FUNCTIONAL DYNAMICS IN SYSTEM OF INNOVATION

FUNCTIONAL DYNAMICS IN SYSTEM OF INNOVATION:
A GENERAL MODEL OF SI METAPHORIZED FROM TRADITIONAL CHINESE MEDICINE
Xi Sun and Xin Tian
School of Management, Graduate University of Chinese Academy of Sciences
Beijing, 100190, China
E-mail: sunxi-b08@mails.gucas.ac.cn; tianxin05@ mails.gucas.ac.cn
Xingmai Deng
School of Management and Economic, Beijing Institute of Technology
Beijing, 100081, China
E-mail: dxingmai@gmail.com
Based on a comparison between two strands in SI and an analysis on the notion of “ideal model”, this paper builds a general model of SI through the metaphor form function-defined ideal model in Traditional Chinese Medicine (TCM). This general dynamic model metaphorized from TCM is built on the base of Yin-Yang-Five-Phases theory. It is made up of five sub-systems and the supporting networks of innovation. Both static descriptions and evolutional dynamics of SI are discussed. Policy implications are given based on the basic features of SI as a complex adaptive system.
1. Introduction
The concept of “systems of innovation” (SI) is still in the state of art because of conceptual diffuseness and strands of methodologies. This restricts its effect in policy making. This paper tries to develop a model to study SI in a systematic manner. Although path-dependence is important in SI, we argue there is rationality to develop an ideal model of SI because of the convergent global competition and common features of innovation. The ideal model introduces the systematic thought of Traditional Chinese Medicine (TCM) by metaphor based on the function-defined approach. The archetype in TCM is an ideal model of human body, so SI model here is also ideal to manifest what SIs should be as complex adaptive systems (CAS). That needs a description of dynamics among sub-systems of SI. The central topic of both models is harmonies among all function-defined sub-systems. Disharmony would be adjusted by self-organization or outside interventions. Human body is intervened by therapy, while SI policy.
The paper is organized as follows. Section 2 will present the two main strands in SI research, i.e. the actor-defined approach and function-defined approach, and analyze the rationality to develop an ideal model of SI. Section 3 will give an introduction to the systematic thought in TCM, which is mainly the Yin-Yang thought and the Five Phases theory. The metaphorical model will be developed in Section 4. Modeling is conducted by the basic logic of TCM: to identify Yin and Yang in SI firstly, then to metaphorize different functions of SI into different functional sub-systems in human body. Analyses on systematic dynamics are possible when the fundamental metaphors are established. Section 5 discusses policy implications of the metaphorical model with some examples in China. The last part concludes this paper from the perspective of methodology.
2. Divergent Systems of Innovation (SI) Approach in the Past Two Decades
SI approach emerged in the 1980s when the systemic nature of innovation is increasingly realized. Nowadays SI is still the most attractive realm in innovation research. But it is still not a formal theory, but an approach or conceptual framework.
2.1. Origins of SI and the Actor-defined Systems of Innovation
All the earliest researches on national innovation systems (NIS) could be classified into two strands. Freeman (1987) and Nelson (1993) could be seen as the springs of SI in macro-level those emphasize the arrangement of institutions and the role of R&D. While Lundvall (1992) highlighted the theoretical analysis on interactions between producers and users, what he called the micro-foundation in NIS. These two strands get no agreement on the key issues in NIS: Nelson (1993) stresses the balance between public and private technology, while Lundvall (1992) put learning in the core of NIS. This reflects the lack of a general definition of NIS (Edquist, 2007).
But there are some similarities between them, one of which is that they defined NIS by actors and relations among actors, what are partly influenced by institutions (Freeman, 1992; Lundvall, 1992). This has deep influence on the SI approach. From then on, Patel and Pavitt (1994), Metcalfe (1995) and OECD (1997) define NIS as actors-based innovation networks regulated by institutions. Because of relative success on the research of the systemic nature of innovation, SI approach developed several other specifications. The notion of sectoral systems of innovation (SSI) focuses on the innovative and production processes in a border defined by sectors (Breschi and Malerba, 1997); regional innovation systems focus on interactive learning embedded in region (Cooke et al., 1997); technological systems focus on the generation, diffusion and utilization of specific technologies in technology networks (Carlsson and Stankiewitz, 1995). All these SIs are defined and analyzed by institutions and actors, or agents.
