TECHNOLOGICAL INNOVATION AND THEORIES OF REGIONAL DEVELOPMENT

by Matthew A. Zook March 17, 1997 Inside Field Statement Department of City and Regional Planning University of California-Berkeley

Committee: Prof. AnnaLee Saxenian, Chair Prof. Manuel Castells Prof. Michael Teitz

Table of Contents Introduction and Overview Traditional Theories of Regional Development Location Theory / Agglomeration Disequilibrium / Cumulative Causation Growth Poles A Brief Review on Theories of Technological Innovation Insights of Schumpeter and Solow Creation and Diffusion of Innovation Integrating Innovation into Theories of Regional Development Structural Theories Product/profit cycle Long Cycles/Waves

Path Dependency Restructuring of Production and Labor Systems Role of Manufacturing and Services Division of Labor Flexible Specialization, New Industrial Spaces, and Institutions Regulation School and Flexible Production New Industrial Spaces Institutions and Embeddedness Conclusion: Emerging Debates

Introduction and Overview

Technological innovation and regional development are two closely intertwined processes that shape and support the other. Although both originate from economics, they have been separated for most of the 20th century. Classic economic thinkers such as Ricardo recognized the role of technology, albeit he saw diminishing returns to agriculture and capital formation as more important, and Marxs theory placed technological innovation as one of the prime movers in capitalist development. Regrettably early theories of regional development, e.g., location theory, followed Ricardos lead and treated technological innovation as secondary in relation to other conditions, such as labor to capital ratios. Location theory strove for optimal resource allocation and ceteris paribus assumed unchanging technology that was freely available and instantly adapted by firms and countries. The process of invention becoming innovation and diffusing simply was not reflected in this model. Instead, location theory focused on transportation costs. More complex models of location emerged with Isards work on a general equilibrium model of industrial location but were immediately confronted by two important critiques. The first was a critique of the assumption of balanced growth and the price-equalization mechanism that would result in similar development across regions. Hirschmans thesis on unbalanced growth and Perrouxs concepts of growth poles in economic space were important trends in this critique. The second critique grew out of the exclusion of innovation in traditional location theory. Based and inspired by the work of Schumpeter who posited that innovation was the source of economic expansion, this trend based in the field of economics began looking seriously at the role of innovation in growth. Later scholars continued Schumpeters work and at the emergence of Isards general equilibrium model were able to argue forcibly that technological change was a major determinant in increasing industrial output. The work on the economics of innovation has continued to the present with debates on whether innovation is driven by market-demand or technology-supply; the nature of innovative firms and regions, and how innovation if diffused between firms and regions.

With the crisis of major manufacturing regions in industrialized countries during the 1970s, these two critiques of static location theory models evolved, combined and emerged in a series of schools of thought and debate. For purpose of organization I have classified them in three broad generalizations: 1. Theories of structural determinants of change (profit cycle, long cycles, path dependency); 2. The restructuring of production and labor systems (post-industrialism, informationalism, and division of labor); and 3. Flexible Production, New Industrial Space and Institutions. This inside field statement is an attempt to trace the history of theories of regional economic development and how the issue of technological innovation has been treated. Early models discounted its importance but as this proved to be highly abstract from reality, theories have evolved to make the phenomenon of technological change an endogenous part of regional development.

Traditional Theories of Regional Development

The first section outlines the history of the early thinking on industrial location and regional development. Many of these theories were applications of neo-classical economics to a spatial context. Location Theory / Agglomeration The start of the twentieth century marks the beginning of the modern formation of social science disciplines including regional location theorists. Ironically, the early thinking on spatial location occurred at the same time that other social science disciplines, most notably economics, were pursuing a strategy which ignored space. The two main approaches of the location theory school were minimizing costs as per neo-classical economics and the analysis of spatial variation in demand and how monopolies can develop The first location theorists designed models that used a few sets of primary inputs, raw materials and transportation costs, as the principle determinants of location of industries. The idea of transportation costs challenged Ricardos formulation of land rents based on fertility, e.g., von Thunens (1966) argument that transportation costs make land near markets more valuable than peripheral land. This formulation was the basis for decreasing land rent curves as distance from a central market place increased. Marshall (1892) asserted that once established, these central places were likely to persist as industrial districts because the mysteries of the trade were in the air which in turn created highly skilled labor pools and an ability to innovate. Alfred Weber (1909, 1929) expanded upon the concept of spatially-differentiated costs with the idea that production costs can also vary across space. His model consisted of three interlinked determinants of costs starting first with transportation but including the cost of labor and the savings from agglomeration economies. Based on its inputs and markets,

