through membership in industry associations was described as

useful, but in these cases it was stressed that the benefits accrued more from the ability to swap ideas, rather than in yielding a new technology or technique.

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Organisational Factors Integration and transfer within the company As mentioned earlier, external people have frequently been absorbed into the company as a mechanism of taking in new skills and capabilities and integrating these with existing activities. When an internal engineer or engineering team is assigned a particular project task, they may choose to integrate a technology from outside the company. If this type of “systems integration” works then individuals who introduce a critical technology are rewarded through performance payments. On the other hand, limitations in the performance of externally available components can often be a driver for internal innovation. The development of new active phased array radar by CEA is just such an instance, where traditional approaches (klystrons) were ignored in favour of “starting from scratch” using newly available telephonic components. CEA has also been involved in other specific work for the Australian Department of Defence, notably in supplying communication and direction finding systems for the Royal Australian Navy’s ARMIDALE Class Patrol Boats in 2005. This involved the now operational integrated ship communications system (CEA-ISCS) and the WARRLOCK directional finding systems, in which over 30 of CEA’s suppliers (many from the Canberra district) made significant contributions to the innovative engineering concepts involved in these developments. Notably, CEA modified the design of the patrol boats mast structure, and antennae in order to accommodate these systems on to the small patrol boat vessel. It is anticipated that scaled up versions of these systems could be used in larger vessels. Since 2003 and with support from the Department of Defence (originally a $6.2 million grant) CEA has been developing a high powered version of their CEA-FAR active phased array radar system. This involves development of a family of scalable radars and was designated as AUSPAR. The mechanical and thermal aspects of the AUSPAR radar design are being progressed in CEA’s facilities in Adelaide and Melbourne, where specialist engineering and manufacturing teams are located. The AUSPAR development was described as one involving strong team development across the Department of Defence, expertise at DSTO, and policy and project support from the Defence Materials Organisation, Electronic Systems and Industry Divisions, and Defence Headquarters personnel. More recently AUSPAR attracted the attention of the US Department of Defence, and a joint US-Australia agreement was established. It is anticipated that the advantages of the AUSPAR technology will be the provision of a scaleable, light weight and low cost solution to a variety of 3D radar applications from anti-ship missile defence, through air warfare to land and sea-based theatre missile defence. The total development cost of AUSPAR under the new agreement is $30 million, over three years. It is recognised that these commitments are all part of a continuous process of “giving the company that is achieving, more challenges”; and thereby potentially stretching the employees to new heights. CEA’ s deliberate approach to breaking projects into modules and working in small teams on the different aspects, say transmission, reception, etc – not the radar system as a whole, assists in limiting the stress on their employees. Such an arrangement, however, also demands good team supervisors are in place, and team psychology put into practice. CEA management, however, also subscribe to the view that a “poor supervisor” may be an excellent asset in some other niche area of the company – thereby, minimising the losses of tacit knowledge, as is also the case with the codified knowledge associated with the maintenance of “project books” on every project.

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Evaluation With each new project a series of teams are formed to investigate the feasibility of applying specific technological developments and integrating these within existing products, or in creating new ones. The time period for such an assessment in the company is usually no more than 3 months. Such an approach was applied to evaluating the best assembler techniques and independently a chip set program. The company stressed that in such cases and even on entire new projects, if project milestones are not met or the outcome proves unworkable, nothing is lost. All knowledge is retained. As mentioned the company maintains “project books” or technical notebooks on every project. It also has a formal IP Register, which also interrelates to part of the due diligence required by their partner Northrop Grumman. Exploitation Along with new knowledge and its application, knowledge re-use also proves vital to the company. Knowledge may be ubiquitous across a wide range of systems – but it may also meet a niche requirement for some particular customer(s). For example, decisions about whether a demand in a product is best met through hardware or a software solution is often left to the very last. The customer’s problem is perceived as the company’s opportunity. CEA notes that it has to do little to attract new customers in the exploitation of their outputs. More generally, customers find out about CEA, thereby expanding the customer base. Quality and configuration management systems CEA is engaged in the primary field of electronics and communications technology in which there is a rapid evolution in the technology of the components they employ as well as in their own systems. The company is third party accredited to the AN/NZS ISO 9000:2000 Quality Standard. Perhaps more importantly, CEA creates up-to-date documentation for all the final systems that it produces. While there may be configurational differences brought about by changes in components, new documentation and procedures are always generated with every evolutionary change. Most of the testing processes employed prior to final release of a product by CEA are now fully automated. As an example, an employee devised an automated procedure for testing the complex circuit boards used in CEA’s equipment. This reduced the testing time form 30 hours to 30 minutes per board. Alliances CEA Technologies has a history in the formation of strong strategic alliances. One that is most readily documented started in the mid-90s and involved BAE Systems in the development of CEAMOUNT, a new generation of CEA’s Solid State Continuous Wave Illuminator now onboard the ANZAC Class Frigates, and capable of supporting simultaneous engagement of multiple targets. A second major alliance, originally established in 2001, is between CAE and Saab Systems, based in Adelaide. This alliance is focused on the international marketing of the “CEA-Saab System”, otherwise called the “Australian Anti Air Warfare system”. This system is based around CEA’s 3D scalable active phased array radar (CEAFAR) and phased array missile illuminator (CEAMOUNT) and Saab’s 9LV Mk3E Combat Management System (CMS), and offers unprecedented ship self-defence and air warfare capability for both new ships and upgraded vessels. This system has been selected as part of the $700 million Anti-Ship Missile

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Defence upgrade of the Royal Australian Navy’s ANZAC frigates, but is perfectly suitable for all other Navies. These two companies (CEA and Saab) have also worked with Europe’s premier warship builder Blohm + Voss GmbH in developing their joint system for application in the 3,500 tonne Meko® D new generation frigate to be used by the German Navy. In 2003, following over 20 years of experience in the design and manufacture of radar and radar processing systems CEA became the preferred supplier of Waveform Synthesisers to Raytheon Australia, the subsidiary of the Raytheon Company (NYSE:RTN) with sales of $18.1 billion. These Waveform Synthesisers form an integral part in providing the main reference signal for the Raytheon Mk73 Solid State Continuous Wave Illuminator Transmitter for the US navy. CEA has supplied well in excess of 100 of their synthesisers to Raytheon to date. In March 2006, CEA Technologies entered into a strategic alliance with the US defence giant ($US30 billion turnover, 120,000 employees worldwide) Northrop Grumman Corporation. This involved Northrop Grumman taking a minority share in CEA Technologies. The intention is that the companies will work collaboratively in the area of radar technologies in order to enhance their respective leadership positions in the radar market worldwide. In October 2006, Northrop Grumman’s Sector Vice President Bob DuBeau noted: “By combining CEA’s technologies, skills and competencies with Northrop Grumman’s capabilities as a systems provider and integrator, the strategic relationship has already improved both companies’ product offerings and provides more complete solutions to our customers”. In many of the above alliances temporary staff exchanges between the partner companies have been quite frequent. For example, BAE seconded a staff member to CEA, and it envisaged that the new arrangements with Northrop Grumman will involve similar exchanges. In addition, CAE accepts secondments of personnel from DSTO, and has seconded staff itself to the rapid prototyping project at DMO. Exports represented 40 per cent of CEA’s sales in 2000/2001. Today that figure is reduced due to the higher level of commitment to Australian-based projects. Intellectual property (IP) The company noted that “compartmentalisation electronics” is extremely difficult to patent. Consequently CEA primarily relies on trade secrets and confidentiality with respect to the majority of its IP. In addition, many of CEA’s products are customised and the subject of high levels of security for the customer. In terms of technology licensing, CEA works with licensed technology from the former signal processing CRC concerning automated tracking, and intends to license out some of its own technology in the future. Codification of Knowledge As noted earlier no knowledge generated by the company is lost, and it is frequent for knowledge accrued from failed projects to be subjected to considerable re-use. The company maintains records of all projects pursued in the form of engineers’ technical notebooks – “Project books”, appropriately titled for each project.

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Impediments to Building New Capabilities The potential lack of availability of technically skilled people stands out as a potential major impediment to building new capabilities within the company. So far this has not been a major issue, but is one that the company is cautious about in terms of future endeavours. Do Government Programs Assist in Building Capabilities? The company has been the recipient of a range of R&D support grants from government agencies, and earlier of the NPDP program which helped in promoting the business through established radar technology reference sites. As another example in R&D support, AusIndustry was a partner in the CEAMOUNT development of CEA and BAE Systems. There was a period where it proved difficult to raise capital, but recent joint government initiatives (US-Australia) have eased that burden. Conclusions The company CEA Technologies has a strong history of innovation based on the introduction of new technologies to meet customer demand. The absorptive capacity of CEA is high, but appears highly dependent on the person of the Technical Director. When management was confronted with this view it was indicated that it might take up to 5 people to perform the Technical Director’s present functions, but that mechanisms were in place for that to occur with other engineers trained up by the Technical Director as technology “spotters”, especially on new electronic and communications technologies relevant to the company.

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Clonakilla Wines Pty Ltd. Interview conducted with Mr Tim Kirk, General Manager, Wine Maker and Head of Marketing, December 2006. Short History including Prior Experience Clonakilla is currently a 38 hectare (ha) property just outside the village of Murrumbateman, about 18ha of which was acquired by John Kirk (a CSIRO Plant Scientist) in 1971 with the aim of establishing a small family vineyard and wine making capability. John noted that the climatology of the Canberra region was not unlike that of the Bordeaux region and Northern Rhone Valley of France. Initial plantings were of Cabernet Sauvignon and Riesling vines, followed by Shiraz, Chardonnay and Pinot noir vines covering about 1ha in all. Larger plantings became feasible in 1978, following the sinking of a bore. It was not until 1986 that John planted Viognier vines, and these yielded little until 1992. The current General Manager Tim Kirk took over the reins as wine maker in 1996 having worked in the winery during vintage almost every year of his life. Tim and his wife added the adjacent 20.2ha property to the original purchase and planted vines up to a total exceeding 9ha under vine. Evidence of Innovation While commercial wine was first produced at Clonakilla in 1976, it took until the 1990 for the Clonakilla vineyard to move away from traditional Burgundy/Australian Shiraz/Cabernet blending to produce Shiraz and Cabernet separately, followed by medal showings for their Shiraz. Innovation at Clonakilla is evidenced in both responses to problems and planned capitalisation on new opportunities72. Tim Kirk, who has no formal qualifications in wine making73, but who is clearly imbued with a passion for high quality wines, describes the most significant innovation successes in terms of “seeking a point of difference in the industry”. It was this philosophy that led to the production of the highly acclaimed Clonakilla Shiraz Viognier, first produced in 1992, but growing in both stature and sales in the late 1990s; and later in the decision to utilise the winery equipment to import grapes from a hotter climate district (Young) to produce a high quality Shiraz known as Hilltop. After the Hilltop crop is barrelled, the equipment is free for the “cold climate” grapes of the estate wines. Further, in 1998, the Clonakilla winery released straight Viognier, which is now seen as the Australian benchmark for that style of wine. With the effective closure of Kamberra wines (part of the James Hardy Group) in Canberra, Tim is now seeking opportunities for wines made from select grapes from the Canberra district. Human Capital/Other Resources Human resources and training Clonakilla has only 6 full time employees, possibly expanding to 8 in 2007. A relatively high growth in casual employees traditionally occurs during the picking and pruning phases of grape growing. Tim Kirk attributes his skills to a number of factors, not least of which is a true appreciation of wine acquired from possessing a highly sensitive palate and a keen and

72 Problems confronting vineyards range from the need to cater for supplementary irrigation, ideally locating the vines, locust plagues, cloudy and powdery mildew, and botrytis infestation. All have known solutions, but all demand new learning for the relative newcomer. Since 1972 the Clonakilla estate has faced all these problems, none more recent than a late frost in November 2006 that considerably reduced the likely yield of the Voignier crop. 73 John Kirk completed a wine science degree in the mid-1980s.

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distinguishing sense of smell. He “learned on the job” to be discerning about what to look for in a good wine. Other resources Most of the equipment employed by Clonakilla is typical for that used in most boutique wine making establishments with about a dozen stainless steel fermenters, high volume storage fermenters for the “whites”, a 2-tonne Della Toffola airbag press, and numerous French oak barrels. Bottling and labelling is performed using a rented “mobile” device, and labelling has occasionally been somewhat problematic. Last vintage the company processed about 160,000 tonnes of grapes – a moderately high amount for a small operation. A recent investment of $0.5 million in an insulated and temperature controlled storage shed is testament to the company’s recent growth. A small laboratory is used to monitor, such things as pH, titrateable acid and Baume (sugar content) of grapes and ferments. Intensity of Learning Knowledge acquisition

Internal – Tim prides himself with an ability to “soak up” information from others. He also reads the wine literature avidly, and has travelled to several of the wine regions of the world, but especially to the Rhone Valley in 1991, where he developed an appreciation for the complexity of Marelle Guigal’s Cōte Rōtie wines, and later the Yarra Valley where he learned from Dr Bailey Carodous how Yarra Yerring made its Shiraz Viognier. These influences and a considerable amount of experimentation on both co-fermenting Shiraz and Viognier grapes, and on the various levels of Viognier to put in the blends, enabled Tim to create the Clonakilla Shiraz Viognier, which has been acclaimed by Carodous, and more significantly by a range of influential wine writers, for at least the past three years.

External/Networking – Tim Kirk notes the cooperative spirit engendered throughout the wine industry in Australia, and increasingly internationally. “The French are much more open than they used to be”. All the R&D and all the new findings about vines and their maintenance, and about wine making techniques, is readily and freely available within the industry through informal networks. For Clonakilla the distinguishing mark is now in their product and the expectations to maintain the standard arising from the acclamations that some of its wines have rated on a year by year basis. Clonakilla also maintains informal linkages with the French Northern Rhone Valley winemakers. Organisational Factors Integration and transfer within the company It is apparent that the key to assimilation of new approaches or new products in wine making is largely attributable to the wine maker. According to Tim Kirk, the capacity to sell the product is a further important facet in the wine industry – and it involves the ability to generate excitement and fervour about the product. Tim Kirk is the marketer for Clonakilla and suggests that his capacity to make wine, his discerning palate, and the ability to communicate well in order to develop relationships with wine writers, wine buyers (including restaurants), and wine distributors is critical for sales. Clonakilla exports about 20 per cent of total sales, and the split between retail sales (at the

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cellar door) and wholesale sales (through buyers) is about 50:50. Tim considers that his communication ability with customers at the cellar door is as critical as that with professional wine aficionados. Tim also offers wine tastings at dinner functions. Although the original aim of making Clonakilla’s Hilltop Shiraz was to produce a less expensive product in the Clonakilla stable, Hilltop now provides higher sales revenues than any other Clonakilla product, and significantly is the red wine of choice in Qantas business class. Evaluation Evaluation of new approaches and new wines is also in the hands of the wine maker. Many value judgements are used in the process. Importantly, Tim Kirk has received recognition not only as a good winemaker, but also a good judge of wines. He participates in many wine judging events and notes the opportunity to further network with other wine judges who are frequently wine makers. Quality and configuration management Quality of product in the wine industry continues to be based on the art of wine, and is based largely on value judgements; and strongly influenced in the market place first by the wine writers and then by consumers. Alliances Clonakilla has not entered into any formal agreements with any other wine companies, nor with its overseas distributors. Distribution is promoted by keeping distributors up-to-date with the latest accolades received by the product. The market then tends to speak for itself. Intellectual property There is no formal intellectual property protection with the exception of the company Trademark. Codification of Knowledge The viticulture and wine making techniques are passed on to the employees in the company by demonstration and work experience. In this industry little appears to be heavily documented. Clonakilla also employs an assistant winemaker Bryan Martin. Bryan is a graduate of Charles Sturt University, with a Bachelor of Applied Science (Wine Science) and an Associate Degree in Applied Science (Wine growing). He works directly to Tim Kirk at Clonakilla, but has also developed wines for another smaller (7 ha) local Canberra wine company, Ravensworth, which planted Shiraz; Viognier; Sangiovese; Marsanne; Riesling; Cabernet; and Sauvignon Blanc from 1998 to 2001. As might be expected the techniques of making a Shiraz-Viognier have been passed on to Bryan from Tim, and the Ravensworth winery is growing in reputation for its own Shiraz-Viognier, but is probably best known to date for its premium Sangiovese, Shiraz, Riesling, and more recently Marsanne products. Impediments to Building New Capabilities Lack of available capacity to grow a larger winery, and equally the capital to support such growth are impediments. However, in general, Clonakilla appears to be comfortable with its present size and position within the wine industry operating as a family boutique winery.

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Do Government Programs Assist in Building Capabilities? Benefits arise from outcomes of R&D undertaken at the Australian Wine Research Institute through networking. Conclusions The primary philosophy in the wine industry appears to be to “give new things ago”. This is not as loose a process as the term may appear to suggest. Although largely judgemental, the discernment of distinguishing characters and flavours in wines is clearly the province of a few experts or individuals with distinct palates, etc. In assessing absorptive capacity for Clonakilla the major concern is the dependence on one man, Tim Kirk, and the heavy reliance on a process of symbiosis for passing on viticulture and wine making techniques to employees. It is not possible to identify a clear chain of command within segments of the business (viticulture, winemaking to sales and promotion) or even opportunities for succession. In Tim’s view if he were not there the viticulture and wine making techniques would continue – but his unique palate for the best of Shiraz-Viognier, and his ability to build networks and relationships are unlikely to endure.

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Institute of Drug Technology Australia Limited (IDT), Interview conducted with Dr Graeme L. Blackman, Chairman and Managing Director, December 2006. Short History including Prior Experience IDT began life in 1975 as the consulting arm of the Victorian College of Pharmacy (now part of Monash University), and was bought out by management (Dr Blackman) in 1986, before floating on the second board of the Australian Stock Exchange in 1988. While the management was well versed in its knowledge of pharmaceuticals and pharmaceutical practices, the experience of running a company would have been relatively new. IDT is effectively an outsourcing business specialising in the development, scale-up and manufacture of active pharmaceutical ingredients (APIs), using quality systems designed to exceed all international standards and regulatory requirements. The company also provides clinical trial facilities through its CMAX Division and has recently commenced the development and commercial production of specialised pharmaceutical dosage forms. This business model relies on the desire by clients (especially international clients) to identify and access the skills and capabilities of the company. IDT currently employs 140 scientists, and to the year ending 30 June 2006, revenue was $25 million and profit after tax $3.6 million. Evidence of Innovation At foundation IDT was involved in the provision of pharmaceutical formulation R&D services for local and international pharmaceutical companies. Later the company moved into the manufacture of cytotoxic active pharmaceutical ingredients (APIs) largely for local pharmaceutical houses, the largest of which in those days was Faulding. This activity demanded in house design, development and engineering of highly specialised containment systems. In particular in the late 1970s to early 1980s IDT developed the techniques needed to manufacture two anti-cancer actives, cis-platin and carbo-platin, from platinum metal salts. in collaboration with the Royal Melbourne Hospital and David Bull Laboratories, a company subsequently acquired by Faulding. David Bull Laboratories carried out the manufacturing of these products. Importantly, these activities witnessed the build up of not only technologies, but also skills at IDT. In 1989, IDT won a $5 million contract to supply Regulin, a sheep birth-control pill to the British-based Schering Agro Chemicals Ltd. This was the first Australian genetic product to win a major contract from overseas. Schering had acquired the technology and intellectual property to this drug from its Australian owners when they failed to raise enough capital to develop the product in house in Australia. In the event, although the Regulin contract was met by IDT, the drug failed to live up to its commercial promise on the European market. By 1993, IDT was continuing with its success in developing anti-cancer APIs, but the real “shot-in-the-arm” for the company came from the signing of a major supply contract with the local arm of the US pharmaceutical giant Pfizer to build a $4 million plant to manufacture the antibiotic Vibramycin. There is little doubt that the driving force for Pfizer in entering into this deal was the Commonwealth government’s “Factor (f)” program, which offered incentives for multinational pharmaceutical houses to invest in local R&D and developing companies. The key to the innovation at IDT that followed was recognition of a broader market opportunity, and the adoption of a business model that was designed to suit an age in which

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many large multinational pharmaceutical companies were increasingly recognising the potential benefits of outsourcing research and development to assist with their own drug R&D programs. To use the words of Dr Graeme Blackman IDT’s approach was adopted “in response to the realities of the commercial world – if a company is not responsive it will not attract business”. Such a strategy demanded further building up of the capabilities of IDT’s research personnel, and of suitable containment facilities for scaling up the manufacture of more APIs. There is little doubt that it was the customers that IDT had attracted that drove them to achieving world’s best practice during the 1990s. But a significant turning point for the company was in gaining US Food and Drug Administration (USFDA) approval for its facilities in 1998, and in having the facilities continuously meet the exacting standards of the USFDA since then. The facilities so developed are dedicated to manufacturing batches from laboratory scale (grams) to mullti-kilogram commercial scale (up to 250 kilogram per batch) using multi-step chemical syntheses. Since these plants are also designed to manufacture several different APIs, IDT has also implemented stringent measures to ensure that cross-contamination is not possible. IDT expanded its capabilities to the field of clinical trials by the acquisition in 2002 of CMAX, the clinical development unit of Mayne Pharma, located at the Royal Adelaide Hospital. IDT can now offer the capabilities to administer the full range of Phase I to Phase III clinical trails. In 2004, IDT expanded its capabilities to the development and manufacture of finished pharmaceutical dosage forms including tablets, capsules and sterile injectibles. Part of this represents a further cooperation with Pfizer Inc. Human Capital/Other Resources Human resources and training All staff at IDT are highly qualified in the appropriate scientific disciplines and they are also trained to gain a strong understanding of the need to adhere to all the relevant standards associated with drug development and manufacture through attending courses on Good Manufacturing Practice. IDT also has a strong commitment for in-house training on their own systems and procedures. Staff retention over the years has remained high, with less than 5% turnover. During the phase in which IDT was moving towards world’s best practice, especially in the early 1990s, the company recruited experts in the field of Good Manufacturing Practice from local companies that were skilled in the requirements of international regulatory agencies such as the USFDA. The availability of such expertise was crucial if IDT was to establish a high level of GMP credibility and compliance to attract international clients. The PhD and other higher degree qualified personnel dominate the staff in Melbourne with a strong emphasis towards chemistry, biochemistry and chemical engineering, while at CMAX, clinical pharmacists and pharmacologists dominate. Scientific personnel are asked to focus on commercial development, and although there is some novel research carried out, especially in synthetic organic chemistry, publication of results is not permitted. The reward systems employed at IDT include Awards presented to the best performers, and share options for senior executives.

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Other resources In addition to sophisticated R&D laboratories, IDT has an array of manufacturing facilities designated by letters of the alphabet. These include: Facility A which is a 60 litre (L) facility for small scale production of APIs for human and veterinary use. Facility B, commissioned in 1996, and comprising 60L and 250L reaction vessels currently dedicated to the production of anti-cancer (cytotoxic) APIs. The larger Facility C containing a 2000L reactor for large-scale production of non-cytotoxic APIs. Facility D, which is a cleanroom for small scale production of finished dosage forms for clinical trial use. Facilities E, K, L and R each of which contain cleanroom containment facilities for manufacturing highly potent active materials such as cytotoxics, hormones and antibiotics, on a small scale. Facility F is dedicated to the manufacture of small scale low potency materials. Facility V is a biological containment facility for the preparation of viral vaccines. The significance of this array of equipment is that a high proportion of it is distinguished by the phrase “containment”. The manufacture of high potency anti-cancer APIs, hormones, antibiotics and viral vaccines have in common that they demand containment, due to their inherent potency. Additional facilities are planned. Intensity of Learning Knowledge acquisition

Internal – IDT is a member of Medicines Australia which provides an avenue of contact with the local subsidiaries of all the major pharmaceutical companies of the world. In addition, senior management and researchers frequently visit other international companies and attend biotechnology conferences and trade shows. All staff have access to World Pharmaceutical News through SCRIP, and a number of other medical and pharmaceutical magazines; and most follow the scientific literature through regular scientific Journal channels. It was stressed that staff generally do not attend scientific conferences, although a few continue to attend “talk-fests” organised by the Royal Australian Chemical Institute. Communication among staff about significant journal findings is encouraged in seminars and discussions.

External/Networking – IDT has a number of informal associations with the

universities and research organisations, but the main suppliers of ideas are its customers. While virtually all of the “top ten pharmaceutical companies” have ongoing project contracts, and in some cases multiple projects, with IDT, only those that have been publicly announced can be mentioned here. In each case there is a considerable amount of knowledge transfer from the customer if IDT is to provide a satisfactory outcome to meet the contractual requirements. For example, in 2004 Pfizer requested IDT to enter into a fully integrated drug development project of a new drug candidate including secondary manufacturing, the formulation of the product into solid dosage forms, and sterile dosage forms for clinical trials. In 2005, IDT also received FDA approval to manufacture commercial quantities of Thalomid capsules (thalidomide) to its US-based biopharmaceutical client (and owner of the manufacturing rights to thalidomide) Celgene Corporation.

The above external learning processes by IDT have suggested a future strategy that

is likely to see increased activity in secondary manufacturing replacing some of the more generic manufacturing of APIs. This view is compounded by the fact that the manufacture of generic APIs is also being eroded by low cost competitors that are emerging in Asia and in Eastern Europe.

IDT also interacts with other companies by providing advice and assistance in, for

example, the management of clinical trials (eg., the Australian company Starpharma), in

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drug manufacture (eg., the Australian company Biota), and increasingly in the procedures for meeting the regulatory requirements in the industry, especially with the Therapeutic Goods Administration of Australia, and the USFDA. In addition, participation in Medicines Australia and the Pharmaceutical Society of Australia provide good avenues for obtaining “tips” on the function and mechanisms of government policy in Australia.

Organisational Factors Integration and transfer within the company As we have noted in some other Case Studies in diverse areas of activity (eg., CEA Technologies in defence systems, and Clover Corporation in food science and technology) the organisation of taking ideas from conception to commercial outcomes is dominated by a team approach at IDT; and one that is designed to shield individuals from total responsibility of delivering the whole outcome. At IDT flexibility in the team structures is emphasised with common members frequently distributed over 2-3 projects. Each project has a project manager or team leader, and their principal role is to develop knowledge about the particular skills and contributions that each team member brings to a project. Teams at IDT usually comprise 4 – 5 people, and management suggested that when the project manager knows the team it functions as well as any team in the world. The high level of staff retention is taken as evidence to suggest that individual staff are well looked after in this structured arrangement. Management emphasised the significant roles played by the project managers in seeing a project through to culmination in a commercial outcome. At IDT it is also stressed that the upkeep of scientific and engineering documentation is an essential ingredient to its operations. Not only does this process ensure that knowledge is embedded within the firm as opposed to individuals, but also it is a requirement in order to meet the critical assessments and subsequent approvals made by the USFDA. Each notebook entry has to be signed off by the researcher involved and it is not uncommon during an FDA inspection that the question might be asked of the signatory “did you sign this?” Thus everything at IDT is fully documented from the perspective of experimental details to how systems are assembled, and the comprehensive validation of the system. The success of the relationship between the USFDA and IDT is best reflected by the approval for IDT to manufacture Thalomid for its client Celgene, without the FDA invoking additional inspections. Evaluation It is not unusual for IDT to consider a number of new avenues to explore for new business opportunities. Such avenues may be tested with the decision to go no further. In all cases the standard requirements for documentation are maintained and so no new knowledge is lost. As noted above, validation of entire systems of manufacture of APIs and new drugs is fully documented for the benefit of obtaining USFDA approvals. Exploitation The evidence of the exploitation of knowledge by IDT is to be found in the delivery of APIs and finished drugs to its clients; and in the continued growth of such activities at IDT.

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Quality and configuration management Since the approval processes of regulatory agencies dominate the activities of IDT, it may appear repetitive to stress that in the business of pharmaceuticals, USFDA approval is tantamount to, as one writer in the press has noted, “a licence to print money”. IDT is one of a few companies in this business in Australia to have received such approval. It is also critical that IDT receives approval from the Therapeutic Goods Administration in Australia, an internationally recognised regulatory agency employing stringent standards of GMP and quality compliance. Alliances Contractual partnerships exist between IDT and a number of local and multinational pharmaceutical houses, including those publicly identified with Mayne, Pfizer, AstraZeneca, Johnson and Johnson, Wyeth, and Celgene. Other relationships exist on an in-confidence basis between the client and IDT. Intellectual property IP is a subtle part of IDT’s business, and trade secrecy is an essential ingredient for IDT to gain and maintain client confidence; and for IDT’s own protection in doing business. In general, however, IDT is not involved in creating intellectual property, even in cases where process improvements might be made by IDT, the ensuing IP is assigned to the customer. Codification of Knowledge All aspects of work performed at IDT is fully documented, especially to meet the “Certificates of Analysis” following a USFDA inspection, and for ultimate USFDA approvals of processes and procedures. Through these processes all knowledge is embedded in the company and not in the individuals carrying out the work. Impediments to Building New Capabilities IDT has the luxury of being a company that has no difficulty in obtaining funding as long as its existing clients are kept happy through contracts being met in a timely and efficient manner. The company expects continued growth as it moves increasingly to expanding its capabilities in secondary manufacturing of pharmaceutical products. Do Government Programs Assist in Building Capabilities? Back in 1993, IDT was effectively able to “piggy-back” off the Factor (f) scheme through a strategic alliance with Pfizer. That alliance enabled IDT to build new plant, generating additional revenues and jobs, while Pfizer replaced some of its drug imports with active raw materials supplied by IDT. No other government programs impact directly on IDT, but IDT often assists its clients in applying for access to the replacement of the Factor (f) program, now called P3; and in some cases in applications for Commercial Ready grants. Conclusions In the context of the Australian biotechnology industry, IDT is one of a handful of companies that can boast of a continuing array of commercial successes. As noted by Dr Blackman:

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“over 80% of our business is offshore, and it is essential that Australian biotechnology companies understand and embrace the unique value-add that may be available to them in this industry”. He emphasised that a “knowledge gap” continues to exist in most Australian biotechnology companies, which also persist in being largely science driven, rather than commercially oriented. The large pharmaceutical companies like Pfizer spend $ billions on R&D per annum, but frequently ask the statistical question of how many new drugs can be expected to come out of the “pharmaceutical funnel” of meeting the demands of Phase I - III clinical trials. Yet Australian biotechnology activities in this area appear to operate on the basis that every post is a winner, and few address the need to look for the unique high value addition to be accrued from their activities. It is in the above “value-adding” sense that IDT has capitalised on building its skills and capabilities and in extending these to the world; and this has culminated in their present success. IDT is truly a “learning organisation”, and one that must rate very high in its absorptive capacity. While the transfer of knowledge is largely from external sources, the receptors for that knowledge are a highly educated and qualified work force, and a validated system for codifying that knowledge. IDT continues to receive international recognition through the contracts it is awarded. While the knowledge for specific projects largely rests in the IP of the client, it is the in-house capabilities and skills at IDT that attracts the multinational Pharma-houses to work with IDT to perform highly demanding and specific tasks for them. Ultimately this results in greater trust between IDT and its clients, thus increasing the potential of opportunities for demanding work in new drug development to produce finished products, in addition the formulation R&D activity and later API manufacture that characterised IDT’s beginnings.

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Lochard Pty Ltd, Interview conducted with Mr Martin Adams, Managing Director, December 2006. Short History including Prior Experience Lochard Pty Ltd specialises in the design, manufacture and support of airport noise management systems including flight track monitoring. These systems are based on differentiating between the noise characteristics of air and ground transport and other noise generated in and around airports. Over 140 airports worldwide utilise Lochard systems, and world-wide support services involving real time data analysis can now be provided 24 hours per day from a centralised location in Melbourne. Such information aids in the management and monitoring of air and ground transport, assists in the planning of airport expansion, and provides documentary evidence of value in enhancing public relations. Lochard commenced operations in 1990, originally in a joint venture to meet the requirements of a complex Civil Aviation Authority tender to monitor noise at the Sydney and Brisbane Airports. By 1991, the fledgling joint venture had undergone a substantial reorganisation and three of the original four partners exited. It became apparent that there were a number of similar possibilities driven by the growing demand for air travel and rising community concern about aircraft noise, and Lochard’s management in the form of Martin Adams, seized on this opportunity. Martin Adams had a background in IT and data logging and pursued a mechanism that enabled the fledgling company to leap-frog their competition through a novel solution involving digital processing and analysis of noise data. The Professor of Electrical Engineering at the University of Melbourne happened to be Martin’s father and he played an influential role in the early days, especially in regard to the design of the environmental monitoring units (EMU). Today, Lochard is a niche company that holds two-thirds of the world market, has 90 employees, an approximate turnover of $20 million per annum, and exports over 90% of its products and services. Evidence of Innovation Lochard offers turnkey solutions incorporating proven technologies which were developed in-house using the best componentry from wherever it is available. At the core of Lochard’s technology is a data collection system and an algorithm that enables clear distinctions to be made by all noise emitting equipment, notably at airports. Lochard is involved in a continuous R&D program, spending 10 - 15% of turnover and up to 25% in years of major product development. Early products developed and manufactured by Lochard include ground noise EMUs, a PC-based Environmental Analysis and Reporting System (EARS), the Global Environment Management System (GEMS) which is a noise and flight track monitoring system, and an Airport Information Management System (AIMS) database management system. Today, Lochard delivers the ANOMS™ System 8 - an advanced, new generation, technology platform to support airport business requirements in noise monitoring now, and into the future. Lochard subscribes to the view that future airport capacity increases will be achieved not only by increasing the physical infrastructure, but by utilisation of smart technology – their Advanced Collaborative Decision Making (A-CDM) technology. Lochard’s systems enable airports to monitor aircraft flight tracks and the noise they generate as well as weather, air and water quality; enforce airport noise abatement regulations including noise limits and operational curfews; model and optimise noise impact

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for future airport operating scenarios; and communicate environmental performance to airport manager, regulators and the neighbouring community. A major realisation by Lochard early on was that the development, sales and installation of their new equipment in the world’s airports required building up a service department for the running and maintenance of these systems, and this involved a different culture that was difficult to handle in a small company. By 2000, it also proved necessary to retrofit a number of the airports. Thus Lochard embarked on adopting a new business model – one that focussed on providing a service to the customer in the form of a subscription to the output of the system. Martin Adams describes this succinctly as the “mobile phone model”. Such a value proposition has effectively turned Lochard into a data warehouse, whereby the company can sell subscriptions to the data collected by their equipment, processed by them at a central source, and utilised by the customer at their own location. Lochard has established an Internet hosted system in Richmond, Victoria. The company controls the IT infrastructure and architecture, and profitability comes from establishing long term contracts with the airport authorities, eg., a ten year contract with the British Airports Authority. In effect the data handling processes dealt with by this process are in real time. Lochard’s business success factors have thus evolved, though they remain interlinked, from provision of leading edge technologies in noise monitoring and data analysis, establishment of a leading edge client base, establishing a strong market position (2/3 of world market) to provision of customer services. The company now leverages on its experience and is effectively protected by the new business strategy from its competitors. With a view to the fact that software is becoming increasingly commoditised, Lochard sees that its future business lies in the acquisition of new data sets. Human Capital/Other Resources Human resources and training The majority of Lochard’s environment systems personnel have a broad background in relevant fields such as software engineering, telecommunications and aviation. It was argued that the disciplines covered by Lochard can only be handled by people who really know their subject areas. As the business model for the company has evolved so has the need for different kinds of personnel. Staff retention has tended to be in waves as some of the original people involved with development work left and new people came in to provide services, and establish IT systems. In some cases this initially involved bringing in people from external consultancies. However, once the significance of a project is seen as important to the company they have recruited for in-house development. Staff training is especially promoted in the areas of IT, project management, and in-house knowledge of the products and services of the company. However, management training is considered to be poor. As Mr Adams points out: “in a company introducing new innovations and business models people just do not have the time for this sort of training”. The company also offers customer training services, but this is expected to reduce as the new business model takes over. Lochard has a share options plan for staff, but Mr Adams points out that this is a nightmare to administer from the point of view of taxation issues. The usual commission on sales is offered to sales personnel and there is also a bonus structure when sales exceed targets. In general, it is argued that if people are paid a competitive and fair wage, and are provided with job satisfaction they remain with the company. The latter incentives have also been

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very effective in attracting personnel from some of the larger companies, especially in the context of increasing the capabilities of Lochard by – “engaging appropriate people to fit with the new strategies”. Other resources Lochard is well equipped with state-of-the-art capabilities in electronics and IT, and has boosted its R&D commitment in establishing the new Web-based data management system. Intensity of Learning Knowledge acquisition

Internal – The dominant source of ideas in the niche sector in which Lochard operates is said to be the customers. On the other hand the Lochard’s highly qualified staff have developed from scratch all of the instrumentation units and software that the company has built its reputation upon to date.

Martin Adams notes that “not only is the training in the mathematics, engineering

and sciences strong, but the Australian character, and ability to “think outside the square” is suited to the software industry.” Further, the company has found that the cross-cultural expertise in Australia plays an important role in building long-term business relationships.

External/Networking – However, to establish and maintain a position at the forefront of technology developments in their field Lochard has formed over time a number of strategic external linkages. Such linkages have come and gone depending on the area of business pursuit dominating the company at any point in time. Linkages and thus knowledge sources have included the Dutch National Aerospace Laboratories (NLR), the CSIRO, Swinburne University, Thales (formerly Thomson-CSF Research Laboratory, France), Wylie Laboratory (USA). More recent relationships involve Air Quality Japan, BridgeNet International (USA), the DSTO Radar group, and CSIRO’s Environmental Monitoring group. The necessity to develop a sustainable engagement process in these relationships is emphasised by Lochard’s management.

In the linkage project with the DSTO Radar group it was noted that radar can provide

an operation dominated by noise monitoring, an effective method for eaves-dropping on flight tracks. In this context the DSTO has access to the data collection, while Lochard will be involved in the data management side as the project develops.

Linkages with other firms, especially suppliers, have proved particularly critical to

Lochard (see Alliances). Organisational Factors Integration and transfer within the company As mentioned earlier, external people have frequently been absorbed into the company as a mechanism of taking in new skills and capabilities and integrating these with existing activities. The company appears to operate as a fairly casual collegiate group, and communication from the Managing Director through the entire staff remains congenial. In attempting to see the careers of individual’s progress, staff retention has moved in waves since, for example, many of the original development teams left, as the organisation evolved

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to take on a stronger service orientation. Nevertheless, a strong R&D team is maintained in order for the company to remain at the forefront of the technologies relevant to the business. Another evolution in Lochard’s business, however, is the emergence of the increasing degree of specialisation towards software, especially in the context of data management, analysis and the distribution of results to customers in “real time”. The sophisticated Web-based system recently adopted by the company is an expression of the degree of specialisation. Another element of organisational change in Lochard involves the acquisitions made by the company in the USA and Europe. Such acquisitions are often the source of some hostility from absorbed staff – the issues of “will I have a job”, “the impact of different cultures” in “different countries”, and especially the need for customer support for the products absorbed into the new organisation. It was stressed by Mr Adams that there is a fine line between new directions and maintaining high spirits in these circumstances. Communication and open accessibility with leadership have been the key to the successful acquisitions, but such processes have taken up to two years to achieve. Evaluation Many of the systems built by Lochard were successfully subjected to testing in the German Standards Laboratory (PBT). To stress the success of these tests, PBT purchased the Lochard EMU system for their own use. Originally this activity was undertaken to redesign its units to improve robustness and reduce the production time. Exploitation The evidence of the exploitation of knowledge by Lochard is reflected by the company attaining a dominant market position in its niche in a period of 15 years, and in the changes in the business model adopted by the company in order to minimise its cost curve and maximise it revenues. It is evident that data accumulation, analysis and sales of data outcomes provide a sustainable stream of income in this niche area. Quality and configuration management In the field of noise data management and analysis, Lochard has virtually set the world standards. As evidence of this, since the customer has played such an important role in Lochard’s approach, the company has worked hard on maintaining contact with this client base including the holding bi-annual user conferences where issues and concerns have been openly discussed with existing and prospective customers. Alliances Although repetitive, it is important to stress that Lochard has a history of forming strategic linkages with several institutions locally and overseas. Such linkages have come and gone depending on the area of business pursuit, which has changed over time. Linkages have included the Dutch National Aerospace Laboratories (NLR), the CSIRO, Swinburne University, Thales (France), Wylie Laboratory (USA). More recent relationships exist with Air Quality Japan, BridgeNet International (Australia), the DSTO Radar group, and CSIRO’s Environmental Monitoring group. From time to time Lochard has also benefited from linkages with other companies, especially those in their supply chain. Lochard has established tight and exclusive agreements with a number of suppliers especially with respect to accessing technology and specific products.

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There are also many “loose alliances” with other friendly companies (large and small), and these are often formalised when the two companies agree to work together. Lochard noted that all of these arrangements were with companies overseas, and many related to future market access, although some were concerned with specific project ventures. Most recently, Lochard outsourced some of its software development to an Israeli company. The focus is on software for testing equipment in regard to what it is intended to do. When it comes to venturing into new areas Lochard has employed the dual strategy of developing its own knowledge in the area through its alliances with appropriate research agencies (eg., in passive radar and DSTO); or through acquisition of overseas competitors. The latter approach has reduced Lochard’s direct competition in noise monitoring to only one competitor. Intellectual property The Managing Director admits that a lot of the IP held by the company resides in its employees and the records that they keep. He suggested there was room for improvement in formalising more of the IP that the company uses. Codification of Knowledge Lochard maintains documented records of all its activities. These may take the form of paper reports, but in most cases computer data records are maintained. Impediments to Building New Capabilities Following from the fact that Lochard’s own positive experiences came from advice to take on a senior mentor, Martin Adams is firmly of the view that Government policy should focus on providing a Mentoring Scheme for small and medium sized enterprises. Suitable mentoring may also enhance the access to capital which is considered as a major impediment to SMEs. Encouraging the return of suitably experienced expatriates was suggested as one mechanism to boost the numbers of available mentors. Similarly, since Lochard has experienced the need for cultural change in its progression of business model changes, the Managing Director suggested: “training may be desirable for companies on how to improve their ability to absorb change”. “If an organisation is flat out – there is no space to absorb change - especially that involving cultural change”. (As a comment: this suggestion would appear particularly appropriate since absorptive capacity automatically implies change). According to Lochard there is also a need to acknowledge the importance of global linkages and the global platform in which companies like them operate. In simple terms: encouragement for the flow of people (both ways), and opportunities for foreign investment should be promoted. Do Government Programs Assist in Building Capabilities? One of the early driving forces for the company was that it won an R&D grant (1993-95), which enabled a much more rapid development of their equipment than would have otherwise been the case. To quote Mr Adams, “this grant enabled Lochard to catch the crest of the technological wave and quickly develop what was needed to satisfy the requirements

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of their early contracts”. A second grant was awarded for the development of GEMS in 1994-96. Lochard uses the R&D Tax Concession to support its ongoing R&D program. In addition, when Lochard was in the process of entering overseas market it was the support of Austrade through an ITES soft loan (1997), and Export Market Development Grants (1997-2000) that proved most significant in enabling the company to take and show its products overseas. Subsequently Lochard acquired some of its competitors in the US and Europe and established offices in the US (Boston, Sacremento), UK (Leeds), and Holland (Amsterdam). Conclusions Rapid expansion has often imposed some stress on the Lochard Company though it has learned many important lessons from these experiences. First, the need to develop the appropriate infrastructure and management was highlighted. This problem was compounded by the frenetic pace with which Lochard was developing technology in Australia and the difficulty of keeping its overseas offices abreast of these developments. It resulted in Lochard occasional overstretching – a good example of which was the failure to sustain an office in Taiwan which was perceived as a new market entry point – the office was closed after 2 years. The necessary changes in the business model of Lochard from a company initially able to build and supply any equipment relevant to their niche of endeavour, to one needing to standardise services to over 140 international airports, and further to providing data analyses on an ever increasing number of local phenomenon like noise, weather, air quality, and a footprint of airport activities (ground and air traffic movements) have been reflected in changing capabilities within the firm, and a very high absorptive capacity to effect such changes. Lochard provides an excellent example of a company able to exploit the advantages to be accrued by working with external partners, and turning these into commercial advantage to the company in capturing a major proportion of the world markets in their field of endeavour.