We call all researches above as actor-defined SI approach. It considers actors and institutions as the main components of SI. It has obvious shortcomings: (1) actors in SI tend to play multiple roles, this will make the inter-relations complex (Galli and Teubal, 1997); (2) the difficulty in description of system’s dynamics makes this approach lack a system-level explanatory factor (Liu & White, 2001); (3) the border of system is set a priori to nation, region or technology, while actors are hybrid of innovation functions and unrelated ones, thus the presupposed border is illogical (Johnson, 2001). Thus, a new approach emerged, which define and analyze SI by functions.


2.2. Function-defined System of Innovation
In the retrospect of SI research, Edquist (2005) compares function-defined approach and actor-defined one. He admitted the importance to study functions in SI in a systematic manner. Actually, the function-defined approach in SI emerged in late 1990s.
Galli and Teubal(1997) is the earliest paper gave attention to functions in SI. They emphasized the role functions played in SI research, and developed a function-based componential approach. They categorized functions into hard functions and soft ones, and all components in SI are linked by different linkages. Liu & White (2001) inherited this approach, constructed a framework including 5 fundamental activities— R&D, end-use, education, implementation, linkage—and focused on the performance implications of a system’s structure and dynamics. This model focused more on system-level characteristics, but little on inter-functional relations and dynamics in SI.
Johnson (2001) sorted functions in SI to basic and supporting ones. Basic functions affect the innovation process directly, supporting ones indirectly. In the following empirical work, the list is modified to 5 functions (Jacobson et al., 2004): to create new knowledge, to guide the direction of search processes, to supply resources, to facilitate the creation of positive external economies and to facilitate the formation of markets.
Hekkert et al. (2007) focuses on the processes important for well performing SIs. The authors depict three motors of change in SI in terms of processes and functions, which are demonstrated as A, B, C in Fig.1. Bergek et al. (2008) added insights from political science, sociology of technology and organization theory to describe a systematic approach. 6 steps constitute the scheme (Fig.2). They clarified each functions in step3a. In their latest research on functional dynamic of TIS, Suurs and Hekkert (2009) identified 7 functions in technological innovation systems. Interactions between functions result in cumulative causation in the formation of TIS. The authors acknowledge that complex interactions may lead to complex development process.

Fig.1. Functional dynamics in Hekkert et al.(2007) Fig.2. Policy schemes in Bergek et al. (2008)
We can conclude that functional dynamics approach (FDA) calls for not only the classification of functions, but also the inter-functional dynamics in SI. A clear landscape of functional dynamics derives from a clear definition of innovation process and corresponding functions. Dynamic relations among functions are complex, this is one of the difficulties to build FDA. But we are sure that all functions should not be inter-reinforcing ones, there are not only positive feedbacks but also negative ones.
The two main approaches are both in dilemmas: the actor-defined approach is weak to explain systematic performance in innovation, while the function-defined one is still deficient to manifest fundamental rules and mechanisms of innovation system. Simply, the systems of innovation approach have paid most attention on the nature of innovation, but few on the systematic methodology that is important to model system.
Then, another question comes forth: is there any “ideal model”? In terms of Todtling and Trippl (2005), does one size fit all? They think there should exist no general system model in SI which are highly specific because of different development paths. But some theoretical argument at micro-level may give us some new insights in this problem. Just as Eisenhardt et al. (2001) states, dynamic capabilities of firms are “idiosyncratic in their details and path dependent in their emergence, they have significant commonalities across firms (popularly termed ‘best practice’).” Commonalities are determined by the interaction between fundamental nature of activities and competition. Different SIs have different actors and relations among them, international competition environment and fundamental nature of innovation are alike more or less. It is possible to develop a model to manifest the commonalities among systems based on a proper methodology of system. Summarily, heterogeneities of SI are largely related to the specific forms of actors and institutions, while functions of SI are similar. Thus, we may find an ideal model of SI by FDA under the help of a suitable systematic methodology.
3. Traditional Chinese Medicine: the Potential Proper Methodology of System
TCM may be the methodology we need. It is a philosophical thinking of ancient China. It is holistic to build a functional model embedded in the environment rather than to open the black box of human body reductively . Human organism was seemed “not a machina with a single deux”, and “for any recognizable continuance of identity its parts were not separable” . Chinese doctors give every patient a unique treatment based on specific diagnosis and constitutions. Such “philosophy of organism” is a world-view “derived from the biological, evolutionary and holistic facets of natural science which … have been contributing to ‘a rectification of the mechanical Newtonian universe’” .