each industrial sector would have a transportation minimization point that could be shifted to take advantage of labor cost differentiation and/or agglomeration benefits. Webers model assumed perfect competition which in turn would spatially distribute industry according to the three levels of costs. Hotelling (1929) argued that this perfect competition ignored the monopolistic characteristics enjoyed by firms close to markets who could have competitive advantage to more distant competitors due to lower transportation costs. Thus, firms would choose to locate to maximize their quasi-monopolistic market which would result in a sub-optimal solution for society and contrasted with what was predicted by perfect competition models. Lsch (1954, 1975) and Christaller (1933) extended the theory of market size to explain industrial location as a product of monopolistic markets for products. In order to locate, a firm needs a threshold market size that can support its production. When the market size increases other firms may enter the market to compete for customers. Different industrial sectors have differing market size thresholds but these markets overlap and influence one another through agglomeration. What emerges is a static honeycomb market structure in which each firms market area is packed next to neighboring firms that maintains an equilibrium through readjustment of market size if an individual firms reach expands or contracts. The theories thus far discussed were the origins of the discipline of regional science exemplified in the work of Isard (1956, 1982) who built sophisticated models of regional industrial growth with multiple interrelated factors. One example of this increasing sophistication, is Isards unification of Webers production and transportation costs in the recognition that firms might assume greater transportation expenses if the location lowers the overall production costs. However, Isards attempt to construct a general equilibrium model for industrial location was criticized for assuming that regions have a natural tendency to equilibrate, for its inability to reflect the unique histories of regions, and for its exclusion of non-quantifiable factors, such as technological change. Disequilibrium / Cumulative Causation In an attempt to correct the shortcomings of Isards model of the location theory school (due in part to the shrinking percentage of transportation costs in the overall production costs) and to critique neo-classical theories of comparative advantage, a school of thought focused on disequilibrium emerged. Chinitz (1961) calls for a recognition that the actions of one industry can have significant impact on other regional industries through its purchasing or internalizing of distribution activities and other services. Rather than seeing spatial distribution as transitory and equalized through the price system, Myrdal (1957) and Hirschman (1958) argued that region-specific external economies persist through cumulative causation and polarization effects. Kaldor (1970) asserts that the difference between regions efficiency wage, i.e., the combination of labor productivity and money wage, feeds into the process of cumulative causation. Regions that had acquired stocks of factor inputs and external economies were at a decided advantage for future growth.

However, one of the most vexing problems for both equilibrium and disequilibrium models was their inability to explain growth satisfactory. Regardless of the two theories conflicting ideas of how this growth was distributed, both tended to treat growth as an exogenous factor which could equalize or polarize regions. One technique for explaining growth is the theory of the pole of development that was first voiced by Perroux. Growth Poles Perroux (1950, 1970, 1988) based his ideas on the theory of active units which assumes that under certain conditions actors have the capacity to change their environment. The state of general equilibrium that Isard highlighted was viewed by Perroux as a momentary state at best that quickly segues into a new situation. Perroux set his poles of development in economic space, as opposed to physical space, and conceptualized these poles as centers of the most intense economic activity. The poles were linked to other sectors with varying degrees of strength determined by proximity in economic space. Thus, a pole of development can produce polarization in leading sectors with corresponding growth consequences for close or distant sectors. Although Perroux set his poles in the abstract notion of economic space, regional development theorists, such as Friedmann (1966, 1972), applied these theories directly to physical space with the concept of growth poles. However, as Peattie (1987) illustrates these growth poles generally created disappointing results. Heightened expectations of the benefits of growth poles, over-estimations of external economies and governmental politics affected the ability of governmental sponsored growth poles to turn lagging regions into leaders. Gore (1984) critiques the growth pole development strategies put forth by Friedman for confusing place prosperity with people prosperity. Gore argues that by presenting spatial relationships as a technically rational lens of analysis one actually masks crucial social relationships. Connected to the idea of sector growth poles was the debate between export versus importsubstitution theories of regional development. Although a large segment of this debate took place in the arena of import substituting industrialization (ISI) in developing countries Kay (1989), Hirschman (1968), Hunt (1989), it was also germane to growth of regions in general. For example, Innis (1930) provides a striking example of how Canadas reliance on the export production of fur had large repercussions on transportation infrastructure, governmental and business institutions and its relationship with other countries. In a classic regional development debate on exports, North (1975) contends that all regions grow from exports that provide the income from which internally-focused markets in goods and services can develop. North based his argument on the history of the Pacific Northwest which appears to support his theory. Tiebout (1975) argued that Norths export-base argument is the exception rather than the rule and undervalues the role of domestic oriented industries that play a pivotal role in supporting the export sector. While the debates around growth poles and export/import models greatly enhanced the ability of regional theories to explain the growth of regions there still remained a black box around innovation. Perroux implicitly recognized and Berry (1972) explicitly argued that firms

innovations provided the impetus for a pole of development that could spread to other firms. However, it was left to another set of scholars operating parallel to the regional theorists to tackle the issue of the source, nature and role of innovation.

