The future of the information society in Europe : contributions to the debate.
Date: 2007-08-13
Institutions: Institute for Prospective Technological Studies
Subjects: competitiveness, economic consequence, economic policy, information society, information technology, innovation, knowledge economy, research and development, social policy

T E C H N I C A L   R E P O R T   S E R I E S

The Future of the
Information Society in
Europe: Contributions
to the Debate

EUR 22353 EN

Institute for
Prospective
Technological Studies

The mission of the IPTS is to provide customer-driven support to the EU policy-making process by researching science-
based responses to policy challenges that have both a socio-economic as well as a scientific/technological dimension.

The Future of 
the Information 
Society in Europe:
Contributions to 
the Debate

Editors:

R. Compañó, C. Pascu, A. Bianchi,

J-C. Burgelman, S. Barrios,

M. Ulbrich and I. Maghiros
(IPTS-DG JRC)

2006

EUR 22353 EN

European Commission

Directorate-General Joint Research Centre

Institute for Prospective Technological 

Studies

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EUR 22353 EN

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ISSN 1018-5593

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© European Communities, 2006

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Acknowledgements

The  Institute  for  Prospective Technological  Studies  (IPTS),  one  of  the  seven  research  institutes  that 

make up DG Joint research centre, supports the overall formulation and implementation of appropriate 

Information Society strategies, policies, regulations and actions contributing to a competitive, innovative 

and inclusive European Information Society.

The flagship project ‘Foresight on Information Society Technologies in the European Research Area’ 

(FISTERA), has produced many results over the past few years (2002–2005) focusing on future and emerging 

information society technologies (IST), the specificities of the European IST research community and the 
future social contexts of the use of IST.1

FISTERA attempted to link these results to the wider issues concerning the economic dimension of 

ICTs; first to achieve a more complete and comprehensive view of IST implications and second to relate 

FISTERA conclusions to the existing economic concerns and body of thought that characterise much of the 

policy debate on ISTs. It is this dimension that will play an important role in generating value, and creating 
more and better jobs involving IST. This applies both to direct economic impacts of IST sectors themselves, 

and to the more general implications of the use of IST across all sectors of the economy.

To  this  end,  DG  JRC-IPTS  hosted  a  thematic  workshop  on  the  “Socio-Economic  Aspects  of  the 

Knowledge-based  Europe:  The  Role  of  Information  Society  Technologies  (ISTs)”  in  March  2005.  This 

workshop set out to diagnose the main problems for Europe in achieving the Lisbon 2010 objectives. It also 

aimed to elaborate on possible new initiatives which would go beyond conventional wisdom and which 

would  contribute  to  defining  Europe’s  future  role  in  a  globalised  society,  taking  into  account  the  socio-

economic drivers for better quality of life. After the Workshop, a number of well known economists were 

commissioned by FISTERA to write papers suggesting possible lines of analysis that were not included in the 

core FISTERA design, but which can be seen as crucial elements for a holistic view of the future of ISTs.

This report brings together the workshop’s most thought-provoking contributions to the debate on the 

future of IST in Europe. It suggests ideas that may evolve into possible policy options to increase Europe’s 

economic growth.

The FISTERA network was supported by the European Community under the FP5 specific programme 

for ‘research, technological development and demonstration on a user-friendly Information Society’ (1998-

2002). The FISTERA team and the editors would like to thank Mr. Pierre Marro and Mr. Khalil Rouhana 

(DG  INFSO)  for  their  continuous  support,  Ms.  Patricia  Farrer  for  her  invaluable  contribution  in  proof 

reading the final draft, and also the contributors to this report:

Mr. Emilio Fontela (Universidad Nebrija Madrid, Spain), Mr.  Jeremy Millard (Danish Technological 

Institute,  Denmark),  Ms.  Carlota  Pérez  (Universities  of  Cambridge  and  Sussex,  United  Kingdom),  Mr. 

Luc Soete (United Nations University (INTECH) and University of Maastricht (MERIT), The Netherlands), 

Mr.  Erik  Reinert  (Talinn  University  of Technology,  Estonia  and  Norwegian  Institute  of  Strategic  Studies, 

Oslo, NORWAY), Mr. Ilkka Tuomi (Oy Meaning Processing, Finland) and Mr. John Zysman and Mr. Tobias 

Schulze–Cleven (BRIE Berkeley Roundtable on the International Economy, USA).

1 

For more details, see FISTERA website http://fistera.jrc.es

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Finally we thank all those who attended the FISTERA workshop on “Socio-Economic Aspects of the 

Knowledge-based Europe: The role of Information Society Technologies (ISTs)” held on 10 -11 March 2005 

in Seville, Spain, for their active participation during the workshop, and and who contributed to the draft 

version of the synthesis report of this workshop:

Mr. E.  Bohlin (Chalmers University, Göteborg, Sweden),  Mr. C.  Buhigas Schubert (European Policy 

Centre,  Brussels,  Belgium),  Mr.  G.  Coomans  (Institut  de  Sciences  Mathématiques  et  Economiques 

Appliquees,  Belgium),  Mr.  W.  Drechsler  (Praxis,  Centre  for  Policy  Studies,  Estonia),  Mr.  P.  Duguid 

(University  of  California,  Berkeley,  USA),  Mr.  E.  Fontela  (Universidad  A  Nebrija,  Madrid,  Spain),  Mr.  N. 

Garnham  (Westminster  University,  United  Kingdom),  Mr.  P.  Gaspar  (International  Center  for  Economic 

Growth,  and  Budapest  University  of  Economics,  Hungary),  Mr.  K.  Guy  (Wise  Guys,  Brighton,  United 

Kingdom),  Mr.  P.  Havlik  (Vienna  Institute  of  International  Economy,  Austria),  Mr.  P.  Jarvis  (University  of 

Surrey,  United  Kingdom),  Mr.  M.  Piatkowski  (International  Monetary  Fund,  Washington,  USA),  Mr.  E. 

Reinert  (Tallinn  University  of  Technology,  Estonia),  Mr.  R.  Smits  (Utrecht  University,  the  Netherlands), 

Mr. L Soete (UNU-INTECH and MERIT, and University of Maastricht, the Netherlands), Ms. A. Szalavetz 

(Institute for World Economics of the Hungarian Academy of Sciences, Budapest, Hungary), Ms. L. Tsipouri 

(University of Athens, Greece), Mr. L. Van Langenhoven (UNU Comparative Regional Integration Studies, 

Ghent, Belgium), Ms. R Veugelers (Katholieke Universiteit, Leuven, Belgium), Mr. M Weber (ARC-Systems, 
Seibersdorf, Austria), and Mr. J Zysman (Berkeley Roundtable on the International Economy, University of 

California, USA).

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Table of contents

Summary 

1.  A Competitive Knowledge Society 

by A. Bianchi, C. Pascu, R. Compañó, J-C. Burgelman
A challenging starting point for Europe 
Towards a more creative economy 
IST-enhanced economic disruptions 
Considerations about the way ahead 
Concluding remarks 

2.  Re-specialisation and the Deployment of the ICT Paradigm - An Essay on 

the Present Challenges of Globalisation 
by Carlota Pérez 
ICT shaping, and being shaped by, the global context 
The recurring diffusion pattern of revolutionary technologies 
Installation and deployment: different conditions and behaviours 
Globalisation, market segmentation and the nature of the ICT paradigm 
The challenge of respecialisation in a globalised world. 
Policy actions towards a sustainable and cohesive globalisation 

3.  From Industrial R&D to ICT-based Innovation: the Social Policy Challenge 

for Europe  
by Luc Soete 
On the changing nature of technological accumulation and innovation 
Reflecting on the implications for Europe’s social model 
Conclusions 

4.  How do Wealthy Nations Stay Wealthy? Challenges for the European Policy 

Agenda 
by John Zysman and Tobias Schulze-Cleven 
Evolving models of production and competition 
Value creation in a digital era 
The European social model challenged and sustained? 
In lieu of a conclusion: the agenda for Europe 

5.  Beyond the Lisbon Strategy: Information Technologies for the Sustainable 

Knowledge Society 
by Emilio Fontela 
Technology trends and key new technologies 
Economic and social trends 
Economic implications and policies for the new technology wave 
Final remarks 

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6.  European  Integration,  Innovations  and  Uneven  Economic  Growth: 

Challenges and Problems of    EU 2005  
by Erik S. Reinert 
What is the situation in 2006? 
The  global  context:  the  backlash  of  globalization  and  the  backlash  of 
European integration as two sides of the same coin 
Europe’s deviation from Listian principles 
IST, different types of innovations and different effects on real wages 
Internal factors that determine the feasibility of the Lisbon Strategy. 
External factors that determine the feasibility of the Lisbon Strategy. 
Conclusion: A plea for the return to Continental European economics. 

7.  The Business and Economic Implications of ICT use: Europe’s Transition to 

the Knowledge Economy  
by Jeremy Millard 
The policy background 
The new knowledge economy 
Knowledge and skills in the new economy 
The impact of ICT on jobs and work organisation 
Firms, business impacts and innovation 
Local and regional milieux 
ICT and economic globalisation 
Measuring the role of ICT in the economy 
Conclusions 

8.  The New Meaning Processing Paradigm  

by Ilkka Tuomi
The two paradigms: an overview 
Summary: Main characteristics of the two paradigms 
Conceptual starting points 
Meaning processing in the Internet: Some example applications 
Policy implications 
References 

9.  Conclusions 

About the authors 
European Commission 
Abstract 

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Summary

In  March  2000,  the  heads  of  state  and 

to  construct  its  “dream  world”,  building  upon 

governments  of 

the  European  Union 

(EU) 

and  going  beyond  the  pillars  of  the  industrial 

agreed  on  the  goal  of  making  the  EU  the  most 

society.  New  actions  would  have  to  go  beyond 

competitive  and  dynamic  knowledge-based 

conventional  wisdom, 

taking 

into  account 

economy  in  the  world,  capable  of  sustainable 

Europe’s future role in a globalised society and the 

economic growth with more and better jobs and 

socio-economic  drivers  for  better  quality  of  life 

greater  social  cohesion.  This  overall  goal  has 

in Europe. In order to shed light on possible new 

been widely accepted by European stakeholders. 

actions,  FISTERA  asked  a  number  of  prominent 

Recent analyses, however, have pointed out that 

the implementation of the Lisbon vision has been 

only  partially  successful.  The  Lisbon  strategy 

needs fresh impetus and the pace of reform needs 

to be accelerated. Chapter 1 details some of the 

policy problems the EU has to face in this respect. 