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Textor Technologies Pty Ltd, Interview conducted with Mr Phillip Butler, Managing Director, December 2006. Short History including Prior Experience Textor has operated as a new Australian business since December 2000, when the current Managing Director Phillip Butler acquired 100% of the shares of the Australian subsidiary of the British-owned textile company Lantor International. The purchase included accumulated losses of over $4 million which resulted from trading difficulties from 1997 to 2000. Phillip’s challenge was to turnaround the negative trend, and by 2002 the company returned a sustainable profit, maintained for the last 5 years. Textor has become a significant Australian producer of non-woven textiles offering an array of products for the medical, hygiene, personal care, food packaging, filtration, environment, acoustics, agribusiness, and cleaning markets. The company also provides design and engineering solutions to clients wishing to use non-woven textiles. Phillip had 24 years in glass manufacture with ACI, and moved into textile products running Lantor businesses in Asia and Australia. Other senior professionals were recruited from Orica and from the paper industry. This wealth of experience in other manufacturing industry has been critical in redirecting the activities of Textor. Textor currently employs 46 people of which 12 are qualified engineers, and recorded a turnover of $13.7 million at June 2006. The company’s main customer is the local arm of the US company Kimberley Clark, although 20% of turnover is currently derived from exports into Asia. Phillip Butler goes to great lengths to stress that the company is driven by cash generation, not profits or shareholder dividends, and this in turn places a strong emphasis on the culture and politics of the organisation (see Human resource and Organisational factors). Evidence of Innovation In addressing innovation issues it is pertinent to understand the nature of non-woven textiles. Non-woven textiles combine and arrange fibres in a sheet or web using a variety of techniques, and may involve the use of natural or manufactured fibres sometimes combined with exotic materials that assign to the finished product specific properties. The critical issue is that the fabric is produced from the fibres in a single process. The modern non-woven fabric manufacturer has a preference to work with a continuous rather than batch process. This involves a single production line from weighing and mixing of fibres, carding the fibres to form a web, bonding the web, drying the web, and finally slitting and winding into a package for shipment. The major factor in the turnaround at Textor was the rapid commitment to adopt new state-of-the-art technologies and operating systems that effectively, to use Mr Butler’s words: “married the science of paper making to the craft of textile fabrication”, and introduced a high level of automation through computer monitoring and control. The largest single investment by Textor in plant and equipment involves incorporation of the new bonding system using hydro entanglement process technology in the line. In brief, hydro entanglement technology involves the application of high pressure (60,000 psi) micro water jets above a belt of fibres to lock the fibres together and at a processing rate covering 50 metres of fabric per minute. Textor has also introduced other treatment techniques such as chemically impregnated fabrics, through-air bonded fabrics, and needle punched fabrics providing the company with a versatile collection of “technical textiles”.

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Thus the business model adopted by Textor has not only introduced new innovations, but has effectively moved the company completely out of conventional clothing textiles to technical textiles – from one market to another. The technical textiles produced by the designated techniques are differentiated by their weight (grams per square metre) and fibre composition. For example, viscose /polyester fibre blends (20 - 90 GSM) treated by the hydro entanglement process have better water absorption properties than higher rated GSM fabrics and are used to address medical applications in orthopaedics, hygiene, and wound dressing by Textor. Human Capital/Other Resources Human resources and training A truly novel approach to human resource management was adopted by Textor, that of “open book management”. Open book management is built on trust, ethics and honesty, and involves the entire staff being called into a monthly team meeting (or more frequently if required). At the beginning of each cost month, the day starts at 7 am with a full stock take, followed at 2 pm by the team meeting. The team meeting discusses profit and loss statements for the month, the materials used on line, numbers of rejects and why, bills owing both to and by the company, and so on. By 3 pm the objective is for the leadership of the company to provide the meeting with the financial projections for the future, including sales, profit and other critical cost factors that could effect performance. In addition, mechanisms to introduce cost savings are discussed, e g., at the level of detail on how to reduce the numbers of CHEP pallets at the factory. It is noteworthy that Mr Butler has the conviction that his role is that of a leader as opposed to a manager in Textor; and since everyone shares in assessments of the company’s performance then the reward system adopted by Textor involves sharing 10% of all profit with everyone on an equal basis. All the people in Textor have thereby developed a commitment to the future success of the firm. Mr Butler realistically points to the fact that business behaviour is often cyclical: “life in business is not a straight line – things go up and down”. In the year 2006-2007 Textor is expected to make a loss as a function of a depreciation charge, but on the positive side he notes that this effectively will result in generating $3.0 million in cash for future investment. To explain this philosophy further, Textor’s largest customer Kimberley Clark has access to these management reports as part of the trust system developed under the open book management approach. The approach has established a very strong partnership. This concept applies to the lending institutions involved in some of the investments made by the company. As new technology is brought into Textor’s operations it is the senior management team that learn about the technology and its operational characteristics. They then pass this knowledge on to staff on the shop floor. Overall, everyone knows some details of how particular aspects of the “ideal” line should be operating. This effectively means that everyone is on call 24 hours, seven days a week; and there appears to be a camaraderie developed around this principle especially in trying out new ideas and in establishing the computer controls systems on the production line. In addition, a mentor system has been established for all members of senior management. The latter is attained through astute appointments of Members of the Board of Directors, who have willingly taken on this role.

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Phillip Butler has also introduced some elements of succession planning into Textor, exemplified by his son Andy first being engaged as an operations manager, moving to engineering manager and most recently taking on the role as Marketing Director. However, he also notes that in the business of non-woven fabrics, it is the company that converts Textor’s outputs into final product that really acts as the gatekeeper in the industry. Currently Kimberly-Clark plays the role of converter for the bulk of product shipped from Textor in the form of absorptive polyester non-woven fabrics for disposable nappies. In planning for the future the company is establishing a new converting business to take over these gatekeeper roles wherever possible. Other resources Since its inception in 2000, Textor has invested a total of $16 million on new plant and equipment. In particular this includes the through air bonding line ($4.0 million) and the hydro entanglement bonding ($12 million) technology, and the computer monitoring and control systems for the production lines. These acquisitions were primarily achieved with loans from the Commonwealth Bank. None of the major equipment comes from a single supplier and consequently Textor personnel have been engaged in the process of systems integration, and in designing software control systems to integrate bonding technologies to the production lines. In a frank discussion of future demands it was disclosed that a third major continuous production line for the Kimberley Clark product would probably be warranted, and this would be pursued if the finances were available. On the other hand, if such an investment were to open up a new opportunity in another field then the risk associated with the investment would be reduced. Intensity of Learning Knowledge acquisition

Internal – As is the case for most SMEs, Textor has adopted an approach of acquiring new knowledge through reading the global industry newsletters in their field of activity and in their attending appropriate international trade shows of which there are three major ones in Europe, the USA and now China.

In addition, the collective experience of the management team is applied to

considerations of new technologies in detailed debates among not less than four of the six senior executives. The creation of skills amongst the general staff is left to that group, and the “open book” approach employed as the median for communication.

It has been noted previously that the senior management team in Textor learn about the new and introduced technologies and their operational characteristics before passing this knowledge on to staff on the shop floor. Often this involves teams of staff members working on the integration of components that will ultimately make up a system. For example, high pressure water generators for the hydro entanglement process technology, or the integration of that technology onto a production line using computer monitoring and control. In the case of the hydro entanglement technology a second person was rapidly trained in-house to understand the critical filter components in this system.

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External/Networking – Textor has an R&D contract with the CSIRO Division of Textile and Fibre Technology in Geelong, and Phillip is a member of the Strategic Advisory Committee to that group. In viewing the production line it was evident that experimental equipment from CSIRO was in place, but confidentiality prevents us from mentioning for what purpose.

Mr Butler is a heavy reader of technology journals, but more importantly is a

networker in the industry. He has numerous contacts throughout the world that he can call upon at any time for advice and/or assistance. This information is housed in an extensive card file system. Recently, Kimberly Clark drew Textor’s attention to a competitor’s product. It was the link with CSIRO and the extensive world network possessed by Mr Butler that were able to identify the how and the where of that product’s manufacture – a sort of reverse-engineering process. If there was something Kimberly Clark was missing in their converter processes, the answers came thick and fast through Textor. These networks have other implications for Textor’s role in advising all its clients in their individual fields of specialisation.

On the other hand it is acknowledged that the customer really drives the demand for

new technology. Textor’s job is to look at reducing the cost of performance, whether a better product can be made, what raw materials might be available, the formulations for bonding, etc. The things they do for Kimberly Clark are protected for that customer and its markets, but the things they learn can be applied to other non competing industries and market segments. Organisational Factors Integration and transfer within the company It is important to acknowledge the roll of the “open book” management process, discussed in the section on Human resources as the mechanism through which integration and transfers take place in Textor. The approaches adopted by Textor in automating their production line form an important part of both this and possibly the human resource factors. Textor has invested very little in comparative terms ($150,000) in establishing the digital control of their manufacturing processes. In-house R&D suggested that a system of management was potentially more important than newly developing IT systems. Consequently, Textor adopted the SCADA system and integrated it on their shop floor. The principle they adopted involved treating the PC’s that are hooked on as monitoring ports to the system as Bank ATMs. That is, the interface between the person and the continuous processing machine is a simple matter of entering a code to observe what is going on and to report on any malfunctions and/or adjustments that may have to be made 24 hours a day. Anyone, can interrogate the system at any time to measure the input of fibres, carding, bonding formulation, drying, and through to winding the finished product packages. The “open book” approach means that everyone is aware of the fact their performance is being monitored by the SCADA system. They are also aware that the SCADA system is there is assist them achieve a better performance. Evaluation Evaluation is a collective process in Textor again governed through their open book approach. In Mr Butler’s view although they comply with the ISO 9001 standard, he considers this as “yesterday’s stuff”, to the process of evaluating their products. Essentially the ideal is to control the process through the SCADA system in such a degree that evaluation is irrelevant.

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Exploitation In December 2002 Textor established what is commonly known as the KC-line - the process for manufacturing to meet Kimberley Clark’s requirements. Since inauguration that line has recorded a conversion efficiency of 102%, which suggests Textor is close to pushing the boundaries in this form of manufacture. The line is currently running 24 hours by 5 days per week. Textor has considered moving to a 24 x 7 operation, and would readily invest in a new line if they had the cash. Establishment of this new line might take 2 years, and so Textor is gambling on the preference for them to diversify in the application of non-woven textiles, rather than being tied to one customer. The risk analysis strategy used by Textor suggests diversification as a preferred course of action for the future. Quality and configuration management Quality assurance is determined by the continuous monitoring processes on the production lines, and on customer satisfaction with the product outcomes. Alliances Textor has no formal contract with their main customer - Kimberly Clark. Being a small company it proves easier to work smarter and quicker in response to the needs of a customer than is the case of the larger suppliers. There is a considerable amount of trust between the management teams at Kimberly Clark and at Textor. . Textor has informal relationships with several European nonwoven manufacturers who continue to assist Textor even though they could be considered as competitors. The reputation for innovation and the open book approach which leads to high integrity means that these companies are prepared to trust Textor with industrial secrets in the knowledge that Textor will honour the IP and also share any improvements with them in return. Intellectual property Textor does not use any formal protection mechanisms for its IP, and relies largely on trade secrecy. The value is more in the process than in the product. Codification of Knowledge Knowledge processing and transfer in Textor is dominated by their open book approach. All details of production processes, amendments to same, and R&D findings are fully documented. Impediments to Building New Capabilities A few points were made by Mr Butler:

Profitability of the market is considered an impediment, since Textor is firmly of the belief that they can raise funds on an as required basis. In dealing with research organisations – how do you find the right person? The cost of raw materials is a major factor in determining the cost of non-woven fabric outputs. Most of these raw materials must be imported.

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Do Government Programs Assist in Building Capabilities? Textor was a recipient of funding from the Textile Clothing and Footwear Strategic Investment program (SIP), administered by AusIndustry. This scheme provided incentives in the form of reimbursement grants to promote investment, innovation and value adding in the industry for which Textor clearly qualified. In contrast, Mr Butler had formed the view that the 125% Tax Concession for R&D was not worth bothering with from the perspective of the added administrative burden and the small reward to be gained. Mr Butler noted, however, that: “if you spoon feed a firm, it is really unlikely to be in the game in the longer term”. On the other hand he suggested that there should be some form of incentive for big company people to join small companies for extended periods of mentoring and cross fertilization. Conclusions Phillip Butler is firmly of the view that the adopted approach to fostering manufacturing industry in the face of competition, especially from Asia, is currently addressing the wrong issues. He argues that it is not the low labour costs of Asia that should concern Australia in order that we remain competitive, but rather the issue concerns the margins expected to be realised from our endeavour. Instead of focussing on high margin niches in developing Australian industry (eg., biotechnology) we should adopt a view that high volume businesses can deliver by competing on price, quality, securing the supply chain, and developing a strong focus on exports. The strategy adopted by Textor appears to follow these suggested principles. The company’s cost structure is analysed in terms of raw materials (45%), quality (Textor goes to the fibre mills themselves and takes days to select high quality fibres), and labour (5%). The remaining 50% of costs is embedded in processes, and in Textor’s case in new and at least potentially more efficient processes. The question for Textor and in Mr Butler’s view the nation is how we move firms to recognise the importance of driving the margins down in order to remain competitive. This approach is called the DuPont model and focuses on asset turn rather than higher margins. In the event that price competition is faced from our Asian neighbours then it follows from the above that we must address mechanisms to increase productivity, either by “turning up” the machinery and equipment to produce more, running the machinery 24/7, or in adopting more efficient and cost effective production processes or procedures to manage the production line. From the perspective of absorptive capacity Textor appears to be working in the above directions in order to establish cash flow first, and profits second. They have developed a relatively massive program in adopting advanced and versatile technologies, and have inculcated a company philosophy through their open book management processes whereby every member of staff is empowered. The company has also clearly identified the problem of their vulnerability in dealing with only one major client (gate keeper), and aims to grow into an efficient conversion business themselves. Mr Butler argues that it is easy to monitor competitor’s prices today through the Internet, and to compete on price in high volume businesses. The problem for the high value-add

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businesses fostered under for example biotechnology is that their margins are generally too high and price competition makes them easy targets for takeovers and acquisitions.

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Malloch Digital Design (MDD), Interview conducted with Mr David Malloch, Managing Director, December 2006. Short History including Prior Experience Malloch Digital Design (MDD) commenced operations in May 1985. David Malloch had worked as an electrical engineer in the security industry from 1979, and had developed skills in hardware design and software management for alarm systems. The first MDD product was an alarm panel designed to meet ASIO specifications. The alarm panel was popular in Australia and abroad, and provided the capital to enable MDD to buy a precision metals company to do in-house metal work, and to consider other areas of endeavour. In 1987, interest came from the club industry in the form of design and development of a monitoring system concerned with multiple key use – key security and management. The alarm panel business was subsequently sold to a Sydney company, and David Malloch incorporated the Key Safe system into a new company, Endurance Electronics. By 1992 David reacquired the alarm panel business and MDD, but his then partner stayed with the precision metals fabrication arm of the business, that separated out again. The key and alarm panels were further developed along with other security products such as encrypted communication interfaces (eg., SAMEX); telecommunications intercept equipment, and radio frequency controls and communications in security systems. This resulted in various accolades such as ACT Exporter of the Year Award (1995), and ACT SME Innovative Manufacturer Award (1998). In 2002, David sold off the key panel part of the business, sold the name “Endurance Electronics”, and restructured MDD into an alarm panel and security equipment business. At its height in 2002 MDD had 15 employees. Today this has reduced to 4.5 employees and a turnover of about $800,000 per annum. The company is not currently involved in exporting goods or services. Evidence of Innovation David Malloch himself was responsible for all the hardware design of the early security and key panel systems up to 1999. At that point he made the strategic decision to write himself out of the technology forefront and place this responsibility with his staff. He achieved this by having the security and key panels re-engineered in 1999 – 2000, while he acted as production manager. In their area of security systems David describes MDD as at the forefront of the industry, and he rightly notes with some pride that competitors have to run to try and keep up with MDD’s continuous incremental innovation. MDD consequently proves to be the only supplier of the kind of capability they offer in security systems. In MDD’s own product description, “the current Series 200 alarm systems offer fully integrated high security alarm monitoring and access control, and are fully programmable using a powerful microprocessor to control and monitor all functions. User codes can be added or deleted; sector configurations, time zones, access levels, relay outputs, detector testing, and door control can all be user programmed on-site. An alphanumeric display ensures trouble free system programming with interactive displays and prompts”. The software utilised in MDD’s security systems contains security specific algorithms that are tamper free. Thus, as an example, MDD provides the links between the Lucas Heights

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Reactor and the Federal Police in Kingston, ACT. In addition their products are engaged in providing secure links in the Defence sector. David described the current operations of MDD as backing up and further developing their security systems, but also in developing new concepts. The “concepts” were described as often derived casually, but they can form the basis of new applications of technology in the electronics industry. One such example is the application of digital techniques in the control of remote camera operations in the film and television industry. This project is a joint development with KE Remote and is described in more detail under Alliances. Human Capital/Other Resources Human resources and training MDD is a small company with a highly specialised staff of electronics engineers. All new ideas are brainstormed with the staff informally over lunch. The pros and cons of the notions are pushed around and if something favourable emerges it is pursued in design and then prototyped. Everyone is involved in all the projects and they are the subject of open discussion at all times. Over time, MDD appears to have broadened its specialisation. The company commenced by doing its own thing, eg., security and key panels, but now progressively takes on new work across a broader spectrum of electronics, eg., TransAct power supplies, or the digitisation work with KE remote, etc. All the equipment manufactured by MDD is installed and maintained by MDD today in over 92 locations. Other resources In-house access to comprehensive electronics circuit board design, assembly and testing facilities. Intensity of Learning Knowledge acquisition

Internal – The key to technological sourcing undoubtedly remains as David Malloch, although he shares all his ideas in open discussion with all the present staff. It is David, however, that definitively brings in new concepts, be they drawn from interactions within the industry or conceived by David through the benefits of personal experience. A concept that David had initiated at MDD relatively recently involves the development of locational and adjustable multiple speaker systems at, for example, tables at conference dinners where otherwise echoed sound would tend to dominate.

External/Networking – There appear to be no interactions between MDD and the research institutions, and interactions with other (largely local) firms dominate MDD’s external linkages (see Alliances). David Malloch pointed out that the meetings of Electronics Industry Associations (AEEMA AND AIIA) are often a way in which a company like MDD can sell its services. MDD is also a member of the Business Council of the ACT and of ASIAL, the latter a security-wide group.

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Organisational Factors Integration and transfer within the company As discussed open forum discussion with all staff dominates this small business’s operations. Evaluation The continuous use of MDD systems by the Federal Police and Department of Defence is an endorsement of the credibility of the company’s security systems. Exploitation KE Remote has exploited the latest digital designs in its camera operations. Quality and configuration management Tests are carried out in-house for integrity of circuits, systems and software before installation. Alliances As mentioned earlier, the two ACT companies, MDD and KE Remote, formed a partnership in late 2004 governed by a Memorandum of Understanding that saw MDD provide digital solutions to the camera control systems, zooms, etc, of the crane camera system designed and developed by KE Remote for the film and television industry. Digital electronics offer the advantage of flexibility and functionality in this application and, for example, enabled reduction of the cabling systems down from 9 to only 4 cables. KE Remote retains the rights to the IP for these developments, and is involved in an extensive export business for remote camera operations. Intellectual property All intellectual, property held by MDD is in the form of trade secrets. Elements of this relate to the security of some of the products. Codification of Knowledge Every change made to any and all parts of the equipment developed by MDD is fully documented and maintained at the company’s headquarters. Impediments to Building New Capabilities Capital is the real impediment to growth. A company like MDD is not interested in loans, and is not really part of that group that would be considered by the VC industry. MDD is a goer and world beater, but not generally big or growing enough for the VCs. Do Government Programs Assist in Building Capabilities? Problem of the inaccessibility of government grants. The view was expressed that most small firms just do not have the time or capabilities to write the detail required for consideration as a candidate for an AusIndustry grant. The amount of “form filling-in” required is excessive. This applies to the tax concession, although MDD has used this avenue and will do so again in the future.

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Conclusions It is clear that David Malloch operates using a very open business style with the small staff that he currently has engaged at MDD. It is also evident that David continues to be the “ideas man”, in that he brings in new projects to be pursued jointly with other companies as well as maintaining the progressive push of keeping MDD’s security technology at the forefront of that business. David would also be solely responsible for signing the agreements that see MDD effectively contracted to TransAct or KE Remote in some of the more adventurous products of the latter years. In assessing absorptive capacity for MDD the major concern is the dependence on one man, David Malloch, and the reliance on a process of discussion to get involvement of the remaining staff. It is not possible to identify a chain of command in such a small organisation or of succession for the future. In terms of absorbing new knowledge from external sources the absorptive capacity of MDD appears minimal in formal terms.

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Benthic Geotech Pty Ltd, Interview conducted with Mr Peter Williamson, Chief Executive, December 2006. Short History including Prior Experience Benthic Geotech was founded in 1997 following from a University of Sydney research project in geophysics aimed at exploring rock cores and undisturbed deep sea sediments. Peter Davis of the university attracted initial seed capital, an R&D grant, and university funding, resulting in the company being spun-out of the university. Involvement by Japanese and US investors followed and an experimental launch carried out in Peugeot Sound, USA. A new management team was appointed in 2001, including Peter Williamson, the former General Manager of Boral, Malaysia. He set about raising more capital and government funding for the technological development of a number of probes and tools to provide sub sea bed information for application on offshore foundations. Origin Energy and Woodside were early users of the Portable Remotely Operated Drill, PROD rig, even though there was little track record to show at that point. According to Peter Williamson work commenced in earnest in 2003 aimed at high value offshore project applications. The major milestone for the company came in September-October 2005 when PROD rig was successfully applied offshore in 1,850 metres of water in a project for a Korean client. Following over $14 million in total investment the promise of a research project of the 90s was now fulfilled. Clients have subsequently engaged Benthic to undertake projects and thereby gained a greater understanding of the capabilities of the machine Benthic Geotech have carried out new projects every 2-3 months since the Korean success, the latest on the North West Shelf for Apache (USA), and the company’s order books were fully committed to July 2007 at the time of writing. The company now employs a full-time staff of 15 - 18 people. Turnover last year for Benthic reached $9 million growing at a rapid rate (>100% per annum) putting the company in 4th place as one of BRW’s Fast 100 in 2006. Evidence of Innovation The working version of the PROD rig truly represents a radical innovation in sea bed exploration. Importantly, PROD is a portable and fully self-contained rig; and can be transported in a standard shipping containers. PROD operates on the sea bed and is powered and controlled from a ship via an umbilical. Once the PROD rig is located on the sea bed, and its hydraulic tripod positioned, the drill is isolated from the influence of ship movement. In the drilling activity it is possible to switch between diamond bit rotary drilling, piston sediment sampling and in situ testing at the dictate of the sea bed geology or the clients' data requirements. The piezocone penetrometer carried in the PROD rig can penetrate the seabed up to 100 metres, and provide real time records of tip pressure, friction and pore water pressure. Benthic Geotech claims that PROD provides sample and data quality that is far superior to ship-mounted heave compensated drilling equipment or sea bed cone penetration testing; and that data acquisition capability exceeds existing in situ testing equipment that lack the capacity to penetrate past 20 metres or drill through obstructions.. Benthic Geotech has also developed a spherical ball penetrometer to enable high resolution strength profiling in soft to firm fine grained soils that can be used in conjunction with the

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PROD rig; and a prototype hydrocarbon analysis system to enable real time sensing of methane during the drilling of sub sea bed sediments that can be attached to the PROD rig. Human Capital/Other Resources Human resources and training Three quarters of Benthic Geotech’s full-time staff are experienced engineers and technicians, some from the oil and gas industries. In addition, Benthic engages an “outer ring” of consultants/contractors who spend as much as 2 - 3 days per week working in specialised roles for the company. There also exists a group of offshore contractors that have special skills, but have to be trained by Benthic in their specialised offshore activities. Since most of the staff are highly trained in disciplines relevant to the activities of Benthic. In general, staff members attend a “supervisors” course relevant to offshore drilling. There are also issues with working offshore, and personnel are trained and certified in offshore health and safety procedures. It is also of some note that several of the Board members of Benthic are former senior employees of the major Australian oil and gas services company WorleyParsons, or have interests in the Australian venture capital industry. Other resources Currently, Benthic Geotech only has one operational PROD rig. As demand has increased for Benthic’s geotechnical services, management has committed to building a second rig. Intensity of Learning Knowledge acquisition

Internal – The PROD rig developed by Benthic is a unique innovation and subject to continuous review on-the-job. Consequently, much of the learning can be characterised as on a rapid experience curve. Employees constantly bring in ideas for improvements, but the pace of change sometimes means that the company sometimes grapples with how to retain all the ideas. Most of the senior management team are involved in the decision making for R&D on the current PROD and on developing ideas for the Mark II version.

External/Networking – Benthic Geotech is one of the only companies surveyed that has mentioned the importance of Joint Industry Projects (JIPs). In the oil and gas industry it is quite common for JIPs to be formed to explore generic projects. In this case the industry group comprised: Shell, Mobil-Exxon, BP, State Oil, British Gas, Fugro, Benthic, and a number of other smaller contractors. The study was led by the Norwegian Geological Institute, Centre for Offshore Foundation Studies, and was funded equally by each of the participant companies over a period of two years. The study’s focus was “A Global Standard for Testing Sheer Strength for Deep Water Soft Soils”. The results of the project are shared with all participants. Benthic points to the advantages of such a network over a two year project, and the knowledge flow effects that this has had on their operations. In addition, in this case participation has meant that Benthic’s “ball penetrometer” is fast becoming the new standard for the industry. Benthic Geotech is in wait for future Networking projects of this kind.

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Another industry-industry cooperation and knowledge sharing example is shown in the development of the methane sensor (see Alliances).

Benthic Geotech also has ongoing projects with a number of research institutions. For

example, the “ball penetrometer” was developed in collaboration with the University of Western Australia, although from Benthic’s perspective the idea was conceived by a skilled operations manager who noted from work in the industry that there was a need for a better tool for testing sub-soils. A R&D Start Grant helped support this joint activity, although the final commercial ball penetrometer was developed in the company. An ARC linkage project with a longer-term aim is with the Department of Physics, Australian National University and is investigating the seismic profiles of gravitational field waves using a high sensitivity optical fibre seismic system for use in towed array and seabed array applications. In this case Benthic has an exclusive license for the commercialisation of the emerging technology. Benthic also pointed to 4 other active projects with research institutions or other companies, which were not disclosed for reasons of confidentiality.

Customer exposure and feedback to the technology offered by Benthic, was also

identified as being a source of positive contributions to future developments and/or modifications of the PROD and ancillary equipment. Organisational Factors Integration and transfer within the company Benthic employs the view that the company absorbs knowledge, processes it, and implements it by employing the “right team” in the process. Benthic teams are designed to have “porous and loose boundaries” whereby team members can leverage off each other. This provides Benthic with the kind of flexibility that is not evident in large bureaucratic structures. It is important to acknowledge that Benthic Geotech employs extensive linkages with multiple research institutions and other firms, and it is the above team structure that enhances absorption of these external ideas into the firm. Evaluation Benthic is best described as a “marine geotechnical service company”, and in that sense it is the satisfaction of the customer/client that enables an evaluation of the worth of the technology. This is also an area of high specialisation and growing order books are a reflection of recommendation and reliability. The clients are provided with a digital log of all drilling parameters which, once the geotechnical characteristics have been established, can be used as an indexing tool for material strength down the drill hole; and subsequently be used to make judgements about the suitability of a site for the foundations of off-shore structures. On occasion data produced by Benthic is also used by geotechnical engineers who consult to oil and gas companies Exploitation The PROD rig technology continues to be exploited along with the ancillary equipment associated with the device. Exploitation of this technology is dependent on customer demand and evidence was provided that this continues to grow. The industry itself appears to operate on a referrals basis, and thus a new tool which can be operated at 2,000 meters and

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to penetrate 100 metres of foundation, is an advance. Further, scientific developments also appear to be matched well with the further development needs of Benthic Geotech. Quality and configuration management As noted above, participation in the JIP on Offshore Foundation studies places the Benthic ball penetrometer in conjunction with the PROD rig, in a good position to be seen as the future industry standard. Alliances A home grown concept of Benthic Geotech is the idea of employing a methane gas sensor in conjunction with the PROD rig with a view to providing an early warning of potential gas hazards during drilling, and identifying the presence of methane hydrate concentrations. The prototype Hydrocarbon Analysis System incorporates two sensors supplied by Capsum Technologies, one for high range and the other for low range concentrations. Both these sensors have been used in environmental and scientific studies in many locations to sub-sea depths of 2,000 metres and, like PROD, have been proved robust and reliable. Although no formal alliance was struck, the complementarities between the Benthic and Capsum technologies meant that they worked together as cooperative development partners to make the sensor technology work in demanding conditions. The development of sensors that operate in these conditions represents a solution to a real engineering problem in its own right. Benthic Geotech exhibits strong linkages with other firms and research institutions in at least 6 other projects. Intellectual property To quote from the brochure on “Real-time Methane Sensing During Drilling”: This system and other PROD drilling, sampling and sub-sea technologies and methods are protected by international patents, patents pending, and patent applications. It is noteworthy that within the PROD rig components of the rock coring and stiff sediment sampling systems; and the sediment sampling system are all the object of separate Benthic Geotech patents. Codification of Knowledge In the team environment described by Benthic Geotech it is evident that all knowledge is shared amongst the developmental and in-field teams that operate in the company. The dominance of digital logs in the form of numerous outputs of data and as the output for clients suggests that the company is highly geared to maintaining extensive computer records of all of its activities. Impediments to Building New Capabilities Benthic Geotech’s management pointed out that they have a record of sourcing finance and so this is generally not a problem. Having enough time to achieve all their objectives is a current impediment for the company. For example, they have formed a Technology Advisory Board, but have been unable to find the time to convene it to date.

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Do Government Programs Assist in Building Capabilities? A considerable amount of the continuing development of Benthic Geotech remains at the science end of the research spectrum and hence their participation in the ARC linkage grant program. The company has also been the recipient of two AusIndustry R&D Start grants totalling over $5m, and has used the R&D tax concession in periods when it was not participating in the R&D Start program. It is of some historic interest to note that the then CSIRO Division of Geomechanics, the Norwegian Geological Society and Woodside Petroleum joined in a Department of Industry, Technology and Commerce Generic Technology Research Grant in 1987 to investigate the foundation stability and engineering design of offshore petroleum platforms. The Benthic Geotech PROD rig now makes foundation stability a realistic outcome in almost any undersea terrain. Conclusions In many ways Benthic Geotech has just recently emerged from an R&D base, and although founded as a company in 1997, the science drive of the company clearly dominated until the commercial success of the Korean drilling in 2002 was achieved. Benthic Geotech management noted that a critical step in the offshore industry is the analysis of the rocks and sediments on which it is planned that seabed structures be sited. Benthic can provide initial engineering advice, apply the PROD rig, obtain soil, rock and sediment samples for independent laboratory analysis, pull all the data together, and produce an engineering report for the client. The management team are clearly aware of the changing needs that their new commercial service world now demands, but they have maintained strong external linkages in R&D with both research institutions and industry partners. The development of the “ball penetrometer” and the “hydrocarbon analysing system” are just two clear examples of adding auxiliary capability to the PROD rig. The evidence suggests that Benthic Geotech possesses a high absorptive capacity and this is no better illustrated than in the company entering the Joint Industry Program with the outcome that at least part of their system may become the acceptable industry standard.

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Clover Corporation Limited, Interview Conducted with Dr Ian Brown, CEO and Managing Director, December 2006. Short History including Prior Experience Clover Corporation Limited is a publicly listed company on the ASX whose principal shareholder is Washington H. Soul Pattinson and Company Limited. The company was founded in 1988 by Dr Hamish Drummond, following many years of international experience with Hoffman La-Roche in the agriculture and pharmaceutical industry. Drummond recognised the need for essential fatty acids as food supplements and established R&D activity to refine Evening Primrose oil (rich in gamma-linoleic acid), and tuna oil (rich in docosahexaenoic acid or DHA), the latter otherwise described as an omega-3 essential fatty acid74. Clover Corporation was publicly listed on the ASX in November 1999 with the specific aim of improving human health through nutrition involving the delivery and use of high DHA marine oils. Although Clover has generated some of its own IP it has also relied on the formation of strategic research relationships to help develop innovative products and technology. One of those linkages was with Food Science Australia (FSA) which concentrated on the preparation of microencapsulated forms of omega-3 oils. The result of this program was the FSA “MicroMax®” technology which has been licensed in specific applications by Clover. The range of stable encapsulated powder products using high DHA oil, using either the FSA or internally developed micro-encapsulation methods, are sold under the Driphorm™ trademark. These products are used in a broad range of infant formula, supplement and foods. The USFDA has granted high DHA marine oils GRAS (generally accepted as safe) approval. Clover has a 50:50 joint venture with JSR Farming Group called JSR Clover Ltd. This joint venture was designed to assist in the commercialiseation of a patented omega-3 application product called “Prosperm”, which helps to increase the fertility of animals such as boars, Omega-3 oils are also being used in the patented Vitapork program designed to improve health benefits associated with eating pork. In November 2002, Clover entered into a joint venture (70%) with the Queensland-based Food Spectrum Group to form a manufacturing company Nu-Mega Ingredients Pty Ltd to manufacture and accelerate the international marketing and sales of high DHA marine oils, both liquid and powdered products. In 2003 Clover also entered into a joint venture with Austgrains Pty Ltd (50:50) to establish Future Food Ingredients Pty Ltd (FFI) to manufacture and market a unique debittered soy flour (Nu-Soya®), enzyme active soy flour, and speciality premixes and concentrates containing these ingredients. Nu-Mega has been engaged to assist in the sale of the Nu-Soya® ingredients. In mid-2006 Clover Corporation appointed Dr Ian Brown as CEO and Managing Director and he brings to Clover over 25 years of technical and commercial experience in cereals, ingredients, food and nutrition industries. In relation to nutritional ingredients he has previously made a significant contribution to the international success of resistant starch ingredients including those sold under the name of Hi-maize®. Revenues at Clover Corporation have been growing from $9.6 million in 2002 to $17.3 million in 2006, and average about $15 - 17 million per annum. 74 The most important omega-3 fatty acids in human nutrition are: α-linolenic acid (ALA), eicosapentaenoic acid (EPA), and docosahexaenoic acid (DHA).

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Evidence of Innovation The above “Short History” of the Clover Corporation describes the process of a company with an emphasis on human health and nutrition moving from driving R&D and market insight, to the manufacture of high quality DHA marine oil products whilst developing mechanisms to deliver these products in a wide variety of applications including infant formulations, functional food ingredients, and nutritional supplements. Over the years since 1988, the company has selected sources (eg., tuna oil) with high levels of omega-3 fatty acids, in particular DHA. Clover has lead through internal developments or by accessing new developments through its many strategic research relationships. Simultaneously, the importance of omega-3 fatty acids in the diet has been drawn to the attention of the world from the perspective of health, in particular in respect to the facilitation of general wellbeing, neurological and visual development in infants; beneficial impact on diseases like diabetes and arthritis; helping to alleviate mental conditions like bipolar disorder and ADHA; and the prevention or delay of chronic diseases in the aging, like dementia or Alzheimers. The nutritional and clinical investigation of omega-3 fatty acids have been accompanied by extensive research, some supported by Clover through the provision of refined omega-3 oil from fish oil (particularly tuna), generally in capsule form. Clover has also explored enhancing the use of the high DHA oils by increasing their stability and broadening the range of applications through encapsulation. Clover has also been involved in research programs devoted to finding commercial sources of omega-3 oils from microalgal sources. In addition Clover Corporation also supports an active program in nutritional and clinical research. Human Capital/Other Resources Human resources and training Clover Corporation in association with its joint ventures Nu-Mega and FFI employs less than 50 people. Nu-Mega also acts as the marketing arm of Nu-Soya® on behalf of the manufacturer Future Food Ingredients Pty Ltd. One person serves as innovation manager with a focus on product and technology development while there is a dedicated applications department. Staff training is provided and it is focused in a variety of areas necessary for the conduct of the business. There is a continual search for good people with knowledge of the products and industry in which Clover Corporation and its joint ventures operate. Other resources Clover Corporation owns the manufacturing equipment which is leased to Nu-Mega along with access to all the existing and new IP that Nu-Mega employs in manufacturing high DHA oil and powders including the micro-encapsulation technology embraced by MicroMax®. Intensity of Learning Knowledge acquisition

Internal – One important responsibility of Dr Ian Brown is to identify and source appropriate knowledge and technology to enhance the endeavours of all Clover Corporation’s operations. Dr Brown is commissioned to gain access to emerging research and technologies

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relevant to Clover Corporation’s activities, and to facilitate the establishment of new international markets for the products emerging from Nu-Mega and FFI. Dr Brown and the various managers in the joint ventures maintain comprehensive databases on R&D and emerging technologies relevant to Clover and the joint ventures. There are other individuals at Nu-Mega and FFI with access to knowledge pertinent to their individual activities and businesses. They identify what they really need according to their business plans and develop programs for their evaluation and adoption in an efficient and timely manner.

Following from its tradition as a supporter and procurer of R&D related to nutritional food supplements, Clover Corporation currently supports a number of nutritional and clinical programs, especially involving the provision of materials like high grade DHA (HiDHA) to the researchers. (See: External/Networking).

External/Networking – The fishy odour, flavour and chemical instability of omega-3 had limited its use as a food ingredient. The microencapsulation technology mentioned earlier was jointly developed in a collaboration between Food Science Australia and the Clover Corporation to overcome these problems. This microencapsulation technology is subject to continued development to enhance the functionality of Clover’s powdered Driphorm ingredients. Clover Corporation alone or working with Food Science Australia has introduced a number of microencapsulated ingredients for use in applications such as infant formulae and bread75.

Clover is involved in a syndicate project entitled “Foods for healthy ageing” at the National Centre of Excellence in Functional Foods located at the University of Wollongong whose purpose is to examine the potential of developing foods specifically for this demographic group. Clover Corporation also supports a number of nutritional and clinical research activities concerned with the beneficial properties of omega-3 on a wide range of important health conditions.

Probably the largest recent external project involved Clover Corporation in

collaboration with the CSIRO and was supported by a Food Innovation Grant (FIG) from the National Food Industry Strategy and was focused on DHA oil production by micro-algae. The project aimed to derive an alternative and less costly source of omega-3, namely from marine micro-algae, described as “the natural omega-3 factories of the sea”. A US and a German company currently supply omega-3 derived from micro-algae, but at significantly higher prices than that derived from fish oils.

Clover Corporation is involved in a network of companies looking at foods specifically

designed for the +40’s who are seeking to grow old in a healthy manner. In addition to Clover this project involves Warrnambool Cheese, Masterfoods, Speciality Cereals and Simplot Australia. Each company has subscribed funds to do pre-competitive work relating to scientific developments, potential regulatory claims and consumer trends associated with “food for the aging”. The work also focuses on consumer groups through discussion and interview feedback. This information is assimilated and distilled with a view to creating potential new food products (see also “Omega 3 Centre” described in the Exploitation Section).

75 There are a number of new competitors Firmenich, Switzerland; and Ocean Nutrition, Canada) in the field of microencapsulation technology, each using different underlying technologies for the trapping system

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Organisational Factors Integration and transfer within the company As the major manufacturing arms, Nu-Mega and FFI are kept fully informed by Clover about new IP emerging in their fields of activity, and any information that might be beneficial to their operations in R&D or sales. Nu-Mega is responsible for procuring new market outlets for the Nu-Mega and Nu-Soya product lines since all are nutritional ingredients for use in the food industry. There are a number of people responsible at the manufacturing level for taking on the new approaches as they affect applications, including the Innovation, Applications and Production Managers. There is no lack of ideas for the potential uses of nutritional ingredients; the problem is often the discipline of actually marrying up with food industry partners to incorporate Clover Corporation products into their products. Clover is committed to a course of action, sometimes taking many years, to develop these markets. Evaluation The purity of Nu-Mega products and efficacy of their applications as additives in such sensitive products as baby food attest to the confidence held in Clover Corporation’s products. Exploitation FFI is an example of Clover Corporation moving into a relatively new field of endeavour in the food ingredients business. Management expects that other new developments will occur over the course of time. It is also noteworthy that Nu-Mega is a foundation member of the “Omega-3 Centre”, which is a communication and education forum to promote the nutritional importance of long-chain omega-3 oils. Nu-Mega also provides a newsletter “DHA Update” that serves to inform health professionals, community-based groups and selected journalists about the latest findings in nutritional science as they apply to omega-3 (DHA). Note that some users of the ingredients also often need help with marketing the new gains in their nutritional product, and Clover often assists on this issue. Quality and configuration management The MicroMAX® omega-3 product has high quality in a novel encapsulation system, with high oil loading capacity (50% loading) and enhanced stability, that earned the technology international recognition for technological and commercial excellence, and public health impact (American Oil Chemist Society Corporate Achievement award 2003). The GRAS approval by the USFDA of the microencapsulated omega-3 as an additive to infant formula signifies the quality of the product. As mentioned this technology is now used in infant formula and bread.

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Alliances In June 2006 Clover signed a long-term supply contract with Starkist in Samoa to ensure a reliable supply of crude tuna oil. It is of some interest that the crude oil is refined at a plant in Altona, and new equipment for this purpose was installed there in 2006. In September 2006 Nu-Mega signed a long-term supply agreement with So Natural Foods Australia Ltd (SNF) for the provision of Nu-Soya® whole soy flour ingredients. Under the agreement, SNF will only use Nu-Soya® in its entire range of soymilk. Clover also recently signed an agreement with an overseas company for the application of their microencapsulated technology. Intellectual property The portfolio of IP held by Clover Corporation, internally generated or licensed, in relation to manufacture and product applications grow on a regular basis through its interactions with the research community. Codification of Knowledge As an R&D organisation Clover Corporation is well versed in the maintenance of scientific laboratory books and documentation on all its activities – both in paper and electronic form, as required. There is a continual review of projects that can lead to their alteration or termination when the project assumptions underpinning the work change, or the initial assumptions prove to be incorrect, or because cost overruns are incurred. All projects are aimed at meeting a new business need. Impediments to Building New Capabilities The recurring problem is finding money for R&D support grants, especially where matching grant requirements are demanded. The suggestion was made that perhaps consideration be given to offset the costs of the company’s contribution in the form of a HECS-type arrangement where return of payment is made when the project is paying back its costs. The decline in funding in the university system was perceived as detrimental, and it was suggested that the universities might do more to address the needs of industry – do the things that industry would like them to do. This might be enhanced in Clover’s case if food interests and food safety were better promoted in the university system. Do Government Programs Assist in Building Capabilities? Clover has been the recipient of a number of grants, including ARC and FIG, and would support the continued provision of these funding mechanisms to assist the development of SME’s. The positive effects of support from Austrade in identifying businesses for Clover Corporation to meet with overseas in their promotional visits were applauded. When addressing the prospect of taking in students for short term projects Clover noted the mismatch between the expectancies of a company and the skills base of the potential student intern, which might result in too much time commitment by the overseer and result

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in higher costs than benefits to the company. On the other and the question was raised – how do you get people into the food industry? Conclusions As an R&D company Clover Corporation is on a continuous learning curve based on its thirst for knowledge and a desire to broaden the applications of its existing products and engage in new product developments in their industry. The company’s absorptive capacity is high. Clover Corporation’s capabilities in absorbing and managing new knowledge and fostering this towards improvements in manufacturing and in the applications of nutritional food ingredients (like omega-3 and soya products) provides the company with an array of opportunities to address the world’s growing markets for better health through nutrition. It is noteworthy that the company has stated publicly that one of the new avenues for applications of omega-3 aims at the beverages market, and thus future research will also aim at that market. It is evident that given “the right people and the right plan” there are unlimited boundaries for a company like Clover to explore, and many emerging market opportunities where their approach to addressing market needs through directed R&D should serve them well. However, due to limited resources all activities need to be focused.

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7. Frameworks for Policies to Support Absorptive Capacity A diverse range of policy measures relevant to the development of absorptive capacity have been introduced by various countries. As many of these focus on SMEs, there is a strong SME orientation to the following discussion. Our purpose in this section is to identify the objectives of these policy measures and the underlying rationale for government action - we do so because these issues provide the background to many of the specific policies discussed in Section 8. We then discuss the various instruments that are used to promote innovation and strengthen absorptive capacity. We also discuss in some further detail some particular widely used instruments. 7.1 The Challenge for Strengthening Absorptive Capacity There has been an increased focus of attention on the promotion of innovation in SMEs. According to the OECD SMEs account for over 95% of enterprises and 60-70% of employment in OECD countries and a healthy SME sector is essential for job creation, social cohesion, innovation and growth in advanced industrialised countries.76The OECD convened the first OECD Ministerial conference on SME in 2000. This led to the Bologna Charter on SME Policies. In order to enhance SMEs’ innovation abilities, the OECD framework emphasizes:

facilitating the hiring and training of qualified personnel and disseminating technological and market information;

reducing financial barriers by developing equity financial market, by promoting risk-sharing program (e.g. financial support and tax incentive to R&D), and by promoting partnerships between entrepreneurs, public agencies and financiers; and

facilitating SME access to national and global innovation networks through participation in public R&D programs and procurement contracts.77

Following the Bologna Charter the OECD has compiled useful international comparisons of national SME policies, that are published in OECD Small and Medium Enterprise Outlook reports of 2000, 2002, and 2005. In 2004 the OECD held the SME Ministerial Conference on the theme: Promoting Innovative SMEs in the Global Economy. In addition, the OECD has prepared a Compendium of SME and Entrepreneurship Related Activities carried out by International and Regional Bodies.78 Further, the OECD is pursuing work on SME development in four key areas:

Improving SME access to financing, so that SMEs can have access to appropriate risk capital at all stages of their development. Conference in 2006.

