What Turns Knowledge Into Innovative Products?


Investing in knowledge production, through R&D programmes, research institutes and universities, is widely seen as vital for staying competitive and fuelling a nation’s economic growth. Yet here in Europe the outputs sometimes seem to lag behind the inputs. What makes some countries far better at exploiting the knowledge they create than others? And what role do entrepreneurs play in transforming knowledge into viable commercial innovations?

Knowledge production alone is not enough, says Jörn Block, Professor of Management at the University of Trier and an associate member of ERIM. “You need the knowledge, but you need also the entrepreneurs who turn that knowledge into products and an environment which helps that to happen. If all you have is a large knowledge base, you most likely won’t have genuine innovation.” 

This was a central finding in a recent study of innovation across Europe, carried out by Block and colleagues Professor Roy Thurik of the Erasmus School of Economics, and Dr. ir. Haibo Zhou of the University of Groningen.

“We wanted to apply the knowledge spillover theory of entrepreneurship to see what effect entrepreneurship has in turning knowledge into different innovation outcomes,” says Block. “Our focus was on the commercialisation phase, and we distinguished between ‘true’ innovation, i.e. new to the market, and imitative-type innovation, i.e. new to the firm.” 

‘Knowledge spillovers’ can be seen as an intrinsic part of idea creation and diffusion. “Once you create knowledge, it becomes a public good: everyone can benefit from it,” says Block. While spillovers can be highly beneficial where ideas are exchanged and are built upon in clusters of rival firms – and are what makes areas like Silicon Valley such hotbeds of innovation and magnets for investors – the diffusion means that the commercial benefits of innovation may also be realised far from where the idea originated. The jobs and growth may not necessarily occur in the region where the knowledge was created. 

Using data from a European Commission community innovation survey which monitors innovation over four-year periods across all 21 member states, the team analysed the level of knowledge intensity in the manufacturing sector in each country, – for example, what share of those firms applied for patents. They also examined the extent of innovation activity, looking at how much of the overall turnover was attributable to new-to-the-market and how much to new-to-the-firm innovation. They found a strong correlation between a country’s knowledge intensity and its level of innovation output. They also looked at the levels of entrepreneurship within each country, as determined by levels of business ownership.

What their analysis revealed was that entrepreneurship is indeed important in the commercialisation process but only for ‘true’ innovation. In new-to-the-firm innovation, however, it plays no discernible role: while knowledge is important here too, this type of innovation requires a different set of skills, such as excellence in production.

Large firms are typically skilled at managing the incremental innovation involved in constantly refining existing products or developing modified versions of competitor products, explains Block. Smaller firms tend to be more adept at pushing the envelope with more radical new products and technologies – perhaps because they can deal better with the risk and uncertainty involved, but also because the relative costs of experimentation may be lower.

With more radical innovations, the outcome of the commercialisation process is often uncertain: “it requires some risk-taking among those managing the process, making the entrepreneurial attitude important at this stage,” says Block.

In the decade covered in the study (to 2006), the researchers also saw a trend towards more new-to-market innovation as against new-to-firm, which Block attributes to the increasing importance of entrepreneurship within Europe. “When you compare the economies of countries with a lot of small firms, as in Germany with its strong ‘Mittelstand’, as against those with very few – a ‘managed economy’ consisting largely of big firms, as in France, for example – then you will also find more innovation. More ‘real’ innovation, because the entrepreneurs and the small and medium-sized firms are often the ones who take the risk.”

In terms of government innovation policy, he draws some important lessons from their findings. Firstly, consider carefully where to site knowledge-production initiatives. Despite globalisation, geographical proximity remains important – especially for knowledge-intensive firms. Research shows that many innovations still come from within the local neighbourhood: the knowledge spillover effect means there can be greater synergies if people working on similar or complementary ideas are located close together.

Infrastructure is vitally important where the objective is to create growth and jobs. When establishing a technology cluster, you should always ask Where are the entrepreneurs who are capable of turning those inventions into products? Where are the venture capitalists who will finance the period when no sales are being made and no profits are being generated? 

“If there are only a few entrepreneurs in a knowledge-intensive region, it is likely that commercial opportunities will remain under-exploited or will only be exploited outside the region. In any case, profits will not flow back to the region in which the knowledge was produced.” 

And finally, support for entrepreneurs needs to be carefully targeted. Simply encouraging more people to become entrepreneurs is unlikely to yield real results for innovation:

“For effective use of resources, governments should focus on supporting those who are genuinely transforming new knowledge into innovative products rather than those who merely want to set up another corner shop.”

<link people joern-block>Joern Block is Professor of Management at University of Trier, an associate member of ERIM and part of the Erasmus Centre for Entrepreneurship Research. He is also a Visiting Professor in the Department of Applied Economics at the Erasmus University Rotterdam.

<link people roy-thurik>Roy Thurik is Professor of Economics and Entrepreneurship in the Department of Applied Economics at the Erasmus School of Economics and a Fellow of ERIM.

<link doctoral-programme phd-in-management phd-projects detail>Haibo Zhou is an Assistant Professor in the Faculty of Economics and Business at the University of Groningen and an ERIM PhD alumna.

‘What Turns Knowledge Into Innovative Products?’ by Joern Block, Roy Thurik and Haibo Zhou was published in the Journal of Evolutionary Economics in February 2012.