Where will the EU go in the next decade and how 

will information and communication technologies 

(ICTs)  contribute?  How  can  information  society 

technologies  and  knowledge  (in  the  broader 

sense including education, science and research, 

innovation)  contribute  to  growth  and  hence  to 

welfare? ICTs are systemic technologies, enabling 

change at all levels of society and business: they 

are  everywhere,  in  every  job,  every  business, 

in  all  aspects  of  our  lives  and  organisation  of 

society. To  address  the  challenges  and  to  realise 

the full potential of a knowledge-based Europe in 

a global context, ICTs are therefore essential.

economists and experts to indicate their personal 
opinion,  they  include,  Mrs.  Carlota  Pérez,2  Mr. 
Luc Soete,3 Mr. John Zysman,4 Mr. Tobias Schulze-
Cleven,5 Mr. Emilio Fontela,6 Mr. Erik Reinert,7 Mr. 
Jeremy Millard,8 and Mr. Ilkka Tuomi.9

History  suggests  that  there  is  a  parallel 
between  the  techno-economic  paradigm  led 

by  ICTs  in  a  global  context  and  that  of  the 

previous  industrial  revolutions.  Past  revolutions 

are  therefore  worth  studying  to  understand  how 

ICTs  are  reshaping  the  economy  and  society.  In 

Chapter  2,  Pérez  sees  the  current  globalization 

process  as  the  inevitable  consequence  of  the 

power  of 

ICTs  and 

their 

techno-economic 

paradigm. But, she adds, in order to avoid further 

polarisation or serious backlashes from job losses, 

a set of adequate policies need to be put in place 

to  guarantee  that  the  full  potential  benefits  are 

reaped and that social well being is maximised in 

However, knowledge society policies need to 

all the countries involved.

be holistic, i.e. encompassing technical, economic 

and  social  issues.  Only  as  part  of  a  broader 

strategy  based  on  knowledge,  sustainability  and 

participation  does  it  make  sense.  Europe  needs 

to  identify  the  key  focus  areas  for  the  future 

According to Tuomi (Chapter 8), the emerging 

meaning-processing  paradigm  would  be  more 

appropriate  than  the  current  techno-economic 
paradigm  (following  Pérez’s  terminology)  in  that 

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2 

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4 
5 
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7 
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9 

Visiting  Senior  Research  Fellow  at  CERF,  Cambridge  University,  UK,  and  Honorary  Research  Fellow  at  SPRU  (Science  and 
Technology Policy Research), University of Sussex, United Kingdom.
Professor of International Economics and Director of United Nations University (INTECH) and University of Maastricht (MERIT), 
The Netherlands.
Co-director of Berkeley Roundtable on the International Economy (BRIE), United States.
Research associate at BRIE, Berkeley, United States.
University Antonio Nebrija Madrid, Spain.
Professor at Tallinn University of Technology, Estonia and Norwegian Institute of Strategic Studies, Oslo, Norway.
Senior Consultant for Danish Technological Institute (DTI), Copenhagen, Denmark.
Currently Chief Scientist at Meaning Processing Ltd., Finland.

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it explicitly recognises that human beings create 

growth  is  knowledge  accumulation.  Knowledge 

information  and  knowledge  based  on  different 

cannot  be  fully  appropriated,  but  ICT  increases 

interpretations  of  reality,  which  depend  on 

the codification and transferability of knowledge 

cultural,  social  and  even  biological  factors  and 

world-wide.  In  ICT-based  innovation  systems, 

contexts.  The  new  emerging  paradigm  would 

knowledge has to be considered as a capital good, 

be,  in Tuomi’s  view,  more  adapted  to  tackle  the 

because it can be employed for producing other 

challenges  of  the  information  society  because 

goods, for producing additional knowledge, it can 

meaning  and  semantics  are  increasingly  located 

be accumulated, and it is globally accessible.

at  the  core  of  computing,  communication  and 

knowledge.

ICTs  also  change  the  nature  of  labour 

and  employment  by  increasing  their  content 

The  nature  of  the  ICT  revolution  entails 

in  knowledge,  so  that  education  becomes  the 

profound  changes  and  has  direct  policy 

main  factor  of  production.  Education  is  in  fact 

implications for the EU. The role of technology in 

at the heart of the growth process, given its link 

economic growth can be analysed following the 

to  innovative  capability  and  R&D  activities. 

‘supply-pushed’ model, where new technologies 

Millard’s analysis, in Chapter 7, suggests that ICTs 

and  related  innovations  emerge  from  science 

can  lead  simultaneously  to  de-skilling  and  re-

and  are  available  to  entrepreneurs  in  a  pool 
technological  opportunities.  Technological 
of 

skilling, depending on the initial skills and market 
conditions.  De-skilling  occurs  when  activities 

revolutions  can  also  be  considered  through  the 

can  be  automated,  while  re-skilling  concerns 

demand-pulled  model,  where 

technological 

the acquisition of tacit knowledge, which is very 

improvements emerge from the activity of profit-

resistant to automation and grows rapidly due to 

oriented  entrepreneurs  looking  for  temporary 

the ICT-induced speed of change.

monopolistic positions. A crucial issue, according 

to  Fontela  (Chapter  5),  is  to  know  when  and 

where  the  technological  clusters  are  most  likely 

to be located in the future.

Soete  points  at  one  particular  area  in  need 

of  fundamental  rethinking:  the  European  social 

security  system,  which  is  still  deeply  rooted  in 

the requirements of the former industrial society. 

Europe  has  recognized  the  emergence  of 

Europe  should  actively  consider  revising  the 

the  new  paradigm  for  economy  and  society 

current  social  security  system  and  adapting  it 

and  consequently  focused  its  policy  actions  on 

to  new  ways  of  working,  increasingly  rooted  in 

research and innovation, but has not yet developed 

a  new  balance  between  labour  and  pleasure 

an integrated policy approach. As a consequence, 

at  work.  A  knowledge-based  Europe  needs  to 

Soete  argues  in  Chapter  3  that  Europe  does  not 

fully  mobilise  its  available  labour,  by  creating 

use  all  the  leverages  for  supporting  growth  and 
innovation.  Additionally,  and 
for  stimulating 
more importantly, European policy-makers do not 

flexible  working  environments  and  realistic 

life-long  learning  schemes.  ICTs  will  be  a  key 
enabler  here.  Technical  and  societal  innovation 

pay enough attention to institutional constraints/

should therefore become an intrinsic part of our 

barriers  which  limit  the  full  deployment  of 

culture and the European value system. It should 

knowledge  and  innovation  potential  for  growth. 

be  encouraged  at  all  levels  in  order  to  augment 

Europe should reinforce its investment in quality 

the economic and social value which can come 

and  quantity  of  knowledge,  by  implementing 

from it. Social policies in Europe need, according 

macroeconomic  and  fiscal  policies  supporting 

to  Zysman  and  Schulze-Cleven  (Chapter  4),  to 

knowledge  and  innovation.  Such  an  adjustment 

encourage “social flexibility”, but not necessarily 

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would  encourage 

innovative  and  risk-taking 

by means of a reduction of social security. On the 

attitudes, which then might contribute to growth. 

contrary, the provision of the right kind of social 

Finally,  he  concludes  that  the  only  input  factor 

security  will  not only allow  people  to feel more 

that  could  bring  about  long-term  sustainable 

secure,  but  also  enable  them  –  and  production 

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systems  in  general  -  to  be  more  adaptable.  In 

- 

promoting 

cooperative 

processes 

in 

this context, one must distinguish the question of 

particular  through  the  intertwining  between 

“how  much”  social  security  costs,  as  measured 

competition and cooperation, and

in  financial  transfers,  from  the  “how”,  i.e.  the 

mechanism of providing social security.

- 

improving  measurement  of 

economic 

performance 

in 

the  knowledge  society 

New players, such as China and India, have 

in  particular  by  taking  into  account  the 

turned  the  market  upside  down.  The  challenge 

changing nature of the economic, social and 

for  Europe  is  how  to  stay  “wealthy”  in  a  rapidly 

environment accounting framework.

evolving  and  ever  more  competitive  global 

economy.  Zysman  and  Cleven-Schulze  argue 

that, in this new digital era, the key to success is 

“experimentation”. Globalisation, pushed by the 

cross-national  productions  networks,  requires  a 

constant change of production systems, business 

models and strategic decisions.

How  can  governments 

in  a 
globalised  world?  Pérez  singles  out  three  areas 
for  intervention.  The  first  is  the  regulation  of 

intervene 

globalised finance to favour long-term investment 

rather than short-term financial gain through –for 

instance-  rapid  movements  of  capital.  Second, 

a  shared  vision  accompanied  by  consensus 

Turning to the question of what consequences 

policies  should  be  promoted. This  would  guide 

these evolutions have for policy-making, there is 

market  action  towards  a  win-win  process  of 

a need for a systemic approach to the economic 

regional re-specialisation so that full employment 

institutions 

(labour  market,  product  market), 

–or  earning-generating  activity–  can  once  more 

resulting  in  a  full  set  of  structural  reforms.  All 

become  a  reality  in  the  advanced  world  and  an 

these  should  be  implemented  as  a  systemic 

attainable  goal  in  developing  countries.  Finally, 

policy  for  better  political  governance.  In  order 

the  social  safety  net,  previously  provided  by  the 

to encourage growth, Europe should increase its 

welfare state, should be “reinvented” in a manner 

efforts to identify growth sectors, and re-allocate 

consistent with the current globalising paradigm. 

resources to growing firms and sectors with more 

It  should  be  capable  of  reopening  the  ample 

growth  potential.  The  knowledge  society  will 

upward  mobility  routes  that  until  recently  gave 

rely  upon  a  different  weighting  of  factors  (i.e. 

strong cohesion to more developed societies.

innovation, growth, and learning amongst others). 

As  the  composition  of  these  factors  changes, 

priority  setting  gets  difficult. Thus,  for  Europe  to 

be successful in innovation, growth, productivity 

and  learning,  trade-offs  need  to  be  made  more 

explicit,  so  that  informed  choices  can  be  made 

and a feasible path set.

Policy-makers  and  the  public  sphere  have 

On a more conceptual level, Reinert argues 

in Chapter 6 that a long-term solution for Europe 

will  have  to  be  based  on  an  understanding  of 

why  economic  development  is  such  an  uneven 

process.  The  selection  of  good  policy  options 

should  be  based  on  much  more  profound 

and  differentiated  analyses  of  technology  and 
innovations  and  their  economic  consequences 

an  important  role  to  play  in  the  new  growth 

on  both  wages  and  employment  at  company, 

paradigm.  Fontela 

identifies 

four 

important 

national  and  community 

levels.  Reinert 

dimensions  to  improving  the  design  of  public 

believes  that  new  models  should  be  developed 

interventions. These involve:

- 

taking 

into  account 

the  specific  socio-

economic  contexts  in  which  ICT-related 

policies are implemented,

- 

promoting  research  (both  basic  and  market-

oriented) at all levels,

which  better  describe  phenomena  such  as 

economic differences (beyond the framework of 

equilibrium theory).

Moreover, though Europe has accepted the 

importance  of  the  ICT  techno-revolution  for 

the  economy  and  society,  an  integrated  policy 

approach,  employing  all  economic  and  social 

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10

levers  to  stimulate  innovation  and  maximise  its 

into account when redesigning the foundations of 

benefits,  is  still  missing.  So  far,  policy  makers 

national social security systems.

have  picked  up  the  most  obvious  challenges  of 

the knowledge economy, but, arguably, they have 

not yet grasped the whole range of implications. 

As  the  knowledge  society  will  bring  profound 

change  in  our  economies  and  societies,  these 

implications  must  be  well  understood  and 

placed  at  the  core  of  EU  policy  making  in  the 

coming years.

The 

implications  of 

Europe’s 

ageing 

population are a related challenge. When today’s 

(the 

forty-year-olds 
‘baby-boom’  generation) 
reach  retirement  age,  the  dependency  ratio11 
increase  and  current  social 
will  drastically 

security  systems  will  be  in  danger  of  becoming 

unaffordable.  ICTs  can  make  a  contribution 

towards  maintaining  social  welfare  in  an  ageing 

If  digital  technology  affects  the  whole  of 

society  by  increasing  productivity,  stabilizing 

society,  then  all  of  society’s  existing  norms  and 

costs  and  keeping  older  citizens  socially  and 

laws  should  be  re-assessed  to  check  whether 

economically active. For this to happen, effective 

they are adapted to the new reality or not. Rather 

ICT  implementation  will  first  imply  profound 

than  trying  to  adapt  the  application  of  existing 

changes in processes, in organizations and in the 

rules  to  the  knowledge  society,  one  should 

ways  all  actors  operate  in  our  society,  whether 

investigate  how  far  the  rules  themselves  need 
to be adapted for all sectors. One example with 

In 
private  businesses  or  public 
addition,  if  Europe  wants  to  have  a  world-class 

institutions. 

policy implications is how the shift towards more 

ICT  industry  despite  a  shrinking  workforce  and 

knowledge-based  activities  will  affect  the  future 
social security system.10 Changes in type of work, 
blurring of borders between work and leisure, and 

a  high  dependency  rate,  policy  makers  need 

to  make  every  effort  to  put  the  right  framework 

conditions 

in  place  before 

the  baby-boom 

the increasing variety of jobs (from hard physical 

generation reaches retirement age.

labour  to  intellectual  activities)  should  be  taken 

“Knowledge workers” –as opposed to those dealing with physical labour- will be predominant and drive the economy.