Identifying ways to remove barriers to SME access to global markets- collaborative study with APEC.and conference in 2006.

Increasing understanding of global value chains and the way in which SMEs can benefit from them- joint study with UNCTAD and others.

76 OECD, 2004, Promoting entrepreneurship and innovative SMEs in a global economy: Towards a more responsible and inclusive globalization, 2nd OECD conference of Ministers responsible for SMEs, Istanbul, Turkey, 3-5 June 2004. 77 OECD, 2005, “OECD SME and Entrepreneurship Outlook, 2005” 78 See www.oecd.org/cfe/sme

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Disseminating work carried out on best practices for the evaluation of SME policies and programmes by working with member and interested non-member economies and international organisations – The OECD will develop and test a handbook of best practices for the evaluation of SME policies and programmes.

A wide range of studies in many countries have concluded that most SMEs have weak absorptive capacities, that these weaknesses limit their capacity to acquire and implement knowledge and as a result the competitive performance of these firms is also limited. Many of these studies have also found that relatively modest interventions, such as the provision of networking services or the short term placement of experts (human capital placement), usually has positive outcomes for the firms. It is reasonable to then ask, why do most SMEs not organise these services for themselves? At least partial answers to that question are:

Many SMEs have trouble identifying and articulating their specific needs in a way that can easily form a clear demand for service providers and, as service providers seek to provide generic services with a high level of replicability/knowledge re-use, the scene is set for an unsuccessful market-based interaction;

Most SMEs do not know how to identify and evaluate experts and also how to assess the costs and benefits of interaction with an expert;

Cognitive failure, due to a lack of relevant knowledge, may lead the firm’s senior managers to simply not grasp the relevance of particular areas of new knowledge and hence to be ‘boundedly rational’; and

Firms may lack the complementary assets that will have a major role in shaping the level of return to investment in knowledge acquisition, for example, a firm may have difficulty raising capital on reasonable terms, accessing skilled labour,or entering new markets.

The review by Thorpe et al (2005) concludes that policy interventions to support knowledge development in SMEs face particular design challenges: 1. First, entrepreneurs and SME managers tend not to see government agencies as

credible or relevant sources of advice; and

2. Second, a good deal of evidence suggests that generic programs are far less successful than programs that are locally focused and sensitive to the context.

The review suggests that programs are most successful where they facilitate SMEs to build social capital, develop networking and team building capacities: ‘the role of government intervention would be to support networking activity and the general architecture of knowledge use but not to be involved directly in its creation and delivery...” (p82) Bessant et al (2005) also review literature related to public policy interventions that are targeted at the three levels of capability: raising awareness; strengthening knowledge and understanding; and stimulating implementation – summarized in Table 7.1.

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Table 7.1: Approaches to Supporting Knowledge Acquisition and Application in SMEs

Focus of

Intervention

Problem/

Challenge

Mechanism Key Sources

Raising awareness

Inter-firm networks to assist firms to identify and respond to new & emerging opportunities.

External consultants to facilitate collective assessment/planning

Diagnostic capability

Pittaway et al ,200479 Bessant et al (2005)80 Arnold et al (2004)81

Strengthening knowledge and understanding

Most SMEs: do not have effective mechanisms for gathering diffuse knowledge have poor external links

Networking and improved access to information and knowledge

External agents to catalyse the formation of networks and knowledge sharing

Arnold et al (2004) Humphrey & Schmitz (1995)82, Bessant et al (2005)

Stimulating implementation

Provision of experts (typically academics) to work within firms.

Arnold & Teather (2001)83 Arnold et al (2004)

Source: Bessant et al 2005.

7.2 Promoting Innovation in SMEs: Policy Rationales It is generally accepted, although not well researched, that SMEs face particular difficulties in innovation,for example, see Table 7.2. SME managers tend to be more sales oriented, and in high tech SMEs often more technology oriented, and do not plan well. Their approach to management and planning tends to rely more on tacit knowledge than on systematic approaches84. It is clear however that firms which lack the capacity to act on new knowledge, because, for example, they have no access to finance to invest in upgrading or no time/division of labour to enable a focus on change and experiment, are unlikely to be strongly oriented to acquiring new knowledge. Table 7.2: SME Disadvantages in Innovation SMEs Disadvantages Marketing Market start-up abroad can be prohibitively costly Management Often lack of management specialists, e.g.business strategists, marketing

managers, financial managers Qualified technical manpower

Often lack suitable qualified technical specialists. Often unable to support a formal R&D effort on an appreciable scale

79 Pittaway, L., Robertson, M., Munir, K., Denyer, D., and Neely, A. (2004), Networking and innovation in the UK: a systematic review of the literature, Advanced Institute of Management Research, London. 80 Bessant, et al op cit 81 Arnold, E., Allinson, R., Muscio, A., and Sowden, P. (2004) Making best use of technological knowledge: a study of absorptive capacity of Irish SMEs. Brighton, Technopolis Group 82 Humphrey, J. and Schmitz, H. (1995), Principles for promoting clusters and networks of SMEs, UNIDO Discussion Papers no. 1, Vienna. 83 Arnold, E. and Teather, S. (2001) People as vectors of technological capability in technology, knowledge and skills transfer schemes. Brighton,Technopolis Group. 84 Bretherton, P. Becket, R. Soosay, C.l and Hyland, P. (2006) Building Innovative Capabilities in SMEs through Virtual and Knowledge Networks. CINet 2006: 181-191

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External Communications

Often lack the time or resources to identify and use important external sources of scientific and technological expertise

Finance Can experience great difficulty in attracting capital, especially risk capital. Innovation can represent a disproportionately large financial risk. Inability to spread risk over a portfolio of projects.

Economies of scale and scope.

In some areas economies of scale form substantial entry barriers to small firms. Inability to offer integrated product lines or systems

Growth Can experience difficulty in acquiring external capital necessary for rapid growth. Entrepreneurial managers sometimes unable to cope with increasingly complex organisations

Legal Lack of ability in coping with the patent system. Can not afford time or costs involved in patent litigation

Government Regulation

Often cannot cope with complex regulations. Unit cost of compliance for small firms often high

Source: Dodgson, M. & Rothwell, R. (1992) European technology policy evolution: convergence towards SMEs and regional technology transfer. Technovation Within the context of the recent OECD studies on policies to strengthen innovation in SMEs, and drawing on a wide range of prior studies, Potter (2005) has identified the market failures and system failures that provide a starting point for an assessment of the case for policy measures. These various types of ‘failure’, their characteristics and some of the possible policy responses are set out in Table 7.3. Many assessments of innovation policies have concluded that, in promoting innovation in SMEs, there is a key role for government in supporting the availability of knowledge and information: “..the costs of searching for and translating even freely available information into terms useful to local firms are not trivial. And there are great economies in centralizing these activities in organisations with special capabilities to carry them out. Efficiency requires that these costs, separate from the vastly lesser variable costs of dissemination, be borne but once. Otherwise each potential beneficiary of the same information would have to replicate the search and translation costs that would far better be shared, as fixed costs, in some way among all the potential beneficiaries.”.85 Table 7.3 Market and System Failures and SME innovation

Type of failure Nature of failure Potential local policy actions

Types of Potential Market Failures

Information failures

Barriers to the flow of information on innovation opportunities lead to missing markets and constraints for SMEs in obtaining finance, strategic partners, etc.

Promotion of networks and partnerships. Public support to SME research projects. Encouraging specialist finance providers.

Public goods Undersupply of non rival and non excludable goods that contribute to SME innovation, e.g.university research.

Public supply of basic innovation infrastructure locally.

Externalities

Undersupply of activities that benefit others in addition to the producer, e.g.training of highly skilled labour. Reduced incentives to SME innovation.

Direct public support for SME research projects. Public support for training of highly skilled labour in local specialisms.

85 UNIDO Industrial Development Report 2002/3 Competing Through Innovation and Learning. P117.

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Monopolies

Incumbent firms restrict entry through branding and other behaviour, constraining the ability of innovative new and small firms to enter the market and compete.

“Second best” policies supporting SMEs in order to “level the playing field”. Support of new firm entry in local sector specialisms.

Indivisibilities

There is an indivisible cost involved in creating knowledge and if marginal cost pricing is used the fixed cost is irrecoverable, constraining the production of knowledge by SMEs and others.

Public funding of public and private research projects with potential spin offs for SMEs.

Types of Potential System Failures

Infrastructure provision

Underinvestment in the local infrastructure with which firms interact, e.g. communications infrastructure and tech. transfer organisations.

Incentives for private or public provision of communications and knowledge transfer infrastructure.

Transition and lock in failures

Firms and localities are highly capable in their own technological area but not in related areas. They are therefore unable to switch away from their existing technologies.

Incentives for technological activities that broaden firm and organisational capabilities and nurturing of emerging technological systems.

Institutional failures

The institutional and regulatory context has an unexpected negative impact.

Monitoring and adjusting local institutions and regulations.

Learning failures

Firms may not be able to learn rapidly and effectively.

Developing firm capabilities through human capital programmes, support for R&D and technology dissemination. Opening channels to kn. sources, e.g.universities and other firms.

Suboptimal balance between exploitation and exploration

Local innovation concentrations may work too much on exploitation and not enough on exploration (or vice versa)

Using public procurement and funding to support exploration, introducing diversity in the industry by supporting new and small firms, supporting variety through dissemination of codified information. (Or encouraging commercialisation of basic research.)

Suboptimal balance between selection and variety

Local innovation concentrations may have too rapid selection, whereby underperforming firms or activities close, and too little variety, in terms of firms and activities carrying potentially promising new technologies (or viceversa).

Strengthening competition policies and use industrial and technological policies to support new firms carrying potentially promising technologies (or weaken competition policies and limit the use of industrial and technological policies supporting firms that are likely to fail).

Appropriability traps

Too stringent appropriability may limit the spread of knowledge within the innovation system.

Encouraging local knowledge transfers.

Complement- arity failures

The appropriate complementarities may not be present in a local innovation system.

Formation of R&D networks, industry university interfaces and bridging institutions.

Source: Potter, J. (2005) Local Innovation Systems and SME Innovation Policy OECD SME and Entrepreneurship Outlook. p135 This report goes on to argue that there are three reasons why the SME beneficiaries might not the required to meet a share of the fixed costs in developing and maintaining technology support organisations:

1. Services will often have to be developed well in advance of a market large enough to sustain the delivery of the service to private entities;

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2. Firms that invest in efforts to acquire and use new knowledge generate externalities so that many other firms capture benefits from their innovation leadership86;

3. Innovation in SMEs is often not characterized by high or sustained levels of R&D, and hence the provision of technology services is often one of the only practicable means of effectively subsidizing technological effort in such firms.

7.3 Frameworks for Policy Policies for Capability Development in SMEs Programs to promote the diffusion of new technologies, both hard (eg ICT-related) and soft (eg TQM) have been a component of industry policies in most countries. As markets become increasingly global and competitive, governments have become concerned to ensure that firms have the capacities to integrate technologies from any sources. The focus of diffusion policies has changed with changing priorities, for example in the 1980s the focus was on ‘catching-up’ with Japanese manufacturing management technologies, and in the 1990s it was the application of ICT. Over time there has also been a greater awareness that, to a greater or lesser degree, the process of diffusion is also a process of innovation. Firms usually must adapt, eg their organisation, processes, or approach to training, to effectively implement the new technologies. Hence, where firms that lacked the capacity for innovation the process of diffusion was less effective. Potential users of new technology may face costs associated with learning and substantial uncertainty about costs, risks and benefits, which may lead to an underinvestment in technology. Where firms lack access to capital or trained human resources, or where there are regulatory barriers, diffusion will be limited. Hassink (1996) has usefully distinguished three groups of SMEs (Table 7.4) and argues that these characteristics need to be taken into account in the design of policy:

technology-driven SMEs which need to keep abreast of leading technologies;

technology-following SMEs where technology does not have to be advanced; and

technology-indifferent SMEs, which are essentially craft firms and which rarely invest in new technological equipment.87

Table 7.4: Characteristics of Innovative Activity in Types of SME

Type 1 Type 2 Type 3 Technology level

Technology-indifferent

Technology-following Technology-driven

86 By working with research and technology support organisations, innovation leaders among the SMEs help to develop capacities, approaches and knowledge (ie learning) in these organisations which will also be a source of externalities 87 Hassink, R., 1996, Technology transfer agencies and regional economic development, European Planning Studies, 42(2), pp. 167-184.

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Innovation source

- Customers - Local competence and actors

Suppliers of machinery and equipment for less technologically advanced SMEs

R&D sectors for research-intensive SMEs

Characteristics Dependent subcontracting

Catch-up R&D-intensive

Geographical dimension

Geography-indifferent National / regional International/ national/ regional

Source: APEC SME Innovation Centre (2006) A Research on the Innovation Promoting Policy for SMEs in APEC : Survey and Case Studies. Korea Technology and Information. Promotion Agency for SMEs. The observation that many innovative SMEs have strong regional links can provide a nexus for policy initiatives that can be focused on local organisations and networks and on the flow of knowledge and ideas through spillovers88. UNIDO have analysed the role of various types of institutional support for technological upgrading efforts by firms, whether provided by government or jointly with the private sector. This is useful for an overall perspective and Table.7.5 lists the major institutional mechanisms . The specific form and focus of these organisations vary and most organisations also evolve over time in response to new needs. In 2006 the APEC SME Innovation Centre carried out a major survey of policies among APEC countries to promote innovation in SMEs. The report provides a detailed profile of policies organised in relation to the policy framework shown in Table 7.6, which is also useful for developing an overall perspective on policy measures. Shapira and Rosenfeld in work for the OECD on technology diffusion developed a framework for characterizing the objectives and instruments for promoting technology diffusion. This useful list, which complements that of the UNIDO work, is set out in Table 7.7 Table 7.5: Institutional Support for Firm’s Technological Efforts. 1. Basic Industrial Services

Promote inward investment Provide export services Provide management services

Collect marketing information Collect data on exports and imports Provide managerial consulting

Provide financial services (accounting, tax assistance, investment advice) 2. Technology Information Centres

Provide information technology to firms, including networks, software, Internet capabilities, intranet, and databases

Perform troubleshooting, assistance, and repair to firms Provide training in informational technology applications

88 Asheim, B. and Isaksen, A., 2003, SMEs and the regional dimension of innovation, in B. Asheim, A. Isaksen, C. Nauwelaers and F. Tödtling(eds.), Regional Innovation Policy for Small Medium Enterprises, Edward Elgar, pp. 21~46.

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3. Metrology, Standards, Testing, and Quality Control Centres

Define domestic standards Assist firms in meeting International Organisation for Standardization (ISO)

compliance standards Train firms in ISO standards and regulatory requirements Test products to ensure compliance with standards Provide technical assistance to firms

Help firms with calibration of instruments Maintain calibrated standards and calibration equipment Calibrate firms’ machinery

4. Productivity Centres

Improve quality Improve productivity, efficiency Provide training

5. Technological Extension Agencies

Extend available technology to businesses lacking technical capabilities Help firms use cleaner production technologies Provide information on available technology Identify problems and use access to technology sources to solve problems Serve as external consultants and assist firms with trouble-shooting Promote cooperation of small and medium-size enterprises with larger research and

cluster initiatives 6. Research and Development Laboratories

Design new processes and products. Train businesses through demonstration, participation and extension Implement new technologies

Import and learn foreign technology Adapt foreign technologies to local requirements Integrate these technologies into economy in collaboration with firms

------------------------------------------------------------------------------------------- Source: UNIDO Industrial Development Report 2002/3 Competing Through Innovation and Learning. P118. Table 7.6: Policies for Promoting SME Innovation – Framework for an APEC Study

Policy Focus Elements Sub-elements Contents

Procurement of government

Procurement programs

- Facilitating procurement of new technology products by suggesting guideline and establishing e-marketplace - Technology development support program on condition of government procurement in certain periods

Export promotion policies

- SME export-supportive institutional infrastructure - Export development & promotion agencies Marketing

Building up capacity of overseas marketing

Programs for enhancing integration of SMEs into global supply chain

- Incentives to inward FDI MNCs involved in production networks with local SMEs - Linkage promotion program - Capacity building program for technical and management upgrading

Recruiting R&D manpower Accessibility of local skilled labour

- Promoting SMEs’ recruitment of graduates from tertiary education courses. - Subsidy to recruit R&D manpower

Human Resource Development

Training SME specific training programs Diversity of training

-ICT skill program for SMEs -Subsidy to training SME personnel -Training at different levels: researchers/ technicians etc

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Generation of kn. in SMEs

Efficiency of R&D R&D grant, tax

- Inclusion of SMEs to national R&D programs - Stimulating generation of knowledge in SMEs

Globalisation - License and other office for SMEs

Technology

Diffusion and system Technological

collaboration - Promoting collaboration between firms: vertical & horizontal collaborations - Promoting technological collaboration between SMEs and universities/public institutions

Government equity programs

- Establishing governmental sponsored special-purpose funds, which provide direct equity financing to innovative SMEs or venture firms - Participating in private hybrid funds specialized for investment in innovative SMEs or venture firms

Equity Financing

Networks of venture capitalists: Business Angel Networks (BANs)

- Providing communication channels to business angels, venture capitalists, investors and entrepreneurs looking for financial sources with high potential innovative technology

Direct loan programs

- Providing direct loans to innovative SMEs or venture firms with favourable interest rates or often with long-term fixed rates

Loan guarantee programs

- Providing official guarantee about SMEs to financial institutions with which loan guarantee institutions compensate the losses in the case of the SMEs’ default

Financing

Debt Financing

Certification of SMEs

- Providing adequate information and credibility about SMEs and venture firms’ technology and business growth potential - Solving the problems of information asymmetry to outside investors or financial institutions

Provision of Information

Establish a site or system for information dissemination

Management counseling

Management of Innovation

Management Counseling

Support system for counselors

Local Assets Level-up Program

Knowledge-based organisations

-Public investment in technology development organisations, including universities and public research laboratories

Promoting Networking

Network agencies Collaborations

Encourage local collaboration by strengthening networks among SMEs, large firm & RTOs

Clustering & Networking

Capabilities Development Program

Consultancy, education & train’g

-Increasing SMEs’ capabilities to absorb innovation -Enhancing ability of SMEs to engage in collaborative research with research organisations

Derived from APEC SME Innovation Center (2006) A Research on the Innovation Promoting Policy for SMEs in APEC: Survey and Case Studies. Korea Technology and Information Promotion Agency for SMEs. http://www.apecsec.org.sg/apec/publications/all_publications/small_medium_enterprises.html Table 7.7: Technology Diffusion Programs: A Characterization of Objectives and Instruments

Focus of Program

Instruments Examples

Awareness building and technology demonstration

Awareness of potential uses of new technology through demonstration projects, training, pilot plants, performance benchmarking, web pages or electronic information.

Regional Technology Centres (Japan)

Information search and referral services

Provide technical information to lower the search costs for potential users, via regional centres or the internet

Technical Information Centres (Denmark; many US States)

Technical assistance and consultancy

Provision of experts to assess problems and identify technological options for upgrading

Usually located in regional technology centres Manufacturing Extension Partnerships (Kansas, Ohio, Oklahoma).

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Training

Promote investment in human capital, by identifying training needs, improving the supply of appropriate training, providing training services

UK Learning & Skills Council http://www.lsc.gov.uk/

Collaborative research & technology projects

Increase industry involvement in applied research Applied Research Centres – Steinbeis and Fraunhofer Centres (Germany)

Personnel exchange and the support of R&D personnel

Secondment of staff to technology centres or other firms, subsidy for the employment of qualified staff in SMEs.

Regional Technology Centres (Japan)

Standardization

Facilitate the development of standards to promote application, eg in e-commerce, ISO 9000 series.

Financial support

Subsidies, low cost loans, grants for the use of consultants, the purchase of new equipments

US SBIR Program Regional Technology Centres (eg Minnesota)

Procurement

Policies that require offsets to (and support for) SMEs can promote technology support

US SBIR Program

Inter-firm cooperation

Sponsorship of collaborative industry groups (vertical, horizontal, sectoral) for information sharing, joint production, joint problem solving.

EU Sprint Program.

Facilities for technology transfer

Often linked to research centres and combine demonstration, information provision and other local support.

Advanced Technology Development Centre, Univ. Georgia. Centres in many science parks.

Regional or sectoral cluster measures

Development of ‘social capital’ through inter-firm and inter-organisational links

Many regional and national cluster development programs

Macro policy measures

Overall framework conditions that influence eg cost of capital, IP protection, labour market policy, tax policy (eg depreciation for investment in new technology)

Based on Shapira and Rosenfeld (1996) An Overview of Technology Diffusion Policies and Programs to Enhance the Technological Absorptive Capabilities of Small and Medium Enterprises. Background Paper for OECD Directorate for Science. Strengthening Absorptive Capacity in SMEs Over the past decade or more technology diffusion programs have become increasingly focussed on SMEs. These programs recognise that while only a small proportion of SMEs have the capabilities and commitment for advanced innovation and rapid growth, a larger proportion are active technology users, with the potential to sustain ongoing productivity improvement through investment and incremental innovation. It is well recognised that even in these categories of SME the absorption and application of new knowledge is constrained or slowed by intra-firm issues that limit access to adequate information (search and assessment costs and absorption capacities). In relation to the business infrastructure, mall firms often face greater difficulties than large firms in obtaining support from vendors, and appropriate and affordable consulting services. Small firms are often reluctant to share information (about business resources and technologies) with other small firms. The ‘social infrastructure’ is often better suited to larger firms, such that training and research organisations are often less responsive to the needs of small firms. There is considerable debate about the appropriate targeting and mix of policies at the micro (intra-firm), meso (inter-firm, clusters, regional and sectoral programs) and macro

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(framework conditions) levels. It is important to also consider whether these programs are focused on start-up SMEs or on established firms. The work of Shapira and Rosenfeld provides a very useful overview of such policy measures – Table 7.8 Table 7.8: Measures to Strengthen Absorptive Capacity in SMEs

Micro: Firm-level Benchmarking Increase awareness of best technology use through benchmarking services,

facility visits, or technology demonstrations. Assessment Assist firms in diagnosing technology needs and identifying tech. opportunities. Strategy Development

Aiding firms to develop longer-term technology upgrade paths, in the context of broader business plans.

Information Provision

Enriching the information resources available to firms, including information about tech. trends and opportunities and responses to specific information needs.

Brokering Helping firms identify other resources that can help them in deploying technologies, such as private consultants, public service providers, and other firms.

Implementation Assisting SMEs to implement new technologies, through in-plant technical assistance and problem solving.

Cost-sharing and justification

Reducing financial barriers to the technology implementation, through cost sharing, grants, loans, and other financial mechanisms. Also includes helping SMEs cost-justify investments in new technologies.

Training Increasing human capital and expertise to understand, absorb, operate, and improve technology within SMEs.

Teaming Assisting the managers and workers of SMEs to work together, to find joint solutions to operational, business, and technological problems.

Marketing Aiding SMEs to commercialize new technologies, particularly new product technologies, through assistance with pilot production, marketing, and procurement. Initiatives in this area also include export promotion and programs that focus on national and international supply chain links.

Learning and exchange

Providing opportunities for SMEs to continuously learn about new technology developmentsand opportunities. May include promoting membership in learning groups and associations, as well as traditional exhibitions or seminars. Can also include personnel exchanges.

Meso: Business-infrastructure Qualification Upgrading the capabilities of complementary private service providers to assist

SMEs. Best practices Identifying, promoting and disseminating best practices among customers,

vendors, private support services to support SME technology diffusion. Association Collaboration with/strengthening trade and industry associations and increasing

their involvement in technology diffusion Dialogue and information flow

Promotion of forums and mechanisms to strengthen relationships and information flows within industries and regions, such as customer-supplier forums or industry consortia.

Networking and collaboration

Seeding industrial networks and other collaborative projects, to encourage SMEs to be involved in shared efforts to understand, apply, and commercializenew technologies.

Meso: Social infrastructure Facilities Improving facilities, physical infrastructure, and the available of new technology

equipment, software, and other technical resources. Cost sharing Financial support or match to support program development.

Technical assistance

Technical assistance for program development and operations.

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Training Training of service personnel to work effectively with SMEs. Linkages and industry feedback

Promotion of closer linkages between technology developers and SME users, and incorporation of SME feedback into the process of new technology development.

Partnership Promotion of partnership among different service providers to coordinate assistance to SMEs. Also promoting inter-regional and inter-national partnerships and information flows beneficial to SMEs.

Innovation Seeding innovative new approaches, pilot projects, model programs. Best practices Development and sharing of program best practices to increase the technological

absorptive capabilities of SMEs. Tools Development and sharing of analytical tools, such as performance benchmarking

instruments and methods, which can help diagnose SME needs and be shared among service providers.

Information Availability of timely technical information sources for service providers and creation of opportunities for information development, exchange, and dissemination.

Participation and governance

SME representation and involvement in program design and operations, through advisory mechanisms, program governance, focus groups, etc. Also, SME membership and financial commitment, including cost-sharing of services.

Evaluation and review

Ongoing evaluation and review of program performance, using internal and external evaluation methods, aimed at program improvement.

Macro: Policy and attitude Leadership Policy leadership in raising attention to SMEs and their technology needs and in

focusing public and private resources. Policy dialogue Promoting forums and other exchange opportunities where SME needs and

opportunities can be represented. Analysis and monitoring

Problem research and analysis about the technological needs and opportunities facing SMEs.

Coordination Developing coordinated policy frameworks to guide program measures and service delivery.

Complementary macro measures

Ensuring that other policies, such as tax, regulatory, trade, or labor market policies, support SME technology diffusion and their own self-investment in their capabilities.

Based on Shapira and Rosenfeld (1996) An Overview of Technology Diffusion Policies and Programs to Enhance the Technological Absorptive Capabilities of Small and Medium Enterprises. Background Paper for OECD Directorate for Science. These various frameworks show the diverse range of specific intervention targets, instruments and delivery mechanisms that are used for policy measures related to absorptive capacity. In Figure 7.1 we summarise these various lists and frameworks and characterise the targets and measures used.

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Figure 7.1: Targetting Measures for Developing Absorptive Capacity and Innovation in SMEs

Source: Authors 7.4 Absorptive Capacity Development-Related Programs at the State Level Overview89 A wide range of programs have been developed by the Australian States to promote innovation. Several new initiatives have been introduced and further initiatives are under

89 The information in this section is largely drawn from the websites of State Government agencies or national agencies and is not based on an independent assessment of the programs.

Incentive to innovate Stimulate demand

Awareness of opportunities

Capability development

Innovation implementationFramework

Conditions

Strengthening the Supply Side

Strengthen Business & Social

Infrastructure

Direct Services

Procurement

Training

Develop consultants

Subsidise consultants

Needs identification

Depreciation

Training subsidy

Diagnostics

Benchmarking

Overall policy coordination

Develop & dissem’t business mngmt tools

Tech support centres

Training programs

Info resources

Networks among consultants

Develop business tools

Outplacement of researchers

Marketing support

Staff placement

Export dev’t services

Financial support

Tech. support

Guides to tech & mngmt

Info provision

Brokering

Mentoring

Seeding networks

Support Collab’n

Regional centres

Roadmaps foresight

Info resources

Seminars, forums

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development. While the majority of these initiatives operate at the State level, others link to national programs such as those of the Australian Institute for Commercialisation.

The wide range of programs can be classified into seven groups as shown in Figure 7.2 and the specific programs are listed in Table 7.9. Each is briefly described in the Section 8, which deals with specific programs from each State. This information was largely drawn from websites and is not intended as a comprehensive review. However, the overview provided suggests a structure of interventions broadly similar to those at the national level:

The development of absorptive capacities and innovation management capabilities is usually not a major focus of programs, but is an important secondary objective of programs focused on other main objectives, in particular the commercialization of technologies;

Regional Centres, Innovation Centres and private sector organisations are often used to deliver programs – but, as at the national level, these do not appear to have the breadth of roles nor the depth of capability of similar centres in many other countries.

An indicative stocktake of State level programs is at Appendix 3.

Figure 7.2: Business Innovation Programs in the Australian States

Business Development

Support: Business

Technology awareness, diffusion,

demonstration or evaluation

Research – Industry Links

Cluster Development Programs

Sectoral Development Programs

Programs to Build Absorptive Capacity & Strengthen Innovation Commercialisation

Support

Export Development

Table 7.9 Programs at the State Level Related to Building Absorptive Capacity & Strengthening Innovation New South Wales Victoria Queensland South Australia Western Australia Commercialis-ation Support

Innovation Advisory Centres

VicStart – Tech. Comm’n Pgm; Innovic; Innovation Partnering; Mentre Comm’n & Growth Pgm; Regional Tech. Comm’n; Management Excellence for Tech. Start-Ups

Innovation Start-Up Ideas 2 Market; Technology Innovators Forums; Financing Growth Pgm

Centre for Innovation Innovation Centre Innovation to Market Pgm

Research – Industry Links

Research-Industry Partnerships Pgm; National & International Research Alliances Pgm Partnerships Alliances Facilitation Pgm

Constellation SA

Cluster Dev’t Pgms

Innovation Clusters Business Clusters

Sectoral Development Pgms

TCF Technology Network; Food Manufacturing High Performance Consortium; Aerospace & Defence Innovations

Tech. awareness, diffusion, dem’n or evaluation

Technology Diffusion Pgm; Technology Demonstration Pgm

Tech. Evaluation Pgm; Technology Demonstration Pgm; Innovation Insights

Centre for Innovation

Business Dev’t Support: Business Advisory

High Growth Business Pgm; Small Business Advisor Services; Hunter Industry Dev’t Centre*

Grow Your Business Pgm; Industry TechLink

Centre for Innovation Small Business Centres

Export Dev’t

* The Hunter IDC is a regional centre which delivers a range of State Government programs to firms in the region, including innovation advice and cluster development.

7.5 Absorptive Capacity Support Options – Potential Intervention Points It is useful to link a discussion of policy targets to our earlier assessment of firm-level models of absorptive capacity in Section 3. This complements the broader system level perspective on set out in Figure 7.1. This provides a framework, linked to the survey instrument for identifying possible intervention points. The main intervention points used to deliver firm level initiatives with a view to strengthening absorptive capacity, and as set out in Figure 7.2, are: • Improving access to finance, markets; • Improving the knowledge infrastructure, access to institutions, networks, collaboration

capability; • Improving management, business planning; • Human resource development – training; • Technology and market intelligence; and • Improving the capacity to benefit from innovation- complementary assets This framework might be useful in assisting the assessment of a large sample of firms as proposed in the suggested survey, with a view to better defining policy targets; whereas the framework in Figure 7.1 is more useful for identifying possible policy instruments. Drawing on a similar perspective Daghfous (2004) suggests that firm level actions should focus on: • ensuring a management commitment to effective learning; • developing an internal culture that supports change; • improving communication across functional boundaries; • organising mechanisms to facilitate exchange through seminars, chatrooms and

intranets; and • rewarding those who share knowledge. In the following we discuss briefly the experience with two important types of SME –related support measures below. One purpose in doing so is to show that many of the possible policy instruments have been the subject of considerable research that should be drawn on in the further assessment of policy options.

Networking90 Networks, which can take many forms, can assist SMEs to access relevant knowledge but the effectiveness of networks requires high levels of trust and accountability91. Bessant et al (2005) report many studies of the formation of strong networks which have had a significant impact on the performance (eg export competitiveness) of SMEs. They comment that experience in the design and provision of network development services points to the

90 Hanna, V. and Walsh, K. 2002 “Small firm networks: a successful approach to innovation?”, R&D Management, Vol. 32, No. 3, pp. 201-207. Lee, D.J. and Jang, J.I. 1998 “The role of relational exchange between exporters and importers: evidence from small and medium-sized Australian exporters, Journal of Small Business Management, Vol. 36, No. 4, pp. 12-23. 91 Tsai, W. (2001) Knowledge Transfer in intraorganisational networks: effects of network position and absorptive Capacity on business unit innovation and performance; Academy of Management Journal 44(5):996-1004

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importance of maintaining a strong demand orientation ie the networks must be focused on addressing the issues of which firms are aware and see as vital. They also note that, at least initially, the key role of consultants is less one of knowledge transfer and more one of working with the firms to identify and prioritise issues in order to clarify what are the key issues for the network. Given this ‘insider’ role of consultants, it is not surprising that what Bessant calls ‘homophily” (or similarity between groups) is important in underpinning trust and communication and hence effective networking: “.. people prefer to learn from homophilitic networks (‘people like us’), The importance of homophily (birds of a feather flock together) is thought to increase as firms move from solution to legitimisation because the more removed from a simple solution something is, the more trust, experience and/or closeness is needed to utilise the benefit. Trust and experience can be expected to be greater within groups than between.” (Bessant et al, 2005, P46). Figure 7.1: A Process Model of Absorptive Capacity, Its Antecedents, and Its Outcomes

Adapted and Developed from Lane, Koka & Pathak, 2006

Acquire new external knowledge

2

1

Recognise & understand new external knowledge (exploratory learning) 5

3 Networks, clusters, SIS

Learning mechanisms: licensing, training, alliances

Characteristics of the Firm’s structures and processes- drive the efficiency & effectiveness of assimilation & application

Environmental Conditions: drive the incentives to develop AC

Characteristics of internal and external knowledge drive the depth & breadth of understanding

Characteristics of the Firm member’s mental models – drive the creativity of recognition, assimilation and application Knowledge

Outputs- scientific, technical, organisational

Firm Performance

Commercial Outputs (products, services, IP)

Firm Strategies (drive the focus of recognition &

understanding of assimilation and of application)

Characteristics of Learning Relationships – drive the ease of understanding)

Assimilate external knowledge (trans -formative Learning)

Apply assimilated external knowledge (exploitative learning)

1

4 6

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While networks clearly can be a valuable mechanism to promote upgrading in SMEs they may have a limited impact on actually improving absorptive capacity so that the firms continue to be more effective users of external knowledge (Arnold, et al, 2004). Cluster promotion has also developed into an important policy instrument for SME support, where firms are encouraged to link, leverage and learn. The increasingly global supply chains present challenges (and opportunities) for SMEs, but they must often strengthen their capabilities both for production (efficiency, quality, reliability) and innovation (change to meet new requirements or use new technology). Over the past decade there has been a strong interest in the role of clusters as a mechanism to achieve ‘collective efficiency’92. Collective efficiency is seen to arise from the benefits of agglomeration (eg a labour market) and from more active processes of cooperation. A good deal of emphasis is placed on the extent to which social capital built up in a region (trust, shared institutions and values) facilitates the diffusion of tacit knowledge and the development of cooperation. Regional organisations, particularly if cluster-related, can play a valuable role in the provision of services for, eg market and technology information, and training. However, ultimately individual firms must strengthen their own capabilities but the cluster approach is not built on a strong foundation of understanding of how that happens93. This has led some to policy analysts to suggest that cluster-oriented policies may not adequately focus on stimulating technological learning efforts at the firm level, focusing instead on developing local organisations, institutions and collective activities. They suggest for example that programs that selectively target progressive companies may generate faster and more effective results and the knowledge and skills developed will then diffuse to other regional firms through demonstration effects94. Provision of Expert Services The challenge for effective programs of this type is to ensure that the recipient firm is almost ‘ripe’ – ie has both strong strategic intent of pursue a goal based on upgrading and change in structures etc (eg innovation, growth, exports) and the foundation capabilities to enable effective knowledge absorption, but need the additional input to precipitate effective action (Arnold & Teather, 2001). Bessant et al (2005) suggest that those mechanisms that are likely to be most effective for firms with reasonably well develop absorptive capacity would not be appropriate for firms with limited capabilities. They provide the example of the Ireland’s TechStart program which focuses on the later and the UK’s Knowledge Transfer Partnerships (KTP) which focus on the former. A number of recent studies have questioned the assumption that the resistance of individuals to change is the major barrier to the implementation of new knowledge (Bessant et al, 2005) For example, Jansen (2004)95 stresses the inability of managers to develop

92 Schmitz, H. & Nadvi, K., (1999) Clustering and Industrialization: Introduction World Development. 27(9): 1503-1514. 93 Caniels, M. and Romijn, H. (2003) SME Clusters, Acquisition of Technological Capabilities and Development: Concepts, Practice and Policy Lessons. Journal of Industry, Competition and Trade. 3(3): 187-210. 94 Caniels & Romijn (2003) 95 Jansen, K. J. (2000) The emerging dynamics of change: resistance, readiness, and momentum. Human Resource Planning 23(2), pp 53-55. Jansen, K. J. (2004) From persistence to pursuit: a

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systems (structures, incentives, performance assessment) that facilitate changes and suggests that coaches can play a positive role in developing ‘readiness to change’ through developing proactive beliefs, attitudes and behaviours (Bessant et al, 2005). 7.6 Conclusions The review in this Section is intended to provide a background the survey of specific programs that follow in Section 8; and is designed to link the discussion of innovation support initiatives to the earlier discussion of absorptive capacity. While a comprehensive review is beyond the scope of the present study, this overview points to several points relevant to the current study:

There are an extensive and increasing range of programs aimed at reducing barriers to capability development, innovation and growth in SMEs;

These initiatives are influenced by the perception that SMEs play a vital role in innovation systems but that significant market failures limit their development;

A diverse range of instruments are used and there is increasing interest in evaluating these programs and in developing international initiatives to share experience in SME program design and implementation;

SMEs tend not to see government agencies as credible assistance delivery mechanisms;

Many SME assistance programs use regional centres, networks and private firms (eg consultants) to deliver programs; and

Experience suggests that it is vital to recognise the different needs and capabilities, and potential to benefit from assistance, of different types of SME.

longitudinal examination of momentum during the early stages of strategic change. Organisation Science 15(3), 276.

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8. Policies that Promote Absorptive Capacity 8.1 Introduction Arnold et al (2005) surveyed the main policy instruments to promote absorptive capacity in several European countries- summarised in Table 8.1. On the basis of this survey they concluded that:

The range of policy instruments has tended to be reduced and streamlined over the past decade;

There is a trend to delivering company support through ‘one stop’ shops such as Enterprise Ireland;

There has been an increase in the focus on support for university-industry links in particular and networking in general;

Many countries have developed technology oriented diagnostic services at the forefront of their interface with firms;

Human capital development through explicit training and placement schemes, and as a by-product of R&D support programs is a major feature of the instruments.

Table 8.1: International Overview of Schemes to Promote Absorptive Capacity

Hum

an

Capi

tal

Acad

emic

N

etw

orks

Oth

er

Net

wor

ks

Org

anis

atio

n, R

outin

es

Lear

ning

Codi

ficat

ion

Capa

city

Ex

pans

ion

Dia

gnos

is

Ireland RTI Programme X X Innovative Management Initiative X X R&D Support X X Innovation Partnerships X R&D Awareness X Programmes in Advanced Technology X (X) Fusion Scheme X Expertise Ireland X Country Enterprise Boards X X UK Business Links X Technology Prog. - Collaborative R&D X -Knowledge Transfer Networks X X X Grants to Investigate Innovative Ideas X X Grant for R&D X Knowledge Transfer Partnerships X X Access to Best Practice Business X X Management and Leadership Programme X X LINK _ OST X Faraday Partnerships X X X Regional Skills Partnerships X Phoenix Fund X X Netherlands Training Facility X Training Impulse X X

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Knowledge Transfer Branch Orgs/SMEs X X Knowledge Transfer Entrepreneurs/SMEs X X X Dreamstart – NTBFs X X WBSO R&D allowance X O&O Fonds X X X Sweden VINNVÄXT X X VINST X X Innovation Systems and Clusters X X TUFF Technology Transfer/Brokerage X X X Regions – IT X X IT.SME.se X X Finland Entrepreneurship Policy Programme TE-Centres X X Centres of Expertise X X Technology Programmes X X R&D Funding for Companies X Feasibility Studies X Business from Research (TULI) X Technology clinics X X Source: Arnold, et al 2005. p27

The Technopolis study identified several possible initiatives for strengthening absorptive capacity in Irish firms:

“Our study….suggests a number of directions in which absorptive capacity needs improvement, especially in

Recognising the relevance of external knowledge Increasing the employment of qualified scientists and engineers by indigenous

companies Modernising and professionalising management Reducing firms’ comparative isolation and by improving external linkages Accelerating the rate at which firms develop technology-networks. Helping firms to search more widely for knowledge Reducing their levels of perceived risk associated with innovation, through better

information and access to knowledge Where they exist, R&D and innovation functions appear to be organisationally isolated and often sub-critical. Half the firms said that they need external help to undertake almost any kind of technological innovation, including the adoption of externally produced turnkey technologies, confirming the perception that Ireland requires ‘catching up’ policies for absorptive capacity development in many if not all branches of industry. Existing policy measures are limited in this area. Little help is available for firms, which need to become more adventurous in their innovative activities, without at the same time going so far as to become involved with ‘science push’ activities. Here, Ireland is deficient not only in schemes but also in the knowledge infrastructure. This kind of intermediate knowledge development is not interesting for most HEIs: it is not their mission. Internationally, it is satisfied by specialised Research Institutes, such as the Danish GTS Institutes, whose mission involved delivering ‘technological service’ to industry, especially SMEs.

Improving the capabilities of smaller firms with low technological capability can not be achieved simply by hanging up a sign advertising support, and waiting for companies to apply. A proactive approach is needed to:

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• Broaden awareness of innovation and recognising the value of external knowledge • Develop human resources • Increase networking • Improve management organisation and routines • Develop learning processes within companies.” 8.2 Insights into Relevant Policy Experience in Australia Bretherton, et al (2006) review the experience of two programs that developed networks to promote knowledge transfer and uptake in SMEs. One of these was set up by the Department of State Development in Queensland and aimed to assist SMEs in non-metropolitan regions to access capital, and the other was set up by the Tooling Industry Federation of Australia and aimed to promote upgrading in SMEs and greater collaboration for commercial objectives. Bretherton, et al (2006) conclude from an initial assessment of the program that: ‘The central strength of the process is the group mentoring sessions… [which provide] a focus that addresses how SMEs can access expertise in a short time frame from multiple sources. [and that] the mentoring process is a successful approach to growing businesses and is a low risk strategy for government.”96 However, they emphasized that each network must develop its own specific approach at its own time and that a flexible framework for such a program is essential. Beckett (2006) provides a useful assessment of the experience of an Australian project developed to facilitate greater cooperation among SMEs. The project, supported by AusIndustry’s Innovation Access Program and two industry associations, focused on two sectors (automotive components and aerospace) where globalization, and moves by large customers to reduce the number of suppliers, threatened the supply chain links of small firms. Individually the smaller firms tended to move into a negative cycle focused on declining opportunities in domestic markets. Beckett describes a situation where the work of a number of actors, including facilitators and industry associations, developed a ‘breeding environment’ where opportunities were firms began to become familiar with each others interests and capabilities and discussed possible foci for collaboration. Even at this stage the development of ‘social capital’ through the work of the industry association and an earlier industry networking program played an important role in creating the ‘space’ to explore opportunities. However, the formation of specific collaborations required a focusing device and a subset of actors prepared to pursue an identified opportunity. Over time, with a greater development of shared understanding about complementary capabilities and shared interest, other, possibly longer term spin-off networks evolved. For example, one of these brought together a number of firms and some research providers in a formal relationship mediated by the industry association. This pattern of tiered network evolution is illustrated in Figure 8.1 and discussed in the following statement:

96 96 Bretherton, P. Becket, R. Soosay, C.l and Hyland, P. (2006) Building Innovative Capabilities in SMEs through Virtual and Knowledge Networks. CINet 2006: 181-191 ; p.187

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Figure 8.1: Evolution of Relationships in an Industry Network Program

Source: Based on Beckett (2006) “…an initial focus on receptive clients rather than on internal collaboration practices should be given priority in project development. The identification of receptive focal firms was seen to be very important in engaging with global markets. Building capability and capacity via the cooperation of a few focal firms that could in turn engage with smaller firms in a hub and spoke style emerged as the dominant arrangement. This was partly because most of the smaller firms did not have the absorptive capacity for direct engagement with global markets, and partly because client purchasing departments did not seem comfortable about dealing with a virtual enterprise or some kind of cartel. The whole evolutionary process seemed to involve ongoing interplay between the operations of a long term breeding network ..that explores possibilities and the short term operation of a virtual enterprise or agile shop floor arrangement that exploits any opportunities identified. It was observed that the industry associations could play an important role in sustaining a breeding network, but had very little participation in the exploitation stage. Understanding the quite different dynamics and the interdependencies of these two forms of collaboration was seen as a success factor. The firms involved in the RELINK demonstration projects would generally regard each other as competitors, and it was essential that some way in which the firms complemented each other was identified to form sustainable working arrangements. Some firms with an attitude of conditional cooperation may have been involved to provide capacity, but they were not seen as long term participants…..It seemed easier to get things started with complementary firms….. but harder to sustain the collaboration if they did not find a common theme. It seemed hard to get competitors working together, but once some form of complementarity was found, the collaboration seemed self-sustaining. “ (Beckett, 2006, p13-14.