3.1. Yin-Yang Theory in Traditional Chinese Medicine
TCM begins and ends with Yin and Yang and never goes outside Yin and Yang. Yin and Yang are a general term for two opposites to describe how things function in relation to each other and to the universe. All things have both Yin and Yang aspect. The Yin aspect is associated with such qualities as cold, rest, constringency and downwardness. The Yang aspect is associated with heat, stimulation, radiation and upwardness. They contain within themselves the possibility of opposition and change, and depend on each other for definition, mutually create and control each other. Furthermore, they transform into each other. It is only through this kind of mutual creation and restriction that dynamic equilibrium can be established. Harmony means that Yin and Yang are relatively balanced; disharmony means that the proportions are unequal.
TCM believes that normal physiological functions of human body result from unified and opposite relation between Yin and Yang, and the internal viscera, both functional and corporeal, are of the two counter-reacted aspects which are interdependent, inter-supporting and inter-consuming in harmony. Disharmony would result in disease. Both of them are always in dynamic balance in which one waxes while the other wanes. Even under normal conditions, Yin and Yang can not be in absolute balance.
The basic Yin and Yang substances of the body include Qi, Blood, Essence, etc. Qi could be seemed as matter on the verge of becoming energy, or energy at the point of materializing. It promotes all organic activities, thus is the source of transformation in the body. Blood in TCM is not same to “blood” in West. The major activity of Blood is to circulate continuously through the body, nourishing, maintaining, and moistening its various parts. Essence is the Substances that underlie all organic life. It is the source of organic change. It is supportive, is the basis of reproduction and development.
3.2. The Theory of Five Phases (Wu Xing) and its Applications in Medicine
The Five Phases theory is to classify phenomena in terms of 5 processes, represented by wood, fire, earth, metal, and water. It is a system of correspondences and patterns that subsume events and things, especially in relation to their dynamics.
Each Phase is an emblem that denotes a category of functions and qualities. Wood is associated with active functions that are growing. Fire designates functions that have reached the most active state and are about to decline or rest. Metal represents functions in declining. Water represents functions that have reached a maximal state of rest and are about to start a new cycle. Earth designates balance or neutrality, is a buffer among other Phases. In terms of Yin-Yang theory, Wood is the Yang in Yin, Fire is the Yang in Yang, Metal is the Yin in Yang, Water is the Yin in Yin, and Earth is the buffer between Yin and Yang. The Five Phases can also be used to describe annual cycle in terms of biological growth. Wood corresponds to spring and is associated with birth, Fire corresponds to summer and growth, Metal corresponds to autumn and is associated with harvest, Water corresponds to winter and is associated with storage, Earth corresponds to the change from one season to the next and the activity of transformation.
The Five Phases generate sequences and movement, as well as qualities which are important in TCM. These correlations (solid lines in Fig.3a), are known as the Mutual Production order. They represent the way in which the Five Phases interact and arise out of one another. Production implies that one activity can promote or bring forth another. Another sequence is known as the Mutual Checking or Mutual Control order. In this sequence, each phase is to control or restrict the corresponding Phase (broken lines in Fig.3a). Production and Control have inseparable correlations in the Five Phases. They oppose each other and yet also complement each other. Production leads to growth and development; while Control balance and coordination during development and change. However, once any one of the Five Phases becomes excessive or insufficient, there would appear abnormal counter-control known as insult and humiliation. By insult is meant that one of the Five Phases over-controls upon another one when the latter is weak. Humiliation means that the strong bullies the weak. It is also a morbid condition in which one phase fails to control the other in the regular order, but in reverse order. It is clear that the order of humiliation is just the opposite to that of insult.

Fig. 3a. inter-dynamics of Five Phases Fig. 3b.inter-dynamics of Five Yin Organs
In TCM, the Five Phases Theory is used to explain different kinds of medical problems by analogizing and deducing their properties and interrelations. In the sense that the Phases correlate observable phenomena of human life into images derived from macrocosm, they serve a similar function as that of elements in other medical systems. TCM recognizes five Yin Organs (wu-zang) and six Yang Organs (liu-fu), all are defined by function but remote to the anatomic reality. The Yin Organs are Liver, Heart, Spleen, Lungs and Kidneys, by sequence which corresponds to Wood, Fire, Earth, Metal and Water in the Five Phases (Fig 3b). Because the Yin Organs are generally more important in medical theory and practice, thus we only give further illuminations to them.
