Transcript How New Knowledge is Endogenously Created in the New ICT

Innovation in the New ICT
Ecosystem:
How New Knowledge is Endogenously
Created in the ICT Sector
Martin Fransman
Professor of Economics and Founder-Director Institute for
Japanese-European Technology Studies
University of Edinburgh
1
The challenge facing Europe
1.
European companies face increasing competitive pressure
through globalised markets from the US on the one hand,
and Japan, Korea, China and India on the other.
2.
The only viable response is innovation i.e. the creation of
new knowledge relating to products, processes, forms of
organisation, and markets (Schumpeter’s definition).
3.
The low cost option is ruled out by China and India.
2
How is new knowledge endogenously
created in the ICT Sector?
Paradoxically, even Schumpeter does not provide an
answer
• Even Schumpeter, the scholar on innovation par excellence, does
not tell us how innovation happens.
• He does tell us what innovation is (i.e. new products, new processes
and technologies, new forms of organisation, and new markets).
• He does tell us who the agents of innovation are (i.e.
entrepreneurs).
• He does tell us about the effects of innovation (i.e. creationdestruction).
• And he does distinguish innovation from related events (such as
invention, uncertain financing of innovation, and diffusion).
• But he does not tell us how innovations happen.
3
How is new knowledge endogenously
created in the ICT Sector?
1.
One important way (though not the only way) is through the
symbiotic interactions between the creators and users of
this knowledge. (von Hippel has developed this insight)
2.
Other ways include basic or longer term research, where
there is no immediate user, in universities and corporate
R&D labs, and exogenous change coming from other
sectors.
3.
But, who are the main creators and users of knowledge in
the ICT Sector?
4
How do they fit together as creators and
users of knowledge?
5
The Creators and Users of Knowledge in
the ICT Sector
At a high level of aggregation there are 4 groups of players
who create and use knowledge.
(1) networked element providers
(2) network operators
(3) platform, content & applications providers
(4) final consumers
[NOTE: The first 3 are intermediate consumers.]
6
A Simplified Model of the New ICT Ecosystem
Output of innovative goods and services (from all three layers)
Final
consumer
Global trade
Layer 3
Cont. & App. Providers
Financial
Markets
Layer 2
Regulation
Converged Networks
Global trade
Layer 1
Standardisation
Networked elements
7
ICT Companies in the FT Top 500 from
the US, Japan, Europe and East Asia
(Korea, Taiwan and China), 2006
Layer
Total number of
companies
III
9
II
18
I
29
Number of companies
by region
US 6
Japan 2
Europe 1
US 5
Japan 3
Europe 8
East Asia 2
US 12
Japan 9
Europe 6
East Asia 2
Source : M. Fransman (copyright), calculated from FT Top 500, 2006
8
There are 6 symbiotic relationships between
these four players
4
CONSUMERS
Relationship
Relationship
6
3
Relat.
4
3
2
NETWORK
OPERATORS
Relat.
PLATFORM,
CONTENT &
APPLICATIONS
PROVIDERS
2
Relationship
Relationship
1
1
5
NETWORKED
ELEMENT
PROVIDERS
9
6 symbiotic relationships in the New ICT
Ecosystem
CONSUMERS
3
3. PLATFORM, CONTENT &
APPLICATIONS PROVIDERS
2
5
2. NETWORK
OPERATORS
1
6
C
O
N
S
U
M
E
R
S
1. NETWORKED ELEMENT
PROVIDERS
4
CONSUMERS
10
3 Flows within the Symbiotic Relationships
1.
Financial flow, emerging from the buyer-seller
relationship.
This creates financial incentives for knowledge-creation.
2.
Information flow, as creators and users get to know
more about each other.
3.
Material flow, as the creators provide inputs (atoms or
bits) for their users.
