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TECHNOLOGICAL INNOVATION AND THEORIES

OF REGIONAL DEVELOPMENT

by

Matthew A. Zook

March 17, 1997

Inside Field Statement

Department of City and Regional Planning

University of California-Berkeley

Committee:

Prof. AnnaLee Saxenian, ChairProf. Manuel Castells

Prof. Michael Teitz

Table of Contents

Introduction and Overview

Traditional Theories of Regional Development

Location Theory / Agglomeration

Disequilibrium / Cumulative Causation

Growth Poles

A Brief Review on Theories of Technological Innovation

Insights of Schumpeter and SolowCreation and Diffusion of Innovation

Integrating Innovation into Theories of Regional Development

Structural Theories

Product/profit cycleLong Cycles/Waves
mailto:[email protected]:[email protected]://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Intro%23Introhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Traditional%23Traditionalhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Review%23Reviewhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#integrating%23integratingmailto:[email protected]://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Intro%23Introhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Traditional%23Traditionalhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Review%23Reviewhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#integrating%23integrating


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Path Dependency

Restructuring of Production and Labor Systems

Role of Manufacturing and ServicesDivision of Labor

Flexible Specialization, New Industrial Spaces, and Institutions

Regulation School and Flexible ProductionNew Industrial Spaces

Institutions and Embeddedness

Conclusion: Emerging Debates


Technological innovation and regional development are two closely intertwined processes

that shape and support the other. Although both originate from economics, they have been

separated for most of the 20th century. Classic economic thinkers such as Ricardorecognized the role of technology, albeit he saw diminishing returns to agriculture and

capital formation as more important, and Marxs theory placed technological innovation as

one of the prime movers in capitalist development. Regrettably early theories of regionaldevelopment, e.g., location theory, followed Ricardos lead and treated technological

innovation as secondary in relation to other conditions, such as labor to capital ratios.

Location theory strove for optimal resource allocation and ceteris paribus assumedunchanging technology that was freely available and instantly adapted by firms and

countries. The process of invention becoming innovation and diffusing simply was not

reflected in this model.

Instead, location theory focused on transportation costs. More complex models of locationemerged with Isards work on a general equilibrium model of industrial location but were

immediately confronted by two important critiques. The first was a critique of the

assumption of balanced growth and the price-equalization mechanism that would result insimilar development across regions. Hirschmans thesis on unbalanced growth and

Perrouxs concepts of growth poles in economic space were important trends in this

critique.

The second critique grew out of the exclusion of innovation in traditional location theory.Based and inspired by the work of Schumpeter who posited that innovation was the source

of economic expansion, this trend based in the field of economics began looking seriously

at the role of innovation in growth. Later scholars continued Schumpeters work and at theemergence of Isards general equilibrium model were able to argue forcibly that

technological change was a major determinant in increasing industrial output. The work on

the economics of innovation has continued to the present with debates on whether

innovation is driven by market-demand or technology-supply; the nature of innovativefirms and regions, and how innovation if diffused between firms and regions.
http://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Conclusion%23Conclusionhttp://www3.ekf.tuke.sk/RE/Priemyselne%20parky%20a%20clustre%20a%20inovacie/TECHNOLOGICAL%20INNOVATION%20AND%20THEORIES%20of%20reg%20dev.htm#Conclusion%23Conclusion


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each industrial sector would have a transportation minimization point that could be shifted

to take advantage of labor cost differentiation and/or agglomeration benefits. Webers

model assumed perfect competition which in turn would spatially distribute industryaccording to the three levels of costs. Hotelling (1929) argued that this perfect competition

ignored the monopolistic characteristics enjoyed by firms close to markets who could have

competitive advantage to more distant competitors due to lower transportation costs. Thus,firms would choose to locate to maximize their quasi-monopolistic market which would

result in a sub-optimal solution for society and contrasted with what was predicted by

perfect competition models.

Lsch (1954, 1975) and Christaller (1933) extended the theory of market size to explainindustrial location as a product of monopolistic markets for products. In order to locate, a

firm needs a threshold market size that can support its production. When the market size

increases other firms may enter the market to compete for customers. Different industrialsectors have differing market size thresholds but these markets overlap and influence one

another through agglomeration. What emerges is a static honeycomb market structure in

which each firms market area is packed next to neighboring firms that maintains anequilibrium through readjustment of market size if an individual firms reach expands or

contracts.