A Brief Review on Theories of Technological Innovation

The previous section ended with an assertion that innovation is a key component in regional development and essential in explaining patterns of growth. The equilibrium and disequilibrium theories outlined so far fall short in unpacking the black box of innovation which puts them in good stead with most of their contemporaries in economics. Although Adam Smith emphasized the role of innovation and Marx saw changing systems of production as the key component to controlling relations of production, most economists in the first half of the 20th century were content to treat innovation as exogenous factor without explaining it. This section will trace the theoretical history of those who attempted to analysis this concept. Insights of Schumpeter and Solow The notable exception to this rule was Schumpeter (1928, 1939) who saw innovations as perpetual gales of creative destruction that were essential forces driving growth rates in a capitalist system. Schumpeters thinking evolved over his lifetime to the extent that some scholars have differentiated his early thinking where innovation was largely dependent on exceptional individuals willing to take on exceptional hazards as an act of will, i.e., entrepreneurs, from his later thinking that recognized the role of large corporations in organizing and supporting innovation. This resulted in his emphasis on the role of oligopolies in innovation and which later was falsely viewed as the main contribution of his work. (Freeman, 1994) Schumpeter (1928) pointed to the discontinuous and disruptive nature of technological change in capitalism that brings the inseparable combination of short-term instability and long-term growth. He was not a technological determinist but recognized the social and organization forces that played key roles in his cyclical process of industrial change. Schumpeter argued that entrepreneurs, who could be independent inventors or R&D engineers in large corporations, created the opportunity for new profits with their innovations. In turn, groups of imitators attracted by super-profits would start a wave of investment that would erode the profit margin for the innovation. However, before the economy could equilibrate a new innovation or set of innovations, conceptualized by Schumpeter as Kondratiev cycles, would emerge to begin the business cycle over again. For all his insight on the role of innovation, Schumpeter still did not really explain the source of innovation. He was able to point to its importance and its role in timing economic cycles but did not address its source. This rather interestingly allowed Keynesian economics to argue that levels of investment were the cause of innovation. It was not until the 1960s that economists would begin again to search for the source of innovation. The importance of innovation was highlighted by researchers like Abramovitz (1956) and Solow (1957) who were able to demonstrate how little neo-classical economics

was able to explain. Based on data on the United States economy from 1909-49, Solow showed that only 12.5 percent of the increase of per capita output could be traced to increased use of capital. This left a surprisingly large 87.5 percent residual that Solow attributed to technical change. Romer (1986, 1994) echoes Solows observation and continued the call for innovation theorists to internalize the process of innovation within their models. To this end, the work on innovation that emerged from the base set by Schumpeter has been concentrated on the creation of innovation and its subsequent diffusion between firms, industries, and regions. Creation and Diffusion of Innovation The first step in understanding the source of innovation is to understand the relationship between research and development (R&D), invention and innovation as defined by Freeman (1982). R&D is a method that uses knowledge based in science or craft to create a new product, process or method of organization. An invention is an idea or model for a new process or product that can be patented. Finally, an innovation is a commercial viable use of an invention. One of the most difficult aspects of innovation research is that innovations vary from small incremental steps to radical changes. Radical innovations are more attention grabbing but incremental changes can prove just as crucial in the long run. Therefore, because innovation can be incremental or radical; involve a process or product; and is highly correlated with changes in organizational structure, attempts to empirically measure it are extremely problematic. Counting patents, expenditures on R&D, and firm size are at best proxies for innovation that can provide some insight but should not be viewed as truly representative (Freeman, 1994). Freeman argues that starting in the 19th century the nature of R&D has shifted from craft orientation to a more science based approach characterized by greater complexity of inventions and innovations as well as an increasing division of labor between R&D and production. Science plays a role in providing trained personnel for R&D rather than through published papers. Using this definition of innovation and assuming that the majority of innovation comes from firms, economists during the 60s and 70s engaged in debates on the force that drove this innovation. Schmooklers (1966) study of chronology of inventions in major industries argued that market demand rather than scientific discovery was the stimulus for invention. Although Schmookler concentrated on invention and not directly on commercially successful innovations, his study provided a theoretical justification of a market-pull model where innovation was based on the demand of the market. Although popular in neo-classical economics for its reliance on market explanations, the market-pull explanation was shown to have weak empirical backing. Mowery and Rosenbergs (1979) review of empirical studies on the relation between market-demand and innovation provided a convincing repudiation of a linear process of innovation driven by the market. Although there have been arguments for a technologypush model of innovation, the current theories of innovation also reject a linear supply model. Von Hippel (1988) asserts that in fact the source of innovation varies greatly with some originating from users, others coming from suppliers, and some emanating from