11
Old and New Symbiotic Relationships
 The ‘Old’ ICT Symbiotic Relationships
(i.e. pre-Internet)
Relationships 1, 4 and 6
(In telecoms until circa-1980: a closed innovation system)
 The ‘New’ ICT Symbiotic Relationships
(i.e. post-Internet)
Relationships 2, 3 and 5
(An open innovation system, with low-cost entry for
existing and new firms)
12
Examples of Symbiotic Relationships
Example 1
• Symbiotic Relationship 1 between telecoms operators and their
network element suppliers.
• While the suppliers do most of the R&D, the operators provide both
the investment and user-knowledge feedback (see data at end).
Example 2
• Symbiotic Relationship 3 between content & applications
providers and final customers.
• E.g. web 2.0 relationships where the consumer is also an innovator
and information provider.
Example 3
• Symbiotic Relationships 1 & 6 Japan’s overly innovative mobile
phone makers who are not internationally competitive
• Who provide functionalities such as: digital broadcast (“One Seg”),
camera and video, wireless LAN, high-speed data communication,
IC credit payment.
13
Mobile Handset Makers: Market Share
Leading mobile handset makersMarket share based on numbers sold (%)
Q4 2007
Q4 2006
Nokia
40.4
Nokia
36.2
Samsung
13.4
Motorola
21.5
Motorola
11.9
Samsung
11.3
Sony Ericsson
9.0
Sony Ericsson
9.0
LG
7.1
LG
6.3
RIM (Blackberry)
1.2
Sagem
1.5
ZTE
1.2
Sharp
1.3
Sharp
1.0
Kyocera
0.7
Kyocera
0.7
BenQ
0.7
Apple (iPhone)
0.6
Bird
0.7
14
Symbiosis – example 4
Apple’s iPhone
• Symbiotic relationship 4,
between network element
providers and final
consumers (e.g. great
design)
• and symbiotic
relationship 1, between
network element
providers and telecoms
operators (e.g. AT&T)
15
The Environmental Context of the
Knowledge-Creating Symbiotic Relationships
• Knowledge is always created locally within specific
contexts (e.g. Antonelli (2008).
• There are 4 sets of influences on the symbiotic
relationships, as shown in the next slide.
16
Symbiosis is Environmental Context-dependent
COMPETITION
6
FINANCIAL
INSTITUTIONS
Symbiotic
Relationships
REGULATION
&
COMPETITION
LAW
OTHER
INSTITUTIONS
e.g. legal
standardisation
universities
17
The Innovation Opportunity
1.
The set of factors identified in the previous slides define
opportunities for innovation.
But, will they be constructed as opportunities or not, and who
will see them?
2.
It is precisely here that the Schumpeterian Entrepreneur
enters, whether through a small firm or a large, established
company.
3.
A key issue is the incentives that the system provides the
entrepreneur (e.g. Metcalfe (2004), Baumol et al (2007)
18
4 Implications for Government Policy-Makers
1.
They should establish prioritised outcome objectives for their
national ICT systems.
2.
They should establish performance indicators in the prioritised
areas and use them to benchmark their system against a) the
global leaders and b) several comparable countries.
3.
On the basis of the indicators they should identify the strengths
and weaknesses of their national system.
4.
They should propose action to be taken by identified players in
the national system to improve performance. (Governments will
differ in terms of what they think can and should be done.)
All the information in 1-4 should be made public and subject to
analysis and debate.
19
3 Implications for Regulators
1.
A better understanding of the innovation/knowledge-creating
process will allow regulators to take a more dynamic approach,
complementing their often static regulatory tools.
Antonelli (2007): “Regulators should care for the dynamic properties of the
economic systems they want to regulate….The dynamics of the system can be
understood and analysed only when the localized context of action – and
innovation – of each agent, both on the demand and the supply side, is taken into
account.” (Communications & Strategies, No.68, 2007, p.15.)
2.
Regulators have correctly emphasised competition and acted
against the abuse of significant market power. However, although
competition is an important component of innovation, competition
is not sufficient to produce internationally-competitive innovation.
Institutions and entrepreneurship are also necessary.
3.
Regulators should try and take greater account of innovation
dynamics in making their regulations.