-Liver rules flowing and spreading. Liver or Liver Qi moves the Qi and Blood in all directions, sending them to every part of the body.
-Heart dominate Blood and Vessels. It propels and regulates the circulation of Blood. Under the impulse of Heart-Qi, Blood is transported to all parts of the body.
-Spleen rules the transformation and transportation. It is the primary organ of digestion and is the crucial link in the process by which food is transformed into Qi and Blood, thus it is viewed as the source for the production and transformation of Qi and Blood. Besides this, Spleen governs Blood. It keeps Blood flowing in its proper paths.
-Lungs dominate Qi and respiration. They are the place of exchange between the gases inside and outside the body. They regulate Water channels, govern dispersing and descending, and communicate with numerous vessels to coordinate functional activities of the whole body, assisting Heart to adjust normal circulation of Qi and blood.
-Kidneys store the Essence and are seemed as the "foundation of prenatal life". They are the foundation of the entire process of Water movement and transformation, they rule Water through their Yang aspect.
The Mutual Production order of the Five Phases in five Yin Organs describe normal generative functions, that is the different phases of Qi’s movement, i.e. birth, growth, transformation, harvest and storage. The producer here is called Mother and the produced, Child. Some patterns of disharmony can be explained by reference to the Mutual Production order, especially patterns of Deficiency. And a disharmony within the Control order might mean that an Organ controls excessively over the Organ it regulates (insult), then it would lead to a Deficiency in the regulated Organ. Or the Organ that should be regulated may become the regulator, such conditions usually happen when the former regulator is deficient (humiliation), while the regulated one excites excessively.
3.3. Meridian in Traditional Chinese Medicine
Meridian comprises an invisible network that links together all the Substances and Organs. These networks are unseen but important: the Substances Qi and Blood move along them, carrying nourishment and strength. Because Meridian makes all tissues and organs in body an organic whole, it is essential for maintenance of harmonious balance. Furthermore, the Meridian connects the interior of the body with the exterior. Thus we can say the Meridian is the interface of human body which is a dissipative structure. Meridian theory assumes that disorder within a Meridian generates derangement in the pathway and creates disharmony along the Meridian, or that such derangement is a result of a disharmony of the Meridian’s connecting Organs.
In TCM, human body is in dynamic balance of Yin and Yang in both the whole system and its function-defined sub-systems. All sub-systems, especially the Five Yin Organs interact with each others through Meridian to seek a relative balance among different functions at the system level. Health is the result of harmony between Yin and Yang and among different functional sub-systems. Thus, there exists an ideal model of human body which is in the dynamic harmony in TCM. All diseases are resulted in the deviation from the ideal model. Slight deviation could be self-adjusted by internal systemic dynamics; while serious ones need therapy as an intervention.
4. A Metaphorical Model of SI Based on Traditional Chinese Medicine
This section try to build a ideal model of SI derived from TCM. Because the archetype is used to describe the ideal state of human body as a CAS, the ideal model of SI also describes a self-organized process of innovation in nation, region or sector. The metaphorical model following will take TCM as an archetype and a reference in methodology, and the model here has not to correspond to the archetype strictly. It is necessary to declare that the main purpose of this paper is to introduce the fundamental methodology in TCM which is in a systematic manner into the SI research. So this paper only gives a conceptual framework and some tentative explanation of system dynamics in SI which are analyzed qualitatively without any numeric experiment or simulation.
4.1. Description of basic static features of sub-systems
It is important to make proper metaphors of Yin and Yang in SI. Because Yin is usually associated with functions which tend to form concrete bodies, we can link it with finance-related functions in SI which usually resulted in the formation of capital goods; another support to this metaphor is that the Essence stored in Kidneys is considered as money that can finance any Organs to function normally. Yang is typically related with stimulation, radiation and increase. In knowledge economy, the most critical engine of economic growth and commercial success is knowledge. Thus it is reasonable to link Yang with the movement of knowledge. There needs a network to link all functional modules together like Meridian in human body so that different functions could interact with each other. Here we call it the Supporting Networks of Innovation.