The theories thus far discussed were the origins of the discipline of regional science

exemplified in the work of Isard (1956, 1982) who built sophisticated models of regionalindustrial growth with multiple interrelated factors. One example of this increasing

sophistication, is Isards unification of Webers production and transportation costs in the

recognition that firms might assume greater transportation expenses if the location lowers

the overall production costs. However, Isards attempt to construct a general equilibriummodel for industrial location was criticized for assuming that regions have a natural

tendency to equilibrate, for its inability to reflect the unique histories of regions, and for itsexclusion of non-quantifiable factors, such as technological change.

Disequilibrium / Cumulative Causation

In an attempt to correct the shortcomings of Isards model of the location theory school

(due in part to the shrinking percentage of transportation costs in the overall production

costs) and to critique neo-classical theories of comparative advantage, a school of thoughtfocused on disequilibrium emerged. Chinitz (1961) calls for a recognition that the actions

of one industry can have significant impact on other regional industries through its

purchasing or internalizing of distribution activities and other services. Rather than seeing

spatial distribution as transitory and equalized through the price system, Myrdal (1957) andHirschman (1958) argued that region-specific external economies persist through

cumulative causation and polarization effects. Kaldor (1970) asserts that the difference

between regions efficiency wage, i.e., the combination of labor productivity and moneywage, feeds into the process of cumulative causation. Regions that had acquired stocks of

factor inputs and external economies were at a decided advantage for future growth.


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However, one of the most vexing problems for both equilibrium and disequilibrium models

was their inability to explain growth satisfactory. Regardless of the two theories

conflicting ideas of how this growth was distributed, both tended to treat growth as anexogenous factor which could equalize or polarize regions. One technique for explaining

growth is the theory of the pole of development that was first voiced by Perroux.

Growth Poles

Perroux (1950, 1970, 1988) based his ideas on the theory of active units which assumesthat under certain conditions actors have the capacity to change their environment. The

state of general equilibrium that Isard highlighted was viewed by Perroux as a momentary

state at best that quickly segues into a new situation. Perroux set his poles of developmentin economic space, as opposed to physical space, and conceptualized these poles as centers

of the most intense economic activity. The poles were linked to other sectors with varying

degrees of strength determined by proximity in economic space. Thus, a pole of

development can produce polarization in leading sectors with corresponding growth

consequences for close or distant sectors.

Although Perroux set his poles in the abstract notion of economic space, regional

development theorists, such as Friedmann (1966, 1972), applied these theories directly to

physical space with the concept of growth poles. However, as Peattie (1987) illustratesthese growth poles generally created disappointing results. Heightened expectations of the

benefits of growth poles, over-estimations of external economies and governmental politics

affected the ability of governmental sponsored growth poles to turn lagging regions intoleaders. Gore (1984) critiques the growth pole development strategies put forth by

Friedman for confusing place prosperity with people prosperity. Gore argues that by

presenting spatial relationships as a technically rational lens of analysis one actually masks

crucial social relationships.

Connected to the idea of sector growth poles was the debate between export versus import-

substitution theories of regional development. Although a large segment of this debate

took place in the arena of import substituting industrialization (ISI) in developing countriesKay (1989), Hirschman (1968), Hunt (1989), it was also germane to growth of regions in

general. For example, Innis (1930) provides a striking example of how Canadas reliance

on the export production of fur had large repercussions on transportation infrastructure,governmental and business institutions and its relationship with other countries.

In a classic regional development debate on exports, North (1975) contends that all regions

grow from exports that provide the income from which internally-focused markets in goods

and services can develop. North based his argument on the history of the PacificNorthwest which appears to support his theory. Tiebout (1975) argued that Norths

export-base argument is the exception rather than the rule and undervalues the role of

domestic oriented industries that play a pivotal role in supporting the export sector. Whilethe debates around growth poles and export/import models greatly enhanced the ability of

regional theories to explain the growth of regions there still remained a black box around

innovation. Perroux implicitly recognized and Berry (1972) explicitly argued that firms


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innovations provided the impetus for a pole of development that could spread to other

firms. However, it was left to another set of scholars operating parallel to the regional

theorists to tackle the issue of the source, nature and role of innovation.

A Brief Review on Theories of Technological Innovation

The previous section ended with an assertion that innovation is a key component inregional development and essential in explaining patterns of growth. The equilibrium and

disequilibrium theories outlined so far fall short in unpacking the black box of innovation

which puts them in good stead with most of their contemporaries in economics. AlthoughAdam Smith emphasized the role of innovation and Marx saw changing systems of

production as the key component to controlling relations of production, most economists in

the first half of the 20th century were content to treat innovation as exogenous factorwithout explaining it. This section will trace the theoretical history of those who attempted

to analysis this concept.

