Globelics 2010

8th International Conference

Making Innovation Work for Society:

Linking, Leveraging and Learning

1 - 3 November 2010
University of Malaya, Kuala Lumpur, Malaysia

Coevolutionary processes and economic development: stylising

evidence coming from Mexico and Israel

Name of
Corresponding Martn Puchet
Author
Professor
Title & Position
Institution & Full Universidad Nacional Autnoma de Mxico
Postal Address
E-mail Address anyul@servidor.unam.mx

Globelics
The Global Network for Economics
of Learning, Innovation, and
Competence Building Systems
 Coevolutionary processes and economic development: stylising
evidence coming from Mexico and Israel

Martn Puchet Anyul, Universidad Nacional Autnoma de Mxico,

anyul@servidor.unam.mx
Gabriela Dutrnit, Universidad Autnoma Metropolitana, gdutrenit@laneta.apc.org
Morris Teubal, Hebrew University, msmorris76@gmail.com

1 Introduction .................................................................................................................................... 2
2 Learning from the cases of Mexico and Israel ................................................................... 4
2.1 The case of Israel .................................................................................................................... 5
2.2 The case of Mexico ................................................................................................................ 8
3 Stylized evolutionary model based on a continuous STE-Innovation coevolution
process towards economic development ................................................................................ 12
4 Coevolution in the arenas of STE and Innovation ......................................................... 18
5 Towards an explicative model .............................................................................................. 21
5.1 The concepts and basic relationships ............................................................................. 21
5.2 Dynamic profiles of coevolution ..................................................................................... 24
6 Building analytical links with the Classical Theory of Development ..................... 27
7 Final reflections .......................................................................................................................... 31

1 Introduction
1

A number of new industrializing countries have achieved remarkable success in terms

of economic and social development. In fact, they are moving in the direction of
integrating the developed world. In contrast, most of the countries from the South are
still looking for their own way to initiate a successful development trajectory, with
different degree of advance.

Today it is clear that the structure of linkages at local, regional, national and
international levels, and the construction of national systems of innovation (NIS)
contribute to success (Freeman, 1987; Lundvall, 1992; Nelson, 1993; Edquist,
1997; Kim, 1997; Niosi, 2000). Moreover, there is growing consensus that a close
relationship between innovation and economic growth exists; the creation and
dissemination of knowledge are basic factors for innovation, sustainable economic
growth, and the well-being of nations. However, no agreement has been reached
concerning the processes linking the two. From a simplistic view it can be argued that
innovation influences economic growth directly (probably a New Growth Theorys
view). From a more structuralist and systems-evolutionary perspective innovation
affects economic growth if triggers structural change, which for the purposes of this
discussion is identified with new sectors (or widely defined product classes), markets,

1
An expanded version of this article will appear in Cristiano Antonelli (Ed), Elgar Handbook on the
System Dynamics of Technological Change, Edward Elgar (forthcoming).
clusters, large multinational companies, and other forms of what may be termed Higher
Level Organizations (HLO) that can be characterized as multi-agent structures (e.g
networks, regional or sectoral innovation systems). In this view, the impact of
innovation will be relatively weak if it does not trigger the emergence of these higher
levels, multi-agent structures, and will be strong if it does.2

The Structuralist/Evolutionary Perspective to economic growth goes back to

Schumpeter (1934, 1939) and Kuznets (1971, 1973), and more recently to many authors
(e.g Saviotti and Pyka 2004, among others). This perspective did not consider fully
possible coevolutionary processes underpinning the link between structural change and
economic growth. Moreover, whilst some analysis of coevolutionary processes of
various kinds would gradually become central in research that follows an Evolutionary
Perspective (e.g Nelson 1994, 2007; Saviotti 1996, 1997; Murmann 2002, 2003;
Breznitz 2007a, 2008b),

From the Development Economics literature exist approaches that analyze the structural
changes between sectors either as jumps or as transitory discontinuous, assuming both
unbalances between sectors or zones of the economies, and institutional modifications
(e.g. Gersenkron, 1962; Rosenstein Rodan, 1943). At the same time an analysis is
carried out on trajectories caught in situations of reinforcement of their own tendencies
through mechanisms of accumulative causation (Myrdal, 1957) or that converge toward
situations of slow growth (Nelson, 1956; Kaldor, 1966) instead of doing so toward a
balanced growth. Also, the dynamics of permanent or self-sustained cycles (Goodwin,
1951; Kaldor, 1940; Kalecki, 1933, 1935) show that the transit from recurring
oscillations toward trajectories of sustained growth require the accumulation of
productive capabilities and institutional changes. These contributions of the pioneers of
the theories of development and of the cycles of growth are centred on the evolution of
the income and investment of the countries. Innovation as an endogenous factor of
development or sustained growth had a limited presence in these models. Today is
possible to place innovation as the powerful process to produce, as proposed by those
theories, structural changes to avoid or get out of traps of low growth, recurring cycles
of growth, or an accumulative causation that leads to the reproduction of conditions of
slow growth.

The Schumpeterian literature on coevolution still seems to lack a basic analytical

framework for incorporating such processes into a broader evolutionary process, and
even less one linking innovation to economic development (see also Fagerberg et al
1999, Sotarauta and Srinivas 2006, and Fagerberg and Verspagen 2007).

This paper makes a contribution in the direction of the Schumpeterian literature and
focuses on coevolutionary and emergence processes in structural change and growth
following an Industry Life Cycle Perspective (Abernathy and Utterback 1978, Klepper
1996, among others). It also knit a bridge with the classical Development economics
literature.

Previous work (see Avnimelech and Teubal 2006, 2008) suggests the importance of
characterizing a prior, pre-emergence phase in the contexts of an Industry Life Cycle

2
To exemplify the practical relevance of this perspective see an analysis of the Structural Change
constraints blocking the renewal of accelerated growth in Chile (World Bank 2008, and Haussman and
Klinger 2007).
conceptual framework where the transition to emergence may or may not take place.
The pre-emergence phase is characterized by inventions/innovations, which contribute,
together with collective and interactive learning, to define both a new product class and
a standard product (or platform) configuration. This is the qualitative dimension that lies
at the root of new sectors or industries (a necessary but not sufficient condition). But the
major impact of innovation on economic growth may depend on a successful transition
to the emergence phase, where the quantitative dimension of structural change (or
scaling up of the invention/innovation) takes place. Contrary to most Industry Life
Cycle Theory, this transition is neither assured nor automatic; following a
coevolutionary processes approach, there might be a critical mass required to generate
an endogenous dynamic. However, our presumption is that there are many socially
profitable, invention/innovation-led situations that conduct neither to new
industries/HLOs nor to the associated quantitative scaling up and high impact. This
insight strongly suggests that government policy may have an important role to play to
overcome this situation. A related point is the need of updating an analytically
satisfying view of what new industries, markets and clusters are, a view that could
contribute to differentiate those HLOs with allocative efficiency from those that are
characterized by dynamic/technological/Schumpeterian efficiency.3

The purpose of this paper is to contribute to the analysis of coevolutionary processes in

economic development focusing on their role in the emergence of the above multi-agent
structures, and in initiating a self-sustained development process more generally
speaking. The coevolutionary processes considered involve Science, Technology and
Higher Education (STE) capabilities and outputs, Innovation (including capabilities at
firms), and to some extent innovation policy and innovation finance. We will focus on
two case studies and then attempt to extract a number of common features about the
nature and importance of coevolutionary and emergence processes for growth and
development. An explicative model that includes dynamic profiles of coevolution is
also proposed. The two case studies are: (1) Israel, with a focus on the dynamic
processes leading to emergence of a Venture Capital industry and market and associated
entrepreneurial high tech cluster during the 1990s; and (2) Mexico, with a focus on the
conditions for successful STE-Innovation coevolution.

After this introduction, Section 2 describes evidence coming from the two cases: Israel
and Mexico; based on the evidence, Section 3 depicts a stylized evolutionary model
based on a continuous STE-Innovation coevolution process towards economic
development; Section 4 introduces basic ideas from the literature on coevolution to
analyze the coevolution of STE with Innovation, and relates it to the literature on
development economics; Section 5 proposes a broad model of growth and coevolution
in the context of economic development; and Section 6 contains final reflections.

2 Learning from the cases of Mexico and Israel

This section presents empirical evidence of coevolutionary and emergent processes of

STE and Innovation coming from Israel and Mexico, two countries that are at different
stages of economic development.
3
See Antonelli and Teubal (2009), Avnimelech and Teubal (2009), and Cimoli, Dosi and Stiglitz (2009).
Concerning markets for technology see Arora, Fosfuri and Gambardella (2006).
2.1 The case of Israel

Israel is an example of a successful dynamic process leading to the emergence of a

Venture Capital Industry and Market (VC) and associated Entrepreneurial High Tech
Cluster (EHTC) during the 1990s. This process started in 1969 when the agency in
charge of supporting Business Innovation (I) was created (Office of the Chief Scientist
OCS, Ministry of Industry and Trade). Once initial conditions were established (Phase
0), three phases were identified during the 1969-2000 period.4

Phase 0 Initial Conditions (before 1969). Preliminary initial conditions related to STE
including the stock and flow of science and engineering graduates were created before
1969. The establishment of Israel's STE infrastructure began long before the state
achieved independence in 1948. Concurrently with the expansion of agricultural and
urban settlement, scientific teaching and research institutions were also being
established, particularly immediately after WWI. These were frequently staffed by
highly accomplished, active scientists who had obtained their knowledge and training
abroad. They included an University (The Hebrew University) and an Engineering
Institution of Higher Learning (Technion- Israel Institute of Technology) both founded
in 1925; and later, but before WWII, the Weizmann Institute of Science and the Volcani
Centre for Agricultural Research. Thus, by the time the state was established, strong
basis for the development of science and technology had been built.