10 
11  Ratio between contributors to non-contributors to the pension system.

1. A Competitive Knowledge Society 
 by A Bianchi, C Pascu, R Compañó, J-C Burgelman12

This  chapter  builds  upon  the  discussion 

implementation.  The  challenge  was  to  analyse 

that  took  place  at  the  FISTERA  workshop  on 

the  objectives,  deliver  a  diagnosis  of  Europe’s 

socio-economic  aspects  of  a  knowledge-based 
Europe.13  The  workshop  aimed  to  investigate 
towards  a 
how 

far  Europe  has  progressed 

current status and offer new insights into possible 

new ways to achieve these objectives. The table 

below 

summarises  workshop  participants’ 

knowledge society. The discussion focused on (a) 

views,  grouped  by  diagnoses,  with  regard  to 

the status and adequacy of the vision, objectives 

Europe’s  situation  on  a  number  of  key  factors  - 

and values that inspire European Union policies 

namely  vision,  innovation,  productivity,  work, 

and  (b)  the  proposed  components  of  a  systemic 

globalisation, learning, risk, society, state/public 

approach,  and 

the  necessary  actions  and 

sector, diversity - and possible ways ahead.

Table 1: Some key aspects towards a Knowledge-based Economy in the European Union

Diagnosis

Forward-looking considerations

Vision

Innovation

The rationale of the Lisbon Objectives is not uncon-
tested. Some economists argue in favour of a long-
er-term vision, because they believe that more time 
(>2010) is necessary to achieve a knowledge-based 
economy.  Others  argue  that  Europe  should  ‘jump 
beyond  Triade  thinking  (EU/US/Japan)’  and  learn 
from the emerging world’s ‘hot spots’, particularly 
in (south-east) Asia. This vision should contribute 
to two distinct (but complementary) aims: to foster 
political,  social  and  economic  unity  within  the  EU 
AND encourage growth in a global context.

The Schumpeterian understanding of technological 
change, and its activity-specific growth potential are 
still valid. Future knowledge-based economics will 
take root in a techno-economic paradigm shift and 
decision makers need to reassess the new balance 
between social and business benefit. 

The Lisbon Strategy largely followed a top-down ap-
proach. However, in order to achieve more effective 
political, social and economic convergence, Europe 
would need to broaden the ownership of the vision, 
by making more use of bottom-up approaches. 

Short  term.  In  order  to  take  full  advantage  of  ICT, 
governments  should  take  adequate  policy  actions 
to re-engineer core organisations of the innovation 
system. To boost the economy, current policies on 
intellectual property, including copyright and trade-
mark  regulation  should  be  updated  to  conform  to 
the ‘digital era’.
Mid-term.  It  may  be  possible  to  redirect  this  new 
techno-economic  shift  to  solve  grand  challenges. 
For instance, the innovation should aim to combat 
poverty world-wide. This could combine social soli-
darity with economic prospects, as the “bottom of 
the pyramid” is a huge market.
Long-term. The current IT revolution is likely to pro-
long its cycle through possible applications arising 
from  the  so-called  ‘converging  technologies  (CT)’ 
paradigm.  Europe  should  not  miss  this  emerging 
CT trend and look for opportunities in these sectors 
(e.g. giving priority to cognitive sciences). 

12 

13 

European Commission (EC), Joint Research Centre, Institute for Prospective Technological Studies, Sevilla (Spain). The opinions 
of the authors do not necessarily represent those of the EC. Neither the EC nor the authors are responsible for the use which 
might be made of the following article.
“Towards a European Knowledge Society: New ICT Solutions to Old Challenges five years after Lisbon”, FISTERA workshop, 
Sevilla 10-11 March, 2005.

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11

 
 
 
 
 
 
 
 
 
 
 
 
Table 1: Some key aspects towards a Knowledge-based Economy in the European Union (Cont.)

Diagnosis

Forward-looking considerations

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Productivity

Work

Globalization

Learning

Risk

Society

How to apply the concept of productivity to a knowl-
edge-based  economy  is  debatable.  For  instance, 
how to measure the quality of (increasingly more) 
knowledge-intensive services is not obvious.
New Member States have great economic potential 
and  should  avoid  EU15  mistakes,  by  making  the 
best out of the division of labour, and by reforming 
social security systems. 

In a knowledge-based society, production will shift 
to  ‘knowledge  products’.  Consequently,  employ-
ment will be embedded in knowledge-as-a-product 
activities,  whereby  additional  jobs  will  mostly  be 
generated  in  services.  Innovation  will  need  to  be 
accompanied  by  organizational  change  and  social 
interaction
In  comparison  to  previous  EU  enlargements,  the 
last one was more complicated, due to its magni-
tude,  the  large  economic  divergences  and  the  un-
favourable economic environment of several older 
Member States. The integration is not happening as 
quickly as expected and it appears that the econom-
ic and global political power of the enlarged Europe 
is still not fully recognized. 

There seems to be a mismatch (rather than a short-
age)  of  highly  educated  ICT  workers.  How  future 
needs  will  evolve,  is  arguable.  All  agree,  however, 
that  there  is  a  risk  of  excessive  focus  on  formal 
teaching and lack of interest in practice. Future ac-
tions  must  involve  a  range  of  concepts,  including 
education and life-long learning.
Share/transfer to the New Member States R&D and 
learning.
As a result of complex financial and legal rules and 
established  cultural  schemes,  there  is  a  reduced 
risk taking attitude in the European Union, hamper-
ing innovative research.
There  appears  to  be  insufficient  incentive  to  pro-
mote  effective  use  of  ICT.  The  ICT  contribution  to 
innovation,  quality  of  life,  and  the  benefits  to  the 
final user are still low.

State/public sector

There  is  a  need  to  reform  public  administrations, 
and  particularly  their  back  offices.  This  applies  at 
all layers of the (nation, region, sub-regional local) 
governance of economic growth and development.

Diversity

12

There are different development levels and income 
distribution throughout Member States. The trade-
offs that arise when growth, stability and cohesion 
are pursued at the same time need to be discussed 
openly.  Europe’s  economic  and  cultural  diversity 
should  not  only  be  seen  as  problem  but  also  be 
seen as a source for growth, provided that there is 
an honest assessment of different regional levels of 
development, and absorptive capacities and possi-
bilities for action.

Having an overview of the financial boundary con-
ditions  before  designing  implementation  measures 
is  a  strategic  asset  (otherwise  illusory  visions  and 
wrong expectations may be created). The agreement 
and approval of the new financial perspective (2007-
2013) allows for a foreseeable horizon.
Economic  progress  should  be  carefully  monitored 
and  the  transition  to  a  knowledge-based  economy 
urgently  demands  the  development  of  commonly 
agreed indicators. 
In a highly dynamic working environment, (human) 
talents  have  to  adapt  rapidly  to  changing  environ-
ments.  Therefore  there  is  a  need  to  explore  new 
forms of life-long learning.

Europe is facing globalization and increasing region-
al protagonism at the same time. These tendencies 
have to be reconciled and the regionalism perspec-
tive,  based  on  multiple  dimensions  of  integration, 
must be taken into account as it also implies aspects 
of partnership and outsourcing (outside EU).
European countries should interact together in glo-
bal  social  networks,  global  innovation/knowledge 
networks.
The objective is to enhance inter-personal and cul-
tural skills of future workers rather than generating 
high-tech specialists. More emphasis should be put 
on research in education, innovative developments 
in life-long education, e-learning and support.

Promote  Regional  agreements,  in  order  to  imple-
ment  economic  and  growth-related  clauses  suc-
cessfully.

Adverse  perceptions  of  ICT  may  partially  be  over-
come (a) by making sure that ICTs are taken up for 
useful purposes and match the demand side, (b) by 
integrating more social scientists in the innovation 
process with adequate resources and (c) by estab-
lishing platforms for early participation of users.
Public  Administrations  should  promote  more  de-
mand-pull innovation by involving citizens in policy 
formulation  and  distinguish  responsibilities  (rather 
than  ‘selling’  policies  to  the  people.)  In  view  of 
changing  demographics,  specific  programmes 
should be designed for services for elderly people.
Europe  should  consider  encouraging  the  estab-
lishment  of  some  ‘hot  spots’  and  world  class  re-
search nodes in the New Member States (as leading 
lights).

 
 
 
 
 
 
In the following pages, the authors present a 

number of issues of interest raised by participants 

in the March 2005 FISTERA workshop on socio-

economic  aspects  of 

the  knowledge-based 

Europe.  The  objective  is  to  be  selective  rather 

than exhaustive.

A challenging starting point for Europe

In  March  2000,  the  EU  heads  of  state  and 

government  agreed  on  the  goals  of  transforming 

the  EU  into  the  most  competitive  and  dynamic 

knowledge-based economy in the world, capable 

of  sustainable  economic  growth  with  more  and 

better  jobs  and  greater  social  cohesion  (i.e.  the 

Lisbon  objectives).  They  present  a  uniquely 

European  view  on  the  emerging  knowledge 

society,  combining  innovation-driven  economic 

dynamism  with 

social  and  environmental 

sustainability.

One of the base lines of the Lisbon process 

is  the  comparison  of  EU  and  US  economic 

performance.  There  have  been  examples  in  the 

past  where  defining  European  objectives  with 

respect 

to  a  common 

‘external  competitor’ 

has  mobilized  efforts  towards  a  unifying  goal. 

the US; and (c) finance, due to the higher value of 
transactions in the US.14

Since  its  adoption  in  March  2000,  many 

important  issues  have  arisen,  which  will  affect 

the  Lisbon 

strategy. 

International 

terrorism 

prompted  the  quest  for  security.  The  Internet 

bubble burst. Globalisation continues to progress 

rapidly,  and  new  economic  focal  points  such  as 

China  and  India  are  emerging  strongly  on  the 

global  economic  map.  Broadband  networks  are 

becoming  widely  available  in  most  EU  Member 

States,  and  the  number  of  broadband  users  is 

growing fast. Peer-to-peer file sharing has become 

the  largest  consumer  of  Internet  bandwidth, 

spam  and  scam  e-mail  now  represents  about 

four fifths of all emails, and Internet blogging has 

become  an  important  political  force  in  the  US 
and  elsewhere.  Digital  storage  is  now  cheaper 

than  paper.  Open  source  software  is  diffusing 

in  enterprises  and  runs  most  of  the  Internet 

infrastructure.  Wireless 

technologies  such  as 

WiFi and RFID are about to be widely deployed. 

Voice  over  IP  telephony  and  multiplayer  online 

role-playing games are examples of a new wave 

of  emerging  applications.  As  a  consequence, 

new business models are emerging, which could 

Nowadays,  Europe  should  not  regard  the  US  as 

change the competitive context.

a  blueprint  to  copy,  but  as  a  model  from  which 

lessons  can  be  learnt.  Generally  speaking,  the 

accepted view is that the EU is losing ground in 

Europe between Globalisation…

terms of productivity growth rate with respect to 

The globalized economy has been driven by 

the USA. However, a number of provisions need to 

accelerating fragmentation and recombination of 

be made. In contrast to the EU, the US accounting 

value  chains  using  ICTs.  Global  companies  are 

system  adjusts  prices  for  quality  improvements, 

trying  to  maximize  the  advantage  of  the  global 

the  so-called  ‘hedonic’  pricing,  which  may  lead 

trend in terms of access to skills and labour force, 

to  an  overestimation  of  US  productivity  values. 

taxation and investment, proximity to markets and 

Moreover,  the  US  competitive  advantage  seems 

demand, logistics, etc., rather than mere access to 

to  be  concentrated  in  just  three  sectors:  (a)  ICT 

raw materials. The competitive advantage is built 

production  (rapidly  falling  component  prices 

on knowledge.

particularly  favour  those  economies  with  strong 

ICT  production  industries);  (b)  retail,  due  to 

lower-level restrictions on green-field building in 

At  first  glance,  globalisation  seems 

to 

challenge the very foundations of nation-states as 

it questions their “raison d’être” and reduces their 

14  Comparing productivity data across the Atlantic is - however - questionable because they are based on an ever less appropriate 
industrial society model and are hardly suitable for the future knowledge society. In spite of the lack of commonly accepted good 
indicators, there seems to be consensus that the EU is behind the US using ICT to spur productivity growth. The OECD sustains this 
claim also neglecting the effect of hedonic pricing. And, deficiencies in measuring services are similar in the US as in Europe.