Insights of Schumpeter and Solow

The notable exception to this rule was Schumpeter (1928, 1939) who saw innovations as

perpetual gales of creative destruction that were essential forces driving growth rates in acapitalist system. Schumpeters thinking evolved over his lifetime to the extent that some

scholars have differentiated his early thinking where innovation was largely dependent on

exceptional individuals willing to take on exceptional hazards as an act of will, i.e.,entrepreneurs, from his later thinking that recognized the role of large corporations in

organizing and supporting innovation. This resulted in his emphasis on the role of

oligopolies in innovation and which later was falsely viewed as the main contribution of hiswork. (Freeman, 1994)

Schumpeter (1928) pointed to the discontinuous and disruptive nature of technological

change in capitalism that brings the inseparable combination of short-term instability and

long-term growth. He was not a technological determinist but recognized the social andorganization forces that played key roles in his cyclical process of industrial change.

Schumpeter argued that entrepreneurs, who could be independent inventors or R&D

engineers in large corporations, created the opportunity for new profits with theirinnovations. In turn, groups of imitators attracted by super-profits would start a wave of

investment that would erode the profit margin for the innovation. However, before the

economy could equilibrate a new innovation or set of innovations, conceptualized by

Schumpeter as Kondratiev cycles, would emerge to begin the business cycle over again.

For all his insight on the role of innovation, Schumpeter still did not really explain the

source of innovation. He was able to point to its importance and its role in timing

economic cycles but did not address its source. This rather interestingly allowed

Keynesian economics to argue that levels of investment were the cause of innovation. Itwas not until the 1960s that economists would begin again to search for the source of

innovation. The importance of innovation was highlighted by researchers like Abramovitz

(1956) and Solow (1957) who were able to demonstrate how little neo-classical economics


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was able to explain. Based on data on the United States economy from 1909-49, Solow

showed that only 12.5 percent of the increase of per capita output could be traced to

increased use of capital. This left a surprisingly large 87.5 percent residual that Solowattributed to technical change.

Romer (1986, 1994) echoes Solows observation and continued the call for innovationtheorists to internalize the process of innovation within their models. To this end, the work

on innovation that emerged from the base set by Schumpeter has been concentrated on thecreation of innovation and its subsequent diffusion between firms, industries, and regions.

Creation and Diffusion of Innovation

The first step in understanding the source of innovation is to understand the relationship

between research and development (R&D), invention and innovation as defined byFreeman (1982). R&D is a method that uses knowledge based in science or craft to create

a new product, process or method of organization. An invention is an idea or model for a

new process or product that can be patented. Finally, an innovation is a commercial viableuse of an invention. One of the most difficult aspects of innovation research is that

innovations vary from small incremental steps to radical changes. Radical innovations are

more attention grabbing but incremental changes can prove just as crucial in the long run.

Therefore, because innovation can be incremental or radical; involve a process or product;and is highly correlated with changes in organizational structure, attempts to empirically

measure it are extremely problematic. Counting patents, expenditures on R&D, and firm

size are at best proxies for innovation that can provide some insight but should not beviewed as truly representative (Freeman, 1994).

Freeman argues that starting in the 19th century the nature of R&D has shifted from craft

orientation to a more science based approach characterized by greater complexity ofinventions and innovations as well as an increasing division of labor between R&D andproduction. Science plays a role in providing trained personnel for R&D rather than

through published papers. Using this definition of innovation and assuming that the

majority of innovation comes from firms, economists during the 60s and 70s engaged indebates on the force that drove this innovation. Schmooklers (1966) study of chronology

of inventions in major industries argued that market demand rather than scientific

discovery was the stimulus for invention. Although Schmookler concentrated on inventionand not directly on commercially successful innovations, his study provided a theoretical

justification of a market-pull model where innovation was based on the demand of the

market. Although popular in neo-classical economics for its reliance on market

explanations, the market-pull explanation was shown to have weak empirical backing.