The first years of the State saw a number of attempts to foster applied or directed
scientific research. The first central mechanism envisaged was the creation and support
by the Government of publiclyowned and managed, specialized applied research
institutions. In 1959 the National Council for Research and Development (NCRD) was
established and entrusted with the formulation of a national policy for directed/applied
research and the coordination of activities of government Ministries, under whose
auspices R&D was conducted. Since agricultural research was already flourishing, the
emphasis was given to public institutes for industrial research.

Starting in the 1950s, RAFAEL (acronym for Armaments Development Authority) was
the first, and for many years, almost the only public research institution in Israel to
conduct high-tech industrial R&D, with a focus on computers. Its R&D capabilities
were diffused to other defence and civilian companies and organizations (e.g. Israel
Aircraft Industry in 1962; Elbit, a pioneering private company who later developed the
countrys first minicomputer; and the Technions newly created Electronics Lab, two of
whose members were instrumental in founding Elscint in 1969, the most prominent
civilian high tech firm of the 1970s). Even though by the late 1960s a significant STE
infrastructure, with some public technological institutes (PTI), had been established,
R&D in the business sector was practically non-existent.

Phase 1 Background Conditions (1969-84). A new institutional setting for innovation

policy was established based on the creation of the OCS in 1969. From the outset, the
policy of the OCS was to enhance social/economic welfare by inducing an innovation-

4
See Pugatch, Teubal and Zlotnick (2009) for a short summary of the pre-1969 STE-related institutional
development and policy; and Avnimelech and Teubal (2006) for a broader discussion of Phases 1-3.
based economic growth process through the diffusion of R&D to the business sector.
Three new universities and a new set of Government owned, applied public research
institutes were established. These and the already existing institutions in the context of
continued support for the STE infrastructure (until the year 2000) led to an increasingly
large pool of qualified scientists and engineers. In addition, innovation policy was
initiated with the OCSs Grants to firms R&D program followed by the Bi-national
Industrial R&D program (BIRD), which promoted collaborative commercial innovation
between Israeli and US firms.5 Financial incentives were also extended to multinational
corporations, a fact that contributed to a strong and relatively early multinational R&D-
performing presence in Israel. Finally, huge investments in defence R&D (software,
communication and instrumentation) were undertaken. The outcome was the
establishment and growth of R&D performing companies, particularly in the
communications/electronic areas, which has had significant direct and indirect effect on
the evolution of Israels NIS. During this period, the first attempts of searching for
innovation finance mechanisms were undertaken.

Phase 2 Pre-Emergence (1985-92). This phase came along a number of macroeconomic

and liberalization policies, such as the successful price stabilization program of 1985
and the liberalization of capital, foreign trade and foreign exchange markets. This phase
coincided with global changes, including enhanced capital movements and
opportunities for foreign high-tech start-up companies (SUs) to float in NASDAQ,
liberalization of communications markets in the US, the UK and Japan, and the
internationalization of US investment banks (and their search of investment
opportunities in Israel). On the real side of the system, we observe a sharp restructuring
of the military industry including the very significant cancelling of the Lavi fighter
plane project. This contraction caused an increase in the variety and stock of engineers
and technicians in civilian industry and a rather permanent increase in the share of
annual flows of engineers and scientists made available for business innovation. It also
generated variation in the business sector; a pool of technological entrepreneurs
benefited from the selection process coming from the OCSs Grants to R&D program.
A strong learning and experimentation process with respect to entrepreneurship and VC
also characterized this phase. It led to identification of the Limited Partnership form of
VC organization, which was subsequently selected by policy makers and embodied in
the design of the Yozma Program in 1993.6

The outcome was an expansion of informal VC activity; an increased rate of SUs

formation leading to a critical mass of start-ups (300 in 1992); the appearance of the
first VC funds (starting with Athena in 1985); and the creation of companies like Lannet
and M-Systems, SUs that successfully floated in NASDAQ. Moreover, individuals
(foreign and returning Israelis) and some organizations, such as Advent Private Equity,
came to Israel to search for new investment opportunities in high-tech. Underpinning
the above was an additional OCS priority: promoting entrepreneurship and SUs, and
the establishment of a domestic VC industry to support them. New government
programs were implemented: the Inbal Program (1991) that targeted VC and failed, the

5
The Grants to industrial R&D program was a horizontal (i.e. open to all firms in the business sector) and
rather neutral (i.e. non discriminatory) subsidies-based program. It became the backbone and dominant
Innovation Policy program of Israel (its share of total disbursements by the OCS was seldom below
80%).
6
Yozma was a VC-directed, targeted program that was implemented during 1993-6/7. This contrasts with
the horizontal/neutral Grants to industrial R&D program, which started in 1969.
Magnet Program (1992), and the Technology Incubators Program (1992). In addition,
changes in Governance at Universities made stronger the STE system.

Phase 3 Emergence (1993-2000). During the early 1990s Israel benefited from a wave
of hundreds of thousands of immigrants from the former Soviet Union. Many of them
were highly skilled engineers, technicians, and medical doctors, among others, who
made a singular contribution to high-tech industry, business innovation and Academia.
Hence, this strengthened the human resources side of STE and Innovation populations.
This Phase 3 was triggered by the implementation of the successful Yozma Program, a
policy response to both the weakened impact of the regular Grants to industrial R&D
program and the new opportunities for SUs opened up by the expansion and
globalization of NASDAQ during the 1980s. It targeted a domestic VC market and
indirectly, an EHTC. It triggered a cumulative process with positive feedback based on
the entry of new funds and VC organizations, strong VC-SUs coevolution, reputation
effects stemming from successful exits in the 1995-7 period, cluster effects in the sense
of enhanced scope for the local production of non-tradable intermediate goods and
services and the resultant growth promoting effects, and enhanced activity in Israel of
large multinationals and foreign investment banks. As a result, the number of SUs
increased from 300 to approximately 3000, and VCs and Private Equity funds from 3 to
more than 100. Mergers and acquisitions involving local SUs and a foreign
multinationals increased and exports of software and hardware products reached 13B$.

Intense coevolutionary processes that link STE, Innovation, Innovation Policy and
Innovation Finance, fuelled these phases.7 Two types of coevolutionary links were
particularly important in the case of Israel: (a) Innovation-Innovation policy
coevolution, which started in Phase 1, and (b) Innovation-Innovation Finance
coevolution, which started in the early 1980s when the expansion of actual and desired
R&D to be performed in the Business Sector by far exceeded the increasingly expanded,
albeit still limited budgets. While previous work strongly suggests that the emergence of
VC was a central vector of cluster emergence (with VC-SUs coevolution being a central
component), the relevant coevolutionary processes started before, with the creation of
the OCS in charge of direct support of R&D in firms. During phases 1-3, the STE
infrastructure continuously adapted itself or expanded to allow for the expansion of
innovative activity in firms. Following Allen (2004), we observe that the agents (mostly
of the EHTC), linkages structures and products and services evolved qualitatively during
Phases 1 and 2 (1969-1992). Quantitative changes were relevant mostly in Phase 3.

The upshot is that the operation of both types of coevolutionary processes during Phases
1 and 2 were important for the eventual emergence during 1993-6/7 of Israel's VC
industry and a HLO -the EHTC (needless to say, triggering and sustaining such an
emergence process also required a new targeted policy, the Yozma VC-directed
program). It should also be mentioned that the emergence process itself in Phase 3 was
also propelled by a more specific type (b) coevolutionary process as the SUs-VC

7
Innovation Policy includes not only direct support of innovation or R&D in firms (the main focus) but
also other policies, such as VC policies and associated institutional changes; Innovation means not only
commercial innovation in firms but also innovation capabilities and creation/growth of R&D performing
organizations (such as SUs); while Innovation Finance means new private mechanisms of finance of
R&D/Innovation (e.g. VC)
coevolution- and by other factors (see Avnimelech and Teubal 2006).8 Thus towards the
end of the 1990s, VC had become the main source of finance of R&D in the business
sector having substituted the governments previous dominant role. Moreover, a large
share of the business sector R&D was being undertaken at the time by SUs.

The post 2000 period is one of increasing difficulties in the STE system, particularly
due to decreases in Government support, which suggest that critical masses of STE
became an issue. The evolution of STE was slower than Innovation, it seems that an
imbalance was generated. Triggering (or re-igniting STE-Innovation co-evolution) may
become a central component of any reasonable strategy.

Summing up, the Israeli case is an example of successful transition from Background
Conditions and Pre-Emergence phases to the phase of Emergence of a VC
industry/market and an EHTC in the 1990s. This led to strong increases in I, in its share
in Gross Expenditure in R&D (GERD), as well as in the GERD/Gross Domestic
Product (GDP) ratio (over 4.5% towards 2007). The success was supported by a strong
STE infrastructure (with beginnings in 1925) and sharp increases in the output (and
stock of) engineers and scientists during the 1950s, 1960s and beyond. This transition
however would not have been possible without an increasingly strong innovative
segment of the business sector. Innovation Policy was an important underpinning of
Innovation with whom it coevolved. Within limits, VC should be considered as a social
technology, which could be adapted to serve as the financial structure to a number of
ICT and non ICT-based industries, markets or clusters, including clean technologies,
biomedicine, among others. Its existence might contribute to rekindle innovation and
structural change based economic growth in the present decade (where targeting of new
industries/clusters involving tradeable goods may be crucial, and were a strategic level
of Innovation Policy may become an imperative).