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1

 
 
 
 
 
 
 
 
 
 
 
influence,  strongly  anchored  in  territorial  logic 
since  the  Enlightenment  in  the  18th  century.  But 
this  observation  is  only  partly  correct.  Emerging 

pressure 

form  reinforced  regional  demands. 

Political voices heard, at these sub national levels, 

are apparently fed, for good or ill, by social and 

economic  focal  points  in  China,  India  and 

cultural regionalisms and nationalisms. Still, this 

South  Korea  have  successfully  matched  national 

regionalism,  complementary 

to  globalisation, 

interest  with  globalization  tendencies  and  are 

may  offer  proximity  democracy  providing  the 

future  challengers  of  currently  economically 

answers citizens seek in their everyday lives and 

strong nations, such as the US. In a way, the new 

a manageable space for governance. On the one 

emerging order is a kind of “global regionalism”, 

hand,  regionalism  should 

foster  competition 

i.e.  quasi-continents  with  the  critical  mass  to 

among  regions  and 

thus 

increase  Europe’s 

exploit incentives to move forward.

economic  competitiveness.  On  the  other  hand, 

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The construction of the European Union can 

be considered to be part of a global “consolidation” 

process. Europe has become a global region with 

its  own  geo-political  and  economic  objectives. 

It  has  an  increasing  say  in  economic,  political, 

environmental or social negotiation and decision-
making at world-level. Europe can be regarded as 

both a consequence and a response of a group of 

states to the globalisation trend. It is accompanied 

by  a  progressive  weakening  of  the  nation-state 

as  the  central  economic  and  political  project. 

Ten  new  Member  States  joined  the  EU  after  the 

Lisbon process was launched and the forthcoming 

integration  of  Romania  and  Bulgaria  before  the 

end  of  this  decade  is  a  further  step  towards  this 

‘consolidation effect’.

In  economic  terms,  the  last  enlargement 

included  countries  with  much  less  developed 

economies in terms of infrastructure endowment, 

per capita income, social and institutional control 

on  illegal  practices,  participation  in  economic 

activities,  etc.  We  have  to  acknowledge  that 

many  EU  indicators  of  social  and  economic 
development  have  since  decreased  on  average 

and  that,  for  the  New  Member  States,  catching 

up with the former EU-15 Member States will be 

a  slow  process.  In  the  New  Member  States  and 

in  the  EU  as  a  whole,  there  is  the  expectation 

that information society technologies will greatly 

influence the speed of this integration process.

1

… and Regionalisms

The  nation-states  seem  to  suffer  increasing 

external pressure from globalization and internal 

uncontrolled  competition  may  magnify  unequal 

initial  conditions  with  the  risk  of  progressively 

concentrating  populations  in  a  limited  number 

of  better-off  regions.  This  adverse  effect  may 

contribute to a vicious circle of underdevelopment 

which Europe’s peripheral regions seem to suffer 

from.  The  trend  towards  regionalism  challenges 

the  European  goals  of 

(territorially  defined) 

cohesion and the provision of similar conditions 

for Europeans wherever they may live.

…  trying  to  benefit  most  from  the  last  EU 

Enlargement

Europe  should  take  full  advantage  of  the 

opportunities offered by the New Member States 

and  simultaneously  help  to  reduce  the  negative 

impacts  of  the  transition/enlargement  decade. 

Unfortunately,  the  EU  has  not  yet  reaped  the 

benefits from the last EU Enlargement of 10 New 

Member States, particularly as global partners in 

R&D.  For  example,  the  enlarged  EU  possesses 

an  educated  and  modestly-paid  labour  force  of 

considerable  size  but  traditionally  it  has  been 
the  USA,  rather  than  Europe,  which  attracts  the 

most researchers across the world. Europe needs 

to  reverse  the  trend.  The  collapse  of  national 

industries  and  the  R&D  systems  in  the  New 

Member States was a considerable drawback. At 

the  same  time,  ‘closing  with  the  past’  may  offer 

the  opportunity  to  effectively  exploit  the  new 

paradigm for global positioning, and benefit from 
networking,  labour  mobility,  delocalisation,  off-

shoring,  outsourcing,  mergers  and  acquisitions 

in  research  activities.  Europe’s  policy  should 

be  directed  at  maximizing  the  socio-economic 

 
 
 
 
 
 
benefits for Europe as a whole and not only a part 

will  largely  be  based  on  knowledge-intensive 

of it, just as a multi-national sets out to maximize 

services  and  products  that  combine  goods  with 

its  gains  for  the  whole  company,  wherever  its 

services. 

In 

the  OECD  economies,  services 

factories may be located.

Global  companies  contribute  massively 

to  R&D 

investment,  patents,  and  marketed 

innovations, etc., but do not respond to national 

imperatives  (even  when  presented  by  “their” 

governments as “national champions”). Their R&D 

tend  to  be  organised  globally,  taking  advantage 

of the best opportunities in terms of labour force, 

taxation  and  investment,  proximity  to  markets 

and  demand,  logistics,  etc.  Therefore,  Europe’s 

public  funding  must  be  directed  at  improving 

Europe’s position in R&D, making use of and not 

combating rules dictated by globalisation.

One  way  to  go  is  to  create  an  increasing 

number 

of 

high-tech 

regions.  Although 

geographically 

restricted,  R&D  nodes  and 

regional  knowledge  clusters 

seem 

to  be 

sustainable  models  of  development  within 

already  account  for  about  70%  of  the  value 

added  and  intermediate  services  account  for 
about a quarter of manufacturing production.16 In 
the  future,  an  increasing  share  of  value  creation 

will  occur  in  the  so-called  ‘creative’  industries 

and  services  producing  content,  experiences, 

designs,  cultural  products,  etc.  ICT  will  largely 

contribute  to  economic  growth  and  societal 

change  by  accelerating  the  transition  from  an 

industrial economic system to a knowledge-based 

service one. The effect is expected to be direct in 

the case of ICT research and production activities 

and  indirect  for  the  adoption  and  effective  use 

of ICT in several layers of society. The latter will 

stimulate new forms of organisation through novel 

activities, and new forms of communication and 

social relationships.

globalisation.  ‘Silicon  Valleys’  across  the  world 

Intangibles, quality and creativity are ingredients 

have  often  been  analysed  as  examples  for  R&D 

for a new growth model…

and innovation policies. They take full advantage 

of  the  ‘networked’  society  and  economy.  How 

to  scale  up  this  regional  development  model, 

without  unbalancing  cohesion  goals  and 

policies, or encouraging disruptive regionalisms, 

is not obvious. How can Europe’s public funding 

for  R&D  foster  the  ‘ideal’  of  regional  hi-tech 

development  without  putting  its  legitimate  goals 

for  territorial  solidarity  and  cohesion  at  risk? 

One  option  under  discussion  is  the  creation 

of  distinct  regional  specializations  which  are 
complementary.15

Towards a more creative economy

In the future knowledge economy, traditional 

industries and agriculture represent only a small 

fraction of the total economy. The new economy 

Europe  has  moved  from  an  agricultural 

economy  to  an  industry-based  economy.  It  has 

developed  competitive  products,  exported  its 

production  abilities,  and  still  leads  in  many 

industrial  sectors.  But  are  we  ready  for  the  next 

transition?  In  the  following  paragraphs,  we  will 

discuss a number of key issues:

Circumventing  Traditional  Constraints.  The 
long-wave  economic  model  suggests  that  new 

key  technologies  experience  50  year  growth 

waves because their logic needs to be embedded 

into  the  slowly  changing  social,  cultural  and 

material  infrastructure  of  the  society. The  use  of 

ICTs, however, has enabled businesses to bypass 

traditional  constraints,  thereby  creating  doubts 

about  the  traditional  model.  For  instance,  the 

extremely  diversified  ‘long  tail’  of  the  content 

market  is  now  a  main  part  of  the  electronic 

15  C. Pérez analyses this option, giving insight including how clear and manageable are the trade-offs in a democratic society.
16  Wölfl, A. (2005) “The service economy in OECD countries,” STI Working Paper, DSTI/DOC 2005/3, OECD.

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1

content  industries,  and  impossible  to  realize 
without  Internet-based  distribution  channels.17 
Instead  of  betting  on  individual  ‘super-hits’  with 

and  products.  For  instance,  the  integration  of 

creativity,  knowledge  and  engineering  needs  to 

be firmly embedded in the concept of the learning 

many consumers, the content industry is exploring 

organisation.

the growth opportunities offered by many ‘micro-

hits’  which  address  specific  communities  of 

consumers.  The  associated  “micro-markets”  are 

extremely  dynamic:  they  can  self-organise  very 

rapidly  using  ICTs,  but  they  can  also  disappear 

quickly. It is therefore possible that the traditional 

long-wave  model  does  not  adequately  describe 

the  dynamics  of 

the  networked  knowledge 

economy.  In  other  words,  in  the  deployment 

phase of the IST wave, there are more new ways to 

create value than in past technology revolutions.

‘Social Value Creation’. Value creation in the 
knowledge society is tightly linked with social and 
cultural  practices.  The  increasing  diversification 

of 

the  social  and  cultural 

foundations  of 

consumption  has  direct  implications  for  value 

creation.  At  the  same  time,  ICT  drives  changes 

in  communication  patterns  and  life  practices.  In 

order to align policies with the emerging growth 

opportunities,  the  social  and  cultural  basis  of 

value creation and economic growth needs to be 

made visible.

Creativity.  In  times  of  globalization  and 
increasing  need 
is  an 

there 

harmonization, 

Creativity  needs  diversity.  Diversity 
considered  to  be  a  stimulus  and  an  underlying 

is 

asset which leads to greater creativity and to the 

ability  to  distinguish  our  intellectual  products 

from others. Europe is culturally very diverse and 

a  variety  of  societal  systems  co-exist.  But  how 

can  Europeans  effectively  exploit  this  richness? 

Although  everybody  acknowledges  the  value  of 

diversity, it is not obvious how this can be turned 

into a competitive advantage as regards the rest of 

the world. Although the outcomes are not clear, it 

seems reasonable that these will make extensive 

use of the networks.

The  innovation  dynamics  in  a  networked 
world.  In  the  traditional  industrial  economy,  the 
generation, use and exploitation of technological 

knowledge was mostly located in the same place. 

Under  global  -rather  than  national  or  European- 

conditions, the location where specific knowledge 

is  generated  becomes  less  and  less  relevant;  it 
is  rather  the  ability  to  use  and  the  capacity  to 
integrate this knowledge that really matters. This 
indicates  that  global  innovation  systems  within 

the  knowledge  economy  are  not  exclusively 

for  differentiation  as  a  means  for  competitive 

based  on  cutting-edge  research,  but  innovation 

advantage.  This  applies,  at  different  levels,  to 

can be generated equally outside on non-science 

corporations,  entrepreneurs  and  workers.  One 

based results as well. Anyhow, it is still true that 

major  source  of  differentiation,  i.e.  doing  things 

R&D  adds  most  value  when  it  contributes  to 

differently,  is  making  use  of  creativity.  Creativity 

innovation  and  leads  to  direct  economic  and 

to 
and  know-how  are  considered 
integration between knowledge and engineering, 

the  key 

and  between  the  fragmented  phases  of  the 

production  systems.  Europe’s  unique  cultural 

diversity  should  be  exploited  as  an  engine  for 

creativity.  Europeans  are  creative  enough  to 

promote  their  identity,  and  to  develop  new 

brands  and  designs,  but  they  need  institutional 

support  to  transform  creatitivy  into  innovation 

social benefits.