Mowery and Rosenbergs (1979) review of empirical studies on the relation between

market-demand and innovation provided a convincing repudiation of a linear process of

innovation driven by the market. Although there have been arguments for a technology-push model of innovation, the current theories of innovation also reject a linear supply

model. Von Hippel (1988) asserts that in fact the source of innovation varies greatly with

some originating from users, others coming from suppliers, and some emanating from


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manufacturers. Mowery (1983) showed that firms developed internal systems of R&D

because of the short-comings of market distribution of information as well for reasons of

secrecy and competitive advantage. Gort and Kleepers (1982) study suggests that there isno equilibrium number of firms in the market of a new product and the entry of firms

depends on profit expectations and the ability to capitalize on information and innovations

not proprietary to existing firms in the market. Pavitt (1984) identified four major types ofinnovating firms in manufacturing: 1) Supplier dominated sectors which have mainly

process innovations such as textiles; 2) Specialized supply sectors which have product

innovations that are the inputs of other industries such as engineering equipment; 3) Scale-intensive sectors with both product and process innovation through capital intensive

investments and 4) Science-based sectors that are directly linked to new scientific

discoveries such as the electronics industry. As Dosi (1988) argues, the economic

incentives for firms in different industrial sectors vary greatly.

Dosi (1982, 1988) extends this argument by defining a system consisting of technological

paradigms that are patterns for solutions based on selected principles of natural science

and technological trajectories that determine the spread of innovations based in aparticular paradigm. Another way of expressing this is that technological paradigms are

radical innovations that necessitate changes in the wider institutional context and

technological trajectories are incremental technological progress. Nelson and Winter

(1982) use a similar conception, the technological regime where innovation and growth areevolutionary (past decisions combine with current cost to set up routines for firms to

proceed) and incremental (because of cost and uncertainty of new knowledge). Nelson and

Winter argue that firms choose a trajectory on the basis of their selection environmentwhich includes market demand and non-market intersectoral variations in the institutions of

innovation (R&D, government support, etc.). Each individual firms decision in turn

shapes its market sector which affects the nature and routinized behavior of their

competitors. Their formulation makes a link between the macro analysis of what isoccurring at the market, regional or national level and the study of innovation generation at

the micro or firm level.

Another model for the creation and diffusion of innovation is based on the linkagesbetween sectors in the generation and modification of innovations similar to Nelson and

Winters (1982) selection environment. The flow of information between sectors and the

ability to adapt new innovation to a firms own environment is emphasized. Cohen andZysman (1987) pointed to this interlinkage as a vital component of a regions or countrys

competitiveness. However, there is no magic formula that will guarantee that a firms new

invention will become a commercially viable innovation. As Rosenberg (1982) argues that

being the first to produce a product does not guarantee that you will be the winner andinventions that have lain unused for years may suddenly be found to be profitable

innovations as circumstances evolve.

Innovation diffusion is influenced by a number of factors such as industrial structure, firm

strategy and governmental policy. Hagerstrand (1967) modeled diffusion by building upthe random patterns that emerged from numerous independent decision-makers reaching

their own conclusions about what to do. Arrow (1962) argued that firms acquire new


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innovation through actually experimentation with new technologies, i.e., learning by

doing. Manfields (1961) econometric analysis suggests that the rate of imitation was

correlated with relatively low sizes of investment and large expected profits. Freeman(1982) suggests that a good understanding of users needs is critical for a firm to become a

successful innovator. Rosenberg (1982) echoes this sentiment by describing diffusion as a

cumulative and interactive process between users and suppliers of a new innovation.

In conclusion, this review of the literature of the economics of innovation is remarkable inits contrast to the equilibrium and disequilibrium models of early regional development

theories. Rather than a general model recent innovation literature such as Romer (1994)

suggests an endogenous dynamic of innovation that is highly dependent on the specificitiesof a sector or regions technological capability, history, firm characteristics and the

incremental nature of much of the innovation process. Romer notes these types of qualities

are notoriously hard to quantify but in order to understand innovation and its impact onregional development they are characteristics that need to be used.


This section picks up the history of regional development in the seventies when the world

underwent a process of complex change. This transformation was greatly influenced by a

new cluster of technological innovation centered on the use of microelectronics in anumber of products and production processes. These innovations had a great impact on

regional economies and theories of regional development which applied the insights of

Schumpeter and other thinkers on innovation to regional development.

The first section looks at arguments that attempt to incorporate innovation into structuralpatterns of the capitalist system. The second looks at the work on the restructuring of

production and the increasing presence of the service sector. The last section deals with thedebates revolving around the idea that a new form of industrial structure is emerging that is

measurably different from those that have come before.

Structural Theories

The next section outlines three of the most direct applications of theories of innovation to

regional development. In contrast to traditional location theories, product/profit cycle, long

waves, and path dependency rely directly on the phenomenon of innovation.

Product/profit cycle

Vernon (1966) developed a product cycle theory based on trading patterns in the United

States to explain the distribution of economic activities. Product cycle is based on the idea

that a product passes through several stages in its production life from an early innovationwhere high levels of skilled inputs are required to a growing standardization that lends

itself to mass production. Thus, in the early phase of its life the production of a product

will be located in a region that is equipped with highly skilled labor and gradually be

shifted to low-wage national or international regions when its production stabilizes.