manufacturers. Mowery (1983) showed that firms developed internal systems of R&D because of the short-comings of market distribution of information as well for reasons of secrecy and competitive advantage. Gort and Kleepers (1982) study suggests that there is no equilibrium number of firms in the market of a new product and the entry of firms depends on profit expectations and the ability to capitalize on information and innovations not proprietary to existing firms in the market. Pavitt (1984) identified four major types of innovating firms in manufacturing: 1) Supplier dominated sectors which have mainly process innovations such as textiles; 2) Specialized supply sectors which have product innovations that are the inputs of other industries such as engineering equipment; 3) Scaleintensive sectors with both product and process innovation through capital intensive investments and 4) Science-based sectors that are directly linked to new scientific discoveries such as the electronics industry. As Dosi (1988) argues, the economic incentives for firms in different industrial sectors vary greatly. Dosi (1982, 1988) extends this argument by defining a system consisting of technological paradigms that are patterns for solutions based on selected principles of natural science and technological trajectories that determine the spread of innovations based in a particular paradigm. Another way of expressing this is that technological paradigms are radical innovations that necessitate changes in the wider institutional context and technological trajectories are incremental technological progress. Nelson and Winter (1982) use a similar conception, the technological regime where innovation and growth are evolutionary (past decisions combine with current cost to set up routines for firms to proceed) and incremental (because of cost and uncertainty of new knowledge). Nelson and Winter argue that firms choose a trajectory on the basis of their selection environment which includes market demand and non-market intersectoral variations in the institutions of innovation (R&D, government support, etc.). Each individual firms decision in turn shapes its market sector which affects the nature and routinized behavior of their competitors. Their formulation makes a link between the macro analysis of what is occurring at the market, regional or national level and the study of innovation generation at the micro or firm level. Another model for the creation and diffusion of innovation is based on the linkages between sectors in the generation and modification of innovations similar to Nelson and Winters (1982) selection environment. The flow of information between sectors and the ability to adapt new innovation to a firms own environment is emphasized. Cohen and Zysman (1987) pointed to this interlinkage as a vital component of a regions or countrys competitiveness. However, there is no magic formula that will guarantee that a firms new invention will become a commercially viable innovation. As Rosenberg (1982) argues that being the first to produce a product does not guarantee that you will be the winner and inventions that have lain unused for years may suddenly be found to be profitable innovations as circumstances evolve. Innovation diffusion is influenced by a number of factors such as industrial structure, firm strategy and governmental policy. Hagerstrand (1967) modeled diffusion by building up the random patterns that emerged from numerous independent decision-makers reaching their own conclusions about what to do. Arrow (1962) argued that firms acquire new

innovation through actually experimentation with new technologies, i.e., learning by doing. Manfields (1961) econometric analysis suggests that the rate of imitation was correlated with relatively low sizes of investment and large expected profits. Freeman (1982) suggests that a good understanding of users needs is critical for a firm to become a successful innovator. Rosenberg (1982) echoes this sentiment by describing diffusion as a cumulative and interactive process between users and suppliers of a new innovation. In conclusion, this review of the literature of the economics of innovation is remarkable in its contrast to the equilibrium and disequilibrium models of early regional development theories. Rather than a general model recent innovation literature such as Romer (1994) suggests an endogenous dynamic of innovation that is highly dependent on the specificities of a sector or regions technological capability, history, firm characteristics and the incremental nature of much of the innovation process. Romer notes these types of qualities are notoriously hard to quantify but in order to understand innovation and its impact on regional development they are characteristics that need to be used.