20
Benchmarking Performance of National
Innovation Systems
International Competitiveness of Incumbent Telcos and
Cable Companies in Broadband Speed (OECD, 2007)
21
Global Comparison of minimum Broadband
Prices (OECD, 2007)
22
Broadband technology diffusion by country
Broadband Technology Diffusion By Country, 2006
COUNTRY
DSL
(%)
CATV
(%)
FTTP
(%)
OTHER
(%)
Japan
62.3
14.2
23.4
0.1
USA
36.5
56.4
0.1
7.1
Korea
53.2
32.8
0.0
14.0
EU
80.4
16.9
1.1
1.7
France
93.9
6.1
0.0
0.0
Germany
96.5
2.3
0.0
1.1
Italy
94.0
0.0
3.4
2.6
Sweden
64.6
17.2
17.5
0.6
UK
72.2
27.7
0.0
0.0
Source: Information supplied to the author by MIC, Japan.
23
Problems regarding governance by telecoms
regulators
The Dominant Regulatory Paradigm in Telecoms (DRPT)
• The mindset of telecoms regulators has been shaped by
neoclassical economic theory which teaches that social
welfare is maximised under conditions of intense competition
(i.e. perfect competition).
• Accordingly, regulators have seen the creation of competitive
conditions as one of their main tasks.
• A major focus has been on bottleneck infrastructure where
significant market power (SMP) and dominance may be
exercised. This has justified ex ante, sector-specific
regulation.
24
What is wrong with DRPT? (1/2)
• The economic theory underlying DRPT tends to be static and does
not take account of the process of innovation.
• Accordingly, the causal link between competition and the output of
the ICT Ecosystem – i.e. more innovative goods and services – is
inadequately explained and dealt with by policy.
• Apart from competition (see below), the performance of the ICT
Ecosystem also depends on co-operation (c.f. the 6 key symbiotic
relationships) and a range of institutional drivers of performance.
• The institutional drivers of performance include: financial institutions
and markets (c.f. Telecoms boom and bust); legal institutions (c.f.
role of litigation in frustrating US Telecoms Act, 1996);
standardisation (c.f. success of GSM); and universities (c.f.
university research on ICTs, role of Stanford U. in incubating
entrepreneurs of Yahoo!, Google, etc).
• In short, DRPT does not deal adequately with the process of
innovation which is the main driver of growth, productivity and new
goods and services.
25
What is right with DRPT? (2/2)
• The DRPT is right to attach high priority to competition.
• But it does so for the wrong reason, tending to assume implicitly
that competition will automatically result in maximum social
welfare. (In economic theory, perfect competition logically
implies – i.e. is the same thing as – optimisation of social
welfare.)
• However, in a world of innovation, change and uncertainty, the
determinants of globally superior performance are far more
complex than this theoretical approach acknowledges.
• The DRPT is right to be concerned about bottleneck
infrastructure, the existence of SMP and dominance, and the
possibility that this may lead to anti-competitive behaviour.
• Competition is a key driver of the process of innovation, which in
turn is THE key driver of the performance of the ICT Ecosystem.
But if innovation is a key ultimate objective it is necessary to go
beyond these concerns.
26
Problems regarding governance by policymakers
• The main problem is fragmentation.
• The ICT Ecosystem is the responsibility of: telecoms
regulators, ministry of trade & industry, competition authority,
ministry of science and technology, perhaps a separate
ministry of communications (e.g. MIC in Japan), to name just
the main ones.
• Each has their own perspective on the system; none has a
holistic conceptualisation of the ICT Ecosystem as a whole.
• This can lead to a lack of co-ordination and inconsistency.
27
Data
• The database, from which the following graphs come, is
based on the 157 top global companies (by market
capitalisation)
• The data comes from Thomson Financial, UBS Investment
Research, DTI R&D Scoreboard, and individual company
reports.
• For further details see Fransman, M. (2007). The New ICT
Ecosystem – Implications for Europe, chapter 4.