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Vernon argued that in order to understand a regions economic vitality, one had to look at

what stage in the product cycle its industries were rather than whether they belonged to

innovative sectors.

Although Vernons theories were in line with cumulative causation, later studies, Nelson

and Rees (1979) and Krumme and Hayter (1975), used the lens of product cycle analysis toargue that regions were on a convergence trajectory. Markusen (1985) took a third path

with her reformation of product cycle theory into profit cycle theory in which firmslocation production facilities in an effort to maximize profits. Markusens profit cycle

argued for a generic tendency of rapid growth, followed normalcy and then decline which

could be influenced by oligopolies to the determinant of regional economic health.Markusen argued that industrial development is no longer synonymous with regional

development and that industrial oligopolies could retard the spread of innovation.

However, product/profit cycle models have come under critique for being too deterministic

and excessively linear. Vernon (1979) later argued that the increased geographical reach of

firms and changes in the national markets of industrialized countries was eroding theapplicability of product cycle theory. Storper (1985) argues that cycle theory over-

generalizes a process that occurred only in a few industries after W.W.II and ignores thepotential of firms to do continuous innovation.

Long Cycles/Waves

Another school of regional development thought influenced by innovation is based on the

idea that capitalist development is not a linear process but a cyclical series of waves.Kondratiev (1935) was the first scholar to identify regularly occurring structural cycles

although he did not implicitly identify technology as the cause. It was Schumpeter (1939)

who first argued that a cycle of technological creative destruction was responsible forcyclical trends in capitalism. He also identified three waves based respectively on 1)textiles 2) railroads and steel, and 3) the electrical and automotive industries. Later

authors, such as Hall (1985), have identified a fourth wave based on aerospace and have

speculated on a fifth wave based on microelectronics.

Mensch (1979) tried to document the phenomenon of innovation clusters and argued thatdepression encourages radical innovations and innovation cycles peak at the end of each

Kondratiev cycle. Mensch argues that firms undertake innovative activity when they are

unable to generate profits from older product with saturated markets. Rosenberg andFrischtak (1983) critique Mensch for his classification and dating of innovation, a quandary

common to all scholars of innovation, and argue that an economic downturn would make

firms more cautious about committing resources aimed at long-term benefits. They alsofault long-wave proponents for non-specificity in identifying the causal links between

innovation, investment and growth and the problem of measuring the effect of innovations

that is mediated by diffusion rates and incremental improvements. Other critiques of longwaves have argued that it is overly technologically deterministic (Freeman, 1982) and/or

that it has missed the importance of incremental innovation and the process of cumulative

or evolutionary innovative process. (Rosenberg, 1982)


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Path Dependency

In the late 1980s a new set of neo-classical economists has rediscovered geography and

have attempted to include space in their economic models. These path dependencytheorists contrast the preordained spatial ordering envisioned by the Location School with

their model of a historically dependent trajectory with multiple possible outcomes. Whilerecognizing that the cumulative causation school did address the effects of history on

regional development, theorists such as Krugman (1995), argue that until recentlyeconomists did not have the proper techniques to rigorously model the effects of increasing

returns to scale. Arthur (1988) and Krugman (1991) provide models of regional

development in which outcomes are not preordained but dependent on the historical chancesiting of the first firm in an industry. This provides a lock-in, i.e., the QWERTY principle,

to this location that encourages further growth there. This lock-in effect and unbalanced

sectoral rates of technological progress are the basis for Williamsons (1980) account ofUS regional inequality.

Martin and Sunley (1996) provide a critical assessment of the path dependency school ingeneral and of Krugman in particular. In the effort to provide rigorous mathematical

formulations of geographical economics, Krugman and Arthur have the standard failings ofabstraction inherent to equilibrium analysis and deductive model building. More

importantly, Krugman is unable to adequately explain why successful regions can suddenly

go into decline or why some regions are more adept at withstanding external shocks. Sabel(1995) argues that path-dependency in technology is too deterministic in the range of

choices it allows economic actors. Sabel and Sabel and Zeitlin (1985) argue that actors

scan multiple strategies at both the local and super-local level to select a solution, often a

hybrid between technologies or processes, that best suits their needs.


This section concerns theories of the transformation of production and labor relations due

to product and process innovations the greatly affected the economy during the late 60s and

70s. Both the post-industrial debate and the New International Division of Labor debateare directly tied to the emergence of a new generation of innovation.