Short term specific opportunity collaboration

Longer term strategic collaboration

Breeder ‘Network’ Initiatives add to ‘social capital’, increase understanding of complementarities, help to identify

opportunities

Project specific network mediated by focal firms

Project specific network mediated by focal firms

Collaborative research program

Joint marketing and production entity

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Experience of SME networks in Europe and elsewhere show a similar pattern of exploratory processes that build on existing relationships but go further to identify complementarities and develop shared purposes, and then often the emergence of more formal but self organizing new sub-networks with joint responsibility an decision making.(Camarinha-Matos and Afsarmanesh, 2004; Chapple, 2005)97. Camarinha-Matos and Afsarmanesh (2004) identify several generic types of actors who play key roles in networks, but have different objectives for collaborating and different objectives. In the Australian case Beckett (2006) found that these categories of actor were identifiable in the development of the networks:

Focal firms – larger and more capable hub firms that take on the lead role in project management;

Technology providers – equipment and service providers, potentially including research organisations;

Regional networks – that may choose to extend their role beyond the initial region;

Communities of practice – patterns of linkage across firms at the individual level; and

Supporting firms – smaller firms that collaborate on a specific base.

8.3 Extending the Study to Other Countries In the present work we have attempted to provide an overview of the instruments that appear relevant to developing absorptive capacity among SMEs in fourteen countries (Australia – AU), UK, Sweden, Norway, Netherlands, Ireland, Japan, Hong Kong, Korea, Denmark, Finland, France, Germany and the USA). Our coverage is generated from secondary sources. It is not intended to be exhaustive, but to provide a sense of the repertoire of instruments in international use. Instrument designs are increasingly transported among countries, so copies of the US SBIR programme, the former UK Teaching Company Scheme (now re-branded as Knowledge Transfer Partnerships), voucher, networking and R&D subsidy schemes are found everywhere. We concentrated on the 11 types of instruments, listed in Table 8.2.

Table 8.2: Types of instrument covered in this survey

Number Mechanism Category 1 Procurement 2 Intellectual Property Support 3 Investment Funds, Venture Capital, Seed Capital, Guarantees 4 R&D or Innovation Subsidy 5 Grants for Bilateral Cooperation between Companies and

97 Camarinha-Matos, L.M, and Afsarmanesh, H (2004) “The Emerging Discipline of Collaborative Networks” in “Virtual Enterprises and Collaborative Networks”(Ed L.M. Camarinha-Matos) Kwuhler Academic Publishers, the Netherlands. ISBN 1-4020-8138-3, pp 3-16. Chapple, K. 2005, Building Institutions from the Region Up: Regional Workforce Development Collaboratives, Working Paper 2005-01, Institute for Urban and Regional Development, University of California, Berkeley, CA.

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Universities/Research Institutes 6 Public-Private Partnerships involving multiple companies plus institutes from

the Knowledge Infrastructure 7 Other R&D or Innovation Networks 8 Tax Incentives or Relief’s 9 Advisory or Brokerage Services

10 Training Schemes & Recruitment 11 Science Parks, Incubators

The numbers on the left hand side of Table 8.2 are used as a ‘key’ to the different instrument types in the following more comprehensive table of instruments (Table 8.4), which also summarises the and relevance of these instruments to various types of absorptive capacity: • Direct development of human capital, for example through training, recruitment and

mobility schemes; • Various kinds of networking, involving innovation-related links with the knowledge

infrastructure or with other companies; • Changes in organisation and internal processes; and • Learning and generation of strategic intelligence, such as information about

technological and market opportunities. As a fifth category of absorptive capacity, we have included the generation or transfer of technology, because this can provoke increases in absorptive capacity. It is clear that policymakers in the countries studied take care to ensure that instruments collectively tackle the full range of possible categories of absorptive capacity. A more detailed description of the different instruments is provided in the Appendix with the exception of details on the Australian programs. A few of the lesser known programs from, for example the USA, are described in Section 8.4.9. 8.4 Assessing the Eleven Most Relevant European National Support Programs for Absorptive Capacity In this section we focus on 11 particularly relevant European national programs, which have been evaluated and have been found to be effective. The specific programs we discuss are summarised in Table 8.3. Table 8.3: The Eleven Most Relevant European National Support Programs for Absorptive Capacity

AC Components Networking Instruments Cont. Cat

.

Human

capital

Knowledge infrastructu

re

Companies

Organisation etc

Learning,

strategic intellige

nce

Technology

generation or

transfer Business Link UK 9 XXXX XXXX XXXX XXXX Ufi/Learndirect UK 10 XXX

X

Knowledge UK 6 XXXX XXXX XXXX

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Transfer Partnerships NT Programme NO 5,9 XXXX XXXX XXXX XXXX FRAM NO 7,

10 XXX

X XXXX

WBSO - Research and Development (Promotion) Act

NL 8 XXXX

Syntens - Innovation network for entrepreneurs

NL 9 XXXX XXXX

Innovation Consortiums

DA 6 XXXX XXXX XXXX

Centre of Expertise Programme

FI 6 XXXX XXXX XXXX XXXX

Technological Development Network

FR 7 XXXX XXXX

PRO INNO II DE 4 XXXX XXXX 8.4.1 The UK Business Link – UK The central objective of Business Link is to improve the competitiveness of small firms through more comprehensive provision of business support. In pursuit of this objective their aims are to: • Increase the use of business support by small firms; • Rationalise the provision of support to reduce duplication and to make it more

coherent; and • Improve the quality of support services. Business Link came into being as a result of the "one stop shop" for business support initiative announced by the then President of the Board of Trade in July 1992. Nine pilot Business Links were approved for start up in April 1993. The network was gradually extended thereafter, so that by January 1997 a total of 89 Business Link partnerships, with 241 outlets covering the whole of England, had come into operation. At present, there are now 45 county-based Business Link Operators. Each Business Link is based on a partnership between local agencies involved in support for businesses. Business Links entail a significant degree of partnership working, especially at the strategic level. As well as promoting collaboration, Business Links have encouraged the sharing of resources between partners.

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In addition to the network of services, there is a central website (http://www.businesslink.gov.uk) with information on how to start and sustain a new enterprise including: • Start-up and finance; • Tax and employment; • e-commerce and marketing; • International trade; and • Business growth, acquisition and sale. Business Link is funded by the Department of Trade and Industry through the Small Business Service for SMEs, Consultancies and Private institutions for Education. An evaluation concluded that although Business Link tries to serve all SMEs, they especially target growing firms and those identified as having growth potential. Firms in the manufacturing, high tech. and business services sectors are also targeted more frequently than those in other sectors. The evaluation also concluded that businesses do, indeed, benefit from support, and that they assess Business Link support more highly than other support or support they have used in the past. However, there is still evidence of market failure. This is largely due to the facts that firms are not sufficiently aware of the support available and/or do not understand the need for/value of support. Business Links and partners have improved the coherence, co ordination and quality of services, but they acknowledge the scope for further improvement in these respects. University for Industry/Learndirect – UK University for Industry (Ufi) aims to work with partners to boost people's employability, and organisations productivity and effectiveness, by: • Inspiring existing learners to develop their skills further; • Winning over new and excluded learners; and • Transforming the accessibility of learning in everyday life and work. Secondary objectives of Ufi are to increase the number of companies (particularly SMEs) that provide learning opportunities for employees, and improve the quantity and quality of learning provision. Fronted by the website http://www.learndirect.co.uk, learndirect has been developed by Ufi with a remit from government to provide high quality post-16 learning which: • Reaches those with few or no skills and qualifications who are unlikely to participate in

traditional forms of learning; • Equips people with the skills they need for employability, thereby strengthening the

skills of the workforce and increasing productivity; and • Is delivered innovatively through the use of new technologies. Learndirect operates a network of more than 2,000 online learning centres in England, Wales and Northern Ireland providing access to a range of e-learning opportunities. Its flexible learning is available to individual adults wanting to improve existing skills or to learn new ones, and to employers looking for an innovative way to develop the skills of their

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workforce. Since its launch in 2000, 1.3 million learners have enrolled on almost three million learndirect courses. More than 550 different courses (most of which can be purchased online) are on offer covering a range of subjects, including management, IT, Skills for Life and languages, at all levels. More than three quarters of the courses are available online allowing people to learn wherever they have access to the Internet - at home, at work or at a learndirect centre. The Ufi works with employers through Learndirect Business to help develop employee’s skills whilst in the work place (on-line) removing barriers such as travel time and costs, and course intake dates.98 The Ufi/Learndirect is provided by the Department of Education and Employment for SMEs and Individuals looking to boost their skills within their existing employment or to help them gain new employment. An external assessment of the progress that Ufi has made was reported in 200399. This evaluation benchmarked Ufi’s performance against other domestic and international organisations engaged in similar activities, as well as highlighting lessons that will inform future Ufi activity. The evaluation reported that the very nature of learndirect learning results in improved ICT skills, which is equipping a growing population of learners who can access new learning provision that is increasingly ICT based. There was also evidence to show that e learning is breaking down the psychological and physical barriers that prevent many adults from returning to learning. The five main messages to emerge from the study are that Learndirect: • has so far had more of an impact on individuals than on organisations; • contributes to lifelong learning by engaging new learners, and by widening

participation by reaching out to traditionally disadvantaged groups; • leads to further learning progression; • is helping some learners enhance their employability; and • is contributing to the expansion and diversification of the learning market. There are also some major challenges: • Lifelong learning versus productivity; succeeding on one does not automatically

mean success on the other; • Stepping in versus stepping on; the emphasis on learning progression might pose

some problems of reconciliation between the unique learning offer and a push to progress;

• Virtual versus supported learning; there are unresolved issues regarding support for virtual learning; and

• The benefits and risks of specialisation; the pressure is on for greater specialisation of both delivery and content especially in the employer market.

Knowledge Transfer Partnerships - UK Formally known as the Teaching Company Scheme from the DTi, this initiative aims to increase interactions between Universities and companies. Graduates are recruited to work in a company (SME) for two years in close cooperation with a University, on a strategically

98 Information taken from Learndirect website, available at; http://www.learndirect.co.uk/aboutus/ 99 New learners, new learning; a strategic evaluation of Ufi available at http://www.dfes.gov.uk/research/

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important project, where they will gain enhanced career development benefits. It is also the aim of the policy to help the company and university learn how to collaborate across sectors. This measure provides a grant to cover part of the cost of using a person to transfer and embed knowledge into a business from the UK knowledge base (including universities, colleges and research organisations) via a strategic project. Each Partnership employs one or more high calibre Associates (recently qualified people) for a project lasting one to three years, transferring the knowledge the company is seeking into the business. Each Associate works in the company on a project, which is core to the strategic development of the business. Associates are jointly supervised by a senior member of the business and an academic or technical specialist from the partnering knowledge base organisation. Through contact with businesses, the knowledge base partner is also provided with a relevant and improved understanding of the challenges companies encounter, and their business requirements and operations. It is estimated that on average, every £1 million invested in Knowledge Transfer Partnership (KTP) results in 77 new jobs created, and training for 263 members of staff, as well as giving academics experience of working in a business environment (Figures based on final reports by company participants whose completed TCS programmes were assessed in 1997-98). The DTI Innovation Report (2003) showed that successive reviews of the KTP confirmed the value to business of the technology transferred. 80% of companies involved believe that knowledge transferred during the placement was either new to the firm or represented a considerable advance of their knowledge base. In a DTI review carried out in 2004, KTPs emerged as one of the most successful knowledge transfer mechanisms that the Government offers to UK businesses. Each Partnership brings business benefits, skills and knowledge to industry, graduates and academics across the UK. (Source: http://www.ktponline.org.uk/) 8.4.2 Norway NT Programme – Norway The NT programme’s main aim is to contribute to increased innovation in existing and new technology firms in Northern Norway by providing capital and advice and by developing networks of companies and knowledge institutions. The programme was established as a follow-up to the R&D plan for Northern Norway. According to this plan, which was drawn up by a government-appointed committee in 1987, the competence base of companies in Northern Norway needed to be strengthened in order for these companies to be able to take part in public R&D projects and for other R&D initiatives to have any effect. The programme is provided by Innovation Norway to both SMEs and larger companies through the provision of grants. An evaluation of the programme published in 1992 concluded that the measure had played a central and positive role in Northern Norway. Main findings were that the NT programme had: • Contributed to the allocation of resources to R&D initiatives, both directly and

indirectly; • Given results at the company level in the form of competence, new products, new

technology and increased turn-over; and

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• Reached and activated a group of innovation oriented companies, which in turn could function as key actors in broadening the use and development of technology in Northern Norway.

A more recent evaluation was published in 2000. The report demonstrated that there was a continued need for this kind of program. It showed that the R&D activity in companies in Northern Norway had not changed significantly since the programme was started up 12 years earlier. However, the firms' situation seemed to have improved as regards competences, experience from project work, networking and the ability to make use of relevant regional assistance. The evaluation stated that the main contribution of the programme was of a financial nature, and concluded that the programme could be regarded as profitable from a national viewpoint and that the additionality of the project was high. (Source: http://www.nt.norut.no/) FRAM - Norway Given the growing importance of employee competence to the ability of enterprises to innovate and adapt to changes, the development of skills is one of the strategic priority areas for the Norwegian Industrial and Regional Development Fund (SND). SND has, a number of years, developed and implemented national programmes aimed at improving the competence and ability to innovate of small and medium-sized enterprises (SME). One example is the FRAM programme. FRAM emphases systematic management and strategy development in SMEs with less than 100 employees, with the main focus on companies with less than 30 employees. For 2001, €5.1 million was allocated to this programme. The FRAM process lasts for 15 months, during which 10-12 companies work together in six two days workshops. In these workshops, the top manager and other key employees acquire theoretical knowledge, exchange experience and network with other FRAM companies. Between the workshops, the companies and their dedicated FRAM advisors work jointly to respond to relevant opportunities and challenges. Since 1992, close to 3,000 small enterprises have completed this programme. In addition to a number of qualitative targets, more than 80 % of the participating companies meet FRAM's profitability improvement target. (Taken from; European Charter for Small Enterprises The Norwegian response, NHD - The Royal Ministry of Trade and Industry) (Source: http://www.innovasjonnorge.no/) 8.4.3 The Netherlands WBSO – Research and Development Act – Netherlands The objective of the WBSO Act is to stimulate R&D by alleviating the wage burden for companies through tax reduction. This Act provides a fiscal facility for companies, knowledge centres, and self-employed persons who perform R&D. In this context, R&D means technical/scientific research, the development of technologically new physical products or physical production processes (or parts thereof) and the development of technologically new software (or parts thereof). Non-companies qualify only if they perform R&D on the instructions and at the expense of a Dutch company. Under the Act, a contribution is paid towards the wage costs of employees directly involved in R&D. The contribution is in the form of a reduction of payroll tax and social security contributions and an increase in the tax deductions available to self-employed persons.

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In 2005, WBSO was broadened. Since then, R&D includes: • The analysis of the technical feasibility of an R&D-project; • Development of technically new physical products, physical production processes,

software programmes or parts thereof; and • Technical scientific research, which can provide explanations for phenomena in areas

like physics, chemistry, biotechnology, production technology and ICT. Since 2006, also R&D performed in the EU can be eligible for tax reduction. The scheme is managed by SenterNovem – (Agency of the Dutch Ministry of Economic Affairs). The 2002 evaluation found the following primary effects of the WBSO: • Every €1 spent on WBSO gives €1.02 in R&D effort, and • Total R&D spending rises with the total of the WBSO tax credit. According to the evaluation survey - size does matter (larger companies can take more risks, have a lower threshold, faster time to market, side effects: better planning and administration). Secondary findings identified significant effect for firms with < 50 employees. If tax credit rises 1%, the effect on sales of new products (as % of total sales for an average firm) is 0.19 percent points. WBSO was found to be important for reaching goals of innovation like the introduction of new products, lowering the cost of innovation, acquisition and implementation of technological knowledge, higher quality products and innovation process, raising the speed of innovation processes. The evaluation also found that the WBSO is considered to be easy to access for companies (low administrative burdens) and therefore attractive for SMEs.(Source: http://www.senternovem.nl/wbso/) Syntens – Innovation Network for Entrepreneurs - Netherlands Syntens is an "innovation network for entrepreneurs", a network of 15 centres (circa. 450 full-time advisors), with the objective to increase innovativeness of SMEs. Syntens centres provide support and advice to SMEs on technology and innovation. In practice, Syntens' advisors help SMEs with drawing up an Innovation Action Plan. Within this framework, tailor-made technological and non-technological innovation oriented knowledge is made accessible and applicable for firms. Furthermore, Syntens implements the policies of the Ministry of Economic Affairs, for example, in the area of new business ventures and innovation vouchers for SMEs. Collaboration with SenterNovem, Chambers of Commerce, Regional Development Agencies and the Netherlands Patent Centre will be increased in the near future to enhance the efficiency. Syntens receives approximately €34 million base funding and €19 million targeted funding. In 2002 an evaluation was performed with the following results: • Syntens reaches 18,500 SMEs per year, 40% of which are new clients. This change in

clients is important, because the effect on companies of Syntens' services is the greatest in the first year.

• Collaboration of Syntens with knowledge institutes and branch organisations is limited. • Contact with Syntens has resulted in 30% of the companies gaining (increased)

cooperation with other companies or knowledge institutes, in 40% to participation to regional projects and in 30% to more awareness of innovation measures.

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• Half of the companies have started a "renewal project" as a result of a Syntens-advice. Half of these companies have the opinion that the strategic meaning of these projects is large to very large.

• Surveys show that for 60% of the companies contact with Syntens has resulted in an increase in labour productivity. (Source: http://www.syntens.nl/Syntens)

8.4.4 Denmark Innovation Consortiums (formerly Centre Contracts) – Denmark The aim of Innovation Consortiums is to strengthen co-operation between companies, public research institutions and technological service providers, to develop new generic product and service technology platforms for the coming 5-10 years development in Denmark. The company participation ensures that the research and development of the project originates from specific needs in Danish companies. Enterprises must contribute 50% of the funding. Some €13 million has been appropriated for the years 2003-2005.Typically a consortium has a total budget of €2.5 million - €5.5 million and lasts 3-4 years. The projects and consortiums that receive support (Grants) from the Ministry of Science, Technology and Innovation must live up to three criteria: • Noticeable commercial potential; • Technology transfer; and • As a minimum, at least two companies, one public research institution and one

technological service institution should participate in an innovation consortium. Smaller companies - with less than 100 employees - can participate in parts of the project.

Then, the co-operation should show its added value by: • Gearing public research towards the specific needs of the trade and service sectors; • Building up competencies and services in a particular technological service that can be

broadly diffused to other Danish companies, especially SMEs; • Creating a highly qualified innovation and research environment; and • Developing projects with a generic content that can be used by, and diffused to, a

broad range of companies. The first 30 innovation consortiums were evaluated in 2005. The conclusion was that the consortium measure has a good national economy effect and that the basic principles of the measure are good. However, the evaluation also concluded that the measure could be improved in certain aspects. (Source: http://fist.dk/site/english) 8.4.5 Finland Centres of Expertise - Finland The Centre of Expertise Programme was launched in 1994 in eight different Centres of Expertise. Due to its subsequent success the Government decided to extend the programme in 1998 and 2002 by appointing new centres and by increasing the number of fields of expertise in the existing centres. There are currently 22 centres of expertise covering 45 fields of expertise, which have been appointed for the period of 2003–2006.

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The task of the centres of expertise is to use internationally competitive knowledge and skills as a resource for business activities, the creation of new jobs and regional development. In order to reach their objective, the centres of expertise: • Establish the prerequisites for the creation and commercialisation of innovation; • Launch cooperative projects between the research sectors and industries; • Continuously strengthen and modernise top-level expertise in the region; • Promote the development of creative and innovative environments; • Makes latest knowledge and expertise easily available for companies; • Increase cooperation between different bodies in the development of research and

knowledge-intensive business; • Use human resources and intensify the use of training and education; and • Activate the research and development operations of small and medium-sized

companies in their fields of expertise. This programme is administered by the Ministry of the Interior and offers grants through the service, which is available to all companies, research institutes and Higher Education Institutions. According to the official, externally commissioned evaluation of the first programme fdor the period (1994-1998), the main result has been the increase of co-operation, both at regional and national level. The State Audit Office (October 2001), in its own evaluation, considers the Centre of Expertise Programme as a key part of the Finnish Regional Policy. Mid term evaluation of the second programming period (1999-2002) indicated that programme has created altogether: 7100 new knowledge-intensive jobs, 9000 preserved jobs, 500 new high technology companies, 1800 new innovations, 40,000 people educated. (Source: http://www.oske.net/in_english/) 8.4.6 France Technological Development Network – France Known in France as the Reseau de Development Technologique, RTD, the Technological Development Network (TDN) allows SMEs with little knowledge about the process of innovation to identify their technological needs, to build a project, and to find necessary competences to carry out the project. It also informs and guides SMEs through the various public support services and policies. The TDN has more than 1700 technological advisers in 21 regional Networks to form the overall network. They facilitate access to multiple resources and supply the companies a coherent, diversified and reactive service. In each French region, a TDN gathers regional institutional actors in the field of innovation (National Agency for Innovation, DRIRE, DRRT, Chambers of commerce) in an informal network. The network co-ordinates actions to promote innovation within SMEs. It pursues a series of targeted missions: • Financial support adapted to very small enterprises with the PTR (Technological

Services networks); • Coordination; • Knowledge of enterprise and of their technological needs; • Training; and • Diffusion of information.

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Members of the network (prospectors) have planned visits to regional SMEs in order to detect innovation needs; they are in charge of presenting the large number of available public measures in favour of innovation. A specific effort is made for SMEs that have never been in contact with public authorities or research organisations. Prospectors have the ability to propose the Network Technology Subsidy, which allows SMEs to finance the first step of an innovation project (covering up to 75% of the project cost but not exceeding €5000). In 2004, 1395 prospectors visited 29 570 SMEs. 1458 grants (PTR) were allocated for a total amount of EUR 6,77. 91,02 % of the beneficiaries where SMEs with less than 50 employees, 62% less than 10 employees.(Source: http://www.rdt-france.org/) 8.4.7 Germany PRO INNO II – Germany PRO INNO II, the successor of PRO INNO, aims at increasing innovation competence, innovation activities and competitiveness of SMEs. The programme supports SMEs in the field of R&D co-operation. Financial incentives aim to stimulate those SMEs that have no R&D activities to engage in R&D. The programme addresses the barriers in SMEs without regular R&D activities and are outside of networks, but which have at least some innovation orientation. The programme also supports international co-operation. It focuses on supporting SMEs on a sustainable basis in order to foster innovation, competitiveness, and development of future-oriented technologies to create and sustain jobs. SMEs should be encouraged to invest in market-oriented R&D as a result of the programme’s reduction of technical and commercial risk. The programmes intend to promote high-value-R&D and (cross-border) co-operation between SMEs and research centres. In July 2002, an evaluation of the PRO INNO II programme was presented by the BMWi (Federal Ministry of Economics and Technology). It stated that research co-operation exerts positive effects on the involved enterprises, including growth in sales, exports and employment. The authors calculated that each publicly funded R&D project under the PRO INNO/FoKo programmes produced additional or at least "secured" employment of 7.9 jobs two years after finishing of the project. This is equal to a funding volume of approximately €13,000 per job. The evaluation recommended to continue the PRO INNO programme as it has a high positive effect upon the participating companies, and is also positively assessed by these companies in terms of programme administration. Further recommendations refer to: • Investigating whether funding should be extended to later stages in the innovation

process, i.e. market introduction; • Increasing the promotion of trans-national projects that include SMEs from other EU

and Candidate countries; and • Continuing regular programme evaluations, especially panel analyses. (Source: http://www.bmwi.de/English/Navigation/root.html)

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8.4.8 European Union Initiatives100 HiGroSME project The HiGroSME project targets innovative European SMEs with high growth potential and helps them to achieve success on European and world markets. The Project is to extend from January 2005 to March 2007. Toward this goal, the project consortium - consisting of 8 European national technology and innovation programme agencies - has: • created a European support network to promote the technological and business

development and internationalisation of high-growth-potential SMEs (HiGro’s) in Europe

• tried to optimise existing national and European support programmes for HiGro's • prepared the creation of a new European support programme and structure for HiGro's

to close critical gaps in existing programs. The HiGroSME consortium is made up of the following organisations: • VDI/VDE-IT, an organisation set up by two of the largest European professional

associations for engineers: VDI - Association of German Engineers and VDE - Association for Electrical, Electronic and Information Technologies;

• FFG (Austrian Research Promotion Agency ), the main Austrian organisation for promotion of research and innovation;

• TEKES, the National Technology Agency of Finland; • ANVAR, the French Agency for Innovation; • EI - Enterprise Ireland, the agency of the Irish Ministry of Enterprise, Trade and

Employment in charge of implementing government policy in the areas of technology, trade and enterprise development;

• ENEA - Italian National Agency for New Technology, Energy and the Environment; • SenterNovem, an agency of the Dutch Ministry of Economic Affairs in charge of

implementing government policy in the areas of technology, energy, environment, exports and international co-operation; and

• CDTI - Centre for the Development of Industrial Technology, an organisation for the promotion of innovation and technology development in Spain.

HiGroSME is funded within the specific research and technological development programme "Integrating and strengthening the European Research Area" of the 6th European Framework Programme. (Source: http://www.higrosme.org/)

100 There is an increasing amount of joint policy research and program development in the area of SME innovation support among regional and international organisations. For example the International Network for Small and Medium Sized Enterprises-INSME is a non profit Association open to international membership. Its mission is to stimulate transnational cooperation and public and private partnership in the field of innovation and technology transfer to SMEs. http://www.insme.info/page.asp?IDArea=1&page=about_insme

159

CORDIS Marketplace101 Seeking technological information can be expensive and difficult. Recent research among SMEs in Sweden shows that only around ten percent among them, can find, in a period of up to three years, a solution to their technological problem. To address such needs of SMEs, the European Commission provides online research and innovation information service CORDIS. The service takes people to the heart of innovative activity in Europe by offering information on the funding opportunities and emerging technologies from the European Union’s research programmes. Under the slogan of “Connecting people to technology” a virtual Technology Marketplace Service offers clearly written digests of new technological advances from all over Europe – easy to search and easy to act upon. In each case the researchers are offering their technology for sale; licence, joint-venture or other type of exploitation agreement. Contact persons are given for each technology so that interest can be followed up directly by the users of the service. The opportunities on offer range from industrial products and processes, information technologies, to environmental and energy solutions. Many have come from major research projects that have been financially supported by the European Commission; but others are from private in-company or nationally sponsored research. There are currently over 1000 technology offers on the virtual Marketplace. The service is updated every week with a new selection of opportunities in all areas and in the five languages of CORDIS – English, Spanish, German, French and Italian. Written up in plain language for non-scientific user, each technology offer carries out links to the more detailed technical specifications. This virtual Technology Marketplace uses as a central resource more than 60 000 research projects co-financed by the European Commission and over 13 000 research results. These are recorded on its CORDIS research and development information service, making it the most comprehensive resources for exploitable technologies in Europe. Established twelve years ago and being one of the first services of the European Commission on the Web; CORDIS today represents over 350 000 database records and 40 000 web pages, including both EU-funded research projects and research results. It is the only public source where such data can be searched by sector, country, region and even by organisation. Many of the technology offers come also through technology transfer organisations, which are part of the European network of 68 Innovation Relay Centres, funded by the European Commission in Brussels and representing the largest network of technology transfer organisations world-wide. CORDIS provides online access to the brokerage activities managed by this network to help local companies with meeting their technology needs and succeed with international transfer of their technological achievements. The Technology Marketplace offers business tips, acting as a central point of access to all EU assistance networks, including a single entry point to European business incubators, and an online Gate2Growth.com for linking entrepreneurs with investors. The Technology Marketplace is one of the most important services on CORDIS and central to its mission to foster innovation in Europe. It attracts now over 200 000 visits every month

101 Sourced from http://www.cordis.lu/marketplace/)

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from people searching for new technologies which could help their business develop new products or processes, and improve productivity. 8.4.9 Some Relevant Programs from Outside Europe United States Despite a large investment in a diverse S&T base there are strong concerns about the capabilities of US SMEs to adapt to technological and market change. Federal and State agencies have increased their role in extension programs, both direct and through non-governmental service providers. There have been two major approaches to promoting technology diffusion: First, a range of measures have sought to improve research-industry collaboration. “The mechanisms to do this are numerous and include the promotion of public-private consortia, the development of industry-focused technology centers (such as the National Science Foundation's Engineering Research Centers), and the establishment of technology transfer offices and cooperative research and development agreements. State and local governments are also active in the promotion of technology development and the diffusion of its results into their local economies and businesses. These measures include university-industry technology centers, university-industry research partnerships, equipment and facility access and demonstration programs, technology financing to projects and companies, start-up assistance for technology-based spin-off firms, information services and interactive databases, network promotion, and help in forming strategic technology alliances. The number and scope of these measures has increased significantly over the past decade, and there is a considerable degree of experimentation and mutual learning among these initiatives.””102 Second, centres and programs focused on manufacturing technology have grown. The National Institute of Standards and Technology (NIST) operates an Advanced Manufacturing Research Facility to develop and demonstrate new manufacturing technology. Many two year technical and vocational colleges have established demonstration centres and ‘teaching factories’ Manufacturing technology and extension centres have been established with regional support and matching federal funding through NIST’s Manufacturing Extension Partnership (MEP) program103. There are now centres in 350 locations:

“Each center works directly with area manufacturers to provide expertise and services tailored to their most critical needs, which range from process improvements and worker training to business practices and applications of information technology. Solutions are offered through a combination of direct assistance from center staff and outside consultants. Centers often help small firms overcome barriers in locating and obtaining private-sector resources. “104

102 Shapira, P. and Rosenfeld, S. (1996) An Overview of Technology Diffusion Policies and Programs to Enhance the Technological Absorptive Capabilities of Small and Medium Enterprises. Background Paper for OECD Directorate for Science http://www.prism.gatech.edu/~jy5/pubs/oecdtech.htm. 103NIST. Manufacturing Extension Partnership. Making A Difference For America’s Manufacturers. http://www.mep.nist.gov/making-difference-Jan2006.pdf. NIST . Manufacturing Extension Partnership Delivering Measurable Results to Its Clients. Fiscal Year 2005 Results JANUARY 2007. http://www.mep.nist.gov/FY2005_MEP_Delivering_Measurable_Results-final_2_.pdf 104 http://www.mep.nist.gov/about-mep/overview.html

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The activities of MEP centers typically include information provision, assessments, demonstrations, brokering, field agent services, qualified referrals, group projects, and training.

“Improvements are often also sought in inter-firm and industry relationships and in public technology, training, and business assistance infrastructures. Most MEP services are focused towards SMEs. Non-profit organisations, colleges and universities, state agencies, industrial associations, and private consultants are most frequently engaged in providing industrial modernization services. In a number of centers, core staff conduct initials assessments and then involve outside experts or consultants to provide follow-up assistance. Companies frequently pay at least some of the costs involved. …The typical MEP center has about 35 professional and technical staff and, each quarter, uses an additional ten consultants. The average number of targeted manufacturers in an MEP's service area is around 6,200. More than two-thirds of the firms served have fewer than 100 employees . Most frequently, assistance is provided in areas of business systems and management, quality, market development, process improvement, and human resources through a combination of initial visits, engagements, assessments, and technical assistance projects. The leading categories of MEP service thus mostly emphasize "soft" technologies and techniques, followed by assistance with process, environmental and product technology. There is a lower level of service in "hard" areas of factory automation. ““105

According to a recent UINIDO report: “Funding for this partnership is provided by state, federal and private funds; firms receiving assistance also pay a portion of the cost. Their fees at most seem to cover 40 percent of MEP operating costs; thus federal and state funding seems necessary to continue providing this consulting service. Many manufacturers who have benefited from MEP programs report increased profits; surveys also suggest that extension services increase employment and generate business growth. Comparative studies have shown that receiving extension services from MEP offices increases the rate of growth and adoption of technology over that of firms not receiving assistance.”106 The National Technology Transfer Centre (NTTC) was established in 1989 and offers technology assessment services and develops lasting partnerships among industry, academia and government agencies. It has operations in Wheeling, W.Va., and Alexandria, Va.. It has professional staff including intellectual-property management experts, scientists and engineers, computer information specialists and programmers, market analysts, Web designers, security experts, outreach specialists and technology transfer negotiators. The NTTC also houses a demonstration and training laboratory in which software and other technologies are tested and demonstrated. Funding for the NTTC is largely from contracts and cooperative agreements with federal agencies including NASA, the National Institute for Occupational Safety and Health, and the Missile Defense Agency, and select commercial clients. The NTTC's core capabilities are Technology Evaluation and Market Assessment, Partnership Development, Computer Information Services, and Strategic Technical Services.

105 Shapira, P. and Rosenfeld, S. (1996) An Overview of Technology Diffusion Policies and Programs to Enhance the Technological Absorptive Capabilities of Small and Medium Enterprises. Background Paper for OECD Directorate for Science http://www.prism.gatech.edu/~jy5/pubs/oecdtech.htm. 106 UNIDO Industrial Development Report 2002/3 Competing Through Innovation and Learning. p127

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Japan Long term relationships with large customers have provided many Japanese SMEs with both sources of knowledge, and stable commercial and technological relationships, which encourage investment in upgrading. Internationalization has weakened these vertical links and in response new regional SME support programs have been developed. These add to the public technology and testing centres (Kohsetsushi) which provide demonstration facilities, technical assistance and R&D for SMEs. There were almost 200 such centres in the late 1990s. These are coordinated by MITI, but most of the budget is met by regional government. These centres also organise collaboration among SMEs to exchange information and collaborate in product development. 107 There are national financial institutions that provide subsidized loans for upgrading by SMEs and regional programs also offer loans and matching grants for SME technology projects. According to a recent UNIDO report: “Unlike extension services in the United States, they provide only technological services—management and financial services are left to other agencies. Charging only nominal fees to their clients, the centres were created and sponsored by the central government, butmaintain relationships with local and prefectural governments. They conduct research, have open laboratories for training, test and examine products for compliance, provide advice and guidance and promote technology diffusion and information dissemination. Because of the long-term relationships between large manufacturers and the smaller manufacturers of their inputs, the centres meet the demands of both-sized firms by focusing on the testing and analysis of materials and products—promoting quality, performance and precision while ensuring standards among the input suppliers. Managers of small firms appreciate and depend on the personalized services that the centres provide and prefer dealing with them than with universities. Traditionally, these small firms simply produced intermediate inputs with new product design and engineering coming down from the larger firms. These same small firms, guided by the Kohsetsushi centres, are now designing new products and spurring technological growth among themselves—innovating themselves rather than simply following larger firms’ leads. Without the government-funded, highly localized centres, most of these small firms would not have access to technological advice or capability, to their detriment and that of the larger companies that use their products. “108 More recently new public/private centres have been established in advanced technology areas to supplement the kohsetsushi. Overseen by MITI, but supported largely at the local level, there are programs to develop ‘business exchange’ groups among SMEs that enourage sharing of information and facilities.

107OECD(1997) Diffusing Technology To Industry: Government Policies And Programmes. OCDE/GD(97)60; Shapira,P. and Rosenfeld, S. (1996) An Overview of Technology Diffusion Policies and Programs to Enhance the Technological Absorptive Capabilities of Small and Medium Enterprises. Background Paper for OECD Directorate for Science http://www.prism.gatech.edu/~jy5/pubs/oecdtech.htm.; OECD Territorial Review of Japan OECD Policy Brief. http://www.oecd.org/dataoecd/20/9/35386262.pdf 108 UNIDO Industrial Development Report 2002/3 Competing Through Innovation & Learning. p127-8

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Canada Industrial Research Assistance Program (IRAP)109 The National Research Council’s primary vehicle for stimulating the innovation capabilities of SMEs is its Industrial Research Assistance Program (NRC-IRAP). The NRC-IRAP is widely regarded as one of the best programs of its kind. Funding to IRAP in 2005-6 was C$86m. The IRAP portfolio of services has four main components:

Technology Expertise and Advisory Services; Financial Assistance for R&D activities; Networking; and Partnerships.

The NRC Industrial Research Assistance Program (NRC-IRAP) provides a range of technical and business advisory services along with potential financial support to growth-oriented Canadian SMEs. The program is delivered by an extensive network of professionals in 100 regional centres and supports innovative R&D and commercialization of new products and services. One of NRC's primary is to link its diverse networks, programs and infrastructure to SMEs to help them access, develop and exploit new technologies and knowledge essential for their growth and prosperity.

Figure 8.2 Canada’s NRC-IRAP Program

http://www.neia.org/FF07/Bob_Robinson.pdf

109 This outline is largely sourced from http://www.nrc-cnrc.gc.ca/aboutUs/corporatereports/annual_report2002/innovation_SMEs_e.html; http://irap-pari.nrc-cnrc.gc.ca/main_e.html; and APEC SME Innovation Centre. Dec. 2006, No. 2

164

The program's success is ascribed to its customized services and the role of the 260 Industry Technology Advisors (ITAs) who are a focal point of one-on-one relationships with companies that extend for years. Approximately 70% of ITAs are employed in over 100 public and private sector organisations known as IRAP Network Members. IRAP is also supported by operational staff--approximately 141 FTEs located at IRAP's national and regional offices.

NRC-IRAP builds on this foundation of ITAs with other strengths. It plugs clients into NRC's extensive networks of knowledge, experience and international contacts. It partners with over 100 Network Member (NM) organisations at the regional level and has more than 1,000 public and private sector innovation service providers within its Canadian Technology Network (CTN) - all providing advice and assistance to SMEs. The program also played a proactive role in identifying and facilitating potential SME partnerships, networks and multi-stakeholder interactions at the local, regional, national and international levels.

NRC-IRAP maintains a vital and growing network that includes more than 100 of Canada's leading public and private research and technology-based organisations. Organisations collaborate with NRC-IRAP to increase the innovative capability of SMEs through Technology Advisory Services, as well as other agreements for specific collaboration initiatives. These collaborations enhance client value-added services, strengthen national/ local infrastructure, extend the program's reach, and bridge gaps in the program's capabilities by creating more innovation services for SMEs.

The IRAP was evaluated in 2001-2 (http://www.nrc-cnrc.gc.ca/aboutUs/audit_irap_e.html)

The evaluation's overall conclusion is that IRAP continues to be relevant to Canadian SMEs and to the federal government's innovation priorities, and has been successful in meeting its mandate and mission.

IRAP has helped to increase the innovation and financial performance of Canadian SMEs:

Approximately 12,364 IRAP funded projects culminated in 39,186 new/ significantly improved products/ services or processes over 1996-2001—approximately 3.2 innovations per IRAP funded project;

Approximately $11.3B actual sales revenues are linked to IRAP-assisted innovations--$4.2B attributable to IRAP over 1996-2001 and equivalent to 11 times IRAP's total contributions to client projects during this period;

Approximately $37.6B forecasted future sales revenues are linked to IRAP-assisted innovations—$14B attributable to IRAP during the remainder of clients' innovation life cycles; and

Approximately 32,600 actual additional jobs are linked to IRAP-assisted innovations—12,025 jobs attributable to IRAP over 1996-2001 and equivalent to $32,000 of IRAP contributions per job created during this period.

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Hong Kong The Productivity Council, Hong Kong - An Effective Technology Support Organisation110 The Hong Kong Productivity Council (HKPC) was started in 1967 to help the myriad small firms that constitute the bulk of the industrial sector. Its focus has been helping firms upgrade from declining labour-intensive manufacturing to more advanced, high value-added activities. It provides information on international standards and quality and provides training, consultancy and demonstration services on productivity and quality to small firms at subsidized rates, serving over 4,000 firms each year. Its on-line information retrieval system has access to over 600 international databases on a comprehensive range of disciplines. Its technical library subscribes to more than 700 journals and has more than 16,000 reference books. The HKPC acts as a major technology import, diffusion and development agent for all the main industrial sectors. It identifies relevant new technologies in the international market, builds up its own expertise in those technologies and introduces them to local firms. Successful examples of this approach include surface-mount technology and three-dimensional laser stereo-lithography. HKPC has also developed a number of computer-assisted design, manufacturing and engineering systems for the plastics and moulds industry, of which over 300 have been installed. HKPC provides a range of management and technology courses, reaching some 15,000 participants a year. It also organizes in-house training programmes tailored to individual needs. To disseminate information technology, HKPC has formed strategic alliances with major computer vendors and provides specially designed software for local industry, consultancy and project management in computerization. HKPC provides consultancy services in ISO 9000 systems and has helped several firms in Hong Kong obtain certification. It assists local firms in automation by designing and developing special-purpose equipment and advanced machines to improve process efficiency. Because small firms have difficulty getting information on and adopting new technologies the HKPC has always had to subsidize the cost of its services. Despite the growth in the share of revenue-earning work, the government still contributes about half its budget. Market failures affecting access to technical information occur even in a highly sophisticated export-oriented economy with highly developed financial services like Hong Kong SAR. 8.5 Characteristics of Successful Programs Most OECD countries have a range of programs that target innovation-related capability development in SMEs. Many countries have been concerned to ensure that the suite of programs does address the needs of SMEs with the potential for growth, and toward that end there is growing interest in international experience in SME support instruments. The following generalisations may be drawn, based on this brief review of several successful programs and also a wider review of experience of initiatives to promote capability development and innovation in SMEs.

110 This outline is sourced from Source: UNIDO Industrial Development Report 2002/3 Competing Through Innovation and Learning. P126

166

The review suggests a set of functional criteria for a program focused on strengthening absorptive capacity in SMEs:

a focus on the more innovation-active SMEs commited to growth;

be located near to firm, be linked into local networks, but be integrated into national information and support networks;

a strong emphasis on developing innovation capabilities, along with technological and market knowledge, but in association with a specific development objective, usually linked to an innovation project;

a requirement that SMEs contribute a significant share of overall costs;

access to a broad spectrum of credible experienced professional advisory services;

facilitate the development of linkages to local, national, and international information sources, service providers, potential business partners and research organisations;

a broad portfolio of services (eg advice, finance, networking) but a flexible delivery customised to the needs of the SME;

The delivery of services is through capable experts who work with a firm to develop an effective and sustained combination of objective performance assessment and flexible delivery of services.

Figure 8.3: Functional Characteristics of Effective SME Innovation Capability Support Programs

Source: The Authors

SMEs: Growth Oriented

Innovation objective

Services: Flexible & Competent

Funding: Suport & co-funding

Focus: Commercial & Competence

Linkage: Sustained, local & links to wider

networks

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Table 8.4: How different instruments address support for absorptive capacity [See Table 8.2 for Categories of Program]

AC Components Networking Instruments Country Categories

*

Human capital Knowledge

infrastructure Companies

Organisation etc

Learning, strategic intelligence

Technology generation or transfer

Biotechnology Innovation Fund

AU 4 XXXX

Building Entrepreneurship in Small Business

AU 10 XXXX XXXX XXXX

Certain imports to manufacturing

AU 1

Commercial Ready AU 4 XXXX COMET AU 10 XXXX XXXX Early Stage Venture Capital Limited Partnership

AU 3 XXXX

Industry Cooperative Program

AU 7 XXXX XXXX

Innovation Investment Fund

AU 3 XXXX

Pharmaceutical Partnerships Program

AU 4 XXXX XXXX

Pooled Development Funds

AU 3 XXXX

Pre-Seed Fund AU 3 XXXX XXXX R&D Tax Concession

AU 8 XXXX XXXX

Renewable Energy Development Initiative

AU 4 XXXX

Renewable Energy Equity Fund

AU 3 XXXX

Small Business Officers program

AU 9 XXXX XXXX

Small Business Incubators

AU 11 XXXX XXXX

Succession Planning AU 10 XXXX XXXX Textile Clothing and Footwear Strategic Investment Program

AU 4 XXXX

Textile Clothing and Footwear Small Business Program

AU 4 XXXX XXXX XXXX

Tradex AU 1 Training and mentoring Projects

AU 10 XXXX XXXX

Venture Capital Limited Partnerships Program

AU 3 XXXX

ARC Linkage Grants

AU 7 XXXX XXXX XXXX XXXX

Cooperative Research Centres

AU 7 XXXX XXXX XXXX XXXX

Food Innovation Grants, National Food Industry Strategy

AU 4 XXXX XXXX XXXX

Technology Parks State AU

11 XXXX XXXX

168

AC Components Networking Instruments Country Categories

*

Human capital Knowledge

infrastructure Companies

Organisation etc

Learning, strategic intelligence

Technology generation or transfer

Small Business Research Initiative (SBRI)

UK 1 XXXX ?XXXX?

Web-Based Toolkit UK 2 XXXX XXXX Enterprise Capital Funds

UK 3 XXXX

Grants for R&D UK 4 XXXX R&D Tax Incentives for SMEs

UK 8 XXXX

Biotech Financial Advisory Services

UK 9 XXXX

CASE – Cooperative Awards in Science & Eng.