… and need to be combined with organisational 

change in industry and administrations

Work, Learning and Skills. There is a need to 
analyse the labour market, and the relationships 

between  economic  activity  stakeholders  using  a 

wider approach, that takes into account the social 

17  The  term  ‘long tail’, was coined by

long  tail’,  was  coined  by  Chris Anderson  (“The long tail”, Wired 12.10, October 2004

“The  long  tail”,  Wired  12.10,  October  2004  http://www.wired.com/
wired/archive/12.10/tail.html.) to describe certain business and economic models such as Amazon.com or Netflix. It refers to 
a feature of statistical distributions in which a high-frequency or high-amplitude population is followed by a low-frequency or 
low-amplitude population which gradually “tails off”.

 
 
 
 
 
 
consequences  and  the  economic  constraints  at 

of the required skills, and also actions to enhance 

the  core  of  European  development.  However, 

the  ability  of  individuals  to  adjust  to  evolving 

experts  have  become  more  cautious  in  their 

labour and competition contexts.

analysis  of  the  possible  current  and  future  skills 

gap  after  the  burst  of  the  Internet  bubble. There 

is  still  no  consensus  amongst  experts  whether 

there  is,  or  will  be,  an  IST  skills  shortage  and 

how big the shortage may be. Many experts argue 
that there is (and will be) an IST skills mismatch 
rather than an actual shortage. This may provide 

insights  into  how  to  move  ahead.  One  option, 

for instance, would be to generate a reservoir of 

people with broad IST skills which are adaptable 

to changing environments, rather than training a 

lot  of  specialists  in  many  specific  ICT  domains. 

Other  options  include  life  long  learning,  the 

inclusion  of  minorities  and  making  the  Member 

States more attractive to external experts.

In  view  of  the  fact  that  –on  the  one  hand- 

planning  IST  education  and  training  is  difficult 

in  the  mid-term  (>2010)  and  –on  the  other-  the 

availability  of  highly  skilled  workers  seems  to 

be  a  necessary  pre-condition  for  success  and 

prosperity in the long run, Europe cannot escape 

from 

taking  measures 

to  reorganise  current 

activities  as  a  key  factor  for  making  the  most  of 

the current transformation and which allows for a 

flexible adaptation to a new IST environment.

Increasing 

the  absorptive  capacity  of 
organizations. ‘Absorptive capacity’ is the rate at 
which  organisations  can  assimilate  scientific  or 
technological  information.18  Limits  to  absorptive 
capacity  partly  explain  why  firms  develop 

internal R&D capacities. R&D personnel not only 

conduct development along lines they are already 

familiar  with,  but  they  also  have  formal  training 

and external professional connections that make 

it  possible  for  them  to  evaluate  and  incorporate 

externally  generated  technical  knowledge  into 

the firm more effectively than other employees. In 

other words, firms also invest in R&D to diminish 
the constraints to absorptive capacity.19

Organisations  have  different  capacities 

for  acquiring,  assimilating,  transforming,  and 

exploiting  knowledge 

to  achieve 

innovation 

and  flexibility.  The  variation  in  organisational 

absorptive  capacity  can  be  attributed  to  factors 

such as: the capacity of the organisation to assess 

its  exposure  to  knowledge  sources,  how  well 

the  organisation’s  existing  learning  model  fits 

with  the  new  models  and  its  past  experiences, 

the  nature  of 

the 

technologies  which  are 

available  to  the  organisation;  and  other  external 

In  order  to  realise  the  new  vision,  Europe 

and 

internal  contextual 

factors 

influencing 

must  make  considerable  modifications 

in 

the  absorptive  capacity,  e.g.  the  existence  of 

several  fields:  economic,  organisational,  as 

government  pressures,  or  the  appointment  of 

well  as  technological.  Preparing  Europeans  for 

eLearning  champions.  The  transformation  from 

these  changes  is  a  critical  task,  which  will  rely 

potential  absorptive  capacity 

into 

realised 

on  old  and  new  learning  and  education  tools 
–  e.g.  distance  learning,  learning  on  the  job, 

capacity  is  influenced  by  formal  and  informal 
social  integration  mechanisms.  The  exploitation 

professional  communities,  knowledge  sharing 

of  realised  capacity 

for  strategic  outcomes 

-  and  all  the  other  ways  which  might  enhance 

is 

influenced  by 

the  characteristics  of 

the 

the  “ready-to-use”  skills  of  the  labour  force.  A 

organisational learners, such as their attitudes to 

stronger commitment should be made to learning 

technology-based  learning,  their  motivation  and 

processes  which  address  the  specialisation  level 

capacity to learn.

18  Martin G., Massy J., and Clarke T. (2003), When absorptive capacity meets institutions and (e)learners adopting, diffusing and 

19 

exploiting e-learning in organizations, International Journal of Training & Development, Vol. 7, No. 4, pp. 228–244.
See –for example- Cohen W., and Levinthal. D. (1990), “Absorptive capacity: a new perspective on learning and innovation.” 
Administrative Science Quarterly 35(1) pp. 128-152.

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1

Mastering the effects of the ageing population is 

many NMS suffer from high unemployment rates 

a major challenge

The economic gap between the EU and the 

US is likely to grow in the future because Europe’s 

population  getting  older  rapidly,  while  ageing 

has  far  lower  impact  in  the  USA.  Simulations 

indicate  that  Europe’s  ageing  demography  could 

be  reduced  but  not  completely  stopped,  even 

by  high  immigration  flows.  Europe  should  have 

taken advantage of the ‘baby boom’ generation of 

the  Sixties.  From  2010  onwards,  this  generation 

will start to reach retirement age and thus, many 

consider  the  present  decade  as  the  last  window 

of  opportunity  before  direct  and  secondary 

adverse  effects  will  become  more  dominant. 

A  direct  result  of  ageing  is  the  ever  increasing 

ratio  of  dependents  to  workers,  which  will  put 

the  sustainability  of  the  social  security  systems, 

including pensions, at risk, unless there is reform.

Secondary  effects  may  be  of  social  nature. 

Older  people  are  generally  less  fond  of  ‘new’ 

products,  forcing  some  companies  to  reconsider 

the time schedule for a return on innovation. To 

a  great  extent,  the  first  wave  of  the  knowledge 
economy  was  driven  by  young  consumers, 

who  actively  adopted  new  information  and 

communication 

technologies 

and 

adapted 

their  life  patterns  to  benefit  from  new  technical 

opportunities.  In  the  next  decades,  the  ageing 

population  will  strongly  influence  the  markets 

for  IST  applications.  These  products  will  have 

to fit the needs of older Europeans. The value of 

new  products  and  services  will  be  increasingly 

dependent  on  people  who  have  made  large 

investments  in  their  established  life-styles.  For 

this user group, novelty is not always a value in 

itself  and  change  may  imply  large  adjustment 

costs. This  demographic  transition  will  lead  to  a 

change  in  the  dynamics  of  product  and  service 

innovation,  making 

successful 

innovation 

increasingly dependent on a better understanding 

of user needs and the contexts of use.

Ageing  demographics  have  more  adverse 

effects  on  weak  economies  than  stronger  ones, 

whose adverse effects may be particularly evident 

in  some  New  Member  States.  This  is  because 

and  pronounced  ageing  at  the  same  time  –  e.g. 

Poland  and  Slovakia.  Although  the  growth  rates 

may be considerable, they may still be insufficient 

to  boost  the  economy  and  generate  a  large 

number of jobs. If the employment rate stays low, 

the  dependency  ratio  –  e.g.  number  of  earners 

supporting  the  economically  “non-productive” 

will gradually worsen.

The  difficulty  of  measuring  progress  during 

the transition phase before the completion of a 

knowledge-based economy

The  emerging  techno-economic  paradigm 

will 

require  new 

indicators 

to  measure 

progress.  Current  measurement  systems  and 

data  collection  methods  represent  solutions  to 

problems  that  were  socially  and  economically 

important in the earlier paradigm. The emergence 

of  the  new  paradigm  can  be  observed  from  the 

apparent discrepancies between institutionalized 

measurements  of  progress  and  ‘common-sense’ 

concepts  of  progress.  For  example,  national 

accounting  has  difficulty 

calculating 

the 

value  created  in  trans-national  networks,  the 

accumulation  of  intangible  assets,  or  the  added 

value quality improvements bring to products and 

services.  The  more  the  new  paradigms  emerge, 

the more old data and measurement systems are 

prone to deliver misleading results. Policymakers, 

therefore,  should  be  cautious  about  interpreting 

progress using ‘old’ indicators.

As  old 

indicators  of  progress  become 

unreliable, there is a clear and undisputed need 

for both the definition of suitable indicators and 

the  setting  up  of  mechanisms  whereby  the  new 

data  is  collected  by  the  appropriate  national, 

regional,  federal  statistics  institutes.  This  seems 

to  be  a  first  priority  for  the  development  of 

a  new  conceptual  framework  for  economic 

development. Obviously, the value and usability 

of 

the  data  will  heavily  depend  on 

their 

geographical  coverage  and  consistency.  In  the 

assessment of the ICT contribution to EU growth, 

the  quality  of  products  and  services  becomes  a 

 
 
 
 
 
 
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critical  competitive  factor.  Currently,  quality  is 

IST enhancing the shift from a product-based to 

barely included in productivity rate measurement 

a service-based economic model

and  needs  to  be  taken  into  account  in  future 

models.

IST-enhanced economic disruptions

The  availability  of  novel  or  significantly 

enhanced IST functionalities and the widespread 

adoption  of  new  IST-based  services  are  likely  to 

create new ways of living and novel perceptions 

of values driving the evolution of culture. A blend 

of  technology,  production,  and  adoption  may 

disrupt some market segments as we know them 

today.  This  offers  opportunities  to  new  entrants 

and  may  change  the  competitive  position  of 

whole  countries.  Progress  in  technology  will 

lead  to  disruptions  that,  in  some  cases,  will 

inevitably affect the value chains in several ways. 

This section analyses those disruptions which are 

likely to affect the international division of labour 

and the positioning of EU companies, along with 

industrial  and  service  channels.  Understanding 

the  potential  impact  on  the  value  chain  is  of 

great 

importance  because  of 

its  economic 

implications  for  the  fabric  of  European  business 

and  because  it  defines  strategic  initiatives  to  fill 

gaps  (e.g.  in  education),  promote  investments 

(e.g.  in  infrastructure),  revise  the  regulatory 

framework  and  the  way  that  societal,  ethical 

aspects  are  looked  at.  It  is  hard  to  predict  what 

will  cause  a  disruption  and  when,  but  some 

necessary  (but  not  sufficient)  conditions  can  be 

investigated.  The  FISTERA  network  identified  a 

number  of  possible  technology-enhanced  topics 

as  potential  instigators  of  disruption,  which  are 

briefly  summarized  in  the  following  paragraphs, 

as a basis for discussion.

Manufacturers  will  increasingly  skip  the 

distribution and supply chain and deliver services 

directly  to  the  end  user.  In  doing  so,  some 

manufacturers  will  also  be  creating  a  platform 

which  will  enable  third  parties  to  offer  new 

services. Distribution and supply chains become 

another  link  in  the  chain,  rather  than  being 

decoupled from it. This shift in the business model 

away from simply producing and selling products, 

towards making money in after-sale services has 

already happened. For example, manufacturers in 

the automotive industry are increasing their after-

sales  services  and  money  in  the  IT  industry  is 

mostly generated through sales of ink, rather than 

the  printer  itself. Though  it  is  debatable  whether 

this  is  an  advantage  or  a  disadvantage  from  the 

manufacturers’  point  of  view,  one  issue  appears 
to be clear:20 IST will benefit in both cases – first, 
as an industry in its own right and second, as an 

enabling technology that promotes the shift from 

products to services.