2.2 The case of Mexico

The analysis of the Israeli case ignores an important coevolutionary process, that
between STE and I. Our analysis of that countrys evolutionary process began when
Israel already had a very strong STE infrastructure, a fact which -together with the
significant subsequent growth of this infrastructure at least until 2000- enabled
innovation in firms and associated coevolutionary processes to prosper. In contrast, our
analysis of the Mexican case focuses precisely on such a STE-Innovation
coevolutionary process. More specifically, it attempts to show how policy may shift a
situation characterized by the absence of such coevolution to trigger a virtuous one.
Once initial conditions were established (Phase 0), two phases were identified during
from1970 on.9

8
For instance, the types of organizations involved in the coevolutionary process in Phase 3 where largely
fixed (Limited Partnership VC organizations with an early phase, the ICT-oriented investment strategy;
and Born Global SU companies oriented not only to product but to technology and capital markets).
These where the result of an interactive selection process which took place in Phase 2, a process we call
qualitative coevolution, since it helped to define the type of institutions or organizational forms/strategies
that would prevail during the emergence and coevolutionary process of Phase 3. Note that the latter
involved significant replication, reproduction and retention), allowing the quantitative expansion of
existing organizational forms and strategies of both types of agents.
9
See Dutrnit et al (2008b, 2010) for a broad discussion of these stages.
Phase 0 Initial Conditions (before 1970). The building up of STE infrastructure started
in 1910 with the re-foundation of the National Autonomous University of Mexico
(UNAM). There were two waves of STE infrastructure building, 1935-1945 and 1970-
1982, where almost all the national institutes, public research centres and universities
were created. Both waves were related to economic policy focused on the intervention
of the State in the economy and promotion of industrial development. It is worth to
mention the creation of the National Polytechnic Institute (IPN, 1935-1938), the
Mexican Academy of Sciences (1958), the Centre for Research and Advanced Studies
(CINVESTAV, 1961) and the public institutes for scientific research and technological
development connected to the main state firms, as the Mexican Institute of Oil (1965)
and the Electric Research Institute (1975).

During this period, STE strategies were modelled following different approaches and
practical actions adopted by the most prestigious research centres and higher education
institutions. At the same time, a number of government promotion agencies were
created (e.g. NAFIN-1935 and BANCOMEXT-1937), which had some influence on
technological activities. During this Phase 0, STE and Innovation were stimulated
following a linear model based on a top-down approach and a supply-driven, supply-
push strategy. R&D activities by the business sector were carried out more as a ludic
activity than as a means for increasing competitiveness. By the late 1960s a STE
infrastructure had been built, however, R&D activities in the business sector were
extremely limited.

Phase 1 Background Conditions (1970-end 1990s). The first phase started with the
creation of CONACyT, which became the loci to foster the building of domestic
capabilities in STE and I. With the creation of the National Council for Science and
Technology (CONACyT) in 1970, explicit STE policies emerged. From then, several
initiatives to foster national development of STE and Innovation capabilities and
outputs were designed and implemented, strengthening the supply-driven strategy. To
this end, several policies, programs, and mechanisms were designed and implemented
to create and strengthen a set of public academic institutions that were predominantly
involved in scientific knowledge production and human resource formation in science
and technology, and to the development of scientific communities in certain knowledge
fields.

During this period two dozens public research centres were created to strengthen
scientific research and technological development, some of them are PTI, other more
oriented to basic science. On the STE side, a special effort was made to generate a pool
of qualified scientists and engineers through the creation of a large Scholarship Program
for postgraduate studies in 1971, and by implementation of the National System of
Researchers program (SNI for its Spanish acronym)10 in 1984. The idea that innovative
capability building was important for competitiveness came to being in the 1990s. STE
policies moved to a demand-pull approach, although still in the context of a rather linear
model of innovation. Hence, on the Innovation side, the first programs to promote
private sector R&D were implemented (they acted as pilot programs): the Fund for

10
This is one of the STE instruments with the longest tradition in the country; its main goals include the
promotion of the formation, development and consolidation of a critical mass of researchers at the highest
level, mostly within the public system of higher education and research. The program grants both
pecuniary (a monthly compensation) and non-pecuniary stimulus (status and recognition) to researchers
based on the productivity and quality of their research.
R&D and Technological Modernization (FIDETEC), the Program to Support Technical
Modernization (PROMTEC), the Fund for Strengthening Scientific and Technological
Capacities (FORCCYTEC), and the Incubator Program for Technology-Based
Enterprises (PIEBT). In addition, during the 1990s the Mexican government enacted
regulatory changes intended to strengthen innovation and technological transfer, such as
updating the Law of Patents and Trademarks to protect intellectual property rights for a
more prolonged period, and the updating of quality norms and other metrology
standards. However, this trajectory was affected by the 1982 crisis and the economic
reforms of 1983. Since then, a new approach to development was adopted, where
market forces appeared as the only effective way to regulate the economy and provide
direction for policy-making decisions. This affected the industrial policies that may
have complemented the STE policies.

Phase 2 Pre-Emergence phase (2000 on). This phase started when a more structured
STE infrastructure was already built and there was already a small pool of qualified
scientists and engineers. Although the building of Innovation capabilities had been a
major concern of policy makers since the initiation of explicit STE policies in 1970,
only in the beginning of the 2000s did they become more consistently oriented toward
the promotion of business sector R&D. The approval of the Science and Technology
Law in 1999 represented a break in the evolution of STE policies and created the bases
for novel forms of governance. The new Science and Technology Law of 2002, the new
Organic Law of CONACyT, and the implementation of the Special Program for Science
and Technology 20012006 (PECYT, for its Spanish acronym) strengthened this
process.

PECYT contributed to change the previous policy focus on STE to a broader view
comprising STE and I. In fact, it represents the first formal attempt to design innovation
policies based on the double objective of increasing both the share of GERD/GDP and
the private-sector contribution to R&D activities. While this program was elaborated
with an interactive STE and Innovation perspective, resource allocation evidence
reveals the persistence of a linear, science-push approach both by policy makers and the
scientific and technological community.

It triggered a Pre-Emergence process (which is now followed by the PECiTI 2007-

2012), based on a horizontal and non-discriminatory/neutral program (generating
variety), oriented to trigger and perhaps sustain the emergence of specific sectors. Other
more consistent instruments to promote private R&D were introduced as well, such as
the fiscal benefit for R&D,11 the sectoral fund for innovation and the program for the
creation of new businesses from scientific and technological developments (AVANCE
for its Spanish acronym, aimed towards the promotion of high-tech SUs). Although
CONACyT has been primarily responsible for formulation, implementation, and
coordination of the different STE and Innovation policies, changes in the Laws
contributed to the appearance of new actors and multi-actor structures, like the Advisory
Forum for Science and Technology and the National Network of State Councils and
Institutions for Science and Technology (REDNACECYT for its Spanish acronym),12
which made the governance of the system quite a complex process.

11
The PECiTI 2007-2012, launched in September 2008, replaced this program by a new instrument
called Technological Innovation Fund (FIT for its Spanish acronym).
12 The Advisory Forum is an independent civil organization for advising the President, the General

Council for Scientific Research and Technological development and CONACyTs Board of Directors
The 2000s has been a decade of learning and adaptation to the new institutional set-up,
as well as one of confrontation between the winners and losers of these changes. In
2002, creation of a multi-actors structure the Advisory Forum for Science and
Technology- contributed to building the consensus required for the modern institutional
set-up.

As discussed in Dutrnit et al (2008a, 2008b), the relevant coevolutionary processes,

namely STE-Innovation coevolution, started only in this decade, with the changes in the
institutional set-up, the introduction of the PECYT, and the consequent growth of
innovation in firms. The basic constraint to STE-Innovation coevolution was the
relatively small size and still weak growth of these populations, since it meant a narrow
process of variation in each one, and a low potential for both selection (or replication)
and retention processes, and for mutually adapted bi-directional links.

On the STE population, while overall the Mexican academic community has grown
over time, its size is still relatively small according to international standards and
relative to population and its needs. At 44,000 individuals, they represent only 1.1 per
thousand employed in the economy and 53.6% of total researchers in the country. This
shows the current academic bias of R&D activities in Mexico, a situation comparable
maybe to that of Israel up to the late 1960s (prior to the systematic diffusion of R&D in
the business sector). Scholarships were used to increase the supply of STE
postgraduates. This program sponsored 136,000 scholarships for postgraduate studies in
Mexico and abroad. On the Innovation population, fiscal benefits for R&D was the most
successful new instrument in terms of resources committed and number of firms
benefited; it was coordinated by the Finance Secretary, and increased from $45 million
dollars in 2001 to $413 in 2007. The number of firms that benefited increased from 679
in 2001 to 1,616 in 2006. The upshot is that this instrument contributed significantly to
the increase of business sector R&D as percentage of the GERD from 14.1% to 41.5%
between 1995 and 2005. There was also an important increase in the number of trained
engineers and technicians that are employed in the productive sector in existing and
emerging fields, both as percentage of employment in industry (from 0.1% in 1995 to
0.5% in 2005), and as a percentage of total personnel in R&D activities (from 10.3% to
45.3% in the same years). In fact these figures reveal that the number of engineers and
technicians in industry has grown more quickly than the number of academic
researchers. However, they are still very low in comparison to international trends and
reveal the possible existence of significant shortages in this resource. In contrast, private
sources of finance for R&D continue to be limited. The VC market is very reduced in
terms of both the number of funding institutions and the volume of resources to fund
innovation. Bank credit for funding firms development, including innovation projects,
has been approximately 20% of the GDP, lower than Argentina (24%), Brazil (34.2%)
and Chile (64.4%). The lack of a VC market is one of the weaknesses of the Mexican
NIS.

Unfortunately, public resource disbursements were insufficient and not consistent with
STE and Innovation policy design and objectives. Thus, the share of GERD/GDP was

(which comprises directors of the main universities, research centres, industrial association and
scientific academies). REDNACECYT is a civil association that embodies a permanent forum for
discussing and suggesting initiatives aimed at fostering scientific and technological development
throughout the different states of the Mexican Federation.
maintained at its historical level of 0.4%. Very specific features of the environment
have influenced these processes. One of the main factors is the limited political and
social priority that government and society have traditionally assigned to STE and
Innovation. This is reflected in the low levels of investment -relative to international
standards- in such activities as mentioned above, and in the failure to reach the planned
GERD/GDP share of 1%.