Integrating Innovation into Theories of Regional Development

This section picks up the history of regional development in the seventies when the world underwent a process of complex change. This transformation was greatly influenced by a new cluster of technological innovation centered on the use of microelectronics in a number of products and production processes. These innovations had a great impact on regional economies and theories of regional development which applied the insights of Schumpeter and other thinkers on innovation to regional development. The first section looks at arguments that attempt to incorporate innovation into structural patterns of the capitalist system. The second looks at the work on the restructuring of production and the increasing presence of the service sector. The last section deals with the debates revolving around the idea that a new form of industrial structure is emerging that is measurably different from those that have come before. Structural Theories The next section outlines three of the most direct applications of theories of innovation to regional development. In contrast to traditional location theories, product/profit cycle, long waves, and path dependency rely directly on the phenomenon of innovation. Product/profit cycle Vernon (1966) developed a product cycle theory based on trading patterns in the United States to explain the distribution of economic activities. Product cycle is based on the idea that a product passes through several stages in its production life from an early innovation where high levels of skilled inputs are required to a growing standardization that lends itself to mass production. Thus, in the early phase of its life the production of a product will be located in a region that is equipped with highly skilled labor and gradually be shifted to low-wage national or international regions when its production stabilizes.

Vernon argued that in order to understand a regions economic vitality, one had to look at what stage in the product cycle its industries were rather than whether they belonged to innovative sectors. Although Vernons theories were in line with cumulative causation, later studies, Nelson and Rees (1979) and Krumme and Hayter (1975), used the lens of product cycle analysis to argue that regions were on a convergence trajectory. Markusen (1985) took a third path with her reformation of product cycle theory into profit cycle theory in which firms location production facilities in an effort to maximize profits. Markusens profit cycle argued for a generic tendency of rapid growth, followed normalcy and then decline which could be influenced by oligopolies to the determinant of regional economic health. Markusen argued that industrial development is no longer synonymous with regional development and that industrial oligopolies could retard the spread of innovation. However, product/profit cycle models have come under critique for being too deterministic and excessively linear. Vernon (1979) later argued that the increased geographical reach of firms and changes in the national markets of industrialized countries was eroding the applicability of product cycle theory. Storper (1985) argues that cycle theory overgeneralizes a process that occurred only in a few industries after W.W.II and ignores the potential of firms to do continuous innovation. Long Cycles/Waves Another school of regional development thought influenced by innovation is based on the idea that capitalist development is not a linear process but a cyclical series of waves. Kondratiev (1935) was the first scholar to identify regularly occurring structural cycles although he did not implicitly identify technology as the cause. It was Schumpeter (1939) who first argued that a cycle of technological creative destruction was responsible for cyclical trends in capitalism. He also identified three waves based respectively on 1) textiles 2) railroads and steel, and 3) the electrical and automotive industries. Later authors, such as Hall (1985), have identified a fourth wave based on aerospace and have speculated on a fifth wave based on microelectronics. Mensch (1979) tried to document the phenomenon of innovation clusters and argued that depression encourages radical innovations and innovation cycles peak at the end of each Kondratiev cycle. Mensch argues that firms undertake innovative activity when they are unable to generate profits from older product with saturated markets. Rosenberg and Frischtak (1983) critique Mensch for his classification and dating of innovation, a quandary common to all scholars of innovation, and argue that an economic downturn would make firms more cautious about committing resources aimed at long-term benefits. They also fault long-wave proponents for non-specificity in identifying the causal links between innovation, investment and growth and the problem of measuring the effect of innovations that is mediated by diffusion rates and incremental improvements. Other critiques of long waves have argued that it is overly technologically deterministic (Freeman, 1982) and/or that it has missed the importance of incremental innovation and the process of cumulative or evolutionary innovative process. (Rosenberg, 1982)

Path Dependency In the late 1980s a new set of neo-classical economists has rediscovered geography and have attempted to include space in their economic models. These path dependency theorists contrast the preordained spatial ordering envisioned by the Location School with their model of a historically dependent trajectory with multiple possible outcomes. While recognizing that the cumulative causation school did address the effects of history on regional development, theorists such as Krugman (1995), argue that until recently economists did not have the proper techniques to rigorously model the effects of increasing returns to scale. Arthur (1988) and Krugman (1991) provide models of regional development in which outcomes are not preordained but dependent on the historical chance siting of the first firm in an industry. This provides a lock-in, i.e., the QWERTY principle, to this location that encourages further growth there. This lock-in effect and unbalanced sectoral rates of technological progress are the basis for Williamsons (1980) account of US regional inequality. Martin and Sunley (1996) provide a critical assessment of the path dependency school in general and of Krugman in particular. In the effort to provide rigorous mathematical formulations of geographical economics, Krugman and Arthur have the standard failings of abstraction inherent to equilibrium analysis and deductive model building. More importantly, Krugman is unable to adequately explain why successful regions can suddenly go into decline or why some regions are more adept at withstanding external shocks. Sabel (1995) argues that path-dependency in technology is too deterministic in the range of choices it allows economic actors. Sabel and Sabel and Zeitlin (1985) argue that actors scan multiple strategies at both the local and super-local level to select a solution, often a hybrid between technologies or processes, that best suits their needs. Restructuring of Production and Labor Systems This section concerns theories of the transformation of production and labor relations due to product and process innovations the greatly affected the economy during the late 60s and 70s. Both the post-industrial debate and the New International Division of Labor debate are directly tied to the emergence of a new generation of innovation. Role of Manufacturing and Services The two sides of the role of manufacturing and services debate are the post-industrial position represented by Touraine and Bell and the primacy of manufacturing position exemplified by Cohen and Zysman. The post-industrialist position argues that as an economy develops it shifts its main activities from the primary and secondary sectors to the tertiary or service sector. Based on the empirical studies of Fisher and Clark and Kuznets, post-industrial theorists like Touraine (1971) and Bell (1973) argue that a new society is emerging that is no longer fundamentally defined on the basis of industrial activity. Knowledge and education gain new importance in both production and social conflicts that are based on the control of information.