UK 6 XXXX XXXX

Collaborative R&D UK 5 XXXX XXXX Faraday Partnerships

UK 6 ?XXXX? XXXX XXXX XXXX

Knowledge Transfer Networks

UK 7 XXXX XXXX

Business Link UK 9 XXXX XXXX XXXX XXXX Corporate Venturing and Matchmaking

UK 7 XXXX

Manufacturing Advisory Service

UK 9 XXXX XXXX XXXX

Micro and Nanotechnology Manufacturing Initiative

UK 1 XXXX ?XXXX? XXXX

Knowledge Transfer Partnerships

UK 6 XXXX XXXX XXXX

Ufi/Learndirect UK 10 XXXX Technology Purchase

SE 1

Industrial Development Centres

SE 5 XXXX XXXX ?XXXX?

Forska & Vax - Research & Innovation in SMEs

SE 4 XXXX

Competence Development in Industry

SE 6 XXXX XXXX

Product Development in Small Enterprises

SE 3 XXXX XXXX XXXX

VINNKUBATOR SE 11 XXXX ?XXXX? University & SME Cooperation

SE 5 ?XXXX? XXXX

ProViking Programme

SE 6 XXXX

Key Actors Programme

SE 7 XXXX XXXX XXXX

VINN Excellence Programme

SE 5 XXXX XXXX XXXX

Active Industrial Collaboration

SE 6 XXXX XXXX

Swedish Norwegian Business Cooperation

SE 7 XXXX

Grants to county authorities for regional development

NO 3 XXXX XXXX

169

AC Components Networking Instruments Country Categories

*

Human capital Knowledge

infrastructure Companies

Organisation etc

Learning, strategic intelligence

Technology generation or transfer

SkatteFunn NO 8 XXXX The BIT Programme NO 1 XXXX Measures for regional R&D and Innovation

NO 5,6 XXXX XXXX

Industrial Gardens NO 11 XXXX ?XXXX? XXXX Arena – Innovation in Networks

NO 7 XXXX XXXX

NT Programme NO 5,9 XXXX XXXX XXXX XXXX Centres for Research-Based Innovation

NO 9 XXXX XXXX XXXX

Centres of Expertise NO 11 XXXX XXXX User Initiated Research

NO 4 XXXX XXXX XXXX

Competence Development Programme

NO 10 XXXX XXXX XXXX

Programme for Innovation and Entrepreneurship in Norway

NO 6 XXXX XXXX

FORNY – Commercialisation of R&D Results

NO 5,6,7,4 XXXX XXXX XXXX XXXX

SBIR Pilot NL 1 XXXX XXXX Challengers Module NL 3 XXXX Innovation Subsidy for Collaborative Projects

NL 4,5 XXXX XXXX XXXX

WBSO - Research and Development (Promotion) Act

NL 8 ?XXXX? XXXX

Innovation Performance Contracts

NL 4 XXXX

Casimir NL 6 XXXX XXXX Innovation Vouchers

NL 1,2 XXXX XXXX XXXX

Syntens - Innovation network for entrepreneurs

NL 9 XXXX XXXX

RAAK – Regional Attention and Action for Knowledge circulation

NL 5,6 XXXX XXXX

Investment Grants for Knowledge Infrastructure

NL 5,6 XXXX

IOP-TTI module NL 6 XXXX Smart Mix NL 6 XXXX XXXX IOP Innovation oriented Research Programmes

NL 6 XXXX XXXX

INNOVA Collaborative R&D Programme

IE 7 XXXX ?XXXX? XXXX

Industry Lead Research Networks

IE 7 XXXX XXXX

R&D Capability Initiative

IE 1 XXXX

FUSION - IE 6 XXXX XXXX XXXX

170

AC Components Networking Instruments Country Categories

*

Human capital Knowledge

infrastructure Companies

Organisation etc

Learning, strategic intelligence

Technology generation or transfer

Knowledge transfer across the Island of Ireland Additional R&D Tax Credits

IE 8 XXXX

Tax deduction for companies investing in R&D

IE 8 XXXX

Science and Technology Personnel Placement

IE 10 XXXX XXXX XXXX

Training Standards Excellence through People

IE 10 XXXX

Innovation Partner Initiative

IE 5 XXXX

Technology Transfer & Business Partnership Programme

IE 2 XXXX XXXX XXXX

Technology Service Centres

IE 9 XXXX XXXX ?XXXX?

Technology and R&D Management – Short Courses

IE 10 XXXX XXXX

National Institute of Technology Management - NITM

5 XXXX

Stimulating Innovation Management and Strategies at Enterprise level

IE 4 XXXX XXXX

Facilitation of Fund Supply

JP 3 XXXX

Building of Business Support Systems

JP 9 XXXX XXXX

Promotion of Business Start-ups and Venture Business

JP 2,3,4,9 XXXX XXXX XXXX XXXX

Support of Technical Development – Including SBIR

JP 1,5,10 XXXX XXXX XXXX XXXX XXXX

Support of Business Innovation

JP 3,4,8 XXXX XXXX

Support for the international development of SMEs

JP 3 XXXX XXXX XXXX

IT Productivity Improvement Campaign

JP 1 XXXX

HR Development in partnership with the real world and the regions

JP 5 XXXX XXXX

SME Funding Schemes

HK 3

171

AC Components Networking Instruments Country Categories

*

Human capital Knowledge

infrastructure Companies

Organisation etc

Learning, strategic intelligence

Technology generation or transfer

- Loan Guarantee Scheme - Export Marketing Fund - Training Fund - Development Fund

- -

XXXX -

-

XXXX - -

- -

XXXX -

XXXX

XXXX

XXXX

XXXX SUCCESS – Support and Consultation Centre for SMEs

HK 9 XXXX

Hong Kong Trade Development Council

HK 9 XXXX XXXX XXXX

Innovation and Technology Fund

HK 3,5,9 XXXX XXXX XXXX

New Technology Training Scheme

HK 10 XXXX

Design Smart Initiative

HK 7,9,10,11 XXXX ?XXXX? XXXX XXXX

Hong Kong R&D Centres

HK 7,11 XXXX XXXX XXXX XXXX

Business Incubator KO 11 XXXX XXXX Finance Service KO 3 XXXX Capacity Building of Human Resources

KO 8,10 XXXX XXXX

Strengthening Knowledge Procurement from Overseas

KO 9, 10 XXXX XXXX

Inno-Biz KO 3 XXXX KOSBIR KO 3 XXXX SMEs' Technology Innovation Program

KO 4 XXXX

New Technology Purchasing Assurance

KO 1,3 XXXX

Industry-University-Research Consortium Program

KO 5 XXXX

Transferred Technology Development Project

KO 5 XXXX XXXX

SME Production Digitalization Project/ Total Information Management Providers

KO 9,10 XXXX XXXX

Biz-Match KO 7 XXXX

Industrial PHD initiative

DA

10

XXXX XXXX

Innovation accelerating research platforms

DA

6

XXXX XXXX XXXX

Innovation Consortiums

DA 6 XXXX XXXX XXXX

High-tech Networks DA 6 XXXX XXXX XXXX Approved Technological Service Institutes (GTS-

DA 9 XXXX XXXX

172

AC Components Networking Instruments Country Categories

*

Human capital Knowledge

infrastructure Companies

Organisation etc

Learning, strategic intelligence

Technology generation or transfer

Institutes) Pre-project grant for the sixth EU framework programme

DA 6 XXXX XXXX XXXX

Regional technology centres

DA 9 XXXX XXXX

Tekes Funding for Feasibility Studies (VARA)

FI 4 XXXX XXXX XXXX XXXX

TRIO Programme FI 6 XXXX XXXX TUPAS Funding Service

FI 5 XXXX XXXX XXXX

YRKE - national development project for business incubators

FI 11 XXXX XXXX

Centre of Expertise Programme

FI 6 XXXX XXXX XXXX XXXX

Technology strategy design

FI 4 XXXX

Tekes technology programmes

FI 6 XXXX XXXX

Improving the use of research results at universities

FI 5 XXXX XXXX

SME Pact FR 6 XXXX XXXX XXXX XXXX Technological Development Network

FR 7 XXXX XXXX

Corporate Tax Credit for Research Expenses (CIR)

FR 8 XXXX

Technological Research and Innovation networks (RRIT)

FR 6 XXXX XXXX XXXX

Support for Innovation FR 4 XXXX XXXX Support to the recruitment of PhD candidates on an applied research project within an enterprise - CIFRE convention

FR 10 XXXX XXXX XXXX

Support for the recruitment of technicians on innovative projects (CORTECHS)

FR 10 XXXX XXXX XXXX

Technology Diffusion within SMEs (Procedure ATOUT)

FR 4 XXXX

Support to Recruitment for Innovation (ARI)

FR 10 XXXX XXXX

Competitiveness clusters

FR 6 XXXX XXXX XXXX XXXX XXXX XXXX

Support for the recruitment of post-doctorate in SMEs

FR 10 XXXX

Industrial and Commercial Business Services (SAIC)

FR 5 XXXX XXXX

National Centres for Technological Research (CNRT)

FR 6 XXXX XXXX XXXX

Youth and Innovation FR 10 XXXX XXXX XXXX Innovative Regional Growth Poles

DE 6 XXXX XXXX XXXX

InnoNet DE 5 XXXX XXXX XXXX PRO INNO II DE 4 XXXX XXXX Thematic R&D DE 4 XXXX XXXX

173

AC Components Networking Instruments Country Categories

*

Human capital Knowledge

infrastructure Companies

Organisation etc

Learning, strategic intelligence

Technology generation or transfer

programs Promotion of Joint Industrial Research (IGF)

DE 4 XXXX XXXX XXXX

Innovation Programme (ERP)

DE 3 XXXX

Technology Venture Capital Programmes

DE 3 XXXX

InnoMan DE 9 XXXX XXXX XXXX Networks of Competence

DE 6 XXXX XXXX XXXX

Information Centres DE 9 XXXX XXXX Management of Innovation Networks for East German SMEs (NEMO)

DE 6 XXXX XXXX XXXX XXXX

INSTI - IPR promotion DE 2 XXXX XXXX XXXX Promotion of Inventors at the Fraunhofer Patent Bureau for German Research

DE 2 XXXX XXXX XXXX

Small Business Innovation Research (SBIR)

US 4 XXXX

Small Business Technology Transfer (STTR)

US 4 XXXX XXXX

Small Business Innovative Partnership (SBIP)

US 9 XXXX XXXX XXXX

- 174 -

9. Conclusions

Key Findings

Increasing competitive pressure is both raising the importance of innovation and driving firms to become more specialised, and as a consequence firms must increasingly look outside for new knowledge. These same pressures are also driving firms to increase the level of collaboration with other firms and with research organisations. Increasingly, the processes of learning and innovation involve a great deal of interaction with other firms (customers, suppliers) and sometimes, but usually much less often, research organisations. Hence, knowledge and capability is distributed. It is not possible for firms to hold in-house all of the knowledge and capability required and hence how they build the relationships access this distributed knowledge and capability is a key issue.

A firm’s absorptive capacity (AC) refers to its capacity to recognise, acquire, assimilate, transform, and exploit knowledge from external sources. A key aspect of absorptive capacity is the recognition of an opportunity arising from new knowledge about, eg technology, customer’s needs, market trends. That recognition often requires a strong prior basis of knowledge. But this recognition is of little value unless it is allied with strategic intent and implementation capabilties.

Lane et al (2006) define AC as:

a firm’s ability to utilize externally held knowledge through three sequential processes:

(1) recognizing and understanding potentially valuable new knowledge outside the firm through exploratory learning,

(2) assimilating valuable new knowledge through transformative learning, &

(3) using the assimilated knowledge to create new knowledge and commercial outputs through exploitative learning.

The foundations of AC are a firm’s knowledge resources (prior knowledge), structure and organisation (including routines, culture, communication patterns) and external linkages. However, these foundations need to be relevant to a firm’s specific context and directions and brought into focus by a firm’s strategic intent. Effective absorptive capacity requires the capabilities for all of these activities. Firms develop AC as a result of explicit measures (such as hiring trained staff, establishing R&D activities/organisations, developing alliances) and as a by-product of their activities (particularly the more intense learning experiences associated with problem solving,

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innovation and collaboration). Consequently, firms develop absorptive capacity in an evolutionary way over time and within a specific organisational and knowledge context. For that reason scientific knowledge is not a public good, as only some individuals and organisations are capable of using it. Firms can more easily add to knowledge and diversify in areas in which they already have a knowledge base. Firms face particular challenges in external knowledge acquisition where

they have few linkages with the firms or organisations from which they seek to acquire knowledge;

The fields of knowledge and innovation are new to the firm The pace of change in technology is rapid and unpredictable.

The more that firms face such challenges that more that the strengthening of AC will require purposeful strategies and sustained investments, and often organisational and managerial innovations to raise the capacity to learn and innovate. Knowledge that is relevant for innovation includes both codified (know what) and tacit (know how) knowledge, although the former is becoming relatively more important. Mechanisms that are suitable for acquiring one of these types of knowledge may not be as effective for the other. Carrying out R&D, hiring qualified staff, developing links into knowledge networks, and attending conferences (etc) will facilitate the acquisition of codified knowledge. Firms learn from other firms most effectively when the partners are similar in terms of structure, human resource policies and knowledge bases. In the wider field of innovation, issues concerning the identification and assessment of relevant new knowledge, managing the collaboration and the acquisition of knowledge (eg through R&D, licenses, public domain sources) and integrating existing and new knowledge and developing capabilities for managing these processes, are extensively researched. Hence, there is a substantial overlap between the literature explicitly concerned with absorptive capacity and the wider innovation literature. There is increasing interest in more effectively managing knowledge, learning and innovation. This is leading to a greater understanding of these issues and also to a widening range of tools to assist the management of knowledge, learning and innovation. Absorptive capacity is a part of a firm’s innovation capabilities and hence its development is a dimension of innovation management.

Absorptive capacity is a functional concept, and in practice it is based on an interdependent foundation of capabilities, structures, routines and policies, and is largely situation-specific. For this reason it is not possible to develop a set of reliable standard indicators of absorptive capacity. Only a small proportion of SMEs are dynamic in terms of innovation and growth. Similarly, without the capabilities to absorb and use knowledge, membership of a network is of little value. Cluster-based inter-firm links may not always play a major role in firm’s

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knowledge acquistion Firms with more qualified managers tend to invest more in training and establish more external links. Internationally, there is an extensive and increasing range of programs aimed at reducing barriers to capability development, innovation and growth in SMEs. These initiatives are influenced by the perception that SMEs play a vital role in innovation systems but that significant market failures limit their development.

A diverse range of instruments are used and there is increasing interest in evaluating these programs and in developing international initiatives to share experience in SME program design and implementation.

SMEs tend not to see government agencies as credible assistance delivery mechanisms.

Our review of selected successful programs suggests a set of functional criteria for a program focused on strengthening absorptive capacity in SMEs:

a focus on the more innovation-active SMEs commited to growth;

be located near to firm, be linked into local networks, but be integrated into national information and support networks;

a strong emphasis on developing innovation capabilities, along with technological and market knowledge, but in association with a specific development objective, usually linked to an innovation project;

a requirement that SMEs contribute a significant share of overall costs;

access to a broad spectrum of credible experienced professional advisory services;

facilitate the development of linkages to local, national, and international information sources, service providers, potential business partners and research organisations;

a broad portfolio of services (eg advice, finance, networking) but a flexible delivery customised to the needs of the SME;

The delivery of services is through capable experts who work with a firm to develop an effective and sustained combination of objective performance assessment and flexible delivery of services.

Cohen and Levinthal introduced the term “absorptive capacity” to refer to firms’ capabilities to manage the acquisition of knowledge, defining it as “the ability of a firm to recognise the value of new, external information111, assimilate it, and apply it to commercial ends” (1990). They focused in particular on the role of R&D in knowledge acquisition and their 1989 paper referred to the ‘two faces of R&D’ emphasizing the extent to which R&D not only generates new knowledge internally but also operates as an antennae for a firm, picking up, tuning in and receiving relevant signals regarding new knowledge. Indeed a key message of their paper, and the substantial literature that followed their seminal work, was that without the kind of knowledge assets and specialist organisation in in-house R&D firms may be in a rich knowledge milieu but fail to decipher, receive or read the signal.

111 It is clear from their paper that Cohen and Levinthal used information and knowledge interchangeably.

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Since the time of these contributions there have been two major developments, both with origins well before 1990 but both of which now related closely to the evolving concept of absorptive capacity. The first of these developments concerns the growing role of knowledge and the changing patterns of knowledge generation, distribution and application in industry. Every indicator (R&D, patents, publications, employment of qualified human resources, product cycles) points to rapid growth in the generation of knowledge and the rising significance of knowledge for competition. Perhaps more importantly, there has not simply been a quantitative change. The processes of knowledge generation and use have become far more interactive. Firms have become more specialized and they collaborate much more with other firms and with research organisations. That collaboration is growing not only in frequency and in geographic scope (as we might expect in an increasingly global economy) but also in its strategic significance. Firms’ linkages, both for production and distribution and for innovation, are increasingly central to their competitive strategy. The second development is the corollary of the first. In an increasingly competitive economy, where knowledge is central to performance, firms are focusing on how they manage knowledge. That challenge of managing knowledge is more complex because knowledge is more complex and turbulent , because the knowledge base for most areas of industry is widening and because there are many more sources of knowledge. It is not surprising that firms are concerned with whether they are learning organisations and whether they have effective approaches for knowledge management. As a consequence of these two developments the capabilities of firms to recognise, assess, acquire and apply external knowledge is a vital issue for enterprise management - and for public policy. However, with that growing interest the concept of absorptive capacity has been more closely linked to the wider concept of learning. One useful result of that linkage is the recognition that the acquisition of external knowledge is not only through the ‘antennae’ of R&D. Many types of external knowledge are relevant for strategy and innovation and all parts of a firm can be involved in recognizing, assessing, acquiring and applying external knowledge. Literature that specifically addresses the issue of ‘absorptive capacity’ has largely used the concept rather than explored it. This is a problem because the concept is essentially a functional one, with quite limited specification of its contents. What constitutes an absorptive capacity, in any kind of meaningful management or policy sense, varies across sectors and time and depends on a firms’ specific strategic objectives. While recognising that what enables firms to have absorptive capacity is quite diverse and open ended, it is nevertheless possible to identify the main components of such a capacity. However, these components really only have meaning in the context of strategic intent – ie that the firm is an active learner motivated by strategic objectives (however broadly defined) – and are largely only of significant value when they complement each other to form a coherent capability. With those caveats in mind, the general components of absorptive capacity are:

prior knowledge (derived from training, hiring, R&D, problem solving, prior learning from external sources etc);

channels for linking with sources of knowledge (networks, alliances, conferences);

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alignment between organisations that enables effective communication (shared goals, values, culture, knowledge, structures);

mechanisms for knowledge dissemination, capture and application within the firm (‘routines’ for knowledge sharing, cross functional teams, job rotation, mentoring, appropriate structures and incentives).

In a review of this literature Lane et al (2006) revised the definition of absorptive capacity as a company’s ability to use external knowledge through three sequential processes:

(1) Exploratory learning - recognising and understanding potentially valuable new knowledge outside the firm;

(2) Transformative learning - assimilating valuable new knowledge; and

(3) Exploitative learning - using the assimilated knowledge to create new knowledge and commercial outputs.

Recent analysis of the development and role of absorptive capacity has brought out three significant issues for management, policy and further research:

Firms acquire, store and distribute tacit (activity-related know-how) differently from how they acquire, store and distribute codified (know what, know why) knowledge. The two types of knowledge are complementary and an approach to absorptive capacity in one is often not relevant to the other type of knowledge.

There are trade offs between the breadth and depth of absorptive capacity or learning. This is not related to the capacity to manage a large flow of knowledge and information, but to the overall orientation of the learning activity. This trade-off is often discussed in terms of the conflict between exploration (a diverse range of links and activities to identify and assess relevant new knowledge) and exploitation (a focused and deep engagement with a limited number of sources to build the relationships that enable effective knowledge transfer).

By and large firms develop their absorptive capacity in an evolutionary way, through a combination of explicit measures and as a by-product of problem solving and individual initiatives that become incorporated into enterprise structures and routines. For that reason the process of developing absorptive capacity is highly path dependent – and every firm has a different path. A significant challenge arises when firms have to change their ‘path’, either because of a change in strategy or because the knowledge base of their industry changes, and hence they need to develop a different absorptive capacity. As the existing absorptive capacity was not the result of explicit policy and indeed is likely to be rooted in a diverse range of only partially recognised capabilities, routines, structures and external interactions, how does management go about purposefully renovating and redirecting it? This is a key issue for management and policy.

The recent comprehensive review of this literature by Lane et al (2006) concludes that the research has three weaknesses:

it focuses too much on R&D and high-tech firms and as a result understates both the role of learning in other parts of the firm and the significance of non-technological knowledge;

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it focuses on the knowledge recognition and acquisition aspects and too little on the assimilation and application aspects; and

it has relatively little to say about how firms can develop absorptive capacity in R&D and non-R&D contexts.

While recognising the limitations of current approaches to absorptive capacity it is possible to draw from the recent research the foundations of a useful dynamic model of absorptive capacity (Figure 3.3). Nevertheless, it is clearly necessary to go further than this ‘absorptive capacity’ literature can take us. For this reason we also selectively reviewed the diverse and rapidly expanding range of research that, in one way or another, is concerned with how firms learn from external sources. This extensive and diverse range of literature, often from different fields and with foundations in different theoretical frameworks is relevant to the issues involved in management, policy and research related to absorptive capacity. Several strands of this literature were reviewed to draw out perspectives and approaches relevant to the focus of this report. The dynamic capabilities (DC) framework was developed within the context of the resource–based theory of the firm and emphasises, and characterises, the capabilities required to renew a firms capabilities to compete and innovate. This framework can help to integrate the absorptive capacity (AC) approach into the resource-based perspective and in so doing provide an essential link with the wider concept of learning within the context of corporate strategy. Nevertheless, we propose that this AC/DC framework can usefully be developed to incorporate a dimension for the explicit development and re-orientation of AC/DC – ie in response to new strategic directions to build new capabilities to learn in new paths. Research in several of the fields surveyed points to a growing interest in how to effectively identify, assess and acquire knowledge and a growing concern about how best to do that when the scope of relevant knowledge is widening, the range of potential sources is diversifying and the risk of being a slow learner is increasing. In the case of SMEs, interaction with other firms through networks and mentors helps the owners/managers to better reflect on their learning orientation and routines. But, whether in SMEs or larger firms, active learning needs to be linked to a strategy of acting on new opportunities. The growing understanding of innovative firms and innovation systems has led to greater recognition of the role of formal and informal networks and interactions. The story of innovation, and the innovation capacities of firms, cannot be abstracted from the role of individuals, their personal motivations, networks and their role as gatekeepers and mentors. This is particularly the case with SMEs (these issues resonate in our case studies of Australian firms). These links play a vital role in innovation and all the available evidence points to their increasing importance. While many of these links are closely tied to a firm’s commercial relationships, many are non-market and not motivated by commercial objectives. Not only are they based to an important extent on inter-personal links, but effective collaboration usually takes time and effort (and joint learning) to develop. Hence, for SMEs, their absorptive capacity is as much about their external relationships (their networks and social capital) as about their internal routines - which are themselves strongly influenced by their external interactions. For many SMEs, their current capabilities, their absorptive capabilities and their strategic vigour (responsiveness to customers, preparedness to act on opportunities and develop new capabilities) influence the extent to which customers, suppliers, and other firms and organisations, are prepared to collaborate

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with them. This suggests a virtuous cycle of capability – learning - confidence – opportunity – network building - learning – capability – growth, and so on. However, beneath this virtuous cycle of increasing returns are some challenging trade offs, principally around exploration versus exploitation and formalisation (of learning and innovating routines) versus flexibility. It is inevitable that firms will move off the virtuous cycle from time to time to focus on shorter term issues and one of the roles of networks (and policy programs) is to help them get back on it. Approaches to Assessing Absorptive Capacity We have identified three conceptual frameworks that can contribute to a useful approach for management, policy and research in relation to absorptive capacity, although only one of these was developed to specifically address the issue of absorptive capacity. In Section 4 we drew on all three of these complementary approaches to develop an integrated framework for the case studies. There is little doubt that as the pace of change is increases and industrial activity becomes more knowledge intensive, effective innovation management becomes a more critical capability. Even the largest and most capable firms find innovation management a challenge. The 2006 IBM Global CEO Innovation Survey stressed the increasing importance of innovation and of collaboration for corporate growth. The CEOs surveyed identified a widespread capability-related gap between importance and performance in relation to:

integrating corporate and innovation strategies;

managing collaboration for innovation; and

strengthening and leveraging the innovation capabilities of the overall organisation. These challenges will be no less important for smaller firms, even if their management may be less complex. As the capabilities for such aspects of management are becoming more important it becomes increasingly important to assess whether there are gaps in the level of such capability in industry. The complex conceptual frameworks that have been developed to understand the development of innovation capabilities in firms are not readily transformed into operational indicators. This is even more the case when we aim to develop generic analytical tools suitable for assessment in different types of firm in different sectors. For example, the types of innovation culture in a design studio are likely to be quite different from those in a heavy engineering plant, and the linkages that are vital for a biotechnology company are different from those likely to be relevant to a software developer. The concepts of routines, learning and alignment play key explanatory roles in these frameworks but are in themselves complex and situation specific. Based on the literature and prior surveys the following four dimensions are fundamental to any assessment of Absorptive Capacity: 1. Strategy

Vision

Justification/rationale

Motivation

Coherence

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Focusing devices

2. Knowledge base

Familiarity

Cognitive link

3. Internal Organisation & Communication

Structure

Routines

Roles (gatekeepers, boundary spanners, change agents)

4. External Links

Alignment (structure, culture, knowledge), (gatekeepers, boundary spanners)

The Case Studies of Absorptive Capacity in Australia Ten SMEs representing a range of industry sectors were selected for interview as case studies. The sample included a high proportion of knowledge-intensive firms – in order to ensure a focus on firms involved in active knowledge acquisition and application. For that reason the sample cannot be considered as totally representative of Australian industry. The case studies demonstrate the importance to the firm of prior knowledge and active management in absorbing new knowledge from external sources. Prior knowledge comes from prior experience in the specific firm or a similar firm; and is usually built on a base of scientific and engineering knowledge. Leading research-intensive firms often play a key role in developing high level human resources, who through mobility diffuse knowledge and experience throughout the industry. The Australian case studies suggest that a good deal of the knowledge flow occurs to a large extent through a firms’ direct business contacts. Suppliers and customers prove particularly important, as in some cases are consultants. This emphasises the significance of the knowledge ecology and the extent to which innovation performance is stimulated and supported by the endeavours and capabilities of other firms. In general, industry associations were not seen as important sources of new innovation-related knowledge. These patterns of interaction are consistent with the findings of Oslo Manual-Based Innovation Surveys. The relatively high role of links with public sector research organisations among these case study firms – 40% had such linkages - arises from the characteristics of the sample, although relatively few of the companies expressed the importance of such linkages. In the context of continually evolving structural change, the key role of knowledge flows from linkages with suppliers and customers in stimulating and enabling innovation points to an issue that may warrant further study. As industries globalise, a higher proportion of suppliers and customers will be offshore; and some areas of industrial activity are bound to decline in Australia. The level and quality of innovation in Australia will thus be related not only to the quality of the interactions but also to the capacity to interact with world leading suppliers and users. Some of the case study firms had difficulties in building or retaining collaborative links with partners. These trends will reinforce the drivers toward specialisation in particular regions but also are also likely to increase the importance of interaction with suppliers and customers outside Australia. They may also create a greater need for innovation support services as knowledge and capability gaps open in the local knowledge

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ecosystem. This structural change is related to the growing importance of business model innovation, which is drawn out in at least three of the current case studies. Such restructuring required the firms studied to build new capacities for knowledge acquisition; and this is not always readily achieved. A more rapid pace of change will also place greater stress on human resources and particularly on management in firms. Some of the case study firms faced growth constraints due to shortages of skilled personnel and others sought mentors to support management. The case studies also emphasised the key role of teams and of well developed project management routines within firms. These played a central role in the dissemination and exploitation of knowledge within the firm. The case studies illustrate the importance of trained human resources as a major element in both establishing and building absorptive capacity; and emphasise the importance of staff retention and reward schemes as mechanisms for retaining tacit knowledge. While knowledge sources and approaches to sourcing knowledge may vary, it is the flexibility and receptivity of all the people in a company that contributes significantly to a high absorptive capacity. The Australian case studies thus support the broad findings of international studies on innovation in SMEs. Effective innovation management, good managerial and technological capabilities, a strong strategic intent, a commitment to upgrading and extensive external networking are common characteristics of successful firms. Since there are no recipes for effective innovation management, each firm had to develop the approaches and routines that worked in their particular situation, but these experiences may serve as useful guides for other firms and managers. Our sample of 10 diverse Australian firms may not be conducive to drawing out too amny reliable generalisations about absorptive capacity in Australian SMEs. However, several of the ten case studies provide examples of ideal functioning systems, though it is stressed that each firm used different approaches in developing their absorptive capacity. As indicated in Section 4, analysing the anatomy of the firm takes into account the dependency of the firm’s functions and the interactions of all of the critical components of absorptive capacity. Thus we suggest that it may be worth exploring how firms might benchmark their own capabilities with those of other high-performing firms within their sector. As also noted in Section 4, in meeting the requirement to devevelop a methodological basis for a possible national survey of absorptive capacity we have developed a questionnaire (Table 4.6), based on the experience of the current project. However, the Australian case studies suggest that micro-businesses provide atypical outcomes in assessing absorptive capacity, since the firms of this type that we studied appeared overwhelmed by the dominant influences of the owner-managers across all aspects of the business. Therefore, we suggest that any planned survey only consider SMEs employing 10 or more persons. The appropriate sample size of any survey will depend on the purpose of the survey. If the objective is systematic assessment of absorptive capacity (and hence also necessarily innovation management) capabilities in Australian industry with an allied objective of relating capability levels to performance, a large a carefully structured sample will be required.

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Policies to Strengthen Absorptive Capacity It is increasingly recognised that the patterns of change in advanced economies are increasing the role of SMEs, particularly knowledge-intensive SMEs, but also increasing the importance of their capacities to innovate. It is widely recognised that these developments strengthen the case for intervention to support capability development and knowledge acquisition in SMEs. Much innovation in products, marketing and organisation in fast moving and in service sectors is relatively quickly copied by other firms. Market failures arise from the diversity of SME needs and their incapacity to both express clear demands and to assess the benefit of potential suppliers. Market failure also arises because it requires (technical and managerial) knowledge to identify, assess, acquire and benefit from new knowledge and hence firms often require support to move back onto a virtuous cycle of upgrading. Further, much innovation in SMEs is not R&D intensive, and the provision of support services for knowledge acquisition and implementation is one of the few practicable means of subsidising innovative effort in such firms. These issues are of particular importance in Australia because SMEs account for a relatively high proportion of R&D. The available evidence from Australia and internationally is that management capabilities in SMEs are limited and that managing significant changes in direction into unfamiliar areas is particularly difficult. Australia has not yet responded adequately to the changing demands on SMEs arising from technological change and increasingly global markets, and the growing role of knowledge intensive SMEs. There is a gap in the support services. Unlike many countries Australia does not have an agency focused on technology transfer to, and capability (including importantly management) development in, SMEs. There has historically also been a relatively low orientation to export markets in manufacturing and services. In response to these changes many other OECD countries have introduced a diverse range of policies and instruments, and modified existing programs, to strengthen absorptive capacity and promote knowledge acquisition and application. These policies and programs include components of mainstream innovation policies and components of broader SME development policies. Section 7 provided an overview of both the rationale for these policies and the range and specific objectives of the instruments that are used. Section 8 provided a comprehensive characterisation of absorptive capacity-related programs in several countries, and detailed information on several particular programs that appear to have been highly effective. Very few of these programs specifically target the strengthening of absorptive capacity, although many are focused on relevant aspects, such as linkages with the knowledge infrastructure, access to expertise, employment of graduates, etc. In comparison with other countries Australian innovation programs have tended to focus on R&D and commercialisation, resulting in a relative focus on new firms and on specific projects. Consequently, there is not a coherent set of programs focused on enhancing absorptive capacity and through this the innovation capabilities of established SMEs. Characteristics of Successful Programs Most OECD countries have a range of programs that target innovation-related capability development in SMEs. Many countries have been concerned to ensure that the suite of programs does address the needs of SMEs with the potential for growth, and toward that end there is growing interest in international experience in SME support instruments.

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The following generalisations may be drawn, based on this brief review of several successful programs and also a wider review of experience of initiatives to promote capability development and innovation in SMEs. The review suggests a set of functional criteria (summarised in Figure 9.1) for a program focused on strengthening absorptive capacity in SMEs:

a focus on the more innovation-active SMEs commited to growth;

location of service providers near to a firm, be linked into local networks, and be integrated into national information and support networks;

a strong emphasis on developing innovation capabilities, along with technological and market knowledge, but in association with a specific development objective, usually linked to an innovation project;

a requirement that SMEs contribute a significant share of overall costs;

access to a broad spectrum of credible experienced professional advisory services;

facilitate the development of linkages to local, national, and international information sources, service providers, potential business partners and research organisations;

a broad portfolio of services (eg., advice, finance, networking) but a flexible delivery customised to the needs of the SME; and

the delivery of the program through capable experts who work with the firm to develop an effective and sustained combination of objective performance assessment and flexible delivery of services.

Figure 9.1: Functional Characteristics of Effective SME Innovation Capability Support Programs

Source: The Authors

SMEs: Growth Oriented

Innovation objective

Services: Flexible & Competent

Funding: Suport & co-funding

Focus: Commercial & Competence

Linkage: Sustained, local & links to wider

networks

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Recommendations As emphasised by the Productivity Commission’s recent Report on Public Support for Science and Innovation:

“High quality human capital is fundamental to the innovation system. A highly skilled workforce not only provides Australia with the capability to pursue scientific knowledge and undertake research and development type activities, but also to utilise and adapt innovation flowing from research and development undertaken in other countries.”

The available evidence points to the growing importance of innovation capability and particularly the capacity to identify, assess, acquire, absorb and use external knowledge, but as this study as shown, our understanding of the role and limitations of absorptive capacity in Australian companies is limited. It is also evident that human capital and its organisation dominates any discussion of absorptive capacity. Given this, Recommendations 1 and 2 are aimed at building the ability of firms to grow and understand absorptive capacity through the people within exisiting firms, and to gain a broader understanding of absorptive capacity across all firms. This knowledge will then lead to the broader actions outlined in Recommendations 3 and 4. Thus, our first recommendation arises from the observation in the 10 Case Studies that it may prove worthwhile to Benchmark ‘absorptive capacity’ in firms. This would be most useful where it enabled firms to benchmark themselves against others in their sector. It would be possible to include some questions from the ABS Innovation Survey in such benchmarking, which would enable a strong comparative basis, linked to performance. This could include the development of a web-based systematic on-line diagnostic and benchmarking framework, which could be used by firms independently or in association with consultants as the basis for developing an in-house absorptive capacity and innovation management development program. With appropriate confidentiality guarantees, the use of the on-line service would also generate information and firms’ assessments of their strengths and weaknesses and hence provide an ongoing source of information. These diagnostic and benchmarking tools could be linked to on-line guides to addressing the specific issues identified as well as guides to relevant service providers in Australia. Recommendation 1 Develop a Benchmarking and diagnostic program for firms operating in selected sectors to enable firms to assess themselves against high performers and to develop capability development strategies. Our second recommendation is intended to assess absorptive capacity in a broder range of firms than was possible through the present study using only 10 case studies. That assessment should extend to addressing the issue of weaknesses in managing major shifts in orientation, capabilities and strategies in established firms. We thus recommend undertaking a survey, particularly of the more innovative SMEs in Australia employing more than 10 people, to identify weaknesses in absorptive capacity and other barriers related to innovation and strategic change involving major redevelopment of capabilities. The design

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and the interpretation of such a survey should also be informed by a review of the results of the ABS Innovation Survey and prior studies on innovation in Australian industry. Recommendation 2

Undertake a survey of a representative sample of companies across a range of sectors, particularly of the more innovative SMEs in Australia to identify any weaknesses in absorptive capacity and other barriers to innovation and strategic change. The SMEs surveyed to employ not less than 10 and up to 200 people. As this report has shown most other countries operate programs and organisations designed to combine a range of services, to be local (ie., linked into SME networks) and to focus on developing the capabilities of firms. They have not sought to have their research organisations meet this need. Most SMEs do not have long term capability development strategies and hence capability development is in large part a by-product of growth (eg., by hiring new staff), interaction around day to day activities (eg., with customers), problem solving and innovation. For this reason it is valuable to use programs/centres focused on firm development to deliver initiatives that stimulate and assist firms to respond to specific challenges, eg regulations regarding environmental emissions or product and process safety, export development. Our third recommendation is the suggestion for DITR to undertake, in the light of the results of the detailed survey (Recommendation 2), an in-depth review of several absorptive capacity-related programs in other countries that appear to be relevant to Australia. These include:

an Innovative SME Centre support program to co-fund regional or sectoral initiatives to strengthen absorptive capacity, innovation management and networking in the more innovation-oriented SMEs;

an SME innovation-focused procurement program modeled on the US SBIR program; and

a program to promote greater interaction between SMEs and between SMEs and research organisations, modeled on such programs as the Swedish VINST or the British Business Links and Business Fellowships programs.

Recommendation 3

In the light of the results of the detailed survey and related review, and in consultation with other stakeholders, undertake:

a focused assessment of a selected range of absorptive capacity-related programs in other countries that are effective in their context and may be relevant to the Australian context. This assessment to recognise that very few of these international programs specifically target absorptive capacity; and

an assessment of the scope to improve existing programs to better target strengthening absorptive capacity and assisting external knowledge acquisition.

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In regard to Recommendation 1, Standards Australia have developed a set of high quality and working guides to knowledge management in firms. The 2006 – 2008 Strategic Business Plan of the Coordination Group of Standard Australia’s Knowledge Management Committee proposes a work program involving similar initiatives leading to guides in Innovation Management, Sustainability, and Foresight. This work deserves sustained support and the outcomes warrant extensive promotion. The guides should also be the basis for on-line interactive support tools for firms. Thus Recommedation 4. Recommendation 4

Support the work of Standards Australia’s Knowledge Management Committee and promote and leverage off the outcomes of its work.

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10. Selected References

Fields Included

Spillovers, Diffusion and Knowledge Transfer

Dynamic Capabilities and the Resource Based View of the Firm

Innovation Management

Accessing External Technology

Research- Industry Interaction

Innovation and Change in SMEs

Organisational Learning

Firm Learning

Innovation Capability Audits

Technological Learning in Latecomer Firms

Knowledge Management

Networks and Clusters

ICT Diffusion and Capabilities

Learning through Strategic Alliances.

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APPENDICES

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Appendix 1

Characteristics of Innovation in Australia: 2005 ABS Innovation Survey Table App.1.1: Innovation Activity by Size of Firm, 2004 and 2005

Businesses innovating %

Businesses which started but did not yet

complete or abandoned any innovative activity

%

Businesses which were innovation-active

%

Employment size 5–19 persons 28.4 10.1 29.8 20–99 persons 46.6 17.2 47.9 100 or more persons 51.5 21.4 54.8 Total income Less than $1m 25.4 10.6 27.1 $1m-Less than $5m 34.7 11.5 35.9 $5m or more 48.3 16.8 49.6 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.2: Type of Innovation Introduced in 2004 and 2005 by Size of Firm

PROPORTION OF BUSINESSES WHICH INTRODUCED OR IMPLEMENTED Any new or significantly

improved goods or services %

Any new or significantly improved operational

processes %

Any new or significantly improved organisational/ managerial processes %

Employment size 5–19 persons 15.8 16.9 20.7 20–99 persons 29.2 34.4 35.6 100 or more persons 28.9 34.7 40.0 Total income Less than $1m 15.2 15.4 18.9 $1m-Less than $5m 18.9 22.8 24.7 $5m or more 29.5 32.3 38.1 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.3 Types of Innovation and Type of Firm: Comparisons between 2002-03 and 2004-05

Total Proportion Of Businesses Innovating

Businesses Which Introduced Or

Implemented Any New Or Significantly Improved Goods Or

Services

Businesses Which Introduced Or

Implemented Any New Or Significantly

Improved Operational Processes

Businesses Which Introduced Or Implemented Any New Or Significantly Improved Organisational/ Managerial Processes

2002 & 2003

%

2004 & 2005

%

2002 & 2003

%

2004 & 2005

%

2002 & 2003

%

2004 & 2005

%

2002 & 2003

%

2004 & 2005

% Employment size (persons)

5–19 25.0 28.4 11.2 15.8 15.7 16.9 14.9 20.7 20–99 41.0 46.6 17.8 29.2 26.2 34.4 28.1 35.6 >100 55.6 51.5 33.7 28.9 40.1 34.7 35.6 40.0 Industry Mining 24.2 31.4 7.4 10.6 14.8 17.6 15.5 22.2 Manufacturing 39.5 41.7 23.0 26.9 24.5 27.3 21.8 27.9

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Construction 27.2 30.8 7.8 16.5 17.3 22.0 19.3 26.2 Wholesale trade 36.1 43.4 21.8 25.5 19.6 26.4 24.1 33.2 Retail trade 24.7 27.5 7.4 15.8 17.0 15.4 13.2 18.8 Accommodation, cafes & restaurants

22.9 35.6 9.2 23.6 14.8 25.0 14.2 27.8

Transport and storage 30.7 34.0 12.4 18.1 20.4 25.1 20.0 26.9

Communication services 43.8 35.5 25.8 28.5 32.2 25.3 27.6 27.1

Finance and insurance 38.7 37.9 18.2 18.9 24.6 25.7 28.3 30.7

Property & business serv. 27.3 30.3 13.0 16.4 18.5 20.1 18.3 22.6

Total 29.6 33.5 13.4 19.4 18.9 21.6 18.4 24.9 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.4. Characteristics Of Innovation In 2004 And 2005: Novelty

PROPORTION OF BUSINESSES THAT INTRODUCED OR IMPLEMENTED

New goods or services

%

New operational processes

%

New organisational/ managerial processes

% Degree of novelty of the new goods or services or processes developed

New to the business only 74.0 87.4 93.9 New to the industry 20.0 10.8 5.5 New to Australia 15.2 3.6 0.8 New to the world 7.7 0.8 0.3 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.5: Characteristics of Innovation In 2004 And 2005: Locus Of Development.

PROPORTION OF BUSINESSES THAT INTRODUCED OR IMPLEMENTED

New goods or services

%

New operational processes

%

New organisational/ managerial processes

% Where the new goods or services or processes were developed

Within the business or related company 74.7 65.8 75.9 In co-operation with other businesses or institutions

21.8 25.6 18.7

By other businesses or institutions 10.4 12.9 8.8 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.6: Barriers To Innovation, 2004 and 2005

Innovating businesses %

Cost related barriers

Excessive economic risk perceived by the business 19.0 Excessive economic risk perceived by financiers 5.0 Direct costs too high 31.6 Cost or availability of finance 15.8 Government regulations or standards 22.5 Any cost related barriers 58.4 Market related barriers

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Potential market already dominated by established business 20.0 Lack of customer demand for new goods or services 10.0 Unable to appropriate benefits from intellectual property 3.6 Inability to secure strategic partnerships 4.8 Market too small or unknown 11.6 Lack of information on technologies 2.5 Any market related barriers 36.7 Lack of skilled staff 27.2 Other barriers 4.6 No barriers to innovation 26.7 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.7: Drivers of Innovation in Innovating Businesses in 2004 and 2005

EMPLOYMENT SIZE 5-19

persons % 20-99

persons %

100 or more persons

%

Total %

Profit related drivers Improve productivity 70.7 72.6 ^64.7 70.9 Increase revenue 71.6 70.3 77.0 71.5 Reduce costs 51.7 58.4 ^57.2 54.2 Any profit related drivers 95.6 91.3 94.8 94.2 Market related drivers Be at the cutting edge of the industry 32.8 41.4 46.4 36.4 Increase responsiveness to customer needs 62.7 69.0 73.0 65.3 Increase market share 40.7 57.4 ^51.6 46.6 Establish a new market 25.8 32.5 33.1 28.4 Exploit new ways to manage this business's supply chain 17.7 23.7 ^34.0 20.6

Increase export opportunities 8.1 9.6 10.7 8.7 High degree of price competition in this business's product markets

26.5 31.5 27.6 28.1

Any market related drivers 86.8 92.8 91.1 88.9 Legal related drivers Be environmentally responsible 17.6 19.6 26.6 18.8 Improve safety or working conditions 33.0 44.8 37.3 37.0 Meet government regulations or standards 34.7 34.8 29.8 34.4 Any legal related drivers 51.5 55.8 56.0 53.1 Other drivers 6.1 5.1 7.1 5.8 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.8. Overall Collaboration by Businesses: 2004-5

EMPLOYMENT SIZE 5-19

persons %

20-99 persons

%

100 or more persons

%

Total %

Type of collaboration for any purpose

Joint marketing or distribution 13.1 17.7 12.8 14.5 Joint manufacturing 3.7 5.4 4.4 4.2 Joint research and development

6.4 8.0 14.5 7.4

Other joint venture 6.6 3.2 8.0 5.7 Licensing agreement 5.7 2.7 4.7 4.7 Other form of collaboration/alliance

1.5 1.4 4.5 1.7

Any collaboration 24.9 26.8 33.0 26.0

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No collaboration for any purposes 75.1 73.2 67.0 74.0

Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.9: Collaboration by Innovating Businesses in 2004 and 2005

LOCATION OF ORGANISATION

From within same state or territory

%

From elsewhere in

Australia %

From overseas

%

Any location

%

Type of organisation collaborated with Other parts of a wide enterprise group to which the business belongs

8.2 6.4 2.6 12.6

Market organisations Clients or customers 10.4 5.0 2.1 12.0 Suppliers of equipment, materials, components or software 8.8 5.0 3.0 11.3

Consultants 5.6 3.2 1.3 7.5 Competitors and other businesses from the same industry 7.7 2.9 1.3 9.2

Any market organisations 18.3 8.9 5.3 21.4 Institutional organisations

Universities or other higher education institutions

2.0 0.7 0.1 2.3

Government agencies 3.2 0.6 0.2 3.3 Private non-profit research institutions 0.5 0.3 0.1 0.6 Commercial laboratories/research and development enterprises

1.4 0.4 0.3 1.6

Any institutional organisations 4.5 1.5 0.4 4.9 Other types of organisations 1.2 0.1 0.1 1.4 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.10: Sources Of Ideas And Information Used By Innovating Businesses, 2004 And 2005

5-19 persons %

20-99 Persons %

100 or more Persons %

Total %

Sources of ideas or information for innovative activity

Internal sources 72.2 80.8 87.3 75.8 Market sources 67.3 74.4 67.6 69.6 Institutional sources 7.6 6.2 16.2 7.7 Other sources 43.6 44.0 42.4 43.6 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2

Table App.1.11: SOURCES OF IDEAS OR INFORMATION, 2001– 2003

Innovating businesses [Proportion of Firms indicating this as a Key Source.]