The evidence illustrates that the evolutionary path of STE and Innovation has been quite
weak, due to the restrictions of each populations variation, selection and retention
processes. It seems that Mexico is still below the critical masses required for dynamics
processes. In addition, there have been difficulties in building bidirectional mechanisms
that support coevolutionary processes. The selection environment, the narrow STE and
Innovation culture of the society and budget constraints have had a dramatic influence
on this aspect of the NIS. Following Allen (2004), it can be argued that also in this case
the agents, linkages structures and products evolved qualitatively during Phases 1 and 2.
But limited quantitative changes wee observed.

Summing up, our interpretation is that until the year 2000 (Phase 1), Mexicos situation
involved subcritical masses of STE and especially of Innovation. This did not permit
even a limited coevolutionary process to take place. The situation after the year 2000
has improved (Phase 2), especially with respect to Innovation, which increased
substantially both in absolute and relative terms. This facilitated only a limited STE-
Innovation coevolutionary process. It is important to improve the conditions for
generating variation through significant increases in size and diversity of agents and
organizations, as well as assuring effective and mutually adaptable selection and
retention processes, which are still in their infancy. This would mean implementing
policies acting on the governance of the system. This may not be easy due to the still
fragile institutional edifice in the STE and Innovation arenas, the evolving multi-actor
related governance profile, and the weaknesses of STE and Innovation policy design
and implementation.

3 Stylized evolutionary model based on a continuous STE-Innovation

coevolution process towards economic development

The Israeli and Mexican experiences suggest some features that help to depict a broad
conceptual framework on coevolution in innovation and structural change-based
economic development. It takes STE-Innovation coevolution as emphasized in the
Mexican case as the central axis of the analysis with the other coevolutionary processes
considered in the Israeli case (Innovation-Innovation Policy and Innovation-Innovation
Finance coevolution) as influencing this process. The stylization of both experiences
suggests the existence of three Stages:

Stage I. Preconditions: Achieving Critical Masses and Limited STE-Innovation

Coevolution
Stage II. Strengthening of STE-Innovation Coevolution through Increasing
Returns, Capability Development and Specific Financial and Technical
infrastructures
 Stage III. Continued of STE-Innovation Coevolution, and Widespread
Emergence

Box 1 links these stages with the phases used to analyze each individual country. Based
on the evidence of Israel and Mexico, some key features of each stage are highlighted.

The evidence reveals that Mexico is situated in Stage I, with a relatively high level of
STE relative to Innovation but low absolute levels of both variables. This reflects the
focus of that countrys innovation policies since the 1970s during Phase 1, with the
creation of CONACyT, to build the STE infrastructure with only a limited effort before
2000s devoted to promote Innovation. During the 2000s (Mexico's Phase 2) a greater
effort took place to improve the institutional set up along with new programs to foster
Innovation. The coevolution that existed during Phases 1 and 2 mostly involved
qualitative rather than quantitative changes. Both the weak financial effort and the
relative failure at effectively adapting STE and Innovation governance during the last
25 years contribute to explain the current initial conditions and the limited movement to
reach higher levels.

From 2000 onwards, there has been a stronger pace of both STE and Innovation
evolution, quicker in the case of the Innovation. A special effort was made to promote
R&D in the business sector, increase the pool of researchers and engineers, promote
linkage between the agents and establish conditions for better governance, but these
conditions were still insufficient to generate an endogenous coevolutionary dynamic. In
addition, the financial system has neglected to introduce new schemes (like VC) to fund
Innovation. Also, the time available for introducing changes was insufficient for
improved governance to evolve, one that spurred radical changes in agents behaviour.
Moreover, the financial effort by the government was far below minimum magnitudes
and standard international levels (and shares of overall effort) to spark or trigger a self-
reinforcing coevolutionary process of STE-Innovation, which would involve the
economy and society as a whole.

Concerning to the timing, it took several decades to build the minimal STE
infrastructure and some Innovation capabilities, and it took 19 years to accomplishing
Phase 1. However, even today, neither the STE infrastructure nor Innovation are
sufficiently strong and varied to be able to sustain an endogenous STE-Innovation co-
evolutionary process. Phase 2, 10 years more, may be seem as a Pre-emergence phase to
the above process, but it has not ended yet. Thus, the main objective may be to set the
conditions for re-igniting STE-Innovation coevolution, and thereby spur a more
endogenous, autocatalytic and coevolutionary path of development. In such conditions,
increasing returns and emergence processes of some sectors/clusters may occur.
Box 1: Stages in the overall evolutionary model (and Phases in the evolution of countries)

Phases of the evolution

Model rationalization
ISRAEL MEXICO

Stage I: Pre-conditions: Achieving Critical Masses and Limited STE-Innovation Coevolution

Building up the infrastructure and critical masses of STE and Innovation Phase 0: Strong STE and Phase 0: Limited STE and
Qualitative changes in both populations Innovation system and PTI: Innovation system: before
Horizontal policies to foster variation in STE and Innovation, experimentation of new before 1969 1970
programs, and learning (including collective learning) about innovation through design and
implementation Phase 1 Background Phase 1 Background
Institutional set up and building up of effective system governance Conditions: 1969-84 (15 Conditions: 1970-1999 (19
Creation of some PTI to absorb technologies, provide technical services and employ/train years) years)
immigrant & returning engineers/scientists and students
The above would set the bases for Innovation-Innovation Policy coevolution and for limited Phase 2 Pre-emergence:
STE-Innovation coevolution 2000 and beyond
(unaccomplished)

Stage II: Strengthening of STE-Innovation Coevolution through Increasing Returns, Capability Phase 2 Pre-Emergence:
Development and Emergence of specific Financial/Technical Infrastructures 1985-92 (7 years)
Emergence of important innovative SME/SU segment in the Business Sector
Quantitative growth in both populations (Dynamically Efficient Critical Masses) Phase 3 VC and EHTC
Growing systemic intermediation of support systems: VC and PTI Emergence: 1993-2000 (7
Strong STE-Innovation coevolution, supported by interactions between capabilities and years)
governance, and by emergence of VC and PTI.
New qualitative changes and collective learning in new HLO
Policy: Innovation-Innovation Policy coevolution, design and implementation of new
programs, more vertical/targeted policies, greater policy mix
Emergence of new financial segments and markets to finance innovation in SMEs and
innovation more generally speaking
Emergence of new segments of intermediate institutions and markets for training, R&D
services and other technical services, especially to the growing segment of innovative firms
Improving governance, particularly at STE institutions
Stage III: Continued of STE-Innovation Coevolution and Widespread Emergence Future Phases: 2001 and
Implementing a strategic approach to Innovation Policy to re-ignite STE-Innovation beyond (unaccomplished)
coevolution, set strategic priorities in a supra-ministerial setting, and develop a national vision
concerning STE and Innovation (and related issues and areas)
Quantitative and Qualitative changes in both populations (new critical masses and enhanced
capabilities in emerging areas)
Policy: design and implementation of new programs to foster new sectors (targeting)
Widespread mission-oriented R&D involving institutions in the STE and Innovation arenas
Widespread Emergence of new Higher Level Organizations e.g. clusters
Collective learning during/after emergence of new HLO and qualitative changes
Improving governance to include new actors
In Israel, strong support of Innovation after establishment of the OCS in 1969 along
with a strong and growing STE infrastructure led to a critical masses at the end of that
countrys Phase 2 in 1984 (Stage I). Moreover, the search and adoption of new non-
OCS mechanisms of financing R&D in firms assured the timely expansion of
Innovation and contributed to the creation of a critical mass of SUs companies by 1992
and attainment of Dynamically Efficient Critical Mass (DECM) by that year. It is worth
mentioning that the transition to such an endogenous process benefited from the
flexibility and creativity of the OCS, which indeed existed at the time. The early
activities of this Agency, together with the strong STE infrastructure, spurred a strong
industrial R&D response that in turn led to expansion of OCS budgets and to some new
programs. This is evidence of a strong Innovation-Innovation Policy coevolutionary
process during the 1980s. We should also mention changes in STE governance and
establishment of Technology Transfer Offices at the Hebrew University and Weizmann
Institute during that decade. All of these contributed to have the resources to move
forward and complete the Stage II during 1993-2000 when a full-fledged VC industry
and EHTC were created.

Concerning the timing, by the mid 1980s the emergence of sufficient Innovation,
Innovation Capabilities and Innovative Organizations was able to end Phase 1 in 15
years and begin Phase 2- Phase 2 and 3 were much quicker, the process was
accelerated. Phase 2 was accomplished in only 7 years; a virtuous STE-Innovation co-
evolutionary process started and allowed to move to Phase 3 till the year 2000, in
another 7 years. Emergence processes were strengthened. The country is at the
beginning of a new Phase.

The evidence suggests that both countries face new constraints that would appear pretty
fast in the area of finance and possibly of intermediate institutions supporting the
increasingly amount and variety of firms technological activities. Referring to
intermediate institutions, the broad policy mix introduced in Mexico fostered the
emergence of a large number and variety of these institutions, many of which will
probably not survive the ongoing selection and retention processes. In the case of
Israel, most of the civilian-oriented institutions were created prior to 1969, and the OCS
in fact reduced its overall disbursements to them during the first half of the 1970s,
focusing instead on direct support of R&D projects at firms (see Breznits 2007a).
Concerning to the inevitable Innovation finance constraint that would appear during the
above Stage II process, some countries should aim at triggering emergence of a
domestic Innovation finance and SME-finance segment of agents. This would reinforce
Innovation and through this, the overall STE-Innovation coevolutionary process.