The primacy of manufacturing camp argues that the post-industrial society is a myth and that manufacturing continues to play an explicit and critical role in economies. Cohen and Zysman (1987) argue that without manufacturing, high-wage service jobs would not develop and that shifts to a service economy are an indicator of a declining rather than growing economy. The service sector is dependent on manufacturing for it existence and any country that is content to offshore its production loses the strategic combination that makes it grow. In this way, Cohen and Zysmans strategic sectors are similar to Perrouxs propulsive industries in that they are the pole around which an economy develops. Castells (1989) added his own flavor to the post-industrial theory by arguing that a new informational mode of development has emerged in which the "matter" that is being worked upon is knowledge itself. The machines (hardware) have become less important than what passes through them (software) and the main innovations are on processes rather than products. These changes on processes have multiplier effects on society because processes enter into all spheres of human activities. As information rises in importance, industrial processes do not so much decline as become periphery to the core of information processing. This central core of information guides the production process and influences the consumption process through distribution networks. Sassen (1991) argues that an expansion of producer services, i.e., services that are intermediate inputs and not final consumption products, are redefining the nature and location of production systems. Manufacturing continues to play an important role but it is increasingly subservient to the financial and producer services complex that is ultimately not concerned whether manufacturing occurs locally, regionally, nationally, or internationally. One of the biggest problems for the post-industrial school was that the classification of services that included all economic activities besides manufacturing and primary industries. This coupled with a linear approach and inability to formulate precisely the manner in which services drive an economy has weakened the post-industrial argument. However, the primacy of manufacturing approach is overly-subjective on its valuing of services and has data comparability problems with cross national comparisons between the USA and Europe and Japan who have relatively higher proportions of manufacturing in their economies. Finally, as Castells and Aoyama (1994) show that the paths of development of various countries can be quite divergent and take many different forms. Division of Labor A necessary component to the restructuring of the production process are activities such as mergers, plant relocation and rationalization of multi-plant production which as Bluestone and Harrison (1982) argue has serious repercussions for labor relations. Massey (1979) define this process as de-industrialization characterized by a shift from sectoral specialization to a division based on functional specialization in the overall production system. The result of this division of labor has spatial implications for innovationgeneration as regions gain or loss the ability to create innovation as function of control and R&D are separated from production.

