A Theory of Innovation Agencies in a Regional Economy. The Case of Alberta : Leadership, Energy and Innovation. By Terry Ross

The following is the introductory chapter from my PhD 

Innovation is a complex phenomenon that cannot be properly understood without appreciating the breath of economic elements and the systematic process by which they co-evolve (Smith, 2000).  The problem is that the role of Government innovation policy (specifically creating organizations to catalyze innovation processes) is underappreciated for its ability to affect the system of innovation. The solution is to investigate the process and impact of these organizations in a system of innovation.  

1.1          Development of the Question

The core question explored in this dissertation relates to understanding the role of innovation agencies in the long term development of a regional economy.  To place this question in its proper context requires a discussion of the theoretical drivers of economic growth.  The Austrian economist Joseph Schumpeter suggests that capitalist development was the result of long run co-evolution of elements in the economy recombined in qualitatively different ways that add positive socioeconomic value (Schumpeter, 1942).  His approach highlights the entrepreneurial function as a crucial source of disequilibrium within a socioeconomic system, although Schumpeter had very little to say about innovation within an organization (Magnusson,1994).

The neoclassical approach to economic growth rose to dominate the approaches to economic growth.  The neoclassical approach analyzes an instant of economic time, assumes that economic actors all have immediate access to knowledge and includes low amount of context in its models.  Technical change is recognized as a key contributor to economic growth, but is treated as an exogenous element and in not included within neoclassical models (Abernathy and Clark, 1985; Freeman, 1994; Solow, 1994; Stoneman, 2002).   

Overwhelmed by neoclassical doctrine, interest in Schumpeter’s dynamic and evolutionary approach to economic growth had largely faded by the 1950’s.  However, starting in the late 1970’s economist’s began to propose economic models that incorporated innovation as a factor explaining differences economic data that could not be accounted for by the equilibrium models (Nelson and Winter, 1982; Freeman, 1994).  Approaches that incorporate technological competition and evolutionary dynamics rely on learning and skill development as a key dynamic in understanding the processes or regional (and organizational) economic growth.   Learning and skill development impacts the performance of an economy (and organizations) because knowledge, routines, and skills are enablers of innovation and technical change.  Furthermore, unlike neoclassical economic models, knowledge and skills are not presumed to be evenly distributed throughout a socioeconomic system (e.g. amongst individuals, organizations and regions) (Nelson and Winter, 1982; Lundvall, 1998;  Nelson and Winter 2002; Lundvall, 2007).   Skills are gained through experience (and are therefor tacit and challenging to transfer) and enable more effective behaviour.  Skills can aggregate into routines and manifest in the capabilities of an organization, or a regional economy (Nelson and Winter, 1982).  The dynamics of learning and skill development is particularly important in the context of examining innovation agencies since quite often their mandate is focused upon knowledge and skill development in the regional economy.

Economic evolution is also impacted by institutions (the formal and informal rules of the society) which act to constrain and shape interaction, thereby having a crucial impact upon and the way that societies evolve over time (North 1990).   Institutions are conceptually crucial in this dissertation as they shape the interaction between regional system of innovation elements (e.g. organizations, natural resources, knowledge) (Johnson, 1992; Freeman, 1995; Edquist, 2001). 

The system of innovation approach purports that innovation and economic performance arises from the configuration of elements (agents, users, positional goods, institutions, relationships, knowledge) within the system as it is defined.  The systems of innovation is not a economic model per se, but more like a framework.  The systems of innovation literature began with national regions as the unit of analysis, to be followed with sub-national perspectives as well as technological systems of innovation and sectoral systems of innovation (Breschi and Malerba, 1997; Cooke, Uranga and Etxebarrie, 1997; Edquist, 2001; Carlsson et al. 2002; Doloreaux, 2002; Geels, 2004; Doloreaux and Pareto, 2005; Fagerberg et al., 2005).  