Role of Manufacturing and Services

The two sides of the role of manufacturing and services debate are the post-industrial

position represented by Touraine and Bell and the primacy of manufacturing position

exemplified by Cohen and Zysman. The post-industrialist position argues that as aneconomy develops it shifts its main activities from the primary and secondary sectors to the

tertiary or service sector. Based on the empirical studies of Fisher and Clark and Kuznets,

post-industrial theorists like Touraine (1971) and Bell (1973) argue that a new society isemerging that is no longer fundamentally defined on the basis of industrial activity.

Knowledge and education gain new importance in both production and social conflicts that

are based on the control of information.


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The primacy of manufacturing camp argues that the post-industrial society is a myth and

that manufacturing continues to play an explicit and critical role in economies. Cohen and

Zysman (1987) argue that without manufacturing, high-wage service jobs would notdevelop and that shifts to a service economy are an indicator of a declining rather than

growing economy. The service sector is dependent on manufacturing for it existence and

any country that is content to offshore its production loses the strategic combination thatmakes it grow. In this way, Cohen and Zysmans strategic sectors are similar to Perrouxs

propulsive industries in that they are the pole around which an economy develops.

Castells (1989) added his own flavor to the post-industrial theory by arguing that a new

informational mode of development has emerged in which the "matter" that is beingworked upon is knowledge itself. The machines (hardware) have become less important

than what passes through them (software) and the main innovations are on processes rather

than products. These changes on processes have multiplier effects on society becauseprocesses enter into all spheres of human activities. As information rises in importance,

industrial processes do not so much decline as become periphery to the core of information

processing. This central core of information guides the production process and influencesthe consumption process through distribution networks. Sassen (1991) argues that an

expansion of producer services, i.e., services that are intermediate inputs and not final

consumption products, are redefining the nature and location of production systems.

Manufacturing continues to play an important role but it is increasingly subservient to thefinancial and producer services complex that is ultimately not concerned whether

manufacturing occurs locally, regionally, nationally, or internationally.

One of the biggest problems for the post-industrial school was that the classification of

services that included all economic activities besides manufacturing and primaryindustries. This coupled with a linear approach and inability to formulate precisely the

manner in which services drive an economy has weakened the post-industrial argument.However, the primacy of manufacturing approach is overly-subjective on its valuing ofservices and has data comparability problems with cross national comparisons between the

USA and Europe and Japan who have relatively higher proportions of manufacturing in

their economies. Finally, as Castells and Aoyama (1994) show that the paths ofdevelopment of various countries can be quite divergent and take many different forms.

Division of Labor

A necessary component to the restructuring of the production process are activities such as

mergers, plant relocation and rationalization of multi-plant production which as Bluestone

and Harrison (1982) argue has serious repercussions for labor relations. Massey (1979)define this process as de-industrialization characterized by a shift from sectoral

specialization to a division based on functional specialization in the overall production

system. The result of this division of labor has spatial implications for innovation-generation as regions gain or loss the ability to create innovation as function of control and

R&D are separated from production.


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Although division of labor has always existed, this expanding spatial component can be

directly tied to the emergence of new telecommunication technologies which enable firms

to operate across much vaster distances. Precipitated by the economic crisis of the 70s,Froebel, Heinrichs, and Kreye (1979) argue that the these processes and organizational

innovations allow the formation of a New International Division of Labor (NIDL). The

theory of NIDL asserts that the principle direction of technological change is towards theseparation between innovative functions and low-skilled production. Massey (1984)

argued that these new spatial structures of production were not just an outcome of

industrial restructuring but an integral part of the reproduction of society and it dominantrelations. Because Masseys theory is based in the industrial and spatial specifics of each

case she is reluctant to argue for one specific model but cautiously put forth examples of

how spatial hierarchies in managerial, production, and control can influence the

distribution of production. Shaiken (1984) echoes the sentiment that uses of newtechnological innovations do follow any set path but emerge through the interaction of

labor, management and technology.

More recently Sassen (1988, 1991, 1994) argues that as mass production facilities havedispersed the command and control functions of production have concentrated in cities.

Concurrently, immigrants enter the economy both through low-wage service jobs related to

the social reproduction of the members of the producer services and in the new

manufacturing sectors (as opposed to traditional mass production) so that capital canextract further concessions from labor. Thus, a more bifurcated society than had existed

under the regime of mass production emerges from these processes: a slowly increasing

group of elite, a shrinking middle class, and a burgeoning underclass.