Although division of labor has always existed, this expanding spatial component can be directly tied to the emergence of new telecommunication technologies which enable firms to operate across much vaster distances. Precipitated by the economic crisis of the 70s, Froebel, Heinrichs, and Kreye (1979) argue that the these processes and organizational innovations allow the formation of a New International Division of Labor (NIDL). The theory of NIDL asserts that the principle direction of technological change is towards the separation between innovative functions and low-skilled production. Massey (1984) argued that these new spatial structures of production were not just an outcome of industrial restructuring but an integral part of the reproduction of society and it dominant relations. Because Masseys theory is based in the industrial and spatial specifics of each case she is reluctant to argue for one specific model but cautiously put forth examples of how spatial hierarchies in managerial, production, and control can influence the distribution of production. Shaiken (1984) echoes the sentiment that uses of new technological innovations do follow any set path but emerge through the interaction of labor, management and technology. More recently Sassen (1988, 1991, 1994) argues that as mass production facilities have dispersed the command and control functions of production have concentrated in cities. Concurrently, immigrants enter the economy both through low-wage service jobs related to the social reproduction of the members of the producer services and in the new manufacturing sectors (as opposed to traditional mass production) so that capital can extract further concessions from labor. Thus, a more bifurcated society than had existed under the regime of mass production emerges from these processes: a slowly increasing group of elite, a shrinking middle class, and a burgeoning underclass. Flexible Specialization, New Industrial Spaces, and Institutions This section continues concentrates on the effect of innovations in the production and labor system based on the work outlined above. Although much of the work in the previous section could be included here, the attempt of this section is to focus on more recent theories that revolve principally around the new forms of industrial districts and agglomerations. Also, in contrast to the de-industrialization and NIDL theories, this sections arguments present a more optimistic view of the restructuring process. Regulation School and Flexible Production One school of thought that attempts to combine the unique character of every region with the reconfiguration of production is the French Regulation School. In this effort they define collective and individual behavior that supports the reproduction fundamental relations, as modes of regulation. These modes of regulation support specific regimes of accumulation that consist of combinations of modes of production, organization and labor reproduction. The dominant regime of accumulation from the 1920s to the early 1970s had been the Fordist mass-production model. Theorists of the regulation school argue that starting in the 1960s the United States and other OECD countries have entered a new regime of accumulation that has fundamentally altered the organizational, production and consumption patterns of society. (Boyer, 1990) For this reason Regulation theory is often

referred to as post-Fordist and in many ways was the precursor to the theories of flexible manufacturing outlined in the next section. (Hirst and Zeitlin, 1991) The great strength of regulation theory is that it allows for great flexibility in explanation of economic growth processes and is not deterministic. However, this is also the source of one of its strongest critiques, namely that it is description and not a theory and is analytically weak. Others argue that the post-Fordism that regulationists see has not actually become the dominant regime of accumulation or is simply an extension of the Fordist division of labor. (Amin, 1994) (Kotz, 1990) Emerging from the Regulation Schools thesis of a new regime of accumulation is the idea of flexible specialization first developed by Brusco (1982) and then expanded upon by Piore and Sabels (1984) highly influential work. They argue that an industrial divide occurs when the technological trajectory used in an economy is called into question. (In this formulation Piore and Sabel use a much broader definition of technological trajectory than Dosi.) However, the shift to a new technological trajectory is not based on an inherent technical logic but rather the result of an implicit collective choice. (Sabel and Zeitlin, 1985) The first industrial divide occurred in the 19th century when mass production techniques displaced the previous system of craft production. Their contention is that currently a second industrial divide is underway as mass production is replace by a system termed flexible production, i.e., the use of general purpose capital and skilled labor to produce a changing product line. Flexible specialization argues that there is a reemergence of industrial districts, e.g., the Third Italy, similar to those first discussed by Alfred Weber in the 19th century. (Sabel, 1988) (Storper and Harrison, 1991) That is, agglomerations of industries in regions that are highly interconnected and resemble a factory without walls. These districts are characterized by numerous small firms, often started by former workers, who service small, specialized markets. Because they do not have the capital investment to enjoy economies of scale, they concentrate on rapidly changing batch manufacturing. Companies acquire flexibility through short-term labor contracts and inter-firm cooperation that allow production to expand or contract depending on demand. Labors position is maintained by the need for skills and institutional processes that regulate labor relations. Thus, proximity to other firms and institutions play an important role in determining a region's success with the flexible production regime. Flexible specialization has been critiqued as excessively optimistic in the progressive nature of this system of production. In particular, Harrison (1994) argues that greater wage insecurity and income differential have created a contingent work force that may persuade firms to compete on the basis of low wages rather than the regional networks that helped to create a productive atmosphere. Pollert (1988) critiques flexible specialization for an ideological stance that is anti-labor and places the responsibility for economic recovery on restructuring labor relations. New Industrial Spaces