The development of natural resources can have particularly profound impact upon the structure and capabilities that eventually emerge within an economy or system of innovation.   Natural resource development can draw upon a lengthy range of inputs from a wide variety of other sectors and also drawing inputs ranging from the crude and unrefined to inputs that represent the edge of human technological capability (Hawkins, 2011). The simple existence of natural resources themselves is certainly no promise of success as socially constructed elements (e.g. intensity of exploration, extraction or refining technologies, institutions governing natural resources, markets for local natural resources) determine the eventual impact (David and Wright, 1997;  Sachs and Warner, 1997; Sachs and Warner, 2001;  Lundvall, 2007).   Given this, it is hardly surprising that institutions and policies that could lead a resource-focused economy towards comparative advantage (e.g. educated workforce, geological surveys, extraction technologies) is often a central economic goal of the regional government (Wright, 1990; Edquist, 1999; Wright and Czelusta, 2004).   In addition to policies meant to maximize resource potential are other instruments that effectively ‘upgrade’ the resources into deliberate socioeconomic forms.  An example is the regional savings policy that is funded from natural resources and designed to help to smooth government expenditures and support investments in economic diversification or quality of life improvements (Magud and Sosa, 2011).

• The organization forms another primary unit in the system of innovation.  Innovation theorists define the organization as a coalition of elements (e.g. individuals, institutions) connected by authority and knowledge-sharing relationships (Nelson and Winter, 2002; Santos and Eisenhardt, 2005; Van Slyke, 2007; van der Mandele and van Witteloostuijn, 2013).  Organizations can contribute five different types of activity to the regional system of innovation:
• research (basic, developmental, engineering);
• implementation (manufacturing, coding);
• end-use (customers of the product or process out- puts);
• linkage (bringing together complementary knowledge though investment) and,
• education (learning and skill development)

Liu and White, 2001

An organizations ability to provide its chosen function can be conceived as being influenced by factors external to the organization (environmental determinism) and internal to the organization  (strategic choice) (Hrebiniak and Joyce, 1985).  Environmental determinism refers to the impact that elements outside the organization have on the organization.  Markets, technological paradigms, institutions, leaders, funding sources, users, competitors are all concepts akin to environmental determinism.  Strategic choice is the inverse of environmental determinism and describes the power an organization has to make choices about its future voluntarily.  The dependence of public organizations on the government generally leads to high environmental determinism and lower strategic choice compared to market organizations.  For innovation agencies the government is a primary source of environmental determinism.  The degree of government environmental determinism is affected by elements such the legislation governing the innovation agency and the personal relationships of key individuals (e.g. CEO, Board Chair).

Much of an organizations environmental determinism and its strategic choice come from the source of funding and governance for the organization.   Joldersma and Winter (2002) describe three ‘funding models’ for organizations.  Task organizations are funded exclusively by the government to provide mandated functions to the public;  market organizations deliver services to clients who pay for the products or services; and hybrid organizations are task organizations whose functions and boundaries include funding from the private industrial environment.   Innovation agencies are most often pure task organizations, however innovation agency investments often leveraged by other government innovation agencies or by industry.  The Alberta Research Council is a notable hybrid innovation agency, its capabilities were aligned with needs of local industry when it came to improving the techniques needed to mine the oilsands.

Organizations are also conceptualized as differing in the proximity to the desired activity.  Primary organizations provide their desired function (e.g. research) directly by conducting research inside their boundaries. Alternatively, secondary organizations affect the behaviour of (or between) primary organizations directly through governance or indirectly by institutions they create or shape. (Liu and White, 2001).

Yet another perspective on how to classify organization is borrowed from the writings of Etzkowitz and Leydesdorff (2000).  Their “triple helix” idea is that there are three overlapping domains industry, university and government.  There are organizations that exist to provide functions in more than one of these domains.  While these authors are arguing about the emerging entrepreneurial/industrial focus of the university domain, this dissertation is exploring the entrepreneurial activity originating from the government domain. 

Industrial organizations (i.e. firms) utilize production factors (e.g. labour, capital, IP) to produce goods and services to a market at a financial charge that must eventually cover the cost of all aggregate expenditures (van der Mandele and van Witteloostuijn, 2013). In a regional system of innovation the industrial organization is the primary organizational type for the deployment of knowledge into commercially viable forms (i.e. technological industrial development).  Furthermore technological competition between industrial organizations drives capitalist (system of innovation) evolution (Fagerberg, 2003; Dosi, 1988).  Industrial organizations are rarely beholden to a single (or small group) customer for their revenue which provides a key difference in environmental determinism compared to a government organization (Joldersma and Winter, 2002). 