By now, Stage III only pertains to the Israeli scene, as Mexico is still in Stage I. For
Israel, Stage III reflects a rather optimistic future, given the new set of threats and
opportunities coming from the global and domestic environments. The major policy
challenge would seem to be the creation of a strategic level of Innovation Policy, to set
up a search and learning intensive path based on a vision of the country and its growth,
and a capacity to set strategic priorities in key areas, such as Biomedicine, ICT high-
tech (with an emphasis on diversification into new applications and fusion of
technologies), Nanotechnology, Water, etc. Changes are required in both policy process
and policy products; in fact the latter is not possible without the former (for a
discussion see Sercovich and Teubal 2009). The central point is that: (i) the global
environment and its competition-enhancement effects suggests very strongly that
HLO/technology targeting will be more important than in the past to sustain innovation
and structural change-based economic growth;13 and (ii) for this and other reasons as
well, the policy process should now increasingly have to include the explicit setting of
priorities (and this set of priorities should be coherent with an overall vision). The
Innovation-Policy institution of the Stage III must be as flexible and creative as OCS
was during the 1970s in order to generate, in 'no time', a strong STE-Innovation
coevolutionary process, one which would counter the gradual decline in the country's
STE capabilities. It should also contribute to link Innovation Policy (broadly defined
now to include both Innovation and STE directed policies), Innovation (broadly defined
to include also capabilities and organizations) and emergence of new HLO (like new
sectors or sub-sectors, markets or submarkets, clusters, regional or sectoral innovation
systems, large multinational companies, global networks, etc). Presumably, the
targeting of new HLO and specific STE capabilities will figure prominently in that
countrys new policy portfolio.

4 Coevolution in the arenas of STE and Innovation

The empirical evidence of Israel and Mexico refers to coevolutionary processes in the
arenas of STE and Innovation. The literature asserts that coevolution is a process that
links the evolution of different arenas of a system, where changes of one induce changes
on the other e.g. they are causally linked. There is a growing literature that applies
coevolutionary concepts to the study of socio-economic systems, although challenging
issues for transferring evolutionary concepts and insights from the biological to the
social arenas have been recognized (Norgaard 1984 and 1994; Levinthal and Myatt
1994; March 1994; Nelson 1995; McKelvey, Baun and Donald 1999; Lewin and
Volberda 1999; van den Bergh and Gowdy 2003).

A stream of literature focuses on coevolution in the arenas of science, technology and

innovation. Nelson (1994) discusses coevolution between technology, industry and
institutions; Murray (2002) focuses on industries and national institutions; Murmann
(2003) on Industries and Academic Disciplines; Metcalfe, James and Mina (2005)
analyse coevolution between clinical knowledge and technological capabilities; and
Nyggard (2008) between technology, market and institutions, amongst others. Some
authors introduce the role of policies in coevolutionary analysis. In this line, Breznitz
(2007b) analyses the coevolution between technology policies, industry and state;
Fagerberg, Mowery and Verspagen (2008) approach the case of the Norwegian National
Innovation System and introduce the innovation policy; Sotarauta and Srinivas (2006)
relate public policy with economic development in technologically innovative regions;
and Nelson (2008) highlights policies more as part of the picture related to the
coevolution of technologies, firm and industry structure, and economic institutions than
as an arena that may coevolve with the others.

The standard evolutionary approach draws on a concatenation of three general causal

processes (variation, selection and retention) introduced by Campbells (1969) model of
change. The struggle over scarce resources is seen as a fourth process in the case of the
social and economic evolution by some authors (e.g. Sotarauta and Srinivas 2006;

13
For the case of Chile see World Bank (2008).
Aldrich 2001), which may lead to new varieties. Variation is associated with the
introduction of new entities; selection can be originated in two ways, as a result of
forces that lead to differential selection, or as a result of a selective elimination of
certain types of variations; and retention involves the mechanisms for preserving,
duplicating, or otherwise reproducing selected variations. Variation, selection and
retention are causal processes that may explain how outcomes are produced from a
given set of conditions including resources, incentives and other framework conditions.
These causal processes may lead to the emergence of an HLO that feeds the
coevolutionary process or whose processes involve coevolution among selected
variables.

A coevolutionary process could be either beneficial or risky for the populations

involved; this depends on the particular causal relationship that links the parties.
Biological ecologists have thought extensively about the relationship between different
populations and they have identified six possible kinds of pair-wise interactions or
processes: competition, predation, neutralism, mutualism, commensalisms and
amensalism (Murmann 2002).

Looking at most of the developing countries, which have: a narrow science, technology
and higher education (STE) and Innovation (I) infrastructure; limited science and
technology human resources; a business sector in which short-term profits are biased
against innovation; weak institutional building; and dramatic social needs, the
coevolution of STE and Innovation may be relevant for accelerating a trajectory of
development. Even though, most of the catching up processes in the last decades were
driven by an extremely acute accumulation of Innovation capabilities, which were
fundamentally driven by learning from experience instead of by science or research and
development (R&D) activities (Hobday 1995 and Kim 1995), it seems that the
conditions for catching up and development have changed. There is little dispute about
the argument that scientific and technological knowledge is essential for the
development process, however the conditions for virtuous cycles of STE-I coevolution
are still unclear.

Following Dutrnit et al (2008a, 2008b), we define STE and Innovation as two activities
that transform capabilities into outputs, thus the populations can be defined in terms of
either one or both variables.14 The population of capabilities for STE is conformed by
researchers and for Innovation by engineers and technicians, including doctors in
science and engineering, involved in innovation activities. Outputs of these populations
include human resources (graduates and postgraduates), specific knowledge and new
capabilities for STE, and new products and processes and patents for I.

Processes leading to new variants in the population of researchers include those

underlying an increase in the number of STE human resources, the creation of positions
for new researchers in existent and emergent fields, changes in incentives to stimulate
researchers to enter emerging fields, and the creation of new research teams in existing

14
Moreover, two levels of analysis of populations can be identified: the individual agent level (followed
in this paper), and the organizational level. At the organizational level, the STE population (Innovation
population) comprises research centers and universities (innovative firms). As systems mature,
monitoring at organizational level becomes relatively more important than at the individual level. But,
when the institutional structures are still immature, as in the case of developing countries, it is more
relevant to focus on individuals.
and emerging fields. The selection process results from research proposal requests for
grants submitted to competitive research funds, and from publication of papers in peer
review journals, among others. Framework conditions, criteria for evaluation and the
existing social norms in relation to STE and Innovation determine what is socially
accepted. This affects the relationships between the relevant science and technology
committees on the one hand and the academic research community on the other, thereby
shaping the selection process. The existence of a permanent post with competitive
income, availability of resources for research, prestige of the universities or research
centres where they work, framework conditions, and the particular social norms affect
the retention process.

A rather parallel process occurs in relation to the population of engineers and

technicians involved in business innovation. Note also that salaries and stability,
stimulus for developing innovation activities (e.g. administrative and researchers
carriers, and innovation culture of the firms), and the prestige of the organization
constitute the retention mechanisms in the population of engineers and technicians,
which is also affected by framework conditions and the particular social norms that
prevail at the time.

Drawn on Murmann (2002), four types of bi-directional causal mechanisms may link
the evolutionary trajectory of STE and of Innovation, and may be in the bases of a
coevolution of both populations: (i) Competition, where each population inhibits the
other; (ii) Predator/host, where one of the populations exploits the other population; (iii)
Neutralism, where neither population affects the other (thus it can be evolution of each
population but not coevolution of both), and (iv) Cooperation, meaning interaction,
which is favourable to both populations (named mutualism in the literature). For
instance, in the case of cooperation, four significant causal mechanisms may link the
evolutionary trajectory of STE and Innovation: Mobility of human resources (PhD
students, technicians and researchers), training of human resources, exchange of
knowledge by formal means (contracts, seminars, stays) and informal networks, and
lobbying by each on behalf of the other. These causal mechanisms bring about
coevolution as they affect the variation, selection and retention processes that transform
STE as well as those that transform Innovation.15

The behaviour of the coevolving populations is governed by a set of norms that they
have internalized over time, and is also influenced by restrictions associated with these
norms. It is worthwhile to differentiate between those norms that shape informal
institutions associated with routines, habits, codes and agents modes of behaviour, and
the formal institutions that emanate from constitutions, laws or regulations and set up
the rules of the game. Both norms and rules of the game condition the variation,
selection and retention processes.

Coevolution and emergence can be linked to explain paths of development. Emergence

refers to a systems behaviour or structure that arises from the interaction between many
individual agents, which happen in random ways rather than being planned or controlled
(Kauffman 1995; Holland 1998). In some cases the system has to reach a combined

15See Murmann (2002) for the case of Industries and National Institutions, and Murmann (2003) for the
case of Industries and Academic Disciplines.
threshold of diversity, organisation, and connectivity before emergent behaviour
appears; in other words, critical masses are needed.

This approach to the coevolution of STE and Innovation take into account the initial
conditions based on the endowment of capabilities (whether they constitute or not a
critical mass to generate dynamics) and the institutional framework. But to transit from
a situation without coevolutive processes towards another where those processes are
endogenously generated and generalized may require an institutional change. In
particular, it is called for the emergence and consolidation of those institutions that
favour variation, selection and retention processes and bidirectional mechanisms. Also
exogenous factors may be needed to trigger new coevolutive processes.

This paper draws on the idea that coevolution of STE and Innovation are relevant for
accelerating a trajectory of development, and that STE-Innovation coevolution is related
to emergence processes (of HLO, like new clusters, markets, sectors, etc). The latter is
based on the argument that emergence requires Innovation and Innovation requires
STE.