The new industrial spaces argument, typified by Scott (1988a, 1988b, 1993) builds upon the flexible specialization model with particular emphasis on transaction costs, and economies of scale and scope. Transaction costs or the cost of economic transactions determines whether firms choose a vertical or horizontal form of production. Scott sees vertical disintegration as an important part of developing external economies of scale that give increased flexibility to adjust to rapidly changing markets. The crisis of the 1970s increased the diseconomies of scope (it was more expensive to produce under a system of vertical integration) of large corporations and encouraged the growth of small firms. Scott argues that it is the standardization of a commodity or service which determines the necessity of spatial proximity to inputs and markets. The more irregular these are the more a region can benefit from the disintegration of vertical firm structure which would further attract innovative industries. In a nutshell, Scotts argues that the regime of flexible accumulation can best be thought of as transactions-intensive agglomerations of human labor and social activity." This idea of a new industrial space of innovative firms has introduced the idea of an innovation milieu that brings Schumpeterian ideas of innovation into a vertically disintegrated industrial space. Based on the compelling example of Silicon Valley, the idea explored in these theories is that the flexibility of the new space would be symbiotic with the creative destruction of innovation. Although Hall and Markusen (1985) and Castells and Hall (1994) have explored the characteristics of milieu and the attempts to recreate them it remains to be seen if these regional planning efforts can create the synergy necessary for the benefits. Institutions and Embeddedness Crucial to the theories of the Regulation school, flexible production and new industrial spaces is the concept and role of institutions and their embeddedness in society. For most of this century, economists and regionalists have conceptualized the atomized individual or firm operating in pure rational competitive environments. Social relations were discounted and did not enter the realm of analysis. Williamson (1975) was an early theorist who asked when economic functions are performed by the market and within hierarchical firm structures. His answer was that transactions that are uncertain, occur repeatedly, and require substantial interaction are those which will take place within firms. Williamson saw these transactions as requiring a higher level of trust and accountability that only could take place within a corporate internal structure. Granovetter (1985) in his seminal article on embeddedness argued that these relations of trust could and do appear within market transactions. He thinks that Williamson overstates the case for the power of hierarchies and argues that societal norms and expectations can create a set of embedded institutions that provide a mechanism for trust to be applied to complex market transactions. Recent work by Putnam (1993) on the efficacy of Italian regional governments provides an empirical example of the influence that society exerts of the functioning of the state and market. Putnam uses a concept of social capital, i.e., the sum of individual trust and community networks, which allows society to operate more efficiently and act as a lubricant that reduces the transaction costs. Putnam argues that

social capital can be built through networks of civic engagement and reciprocity. Through these incremental actions an environment of social trust is formed which offers institutions a more fertile and inviting civic society in which to grow. Sabel (1993) views trust as a precondition of social life and therefore asks not how trust can come from mistrust but how specific relations come to be viewed as trustworthy. Institutions operate best when they are viewed as a self-managed process that emerges from direct experience. It is the incremental changes that allow institutions to adapt rather than a structure of centralized decisionmaking that builds good institutions. Saxenian (1988, 1994) applies the institutionalist approach to argue the case of the growth or lack thereof in high tech industries in England, Boston and Silicon Valley. Her argument is that the regional based system of collective learning in Silicon Valley proved superior to the highly autarkic organization corporate structures of Route 128 or the governmental supported Cambridge, England high tech sector. Storper and Scott (1993) and Storper and Harrison (1991) also emphasize the important role that sets of institutions play in determining how and where technology is adopted. Locke (1995) examines the institutional networks in Italy and argues that successful industrialization relies on dense, egalitarian organizations of association.

Conclusion: Emerging Debates

The introduction of the role of innovation to theories of regional development has strengthened our analytical ability and provided new insights to the changing nature of our society. It is not necessary to believe in a deterministic structure like long waves to recognize that the past twenty years has profoundly reshaped the economy and the role of individuals, regions and national governments. Romer (1993) argues that economics needs a greater appreciation for the role of ideas, both revolutionary and incremental, in a regions or nations development. Romer highlights the role of collective action and institutions in facilitating the use of ideas. Both Swanstron (1996) and Sabel (1996) echo this concern for methods of governance as a critical component of development. This focus on changing institutional structures is also held by Ohmae (1993) who argues that we are witnessing the end of the nation-state and the birth of a new region state. Sassen (1996) suggests that innovations in telecommunications technology and global financial markets have destabilized and transformed many of the institutions upon which the concepts of sovereignty and governance are based. A large understanding gap exists around the impact of the Internet on regional development especially its ability to extend the distance across which meaningful interactions that build a dense institutional network that can be the basis of social capital. Castells (1996) explores the way in which society is increasingly polarized between the Net and the Self. Mitchell (1996) has found trends towards agglomerations of Internet activity in urban centers which suggest a strengthening of cumulative causation. Schonberger (1994) asserts that the emerging mode of production is based on firms' ability to compress time which undermines Fordist techniques of spatial decentralization.

Whatever the outcome of these nascent ideas it is clear that regional development theory has increased it complexity of analysis and consequently the richness of its findings. Regions, firms and innovations all possess unique sets of characteristics that must be recognized rather than assumed or generalized away. However, this is not an excuse for pure description without analysis. Theorists must simultaneously hold the paradoxical notions of uniqueness of place and the implications for research beyond its specific sphere.

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Conclusion: Emerging Debates

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