The university organization is a support structure for innovation, providing trained persons, research results, and knowledge to industry and academia.  Recently the university has increasingly expanded its function relating formation of industrial firms, often based on new technologies originating in academic research (Etzkowitz and Leydesdorff, 2000; Etzkowitz, 2003).  Knowledge that is relevant to economical production of local resources (e.g. mining techniques) often form core regional university routines (David and Wright, 1997).   Mazzucato (2013) notes that an important function for the university research system is to provide the earliest proof of viability for technological systems and processes.  These de-risked systems and processes can then be developed further by industrial organizations.

Universities engage in a multitude of collaborative research activities with industrial organizations (often supported by the government and its agencies), which are referred to as ‘academic engagement’.   Academic engagement (Perkman et al, 2013) is a concept suggesting that inter-organizational collaborations (frequently embodied in person to person interactions) link universities and industrial organizations in efforts that pursue outcomes beyond academic success (e.g. publications) and thereby generate some utility for the non-academic partner.   These activities include what is commonly referred to as commercialization activities (e.g. intellectual property creation and company creation) but academic engagement is a much broader suite of possible activities.   A challenge is that much of the research into academic engagement has focused upon the roles of technology transfer offices (or similar units within the university) and the creation of outputs such as company creation and intellectual property.  Academic engagement is a much broader phenomenon than what is within the scope of a technology transfer organization (Perkman et al., 2013). 

Perkman et al. (2013) suggests policies that aim to encourage and facilitate engagement skills with individuals on both the industrial and academic side will possibly change behaviour and improve the quality and quantity of academic engagement.  It is also important to reinforce that academic engagement requires both an engager and an ‘engagee’ (i.e. it takes two to tango).  It follows then that innovation policy may benefit from efforts to improve the ability of industry agents to understand and appreciate the nuances of working with individuals from the academic domain.

The governments role as defined in this dissertation is the pursuit of economic goals are pursued via context specific economic policy instruments (Etzkowitz, 2003; Borrás and Edquist, 2013).  Through search routines and the efforts of individuals (i.e. policy entrepreneurs) the government can identify opportunities to use innovation policy to address perceived innovation system opportunities or address perceived system deficiencies (e.g. missing functions, missing organizations, missing institutions or poor linkages between system elements) (Nelson and Winter, 1982; Mintrom, 1997; Edquist, 2001).   These instruments can be managed directly by the government itself or by arms-length government created organizations called ‘agencies’ (McCrank et al, 2007). 

Agencies are organizations (not for profit companies, institutions, boards and commissions) created by the government for the purposes of delivering a function.  Agencies are organizations that:  

• Are established by the government but are not part of a government department
• Are responsible to perform a public function (e.g. providing a service, managing regulations, public trusts, or providing the government advice on a particular issue)
• Are responsible to government through a defined reporting relationship. Recognizing the need for quasi-judicial independence in some agencies’ decision making.
• Has some degree of autonomy from government compared with a government department.
• Has government involvement in appointments of key individuals

(McCrank et al., 2007).

Agencies, like all government policy initiatives can be characterized as emerging and progressing through a series of distinct stages.  The idea phase (where the need is identified and a possible solution conceived), the legislative phase (where the idea is codified into a legislative form), the inception phase (when the initiative is ‘born’ marked with the allocation of a budget), implementation phase (when the agency begins operations), the results phase (the later part of the implementation phase when the impact of the agency is expected to be apparent) and the sunset phase (when the agency winds up or evolves into a significantly different form) (Eggers and O’Leary, 2009; van der Madele and van Witteloostuijn, 2013).

Innovation agencies are organizations that are an agency and possess a mandate to positively impact the regional system of innovation.   Innovation agencies have a role in enhancing the system of innovation through providing services or advice to government, university or industry stakeholders either directly or through getting other organizations to provide the desired function.