5 Towards an explicative model

This section built on the framework about the continuous STE-Innovation

coevolution process towards economic development depicted in section 3 and on the
coevolutionary approach presented in Section 4 to propose an explicative model
on STE-Innovation coevolution and economic development.

5.1 The concepts and basic relationships

STE and Innovation are two activities that transform capabilities into outputs. The
population of capabilities for STE is conformed by researchers and for Innovation by
engineers and technicians, including doctors in science and engineering, involved in
innovation activities. STE outputs include human resources (graduates and
postgraduates), specific knowledge and new capabilities for STE, and new products and
processes and patents for Innovation.

We assume that both STE and Innovation are affected by two distinct relationships or
components: a coevolutionary relationship, which we will term endogenous and that
could be either push or pull, and one or more exogenous components. The
coevolutionary components are the variable Innovation, which affects STE directly
through a pull effect [f(I,)], and the variable STE, which affects Innovation directly
through a push effect [g(STE,)]. The exogenous component(s) will be any other
component directly affecting STE [Xste in (1a)] or Innovation [Xi in (1b)].

(1a) STE= f(I...) + Xste f(I,) is the pull effect on STE

(1b) I16= g(STE...) + Xi g(STE,) is the push effect on I

16
We use I=Innovation indistinguishable.
At this point in the analysis, STE in the above equations represents graduates in the
Innovation-relevant disciplines, particularly Engineering and Sciences, and to some
extent from other areas pertaining to the non-technological aspects of Innovation (e.g.
management, finance, and production and marketing of innovative products and
processes).17 Even though we use a broad definition of Innovation -newness to the
economy rather than to the world, not all the Innovation-relevant graduates will be
employed in Innovation by the business sector. Many of the engineering graduates will
be employed in the routine operation and maintenance of production equipment and
physical infrastructure throughout the economy, and even within the business sector. At
this early stage, the left hand side term of (1a) (STE) should be regarded as the supply
of graduates, both domestic and coming from abroad, which are employable in
Innovation in the business sector. This supply is a response to two kinds of demand:

f(I,) is the pull term, which represents an endogenous, short-term demand for
STE graduates induced by the aforementioned Innovation;
Xste could be regarded as 'exogenous' demand by the Government or public
sector for trained Innovation-related graduates, which are not presently being
demanded by the business sector. These are employed by a specific
technological infrastructure -Public Technological Institutes (PTI).

Similarly the demand for Innovation by the business sector in the left hand side of (1b)
derives from two sources:
g(STE,) is endogenous, short-term demand resulting from the supply push of
Innovation, derived from the availability of employable graduates in business
innovation,
Xi is other, 'exogenous' demand resulting from domestic financial
infrastructure, termed here Venture Capital (VC), and by other factors.

Equations (1a) and (1b) require further specification. Specifically they are also subject
to two additional constraints: critical mass conditions and capacity constraints.

Critical Mass Conditions: A minimum level of STE (STEo) is required for push, and a
minimum level of Innovation (Io) is required for pull. Thus:

(2) f(I<Io)=0; g(STE<STEo)=0

The above means that (Io, STEo) represent necessary conditions for a virtuous STE-
Innovation coevolutionary process to take place. We will term this the Critical Mass
Condition. It includes a critical level of Innovation for the pull effect to be effective
(Io), and a critical level of STE for the push effect to be effective (STEo). This refers to
Stage I of the framework depicted in Section 4, and particularly to achieving qualitative
changes in both populations. As the system evolve, new critical masses and enhanced
capabilities in emerging areas will be required in Stage III.

17
An almost exclusive focus on engineering and other relevant graduates may be particularly important in
the early stage of industrialization where imitation and routine types of innovation (rather than more
complex innovation) may predominate. Increasingly and particularly in later stages of development, other
Innovation-relevant outputs of STE, such as specific knowledge and certain STE capabilities that
underpin more complex, multidisciplinary innovations will become increasingly important. These other
outputs will be considered more explicitly later on.
Capacity Constraints: At any moment in time, there exists a maximum level of STE
(STE*), termed STE-Capacity and a maximum level of Innovation, termed I-Capacity
(I*).

(3a) STE*= STE*(R, K; PTI)>Xste

(3b) I*= I*(N; VC)>Xi

PTI and VC refer, as mentioned above, to the specific technological and financial
infrastructures supporting respectively, STE personnel and Innovation. Both structures
of systemic intermediation are particularly important to the strengthening of STE-
Innovation Coevolution during Stage II. Capacity is also affected by the following
variables:

R= number of STE researchers/teachers (maybe weighted by capabilities)

K= scope of physical facilities comprising the STE infrastructure (buildings,
teaching equipment, research facilities, etc)
N= number of innovative organizations in the business sector (or a relationship
between this and skilled personnel in R&D or an index of Innovation
capabilities).

A major distinction is required between capacity and capabilities. For the purposes of
this paper, capabilities refer to the quality (or qualitative aspects) of STE and
Innovation, while capacity refers to the quantitative dimension. Thus for a given
capacity, some types of capability enhancement may lead to an increase in STE and/or
Innovation 'outputs', when e.g. 'outputs' are measured in constant quality terms. There
are two types of capability:
Capabilities which directly affect Coevolution by facilitating enhanced
reactivity\adaptability and thereby enhanced 'pull' (0i>1 in Pull equation of Box
1) or 'push' (0ste>1 in Push equation of Box 1).18
Capabilities which indirectly affect Coevolution through the exogenous term of
equations (1a) and (1b) (see Box 2). PTI act directly on the 'quality' (and
quantity) of STE outputs through the Xste; and VC acts directly on the 'quality'
(and quantity) of Innovation outputs through the Xi term (see Box 2).19

Referring to the links between capabilities and capacity constraints, a main feature of
Stage II of the framework refers to the quantitative growth in both populations, which
require previous qualitative changes -capabilities- that are undertaken during Stage I.
The quantitative dimension allows reaching Dynamically Efficient Critical Masses.

Box 2 summarizes the main relationships mentioned above concerning constraints,

capabilities and policies, this further specifies the basic model of equations (1a) and
18
0j=1 (j=ste,i) will be the unit capability level in the sense that it will prevail initially prior to any
process of capability development. We assume this to be the case prior to and up to fulfilling the critical
mass conditions (i.e. 0j could be greater than one and increasing once STEo,Io is achieved). These
capability variables appear in multiplicative form in the f and g equations (see Box 2). The higher 0i
beyond 1, the higher f and the higher f' for a given I; and the higher 0 ste beyond 1, the higher g and g' for a
given STE.
19
Co-evolution will be indirect since an increase in PTI, for instance, will increase STE through Xste (see
Box 2, first line which corresponds to equations (1a)); and this will increase Innovation from equation
(1b).
(1b). Both Xi and I* depend on the number of innovative organizations (N) and VC, this
later provides the finance and other added value to the former and especially to newly
formed innovative small and medium-size enterprises (SME) and start up (SU)
companies

BOX 2: Summary of main relationships and variables

Independent Components
Dependent Endogenous Exogenous Capacity Constraints
Variables Push &Pull (Other & Long Term)
STE Pull: f(0i I,) Xste(R,K;PTI;) STE*(R,K;PTI)
(<Xste)

Innovation Push: g(0ste STE,) Xi(N; VC;) I*(N;VC)

(<Xi)

The exogenous component of STE (Xste) and STE* depend on the number of STE
researchers/teachers, the STE physical facilities (K), and the network of PTI.

Note that the exogenous levels of STE and Innovation are strongly related to the
capacity levels of these variables, thus policies which increase capacity may generate
the critical mass necessary for the pull and push effects of equations (1) and, therefore,
for the coevolution between these variables. Also the capability coefficients 0j (j=i,ste),
which will be enhanced by 'learning' and by changes in 'institutions/governance', may
contribute to STE-I coevolution once critical masses are achieved.

5.2 Dynamic profiles of coevolution

To identify the dynamic profiles of coevolution, we focus on the f(I,) and g(STE,)
functions of equations (1), including the critical masses for push and pull described in
(2) (STEo and Io), to which we add the exogenous components (Xste and Xi) and STE
and Innovation capacities (STE* and I*). The various cases and sub-cases depend on
the initial conditions, which depend on the relationship between the exogenous
components and the critical masses, and on the relative slopes of the f and g schedules.

There are two main cases. Case 1 is characterized by Decreasing Returns to push and
pull; we assume that capacity variables, capabilities and the exogenous components
are constant. Case 2 is characterized by Increasing Returns followed by Decreasing
Returns as the system approaches capacity levels; we assume non-constant levels both
of capacity, capabilities and the exogenous components, also during the adjustment
process. The relevant schedules are drawn on the STE and Innovation diagram in Figure
1.

Case 1: Decreasing Returns to Push and Pull

This case refers to countries initial conditions under decreasing returns to push and
pull; each one of the two variables (STE and Innovation) have low adaptability or
reactivity [as embodied in the f() and g() functions of equations (1)] to increases in
the other variable (Innovation and STE, respectively). Moreover, it is assumed that
(beyond the relevant critical mass -STEo and Io), a given increase in STE (I) will induce
a progressively smaller increase in Innovation (STE), the higher the level of Innovation
(STE) already achieved.

We assume that both the exogenous components of equations (1) and the capacity
levels of the STE and Innovation systems (STE* and I*) are constant. But, the
exogenous components of equations (1) (Xste and Xi) can be larger, equal or smaller
than the critical mass required for push and pull (STEo and Io).

If the initial conditions are higher than the critical mass required for pull and push
effects to take place, the system can coevolve to reach a Low-Level Equilibrium Trap
(LLET). There would be a coevolutionary process that conducts to this point. Once the
system reaches this point, it will not move further beyond because it is a stable
equilibrium. LLET is a trap because this equilibrium is an attractor.