IST  will  enable  ‘personal’  mass  production 

just  as  the  production  chain  enabled  mass 

products  in  the  last  century.  Two  factors  favour 

“personal” mass production: the greater flexibility 

of production processes on the one hand and on 

the  other,  the  surplus  capability  embedded  in 

many products, which allows users to customise 

them to their needs. These two factors are difficult 

to  manage  (e.g.  personal  customisation,  etc.) 

and  do  not  meet  fast  changing  possibilities  (on 

the  producer  side)  and  needs  (on  the  user  side). 

A  further  step  towards  a  service-based  business 

model  would  address  these  aspects,  disrupting, 

at  the  same  time,  whole  value  chains.  Usability, 

understanding the changing needs of clients and 

20 

Selling products has a limited interaction range with the client as, once a client has bought a product, he is no longer a ‘client’.
Selling products has a limited interaction range with the client as, once a client has bought a product, he is no longer a ‘client’. 
Any  interaction  after  the  sale  is  often  a  disappointed  client  coming  back  with  a  complaint.  On  the  positive  side,  a  one-off 
contact with the client is an efficient way to get a return on advertising costs. The profit margins tend to be easy to calculate, as 
the sale is a single event. In a service sale business model, there is continuous interaction between the client and the service 
provider, who has the opportunity to maintain close ties. In a service relationship, revenues are distributed over time and the 
repeated use of the service leads to margins for the provider. Generally speaking, it is not sufficient to sell a service once; it must 
be sold over and over again. In the product sale business, it is necessary to have satisfied customers, (who are often attracted by 
brand names or word-of-mouth). In the service sales model, the satisfied customer must also be ‘hooked’ to generate revenue.

1

 
 
 
 
 
 
 
 
 
 
 
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the creation of a relationship of trust will be key 

The disappearance of the computer

assets in this evolution.

We  can  confidently  state  that  ‘computers’ 

With  regard  to  IST  as  an  industry,  it 

are already fading into the background. For each 

has  to  be  noted  that  many  IST  products  are 

personal  computer  sold,  there  are  more  than 

becoming  commodities  and  suffering  a  loss  of 

100  microprocessors  embedded  in  everyday 

differentiation.  The  product  is  often  no  longer 

objects,  like  remote  controls,  wrist  watches 

distinguishable  by  its  function,  but  only  by 

or  hotel  room  keys.  The  availability  of  cheap 

brand  (think  about  the  ‘Intel  inside’  campaign). 

storage, processing, sensory and communication 

Therefore, in several IST market segments, brand 

capabilities  in  every  day  objects  and  in  the 

value will lose appeal in favour of lower price, as 

environment  will  further  accelerate  and  create 

is already happening in the growth of unbranded 

tremendous opportunities for new services. New 

products.  The  more 

IST  products  become 

appliances will increasingly include connectivity 

commodities, the more margins will be reduced, 

and processing capabilities, and will interconnect 

forcing companies to explore alternative ways of 

easily with each other, displaying information on 

making  money.  The  adverse  effects  of  replicas 

the most appropriate device.

increase with new  copying  capacity, increasing 

the risk of loss of product value. Shifting from a 
product-based model towards a service business 

model could reduce damage by copying, allow 

regular payment, and also dilute the customer’s 

expenses  (iPod  business  model  versus  illegal 

copying of songs).

The  drivers  will  continue 

to  be  cost 

reductions, shrinking physical size and increased 

computing  power.  The  capacity  of  any  object 

to  process  and  communicate  information  will 

change  the  architecture  of  the  environment.  An 

object  will  rarely  be  a  stand-alone  device  but 

increasingly be designed to be part of and interact 

The transformation into service companies 

with  its  local  environment,  in  other  words  the 

will  require  supreme  attention  to  customers’ 

evolving  needs.  Changing  needs  will  further 

“ambient”.  The  embedding  of  microchips  able 
to communicate with the environment opens up 

shorten  the  product  life  cycle  or  demand 

the  opportunity  to  transform  ambients  and  our 

greater flexibility in functionalities with remote 

relation  with  them.  Thus,  these  ambients  will 

update. The  value  chain  needs  to  be  adjusted 

not just become richer in services; they will also 

to  permit  an  integration  of  the  production 

be  used  as  platforms  for  service  delivery.  The 

phase,  the  delivery  phase  and  the  customer 

ambient becomes both network and (aggregated) 

care phase. In view of the time constraints and 

terminal(s)  at  the  same  time.  Both  the  variety  of 

high level of flexibility required, the role of IST 

existing  production  industries  and  the  service 

will  be  a  key  element  in  this  transformation 

industry  need  to  adapt  their  view  of  the  market 

and  the  impact  on  industry  is  expected  to  be 
considerable. Scientific progress will enable the 

in these terms. The ambient transformation, both 

physical  and  virtual,  is  possibly  the  single  most 

transformation.  Technologies,  including  those 

important  factor  in  the  business  changes  lying 

used  in  production  processes,  have  become 

ahead. It will have a continued positive effect on 

cheaper  and  accessibility  and  management 

the  creation  applications,  including  those  in  the 

of  centralised  service  provision  has  become 

entertainment sector.

easier.  In  the  IST  sector,  for  instance,  rather 

than selling hardware, enterprises often provide 

the  hardware  to  run  the  services  for  free.  For 

instance, 

in 

telecommunications  a  voice 

message service is offered for free and the user 

only pays for the call to hear the messages.

20

From content to packaging

Content  production  keeps  growing  at 

a  staggering  pace.  Humans  have  produced 

more  content  in  the  last  30  years  than  in  all 

 
 
 
 
 
 
their  previous  history  and  it  is  forecasted  that 

iPod)  can  also  leverage  on  content  availability. 

the  amount  of  content  will  double  every  3 

Both  physical  and  virtual  packaging 

(based 

years.  Reduced  production  cost  enhances  the 

on  user  profiling),  will  become  very  important 

“explosion” of information. Individuals contribute 

businesses.  Software 

technologies  and  an 

one  order  of  magnitude  more  information  than 

appropriate  regulatory  framework,  which  takes 

enterprises  to  this  explosion.  Digital  cameras, 

into  account  privacy  and  ownership  issues,  are 

digital  camcorders  or  personal  web  servers 

essential.  Regulations  should  be  applicable  in  a 

support  this.  The  abundance  of  content  will 
change  the  perception  of  the  value  of  content. 
It is no longer the content per se that has value, 
but rather the way content is put into ‘context to 

be consumed’. If 90% of the content you require 

can  be  obtained  for  free  you  will  probably  be 

unaware  that  10%  is  missing.  Here,  packaging 

could make the difference by putting information 

into  a  specific  context.  Similarly,  if  there  is  too 

much information, filtering it and reducing it into 

a given package will also add value.

The  large  availability  of  content  resulting 

from  huge  production  in  the  private,  public  and 

business sectors and the ease with which it can be 

reached,  is  threatening  companies  that  produce 

content.  The  disruptive  force  of  this  evolution 

can  already  be  observed  in  the  record/media 

industry  and  in  the  information  industry.  One 

example  is  the  Encyclopaedia  Britannica,  which 

has been challenged by Wikipedia and other free 

services, and forced to release a large part of its 

content for free. The content and media industry 

is  likely  to  undergo  a  profound  reshaping.  How 

far  present  business  models  can  be  protected  in 

order to maintain content as an asset is unclear. 

Improved content protection technologies will be 

needed,  but  it  is  unlikely  they  will  ever  achieve 

the  high  standards  desired  by  industry.  Besides, 

as alternative “similar” content will often be free, 

‘protectionist’  approaches  are  not  likely  to  be 

sustainable.

In  times  of  content  abundance,  value  will 

shift  to  services  able  to  retrieve  a  specific  piece 

of  information  from  the  thousands,  customise 

it and deliver it in the form that is most suitable 

for a specific use. Today, companies like Google 

seem  in  the  best  position  to  leverage  from  the 

abundance  of  content.  Companies  that  come 

up with good packaging for content (like Apple’s 

trans-national context, possibly a big challenge.

Unlimited and ubiquitous communication

Infrastructures dedicated to communications 

will  fade  away  as  every  object  and  ambient 

becomes  connected.  At  the  same  time,  better 

access to infrastructure will reduce communication 

pricing  and  bundling  of  communications  access 

will increase as time goes by. The service industry 

is  likely  to  embed  communications  in  services 

and  users  will  consider  communications  as  a 

standard  feature  of  any  service.  Customers  will 

pay  for  the  service,  not  for  the  communication. 

Most  value  chains  will  embed  communications 

as  a  supporting  feature.  The  usual  relationship 

between a client using communications facilities 

and  the  operator  providing  them  will  disappear 

for most services. The question is who will cover 

the costs of infrastructure and minimal services.

Access  to  unlimited  bandwidth  will  present 

current operators with new challenges. At the same 

time, unlimited bandwidth will offer new business 

opportunities. We will see an infrastructure that, 

from a perceptual view point, is providing steady 

always-on  connectivity  that  will  be  paid  for  as 

such. Transaction support tariffs will be based on 

usage (charge per transaction, based on a variety 

of  parameters)  and  service-based  payment.  The 

impact  is  on  communication  since  it  needs  to 

readjust  its  architectures  to  traffic  as  diverse  as 

always-on video or transactions. Present services, 

like  voice  communications,  will  drift 

from 

transaction-oriented  tariffing  (where  time  is  the 

measuring  stick)  to  always-on  connectivity.  The 

whole area of service-based tariffing is novel and 

requires the integration of concepts such as virtual 

networks, environment, application, content and 

information. The regulatory framework will have a 

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substantial impact in this area, either stimulating 

A  systemic  approach  may  demand  some 

or hampering the pace of evolution.

institutional  structural  reforms, 

for  example, 

The  market  drive  will  not  be  on  ways  to 

exploit  bandwidth,  but  rather  on  the  services 

themselves. Bandwidth will be taken for granted, 

as  has  happened  with  roads.  Business  does 

not  think  about  exploiting  roads,  just  using 

them.  Telecom  operators  have  been  investing 

in  creating  ever  more  powerful  infrastructures 

and  now  that  these  exceed  demand,  they  are 

struggling to create the need for them. In fact, the 

drive should be to make them “more convenient” 

so that people linger. In road infrastructures, this 

the  clear  definition  of  roles  and  the  setting 

of  priorities  amongst  the  institutional  layers 

concerned.  All 

institutional 

layers  must 

collaborate  in  the  design  of  a  more  competitive 

environment  for  entrepreneurship,  with  a  set 

of  integrated  structural  reforms  of  the  product, 

capital,  and  labour  markets.  These  reforms  are 

urgently needed to improve the way each of the 

dynamic  markets  functions,  the  effectiveness  of 

their  resource  allocation,  and  the  contribution 

each can make to innovation.

translates into service areas, parking facilities, etc. 

One  of  the  bottlenecks  identified  is  that,  in 

In telecom infrastructures, this can translate into 

some Member States, national priorities seem to 

data management, data repository, and platforms 

prevail  over  European  strategies.  With  regard  to 

for service aggregation, etc.

Considerations about the way ahead

There  was  general  consensus  amongst  the 

workshop participants on the lack of enforcement 

mechanisms  for  the  Lisbon  agenda,  especially 

at the Member States level. After having defined 

very  challenging  goals,  no  commitment  to  a 

detailed work plan for national policies followed. 

Agreement  was  expressed  on  the  need  to  move 

from  a  “problems/solutions”  binome 

to  a 

“strategies/implementations” one, implying a pro-

active approach from each of the Member States 

IST, several EU countries have performed foresight 
studies  on  national  strengths  and  weaknesses  in 

order  to  detect  opportunities. These  studies  pay 

little  attention  to  the  European  dimension  and 

technology. This confirms the belief that national 

programmes  are  mainly  designed  to  fit  national 

interests  (industry  structure,  academic  expertise, 

etc.) and only occasionally incorporate European 

elements.  But  there  are  signs  of  opportunity.  In 

view  of  the  fact  that  only  a  few  Member  States 

have long-term national strategies for IST policy, 

the  development  of  a  Europe-wide  vision  and 

pathways  may  encourage  the  Member  States  to 

integrate  a  European  dimension  automatically 

to move towards the general goals.

into future national strategies.