Understanding the impact of an innovation agency is extremely challenging, as they exist in a complex networked socioeconomic system and are idiosyncratic (e.g. the characteristics of the sector they serve, the knowledge base they work with).  There is little, if any, standardized approach to assessing the impact of an innovation agency. No standardized approach to assessing research and development impact could 1) address the complexity of research and development outputs 2) adequately describe the processes by which system of innovation impacts occur and 3) accurately capture the resulting economic outcomes (Tassey, 2003).  Nevertheless, the concept of additionality provides some guidance on how government investments can lead to discernable impact.   Government investments can lead to input additionality (investments lead to additional inputs such as funding into the initiative), output additionality (investments lead to discernable outputs such as HQSP, patents, publications) and behavioural additionality (investments lead to desirable and discernable changes in organizational behaviour) (Buisseret et al., 1995; Cunningham and G?k, 2012).  

It is important to emphasize that this dissertation is grounded in the specific context of a subnational region.   Alberta has an idiosyncratic context leading to its modern regional system of innovation.  The abundance of natural resources, the story of the First Nations loss of local institutional control over natural resources, the gradual transfer of natural resource institutional control to Edmonton, the enigmatic oil sands, the discoveries at Leduc et al, and the leadership of Peter Lougheed are all examples of Alberta specific contingencies.  These contingencies and the current continuity and how this led to the creation of the three innovation agencies examined in this study. 

1.2      Historical Context

To recap some of the most crucial aspects of Alberta’s context leading to the era under study.  The roots of Alberta’s regional system of innovation began millions of years ago when the vast oceans of organic matter began a transformative process that would result in the western Canadian sedimentary basin.  About 13,000 years ago early Albertans successfully settled across the region and developed skills, knowledge, routines and technology in response to the natural resources opportunities of the region (Ives, 2006;  Peck and Vickers, 2006).   In the seventeenth century the pioneer economy began to integrate Alberta’s resources into international markets. The British North America Act created the Dominion of Canada in 1876 and over the coming decades a series of Treaties (‘the Hidden Canadian Constitution’) transferred epic amounts of land and natural resources to the Dominion of Canada (Carter and Hilderbrandt, 2006).

 Alberta’s agricultural economy (at this time still the Northwest Territories) continued to expand and was greatly catalyzed by the completion of the railroad (Hall, 2006).  Alberta gradually gained greater local control over its institutions and in 1905 the Province of Alberta was created, albeit without the governance over her natural resources.  Ottawa held tight control over the oilsands deposits which impact the ability of institutions like the University of Alberta and the Alberta Research Council to conduct research (Chastko, 2004).  

World War One impacted Alberta’s economy by encouraging the agricultural sector to focus on the production of wheat and oats, policies that would prove challenging when the post-war demand collapsed.   In 1914 significant conventional oil reserves were discovered in Turner Valley immediately transforming Alberta’s economic landscape by introducing conventional oil into the development picture alongside the unconventional oilsands.  The 1930 Alberta Natural Resources Act gave Alberta control over its crown lands and resources, with the exception of 2000 square miles of the Athabasca oil sands deposit (done without consulting the province) leading many in Alberta to suspect that Ottawa was planning to commercially develop the oil sands without Edmonton’s involvement (Chastko, 2004). 

The Second World War demanded enormous amounts of food and fossil fuels and the production quotas shortened the life of the Turner Valley fields dramatically.  This led to increased exploration for conventional deposits to a much greater degree than exploring options for developing the oil sands or other economic diversification policies (Myers, 2006; Breen, 2006).  The effort would pay off in 1947 with the discovery of the Leduc oil fields.  These conventional oil discoveries reinforced the conventional oil resources and capabilities at the centre of Alberta’s economy and dramatically changed the economic case for industry and government to support researching and developing the oil sands for decades (Chastko, 2004). Although there were still research being conducted into oil sands mining technologies that would eventually allow commercial scale development. 