SOURCES(c) All Sectors

% Internal Within this business 80.0Other parts of a wider enterprise group to which this business belongs 32.7Market Clients or customers 64.5 Suppliers of equipment, materials, components or software 47.0Consultants (including paid professional advice of all kinds) 32.1

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Competitors and other businesses from the same industry 44.4Institutional Universities or other higher education institutes 7.6 Government agencies 11.2 Private non-profit research institutions 2.5 Commercial laboratories/ research and development enterprises 5.6Other Professional conferences, meetings, fairs and exhibitions 50.5 Web sites, journals 42.5 Other sources of ideas or information 3.6

Source: ABS INNOVATION IN AUSTRALIAN BUSINESS 8158.0 2003 See source for detailed qualifications Table App.1.12A: SOURCES OF IDEAS OR INFORMATION, 2001– 2003

Innovating businesses, by industry [Proportion of Firms indicating this as a Key Source.]

Mining Manufact’g Electricity gas & water supply

Construct’n Wholesale trade

Retail Trade SOURCES(c)

% % % % % % Internal Within this business 86.1 80.2 85.5 79.1 82.8 76.5 Wider enterprise group 43.7 28.0 56.9 12.3 31.2 42.2 Market Clients or customers 51.3 71.1 47.7 54.6 71.6 47.1

Suppliers of equipment, materials, components, sw

32.6 51.5 50.4 46.8 58.2 49.0

Consultants 39.5 25.5 59.2 23.5 27.3 32.9 Competitors & businesses from the same industry

32.7 37.8 47.3 38.7 47.7 44.8

Institutional Universities or other higher

education institutes 8.8 6.4 20.4 5.1 6.2 3.5

Government agencies(d) 24.1 8.2 28.2 13.6 6.4 *8.0 PNP 3.5 1.7 6.4 np 1.2 5.8 Commercial laboratories/ R&D enterprises

9.3 7.0 15.6 1.0 *3.3 *4.4

Other Professional conf’s, meetings, fairs & exhib’s 45.1 40.9 57.4 36.5 49.4 52.9

Web sites, journals 39.5 37.2 47.9 32.5 41.8 33.6 Other sources 3.8 3.0 8.0 5.1 0.3 1.6 Source: ABS INNOVATION IN AUSTRALIAN BUSINESS 8158.0 2003 See source for detailed qualifications Table App.1.12.B. SOURCES OF IDEAS OR INFORMATION 2001– 2003

Innovating businesses, by industry Proportion of Firms indicating this as a Key Source.

Accom’n, cafes and rest’s

Transport and

storage

Comm’ns services

Finance and insurance

Property & business services

Cultural and Rec’l

services

SOURCES

% % % % % % Internal Within this business 80.9 88.0 83.6 83.2 79.7 78.9 Wider enterprise group 43.2 37.9 41.4 42.1 *29.8 35.7 Market

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Clients or customers 78.7 62.2 75.4 68.9 69.6 66.9 Suppliers of equipment, materials, components, sw

37.6 54.3 44.6 35.4 41.7 33.8

Consultants (including paid professional advice of all kinds)

39.6 *22.5 41.3 33.5 40.3 34.4

Competitors & businesses from the same industry

62.9 38.6 56.4 38.8 44.0 56.4

Institutional Universities or other higher education institutes 12.9 4.3 17.9 7.8 *11.3 14.5

Government agencies(d) 18.6 9.0 8.2 16.2 12.7 25.6 PNP 2.6 np 3.5 1.3 2.1 *3.3 Commercial laboratories/ R&D enterprises

0.3 2.3 2.4 5.6 11.2 1.2

Other Professional conf’s, meetings, fairs and exhib’s 56.3 35.3 49.6 51.5 62.2 51.2

Web sites, journals 55.5 36.3 52.1 41.4 55.2 45.3 Other sources 9.2 2.2 2.7 1.2 5.4 5.9 Source: ABS INNOVATION IN AUSTRALIAN BUSINESS 8158.0 2003 See source for detailed qualifications Table App.1.13 SOURCES OF IDEAS OR INFORMATION, 2001– 2003

Innovating businesses, by employment size Proportion of Firms indicating this as a Key Source.

5–19 persons

%

20–99 persons

%

100 or more

persons %

Total %

SOURCES Internal Within this business 78.5 83.2 82.3 80.0 Other parts of a wider enterprise group to which this business belongs

29.3 36.1 52.3 32.7

Market Clients or customers 62.5 67.7 70.6 64.5 Suppliers of equipment, materials, components or software 46.5 47.7 49.5 47.0

Consultants (including paid professional advice of all kinds)

26.9 40.5 47.9 32.1

Competitors and other businesses from the same industry

41.9 50.4 43.7 44.4

Institutional Universities or other higher education institutes 5.6 11.4 11.0 7.6 Government agencies(d) 8.7 15.0 19.4 11.2 Private non-profit research institutions 2.2 2.4 6.0 2.5 Commercial laboratories/research and development enterprises

4.9 5.0 15.5 5.6

Other Professional conferences, meetings, fairs and exhibitions 46.7 57.0 61.2 50.5

Web sites, journals 41.7 42.9 49.3 42.5 Other sources of ideas or information 3.9 3.2 2.1 3.6

Source: ABS INNOVATION IN AUSTRALIAN BUSINESS 8158.0 2003 See source for detailed qualifications

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Table App.1.14: Methods Used To Acquire Knowledge or Ability By Innovating Businesses In 2004 And 2005

LOCATION OF SOURCE

From within same state or territory

%

From elsewhere in Australia

%

From overseas

%

Any location

%

Method used to acquire knowledge or abilities

Employed new skilled staff 39.0 7.3 7.1 45.2 Interchanged staff with another business 5.2 2.1 1.2 7.4 Used consultants (or other paid advisors) 35.7 7.2 2.0 40.6 Acquired new equipment or technology for producing this business's goods or services

33.9 10.3 8.7 46.5

Merger/takeover with/of another business (in whole or part)

3.9 0.9 0.2 4.7

Other methods to acquire knowledge and abilities 6.0 1.1 0.7 7.2 Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2 Table App.1.15: Methods Used By Innovating Businesses In 2004 And 2005 To Acquire Knowledge Or Abilities From Institutions By Location Of Institution From

Australian higher education or research institutions %

From overseas higher education or research institutions %

Any higher education or research institutions %

Method used to acquire knowledge or abilities from higher education or research institutions

Employed new graduate(s) 10.0 0.6 10.4 Employed academic or research staff 2.7 0.7 3.1 Used research results published by these institutions 2.9 1.4 3.8 Used research facilities of these institutions 1.6 0.2 1.6 Used patents, designs, or other intellectual property rights from these institutions 1.7 0.3 2.0

Used consultants from these institutions 5.7 0.7 5.9 Contracted out research and development to these institutions 1.6 0.2 1.6 Other methods to acquire knowledge or abilities from institutions 2.3 0.3 2.4

Source: ABS (2005) Innovation in Australian Businesses. 8158.0 2

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Appendix 2 Instrument Descriptions Country – UK

Name: Small Business Research Initiative Description Allows small businesses access to R&D procurement from Government Departments and Research

Councils, worth up to 1.56billion Euro. Starting April 2001 (launch of SBRI website). Target is to procure 78mEuro of research from small businesses. SBRI is not a grant scheme, but a procurement measure which aims to: - strengthen those existing small firms whose businesses are based upon providing R&D - by increasing the size of the market, - encourage other smaller businesses to increase their R&D capabilities and capacity - to exploit the new market opportunities, and - create opportunities for starting new technology-based or knowledge-based businesses.

Name of Provider Small Business Service – UK Govt. Intended Beneficiaries SMEs Financial Conditions Involved No grants on offer Observations from Evaluations Similar to the US Small Business Innovation Research – no current evaluations for this

Name: Web-Based Toolkit Description The Government unveiled a set of model agreements to help business-university collaborative

working and speed up negotiations for Intellectual Property (IP). The model agreements are part of a "web-based toolkit". The toolkit will help take the hassle out of negotiating collaborative research agreements. It particularly focuses on financial contribution, the use and exploitation of IP, academic publication and confidentiality.

Name of Provider Government – as a result of a working group (CBI, AURIL, SBS, RDA…) Intended Beneficiaries All companies, HE research units Financial Conditions Involved No direct funding provided Observations from Evaluations No evaluations at present time

Name: Enterprise Capital Funds Description Enterprise Capital Funds (ECFs) are designed to be commercial funds, investing a combination of

private and public money in small high-growth businesses that are seeking up to £2 million of equity finance. Each ECF will be able to make equity investments of up to £2 million into eligible SMEs that have genuine growth potential but whose funding needs are currently not met. ECFs will fulfil a genuine need by addressing a market gap in the availability of equity finance.

Name of Provider DTI/SBS Intended Beneficiaries SMEs Financial Conditions Involved Venture capital (including subordinated loans) Observations from Evaluations No evaluations at present time

Name: Grant for R&D Description Previously run nationally, but now run by local DTI Small Business Service offices, the Grants for

Research & Development will be administered by Regional Development Agencies. For small businesses wishing to exploit an innovative idea, this grant provides reimbursed consultancy to help businesses get advice on the steps needed to implement their ideas.

Name of Provider Administered by Regional Development Agencies Intended Beneficiaries SMEs/Consultancies and other private service providers Financial Conditions Involved Grants for labour costs Observations from Evaluations 2001 Evaluation report available at: http://www.dti.gov.uk/about/evaluation/exec_sum.pdf Some

brief highlights from the 2001 Evaluation include following main findings: - Seven in ten projects have outputs which reach the market; - Data supplied by award winners pointed to substantial and positive effects overall on their turnover, exports and employment; - there is evidently scope to increase the aggregate benefits that the scheme delivers.

Name: Research & development: new tax incentives for small and medium-sized companies Description The provision of tax relief for SMEs conducting R&D to help improve the quantity and quality of

R&D undertaken by British firms Name of Provider DTI/Inland Revenue Intended Beneficiaries SMEs Financial Conditions Involved Tax Incentives Observations from Evaluations No evaluations at present time

Name: Biotech Financial Advisory Services Description To improve awareness and accessibility of private sector funds or appropriate Government grants

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for biotech SMEs. The DTI sponsors independent financial consultants to provide the Service, free of charge, to: pre-start-up companies in the biotechnology/life sciences fields; early stage companies seeking seed funding; established firms seeking development funding.

Name of Provider DTI Intended Beneficiaries Biotech and Healthcare SMEs and Pre-Start-ups Financial Conditions Involved Venture Capital Observations from Evaluations This scheme forms part of a wider evaluation of DTI support for biotechnology (due to have been

completed in 2004)

Name: CASE – Cooperative Awards in Science and Engineering Description A scheme for funding the training of postgraduate students to PhD level in projects of joint interest

to industry and higher education institutions. Also "Industrial CASE" is a variation of CASE where studentships are allocated direct to an industrial partner with the company devising its own projects. Companies who have previously participated in the scheme have noted a number of benefits that include: the opportunity to access key expertise that may not exist within the company or which may not be cost effective to develop in-house; an opportunity to test the value of collaborative research for a relatively modest outlay; providing future researchers/potential employees with “real life” experience of industrial and business situations whereby academics have a better understanding of the business.

Name of Provider OST Intended Beneficiaries Scientists/Researchers, Other public non-profit research organisations, HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time.

Name: Collaborative R&D Description Collaborative Research and Development (CRD) support is available to meet some of the costs and

risks associated with research and technology development, by facilitating collaboration between different businesses and the Science, Engineering & Technology base across the UK. CRD provides funding for collaborative R&D projects between businesses, universities and other potential collaborators. Collaborative Research & Development projects must involve two or more collaborators, at least one of which is from industry.

Name of Provider DTI Intended Beneficiaries All companies, HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time.

Name: Faraday Partnerships Description To link businesses, scientists and engineers in universities, research organisations, and capital

providers on collaborative research projects and commercialization processes. Faraday Partnerships or centres are technology specific. Also some education and training programmes. Effective interaction requires the identification of industry needs and the subsequent synthesis of the knowledge and experience of those who can satisfy these needs. Crucially, each Faraday Partnership employs a number of technology translators - people with broad experience of knowledge transfer - who can facilitate projects between Partnership members.

Name of Provider DTI, SBS Intended Beneficiaries All Companies, Scientists/Researchers/HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time.

Name: Knowledge Transfer Networks Description A Knowledge Transfer Network is a single national over-arching Network in a specific field of

technology or business application. It brings together a variety of organisations, such as businesses (suppliers and customers), universities, research and technology organisations, the finance community and other intermediaries who will provide a range of activities and initiatives to enable the exchange of knowledge and stimulation of innovation amongst this community. The objective of a Knowledge Transfer Network is to improve the UK’s innovation performance by increasing the breadth and depth of the knowledge transfer of technology into UK-based businesses and by accelerating the rate at which this process occurs. The Network must, throughout its lifetime, actively contribute and remain aligned to the development of a national Technology Strategy.

Name of Provider DTI Intended Beneficiaries Everybody Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time.

Name: Business Link Description The central objective of Business Links is to improve the competitiveness of small firms through

more comprehensive provision of business support. In pursuit of this objective their aims are to: - Increase the use of business support by small firms; - Rationalise the provision of support to reduce duplication and to make it more coherent; - Improve the quality of support services. Business Links came into being as a result of the "one stop shop" for business support initiative

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announced by the then President of the Board of Trade in July 1992. Nine pilot Business Links were approved for start up in April 1993. The network was gradually extended thereafter, so that by January 1997 a total of 89 Business Link partnerships, with 241 outlets covering the whole of England, had come into operation. Each Business Link is based on a partnership between local agencies involved in support for businesses. Business Links entail a significant degree of partnership working, especially at the strategic level. As well as promoting collaboration, Business Links have encouraged the sharing of resources between partners.

Name of Provider SBS (Small Business Service) Intended Beneficiaries SMEs, Consultancies, Private institutions for education. Financial Conditions Involved No direct funding provided Observations from Evaluations Evaluation concluded that although Business Links try to serve all SMEs, they especially target

growing firms and those identified as having growth potential. Firms in the manufacturing, high tech. and business services sectors are also targeted more frequently than those in other sectors. The evaluation also concluded that businesses do, indeed, benefit from support, and that they assess Business Links support more highly than other support or support they have used in the past. However, there is still evidence of market failure. This is largely due to the facts that firms are not sufficiently aware of the support available and / or do not understand the need for / value of support. Business Links and partners have improved the coherence, co ordination and quality of services, but they acknowledge the scope for further improvement in these respects.

Name: Corporate Venturing and Matchmaking Description Entrepreneurs and small companies with good ideas can be introduced to their perfect investor

partner thanks to a Small Business initiative. Corporate venturing enables small companies to enter into a relationship with a larger investor that will bring finance, contacts and facilities whilst allowing them to retain their own identity. This initiative is being taken forward by Small Business Service (SBS), with external partners, aimed at stimulating awareness and understanding of corporate venturing and offering practical support to potential partners.

Name of Provider SBS Intended Beneficiaries SMEs Financial Conditions Involved Other Observations from Evaluations No evaluations at present time.

Name: Manufacturing Advisory Service Description The Manufacturing Advisory Service (MAS) offers assistance from experts to enable SME

manufacturers to improve productivity, through a network of regional centres for manufacturing. The MAS will deliver the following to companies: practical help; assistance for technology transfer; development of manufacturing skills; dissemination of best practice; development of Networks of Expertise.

Name of Provider OST Intended Beneficiaries Manufacturing SMEs Financial Conditions Involved No direct funding Observations from Evaluations No evaluations at present time.

Name: Micro and Nanotechnology Manufacturing Initiative Description In July 2003, Science and Innovation Minister Lord Sainsbury announced a cash injection for the

Micro and Nanotechnology Manufacturing Initiative over the next six years to help industry harness the commercial opportunities offered by nanotechnology. The initial investment for this initiative formed the first step of developing and implementing the DTI's Technology Strategy.

Name of Provider DTI Intended Beneficiaries HEI, SMEs, Technology and Innovation Centres Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time.

Name: Knowledge Transfer Partnerships Description Increases interactions between Universities and companies. Graduates (TCS Associates) are

recruited to work in a company for two years in close cooperation with a University, on a strategically important project; they have enhanced career development benefits. The company and university learn to collaborate. This measure provides a grant to cover part of the cost of using a person to transfer and embed knowledge into a business from the UK knowledge base (including universities, colleges and research organisations) via a strategic project. Each Partnership employs one or more high calibre Associates (recently qualified people) for a project lasting one to three years, transferring the knowledge the company is seeking into the business. Each Associate works in the company on a project, which is core to the strategic development of the business. Associates are jointly supervised by a senior member of the business and an academic or technical specialist from the partnering knowledge base organisation. Through contact with businesses, the knowledge base partner is also provided with a relevant and improved understanding of the challenges companies encounter, and their business requirements and operations.

Name of Provider DTI Intended Beneficiaries SMEs, HEI, Scientists/Researchers, other public education institutions Financial Conditions Involved Grants Observations from Evaluations Estimated that on average, every £1 million invested in KTP results in 77 new jobs created, and

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training for 263 members of staff, as well as giving academics experience of working in a business environment. (Figures based on final reports by company participants whose completed TCS programmes were assessed in 1997-98)

Name: Ufi/Learndirect Description Ufi aims to work with partners to boost people's employability, and organisations productivity and

effectiveness, by inspiring existing learners to develop their skills further; winning over new and excluded learners; and transforming the accessibility of learning in everyday life and work. Secondary objectives of Ufi are to increase the number of companies (particularly SMEs) that provide learning opportunities for employees, and improve the quantity and quality of learning provision.

Name of Provider Department of Education and Employment Intended Beneficiaries SMEs and Individuals Financial Conditions Involved Grants Observations from Evaluations An external assessment of the progress that Ufi has made was reported in 2003. This evaluation

benchmarked Ufis performance against other domestic and international organisations engaged in similar activities, as well as highlighting lessons that will inform future Ufi activity. The evaluation reported that the very nature of learndirect learning results in improved ICT skills, which is equipping a growing population of learners who can access new learning provision that is increasingly ICT based. There was also evidence to show that e-learning is breaking down the psychological and physical barriers that prevent many adults from returning to learning.

Country - Sweden

Name: Technology Purchase Description The technology purchase approach is a call for tender procedure, meant to stimulate and hasten the

spread and development of new, efficient techniques. The Swedish Energy Agency is a significant and competent customer, with good market knowledge and contacts. The idea behind the approach is to create a win-win situation, with producers gaining access to new markets, while the agency is able to use its critical mass to influence product design and functionalities.

Name of Provider Swedish Energy Agency Intended Beneficiaries All companies Financial Conditions Involved Purchase of technology Observations from Evaluations In a consultant report, commissioned by STEM, describing how technology purchasing is used as a

steering mean the following success factors are identified: * The system in general must be reasonably mature for uptake of the technology in question * Thorough preparations are vital * The purchasing organisation must have a high credibility and put much effort into building confidence

Name: Industrial Development Centres Description The aim of Industrial Development Centres IDCs is to be the "missing link" which will enable co-

operation between enterprises and other important actors by providing access to all the resources necessary to run strategic development work (knowledge, competence, money or time). All IDCs are connected in a network and cooperate with public authorities and departments whose purpose it is to facilitate the development of a globally competitive Swedish industry. This creates important value added. The networks become the natural meeting point for industrial and regional development in the respective regions. Through IDC, small and large enterprises meet, business leaders meet researchers and private enterprises meet the public sector in order to create the best possibilities for development

Name of Provider Separate company owned by the Organisations/Institutions within the network. Intended Beneficiaries All Financial Conditions Involved Grants, Venture Capital, Guarantees Observations from Evaluations The number of IDC-companies has doubled since the start of the network in 1997. (2002) Some 32

percent (2000) of the total turnover of the companies in the network was generated within the so called UPA-commission (Finding, Product Development and Product Pre-study Spin-offs). The remaining 68 percent was generated from such things as: * Educational efforts on different levels * Commissions in large companies * Direct consultancy commissions * Business development commissions * Research and development projects together with universities and colleges * Carrying out or participating in EU-projects Business has expanded with more and more IDC-companies, partners, amount of projects carried out and job opportunities created. The project managers of the IDC-companies have systematically followed up on the employment effects in the companies. A total of 4011 new jobs have been created (2002).

Name: Forska & Vax - Research & Innovation in SMEs Description A majority of company based R&D is carried out in large companies. SMEs, as an important part of

the economy, are contributing to innovation on somewhat different conditions. An intention with this program is to promote innovation and growth by offering R&D resources adapted to the needs of SMEs. A number of issues related to R&D in SMEs are identified. There are none or small R&D resources in SMEs. R&D is associated with high cost and there are often no personal resources available. Its also a high risk project and it takes a lot to be in the forefront of technology. Further on, many companies suffers from a lack of networks or at least time for networking activities. Traditionally a typical program addresses university researchers and involves industry partners as a

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mean to reassure that research results are taken care of and to increase research project relevance. Few or none programs have addressed R&D within SMEs.

Name of Provider Vinnova Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Competence Development in Industry Description The Knowledge Foundation is made up of a number of educational consortia with the cooperation of

universities, university colleges and industrial research institutes. Each consortium works within a defined growth area and on the basis of the needs of companies. Postgraduate programmes consist of various courses at the Master’s degree level and are offered to a large extent as distance-learning courses. The Knowledge Foundation supports the development of new Master’s degree programmes with a clear focus on the needs of trade and industry. The programmes are designed with the collaboration of companies, universities and university colleges. The Knowledge Foundation gives priority to education that reflects new ways of thinking and combines several disciplines or areas.

Name of Provider Knowledge Foundation Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Product Development in Small Enterprises Description The aim of this program is to strengthen small enterprises by providing financing for product

development. A regional infrastructure with "partners" has been formed to assist the program to spread information about the program, to assist companies in the product development process and to administrate the program. These partners are either regional or sector specific.

Name of Provider NUTEK Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: VINNKUBATOR Description The objective is to increase the number of R&D-intensive firms with a high growth potential. An

incubator is a legal person with a high degree of confidence from the business sector as well as among policy-makers. The incubators engage in development of business ideas and support to companies in the pre-seed phase, i.e. the phase where the risk is too high o from the perspective of the venture capitalists.

Name of Provider Vinnova Intended Beneficiaries SMEs, Researchers/Scientists Financial Conditions Involved Grants, Subsidised loans, Venture capital, Guarantees Observations from Evaluations The evaluation of the pilot project has, in quantitative terms shown that:

- The rate of return on the public investments is about 4-6 times the money invested. - The flow of new ideas, has increased with 69 percent totalling 934. - The rate of new companies has been offered to join one of the 14 incubator has

increased with 43 percent totalling 137. - The number of companies within the 14 incubators has increased with 43 percent

totalling 255. - The number of employees within the incubator has increased with 18 percent, totalling

786 - The number of new companies within the incubator (measured over a 6 month period),

has decreased with 1 percent, totalling 72. - The number of companies exiting the incubator (measured over a 6 month period), has

increased with 2 percent, totalling 46.

Name: University & SME Cooperation Description This programme focuses on new forms on cooperation between small enterprises and university and

university colleges. In the first step seven universities are elected for participation. They are to implement and try out a new form of cooperation that can generate knowledge about the importance of entrepreneurship to universities and how it could be stimulated. In the next step six other universities are to implement results from these first experiences made by the seven other universities.

Name of Provider NUTEK Intended Beneficiaries SMEs, HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: ProViking Program Description The Swedish Foundation for Strategic Research has decided to support product realisation research

(product development, manufacturing, product support and maintenance in a life-cycle perspective), through the ProViking programme. The main focus is on industry with manufacturing and/or development, operating in Sweden. The foundation has also decided to fund a National Graduate

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Research School during the five- year period 2003-2008. The goal is to develop better production systems and new product development methods through project cooperation between industry and universities. The research results will be used within Swedish industry to create better cost efficiency and new or improved products that are internationally competitive.

Name of Provider SSE – Foundation for Strategic Research Intended Beneficiaries All companies, HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Key Actors Program Description The long-term goal of the Key Actors Programme is to develop competence, methods, processes and

structures to enhance the professionalism of key actors in the Swedish innovation system. It will focus on increasing the amount and efficiency of co-operation between research performers, industry and other actors in the surrounding society, as well as activation of knowledge (i.e. knowledge transfer and commercialisation of research results).

Name of Provider Vinnova Intended Beneficiaries HEI, Research Organisations Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: VINN Excellence Program Description VINN Excellence (VINN Centres of Excellence) is a development of The Swedish Competence

Centres Programme. VINN Excellence provides a brand new generation of Competence Centres (Centres of excellence in Research and Innovation). The effort is to build bridges between science and industry in Sweden by creating excellent academic research environments in which industrial companies participate actively and persistently in order to derive long-term benefits. The mission is to strengthen the crucial link in the Swedish National Innovation System between academic research groups and industrial R&D. A Centre of Excellence has two main goals: • To become a productive, academic Centre of Excellence by actively involving a number of companies and research groups in joint research • To promote the introduction and implementation of new technology and to strengthen the technical competence in Swedish industry.

Name of Provider Vinnova Intended Beneficiaries All Companies, HEI Financial Conditions Involved Grants Observations from Evaluations The latest third evaluation was performed by the Technopolis Group in 2003. The evaluation

concludes once again that the centres have created both practical and empirical knowledge, which has been directly useful in modernisation, design and development. The centres have furthermore created research-trained people, particularly adapted for working with high-skilled tasks in the Swedish industry, and there are also signs of extended networks of people and organisations that work with a common set of knowledge. The evaluation concludes in addition that that the centres have increased attractiveness of the Swedish innovation infrastructure, which might have an impact on the location of R&D and production for firms From the very beginning Swedish industry has shown a great interest in the Competence Centres and played an active role in their build-up.

Name: Active Industrial Collaboration Description A typical AIS-project involves one or two research institutes, one or two university or university

college research departments, and 15 companies. These actors are to collaborate actively during a period of three years with an overall budget of EUR 650 000 - 900 000 of which Vinnova financing constitutes EUR 320 000 only to research institutes and universities. The contributions of the companies are only in the form of cost for own labour. Technology/knowledge transfer is an integrated part of the project. The four focus areas of AIS are IT, life sciences, manufacturing and processing and sustainable development.

Name of Provider Vinnova Intended Beneficiaries Companies, HEI, Research organisation Financial Conditions Involved Grants Observations from Evaluations Currently being evaluated

Name: Swedish Norwegian Business Cooperation Description This is a program run in cooperation between NUTEK and Innovation Norway. The aim is to

strengthen companies' innovation capacity and stimulate commercialisation and development of new products. Financing offered is to be used for competence development and should involve a Norwegian as well as a Swedish company.

Name of Provider NUTEK Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations No evaluations at present

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Country – Norway

Name: Grants to county authorities for regional development Description In 2003, grants to county authorities (fylkeskommunen) was introduced as a separate post in the

budget of the Ministry of Local Government and Regional Development. The grants are to contribute to and facilitate regional development adjusted to specific regional conditions, and in particular to competence development, readjustment, entrepreneurship and start-ups, and industrial innovation. In accordance with these guidelines, the respective county authorities determine the goals and strategies for the use of the grants.

Name of Provider Royal Ministry for Local Government and Regional Affairs Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations No evaluations at present

Name: SkatteFunn Description SkatteFunn is a measure that gives tax allowances for investments in R&D. 20% of expenses for

R&D projects in SMEs, and 18% in large companies, may be deducted. The basis for deduction is R&D expenses of up to NOK 4 mill (approximately EUR 530 000) for internal projects, and another NOK 4 mill for co-operative projects (or NOK 8 mill for co-operative projects alone). The R&D projects should aim at generating new knowledge, information or experience, which is of value to the development of new products, services or production processes.

Name of Provider The Research Council of Norway Intended Beneficiaries All Companies Financial Conditions Involved Tax Incentives Observations from Evaluations No evaluations at present

Name: The BIT Programme Description The objective of the BIT programme is to improve the profitability and competitive ability of SMEs

through efficient use of ICT and e-business. The programme is to contribute to the development, diffusion and efficient utilisation of ICT solutions within e-business in industrial sectors. This is to be achieved through cooperative arrangements within and between sectors, which receive public support in the form of methodology, quality assurance and co-funding. Emphasis is placed on ICT implementation, organisational and managerial change and competence.

Name of Provider Innovation Norway Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations An analysis of the effects of BIT presented in 2005 shows that companies who have taken part in the

programme as a general rule achieve better results than the average firm in the respective industrial sector.

Name: Measures for Regional R&D and Innovation Description The main goal of VRI is to promote knowledge development, innovation and value creation through

regional cooperation and increased R&D efforts in and for the regions. Regional needs and strengths are to be exploited in a way that secures both regional priorities and national strategies for R&D and innovation. VRI consists of regional programmes, which involve several types of actors. Cooperation within a regional VRI programme should be dynamic, and it is expected that the cooperation between the actors become increasingly binding.

Name of Provider Research Council of Norway Intended Beneficiaries Companies, Research Organisations, HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present

Name: Industrial Gardens Description An industrial garden is a group of knowledge intensive firms gathered under one roof. The objective

of the industrial garden programme is to stimulate value creation creating regional clusters of SMEs which offer attractive work opportunities for highly educated persons and can draw on each the competencies of each other. In addition, the arrangement gives the participating firms the opportunity of establishing a cost saving common technical infrastructure. Each industrial garden is connected to the other industrial gardens - through a common web-site and seminars - and should also be linked to wider industrial and competence networks. As of 2004, the measure covers 1600 employees in 606 companies

Name of Provider SIVA - The Industrial development Corporation of Norway Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations A mid-term evaluation by Hartmark Consulting concluded that firms located in industrial gardens

show above-average employment development, and that industrial gardens contribute to increasing local/regional commitment to industrial development. The overall conclusion is that the measure is contributing positively to regional development.

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Name: Arena – Innovation in Networks Description Arena - Innovation in networks is a programme that aims to generate increased innovation through

co-operation and networking among business players, R&D institutions and the public sector. The programme is intended for regional business communities where concentration of companies within a value chain along with relevant competence communities may be found, and where there is a potential for increasing the interaction and co-operation between these parties. A particular emphasis is thus put on supporting the development of regional innovation systems.

Name of Provider Innovation Norway Intended Beneficiaries SMEs, Research Orgs, HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present

Name: NT Programme Description The NT programme is to contribute to increased innovation in existing and new technology firms in

Northern Norway by providing capital and advice and by developing networks of companies and knowledge institutions.

Name of Provider Innovation Norway Intended Beneficiaries SMEs and Large Companies Financial Conditions Involved Grants Observations from Evaluations A third evaluation was published in 2000. The report demonstrated that there was a continued need

for this kind of program. It showed that the R&D activity in companies in Northern Norway had not changed significantly since the programme was started up 12 years earlier. However, the firms' situation seemed to have improved as regards competences, experience from project work, networking and the ability to make use of relevant regional assistance. The evaluation stated that the main contribution of the programme was of a financial nature, and concluded that the programme could be regarded as profitable from a national viewpoint and that the additionality of the project was high.

Name: Centres for Research-Based Innovation Description The CRI scheme is intended to promote innovation by supporting long-term research by forging

close alliances between research-intensive enterprises and prominent research groups. CRIs are to develop competence that maintains high international standard in fields of importance for innovation and value creation. The scheme is designed to enhance technology transfer, internationalisation and researcher training. The scheme will be based on co-financing provided by enterprises, host institutions and the Research Council of Norway.

Name of Provider Research Council of Norway Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations No

Name: Centres of Expertise Description The CoE-programme was established in 2005 to enhance innovation activities within industrial

clusters seen to have the largest growth potential and be the most internationally oriented. It is intended to focus, enhance and accelerate processes of development within these clusters. Based on collaboration with relevant industrial and knowledge partners, companies should have the opportunity to enhance their capacity to initiate and implement targeted, long-term development processes. Long-term financial support (10 years) will be provided to the clusters selected. The primary target group of the programme are companies, including core and adjunct companies, while research, education and financial institutions are among the secondary group targeted.

Name of Provider Innovation Norway, Research Council of Norway, SIVA Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations No evaluations at present

Name: User Initiated Research Description The main objective of the programmes for user initiated research is to increase industrial R&D. The

underlying idea is that activities and projects carried out within the framework of publicly funded R&D programmes should be initiated, controlled and co-funded by companies in order to ensure industrial relevance. The programmes are moreover to contribute to closer cooperation between companies as well as between companies and research institutions.

Name of Provider Research Council of Norway Intended Beneficiaries Companies, HEI, Research Organisation Financial Conditions Involved Grants Observations from Evaluations In a report published in 2004, Møre Research presented an evaluation of 240 projects that have

received support under the user initiated research programmes. The main conclusions were that: * each Norwegian krone invested in the projects has yielded a double return for the participating firms; * the socio economic benefits probably are even greater, but that they are more difficult to quantify; and * that the firms have been dependent on public support for achieving these returns.

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Name: Competence Development Programme Description The main objective of the Competence Development Programme is to contribute to development

and innovation in the market for post-qualifying education. More specifically, the programme aims to improve the ability of public and private enterprises to identify and meet their competence needs; to develop arenas for cooperation between the enterprise sector and the educational system; and to develop post-qualifying education schemes adjusted to the needs of the enterprise sector.

Name of Provider VOX – Ministry of Education and Research Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations The Institute for Research in Economics and Business Administration, SNF and the Fafo Institute

for Applied Social Science are responsible for carrying out a running evaluating the programme, and will also conduct a final evaluation. Hitherto, main conclusions have been that the programme is generally being carried out according to its intentions, but that there may be a need for strengthening the "ordering competence" on the demand side and to improve firms'' ability to identify and express long term competence needs.

Name: Programme for Innovation and Entrepreneurship in Norway Description The Programme for Entrepreneurship and Innovation in Norway (Program for entreprenorskap og

nyskaping i Norge) is to develop methods, material and networks for the establishment of closer links between educational institutions and industry and the promotion of entrepreneurship in education on all levels. The programme will anchor a nation wide permanent institution, which is to develop and implement models and methods for entrepreneurship in education and training in schools, colleges and universities.

Name of Provider Young Entrepreneurship – Ministry of Trade and Industry, Ministry of Education and Research, Innovation Norway

Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations Eastern Norway Research Institute (Østlandsforskning) is carrying out a running evaluation of the

activities of Young Entrepreneurship. At this point, their conclusions include that increased focus on entrepreneurship in education is viewed as positive and necessary, but that there is a lack of specific guidelines as to how entrepreneurship in education is to implement on the regional and local level.

Name: FORNY – Commercialisation of R&D Results Description The objective of the FORNY programme is to increase wealth creation by facilitating

commercialisation of research-based business concepts or ideas conceived at research institutions, private companies or public enterprises. The programme encourages cooperation between research communities, entrepreneurs, investors, industry, commerce and public authorities; provides public support (up to 50 per cent of the expenses) for infrastructure activities, commercialisation projects and verification activities; and offers a bonus for the completed establishment of companies.

Name of Provider Research Council of Norway Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations An evaluation of FORNY carried out in 2003/2004, concluded that the programme to a large extent

has been successful in obtaining its overall objectives. The evaluation focused on the six commercialising units (CUs) that were established when FORNY was launched in 1995. The conclusion was that the activities of the CUs have had high additionality with regards to the completed commercialisations and have contributed to a compensation for market failure of different kinds. It was furthermore stated, “The value added is greater than the public means that are put into the program.” (Bolkesjø, Møller and Vareide, 2004)

Country - Netherlands

Name: SBIR Pilot Description In November 2004, the ministry of Economic Affairs launched a pilot with contracting out of

innovative R&D to SMEs, following the American Small Business Innovation Research Programme (SBIR). The objective of the Dutch SBIR pilot is to assess how the American SBIR programme can be implemented in the Netherlands in an effective way. The technology field of Electromagnetic Power Technology was selected as a testing ground for the first SBIR pilot. In this field the government had already funded strategic basic research at universities via the Innovation-Oriented Research Programme (IOP) (NL_18) instrument. After the first tender 17 proposals were received from which four were selected to do feasibility studies in December 2004. Subsequently, after half a year, two of the four SMEs will receive a contract for the second phase (development/prototyping). The pilot is managed by SenterNovem. It is open to all SMEs in the EU. The ministry of Economic Affairs expects to launch new pilots mid-2005 in collaboration with other ministries.

Name of Provider Ministry of Economic Affairs Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations No evaluation at present time

Name: Challengers Module Description The Challengers Credit supports excellent innovation projects, in which new products, processes or

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services are developed. The project should have a high-risk profile with substantial technical problems that need to be solved. The Challengers Credit is a credit without interest for SMEs. The credit can amount to 35% of the development cost, with a maximum of 1 million euro. The minimal project size is 300,000 euro (estimated development costs). The project may run for a maximum of three years. The credit should be repaid in max. 6 years after successful completion of the development project.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs Intended Beneficiaries SMEs Financial Conditions Involved Subsidised Loans Observations from Evaluations No evaluation at present time

Name: Innovation Subsidy for Collaborative Projects Description Innovation Subsidy for Collaborative Projects (IS) subsidises technological collaboration aimed at

the research and development (R&D) of innovative and sustainable products, processes or services. The scheme supports companies to pursue innovation with partners. The scheme involves a subsidy for an R&D project that a company executes together with one or more knowledge centres and/or companies. National and international collaborative alliances are eligible for subsidy. SMEs can also apply for a subsidy on a feasibility study to allow them to first establish the feasibility of an R&D project.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations No evaluation at present time

Name: WBSO - Research and Development (Promotion) Act Description The objective of the WBSO Act is to stimulate R&D by alleviating the wage burden for companies

through tax reduction. This Act provides a fiscal facility for companies, knowledge centres and self-employed persons who perform R&D work. In this context, R&D means technical/scientific research, the development of technologically new physical products or physical production processes (or parts thereof) and the development of technologically new software (or parts thereof). Non-companies qualify only if they perform R&D on the instructions and at the expense of a Dutch company. Under the Act, a contribution is paid towards the wage costs of employees directly involved in R&D.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs Intended Beneficiaries Companies, HEI Financial Conditions Involved Tax Incentives Observations from Evaluations The 2002 evaluation found the following effects of the WBSO. First order effects: 1 euro spent on

WBSO gives 1.02 euro in R&D effort. Total R&D spending rises with total of the WBSO tax credit. Outcome of survey: size does matter (larger companies can take more risks, have a lower threshold, faster time to market, side effects: better planning and administration) Second order effects: found significant effect for firms with < 50 employees. If tax credit rises with 1%, effect on sales of new products as % of total sales for an average firm is 0.19 percent points. WBSO is important for reaching goals of innovation, like introduction of new products, lowering cost of innovation, acquisition of fundamental & implementation of technological knowledge, higher quality products and innovation process, raising speed of innovation process. The use and scope of the measure: the WBSO is considered to be easy accessible for companies (low administrative burdens) and therefore attractive for SMEs.

Name: Innovation Performance Contracts Description The Innovation Performance Contracts scheme is in a pilot stage. The core of the pilot scheme is an

agreement (contract) between the Ministry of Economic Affairs (EZ) and individual companies about an extra effort in innovation. Each company makes a multi-annual innovation plan with concrete targets for three years, a financial plan and an action plan for the first term. The companies can do the effort partly collectively. In return, EZ provides a 50% contribution in the extra costs with a maximum of 49,500 euro per company in three years.

Name of Provider Ministry of Economic Affairs Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Casimir Description The main objective of the Casimir scheme is to increase public-private mobility of researchers and

to enhance exchanges of researchers between companies and knowledge institutes and vice versa. Such mobility of researchers can help to reduce the gap between knowledge production and knowledge application. Mobility is also perceived as a means to improve the attractiveness of the job of researcher.

Name of Provider Netherlands Organisation for Scientific Research Intended Beneficiaries Scientists/Researchers Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

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Name: Innovation Vouchers Description The main objective of the (Pilot) Innovation vouchers scheme is to enable small and medium-sized

companies (SMEs) to buy knowledge from knowledge institutes with innovation vouchers and thus to stimulate interaction and exchange between the knowledge suppliers and SMEs. With an innovation voucher SMEs can buy knowledge from (semi-) public knowledge institutes, from large companies with R&D expenditures that exceed 60 million euro per annum, and from foreign public knowledge institutes. The knowledge supplier can hand in the voucher with the innovation agency SenterNovem and receive payment.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations The scheme is a pilot. The first round in 2004 proved to be a success as all available innovation

vouchers were sold out within a few days. The second round (2005) of the pilot scheme was (like the first round) sold out within a few days, which shows the popularity of the innovation vouchers. In the first round, 92% of the vouchers was used. 50% of the applicants had not used the generic (labour tax reduction) WBSO scheme (NL_5) and 83% had not used a specific innovation scheme before. 40% of the applicants was new for SenterNovem, the innovation agency. In other words, the Innovation vouchers appear to have reached a new target group. Additionality was 80% (8 out of 10 R&D jobs would not have been done without a voucher). Longer-term effects can not be measured yet.

Name: Syntens - Innovation network for entrepreneurs Description Syntens is an "innovation network for entrepreneurs", i.e. a network of 15 centres (ca. 275 full-time

advisors), that have the objective to increase innovativeness of SMEs. Syntens centres provide support and advice to SMEs on technology and innovation. In practice, Syntens' advisors help SMEs with drawing up an Innovation Action Plan. Within this framework, tailor-made technological and non-technological innovation oriented knowledge is made accessible and applicable for firms. Furthermore, Syntens implements policy of the Ministry of Economic Affairs, e.g. in the area of new business ventures, innovation vouchers (NL_47) for SMEs.

Name of Provider Syntens – Ministry of Economic Affairs Intended Beneficiaries SMEs Financial Conditions Involved No direct-funding Observations from Evaluations In 2002 an evaluation was performed with the following results: (a) Syntens reaches 18,500 SMEs

per year, 40% of which is a new client. This change in clients is important, because the effect on companies of Syntens'' services is the greatest in the first year. (b) Collaboration of Syntens with knowledge institutes and branch organisations is limited. (c) The contact with Syntens has resulted for 30% of the companies to (increased) cooperation with other companies or knowledge institutes, for 40% to participation to regional projects and for 30% to more awareness of innovation measures. (d) Half of the companies have started a "renewal project" as a result of a Syntens-advice. Half of these companies has the opinion that the strategic meaning of these projects is large to very large. (e) Surveys show that for 60% of the companies contact with Syntens has resulted in an increase in labour productivity.

Name: RAAK – Regional Attention and Action for Knowledge circulation Description RAAK (Regional Attention and Action for Knowledge circulation) aims to improve knowledge

exchange between SMEs and vocational education institutes. These education institutes include both Higher Professional Education (HBO) as well as Vocational Training and Education and Adult Education (BVE). In addition to the aim of strengthening the bridging function of education institutes and innovativeness of SMEs, the RAAK scheme also aims to generate and distribute policy relevant information and best practices regarding new and existing forms of collaboration and activities in the field of knowledge exchange between education institutes and SMEs.