The existence of decreasing returns in coevolutionary processes is the result of

characteristics of both populations and their size. When the size of the STE and
Innovation populations is small, so is the degree of variation between individuals, a
fact that diminishes the likelihood of coevolutionary-friendly selection and retention
processes. This makes the emergence of links, including virtuous bidirectional links
between the populations, less likely, a fact that precludes the eventual exploitation of
increasing returns. The outcome could be impeding a rapid expansion of the
researchers/teachers and students and graduates in academic institutions, and indirectly
of engineers and technicians working in firms.

If STEo > Xste and Io > Xi, it means that the exogenous levels of STE and Innovation are
lower than the critical masses required for a push and pull effect to take place. Thus the
initial conditions also illustrate all future positions; therefore there are no dynamics. We
have a static situation with sub-critical levels of STE and Innovation. In this no-growth
context, the only way for the system to start growing is if the exogenous components
are increased. If the exogenous components are higher than in the previous situation,
and reach exactly the levels of the respective critical masses, the initial position
(STEo=Xste, Io=Xi) lies in a place where both push and pull may take place. Thus a
small increase in the exogenous components may generate a virtuous STE-Innovation
coevolution that lead to a LLET, but an extremely low one. Finally, if the exogenous
components exceed their respective critical masses, the system will experience a
limited STE-Innovation coevolution (up to LLET). Larger exogenous components will
lead to a higher LLET and therefore a more extended coevolutionary process. But they
would not assure that virtuous coevolution would continue in the future beyond the
LLET point (which might be quite low from the perspective of national priorities and
needs).

Summing up, with decreasing returns to push and pull growth of the STE and
Innovation, the system might not be able to take off at all (a critical mass problem), or
if it did, the underlying coevolutionary process would be a constrained one. It would
eventually reach a LLET point. This later situation may characterise Stage I, but there
are no conditions to move forward to Stage II. This seems to be the point where
Mexico is located.

Case 2: Increasing Returns to Push and Pull and Enhanced Capacity

One could say that a longer and more vigorous coevolutionary process is not possible
without increases in capacity, which have not been considered explicitly in the analysis
of Case 1. This is true, but even then, the decreasing returns to push and to pull will
strongly constrain any renewed coevolutionary process, especially at high levels of
STE and Innovation. Alternatively it could be stated, there will be short-term demand
and short-term supply constraints to the full utilization of the system. This situation
will dampen the motivation of policy makers to undertake exogenous increases in
capacity even when needed from a broader strategic perspective. This failure to act will
keep (STE* and Xste) and (I* and Xi) at relatively low levels.

The solution to this problem would involve in the first instance a combination of: (i)
inducing a shift to increasing returns in push and pull, a result of policies such as
improved institutions, capabilities and governance of the STE system, and (ii) increases
in capacity, which reflect long-term, strategic considerations by policy makers to
strengthen STE facilities and Innovation capabilities.

This situation is shown in Figure 1. We assume the economy was at the LLET, and that
this is either the origin or close to the points of origin of a new set of schedules (STE'
and I') incorporating, along a defined range of values, increasing returns to push and
pull (that is the slopes of the f() and the g() functions respectively are increasing)
and higher capacity levels (shown by STE* and I*). After LLET, at the DECM point,
the relative slopes of schedules STE and I have switched again. DECM stands for
Dynamically Efficient Critical Mass, since beyond this point, STE-Innovation
coevolution could be re-ignited, at least for a certain range of variables up to a HLE
(High Level Equilibrium).20 This situation characterises Stage II of the framework,
where Israel was located until the 2000. As DECM is not an attractor, the system
will not easily move from LLET to this point, there are only some very specific
trajectories that can reach this point. Thus, the optimal situation would be to jump from
LLET to HLE, which is a higher-level attractor. After HLE the system may move to
Stage III.

The shift from LLET to HLE is not automatic since an explicit policy is required to
overcome the HLE-LLET gap. With a constant environment and a set of weakly
calibrated and coordinated policies, the system may fail to budge from LLET.
Overcoming the HLE-LLET gap may require much more than routine increases in
'capacity'.

20 DECM should be differentiated from the aforementioned Critical Mass Condition (STEo,Io), which
is required to take the system for the first time from a non (STE-Innovation) coevolutionary mode
to a coevolutionary mode, albeit a limited one ending in LLET, as described in Case 1. The
justification for attaining Critical Mass and a first round of STE-Innovation coevolution is to set the
stage for generating and exploiting Increasing Returns to push and pull. As mentioned above, this
strongly links with the coevolutionary literature summarized in Section 4, which emphasizes the
importance of size and diversity (and the link between the two) of the two populations as
preconditions for virtuous coevolution.
Figure 1: Stages in the overall evolutionary model (with a focus on STE-I
coevolution)

At some HLE point, beyond DECM, the system must stop again, due to capacity
constraints and the likelihood of a shift back to decreasing returns to push and pull as
capacity levels are being approached.

Summing up, while a shift to increasing returns (through institutional and governance
changes) is important; it may even be critical for the temporary renewal of STE-
Innovation coevolution after exhaustion of the first round of the process. Further growth
in the system in this second round would require a continuation of the above, namely,
further increases in the capacity variables and in policies, which, by increasing the
exogenous components of STE and Innovation, may lead to higher critical masses that
would trigger a third process of coevolution. Thus, under this view, the possibility of
continued STE-Innovation coevolution would constantly require reinforcements from
policy makers and favourable exogenous events.21 This is not a sufficiently endogenous,
and thereby, encouraging scenario.

6 Building analytical links with the Classical Theory of Development

This section connects the model of the Coevolution of STE and Innovation with some
concepts of the Classical Theory of Development.

21
In this case there may be a moving equilibrium that is not shown in Figure 1.
In sections 2 and 3, with the methodology of stylized features (Gerschenkron,
1962, Kaldor, 1961), the comparative analysis of the NIS of economies with
different degrees of development made it possible to establish a model based on
interaction and interdependence between the populations that, on one hand, carry
out the STE activities and, on the other, the innovation activities.

Both populations are structured in different levels through organizations centres

of higher education and scientific research, innovation firms and institutions
formal and informal rules that generate norms and incentives of behaviour of
agents and organizations. At the same time, these populations are embedded in a
regulatory framework that includes them and also in other structures that
transcend their internal dispositions. The Box 1 (vid supra) summarizes the
phases crossed by the innovation systems of Israel and Mexico and, based on them,
an interpretative model has emerged that abstracts three stages where the
systems of innovation work differently and corresponds to progressive evolutive
stages.

From a dynamic point of view this rationalization, made in terms of the

coevolution of the populations, shows two types of behaviour described in Figure
1.

The first behaviour is shaped by the interaction of the evolutionary processes of

variation, retention and selection presented by the populations. This interaction
generates forms of growth and the emergence of linkages between them. These
types of behaviour are registered in each of the vertical subsets of the figure that
show the evolution within each stage. If the linkages between the populations were
to remain without substantial modifications, then the systems of innovation would
either be trapped in stage I or would have to take an unfounded leap to stage III.
The second type of dynamic encourages the transit between stages of the
innovation system. The first type of dynamic is internal to each stage. The second
requires passing from one stage to another, and in this sense, is external to them.

From this interpretative experience it is possible to dialogue the approaches of the

theories of economical development or of the cycles of growth and connect the
innovation with these processes. The dynamic between stages is based mainly on
the changes in linkages exhibited by the dynamic economies of scale (i.e.
increasing returns to scale) of the respective populations. These changes are
structural transformations that allow transit between stages. The foundations that
explain these dynamic economies are the existence of increasing or decreasing
returns to scale. The transit of structures that present decreasing returns toward
structures that show increasing returns are, at the same time, changes of stage.
Within the theory of late industrialization, Gercheskron based on the increasing
returns to scale to generate growth (Young, 1928) his model that explains transit
of backward economies toward a developed phase. The fact that they coexist with
developed economies allows technical changes with lower costs and times. This
late industrialization founded on the appropriation of techniques generated in the
developed economies has the analytical line of the changes in the returns to scale
of the innovation depending on the investment on STE and viceversa, that appear
in the coevolutive model described in section 5.
In our model times and forms of transit between stages depend on the
accumulated capabilities for generating STE and innovation in the previous stages.
As the degree of backwardness of an economy moulds the possibilities of
industrialization (Gerschekron, 1962), the accumulated capabilities condition the
stages of the innovation system. The transit between stages also requires the
configuration of a level of critical masses of accumulated capabilities and some
changes of institutional nature, which allow changing the underlying structure of
the returns to scale of STE on innovation and viceversa. Accumulation and
institutional changes are two of the main drivers to overcome the backwardness
(Gerschekron, 1962) and of the big-push (Rosenstein Rodan, 1943). Both
components provide a vision of development that assumes structural changes and
not only permanent structures that may condition growth. In figure 1, these
changes allow to move from one stage to another and change the linkages between
STE and innovation that operate in the actual stage.

In development theories the possibility to move from backwardness to progress,

or from underdevelopment to development, are conditioned by the presence or
absence of feedback mechanisms that reinforce tendencies. If the situation of
economy is one of deteriorated capabilities and the predominance of institutions
that inhibit the generation of capabilities, the presence of feedback processes
reinforces such deterioration, and the systems are subject to a regressive
accumulative causation that trapps them in the previous stage (Myrdal, 1957).
Hence, at international level we can see the coexistence of economies with
different levels of development, and in the case of the innovation system, those
with low (Mexico) and high (Israel) performance. At national level, we can see dual
economies and regions with weak innovation systems and other highly structured.

The explanation of changes between stages within an innovation system has

evolutive and institutional bases, as analysed in sections 3 and 4. These bases
provide new analytical elements, over those analysed by the development theory,
to explain how to transit from underdeveloped to developed economies, or how to
explain the reason why there are tendencies to remain in the lower stage.