Fig. 4.Metaphorical model of System of Innovation
Based on the definitions of Yin and Yang in SI, the metaphorical model corresponding to the Five Phase theory has five sub-systems defined by functions linked by the supporting networks. Functions are assorted into knowledge creation, knowledge diffusion, transformation from knowledge to value, value realization and ex-post selection of innovation, and financial support. They correspond to Liver (Wood/birth), Heart (Fire/growth), Spleen (Earth/transformation), Lungs (Metal/harvest) and Kidneys (Water/storage) respectively. It has to note that the sequence is just a logical path to describe innovation, but not innovation process in reality. Supporting networks of innovation comprise social culture, social structure, infrastructure and legislation (Fig. 4). Although the model is not suitable to enterprises, some micro-dynamics will be discussed in view of their importance as micro-foundation in the holistic mechanism.
- Knowledge creation (KC). R&D has an increasing importance today among the various ways to create knowledge. It is the main part in KC dynamics. R&D also relates to knowledge assimilation, which is significant for followers to create knowledge. Knowledge base embodied on capital goods and talents is necessary for and restricts knowledge creation. Comparatively, the input of knowledge base is the Yin aspect in KC, while the emergence of new knowledge is the Yang one. The Yin aspect links KC with FS, that is to say capital support will come true when the capitalists believe the knowledge base may be enough to innovate. At the micro-level, new knowledge concludes tacit knowledge which is personal techniques derived from recursive practices (Ziman, 2000). At the macro-level, knowledge is mostly created by public research institutions and enterprises. The most important issue here is to keep the balance between public knowledge and private ones (Nelson, 1988).
- Knowledge diffusion (KD). Education and training, personal transfer among universities and industries, information exchange through social networks, licenses of patents under IPR protect and other non-market approaches, e.g. imitation, are the main approaches to diffuse knowledge at macro-level (Freeman, 1987; Morone and Taylor, 2004). Those approaches constitute a knowledge diffusion network. The nucleus of KD is to govern and utilize this network suitably, just as the Heart rules Blood and the Vessels. “To govern” may be the Yin aspect of KD, while “to utilize” the Yang one. The paths of diffusion are context-specific. The structure of interaction is determined by the relation between knowledge suppliers and users, which is affected by the supporting network, including IPR legislation and technological infrastructure. Efficiency of KD is influenced by various factors, from spontaneous reform on routines to legislation, the former of which may be initiated by competition. Knowledge itself would make no sense for innovation until it transforms into product what is valuable for the customers.
- Transformation from knowledge to value (KT). Enterprises are the main actors to transform knowledge into value. They “digest” resources got outside of the SI under the help of knowledge and capital in SI, transform them into a new kind of knowledge carrier. Knowledge embodied in processes and routines are the most important determinant in this period. There are two aspects of this kind of knowledge: to govern or to integrate all resources into the transformation process, and to create some thing valuable. Efficient routines in knowledge transformation improve productivity. KT is greatly related to entrepreneurial activities. Entrepreneurs organize resources and find a solution to satisfy customers’ needs. The solution is an integration of capital goods and knowledge. The accesses to resources, such as market information, customers, and skilled workers decide the specific model of entrepreneurial activities. Transaction structure that associated with the supporting networks determines business model. Entrepreneurship and competition are the most important dynamics in this module.
- Value realization and ex-post selection of innovation (RS). Entrepreneurs realize the value of their solutions in market. Market is a vital mechanism of ex-post selection of innovations (Ziman, 2000). When innovation realizes its value, it would be imitated by competitors, thus effective competition in SI assists KD module to adjust knowledge circulation. Access to market is determined by the bargain among innovators, competitors, users and dealers, which is affected by the supporting network. Integration of useful solution and proper access leads profit and competitive advantage.
- Financial support to other parts of the SI (FS). Investment is indispensable in every function module in SI. This sub-system are the foundation upon which the entire process of capital movement in SI. Knowledge to govern the portfolio of innovation investments is one of the most important knowledge in SI. So, this sub-system also promotes the KT sub-system to transform knowledge to value. Comparatively, to get more capital to finance innovation is another aspect of this module. Access and amount of financial support to innovation determine innovation behavior of the system as a whole.
4.2. System dynamics: sub-dynamics and inter-functional dynamics
System dynamics in the metaphorical model of SI include both micro-level dynamics and macro-level ones. Sub-dynamics enable modules to generate and reinforce itself to be competent to internal coordination and outside competition. They are the foundation of SI, while the inter-functional dynamics link the system as a whole. It should be noted that this list of functions and tentative explanations on system mechanism in SI require further revisions as and when research on SI dynamics provides new insights.