Name of Provider Foundation Innovation Alliance Intended Beneficiaries SMEs, HEI, Other Education Institutions Financial Conditions Involved Grants Observations from Evaluations A study by EIM (Economic Institute for SMEs) concluded that each euro innovation (collaboration)

subsidy resulted in 5-euro additional investment of participating firms. It is expected that the economic effect of the investments will further increase. Since the start in 2004, 600 firms have been involved in one of the 40 RAAK programmes. In 2008, this number should be 10,000.

Name: investment Grants for Knowledge Infrastructure Description The scheme BSIK aims to stimulate the creation of high-quality (public-private) networks within the

Dutch knowledge infrastructure that can address long-term knowledge demands in a flexible way. Collaborative networks of knowledge users (e.g. businesses) and knowledge suppliers (e.g. universities) can get funding if they perform innovative industrial or fundamental research.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs Intended Beneficiaries Companies, HEI Financial Conditions Involved Grants Observations from Evaluations Evaluation outlined on Trend chart – No conclusive remarks on effectiveness.

Name: IOP-TTI module Description The "IOP-TTI module" replaces the former two instruments "Innovation Oriented Research

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Programmes" (IOP) and "Leading Technological Institutes" (TTI). The main objective is to establish long-term strategic R&D collaboration between companies and publicly funded knowledge institutes in those areas that are of strategic importance for the Dutch economy.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs Intended Beneficiaries Companies, HEI, Research Organisations Financial Conditions Involved Grants Observations from Evaluations Ex-ante evaluation of the ''old'' instruments IOP and TTI in 2004 and 2005.

Name: Smart Mix Description The aim of the "Smart Mix" is to promote focus and mass in excellent scientific research and to?

enhance the valorisation of results from research. The Smart Mix is used to address the "knowledge paradox" by vitalising collaboration between the business sector and the knowledge infrastructure in specific areas that are (will be) strategically important for the Netherlands. The Smart Mix is characterised by the combination of focus and (critical) massa in excellent research and the interaction and collaboration in a large part of the knowledge chain.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs, NOW – Netherlands Organisation for Scientific Research

Intended Beneficiaries All Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: IOP Innovation oriented Research Programmes Description IOP is an umbrella programme, which consists of sub-programmes (themes). The main goal of the

Innovation oriented Research Programmes (IOPs) is to increase the accessibility of the public knowledge infrastructure for industry and to increase and intensify interactions between industry and public knowledge institutes. The IOP instrument aims to strengthen basic-strategic research performed in the public knowledge infrastructure in directions that fit with innovation needs of the Dutch business sector.

Name of Provider SenterNovem – agency of the Dutch Ministry of Economic Affairs Intended Beneficiaries All companies, HEI, Research Organisations Financial Conditions Involved Grants Observations from Evaluations The programme outputs are summarised as follows: - IOP projects: most IOP projects are

dissertation projects. These projects produce a large number of reports and articles. The quality is generally regarded as good, although there are examples of failed projects. A substantial number of projects produces concrete results, including patent applications - Careers of IOP researchers: the IOP has produced a large number of highly skilled researchers and a large number of PhDs, working in industry and research institutes (with a clear focus on industry). For companies, the IOP offers the possibility of getting acquainted with young researchers. The other around, researchers come in contact with industrial themes. Most researchers continue to work in the same field, partly in industry, partly in research institutes - Concrete utilisation of IOP knowledge by industry: the concrete use by industry is substantial. There may in general not be an immediate link to commercial success, but relevant has been produced, that leads to economic returns: improved insights, training modules, better test phases, simulation tools, cheaper processes, new companies, new products, new knowledge, new projects, patent revenues, etc

Country - Ireland

Name: INNOVA Collaborative R& D Programme Description The objectives of the Innova programme are:

- To encourage and promote firm to firm research collaboration on a cross-border basis supported by research institutions when appropriate;

- To foster commercial links and to create a more sophisticated critical mass of the resources needed for such activities;

- To increase technology diffusion across the island by increasing access to complementary technical expertise and technologies;

- To contribute to the development of new products/processes that will have market demand;

- To encourage the attainment of new competencies for participants; - To encourage mutual learning (North & South) and the sharing of best practice; - To contribute to the development of the island economy.

Name of Provider Inter-trade Ireland Intended Beneficiaries SMEs, HEI research units Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Industry Lead Research Networks Description The Industry Led Research Programmes are designed to bring together small groups of private

companies with similar research needs and assist their evolution as a network, forge a common purpose by identifying common research needs, and support specific research to meet these needs.

Name of Provider Enterprise Ireland Intended Beneficiaries SMEs, HEI research units

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Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: R&D Capability Initiative Description The R&D Capability Initiative is part of the National Development Plan 2000 - 2006. The Initiative

supports the building up of a company’s R&D infrastructure in the context of a development plan for growing the business. Proposals for investment must therefore represent a clear "step-up" in the development of the R&D function, compared to the company’s current situation

Name of Provider Enterprise Ireland Intended Beneficiaries All companies Financial Conditions Involved Grants Observations from Evaluations The findings have not been published, but all indications are that the measure is successful. It is well

thought of in official and business circles.

Name: FUSION - Knowledge transfer across the Island of Ireland Description FUSION is the first all-island network between industry and academia. The network enables

knowledge and technology transfer across the island, supporting business innovation and increased capability. FUSION develops and facilities 3-way partnerships and projects between: · Companies - private sector businesses (with technology-based development needs). Third Level Institutes - universities, colleges, institutes of technology or research centres. Graduates - high-calibre degree/diploma holders (graduated within the last 5 years). Partnerships are driven by a company need. Within each 3-way partnership, partners work collectively to develop and implement a solution to a technology need within the company. Each company is partnered with a university or college with specialist expertise in the subject area required. The university or college provides one-to-one tailored assistance to solve the company’s technology project. A high-calibre graduate is recruited and based in the company to champion the project. This graduate operates as the link and agent for technology transfer between the university or college and the company.

Name of Provider Inter-Trade Ireland Intended Beneficiaries SMEs, HEI, Researchers/Scientists Financial Conditions Involved Grants Observations from Evaluations Pilot programme (2002-2004) was recently evaluated. All parties in the partnerships expressed

satisfaction with the programme. The continuing level of application is high. To date 55 companies have innovated and improved their competitiveness. Assessment criteria included: 1) Successful implementation of the project 2) Economic impacts of the project such as increased turnover 3) All partners expressing satisfaction with the project and its outcomes 4) Subsequent career development of the graduate/diploma holder 5) Level of new applications by SMEs.

Name: Additional R&D Tax Credits Description The Irish Council for Science, Technology and Innovation (which acts as an advisory board to

Government on science and technology) recommended in a recent policy statement the introduction of tax credits for research and development. The Council noted that R&D tax credits were to be found in 17 OECD countries including the UK, Netherlands, France and Spain against which Ireland was competing for mobile foreign investment. The Councils statement indicated that the introduction of the tax credit of 20 percent on qualifying expenditure for incremental R&D expenditure would have a particular benefit in stimulating R&D activity by multinational companies located in Ireland and also by indigenous enterprises.

Name of Provider Department of Finance Intended Beneficiaries All Companies Financial Conditions Involved Tax Incentives Observations from Evaluations No evaluation at present time

Name: Tax deduction for companies investing in R&D Description Subject to certain conditions, an enhanced tax deduction of 4 times the amount of incremental

expenditure is made available. The deduction applies to R&D expenditures of manufacturing companies that are eligible for a reduced corporate tax of 10%. For individual companies, incremental expenditure in excess of £ 25,000 (£32,000) and up to a limit of £170,000 (£216,000) per annum is eligible for the new incentive with pro rata allowances for groups of firms

Name of Provider Department of Finance Intended Beneficiaries All Companies Financial Conditions Involved Tax Incentives Observations from Evaluations No evaluation at present time

Name: Science and Technology Personnel Placement Description Enterprise Ireland supported Science & Technology placements aimed at companies that have

outdated or limited technological expertise. These allowed them to up-date their skills through technology graduates and managers under what was known as the TechStart and TechManager programmes, respectively. Both schemes have since concluded, but the same skills are now available to assist in increasing company innovation and R&D.

Name of Provider Enterprise Ireland Intended Beneficiaries SMEs Financial Conditions Involved Grants

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Observations from Evaluations A number of evaluations (the major one carried out by Circa Group Europe) indicated a high level of success in terms of type and numbers of graduates/managers and the level of satisfaction was represented by an up to 80% retention of graduates/managers by the sponsoring companies. The scheme was retained in the National Development Plan 1994-99 after 5 years in operation

Name: Training Standards Excellence through People Description Elimination of levy to fund training. The Excellence though People was found to be very successful

in stimulating people development. Excellence through people is Ireland's national standard for human resource management. It has been welcomed and supported by employers, their staff, trade unions and government. All types of organisations are eligible for Excellence Through People including manufacturing and service companies, the Voluntary Sector and the Public Sector.

Name of Provider FAS – National Training and Employment Authority Intended Beneficiaries SMEs Financial Conditions Involved No direct funding Observations from Evaluations No evaluations at present time

Name: Innovation Partner Initiative Description The purpose of the Innovation Partnership scheme (formerly known as the Applied Research Grants

Scheme for Universities and the Institutes of Technology) is to support the undertaking of collaborative applied research with direct industrial and commercial application, between industry and Third Level colleges. The Innovation Partnership scheme is open to academic staff of Third Level colleges in collaboration with an Irish-based company, including commercial state bodies or a consortium of both.

Name of Provider Enterprise Ireland Intended Beneficiaries All Companies, HEI Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Technology Transfer & Business Partnership Programme Description International search programme aimed at identifying Technology Transfer/Licensing opportunities.

The principal aim is to assist Irish industry, particularly indigenous companies, in the identification and introduction of new products or processes through technology acquisition (licensing, joint ventures, etc.). It was aimed at boosting the very modest level of assistance for technology transfer activities provided at the time of its initiation. This initiative provides suitable technology transfer, partnership, and joint venture opportunities for Irish firms.

Name of Provider Enterprise Ireland Intended Beneficiaries All Companies Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Technology Service Centres Description This suite of technology centres/PATs has been designed to assist in the commercialisation of R &

D and to provide technical services to companies. The Technology Centres are mainly based in the Regional Colleges/Institutes of Technology while the PATs are based in the universities.

Name of Provider Enterprise Ireland Intended Beneficiaries SMEs, HEI research units Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Technology and R&D Management – Short Courses Description The courses are organised and managed by Enterprise Ireland, the agency for the development of

indigenous industry but are given by independent consultants/specialists. Starting Date: 1997 Name of Provider Enterprise Ireland Intended Beneficiaries All companies Financial Conditions Involved No direct funding Observations from Evaluations No evaluations at present time

Name: National Institute of Technology Management - NITM Description Enterprise Ireland supports an R&D Management Programme that seeks to improve the ability of

industry to manage the process of R&D, technology development & innovation and to enhance the interaction between the Irish third-level sector and industry and to support high-level research. NITM was set up in 1997. Located in University College Dublin, the Institute is a joint venture between the Faculties of Commerce and Engineering & Architecture.

Name of Provider Enterprise Ireland Intended Beneficiaries All companies, HEI, HEI research units Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Name: Stimulating Innovation Management and Strategies at Enterprise level

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Description The key goals for each participating company are : - Achieve best international practice in Innovation Management - Implement the process through employees involvement - Generate a flow of new product/service/process ideas - Implement a process for planning and management of R&D/innovation - Achieve improved ROI for R&D/Innovation spending - Develop an innovation strategy.

Name of Provider Enterprise Ireland Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations No evaluations at present time

Country – Japan (Taken from http://www.chusho.meti.go.jp/sme_english/outline/04/01.html)

Name: Facilitation of Fund Supply Description 1. Monetary Policies

Difficulty in procuring funds is one of the greatest managerial issues for SMEs, which are in most cases unattractive loan recipients for private financial institutions. Therefore, there were not enough suppliers that could provide funds to SMEs. Thus, financial institutions that can provide a stable supply of fixed long-term and low-interest funds to SMEs regardless of fluctuations in the economy, in the form of governmental SME financial institutions, were needed. Three institutions listed below were created and have been meeting these needs. Offers;

- Long term funds - Credit guarantees

2. Business Upgrading loans Loans for upgrading infrastructure four up to 20 years with a 3 year deferral program

Name of Provider 1. Japan Finance Corporation for Small Business, the National Life Finance Corporation, the Shoko Chukin Bank 2, SMRJ - Organisation for Small & Medium Enterprises and Regional Innovation, JAPAN

Intended Beneficiaries SMEs Financial Conditions Involved Long-Term Loans, Credit Guarantees Observations from Evaluations

Name: Building of Business Support Systems Description 1. SME Support Centres

It is a critical issue to improve the support system for SMEs so as to provide them with appropriate advice on solutions to their managerial issues and the smooth acquisition of management resources, by attentively responding to their widely diverse needs.

- SME/Venture Business Support Centres (strategy, management, finance advice from experienced professionals)

- Prefectural SME Support Centres (advice on HR, technology, and information from consultants)

- Regional Support Centres (for local SME entrepreneurs who plan to start up a business or implement business innovation. In each Centre there is a specialized coordinator on hand, who has adequate knowledge about business management, so that clients can easily discuss their various concerns, and receive over-the-counter consultations, diverse information, etc.

- Co-ordination and collaboration between the centres organised by SMRJ 2. Support by Commerce and Industry Associations and Chambers of Commerce and Industry In order to support the overall management of small-scale enterprises in accordance with the actual conditions of their management infrastructures and styles, Commerce and Industry Associations and Chambers of Commerce and Industry implement management reform dissemination projects (consultation, advice, etc. concerning general aspects of management, such as book-keeping methods, finance, labour administration, and technology).

Name of Provider 1. SMRJ - Organisation for Small & Medium Enterprises and Regional Innovation, JAPAN 2. Commerce and Industry Associations and Chambers of Commerce and Industry

Intended Beneficiaries SMEs Financial Conditions Involved No grants on offer. Observations from Evaluations

Name: Promotion of Business Start-ups and Venture Business Description To realize a smooth start-up or business activity for those who are going to start up businesses, for

SMEs that are at an initial stage of business, and for SMEs that have entrepreneurship and an active approach to creative business activities such as the development of new products or services (so-called venture businesses), the State shall support them comprehensively in funds, human resources, management know-how, information, technology, etc. 1. Ability Development and Management Support (Education, Training, Support) 2. Financial Support (Loans, Credit Guarantee, Investment, Subsidies, Tax Credits) 3. Support of Technical Aspects ( 4. Support under the Laws (as outlined in the previous three measures)

Name of Provider SMRJ Intended Beneficiaries SMEs Financial Conditions Involved Tax Incentives, Grants, Loans Observations from Evaluations

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Name: Support of Technical Development Description In spite of their wishes and ideas, SMEs often have difficulty obtaining by themselves all of the

necessary management resources such as technology, funds, and information, and are limited in their approach to human resource development. In order to overcome such difficulties and limits and to aim for the development of independent and creative SMEs, the State has been providing various types of support, as follows:

- Support (commercialisation of R&D results) - Access to infrastructure (IT) and resources (human) - Collaboration within academia - Training and seminars

Specifically, as seen before in UK, Netherlands and USA – SBIR The Small Business Innovation Research [SBIR] system has been established to activate SMEs with technology development capability and support their creative business activities. Specifically, relevant ministries and agencies and special corporations, grant subsidies, entrustment expense fees, etc. (specific subsidies) for technical development by SMEs, and for consistent support of commercialization, expand debt guarantee lines and establish special cases that need neither collateral nor a third party's guarantee.

Name of Provider SME support Centres, SMRJ, Chamber of Commerce and Industry Intended Beneficiaries SMEs Financial Conditions Involved Grants, Tax incentives, Loans, Subsidies Observations from Evaluations

Name: Support of Business Innovation Description In Japan, it is expected that SMEs lead Japan’s economic development through their own business

innovation, as a new approach to improve business. Business innovation such as development of new products fitting consumer’s needs and providing new services, becomes important as a response to the diversification of consumer needs, intensification of price competition, advance of IT, and economic globalization. In addition, business innovation related to the development of methods for production and providing services, is becoming increasingly important. In these circumstances, under “the Law on Supporting Business Innovation of Small and Medium Enterprises”, SMEs business innovation is broadly supported in order to develop Japan’s economy, these include; Subsidies, Credit Guarantees, Loans, Tax Incentives, Finance for enhancement, Grants for Employment, reduction in patent fees.

Name of Provider SMRJ, Chamber of Commerce Intended Beneficiaries SMEs Financial Conditions Involved Grants, loans, credit guarantee, tax incentives Observations from Evaluations

Name: Support for the international development of SMEs Description METI, to promote the construction of an Asia wide production network, will take measures for the

information provision and funding and HR support for SMEs. Name of Provider (METI) Ministry of Economy, Trade and Industry Intended Beneficiaries Manufacturing SMEs Financial Conditions Involved JPY 4 Billion Observations from Evaluations

Name: IT Productivity Improvement Campaign Description In order to realize world-class IT management within five years, METI will make efforts to promote

the IT Productivity Improvement Campaign by industry, academia, and government, and will support managerial innovations by small and medium enterprises utilizing IT.

Name of Provider METI Intended Beneficiaries SMEs Financial Conditions Involved No financial support available Observations from Evaluations

Name: HR Development in partnership with the real world and the regions Description METI will promote business-academia collaboration for the enhancement of practical education in

the regional technical high schools and the development of technicians, finance related HR, and manufacturing skills.

Name of Provider METI Intended Beneficiaries Individuals and Companies Financial Conditions Involved Grants Observations from Evaluations

Country/Special Administrative Region – Hong Kong

Name: SME Funding Schemes Description - Loan Guarantee Scheme - to help SMEs secure loans from participating lending institutions for

acquiring business installations and equipment and meeting working capital needs. - Export Marketing Fund - To provide grant to SMEs to encourage them to actively participate in

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export promotion activities to expand access to markets outside Hong Kong. - Training Fund - To provide training grant to SMEs to encourage them to provide training relevant to their business operations to their employers and employees, and to assist the SMEs to enhance their human resources, with a view to improving the SMEs' capabilities and competitiveness. - Development Fund - To provide financial support to non-profit-distributing support organisations, trade and industrial organisations, professional bodies and research institutes, to carry out projects which will enhance the competitiveness of Hong Kong's SMEs in general or SMEs in specific sectors.

Name of Provider Trade and Industry Department – SMEO (Small and Medium Enterprise Office) Intended Beneficiaries SMEs Financial Conditions Involved Grants, Loans, Guarantees Observations from Evaluations

Name: SUCCESS – Support and Consultation Centre for SMEs Description The SUpport and Consultation CEntre for SMEs (SUCCESS) is the front line service point of the

HKSAR Government dedicated to the continuous development of local SMEs and the enhancement of their competitiveness by assisting them in achieving long-term success. Operated by the Trade and Industry Department, SUCCESS provides one-stop comprehensive information service on public sector SME support services, business start-up, government business licences and tariff rates of export markets, plus free consultation service on a wide spectrum of business areas through the "Meet-the-Advisors" Business Advisory Service.

Name of Provider Trade and Industry Department, SMEO Intended Beneficiaries SMEs Financial Conditions Involved No funding available Observations from Evaluations

Name: Hong Kong Trade Development Council Description TDC is the global marketing arm and public service hub for Hong Kong-based manufacturers,

traders and service exporters. Its activities are especially geared to small and medium-sized enterprises (SMEs). Acts as a one-stop-shop for SMEs

Name of Provider Government Intended Beneficiaries SMEs, All companies Financial Conditions Involved No funding available Observations from Evaluations

Name: Innovation and Technology Fund Description The ITF, administered by the Innovation and Technology Commission of the Hong Kong SAR

Government, aims to increase the added value, productivity and competitiveness of Hong Kong's economic activities. The Hong Kong SAR Government hopes that, through the ITF, Hong Kong companies could be encouraged and assisted to upgrade their technological level and introduce innovative ideas to their businesses. Programs include; Innovation and Technology Support Program (ITSP) HK Technology Cooperation Funding Scheme (TCFS) General Support Programme (GSP) University-Industry Collaboration Programme (UICP) Small Entrepreneur Research Assistance Programme (SERAP)

Name of Provider HK SAR Government Intended Beneficiaries All companies Financial Conditions Involved Grants Observations from Evaluations

Name: New Technology Training Scheme Description It aims to provide assistance to companies that wish to have their staff trained in a new technology

that would be useful to their business. New technologies include those which are not widely applied in Hong Kong and the absorption and application of which will significantly benefit Hong Kong.

Name of Provider Vocational Training Council, Innovation and Technology Commission Intended Beneficiaries All Companies Financial Conditions Involved Grants Observations from Evaluations

Name: Design Smart Initiative Description Funding

Design Business Collaboration Scheme (DBCS) – aims at promoting collaborations between design and Small and Medium Sized Enterprises Professional Continuing Education Scheme (PCES) – aims at developing professional continuing education courses in design and its application One-Stop-Shop InnoCentre – “Grade A” office space, incubator for start-ups, education and training, networking programme, resource centre

Name of Provider Innovation and Technology Commission

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Intended Beneficiaries All Companies Financial Conditions Involved Grants Observations from Evaluations

Name: HK R&D Centres Description A Number of centres aimed at establishing a physical base for R&D in HK. There are six Centres in

total - Automotive Parts & Accessory Systems - Information & Communications Technologies - Logistics & Supply Chain Management Enabling Technologies - Nanotechnology & Advanced Materials - Textiles & Clothing - Chinese Medicine

Name of Provider Innovation and Technology Commission Intended Beneficiaries All companies Financial Conditions Involved No financing available Observations from Evaluations

Country – Korea (summarised from http://www.smba.go.kr/main/english/sub5/sub05_1.jsp#99)

Name: Business Incubator Description The SMBA supports Business Incubators (BI) operated by universities and research institutes

equipped with facilities and equipment that can support would-be entrepreneurs or new SME founders. This program is designed to promote the survival and growth of newly established venture companies. Currently, about 270 business incubators across the nation host about 4,304 SMEs. SMEs are provided with land, an expert consulting service, marketing education and other supports.

Name of Provider SMBA – Small and Medium Business Administration Intended Beneficiaries SMEs Financial Conditions Involved Observations from Evaluations

Name: Finance Service Description Those intending to start up an enterprise, or expand/restructure an existing business will encounter

the most common difficulties with financing. This is mainly due to banks requiring collateral prior to agreeing to extend a loan, since their technology and corporate value cannot be correctly assessed when evaluating creditworthiness. Therefore, the SMBA provides direct and indirect financing support for SMEs to ensure that creative and innovative SMEs will not fail as a result of difficulties with financing.

Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved VC, Grants, Guarantees, insurance Observations from Evaluations

Name: Capacity Building of Human Resources Description The SMBA is making policy efforts to raise the capabilities of both SME employees and managers,

whilst additionally creating a social and business environment whereby SMEs can employ competent human resources. To lure an increasing number of the workforce into SMEs, the SMBA implements the 'On-site Work Conditions Improvement Program' and provides tax benefits and preferential treatment to workers with lengthy employment. In order to change the way that young people perceive SMEs, and maintain friendly ties between the jobless and SMEs, the SMBA initiated a 'SMEs Experiencing Program for College Students' and a 'Youth Employment Package Program'. The 'SME Training Centre' implements various programs to educate the SME managers and employees in respect of a new management method, and on-site work skills. The foreign workforce's industrial training system and the industrial technician certified system have been put in place to ensure stable availability of manpower at production sites and intermediate-level technicians, respectively.

Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved Tax Incentives Observations from Evaluations

Name: Strengthening Knowledge Procurement from Overseas Description Providing Information on International Procurement Market: International procurement market

amounts to $2 trillion per year. However, Korean SMEs take up only 0.2% or $4 billion of the huge procurement market. In an effort to expand the Korean SMEs' share of the international procurement market, the SMBA provides information on international bidding, award and main contractors in real time (1,000 pieces of bidding information per day) through the construction and operation of the Integrated System on International Procurement(www.b2g.go.kr). The SMBA also offers training programs and seminars on international procurement, and supports SMEs with participation in exhibitions.

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Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved No finance available Observations from Evaluations

Name: Inno-Biz Description Fostering Innovative SMEs (Inno-Biz) : The SMBA intends to identify innovative SMEs equipped

with superior technologies that can enhance their technological level through their own technological innovation system. The purpose is to ensure that they will develop into global blue-chip firms by providing comprehensive support such as technology assurance and preferential treatment on credit loan.

Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved Credit Loans Observations from Evaluations

Name: Description To accelerate the technological development of SMEs, public institutions are encouraged to use over

5% of their technological development budget for SMEs. Under the KOSBIR system, the SMBA spent approximately $920 million in 2005.

Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved Observations from Evaluations

Name: SMEs' Technology Innovation Program Description SMEs capable of developing technologies without support can recover up to 75% of the expenses

spent to develop new products and enhance product quality. The ceiling of the financing amounts to $300,000 for two years in the case of strategic tasks or $100,000 for one year in case of general tasks. Under this program, the SMBA supported 1,912 SMEs in 2005 alone.

Name of Provider Intended Beneficiaries Financial Conditions Involved Observations from Evaluations

Name: New Technology Purchasing Assurance Description In an effort to further commercialize new technologies, government agencies, public institutions

including Defence Ministry, KEPCO (Korea Electric Power Corporation), KOGAS (Korea Gas Corporation), and Korea Railroad Corporation, and private businesses commission SMEs to develop a new technology with the assurance that they will purchase the technological products. Under this program, the SMBA finances the technological development of SMEs, while public institutions purchase the products for a certain period of time. As of 2005, the SMBA has supported 80 technology development projects and plans to expand the participation of government agencies, public institutions and private businesses in this program.

Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations

Name: Industry-University-Research Consortium Program Description To boost the technological capabilities of SMEs, universities or research institutes develop

technology needed in the manufacturing field in collaboration with SMEs. About 220 consortia were formed across the nation in 2005, to support 2,700 SMEs in developing new technologies.

Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations

Name: Transferred Technology Development Project Description This project aims to prevent superior technologies from being discarded and enhance technological

innovation capabilities of SMEs. To this end, the SMBA covers additional development costs required to commercialize transferred technologies owned by universities, research institutes and businesses. In 2005, the SMBA supported about 90 tasks.

Name of Provider SMBA Intended Beneficiaries SMEs Financial Conditions Involved Observations from Evaluations

Name: SME Production Digitalization Project/ Total Information Management Providers

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Description This project helps business managers and employees make good decisions by collecting and analyzing the information produced at the production site with the use of information technology and by checking and supervising production processes. The SMBA supports a program designed to assist the e-manufacturing project aimed at boosting productivity through Computer Integrated Manufacturing (CIM), the Manufacturing Execution Program (MES), and Point of Production (POP)

Name of Provider SMBA/SBC Intended Beneficiaries SMEs Financial Conditions Involved Observations from Evaluations

Name: Biz-Match Description Service offered but the SBC looking to match Korean manufacturers to international businesses.

- Identification and introduction of appropriate qualified Korean manufacturers. - Fair and balanced mediation between you and your Korean partner(s) throughout the negotiation process - Financial support for the selected projects

Name of Provider SBC – Small Business Corporation Intended Beneficiaries SMEs Financial Conditions Involved Grants Observations from Evaluations

Country – Denmark

Name: Industrial PHD initiative Description The Industrial PhD initiative is aimed at enhancing research and development in the Danish business

sector by: - Training researchers to gain insight into the business related aspects of research and development - Building personal networks of knowledge between companies and Danish or foreign universities / research institutions. The objective of the scheme is to permit post-graduate students to obtain a PhD-degree through employment as researcher in a private company. The research/study-programme is formulated in co-operation with a Danish university. The university provides academic advice, courses and evaluation of the PhD-thesis.

Name of Provider The Academy of Technical Sciences Intended Beneficiaries All companies

Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Higher education institutions (education function) Technology and innovation centres (non-profit)

Financial Conditions Involved Wage subsidies Observations from Evaluations The latest evaluation (from 1995) of the scheme was very positive. Companies employing an

industrial researcher establish links with the university involved and increase their research and innovation effort.

Name: Innovation accelerating research platforms Description This measure is aimed at improving the contribution from research to innovation. A precondition for

this to happen is firstly a strengthening of the relations between the public research system and the innovative environments and secondly an identification and investment in selected research areas, that have the potential to drive innovation forward.

Name of Provider Danish Research Agency Intended Beneficiaries All companies

Scientists / researchers (as individuals) Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Technology and innovation centres (non-profit)

Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: Innovation Consortiums Description The aim of Innovation Consortiums is to strengthen co-operation between companies, public

research institutions and technological service to develop new generic technology platforms for the coming 5-10 years product and service development in Denmark. Enterprises must contribute with 50% of the funding. Typically a consortium has a total budget of 2.500.000 - 5.500.000 EURO and lasts 3-4 years.

Name of Provider Ministry of Science, Technology and Innovation Intended Beneficiaries All companies

Higher education institutions research units/centres Technology and innovation centres (non-profit)

Financial Conditions Involved Grants Observations from Evaluations The first 30 innovation consortiums were evaluated in 2005. The conclusion was that the consortium

measure has a good national economy effect and that the basic principles of the measure are good.

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However, the evaluation also concluded that the measure could be improved in certain aspects.

Name: High-tech Networks Description The Strategy focuses on how to improve co-operation between education, research and trade and

business. The goal is that more enterprises, especially SMEs, shall have faster and easier access to knowledge.

Name of Provider Ministry of Science, Technology and Innovation Intended Beneficiaries All companies

Consultancies and other private service providers (for-profit) Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Higher education institutions (education function) Technology and innovation centres (non-profit)

Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: Approved Technological Service Institutes (GTS-Institutes) Description The main objective of the approved technological service institutes is to support and promote

innovation within business and industry located in Denmark. This is done by collecting, developing and creating new advanced knowledge and by ensuring that companies have access to advice and knowledge transfer.

Name of Provider Ministry of Science, Technology and Innovation Intended Beneficiaries All companies Financial Conditions Involved Grants Observations from Evaluations In January 1998 the Agency undertook a poll among companies in Denmark with less than 50

employees. This showed that the approved technological service institutes play an important role for many of the SME. In fact 26% of the small companies had used the services of one or more institutes. And among these three out of four were positive toward using the technological institutes again. However, the poll also showed big variations among the degree to which the institutes are known among the small companies in Denmark.

Name: Pre-project grant for the sixth EU framework programme Description The Strategy focuses on how to improve co-operation between education, research and trade and

business. The goal is that more enterprises, especially SMEs, shall have faster and easier access to knowledge. The primary purpose of the initiative is to increase the international cooperation between business and knowledge institutions. In addition to that the initiative is to be instrumental in bringing Denmark to reach the objective that at least 15 per cent of the funds available under the framework programme are granted to SMEs.

Name of Provider Ministry of Science, Technology and Innovation Intended Beneficiaries SMEs only Financial Conditions Involved Grants Observations from Evaluations In both 2004 and 2005 the funds have ran out before the end of the year, which indicate a strong

interest from the SMEs. The Danish Council of Technology and Innovation will evaluate the measure in 2006.

Name: Regional technology centres Description The main objective of the measure is to strengthen knowledge-based growth and development in the

regions outside of the larger citys. Regional Technology Centres focus on regional competencies and act as intermediaries between regional research and SMEs. Experiences from the former Regional Growth Centres (DK 13) initiative guide the establishment of these centres. The regional Technology Centres aim at strengthening the collaboration between the regional business-environment and relevant knowledge-institutions in relation to research, innovation and technology development. The collaboration is based on business strength positions within a limited geographic area outside the capitol area. The Government has earmarked 8.5 million Euro for 13 Regional Technology Centres during the coming 4 years. 7 of the Centres are new, while the remaining seven Centres build on existing Regional Growth Centres

Name of Provider Ministry of Science, Technology and Innovation Intended Beneficiaries All companies

Higher education institutions research units/centres Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Country – Finland

Name: Tekes Funding for Feasibility Studies (VARA) Description Funding for Feasibility Studies is targeted to small and medium sized companies, universities and

research institutes. The instrument aims to improve chances to launch and carry out successfully R&D-projects and new technology-based business. Funding for Feasibility studies can be used also for preparation of firm's technology strategy, improving in-house conditions for utilisation of information technology or for transfer of research

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know-how to SME. Maximum amount is € 15,000/70 per cent. Name of Provider Tekes – Finnish Funding Agency for Technology and Innovation Intended Beneficiaries SMEs only

Higher education institutions (education function) Technology and innovation centres (non-profit)

Financial Conditions Involved Grants Observations from Evaluations No information available

Name: TRIO Programme Description The programme aims at enhancing the competitiveness of firms by promoting the

internationalisation and improving the business environment of enterprises so that they would be able to continue economically viable activities in Finland. The TRIO Programme focuses particularly on technology industries and within it on system integrators and component manufacturers. The objectives of the programme are: - profitable growth, competitiveness and internationalization of the production of the technology industry - at least 8% annual growth in sales - profitability and solvency at least at our competitors’ level (i.e. significant growth of return on investment and an equity ratio of at least 50%) - strengthening of internationalization - developing, as a major element in business, new services which support cooperation between companies and the end users of products - constant renewal: productive and growing R&D investments

Name of Provider Technologies Industries in Finland Intended Beneficiaries All companies Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: TUPAS Funding Service Description Research services for SME's. Tekes' TUPAS concept is tailored for helping SME's to solve small,

technologically challenging problems by bringing the best knowledge available for companies. In addition, the measure aims to encourage SMEs to exploit more research services and bring SMEs and research organisations to a closer and more active cooperation. SMEs can get grants from Tekes to cover the expenses up to € 15,000 or 70 per cent of the total costs. The research services are provided by research organisations marketing and carrying out technology projects in cooperation with the SMEs.

Name of Provider Tekes – Finnish Funding Agency for Technology and Innovation Intended Beneficiaries SMEs only Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: YRKE - national development project for business incubators Description The YRKE project, national development project for business incubators, has three main foci of

interest: new services, long-term funding and promoting know-how. The parks, which are situated all over Finland, offer development services to new innovative enterprises.

Name of Provider Finnish National Fund for Research and Development (SITRA) Intended Beneficiaries All companies

Technology and innovation centres (non-profit) Financial Conditions Involved No direct funding Observations from Evaluations No evaluation yet

Name: Centre of Expertise Programme Description The aim is to enhance regional competitiveness and to increase the number of high-tech products,

companies and jobs. To achieve this goal, the programme will be used to implement projects reflecting the needs of industry, to encourage industry, research and training sectors to co-operate, to ensure rapid transfer of the latest knowledge and know-how to companies and to exploit local creativity and innovation.

Name of Provider Ministry of the Interior Intended Beneficiaries All companies

Consultancies and other private service providers (for-profit) Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Higher education institutions (education function) Technology and innovation centres (non-profit)

Financial Conditions Involved Grants Observations from Evaluations According to the official, externally commissioned evaluation of the first programme period (1994-

1998), the main result has been the increase of co-operation, both at regional and national level. The State Audit Office (October 2001), in its own evaluation, considers the Centre of Expertise Programme as a top act of the Finnish Regional Policy. Mid term evaluation of the second

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programming period (1999-2002) indicates that programme has created alltogether: 7100 new knowledge-intensive jobs, 9000 preserved jobs, 500 new high technology companies, 1800 new innovations, 40000 persons educated.

Name: Technology strategy design Description This measure is intended for helping companies and research units to develop their own technology

strategy. Tekes provides funding and expertise in designing it. There is also a guidebook available as a tool for technology strategy design.

Name of Provider Tekes – Finnish Funding Agency for Technology and Innovation Intended Beneficiaries All companies

Higher education institutions research units/centres Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: Tekes technology programmes Description Technology programmes are targeted entities of activation, funding and expert services that are

directed on the basis of customers' needs and focus areas in the Tekes' strategy at areas that are strategically important to Finland. The programmes strengthen cooperation between companies, universities, research institutes and the public sector. The programmes emphasise the diverse development and exploitation of international and regional technology cooperation.

Name of Provider Tekes – Finnish Funding Agency for Technology and Innovation Intended Beneficiaries All companies

Higher education institutions research units/centres Higher education institutions (education function) Technology and innovation centres (non-profit)

Financial Conditions Involved Grants Observations from Evaluations Study on research and technology programme activities in Finland states that the technology

programmes for developing innovative products and processes are an essential part of the Finnish innovation system. These programmes have proved to be an effective form of cooperation and networking for companies and the research sector.

Name: Improving the use of research results at universities Description The goal of all the recommended measures is to promote effective commercialisation of university

research results. The efforts have focused on promoting professional innovation services at universities to exploit research results in various ways.

Name of Provider Helsinki University of Technology Intended Beneficiaries All companies

Other public and non-profit research organisations (not HEI) Higher education institutions (education function) Technology and innovation centres (non-profit)

Financial Conditions Involved No direct funding provided Observations from Evaluations No evaluation yet

Country – France

Name: SME Pact Description The objective of the SME Pact is to reinforce relations between innovative SMEs and large

companies and organisations, through commercial contracts or R&D collaboration especially. The Pact has four programmes: - SMEsearch: support to prospecting and contact activities. In practice, this means the organisation of thematic individual or collective meetings - SMEadvocate: individual support to SMEs in their contractual relations with large companies and organisations. Information of large companies on difficulties met on the field by SMEs - SMEtool: mixed think tanks for designing recommendations and setting up support tools. Reflections turn on acquisition processes, diminution of risk for large companies, lightening of procedures - SMEwatch: follow-up, by conferences and annual reports. An annual award will reward large companies signatories of the Pact according to the quality of their relations with SMEs

Name of Provider Comité Richelieu – National Agency for Innovation (OSEO-ANVAR) Intended Beneficiaries All companies

SMEs only Other public and non-profit research organisations (not HEI) Trade unions

Financial Conditions Involved No direct funding available Observations from Evaluations No evaluation yet

Name: Technological Development Network Description In each French region, a Technological Development Network (RDT) gathers regional institutional

actors in the field of innovation (OSEO-ANVAR, DRIRE, DRRT, Chambers of commerce, prefects) in an informal network. The RDT co-ordinate actions to promote innovation within SMEs. RDT

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pursue a series of targeted missions: - Financial support adapted to very small enterprises with the PTR (Technological Services networks) - Coordination - Knowledge of enterprise and of their technological needs - Training - Diffusion of information

Name of Provider National Agency for Innovation (OSEO-ANVAR) Intended Beneficiaries SMEs only Financial Conditions Involved Grants Observations from Evaluations In 2004, 1395 prospectors visited 29 570 SMEs. 1458 grants (PTR) were allocated for a total

amount of EUR 6,77. 91,02 % of the beneficiaries where SMEs with less than 50 employees, 62% less than 10 employees.

Name: Corporate Tax Credit for Research Expenses (CIR) Description The Corporate Tax Credit for Research Expenses (CIR) is a key measure to support R&D

investments within companies. The research Tax Credit is a horizontal measure, non-discriminatory across sectors of activity, and aimed at supporting corporate R&D investments by means of tax incentives.

Name of Provider Ministry in charge of Research Intended Beneficiaries All companies Financial Conditions Involved Tax incentives (including reduction of social charges) Observations from Evaluations Only impact assessments are carried out. It is extremely difficult to establish econometric evidence

on the link CIR / R&D expenses.

Name: Technological Research and Innovation networks (RRIT) Description The objective is to develop public and private partnerships with the creation of national thematic

networks linking public laboratories and enterprises, including SMEs in well-defined fields. The Network will receive a share of public research funding. The research should be on short-term demand and contribute to the creation of innovative firms.

Name of Provider National Agency for Research (ANR) Intended Beneficiaries All companies

Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Technology and innovation centres (non-profit)

Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: Support for Innovation Description The scheme assists technology-based start-ups, newly created firms (less than three years) or firms

willing to develop an innovative project. The measure allows companies to develop new products and processes, to have access to external competencies for innovation projects, to find investors and/or partners in France or abroad, to have access to financial markets, etc.

Name of Provider National Agency for Innovation (OSEO-ANVAR) Intended Beneficiaries SMEs only

Scientists / researchers (as individuals) Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Technology and innovation centres (non-profit)

Financial Conditions Involved - Grants - Subsidized loans (including interest allowances) - A right to purchase a company's equity shares in a limited time period at a price fixed in advance.

Observations from Evaluations An evaluation by an independent evaluator (Technopolis France) was carried out in 2001. The evaluation found that the scheme has a good additionality effect for small and very young companies, in particular in more traditional sectors. The non-financial dimension of the support is well appreciated in particular at early stages of companies’ development. The report concludes that the impact of the scheme is high. The main recommendations are to 1) improve the targeting of the companies, 2) reinforce impact monitoring 3) improve considerations for commercial and marketing aspects of the projects 4) establish more formalised procedures at ANVAR concerning search for and follow up of companies.

Name: Support to the recruitment of PhD candidates on an applied research project within an enterprise - CIFRE convention Description This scheme supports the recruitment of a student by a private enterprise. The recruited student does

his PhD research on an applied topic in the enterprise, under the supervision of a university or public laboratory. The scheme aims to increase the number of executives in key positions within companies, who understand research issues and who have the capacity to liaise with specialised research bodies (academics, institutes, universities or other public research performers).

Name of Provider National Association for Technical Research (ANRT) Intended Beneficiaries All companies Financial Conditions Involved Grants

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Observations from Evaluations No evaluation yet

Name: Support for the recruitment of technicians on innovative projects (CORTECHS) Description CORTECHS is a research convention whose aim is to support young technicians recruitment in

SMEs for research projects purposes. This convention gathers a technician, an SME, a ‘centre de compétence’ that can be a polytechnics, a high school, a research laboratory etc. The Convention is signed for duration of one year between the SME and OSEO-ANVAR in charge of managing the scheme. The aim is also to support co-operation between research bodies - in charge of the monitoring of the research project and the training of the engineer - and the SME.

Name of Provider National Agency for Innovation (OSEO-ANVAR) Intended Beneficiaries SMEs only Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: Technology Diffusion within SMEs (Procedure ATOUT) Description The objective of this measure is to improve the technological level of SMEs. The ATOUT scheme

enable SMEs to access technologies that are new to them but already applied in other segments of the economy. The ATOUT scheme aims at fostering a technological lap forward by SMEs in order to improve products or processes performances.

Name of Provider National Agency for Innovation (OSEO-ANVAR) Intended Beneficiaries SMEs only Financial Conditions Involved - Grants

- Reimbursable loans Observations from Evaluations Evaluations of the ATOUT programme in its different components (support to use of

microelectronic components, of material etc ..) have been carried out. Also evaluations at regional level have been realised (f.i. in Picardie). The main result of the latter, for example, is that despite a high degree of satisfaction among beneficiary enterprises, there seems to be little impact on their internal organisation. One recommendation is to bring further the degree of formalisation of the procedures.

Name: Support to Recruitment for Innovation (ARI) Description The scheme aims to support SMEs that wish to reinforce their R&D personnel and resources. It

gives support to the recruitment by a SME of a researcher to conduct R&D activity. Name of Provider National Agency for Innovation (OSEO-ANVAR) Intended Beneficiaries SMEs only

Scientists / researchers (as individuals) Financial Conditions Involved Grants Observations from Evaluations ARI are often evaluated at regional level.

Name: Competitiveness clusters Description Inspired by numerous foreign examples, the French authorities launched a call for projects in

December 2004 aiming at funding competitiveness clusters with an international visibility. Clusters gather companies, training centres and public and private research organisations around innovative joint projects. Clusters are specialised in scientific and technological fields.

Name of Provider DATAR Intended Beneficiaries All companies

Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Higher education institutions (education function) Other public education institutions (secondary,etc.) Private institutions for education / lifelong learning Technology and innovation centres (non-profit) Business organisations (Chambres of Commerce...)

Financial Conditions Involved - Grants - Subsidized loans (including interest allowances - Guarantees - Tax incentives (including reduction of social charges)

Observations from Evaluations No evaluation yet

Name: Support for the recruitment of post-doctorate in SMEs Description The measure aims to support SMEs that wish to reinforce their R&D personnel and resources. Its

main goals are to help industrial SMEs to structure their R&D and to enhance their technological level, in order to conduct significant projects, and to gain market shares.

Name of Provider Ministry of Research Intended Beneficiaries SMEs only Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: Industrial and Commercial Business Services (SAIC) Description The role of SAIC is to gather in a single structure the promotion and valorisation of Universities and

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HEI industrial and commercial activities. The main objective is to allow Universities and HEI to monitor their development policy in terms of research valorisation and technology transfer for instance, or other lucrative activities and enhance their visibility. The SAIC can manage research contracts (with companies or other public entities), patents policy, etc. The budget is separated from the University budget and has a particular and more flexible accounting regulation.

Name of Provider Ministry of Research Intended Beneficiaries All companies

Higher education institutions research units/centres Financial Conditions Involved No direct funding provided Observations from Evaluations The Report on Research management in Universities of the Court of auditors (October 2005)

explains that despite efforts for promoting SAIC, only 20% of universities created such a structure. The Court insists upon the necessary transition period between former structures and SAIC.