28
R&D is done primarily in Layers 1 and 3
R&D to Sales : average 2002/2006
10%
9%
R&D to Sales
Average Ratio per Layer
(2002-2006)
2%
Internet, e-commerce
Telecom services
Telecom equipment
R&D expenditures : average 2002/2006
7%
Internet,
e-commerce
R&D Expenditures
Distribution between
Layers
(2002-2006)
26%
Telecom
equipment
Telecom
services
67%
29
Investment in the New ICT Ecosystem comes
largely from Telecoms Operators
in Layer 2
CAPEX to sales : average 2002/2006
17%
CAPEX to Sales
Average Ratio per Layer
(2002-2006)
5%
Internet, e-commerce
4%
Telecom services
Telecom equipment
CAPEX expenditures : average 2002/2006
CAPEX expenditures
Telecom equipment
7% 1% Internet, e-commerce
Distribution between
Layers
(2002-2006)
91%
Telecom
services
30
Profitability and Returns are higher in Layer 3
than in Layer 2
Exhibit 9.a
Profitability in the New ICT Ecosystem
Operating Income to Sales
Exhibit 10.a
Return on Equity in the New ICT Ecosystem
Return on Equity
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
2002
2003
2004
WW Information Technology
WW Soft & Serv.
2005
2002
2006
WW Netw ork Svces
ICT eco-system
Source : Thomson Financial 2007
2003
2004
Info Technology
Telecom Services
Softw are & Services
Total World Inc.
2005
2006
Source : UBS 2007
Exhibit 10.b
Return on Equity in the New ICT Ecosystem
Exhibit 9.b
Profitability in the New ICT Ecosystem
Operating Income to Sales
ROE
25%
20%
15%
20%
10%
15%
5%
0%
10%
-5%
5%
2002
2003
2004
2005
2006
-10%
-15%
0%
2002
2003
2004
2005
2006
WW Tcom Eqpt
WW Tcom Svces
WW Int & E-Com
ICT eco-system
Source : Thomson Financial 2007
-20%
WW Tcom Eqpt
WW Tcom Svces
WW Int & E-Com
ICT eco-system
Source : Thomson Financial, 2007
31
This raises a potential problem for the
ecosystem
• To the extent that capital is allocated by financial markets
according to returns, it may turn out that Layer 2 is relatively
deprived of investment funds.
• In turn – via the symbiotic relationship – this could deprive
Layer 1 companies who are dependent on network operators
for revenue…
• …and slow the development of the Internet platform provided
by Layers 1 and 2 on which Layer 3 depends.
32
Do European telcos have more market power
than their US and Asian counterparts?
Answer: There is little evidence to support this argument (to the extent that
market power is reflected in profitability).
In 3 of the 5 years European telcos have been outperformed by US and/or
Asian (Japanese and Korean) telcos.
Operating Income to Sales
25%
20%
15%
10%
5%
0%
2002.
2003.
US Tcom Svces
Asia Tcom Svces
2004.
2005.
2006.
EUR Tcom Svces
Source : Thomson Financial 2007
33
Company data classification
LAYER
Layer 1
(54
companies)
FUNCTIONALITY
Networked elements
SUBSECTORS A
(not mutually
exclusive)
IT
European IT
(incl. system software US IT
providers)
Asian IT
Telecoms equipment
Layer 2
(50
companies)
Layer 3
(53
companies)
Networks
Platforms, contents
and applications
SUBSECTORS B
European tel.equip.
US tel. equip.
Asian tel. equip
Network services
European net. svices
(incl. telecoms, cable, US net. svices
and satellite network Asian net. svices
operators)
Telecoms services
(telecoms network
operators)
European tel. svices
US tel. svices
Asian tel. svices
Software & services
(incl. application
software providers)
European s’ware &
svices
US s’ware & svices
Asian s’ware & svices
Internet & ecommerce
(Internet-based
providers)
European I’net & ecom
US I’net & e-com
Asian I’net & e-com
Content
(traditional media
providers)
34
Companies in our Database : Layer 1
3Com
Acer
Akamai Technologies
Alcatel / Lucent
AMD Technologies
Apple
Avaya
Business Objects SA
Cisco Systems
Computer Associates
Computer Sciences Corporation
Dell
Electronic Data System Corp.