A systemic approach

Areas  where  poor  performance  could 

Governance.  Governance  of  economic 
growth  and  development  has  to  rely  heavily  on 

the sub-national and regional level. An increasing 
number  of  powers  and  responsibilities  are 

block  the  implementation  of  policy  action  were 

located  at  this  level  and  a  greater  potential  for 

considered critical, namely public administration 
organisation,  state  governance,21  organisation 
and  roles  of  institutions,  financial  management, 

participation and dialogue is foreseen. Therefore, 

to  ensure  that  governance  can  cope  with  the 

greater  numbers  and  types  of  actors  involved,  a 

approach  to  risk-taking,  production  and  use 

combination  of  horizontal  governance  based  on 

of  available  knowledge.  All  actions  should  be 

applications and multi-layer vertical governance, 

integrated  in  a  systemic  approach,  able  to  cope 

promoting the enforcement of its acts, should be 

22

with changing situations.

foreseen.

21 

i.e. the network and leverages of influence from the strategy definition layer to the various levels of the society.

 
 
 
 
 
 
State/public administration and eGovernment

elaborated or supported by the stakeholders. With 

Better  quality  public  administration 

is 

recognised as a critical factor for the EU in facing 

the current challenges in terms of competitiveness 

and  strengthening  of  its  global  role.  The  future 

European  society  should  improve  the  efficiency 

and  effectiveness  of  public  bodies,  integrate 

their functions at the European level, and evolve 

and  enrich  their  functions  towards  structural 

cooperation  between  public  and  private  actors 

and  towards  greater  inclusion  and  participation 

of individuals.

IST  can  substantially  contribute 

to 

this 

goal  by  wide  deployment  and  increased  use 

of  eGovernment  applications.  In  fact,  there 

are  already  great 

individual  and  collective 

expectations  for  better  and  safer  government 

services.  There  seems,  however, 

to  be  an 

adoption problem. While the basic technological 

elements  for  properly  functioning  and  efficient 

eGovernment  are  mostly  available,  the  current 

usage  rate  by  citizens  is  unexpectedly  low. 

Interestingly,  there  is  controversy  as  regards  to 

the importance of eGovernment applications for 
the  future. A  recent  Delphi  study  carried  out  by 

FISTERA, involving more than 500 experts, ranks 

eGovernment  among  the  top  IST  applications. 

National  foresight  exercises  and  programmes, 

however, do not rank it as high. This may explain 

why  some  policy  makers  seem  to  underestimate 

their  role  in  the  diffusion  of  ICT  developments. 

Because of the perceived importance, it is urged 

that active measures be taken, including changes 

in  legislation  where  necessary  and  optimization 

of governmental back offices.

regard to IST, there is the need for a set of specific 

actions  (research,  standardization,  regulation, 

etc.) that is clearly defined and has clear priority. 

It was felt that the financial mechanisms currently 

available in the EU need to be adjusted in order to 

favour a consistent risk-taking investment attitude 

for  research  and  innovation.  Prioritization  must 

focus on key IST issues; otherwise the EU runs the 

risk that available human and financial resources 

are  diluted  with  no  critical  mass  for  economic 

and social opportunities.

As technical and societal innovations have to 

go hand in hand, the experts expect that another 

couple of decades may pass before ICT achieves 

its full impact on society. If Europe does not want 

to be flooded by innovations from other parts of 
the world, specific IST choices have to be made 

now:  socio-economic  determinism  and  techno-

determinism should be avoided when researching 

future developments. Any decision on the future 

of  R&D,  even  if  excellently  informed,  will 

necessarily  incorporate  a  certain  level  of  risk. 

Therefore  progress  is  directly  connected  to  risk 

taking, which should be encouraged at all levels. 

Due  to  the  burst  of  the  Internet  bubble, and  the 

difficult  years  in  the  telecom  sector,  however, 

there has been an adverse attitude to risk taking 

in  industry  and  public  organizations.  Now  that 

there  is  evidence  of  the  importance  of  IST,  the 

public  sector  should  contribute  to  support  risk 

taking and actively contribute to it.

Participation and socio-technical systems

An  important  and  distinctive  element  of 

the  European  social  model  is  the  participation 

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Promoting  finance  and  a  more  risk-taking 

of  its  citizens.  Participation  involves  all  those 

attitude

The  Lisbon  Agenda  and  the  Commission’s 

follow-up activities provide a political framework 

for action. This framework was meant to provide a 
detailed action plan that comprises all instruments 

available  to  the  European  Commission  in  a 

coherent way. However, workshop experts felt that 

these action plans may not have been sufficiently 

mechanisms  that  allow  citizens  to  take  an 

active  part  in  social,  political,  economic,  and 

cultural  activities,  i.e.  the  pillars  of  our  society. 

The  principles  of  solidarity  and  cohesion 

are 

fundamental  European  values  and 

they 

evolved  in  line  with  economic  development, 

internationalisation  of  production  systems  and 
the opening of the European boundaries. With the 

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last Enlargement, Europe has gained an additional 

company 

research  departments. 

European 

variety  of  cultures,  societies  and  ways  of  doing 

industry  structure  and  company  size  seems  to 

business. This  variety  and  rich  diversity  calls  for 

generate  a  lack  of  commitment  to  research,  as 

a  focused  effort  to  extract  the  best  elements  in 

compared  to  the  USA.  Specific  policy  actions, 

order  to  increase  the  shared  portion  of  vision, 

based  not  only  on  funding  but  also  on  the 

ideals, and practices. The way this will happen is 

building of closer cooperation, might help the EU 

still not sufficiently defined, but it will build upon 

to face weaknesses originating from the fact that 

an  agreement  between  Member  States  on  their 

it has fewer medium-sized ICT companies active 

concepts  of  community,  and  their  obligations 

in R&D than the USA.

and  rights.  Irrespective  of  how  successful  this 

integration  of  the  New  Member  States  will  be 

and  how  this  will  affect  the  Union,  some  basic 

European  values  are  likely  to  stay.  One  of  them 

will be citizen participation in decisions regarding 

the  future  EU,  and  individual  commitment  to 

the  path  chosen.  New  mechanisms,  including 

ICT tools, will be necessary to increase levels of 

participation.  However,  technology  push  alone 

will  not  be  enough. Technical  innovation  needs 

to  be  complemented  with  social  innovation  and 

institutional and organisational transformation, if 

economic  benefits  are  to  be  reaped  and  growth 

potential achieved. A systemic approach is needed 

Policy  action 

should  be  directed  at 

encouraging  cross-fertilisation  between  sectors 

and countries by sharing accumulated experience, 

and  at  systematically  stimulating  innovation. 

Additionally, 

it 

should  promote 

“frontier 

research”, which would complement vital “user-

driven research” - a necessary condition for more 

integrated  results.  Besides  the  commitment  to 
generate  new  knowledge,  another  important 

policy  target  is  better  exploitation  of  existing 

knowledge, for it use in new ways or developing 

new applications.

which can include all the strategic components of 

Concluding remarks

the society, and integrate them, building on their 

complementarities. This appears to be a condition 

for knowledge-based development and growth.

Research capabilities and the  role of the public 

sector

In 

the  upcoming 

economic 

system, 

knowledge  becomes  an  increasingly  dominant 

factor  for  growth  and  the  question  arises  as  to 
whether ‘knowledge’ is a ‘public good’ and, if so, 
to what extent this is true. In the optic of a public 

good, the role of public research centres becomes 

more  critical,  raising  the  demand  to  strengthen 

public  research  capabilities.  The  relationship 

between public and private knowledge becomes 

very important.

The  Lisbon  objectives  are,  by  definition,  a 

‘moving’ target, requiring regular discussion and 

revision  in  geographical  and  temporal  contexts. 

An  appropriate  monitoring  system  is  needed, 

which  is  not  available  at  the  moment.  A  major 

concern  arises  as  to  whether  comparisons  or 

benchmarks  will  remain  valid  as  Europe  moves 

(from  an  industry/service  based  industry)  further 

towards a knowledge society. It is generally agreed 

that, to grasp the economic dynamics underlying 

the information society, adequate indicators and 

effective  tools  for  building  data  collection  in 

order to guarantee their availability are absolutely 

necessary.  However,  there  is  no  consensus  on 

what  these  new  indicators  should  look  like.  For 

instance,  is  ‘productivity’  still  an  appropriate 

indicator in a society which some scholars have 

Public investment should be made in research 

started  to  define  as  “non-productive”?  Similarly, 

2

laboratories  and  projects,  the  qualification  of 

how  can  we  monitor  the  potentially  beneficial 

researchers,  the  systematic  interaction  between 

role  of  knowledge  and  its  development  trend? 

research  institutes,  and  the  close  cooperation 

What  is  the  EU’s  position  as  regards  knowledge 

between  public  research  bodies  and  private/

trends? Who is sitting on what knowledge? How 

 
 
 
 
 
 
can we access knowledge? How can we learn to 

low propensity to risk taking, the low acceptance 

use it best?

Europe  has  a  unique  social  model  based 

upon  our  history  and  values.  Efforts  should  be 

made  to  keep  those  ‘European’  values  related 

to  welfare  and  civil  responsibility 

for 

the 

future.  This  implies  that  the  highest  standards 

of  citizen  participation  should  be  maintained 

and  aligned  to  the  current  policy  framework, 

the  priority  areas  and  the  way  improvements 

in  participation  are  measured.  One  upcoming 

challenge  is  the  ageing  population  which  will 

affect Europe much more than other developed 

regions. Though the adverse effects of an ageing 

society  are  widely  recognized,  there  is  still 

of a certain level of failure, and the lack of policy 

measures  accommodating  risk,  all  of  which  are 

major impediments for the future. A considerable 

effort is needed to turn this around into a positive 

trend.  Third,  it  was  felt  that  individuals  and 

society  need  to  be  encouraged  to  adopt  a  new 

growth  model  based  on  creativity,  knowledge, 

intangibles,  quality,  and  to  make  best  use  of 

European  strengths,  e.g.  diversity,  skills  and 

innovation, social and institutional learning, and 

inclusiveness. Finally, indicators for the dynamic 

changing  context  must  be  introduced,  which 

suit the transition phase, and strengthen the EU’s 

future position in a fast changing world.

little  quantitative  research  on  how  this  will 

Some  workshop  participants 

felt 

that 

affect  our  future  knowledge-based  economy, 
for  instance  in  terms  of  the  labour  force.  In  a 

perceptions  of  the  EU’s  economic  status  were 
often  too  pessimistic.  This  pessimism  may  have 

knowledge-based society, the number of jobs for 

been  partially  caused  by  the  fact  that  Europe’s 

people with tertiary level education is growing, 

vision  is  defined  on  a  comparative  basis  and 

while  the  number  of  jobs  for  those  with  lower 

is  not  clear.  Unattainable  expectations  may 

education levels is decreasing in most fields. An 

have  arisen  as  a  result  of  the  ambiguities  and 

effective  strategy  directing  a  larger  share  of  the 

difficulties  in  measuring  progress  towards  it. 

young  people  to  higher  education  is  therefore 

A  positive  and  constructive  approach  needs  to 

necessary.  It  should  be  possible  to  direct  our 

be  taken  to  strengthening  the  European  vision, 

efforts to increasing the labour force participation 

possibly  by  redefining  the  objectives  not  only 

rate,  dealing  with  the  high  unemployment  rate 

in  comparison  to  other  regions,  but  also  in  ‘EU 

in  some  social  groups,  and  counterbalancing 

internal’  terms.  It  should  take  into  account 

the  ageing  phenomenon  by  allowing  increased 

important  EU  socio-economic  considerations, 

immigration.  The  inward  flow  should  include 

such  as  an  ageing  population,  and  balance 

both  skilled  and  unskilled  workers,  who  will 

these  out  against  different  trade-offs  (e.g.  how 

contribute to the quality of EU development.

much  growth  can  we  afford  at  the  expense  of 

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With  regard  to  a  systemic  approach  that 

identifies  both  areas  of  concern  and  possible 
solutions,  some  factors  were  considered  outside 

the reach of European influence. However, most 

of them were considered to be sources of possible 

stimulus,  development,  competitive  strength 

and  consolidation  of  the  enlarged  community. 