This section continues concentrates on the effect of innovations in the production and laborsystem based on the work outlined above. Although much of the work in the previous

section could be included here, the attempt of this section is to focus on more recenttheories that revolve principally around the new forms of industrial districts and

agglomerations. Also, in contrast to the de-industrialization and NIDL theories, this

sections arguments present a more optimistic view of the restructuring process.

Regulation School and Flexible Production

One school of thought that attempts to combine the unique character of every region withthe reconfiguration of production is the French Regulation School. In this effort they

define collective and individual behavior that supports the reproduction fundamental

relations, as modes of regulation. These modes of regulation support specific regimes ofaccumulation that consist of combinations of modes of production, organization and labor

reproduction. The dominant regime of accumulation from the 1920s to the early 1970s had

been the Fordist mass-production model. Theorists of the regulation school argue thatstarting in the 1960s the United States and other OECD countries have entered a new

regime of accumulation that has fundamentally altered the organizational, production and

consumption patterns of society. (Boyer, 1990) For this reason Regulation theory is often


14/30

referred to as post-Fordist and in many ways was the precursor to the theories of flexible

manufacturing outlined in the next section. (Hirst and Zeitlin, 1991)

The great strength of regulation theory is that it allows for great flexibility in explanation ofeconomic growth processes and is not deterministic. However, this is also the source of

one of its strongest critiques, namely that it is description and not a theory and isanalytically weak. Others argue that the post-Fordism that regulationists see has not

actually become the dominant regime of accumulation or is simply an extension of theFordist division of labor. (Amin, 1994) (Kotz, 1990)

Emerging from the Regulation Schools thesis of a new regime of accumulation is the idea

of flexible specialization first developed by Brusco (1982) and then expanded upon byPiore and Sabels (1984) highly influential work. They argue that an industrial divide

occurs when the technological trajectory used in an economy is called into question. (In

this formulation Piore and Sabel use a much broader definition of technological trajectory

than Dosi.) However, the shift to a new technological trajectory is not based on an inherent

technical logic but rather the result of an implicit collective choice. (Sabel and Zeitlin,1985) The first industrial divide occurred in the 19th century when mass production

techniques displaced the previous system of craft production. Their contention is thatcurrently a second industrial divide is underway as mass production is replace by a system

termed flexible production, i.e., the use of general purpose capital and skilled labor to

produce a changing product line.

Flexible specialization argues that there is a reemergence of industrial districts, e.g., theThird Italy, similar to those first discussed by Alfred Weber in the 19th century. (Sabel,

1988) (Storper and Harrison, 1991) That is, agglomerations of industries in regions that are

highly interconnected and resemble a factory without walls. These districts are

characterized by numerous small firms, often started by former workers, who service small,specialized markets. Because they do not have the capital investment to enjoy economies

of scale, they concentrate on rapidly changing batch manufacturing. Companies acquireflexibility through short-term labor contracts and inter-firm cooperation that allow

production to expand or contract depending on demand. Labors position is maintained by

the need for skills and institutional processes that regulate labor relations. Thus, proximity

to other firms and institutions play an important role in determining a region's success withthe flexible production regime.

Flexible specialization has been critiqued as excessively optimistic in the progressive

nature of this system of production. In particular, Harrison (1994) argues that greater wage

insecurity and income differential have created a contingent work force that may persuadefirms to compete on the basis of low wages rather than the regional networks that helped to

create a productive atmosphere. Pollert (1988) critiques flexible specialization for an

ideological stance that is anti-labor and places the responsibility for economic recovery onrestructuring labor relations.

New Industrial Spaces


15/30

The new industrial spaces argument, typified by Scott (1988a, 1988b, 1993) builds upon

the flexible specialization model with particular emphasis on transaction costs, and

economies of scale and scope. Transaction costs or the cost of economic transactionsdetermines whether firms choose a vertical or horizontal form of production. Scott sees

vertical disintegration as an important part of developing external economies of scale that

give increased flexibility to adjust to rapidly changing markets. The crisis of the 1970sincreased the diseconomies of scope (it was more expensive to produce under a system of

vertical integration) of large corporations and encouraged the growth of small firms. Scott

argues that it is the standardization of a commodity or service which determines thenecessity of spatial proximity to inputs and markets. The more irregular these are the more

a region can benefit from the disintegration of vertical firm structure which would further

attract innovative industries. In a nutshell, Scotts argues that the regime of flexible

accumulation can best be thought of as transactions-intensive agglomerations of humanlabor and social activity."