4.2.1. Sub-dynamics in sub-systems
Just as the whole system is in a harmonious matching process, every part of the system dynamics should be in an evolutionary balance. Thus it is significant to describe these micro-dynamics of the system clearly and roundly.
The most important issue to incent KC module is to keep the balance between the creation of public knowledge and private ones. Government has to keep a suitable scale of public knowledge creators for two purposes: on one hand, to continuously supply public knowledge which market is failed to incent private ones to do; on the other hand, to prevent private ones from depending on public supply of competitive knowledge.
Knowledge diffuses through market and non-market approaches. It also changes the balance between public knowledge bases and private ones. A proper legitimation on IPR protection could incent the innovators to create more knowledge and facilitate knowledge diffusio. Orientation of education also affects knowledge diffusion. Continual reforms on education system are key constituents of sub-dynamics in KD module.
To keep a sustainable transforming capability of SI, it is remarkable to cultivate an entrepreneur-friendly environment. Emerging enterprises are less inertial to keep old routines which are based on outdated knowledge, thus the main drivers for the emergence of new routines and models in transformation. The successful ones in them introduce new routines into whole economy. Thus to keep multiple springs of competing transforming routines by encouraging entrepreneurship is in the core of KT module.
Competition is a crucial part of evolutionary dynamics in RS module, but not the only driver of this sub-system. In an effective market, interactions between producers and users are co-evolutionary process. The co-evolution results in mutual enlightenments about customers’ needs, by which transformation is oriented. Customers’ cognition about their needs is sometimes the outcome of a recursive explanatory process, which adjusts the ex-post selection and is determinant to the uncertainty in innovation.
Commitment is determined by strategic intent and resources. Contradictions between financial needs and existing resources cause the introduction of external resources and the knowledge about efficiency of innovation investment. The former leads to strategic alliances and utilization of capital market. Permanent improvement on the latter causes dynamic optimization of innovation investment portfolio and capital sources portfolio.
4.2.2. Inter-functional dynamics in ideal state
Harmony emerges when competent sub-systems match with each other closely by interactions. Tentative clarifications of harmonious Mutual Control Cycle in the metaphorized model are given as following.
KC controlling KT: Application of new knowledge in transformation could prevent KT from rigidity which is the byproduct of increasing returns of knowledge bases.
KD controlling RS: diffusion of knowledge erode the appropriablity of innovators’. Thus, followers’ imitations incent innovation by less lucre and more furious competition.
KT controlling FS: competent routines in transformation utilize resources properly, and have decisive effect to prevent excessive thirst in investment and overflow of capital.
RS controlling KC: enterprises try their best to exploit the potential of existing knowledge bases. Market propels knowledge in the orientation decided by customers’ need to restrain the Yang aspect of KC from ascending excessively.
FS controlling KD: the development of FS sub-system is part of the solution to excessive imitation by those SMEs who are short of capital to innovate indigenously.

Fig 5.sequence of self-coordination by mutual control in Five Phases system
Any problem will lead to disharmony. If changes are moderate, SI can adjust by self-coordination. Otherwise, it could not be adjusted spontaneouslyand result in disharmonies. Fig.5 is the general sequence of self-coordination by mutual control.
4.2.3. Inter-functional dynamics in disharmonious systems
Harmony would be destroyed when balances among functional modules are broken or the supporting networks are not expedite. Concretely as following: ①KC not producing KD: supporting networks are insufficient to deliver knowledge to the diffusion network. ②Fire not producing Earth: 1) KD diffuse improper knowledge to KT, e.g. students could not learn the knowledge they will need in their occupation; and 2) the FS Yang could not help KT utilizes investment appropriately, which causes waste even disorder in KT. ③KT not producing RS: access for innovation to market would be severed for many reasons. In developing countries, a large broker and symptom of “foreign is better”(FIB) may be blocks for entrepreneurs. ④RS not producing FS: producers not entrepreneurs invest their profit to innovation-unrelated realms. ⑤FS not producing KC: once both capital and knowledge base are insufficient, it is difficult to create knowledge especially in those emerging areas which have a high threshold in scientific infrastructure. Above five items are the disharmonies in Mutual Producing Cycle. There also exist disharmonies in Mutual Controlling Cycle, while we do not discuss these here because of length limitation.
Obviously, disharmonies here are similar to “system failure” in evolutionary economics. It is necessary to clarify that situations described above are just basic forms of disharmonies of the system. Realities of deviated SI are usually certain combination of basic forms. Thus some more analyses are needed to develop proper innovation policy.