The intrinsic dynamic of each stage contains behaviours that show similarities
with those generated in the macrodynamic of the growth cycles. The existence of
capability accumulation processes and of institutional blockage becomes clear.
These generate linkages between STE and innovation that produce small capability
and capacity increases that cannot reach the required threshold (ie. they do not
reach the critical masses). This fact contributes to explain why the innovation
systems are trapped in low levels of performance, they do not generate those
evolutive conditions that favour the interdependence between both populations,
and only unidirectional linkages are observed. These processes are originated
because of causations of accumulative nature, like those suggested by Myrdal as
traps of low growth (poverty traps), and those suggested by Nelson (1956). The
contribution of our model is to base the explanation of these stages of low growth
on evolutive mechanisms of variation, selection and retention that are insufficient.
They are moulded by inadequate productive structures and regulatory
frameworks.
At the same time, the presence of selection mechanisms in both populations and
coevolution between them explain the emergence of that stage where endogenous
impulses are generated toward a sustainable growth. The possibility that these
impulses overcome a fluctuating behaviour and drive themselves towards a trend
of continuous growth lies on the fact that the mechanisms of intra-population
competence and of interdependence between populations guarantee transit to the
emergence stage, i.e. the emergence of innovation structures and institutions of
high performance. Kaldor (1940) proposed a model, in the context of saving and
investment dimensions, which describe the linkages in terms of actions and
reactions of one variable over the other in such a way that permanent oscillations
are generated. Therefore an economy can face conditions under which stages of
growth are alternated with others of declinement, or at least where sustainable
growth is alternated with slow growth. With the model described in section 5,
based on an evolutive explanation, it is possible to explain how adaptations of the
dynamic economies to scale of STE over Innovation, and viceversa, may contribute
to avoid that these oscillations become a new trap of low growth.

Transit from a stage where the formative conditions of the innovation systems
where built towards another of emergence of high level organizations is not only
associated with the linkage of STE and Innovation. It is also required to reach
sufficient levels of both activities and their linkages in terms of their mutual
economies of scale. There are thresholds that must be overcome in order to reach a
stage of sustainable growth. Scientific research, technological development and
different types of innovations constitute investment opportunities. The
characteristics, rhythms, compositions and amounts of the investments make it
possible to configure scientific, technological and productive structures and
systems of innovation that guarantee a sustainable growth of STE and Innovation.
Kalecki (1933 and 1935) argued that investment has an autonomous portion, e.g.
the maturity time and the composition in temporal and destination terms
(reposition, inventory, new plants), which determine the trajectory of growth of
the economies. Our model of coevolution establishes thresholds of critical masses
and capacities for STE and Innovation to overcome in order to reach specific
growth rates to transit from one stage to another.

Following the ideas of the Development Theory, different types of discontinuous

changes are required to avoid traps of low growth, trends toward permanent
oscillations and recurring situations towards a fluctuating growth:
Structural transformations that guarantee in each stage the adequate linkages
between dynamic economies to scale of STE over Innovation and viceversa.
Institutional changes that create norms and incentives for the populations of
both activities to behave in the appropriate direction with the required
transformations.
Increases in the levels of initial investments to avoid an inadequate
combination of both variables.

All these changes require arrangements, policies and programs of different nature and
characteristics.
7 Final reflections

Based on the empirical evidence of the Israeli and Mexican cases, we present a
conceptual framework and an explicative model for analyzing patterns of STE-
Innovation coevolution in industrializing economies, which could eventually fit
into a broader model of innovation-led, and structural change-based economic
growth. The framework supports the view that such a coevolutionary process is
linked to the Emergence of Higher Level Organizations (HLOs) like new sectors,
markets, clusters, etc which are the substance of Structural Change. This because
new HLOs require new Invention/Innovation and these require STE outputs,
particularly Science and Engineering Graduates.

The conceptual framework and the explicative model stylized features emerging
from the evolutionary history of the Israeli and Mexican NIS, in terms of patterns
of emergence and coevolution (or lack of them) among key variables associated
with innovation and structural change-led economic development. A central
coevolutionary process focuses on STE-Innovation coevolution (emphasized in the
Mexican case); the other ones are Innovaation Policy-Innovation coevolution and
Innovation-Innovation Finance coevolution (emphasized in the Israeli case).

While the Israeli case study has not considered STE-Innovation coevolution
explicitly, the historically strong support of the STE infrastructure (reflecting not
only economic, but also cultural and defence reasons) continued until the year
2000, thus providing ample space for Innovation to flourish. Since this situation
has changed during the present decade, any extension of our analysis will require
more explicit attention to STE capabilities and to STE-Innovation coevolutionary
processes and associated policies involving coordination of narrowly defined
innovation policies including specific STE policies. Other important coevolutionary
processes, such as Innovation-Innovation Policy coevolution during the 1970s and
early 1980s and Innovation-Innovation Finance coevolution during the 1980s and
1990s, were and still could be important factors. They contributed to sustain the
overall cumulative process of knowledge-based growth (including growth of
Innovation and STE) during the three decades leading to the year 2000.

The Mexican case focuses first on igniting an initial STE-Innovation coevolution

process in the country. This includes critical mass conditions for the prior
existence of a LLET attainable with limited STE-Innovation coevolution, and for its
transformation into a dynamic increasing returns process that could trigger and
sustain a much broader coevolutionary process. A major conclusion of this case is
that governments should pro-actively intervene in a coordinated way, both at the
system governance level and in assuring significant increases in resources to both
STE and Innovation. Piecemeal policies will bring only temporary relief without
setting the STE-Innovation system into a new, largely endogenous, coevolutionary
trajectory.

The conceptual framework stylizes three stages; Stage I refers to the Pre-
Conditions for achieving critical masses, while STE-I coevolution is limited; Stage II
considers the strengthening of STE-I coevolution through increasing returns,
capability development and emergence of specific financial/technical
infrastructures; and Stage III refers to the future growth trajectories that require a
re-configured STE-I coevolutionary process and widespread emergence. This
framework suggests that a simple policy focused on changes in STE and Innovation
capacity is not sufficient to assure a continued process of STE-Innovation
coevolution, and of innovation and structural change-based process of Economic
Development. Also required are: (a) adoption of a strategic perspective to
innovation policy, where increases in capacity become endogenous; (b) promoting
enhanced push and pull reactivity through changes in governance and enhanced
capabilities (this will generate increasing returns to coevolution); (c) promoting
Public Technological Institutes, Venture Capital and other infrastructures
supporting innovative SMEs and high-tech start-ups. Moreover it would be
eventually desirable to promote STE-Innovation link programs that directly
promote bi-directional coevolution (nor part of the current model). All of these
may make the process of STE-Innovation coevolution and economic development
more seamless and continued.

An explicative formal model of STE-push of Innovation and Innovation-pull of STE

(and of overall STE-Innovation coevolution) has been presented, in which critical
masses, learning and capability building directly affect push and pull. Overall
coevolution will also be stimulated by Exogenous, largely policy-led, components
such as a network of PTI and VC; by capacity enhancements in the area of STE and
by policy decisions to send students abroad to pursue advanced studies. In this
model, graduates/postgraduates from domestic STE or returnees from abroad play
an important role in nourishing the pool of qualified scientists and engineers,
specially as part of an early STE-thrust focus of Innovation Policy (broadly
defined). This could help create critical masses of both populations (directly of
STE, and through coevolution, also of I), hence generating the necessary conditions
for virtuous coevolutionary processes of STE and Innovation. The formal model
also emphasizes the role of domestic PTI in helping to train graduates, absorb
returnees and immigrants and generate other semi-public goods benefiting
commercial Innovation. Similarly VC could significantly leverage the growth
impact of conventional Innovation inputs. Together with other factors and
depending on context, both PTI and VC could contribute to generate a profile of
rather continuous STE-Innovation coevolution, one that could make a significant
contribution to innovation-led and structural changed-base economic growth.

The two cases analysed in this paper and other anecdotal evidence strongly
suggests that coevolution and emergence should not be ignored when analyzing
innovation and its impact on economic development. The possible importance of
emergence of new industries/markets/clusters or other Higher Level Organization
is consistent both with traditional views of innovation and structural change-led
economic development (e.g. Kuznets 1971, among many others) and with more
modern approaches which also consider coevolutionary approaches. Although
such processes are increasingly being accepted their nature and possible
implications for policy are not yet well understood.22 In this line, our work

22
See for instance Breznitz (2007a) for a comparative view of policies-business development coevolution
in IT industries of Israel, Ireland and Taiwan, Sotarauta and Srinivas (2006) for an analysis of Public
Policy-Economic Development in innovative regions in Finland, US and India, and Fagerberg, Mowery
and Verspagen (2008) for a preliminary analysis of the case of Norway.
suggests that coevolutionary processes may play important roles both in
generating adequate pre-emergence conditions for desirable structural changes
and as part of the emergence process itself. Moreover, the new emphasis on
qualitative aspects of growth and structural change enhances the importance of an
evolutionary targeting perspective (e.g. Avnimelech and Teubal 2008b) and policy
targeting in developing countries (see Rodrik 2004).

Section 6 explores the possibility to connect, from an analytical point of view, the
model of coevolution of STE and Innovation with the problems opened by the
Development Theory and the literature on growth cycles. These theories link
industrialization with development and the lack of structural change with the
possibilities of permanent oscillation of the economies. They motivate us to think
about the actual stylized features of those economies that are still in the way to
reach development, where their trajectories can suffer a fall back to even a decade.
The model proposed in this paper, based on the empirical evidence of two
innovation systems, seems to be a good base to open a way to explain these
problems. How much does the analysed coevolution constitute the core of the
linkages between income and investment as the base for development? Perhaps
this question could be a good starting point for a new research program.

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