The 1960’s saw the rise of an ‘alpha’ policy entrepreneur in Alberta, Peter Lougheed, who came to power in 1971 by decimating the incumbent Social Credit party and launching an assertive series of policy initiatives (Marsh, 2006; Lampard, 2011).  The government led by Peter Lougheed recognized that meaningful intervention in the management of resource rents was needed to ensure the long term prosperity of the Province and committed significant resources aligned with clear focused economic development agendas (Isaacs, 2013).  One critical policy was the creation of the Alberta Heritage Savings Trust Fund whose mandate was to convert non-renewable resources into a renewable one (a fund) and/or infrastructure that can provide long term benefit to the province (Warrack, 2005).   

It is at this point that the discussion turns to the examination of the individual innovation agency cases that are used in this dissertation for theory generation; AHFMR (The Alberta Heritage Foundation for Medical Research), iCORE (The Alberta Informatics Circle of Research Excellence) and AOSTRA (The Alberta Oil Sands Technology and Research Authority.  These three agencies are referred collectively hereafter as ‘The Trio’.    

The Trio have been in operation (in one form or another) for at least 10 years and thus have had enough opportunity to create a discernable impact in the Alberta regional system of innovation. The Trio represent three sector areas where the government of Alberta has focused significant capital and effort (health research, information technology and deployment of conventional/unconventional oil/gas).  What makes the Trio significant is that they also represent three different innovation agency ‘approaches’.   AOSTRA was focused upon developing new techniques for a regionally bounded natural resource with obvious economic value and an indigenous industry structure that both supported development (e.g. complimentary infrastructure) and opposed development (why support the develop a substitute for conventional resource).   AHFMR was launched on its epic scale due to the natural resourced enabled Alberta Heritage Fund and was focused upon public welfare (i.e. non economic outcomes).  iCORE with its focus on informatics technology was an innovative organizational structure that was focused upon exploiting the potential of what was perceived as a revolution in technological systems (informatics) that Alberta could not afford to ignore.

1.3      Research Overview

The aim of this research is to develop appreciative theory about innovation agencies and their role as government organizations designed to affect particular functions of particular stakeholders within a regional system of innovation.  Since innovation agencies are, by definition, implementers of many of the governments innovation policies they are an important part of the system of innovation.

With this context in mind this paper will explore the following research questions: 

• How are innovation functions activities induced in other organizations by innovation agencies?
• What are the key characteristics of the organizational evolution Innovation agencies typically experience?
• Did the Innovation agencies have a discernable impact on the Alberta regional system of innovation?

The findings from these questions will lead to a discussion of the creation and management of ‘arms-length’ government organizations with a primary mandate to affect change in the regional system of innovation. 

1.4          Structure of the Dissertation

Chapter two reviews of the literature relating to innovation as a driver of economic value.   The chapter is based largely in Schumpeterian and neo-Schumpeterian economic concepts.  It explores topics such as evolutionary economics, systems of innovation, the nature of skill and routine development, the role of natural resources as a primary evolutionary element in regional systems of innovation.  

Chapter three is a review of the literature relating to government created agencies within a regional system of innovation.  The chapter discusses organizational types, organizational dynamics, agency creation, and policy entrepreneurship.

Chapter four presents the research questions in detail and outlines the methods that were chosen to collect and analyze data. 

Chapter five presents the findings from the longitudinal analysis of Alberta, related to the paths that created the necessary pre-conditions for the innovation agencies used in the cases.   The primary contingencies relate to natural resource development and the institutions relating to the management of natural resources. 

Chapter six presents the findings from the analysis of Trio cases.  The first case, the Alberta Oil sands Science and Research Authority is an innovation agency primarily focused upon changing the industrial engagement with the development of the oil sands.  The second case is the Alberta Heritage Foundation for Medical Research, an innovation agency focused upon enriching Alberta’s medical research capabilities.  The third case examines the Alberta Informatics Circle of Research Excellence, an innovation agency mandated to develop Alberta’s informatics capabilities at her universities. 

Chapter seven discusses the findings with reference to the existing literature in order to develop appreciative theories of regional innovation systems and innovation agencies. This chapter discusses how the mandate of these innovation agencies, their capabilities, their functions and their impacts vary dramatically.  However, the discussion will also show how innovation agencies share striking similarities patterns and elements, suggesting new theories about how and why these organizations deserve consideration in systems of innovation literature.