This idea of a new industrial space of innovative firms has introduced the idea of an

innovation milieu that brings Schumpeterian ideas of innovation into a verticallydisintegrated industrial space. Based on the compelling example of Silicon Valley, the idea

explored in these theories is that the flexibility of the new space would be symbiotic with

the creative destruction of innovation. Although Hall and Markusen (1985) and Castells

and Hall (1994) have explored the characteristics of milieu and the attempts to recreatethem it remains to be seen if these regional planning efforts can create the synergy

necessary for the benefits.


Crucial to the theories of the Regulation school, flexible production and new industrial

spaces is the concept and role of institutions and their embeddedness in society. For mostof this century, economists and regionalists have conceptualized the atomized individual or

firm operating in pure rational competitive environments. Social relations were discountedand did not enter the realm of analysis. Williamson (1975) was an early theorist who asked

when economic functions are performed by the market and within hierarchical firm

structures. His answer was that transactions that are uncertain, occur repeatedly, and

require substantial interaction are those which will take place within firms. Williamsonsaw these transactions as requiring a higher level of trust and accountability that only could

take place within a corporate internal structure.

Granovetter (1985) in his seminal article on embeddedness argued that these relations of

trust could and do appear within market transactions. He thinks that Williamson overstatesthe case for the power of hierarchies and argues that societal norms and expectations can

create a set of embedded institutions that provide a mechanism for trust to be applied to

complex market transactions. Recent work by Putnam (1993) on the efficacy of Italianregional governments provides an empirical example of the influence that society exerts of

the functioning of the state and market. Putnam uses a concept of social capital, i.e., the

sum of individual trust and community networks, which allows society to operate moreefficiently and act as a lubricant that reduces the transaction costs. Putnam argues that


16/30

social capital can be built through networks of civic engagement and reciprocity. Through

these incremental actions an environment of social trust is formed which offers institutions

a more fertile and inviting civic society in which to grow. Sabel (1993) views trust as aprecondition of social life and therefore asks not how trust can come from mistrust but how

specific relations come to be viewed as trustworthy. Institutions operate best when they are

viewed as a self-managed process that emerges from direct experience. It is the incrementalchanges that allow institutions to adapt rather than a structure of centralized decision-

making that builds good institutions.

Saxenian (1988, 1994) applies the institutionalist approach to argue the case of the growth

or lack thereof in high tech industries in England, Boston and Silicon Valley. Herargument is that the regional based system of collective learning in Silicon Valley proved

superior to the highly autarkic organization corporate structures of Route 128 or the

governmental supported Cambridge, England high tech sector. Storper and Scott (1993)and Storper and Harrison (1991) also emphasize the important role that sets of institutions

play in determining how and where technology is adopted. Locke (1995) examines the

institutional networks in Italy and argues that successful industrialization relies on dense,egalitarian organizations of association.


The introduction of the role of innovation to theories of regional development has

strengthened our analytical ability and provided new insights to the changing nature of our

society. It is not necessary to believe in a deterministic structure like long waves to

recognize that the past twenty years has profoundly reshaped the economy and the role ofindividuals, regions and national governments. Romer (1993) argues that economics

needs a greater appreciation for the role of ideas, both revolutionary and incremental, in a

regions or nations development. Romer highlights the role of collective action andinstitutions in facilitating the use of ideas. Both Swanstron (1996) and Sabel (1996) echo

this concern for methods of governance as a critical component of development.

This focus on changing institutional structures is also held by Ohmae (1993) who argues

that we are witnessing the end of the nation-state and the birth of a new region state.Sassen (1996) suggests that innovations in telecommunications technology and global

financial markets have destabilized and transformed many of the institutions upon which

the concepts of sovereignty and governance are based. A large understanding gap existsaround the impact of the Internet on regional development especially its ability to extend

the distance across which meaningful interactions that build a dense institutional network

that can be the basis of social capital. Castells (1996) explores the way in which society isincreasingly polarized between the Net and the Self. Mitchell (1996) has found trends

towards agglomerations of Internet activity in urban centers which suggest a strengthening

of cumulative causation. Schonberger (1994) asserts that the emerging mode of production

is based on firms' ability to compress time which undermines Fordist techniques of spatialdecentralization.


17/30

Whatever the outcome of these nascent ideas it is clear that regional development theory

has increased it complexity of analysis and consequently the richness of its findings.

Regions, firms and innovations all possess unique sets of characteristics that must berecognized rather than assumed or generalized away. However, this is not an excuse for

pure description without analysis. Theorists must simultaneously hold the paradoxical

notions of uniqueness of place and the implications for research beyond its specific sphere.

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