5. Policy Implications of Metaphorical Model: Some Issues about China’s NIS
Because the introduction of methodology in TCM which originated more than two thousand years ago to research CAS of human body, the metaphorical model may seem to be complex and remote to common SI research. Thus, it is useful to discuss its policy implications. Some issues analyzed following are related to the situation of NIS in China.
(1) Is the idea of general model inconsistent with the common sense in SI research? Traditional SI research emphasize the path-dependence, thus it seems popular that there is no ideal model in SI. This argument can be discussed from two perspectives. On one hand, harmony is realized through dynamic balances between knowledge and capital, and among sub-systems what are linked by supporting networks. So the structure of SI is changing all the time motivated by internal self-adjustment. Thus the ideal model corresponds to a set of states but not an isolated point. That means the model is so robust that it has many specific forms in reality which are highly related to environment and initial conditions. On the other hand, those failed systems which could not incent innovations properly are deviated from the ideal model. Any deviation is determined by path-dependence, thus deviation is highly specific bases on history. Remedies to the deviations should be corresponding to the heterogeneous disharmonies. So there could exist a framework of anticipatory institutional changes (AIC, Galli and Teubal, 1997) in the transition of SIs, but this framework should not be a simple graft of “best practices”; reversely a treatment derived from specific deviation.
(2) Holistic and generative view on policy-making. This is very important to SIs in transition. The ideal model surveys SI in a holistic to reflect the systemic nature of innovation. It tells the policy makers that a proper AIC should take all aspects into consideration. Innovation policies in developing countries like China are usually developed without anticipatory design on system level. For example, one defect in the evolution of China’s SI is the separate reform courses on enterprises and S&T system since 1980s. There exists even no coordination between these two reforms. So both the reform on S&T system and the reform on enterprises always get half the result with twice the effort (Lu, 2006). Furthermore, the ideal model holds a generative perspective on SI. System dynamics determine the transferring order and corresponding results of deviation among sub-systems. It implies that sequence of policy implementation is so important that it shapes new path-dependence of system in future. Once there is some disarrangement in policy sequence, the efficiency of system transition would be debased, and paths of transition in next phase would be altered. In the reform of S&T system in China in 1990s, lots of public research institutes were reformed into S&T enterprises. This changed the transaction structure between knowledge suppliers and users. While most of the enterprises which have limited absorptive capabilities and inefficient competition, have not realized the significance of knowledge and innovation. Furthermore, the old institutional junctions of both sides are destroyed with the repeal of industrial ministries in earlier time. Thus, this reform was not effective as expected.
(3) Multi-causation or one-to-one relationship? Dynamics in the CAS deny the one-to-one relations between phenomena and essence. There exist multiple causations in SI. Therefore, policy makers have to make sure the essence of disharmonies in SI. A false judgment may leads to inefficient, even opposite outcome. For example, Chinese government is glad to see the surge of R&D expenditure in enterprises. But there are several possibilities for a surge in enterprises R&D. It can be resulted in the shortage of knowledge on governing innovation investment portfolio (Deficiency in FS Yang). It also can be derived from the incompetence of enterprises to integrate resources in the process of transformation (KT is humiliated by FS.). It is also related to the lack of knowledge bases (to prevent FS not producing KC) and inadequacy in education to play its role in KD module (FS insults KD). Thus, a proper investment arrangement on R&D should be shaped based on a clear understanding of multiple causations in the whole system.
6. Conclusion
The paper has carried out an experiment to build an ideal model of systems of innovation based on a selection of basic approach in the research of SI and the help of the basic thought of TCM. Although some concrete explanations to system dynamics are still not supported by existing research, such as the situation of FS humiliated by KD, this paper analyzes SI with some unique methodologies. The main conclusions of this paper on the methodology in SI research can be summarized as follow:
(1) Compared to the actor-defined approach, FDA may be more helpful to future research in SI in a systemic manner. This is decided by the inconsistency between the systemic nature of innovation and the component-based reductionism.
(2) As a CAS, dynamic mechanism in SI should be analyzed from both micro and macro level. This is the most crucial suggestion from TCM. In FDA model, evolution of SI is seemed as the synthetic outcome of both sub-dynamics and inter-module dynamics.
(3) Innovation policies intervened to the CAS have to be developed on the basis of a thorough consideration So a holistic and generative policy framework should be formed in view of systemic heterogeneity and multi-causations among sub-systems.
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