Ericsson
Fujitsu
Safran-Sagem (*)
HP
IBM (*)
Intel Corp.
Juniper Networks
Kyocera Corp
LG Electronics
Logitech International SA
Lucent Technologies
Matsushita
Microsoft (*)
Motorola
NEC
Nintendo
Nokia
Nortel
Palm Inc.
Philips
Qualcomm Inc.
Samsung
Sharp Corporation
Siemens (*)
Sony
ST Microelectronics
Sumitomo (electronic indus.) (*)
Sun Microsystems
Symantec Corp
Tellabs
Texas
Thomson (ex. TMM)
Tomtom N.V.
Toshiba
UTStarcom
Wincor Nixdorf AG
ZTE
US
US
US
EU
US
US
US
EU
US
US
US
US
US
EU
Asia
EU
US
US
US
US
Asia
Asia
EU
US
Asia
US
US
Asia
Asia
EU
US
US
EU
US
Asia
Asia
EU
Asia
EU
Asia
US
US
US
US
EU
EU
Asia
US
EU
Asia
(*) : only for the part of their business in layer 1
Telecoms Equipment
IT
IT
Telecoms Equipment
IT
IT
Telecoms Equipment
IT
Telecoms Equipment
IT
IT
IT
IT
Telecoms Equipment
Telecoms Equipment
Telecoms Equipment
IT
IT
IT
Telecoms Equipment
IT
IT
IT
Telecoms Equipment
IT
IT
Telecoms Equipment
Telecoms Equipment
IT
Telecoms Equipment
Telecoms Equipment
IT
IT
Telecoms Equipment
IT
IT
Telecoms Equipment
IT
IT
IT
IT
IT
Telecoms Equipment
IT
IT
IT
IT
Telecoms Equipment
IT
Telecoms Equipment
35
Companies in our Database : Layer 2
LAYER 2
AT&T / SBC
AT&T histo.
Belgacom
Bell Canada
Bellsouth
BskyB
BT
Cable & Wireless
Cablevision
China Mobile
China Telecom
China Unicom
COLT Telecom Group
Comcast
Cox
DirectTV
DT
Echostar Com. Corp.
Eutelia
Fastweb
Freenet AG
FT
Iliad
Jupiter Telecom. Co Ltd
KDDI
KPN
KT
Level 3 Com. Inc.
Mobile Telesystems
NeufCegetel
Nextel
NTT
Portugal Telecom
Qwest Com.
Rogers Com. Inc
SKT
Sogecable
SprintNextel
Swisscom
Tele2
Telecom Italia
Telefonica
TeliaSonera
Telstra Corp. Ltd
Tiscali S.p.A.
Verizon
Viacom
Vivendi (SFR) (*)
Vodafone
US
US
EU
US
US
EU
EU
Asia
US
Asia
Asia
Asia
EU
US
US
US
EU
US
EU
EU
EU
EU
EU
Asia
Asia
EU
Asia
US
EU
EU
US
Asia
EU
US
Can.
Asia
EU
US
EU
EU
EU
EU
EU
Austr.
EU
US
US
EU
EU
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Network services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
Telecom services
(*) : only for the part of its business in layer 2
36
Companies in our Database : Layer 3
LAYER 3
Akamai Technologies
Amazon
Antena 3 S.A.
Atos
Boursorama
Canal+
Cap Gemini
CBS Corporation
Clear Channel Com. Inc.
Comdirect bank AG
Computer Associates
Dassault System
E*Trade Financial Corp.
Ebay-Skype
Electronic Arts
EMI
Endemol NV
Expedia
Fuji TV
Gestevision Telecinco SA
Google
IAC
IBM (*)
IG Group Holdings PLC
ITV PLC
Lagardère (*)
Liberty Media Corp.