Name: National Centres for Technological Research (CNRT) Description The objective is to bring together public research laboratories and private research centres (generally

of large companies but also sometimes of high tech SMEs) to develop collaborative technological research activities. The Centres are geographically identified and focus on one specific field of competence. Their vocation is to become established poles of competence and excellence at national level.

Name of Provider Ministry of Research Intended Beneficiaries All companies

Consultancies and other private service providers (for-profit) Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Higher education institutions (education function) Technology and innovation centres (non-profit) Business organisations (Chambres of Commerce...)

Financial Conditions Involved No direct funding provided. Funding is decided on a contractual basis through Contrat de Plan Etat Region concluded between the government and regional authorities.

Observations from Evaluations No information available

Name: Youth and Innovation Description The measure aims to support young people (15 - 25 years) who want to develop an innovative

project. The scheme contributes to a better professional integration for the young people and promotes links between education and enterprises.

Name of Provider National Agency for Innovation (OSEO-ANVAR) Intended Beneficiaries All companies Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Country – Germany

Name: Innovative Regional Growth Poles Description The programme supports the establishment of regionally and thematically focussed innovation

initiatives in the New Laender. Initiatives will consist of enterprises, public research organisations/universities and other actors. Co-operative R&D/education projects should rest on regional strength and act as future growth poles. They should be oriented on market commercialisation from the beginning on, including an effective management of the initiative.

Name of Provider Federal Ministry of Education and Research (BMBF), Ministerium für Wirtschaft, Technologie und Verkehr des Landes Schleswig-Holstein, Projektträger Biologie, Energie, Umwelt (BEO)

Intended Beneficiaries SMEs only Other public and non-profit research organisations (not HEI)

Financial Conditions Involved Grants Observations from Evaluations No information available

Name: InnoNet Description InnoNet attempts to improve R&D networks between SMEs and research institutions. InnoNet

applies new ways of promotion (competition approach, support for collaborative research between SMEs and science, network building, subsidies provided only for research organisations).

Name of Provider Federal Ministry of Economics and Technology (BMWi), Technologiezentrum Informationstechnik GmbH

Intended Beneficiaries SMEs only Higher education institutions research units/centres Other public and non-profit research organisations (not HEI)

Financial Conditions Involved Grants (for research institutions only) Observations from Evaluations The most recent evaluation (July 2004) concluded that the programme is successful at encouraging

innovative activity.

Name: PRO INNO II Description The programme supports SMEs in the field of R&D co-operation. Financial incentives should

stimulate SMEs with no R&D activities yet to engage in R&D.

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Name of Provider Federal Ministry of Economics and Technology (BMWi), Arbeitsgemeinschaft Industrieller Forschungsvereinigungen (AIF)

Intended Beneficiaries SMEs only Higher education institutions research units/centres Other public and non-profit research organisations (not HEI)

Financial Conditions Involved Grants Observations from Evaluations In July 2002, an evaluation of the ProInno programme was presented by the BMWi. It says that

research co-operation exerts positive effects on the involved enterprises, including growth in sales, exports and employment. The authors calculated that each publicly funded R&D project under the ProInno/FoKo programmes produced additional or at least "secured" employment of 7.9 jobs two years after finishing of the project.

Name: Thematic R&D programs Description Grants-in-aid for R&D projects are provided for the following thematic fields: - production

technologies - nanotechnology - new materials for key technologies - micro systems technique - laser technology and optical technologies - microelectronics based on silicon technology. The programmes aim to provide support for research on and the development of these technologies.

Name of Provider Deutsches Zentrum für Luft und Raumfahrt Intended Beneficiaries All companies

Scientists / researchers (as individuals) Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Higher education institutions (education function)

Financial Conditions Involved Grants Observations from Evaluations There are several evaluations existing concerning certain thematic programmes (see Research

Report 2000 - Facts and Data, BMBF).

Name: Promotion of Joint Industrial Research (IGF) Description The IGF (“Industrielle Gemeinschaftsforschung”) programme offers direct grants for R&D projects

which are carried out by sectoral research institutions or - on behalf of these institutions - by consortia of companies and/or research organisations. Objective of the programme is the mitigation of structure-related disadvantages of SMEs in R&D activities.

Name of Provider Federal Ministry of Economics and Technology (BMWi), Arbeitsgemeinschaft Industrieller Forschungsvereinigungen (AIF)

Intended Beneficiaries All companies Other public and non-profit research organisations (not HEI)

Financial Conditions Involved Grants Observations from Evaluations No information available

Name: Innovation Programme (ERP) Description The programme provides financing of market-oriented R&D and expenditures for market

introduction of innovations including investment for innovation activities, in SMEs. Name of Provider Kreditanstalt für Wiederaufbau (KfW) Intended Beneficiaries SMEs only Financial Conditions Involved - Subsidized loans (including interest allowances)

- Guarantees Observations from Evaluations No evaluation yet

Name: Technology Venture Capital Programmes Description The Federal Government redesigned its VC programmes (BTU, FUTOUR) in 2004 in order to meet

the new challenges and stimulate the VC market again, Name of Provider Kreditanstalt für Wiederaufbau (KfW) Intended Beneficiaries SMEs only Financial Conditions Involved - Subsidized loans (including interest allowances

- Venture capital (including subordinated loans) - Guarantees

Observations from Evaluations No information available

Name: InnoMan Description The programme offers external consulting services to improve innovation management techniques

in SMEs in Eastern Germany. Public funding is provided for consulting services offered by certain consulting agencies, the former agencies for technology and innovation (ATI).

Name of Provider Federal Ministry of Economics and Technology (BMWi), Verband der Innovations und Technologieberatungs-Organisationen (VITO)

Intended Beneficiaries SMEs only Financial Conditions Involved Grants Observations from Evaluations No information available

Name: Networks of Competence Description This initiative seeks to promote networking among science, education and enterprises in order to

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bundle competence and to present internationally attractive networks to the world. The initiative supports the establishment of such networks and the presentation of the network on the Internet.

Name of Provider Federal Ministry of Education and Research (BMBF) Intended Beneficiaries Main target groups are foreign firms looking for investment in Germany, start-ups, researchers,

students and academics, private and public managers, key persons in economy, politics, administration, media.

Financial Conditions Involved Financial support is provided by BMBF to run the network. Observations from Evaluations No evaluation yet

Name: Information Centres Description Information Centres comprises Patent Information Centres, Thematic Information Centres and

Private Information Agencies. The Patent Information Centres provides access to scientific and technological information that is contained within patents, registered designs and trade marks for firms and private inventors. The Thematic Information Centres "Fachinformationszentren" aims at improving the access to various databases relevant for innovation activities by firms and research organisations. The Private Information Agencies allow SMEs who cannnot afford to have, or choose not to develop, their own databases to call on professional information brokers to do their information inquiries.

Name of Provider Deutsche Gesellschaft für Informationswissenschaft und Informationspraxis (DGI), Arbeitsgemeinschaft Deutscher Patentinformationszentren

Intended Beneficiaries SMEs only Financial Conditions Involved Grants Observations from Evaluations No evaluation yet

Name: Management of Innovation Networks for East German SMEs (NEMO) Description The measure supports the establishment and management of innovative regional networks among

SMEs and between SMEs and R&D organisations in eastern Germany. These networks should support SMEs in creating and commercialising the results of their R&D by reducing costs and improving their position on the market. The measure provides financial support for the management of the network, but not for the SMEs.

Name of Provider Federal Ministry of Economics and Technology (BMWi), Arbeitsgemeinschaft Industrieller Forschungsvereinigungen (AiF)

Intended Beneficiaries SMEs only Higher education institutions research units/centres Other public and non-profit research organisations (not HEI)

Financial Conditions Involved Grants Observations from Evaluations The measure was successfully evaluated in 2005. They conclude that the programme is highly

efficient and reached all expectations to a very good extend.

Name: INSTI - IPR promotion Description The INSTI IPR promotion comprises three measures within the INSTI Network: SME Patent

Initiative, Innovation Market and Innovation Action. The SME Patent Initiative provides subsidies for SMEs in six areas in order to increase the use of intellectual property rights and stimulate inventions by SMEs. The Innovation Market provides a marketplace for inventors and innovators to find companies that assist them in financing and bringing their products onto the market. The INSTI Innovation Action aims at enabling enterprises and start-ups to establish internal innovation processes on a permanent base.

Name of Provider Federal Ministry of Education and Research (BMBF), Institut der deutschen Wirtschaft Köln, Arbeitsgemeinschaft Deutscher Patentinformationszentren

Intended Beneficiaries SMEs only Scientists / researchers (as individuals) Higher education institutions research units/centres Other public and non-profit research organisations (not HEI) Higher education institutions (education function)

Financial Conditions Involved Grants Observations from Evaluations No information available

Name: Promotion of Inventors at the Fraunhofer Patent Bureau for German Research Description The Patent Bureau for German Research (part of the Fraunhofer-Society) offers interest-free loans

for inventors (individuals, researchers from universities and public research labs, inventors from small firms) in order to support them in receiving a patent for an invention and to commercialise inventions. The Patent Bureau also informs, advices and supports inventors in the following areas: technology transfer, intermediation in co-operation, innovation consulting, patent strategies, evaluation on inventions, licensing of patents, licensing contracts.

Name of Provider Fraunhofer-Patentstelle für die Deutsche Forschung) Intended Beneficiaries Inventors at very small firms, researchers at universities and public research labs, private individuals Financial Conditions Involved - Grants

- Subsidized loans (including interest allowances) Observations from Evaluations No evaluation yet

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Country – USA

Name: Small Business Innovation Research (SBIR) Description The Small Business Innovation Research (SBIR) Program was established by Congress in 1982 to

provide increased opportunities for small businesses to participate in R&D, to increase employment, and to improve U.S. competitiveness. The program's specific objectives are to stimulate U.S. technological innovation, use small businesses to meet federal research and development needs, increase private-sector commercialization of innovations derived from federal R&D, and foster and encourage participation by socially disadvantaged businesses

Name of Provider 11 Federal Departments and Agencies – The US Small Business Administration plays an important role as the coordinating agency for the SBIR program.

Intended Beneficiaries SMEs which meet the following criteria: - American-owned and independently operated - For-profit - Principal researcher employed by business - Company size limited to 500 employees

Financial Conditions Involved Grants Observations from Evaluations No information available

Name: Small Business Technology Transfer (STTR) Description The Small Business Technology Transfer (STTR) Program awards contracts to small business

concerns for cooperative research and development with a non-profit research institution (RI), such as a university. The goal of the Congress in establishing the STTR program is to facilitate the transfer of technology developed by an RI through the entrepreneurship of a small business. The small business and its partnering institution are required to sign an agreement on how intellectual property will be shared between them.

Name of Provider 5 Federal Agencies – The US Small Business Administration plays an important role as the coordinating agency for the SBIR program.

Intended Beneficiaries SMEs Non-profit research institutions

Financial Conditions Involved Grants Observations from Evaluations No information available

Name: Small Business Innovation Partnership (SBIP) Description The goals of the NTTC’s SBIP Program are to:

- Provide Phase II SBIR companies with the support needed to move to Phase III (i.e. when innovation moves from the laboratory to the market place) - Make it easy for NASA to make full use of its SBIR Program - Guide NASA technology users to the SBIR innovations they need.

Name of Provider National Technology Transfer Center (NTTC) Intended Beneficiaries SBIR companies Financial Conditions Involved No direct funding Observations from Evaluations No information available

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Appendix 3 Indicative Stocktake of Programs Related to Absorptive Capacity at the State level in Australia New South Wales The NSW Government’s Statement on Innovation outlines how the Government plans to enhance industry innovation as a means of improving productivity and increasing business investment. The statement presents five goals for innovation policy in NSW: improve human capital upgrade knowledge and information infrastructure reduce the cost to business os using science and technology encourage capital allocation to encourage investment reduce regulatory barriers to innovative NSW companies. Current Programs Innovation Clusters Innovation Clusters-related initiatives include: Building and Construction Innovation Cluster: www.idc-hunter.org.au Innovative Technology Network Innovation Cluster: www.uws.edu.au/itn Women in Manufacturing Network: www.smallbiz.nsw.gov.au/wib Each meeting or site visit deals with a theme selected by the members. Management issues covered include strategic planning, best practice, continuous improvement and enterprise resource planning. Some sessions deal with "soft" technologies, such as e-commerce and lean manufacturing. "Hard" technologies, such as automation, robotics, manufacturing cells, computer-aided design and computer-integrated manufacturing, are also covered. It is expected that participants learn from each other and tap into the expertise of leading consultants and academics. They can see technologies and innovations at work during site visits. These activities are designed to increase the confidence of members to adopt new technologies and innovations to grow their businesses. Business Clusters The NSW Department of State and Regional Development recognises the enormous potential in working together and through its Business Cluster program can provide tailored non-financial and financial support to established small and medium enterprises to maximise this potential. Business Cluster funding supports the facilitation and growth of substantive and critical geographical and/or industry sector collaborative efforts. With a large range of benefits, Business Cluster funding encourages feasibility and formation through to operational and strategic ongoing sustainability. These cluster structures typically include many organisations such as private companies, Government and other public institutions and not-for-profit organisations which share a mutual goal to address a significant economic issue. Business Network funding seeks to support smaller groups of companies which strategically choose to work together to develop a specific domestic or export opportunity.

Business Cluster funding. A business cluster may require specialised assistance, outside the scope of the support available from its members, for specific projects which would enhance the cluster's growth during its formation and development stages. Such projects may address issues that will facilitate a cluster's growth or

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performance. Projects could include feasibility and formation planning, industry skills enhancement, overcoming structural economic issues, market research, marketing and promotional activities or support for a facilitator to organise and manage the cluster.This project support may attract a one-off 75% subsidy of up to $10,000 during early stage development and matched (50%) financial support up to $10,000 for any one project. Funding is limited to a maximum of $20,000 per individual business cluster over any two-year period.

Business Network funding. A network of companies which has chosen to work together in order to develop a specific commercial opportunity may attract a matching (50%) subsidy up to $10,000 for any one project. Funding is limited to a maximum of $20,000 per individual business network over.

NSW High Growth Business Program The NSW High Growth Business Program is a New South Wales Government initiative which helps high growth businesses achieve their potential. SERVICES Experienced Business Development Managers from the Department work closely with clients to identify areas of their business that could be strengthened or modified to achieve desired outcomes. More than 4,000 companies have reaped substantial benefits from our assistance programs, with increases in turnover, profitability, efficiency, employment and exports. Our clients have confirmed their satisfaction with the Program in published success stories. To be eligible for assistance under this Program, your company should have:

- at least a two-year record of viable trading; - a sales turnover of between $1 million and $30 million per annum; - a commitment to export or import replacement activity; - demonstrable growth or significant potential; and - a commitment to strategic planning.

Not all eligible businesses may be accepted into the High Growth Business Program.

http://www.fastthinking.com.au/resource/detail.html?returnuri=%2Fresource%2Findex.html%3Fform_resourcecategoryid%3D5%26form_page%3D2&form_resourceid=155 NSW Technology Diffusion Program The program assists small and medium firms to accelerate their adoption of appropriate new technologies and management practices. The program includes:

- organising and supporting technology seminars; - supporting 'Technology Awareness Groups' (TAGs); - helping to create case studies and on-site demonstrations of best-practice

technologies; - supporting participation in technology implementation networks, including

Accelerated Product Development programs;

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- subsidising Systems and Technologies Diagnostics; - subsidising benchmarking evaluations and projects;

- supporting assessments of the innovation environment within firms; - providing information on self-help tools and helping to create new tools; and - assistance for cleaner production assessments and group implementations.

CONDITIONS/ELIGIBILITY NSW-based businesses wishing to participate in the Technology Diffusion Program should demonstrate:

- a clearly defined, well developed and effective business strategy; - the ability to innovate and effectively apply technology; and - an interest in improving the performance of their businesses, but lacking enough

organisational and/or financial resources to do it DSRD's Business Development Manager makes the initial assessment of eligibility.

http://www.fastthinking.com.au/resource/detail.html?returnuri=%2Fresource%2Findex.html%3Fform_resourcecategoryid%3D5%26form_page%3D2&form_resourceid=155 NSW Innovation Advisory Centres (IACs) IACs provide a range of services to help inventors and small enterprises transform ideas into marketable products and processes. SERVICES They also help small businesses to access a range of leading edge practices in product, service and process innovation. Each IAC offers:

- free access to specially designed software to evaluate the innovation; - free commercialisation advice, and referrals to appropriate organisations and

experts; and - a subsidised technical assessment, including a written report.

Some IACs conduct Outreach Visits to assist regional inventors and business innovators. Innovation plays an important role in small business success. Generating ideas for new products, services and processes contributes to business growth and more efficient ways to do business. Research has shown that innovation, when properly managed, produces a higher rate of return than many other forms of investment. The NSW Government is committed to advancing innovation and provides assistance and services to promote the adoption of innovation in business. NSW - Small Business Advisor Services The NSW Government provides small business advisory services across NSW to people wishing to start a business or those who have recently started a business.

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SERVICES Services and products offered by the Centres include:

- practical business counselling and support - help with preparing business plans including marketing, budgeting and cash flow - promotion of small businesses - information on Government services and programs - mentor support for business clients - referral to specialist professional advisers (eg accountants, lawyers and financial

planners); and - training in skills needed to succeed in business

The Centres deliver information, advice and training to start-up and micro businesses and are valuable sources of information on establishing and operating a profitable enterprise. The Centres are focused on creating local small business opportunities. These include developing exports, replacing imports and promoting local employment initiatives. NSW ATS Technology Demonstration Program The Program is designed to encourage collaboration between NSW-based small to medium size technology companies (SMEs) and purchasing organisations in Government and the corporate sector, for the purpose of trialling or demonstrating proven technologies within the ATS program. The objectives of the Program are to:

- demonstrate the ability for the technology to meet a need and deliver cost, performance, functionality or operational benefits to the agency and/or corporate partner;

- provide the SME with a reference site from which domestic and/or international sales can be generated or lead to other business opportunities;

- contribute to the development and future growth of the SME in NSW by leveraging off the outcomes of the activity funded under this Program; and

- forge linkages or alliances for SMEs with the NSW based Government sector and/or the corporate sector to assist longer term growth prospects.

Program features are:

- Funding of up to $35,000 will only be provided to ATS companies or to Government agencies.

- Only ATS companies with a commercial product and an annual turnover of less than $15 million will be considered.

- A Government agency partner may be drawn from the NSW Government, NSW Local Government bodies or the Commonwealth Government.

- The private sector partner would be a major corporation operating in Australia. - A Project Agreement will be put into place that will formalise arrangements between

DSRD and ATS companies and their partners.

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The Industry Development Centre (Hunter) Ltd (IDC) The Industry Development Centre (Hunter) Ltd (IDC) is a not for profit, business service organisation established to assist industry development in the Hunter Region and thereby creating employment opportunities. Established in 1992 as a result of a Federal Government initiative, the IDC helps Industry in the region develop by providing Connection, Facilitation, Advice and Meeting Places:

- Expert advice on government and industry sources - Linkages between regional businesses and research institutions - Promote the development and use of new technologies in existing and new

businesses - Expand regional focus to national and international markets - A package of business advisory services - Attract new business to the region - Encourage product innovation - The Meeting Place for Business

Clusters and Networks The IDC has been involved in the facilitation and development of strategic alliances - assisting organisations in the Hunter to work together to take advantage of opportunities that would have been difficult, if not impossible, to tackle on their own. The "Hunter Advantage", the regional economic strategy prepared by the Hunter Regional Development Organisation (HURDO) is based on the cluster model. The IDC is committed to supporting the following: Information Technology Cluster (HunterTech) Defence Cluster IDC Innovation Recognised as an Innovation Centre of Excellence the Industry Development Centre (Hunter) Ltd (IDC) delivers the NSW Department of State and Regional Development's Innovation Advisory Service, assisting over 1000 individuals and businesses annually evaluate and commercialise new products and technologies. By encouraging increased innovation, investment and trade through the effective use of intellectual property, we make it possible for Australian business to establish and maintain international markets for new technologies. Through the work of the IDC, the support of the NSW Department of State and Regional Development and IP Australia, they assist small to medium business value their intellectual property thereby ensuring sustainable business growth. Hunter Innovation Advisory Service The Hunter Innovation Advisory Service is an initiative of the Department of State and Regional Development, and is proudly delivered by the Industry Development Centre (Hunter) Ltd (IDC). The service provides a range of free and subsidised services to help

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innovation individuals and small-to-medium enterprises to develop their bright ideas. Each year Hunter Innovation Advisory Service provides assistance to more than 1000 innovators/inventors. People in business often have bright ideas about new or improved products, services or processes. Generating ideas and being innovative are important contributors to business success. Innovation Advisory Service There are a range of services to help you make your idea more marketable and profitable. Services include:

- access to self-assessment software; - business advice and referral; - low-cost technical and/or commercial assessment; and - innovation market review.

The IAS is the first step along the path to successful commercialisation. It will help clients begin planning with advice and self-assessment. The Assessment/Evaluation Process The IAS will assist you with an objective assessment/evaluation of your innovation to determine its chances of success. IAS services available include: 1. Self-assessment analysis (free service) Access to a specially-designed computer program which asks you 32 pertinent questions regarding your innovation. A confidential print-out of the questionnaire will assist you with further research required. 2. Business advice and referral (free service) Practical advice and referral on how to proceed with further development of your innovation. You may be referred to a technical assessor (see below), or a Department of State and Regional Development Business Development Manager, or to other organisations or individuals that can help you to commercialise your innovation. 3. Technical and/or commercial assessment (subsidised service) A technical and/or commercial assessment can be conducted to answer the question, "Does the innovation work?" The assessment is offered at a subsidised cost to NSW innovators and consists of an initial consultation, analysis and written report. These assessments include: » Security status of intellectual property; » Technical aspects and manufacturing processes; » Potential applications and markets; » Competing products and technologies; » Business arrangements; » Other relevant issues. 4. Innovation market review (subsidised service) An innovation market review takes analysis one step further from the technical/commercial assessment. The review provides a preliminary evaluation of the market with quantitative information regarding potential competitors, demand, licensees and market size.

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Victoria Department of Innovation, Industry and Regional Development (DIIRD) The DIIRD offices and Divisions most involved in fostering innovation are: Business Development Division Office of Science and Technology ( Office of Manufacturing and Service Industries Office of Business Innovation and Strategy Innovation Economy Advisory Board (Economic Policy and Planning Division) Invest Victoria Programs Technology Evaluation Program The Technology Evaluation program assists business and business collaborations to identify and fast track the evaluation of technology. It aims to accelerate the identification, development and application of new technologies that will fundamentally change the products or operations within the business, group or industry sector involved in the project. Generic outcomes will provide a guide for others to follow, stimulating the adoption of technology in industry, particularly amongst small and medium-sized firms. CONDITIONS/ELIGIBILITY Financial support in the form of a 50% subsidy of up to $20,000 is provided to successful applicants against approved expenditures. Indicative costs include third-party research, training, plant preparation and trials and implementation reports. Technology Demonstration Program – Victoria The Victorian Government's 'Technology Demonstration Program' is a program whereby businesses that have successfully adopted and implemented new technologies within a business, group or industry sector can showcase this achievement. The Technology Demonstration Program aims to raise industry awareness of a new technology application and provide a new benchmark for the manufactured products and processes involved. Direct financial support is available to companies, or groups of companies, to highlight how new technologies have been successfully implemented. CONDITIONS/ELIGIBILITY Financial support in the form of a 50% subsidy of up to $20,000 is provided to successful applicants against expenditures associated with demonstrating the process and benefits of implementing a new technology.

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Indicative costs could include installation, training, technical assistance, marketing or publicity costs associated with the uptake or demonstration of the technology VicStart - Technology Commercialisation Program The VicStart initiative aims to improve the skills, linkages and processes needed to successfully bring Victoria’s innovative science and technology to the market. VicStart concentrates on the market-end of the innovation pipeline, addressing three areas for priority action by:

- building commercial skills, expertise and connectivity to enhance the capabilities of technology entrepreneurs to grow global technology businesses;

- boosting the expertise, experience and development of the technology finance sector so the availability of specialist financial services and investment opportunities is improved; and

- improving linkages between and within industry sectors and research establishments to increase the transfer of technology that has clear commercial outcomes.

- VicStart programs and projects actively assist companies to utilise and exploit science and technology for export, growth and profit. IXC Australia Limited is one of several VicStart Program Partners that provide a range of services that assist established and emerging companies with technology commercialisation. VicStart programs directly help two kinds of company:

- emerging innovators: high growth potential, early stage companies with international markets that are built around the commercialisation of specific technological innovation/s; and

- established innovators: companies that are interested in developing or buying R&D innovation for improved competitiveness, growth and sustainability

Grow Your Business The Victorian Department of Innovation, Industry and Regional Development offers a range of planning and management services and advice and support to assist Victorian firms to develop and implement strategies to become internationally competitive. Eligible business can apply for a grant to engage the services of an independent specialist to undertake:

- the Business Strategic Review, an analysis of where the company has come from, and/or

- the Business Development Plan, which assists organisations to pinpoint where they want to go and how they are going to get there.

Other services facilitated through the Grow Your Business program include:

- Supply Chain Management - Group Programs - Networks Program

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CONDITIONS/ELIGIBILITY The principle criteria for assistance are:

- a company is financially viable with a manufacturing or services base in Victoria - it has export and/or import replacement potential

To be eligible for individual funding under the Grow Your Business program, businesses should:

- be based in Victoria, or intend to locate in Victoria - have management strengths - be financially viable - be committed to strategic planning and growth - should have commitment to innovation and/or potential for export/import

replacement - have been trading at least 12 months, or - be an exceptional new business that has been trading at least six months, and has

either a professional business plan or has attended a Pre-business workshops. Grow Your Business - Business Strategic Review The Grow Your Business Program is designed to be flexible to meet the needs of individual businesses and thus requires a degree of "strategic thought" aimed at identifying the program goals. The Business Strategic Review is a chance to gain a valuable insight into areas of operation and is designed to:

- identify a company's immediate past and present position - illustrate strengths, weaknesses, opportunities and threats - identify and prioritise areas that require attention or change

This "situational analysis" can also be directed to specific issues such as Production/Process, Finance, Export and Marketing, e-Business, Human Resources, Training, Environment. Outcomes can form the basis of a comprehensive action plan. Eligible individual businesses can apply for a grant of 75% of total project cost up to a maximum of $4,000. CONDITIONS/ELIGIBILITY The principle criteria for assistance are:

- a company is financially viable with a manufacturing or services base in Victoria - it has export and/or import replacement potential

To be eligible for individual funding under the Grow Your Business program, businesses should:

- be based in Victoria, or intend to locate in Victoria - have management strengths - be financially viable

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- be committed to strategic planning and growth - should have commitment to innovation and/or potential for export/import

replacement - have been trading at least 12 months, or - be an exceptional new business that has been trading at least six months, and

has either a professional business plan or has attended a Pre-business workshop. Innovation Insights into business best practice in Victoria Innovation Insights is a program that aims to provide small to medium enterprises with cost-effective access to a broad cross section of Victorian industry to view best practices in action. SERVICES The Innovation Insights initiative is managed by Invetech on behalf of the Victorian Government. It promotes and delivers a series of half-day visits where small groups of 15 to 30 Typical Innovation Insights visits would include a presentation, a discussion about the host company's path towards its current position, an extensive tour of the facility and a networking session to end the event. The program provides insights into culture change, safety, training, quality and continuous improvement including modern management tools and practices such as Lean, Agile, TPM, TQM, 5s, and 6 Sigma. The Innovation Insights program is open to any Victorian manufacturing related company and its employees wishing to participate. A charge of $50 plus GST applies. Host companies retain the right to decline entry to competitors. Similarly, when numbers are limited, manufacturers will be given preference to participate in the program. INNOVIC INNOVIC is the brand name of the Victorian Innovation Centre Limited. It is a not for profit organisation limited by guarantee. INNOVIC was established in 1986 by the former Swinburne and Chisholm Institutes of Technology as part of a joint State and Federal Government initiative. It is Victoria’s leading provider of services to innovators, inventors, entrepreneurs and small to medium enterprises who are seeking to turn new ideas into viable businesses. INNOVIC assists over 1,600 innovators with new ideas each year, and its seminars are attended by over 1,100 people annually. Although independent, INNOVIC’s services for early stage innovators –under its VicStart program. INNOVIC provides two distinct services for early and later stage innovators. VIP@INNOVIC is specifically designed to assist Victorian innovators, inventors, entrepreneurs and small businesses with new ideas in the early development stages, and are delivered at minimum cost to users. INNOVIC provides a range of professional services for innovators who are ready to take their ideas to the next stage. These activities are undertaken on a fee for service basis.

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INNOVIC provides a range of professional and confidential services to:

- Ensure that your idea is viable before you start spending money - Support you as you progress through the commercialisation process - Link you with patent attorneys, designers, prototypers, manufacturers and many

other specialists Industry TechLink Industry TechLink is a government funded, privately run service offering free advice for small businesses. The advisory service targets small-to-medium businesses (SMEs) in the manufacturing, mining and resources sectors. The service helps to identify opportunities for business growth and then assists with finding the appropriate technology information, people or products to bring these growth opportunities to fruition. Innovation Partnering (REDcentre) Pre-start-up, start-up and early growth hi-tech companies with technology applications that may use technologies such as microelectronics, photonics, nanotechnology, biotechnology and advanced manufacturing. Key services: International business assessment, intensive business improvement, capability building, subsidised technical and professional services. The core of the Innovation Partnering program is an extensive network of experts who contribute time and expertise. Clients are initially given a free formal assessment of their potential, followed by three stages of assistance.

- Stage 1 - Diagnostic: involves initial assessment of the opportunity, referrals and advice.

- Stage 2 - Capability Building: scorecard assessment and expert panel assistance with the technology and business prospects internationally.

- Stage 3 - Linkages to Partners: Strategic Enterprise Springboard exposure with intensive professional, technical and capital needs assessment of the business and linkages to strategic partners.

Mentre® Commercialisation and Growth Program- Mentre (an Information City Company) Pre-start-up, start-up and growth stage companies with technology in areas such as ICT and biotechnology. Key services include intensive and personalised mentoring around the strategic, operational and marketing issues that affect companies at these stages. Clients are matched to a mentor with relevant background and expertise who then assists them through a six-week development program. The Mentre program combines hands-on practical advice from experienced mentors and formal learning through workshops.

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Regional Technology Commercialisation( Pyksis) This program helps companies develop their business cases and increase their chances of success in getting their commercialisation opportunities to market. Regional companies who are developing products and processes based on their innovations. Candidate companies may range from start-ups to long established regional businesses. Participants undertake one-day diagnostic workshops to establish where they are in commercialising their products. A number of these progress to an 11-week business case building program. Key commercialisation tools and concepts are delivered through workshops; business case development is undertaken by 1:1 mentoring; business cases are then presented and tested at a Graduation Showcase. Australian TCF Technology Network –CTFIA Growth stage textile, clothing and footwear companies and research organisations seeking to buy, sell or develop technology focused on innovative products and processes. Key services: Information, contacts and technology brokering. Membership to the Network is free and provides access to the latest information on technological developments and opportunities. The Network aims to help companies find technologies that can potentially create new product lines or develop better processes. It brings together companies, researchers and financiers in TCF and non-TCF sectors. Services include matching members according to needs and interests, identification of technologies and the brokering of resources. Facilitation of workshops and training from international experts. Food Manufacturing High Performance Consortium- Invetech Growth stage food, drink and packaging companies, both big and small, seeking to lift efficiency and identify how technology innovation can benefit their business. Key services: Information, site visits, subsidised consulting expertise. Members are taken through a learning and implementation process looking at best practice use of technology in manufacturing and product development. Membership includes access to Invetech's extensive experience in manufacturing innovation, as well as international experts in key areas. Activities include workshops, an international study tour and access to best practice factories. Management Excellence for Technology Start-ups- Melbourne Ventures Start-up stage companies developed out of research institutions that need experienced management and international representation. Key services: Management and business development. The program matches companies with appropriate CEOs that have ability to take them through the difficult phases of market research, product development, identification of partners and securing investment. A second component is the leveraging of an international network to secure funding and initiate deals.

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Australian Aerospace and Defence Innovations - AADI Growth stage defence and aerospace companies seeking to develop new products or find new market opportunities. Key Services: Deal facilitation, consortia building, R&D brokering. AADI facilitates commercial exploitation of technologies relevant to the defence and aerospace sectors. AADI acts as an intermediary facilitating the transfer and amalgamation of innovative intellectual property into industry. It achieves this through establishing and growing networks at all levels of industry and government in the defence and aerospace sector. AADI is ideally placed to bring together a number of multi-tier companies to bid for a large US defence contract, or to find the R&D capability needed by a small company seeking to develop a new product. TechFast Program (AIC) Funded by the Commonwealth and State Governments, the Australian Institute for Commercialisation’s (AIC’s) TechFast program works with companies to identify, assess and deliver collaborative innovation projects. Specifically, TechFast helps companies identify new partners that can provide access to useful technologies, processes and knowledge to improve business performance and productivity:

- assess the potential value of projects, develop project plans, formalise partnerships, access direct funding support and project manage collaborative endeavours.

- through the provision of funding support of up to $50,000 per company. - provides you with opportunities to solve existing problems and potentially grow your

business through the adoption of new technologies or creation of new partnerships. - matches your internal capability with technologies and skills from other organisations

from Australia and overseas. -------------------------------------------------------------------------

Queensland Innovation Start-Up Scheme The Innovation Start-Up Scheme (ISUS) is a Queensland Government initiative to help promote innovation and commercialisation. ISUS is a competitive grant that helps companies take the ‘early struggle’ out of commercialisation. The objectives of ISUS are:

- To assist in the formation, development and growth of highly innovative young companies with technology products and services.

- To assist in the advancement of new technologies towards commercialisation - To enhance the economic growth of the Smart State.

The eighth round of projects to be funded through the Department of State Development were jointly announced by the Premier and the Minister John Mickel on 22 February 2007. Details are as follows:

- Grants are between $50,000 - $85,000 over a 12-month period - Funding is to be matched on an 80:20 basis (government 80%: applicant 20%)

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- Applicant must be a Queensland based organisation -

Funding assists in prototype and product development, testing and more. A competitive rounds-based funding program released annually Funding is progressively provided as applicants achieve milestones set out in an agreed project schedule. Research-Industry Partnerships Program The Research-Industry Partnerships Program provides funding to facilitate collaborative 'near to market' research projects between industry and research organisations.

- grants are between $200,000 and $1 million over one to three years - funding rounds will be open, competitive and merit based - funding is to be matched by a cash contribution 1:1 - project must involve at least one research and one industry organisation - partners should have a genuine capacity to utilise the outcomes of the project - project must be capable of generating economic, social and/or environmental

benefits to Queensland - grant funding may be used for project consumables, salary costs for key project staff

and operational overheads -

http://www.sd.qld.gov.au/dsdweb/v3/guis/templates/content/gui_cue_cntnhtml.cfm?id=41166 National and International Research Alliances Program The National and International Research Alliances Program provides funding for collaborative projects that build on Queensland's national and international alliances.

- grants are between $200,000 and $2 million over one to three years - rounds will be open, competitive and merit based - funding is to be matched by a cash contribution of 1:1 - project must be collaborative involving a Queensland-based entity and a national or

international partner - partners should have a genuine capacity to utilise the outcomes of the project - project must be capable of generating economic, social and/or environmental

benefits to Queensland - grant funding may be used for project consumables, salary costs for key project staff

and operational overheads http://www.sd.qld.gov.au/dsdweb/v3/guis/templates/content/gui_cue_cntnhtml.cfm?id=41165 Ideas2Market Ideas2Market is a program for Queensland innovators and entrepreneurs, offering advice and strategies to assist them in commercialising their ideas. It helps develop the skills to navigate through the pre start-up, start-up and growth stages of taking an idea to market—covering feasibility, intellectual property, commercialisation options and business and marketing planning. The program includes workshop training, a guidebook and an extensive online resource.

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http://www.sd.qld.gov.au/dsdweb/v3/guis/templates/content/gui_cue_cntnhtml.cfm?id=22272 Partnerships Alliances Facilitation Program The Partnerships-Alliances Faciliation Program is a continuous funding program which provides funding to support Queensland-based applicants to formulate and facilitate collaborative funding proposals for submission to relevant Queensland, national or international funding schemes.

- grants are up to $100,000 - the program is not rounds based and applications will be accepted on an on-going

basis throughout the year - funding is to be matched by a cash contribution of 1:1 - payment will be made following evidence of submission of the funding proposal to a

nominated funding agency - the proposed project must be collaborative - project must be capable of generating economic, social and/or environmental

benefits to Queensland - grant funding may be used for temporary expert advice, international and/or national

travel and accommodation expenses incurred to develop the proposed project Financing Innovation Growth (FIG) program The final Financing Innovation Growth (FIG) Program for 2006 was delivered to a total of 16 Queensland-based companies. The FIG Program, consisting of a series of eight workshops, was delivered over four months to December 2006 by Brisbane-based organisation, Achaeus Group Pty Ltd. Achaeus' expertise is in addressing commercial issues of companies, developing their strategic management and marketing skills in order to increase profitability and performance. The Department of State Development assisted 12 ICT companies and 2 biotechnology companies to undertake the program by subsidising their participation costs. The FIG program helps ICT and Biotechnology companies to develop their strategies and business models to increase profits and multiply the value of their business. It teaches the hands-on skills needed to attract capital and fast track business growth. The FIG program seeks to transform innovative early stage companies into market leaders. It helps companies that are targeting global markets to transform their business models and enjoy rapid growth, increased profits and attract investment capital. By participating in FIG companies will learn how to:

- Evaluate new opportunities for growth and profit - Become dynamic business leaders - Undertake strategic marketing - Protect intellectual property - Improve financial management

http://www.iib.qld.gov.au/markets/FIG/ -----------------------------------------------------------------------

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South Australia The State government is currently carrying out a stocktake of their programs related to business innovation and, recognizing the limitations of the ABS Innovation Survey, have also commissioned a detailed survey of innovation activities in 1000 SA firms. The Centre for Innovation established in Adelaide The Centre for Innovation has been established to provide specialist services and act as a catalyst for high-growth South Australian companies to innovate through the development of new products and services, improved processes and business practices and the application of advanced technology. It includes innovation nodes to the north and south of Adelaide to ensure access for local industry. The Centre for Innovation operates under a Board with representatives of the universities, industry, unions and government. It is chaired by Mr. David Simmons, Managing Director of Hills Industries. Services available to enterprises through the Centre for Innovation will include:

• Innovation support – promoting advanced tools and techniques, innovation and opportunity audits, access to specialist services (lean techniques, supply chain management, product development and process improvement).

• Commercialisation support – supporting businesses through the Techfast Program of the Australian Institute of Commercialisation and through advice on product commercialisation.

• Collaboration – linking industry needs with service providers (including universities) and providing access to State, national and international expertise.

• Cultural change – helping with the process of education, awareness raising and information brokering through a series of tailored programs and events for industry.

The Centre for Innovation will also provide advice on specialist areas, including:

• Lean techniques • Process engineering • Supply chain and logistics

Constellation SA? Constellation SA is a pivotal initiative of the South Australian Government’s 10- year vision for science, technology and innovation in the State. It is based on the creation of five “innovation alliances” of research, educational, and industrial/commercial organisations in specific themes of technology and/or industry activity. Alliance participants may be located anywhere in the State. Each alliance will have a central office or coordination centre based in an “innovation precinct” in Adelaide, where a concentration of research facilities and R&D activity related to the alliance exists. Aims Collaboration between the State’s industries and researchers will focus R&D activity and promote R&D excellence to drive and support key areas of economic significance to the State. Constellation SA will reduce fragmentation of effort within the State’s R&D sector and build on existing critical mass in specific research areas.

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A clearly articulated strategic direction for the State’s research sector, accompanied by focussed investment in R&D and closer links with industry will encourage improved performance in winning national and international R&D grants and income. Partnerships between industry and our educational institutions will ensure that we establish the State as a life long learning community, with a skilled workforce to take advantage of future opportunities. Constellation SA will establish clear links and support for regional economic development and encourage community understanding and appreciation and of the importance of science, technology and innovation to South Australia’s future. Constellation SA will achieve its objectives by:

• establishing recognised centres of coordination between our industry, education and research sectors

• proactively encouraging and supporting public/private partnerships to focus the State’s research and education capability on industry needs

• promoting innovation and the adoption of new technologies in both emerging and established industries

• providing recognised points of contact to access domestic and international information about R&D activity and trends

• focussing Government and industry investment on strategic innovation and R&D activities

• identifying strategic opportunities for co-operative research centres, ARC linkage projects and other collaborative arrangements

• effectively promoting the State’s distinctive commercial, research and education capabilities nationally and internationally.

-------------------------------------------------------- Western Australia Innovation Centre WA The Innovation Centre WA provides a focal point for innovators and encourages the development and provision of a holistic innovation service to Western Australia. The Centre is managed by Event Matrix for the Department of Industry and Resources and provides a focal point and meeting place for entrepreneurs, innovators and service providers. Initiatives being implemented include: a 12-month education and training programme; quarterly networking sessions; an innovation services directory; Inventor of the Year award and incubator programme. Innovation Services Directory 2007 A key aspect of the Government’s innovation election commitment, the Innovation Services Directory 2007 has been developed as a joint initiative of the Department of Industry and Resources, the Small Business Development Corporation and AusIndustry. The inaugural Directory offers a compilation of public and private organisations that provide support services to start-up and existing businesses for the commercialisation of new products, processes and systems. The Directory is intended to assist innovative organisations and start-up companies in accessing professional services such as intellectual property specialists, capital providers, consultants and commercialisation strategists.

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Small Business Development The Department of Industry and Resources is responsible for supporting small to medium business enterprises through strategy development and the delivery of programmes attuned to these emerging companies and industry sectors. The Department offers business mentoring, financial assistance and support in export development among other services. The Department supports the following industries, mining and energy services, manufacturing technologies, biotechnology, ICT, marine and defence and professional services. Financial assistance:The Department offers a number of financial assistance schemes to support small to medium companies Innovation. The Innovation team is responsible for supporting innovative companies through mentoring, seminars and financial assistance. The Path to Commercialisation. A guide to planning an early stage innovation project The Small Business Development Corporation. State Government agency supporting the development and growth of small business in Western Australia. Regional Business Development: The Department supports regional business community through their 12 regional offices based around Western Australia. Small Business Development Corporation SBDC is a Western Australian State Government agency focused on the development of the small business sector and is committed to:

- championing the cause of small business; - developing programs and services to meet the needs of small business development; - establishing and strengthening relationships between SBDC and key agencies (public

and private sector); and - maintaining and enhancing the independence, innovation and responsiveness of

SBDC. Small Business Centres The Small Business Centres offer free assistance and support to new and existing businesses through the following services:

- Free practical business assistance; - Referral to specialist advisers (accountants, lawyers, etc.); - Assistance through the maze of government departments and regulations; - Business workshops; - Business information; and - Problem solving.

Small Business Centres are located in city and country areas to assist you to expand your existing business or explore new business ideas. A management committee with representatives from business, private sector organisations and local government, support a manager who will work with you to achieve your goals.

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Small Business Centres have networks of contacts that they can access to find answers to your inquiries about:

- finance; - marketing; - business planning; - market research; - trade information; - exporting; - regulations and licencing.

INNOVATION TO MARKET The Small Business Development Corporation (SBDC) Innovation to Market (ITM) program has been created to assist Western Australian small businesses and individuals to commercialise an innovation. The ITM program has been designed to assist in the planning of the tasks and activities required to commercialise an innovation. The ITM program also addresses the challenges that may need to be overcome throughout the commercialisation process. To increase the chance of success, the ITM program advocates a structured approach to commercialising an innovation. Some of the areas addressed through ITM include:

- identifying the need in the market; - setting goals, assessing risks and developing a plan for achieving your goals; - costing the development and commercialisation process; - protecting the intellectual property developed and maintaining a competitive

advantage; and - having a commercialisation strategy.

The Three Stages of the program The ITM program is structured in three stages. Each stage has a questionnaire style checklist which requires the participant to think about their innovation and answer the questions. At stages two and three, the participant may be eligible for funding to further assist them in commercialising their innovation. Stage 1 - Where are you at? This first stage of the program will assist the participant to take stock of where they are at in the commercialisation process. This stage offers eligible participants the opportunity for an SBDC officer to conduct a general evaluation of the potential of the idea. Stage 2 - Where do you want to be? This stage helps the participant work out where they want to be and the outcome they are aiming to achieve. Eligible participants are offered the opportunity for the SBDC to engage a specialised consultant to undertake a complete evaluation of the commercial viability of the idea. Stage 3 - How will you get there? This final stage is about the participant identifying any barriers to commercialisation, for example, technical problems, funding and selling. This final stage offers eligible participants the opportunity to engage a specialised consultant to assist with key areas of commercialisation eg IP, marketing; and upon completion of the assistance, to receive a contribution towards the cost from SBDC.

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Appendix 4 COMPREHENSIVE BIBLIOGRAPHY

Aage, T. (2003). Absorptive capacity of industrial districts. Paper presented at the DRUID

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