M6
Mediaset
Microsoft (*)
Monster
News Corp
NHK
Oracle
Partygaming PLC
Pearson PLC
Premiere
Priceline
Rakuten
RTL Group
Salesforce Com, Inc.
SAP
Telecom Italia Media
TF1
Thomson Corp.
Time Warner
Ubisoft
United Internet AG
Verisign Inc.
Vivendi
Walt Disney
Yahoo!
Yahoo! BB Japan
US
US
EU
EU
EU
EU
EU
US
US
EU
US
EU
US
US
US
EU
EU
US
Asia
EU
US
US
US
EU
EU
EU
US
EU
EU
US
US
US
Asia
US
EU
EU
EU
US
Asia
EU
US
EU
EU
EU
US
US
EU
EU
US
EU
US
US
Asia
Software & Services
Internet & e-commerce
Content
Software & Services
Internet & e-commerce
Content
Software & Services
Content
Content
Internet & e-commerce
Software & Services
Software & Services
Internet & e-commerce
Internet & e-commerce
Content
Content
Content
Internet & e-commerce
Content
Content
Internet & e-commerce
Internet & e-commerce
Software & Services
Internet & e-commerce
Content
Content
Content
Content
Content
Internet & e-commerce
Internet & e-commerce
Content
Content
Software & Services
Internet & e-commerce
Content
Content
Internet & e-commerce
Internet & e-commerce
Content
Internet & e-commerce
Software & Services
Content
Content
Content
Content
Software & Services
Internet & e-commerce
Software & Services
Content
Content
Internet & e-commerce
Internet & e-commerce
(*) : only for the part of their business in layer 3
37
Selected Bibliography
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Antonelli, C. and Baranes, E. (2007). ‘The Design of Communication Systems’, Communications
and Strategies, No. 68, 4th quarter, 2007.
Baumol, W.J., Litan, R.E. and Schramm, C.J. (2007). Good Capitalism, Bad Capitalism and the
Economics of Growth and Prosperity. New Haven: Yale University Press.
Fransman, M. (ed) (2006) Global Broadband Battles: Why the US and Europe Lag while Asia
Leads, Palo Alto: Stanford University Press.
Fransman, M. (2007). ‘Innovation in the New ICT Ecosystem’, Communications and Strategies,
No. 68, 4th quarter, 2007.
Fransman, M. (2007). The New ICT Ecosystem: Implications for Europe. Edinburgh: Kokoro.
Malerba, F. (ed.) (2004). Sectoral Systems of Innovation: Concepts, Issues and Analyses of Six
Major Sectors in Europe. Cambridge: Cambridge University Press.
Metcalfe, J.S. (2004). ‘The entrepreneur and the style of modern economics’, Journal of
Evolutionary Economics, Vol. 14, No. 2, May, 157-176.
Nelson, R.R. and Winter, S. G. (1982). An Evolutionary Theory of Economic Change. Cambridge
MA: Harvard University Press.
Schumpeter, J.A. (1943). Capitalism, Socialism and Democracy. London: Unwin.
Schumpeter, J.A. (1954). History of Economic Analysis. New York: Oxford University Press.
Schumpeter, J.A. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital,
Credit, Interest and the Business Cycle. New York: Oxford University Press.
Schumpeter, J.A. (1966). Capitalism, Socialism and Democracy. London: Unwin.
Von Hippel, E. (1988). The Source of Innovation, Oxford University Press.
Von Hippel, E. (1998). ‘Economics of Product Development by Users: The Impact of ‘Sticky’ Local
Information’, Management Science, 44(5): 629-644.
38
Book and Related Website
The New ICT Ecosystem –
Implications for Europe
First part of the book, and a summarising power
point presentation, are freely downloadable, and
the whole book can be purchased (at a lower
price than Amazon’s), on the accompanying
website (go to general section):
http://www.web2foryou.com/home.htm
39