Some  steps  are  considered  critical  to  growth 

and  to  the  establishment  of  the  knowledge 
society. The first one is to monitor systematically 
technology  evolution  and  opportunities  and  to 

make  evidence-based  assumptions  about  which 

technological  disruptions  will  have  high  socio-

economic potential. The second is to oppose the 

losing  regional  economic  cohesion).  The  focus 

of  European  economic  policy  on  growth  and 

employment  are  a  step  in  the  right  direction.  A 

range  of  policy  actions  could  be  envisaged  in 

areas,  considered  by  the  experts  to  contribute 

considerably  to  growth,  where  concerted  public 

action  is  absolutely  necessary.  The  first  one 

is  the  integration  and  cooperation  of  public 

administration at European level, which must be 

accompanied  by  the  evolution  of  the  practice 

of  governance.  Secondly,  there  is  a  clear  need 
for  radical  reform  of  some  of  the  basic  policies 

2

(market, regulation, etc.) of the current economic 

system in order to adapt them to the new wider 

 
 
 
 
 
 
 
 
 
 
 
challenges  presented  by  the  knowledge-based 

The  establishment  and  consolidation  of  the 

global  economy.  Third,  governments  shall  put 

knowledge  society  will  rely  upon  a  different 

in place a legal framework to encourage a more 

weighting of factors (e.g. innovation, growth, and 

risk-taking  attitude.  This  framework  should  also 

learning) than in the past. As the composition of 

include  appropriate  financial  mechanisms  to 

these factors is dynamic and changes with time, 

support  more  risk-taking.  Fourth,  the  promotion 

priority  setting  gets  difficult.  Researchers  would 

of  a  participatory  and  integrating  approach  to 

be advised to make trade-offs and feasible paths 

socio-technical  systems  should  actively  pursue 

more explicit to decision makers, so that they can 

ways of extracting the maximum from technology 

make informed choices between alternatives.

applications,  and  the  related  institutional  and 

organisational  changes.  Finally,  governments 

should  reinforce  research  capabilities  through 

higher  commitment  and  deeper  cooperation 

between public and private actors.

Greater  attention  should  be  devoted  to  the 

impact  of  Enlargement,  labour  mobility  and 

re-localisation,  and  the  better  use  of  ICT  and 

knowledge,  rather  than  relying  on  production 

only.  Additional  effort  has  to  be  devoted  to  the 

elaboration of more effective ways of integrating 

national  policies  with  each  other  in  order  to 

achieve results at European level.

A  systemic  approach 

to 

the  economic 

institutions 

(labour  market,  product  market) 

is  needed,  which  should  result  in  a  full  set  of 

structural  reforms  to  achieve  better  political 

governance. In order to encourage growth, Europe 

should  increase  its  efforts  to  identify  growth 

sectors, and reallocate resources to generate firms 

and sectors with high growth potential.

Priority  actions 

identified  during 

the 

workshop discussion are to:

- 

improve the use of existing knowledge, rather 

than  focusing  only  on  the  creation  of  new 

knowledge,

- 

cover  the  whole  span  of  research  -  from 

application-driven 

to 

curiosity-driven 

research – in R&D,

- 

solve Europe’s governance difficulties, and its 

lack of both focus and implementation tools. 

These tools must match objectives - e.g., the 

‘open  method  of  coordination’  might  need 

to  be  reinforced  with  a  parallel  method  of 

involving national governments in converging 

policy actions,

- 

encourage innovation, as it is one of the chief 

remedies for unemployment,

- 

use a systemic approach to European growth 

and  social  improvement  policy  to  inform  all 

the  above  actions.  This  approach  could  be 

a  critical  means  of  overcoming  the  current 

phase of instability and uncertainty.

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2.Re-specialisation and the Deployment of the ICT 
Paradigm - An Essay on the Present Challenges of 
Globalisation

      by Carlota Pérez

ICT shaping, and being shaped by, the 
global context

The 

future 

of 

Information 

and 

Communications 

technologies 

(ICT) 

is 

inextricably  intertwined  with  the  future  of  the 

global economy and of each regional and national 

economy. This is because the core industries of a 

technological  revolution  are  much  more  than  a 

set of new products, industries and infrastructures 

to be added to the previously existing ones. Each 

technological revolution provides a set of generic 

technologies,  infrastructures  and  organisational 

principles – a new techno-economic paradigm – 

capable of gradually modernising and increasing 

the productivity of the whole economy.

Therefore,  the  specific  market  opportunities 

in  the  ICT  innovation  space  will  be  increasingly 

defined  by  the  direction  and  intensity  of  growth 

in  other  industries,  while  innovation  in  all  other 

industries and activities will be dependent upon 

the  new  potential,  its  characteristics  and  the 

associated capabilities.

Current  biotechnology  and  nanotechnology 

wouldn’t  even  be  conceivable  without 

the 

contribution of swift and massive data processing 

software and extremely precise computer-guided 

towards  customising 
instruments.  The 
chemicals  and  materials,  which  is  rejuvenating 

trend 

what  were  mature  industries,  is  made  possible 

by  computer  aided  engineering  and  simulation 

techniques.  The  same  can  be  said  about  most 

innovations  today,  from  products  and  process 

equipment in manufacturing to practically all the 

service  industries,  from  finance  to  retail.  Even 

the  creative  and  craft  industries  are  innovating 
with ICT, while shepherds and fishermen far from 

modern  cities  use  digital  satellite  data  for  their 

A  similar  situation  ensued  from  1908-13, 

when 

the  mass-produced 

low-cost  Model-T 

became  the  example  that  shaped  the  techno-

economic 

paradigm 

of 

that 

revolution. 

Standardisation  and  assembly-line  production 

were soon applied in one industry after another. 

The  other  core  elements  of  the  constellation, 

the  internal  combustion  engine,  coupled  with 

increasingly  efficient  oil  refining  technologies, 

guided  the  revolution  in  massive  transport  from 

trains,  ships,  carriages,  bicycles  and  horses 

to  automobiles,  buses,  trucks  and  airplanes. 

Universal electricity fuelled by hydrocarbons led 

beyond  industrial  equipment  to  a  whole  range 

of  household  appliances  destined  to  transform 

lifestyles 

radically.  Petrochemical  materials 

increasingly replaced natural fibres in the textile 

industry; they also tended to replace many natural 

materials,  from  rubber  and  wood  to  leather  and 

even  glass,  in  one  use  after  another.  Disposable 

plastics became the  staple diet of the  packaging 

industry  and  agriculture  was  transformed  by  oil-

driven  machinery  and  petrochemical  fertilizers, 

pesticides  and  herbicides.  In  other  words,  for 

over  half  a  century,  oil-based  mass  production 

shaped 

the  direction  of 

innovation 

towards 

the  energy  and  materials-intensive  patterns  of 

production and living that the Knowledge Society 
has inherited.

But  the  relationship  is  mutual.  Technology 

shapes the economy as well as society and these, 

in turn, are constantly shaping technology, guiding 

its development and selecting within the potential 

it offers. The space of the technologically feasible 

will  be  filtered  by  the  economically  profitable 

daily work.

various social agents).

and the socially and culturally acceptable as well 
as modified by market and policy developments 

2

(including  inaction,  as  much  as  action,  by  the 

 
 
 
 
 
 
 
 
 
 
 
 
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2

Thus,  in  the  process  of  examining  the 

future  path  of  ICT,  it  is  important  to  refer  to  the 

characteristics  of  the  specific  techno-economic 

Industrial Revolution in England at the end of the 
18th  Century.  Each  has  generated  a  great  surge 
of  development,  diffusing  unevenly  across  the 

paradigm and to the way they may be influencing 

world  from  an  initial  core  country. The  analysis 

the opportunities in other sectors of the economy. 

of the previous four surges reveals regularities in 

Equally useful is making reference to the regular 

the  pattern  of  diffusion  of  technological  change 

patterns  identified  in  the  diffusion  process  of 

that help us understand the propagation process 

earlier 

technological  revolutions.  Both 

these 

of  the  present  fifth  surge  based  on  ICT. This  can 

frameworks can aid in assessing the options and 

provide criteria for strategic and policy action.

the  viable  paths  for  action,  depending  on  the 

goals of the different actors at play.

This essay is meant to go part of the way in 

that task. It will summarise some of the relevant 
aspects of the great surges model presented by the 
author in Technological Revolutions and Financial 
Capital.22  On  the  basis  of  that  framework,  it 
will  argue  that,  though  the  role  of  free  markets 

was  crucial  in  the  early  decades  of  diffusion  of 

the  ICT  revolution,  their  continued  unrestrained 

and  unguided  operation  can  only  aggravate  the 

tensions inherited from the casino economy and 

the income polarisation of the 1980s and 1990s. 

It will propose that a conscious, policy-facilitated 

and consensus-driven process of respecialisation 

in  the  developed  economies  can  be  the  most 

effective  way  to  overcome  those  tensions  as 

well as the instabilities generated by the present 

uneven globalisation of production.

The  intention  is  to  share  some  of  the 

concerns  and  ideas  for  action  that  emerge  from 

observing the present circumstances with the aid 

of a historical model of recurrence. As such it is a 

personal contribution to a debate about shaping 

the future, the need for which is becoming more 

acute as globalisation proceeds.

The recurring diffusion pattern of 
revolutionary technologies

Double nature of technological revolutions23

An  important  element  of  this  recurring 

pattern is the double nature of each technological 

revolution.  The  great  wealth-creating  potential 

provided  by  each  of  them  stems  from  the 

combination  of  the  new  technologies,  industries 

and 

infrastructures  with  a  set  of  generic 

technologies 

and  organisational  principles 

capable of modernising the rest of the economy. 

The  resulting  best  practice  frontier  is  superior  to 

the previous one and becomes the new common 
sense  for  efficiency  –a  new  techno-economic 
paradigm– 
for 
innovation and competitiveness.

the  guidelines 

that  defines 

This  paradigm  will  transform  the  whole 

economy  and  will  gradually  bring  it  to  a  higher 

productivity  plateau.  Propagation 

is  highly 

uneven  in  coverage  and  timing,  by  sectors  and 

by regions, in each country and across the world. 

Whatever  its  shape  and  rhythm,  the  complete 

process  of  diffusion  of  each  new  technological 

constellation  and  its  techno-economic  paradigm 
constitutes a Great Surge of Development.

Table  1  summarises  the  elements  of  each 

of  the  five  surges,  indicating  the  core  country 

or  countries  from  which  it  is  deployed,  the  date 

of  the  initial  big  bang  –  or  initial  breakthrough 

– that articulates the technological revolution, the 

There  has  been  a  technological  revolution 

main industries and infrastructures and the basic 

every  40  to  60  years,  beginning  with  the 

principles of each paradigm.

Given  that  the  two  following  sections  introduce  the  main  concepts  of  the  model  presented  in  the  book,  the 
22  Pérez  (2002).  Given that the two following sections introduce the main concepts of the model presented in the book, the

reader will be referred to the relevant chapters or pages in each case.

23  Pérez (2002) Ch. 2.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table  1.  The  five  great  surges  of  development:  Technological  Revolutions  and  Techno-economic 
paradigms

Technological 
revolution
Core country 

New technologies 
and new or redefined 
industries

New or redefined
infrastructures

Techno-economic paradigm
‘Common-sense’ innovation 
principles

FIRST: From 1771
The ‘Industrial 
Revolution’
Britain

Mechanized cotton industry
Wrought iron
Machinery

Canals and waterways
Turnpike roads
Water power (highly improved 
water wheels)

Factory production
Mechanization
Productivity/ time keeping and time saving
Fluidity of movement (as ideal for machines 
with water power and for transport through 
canals and other waterways)
Local networks

SECOND: From 
1829
Age of Steam and 
Railways
In Britain and 
spreading to 
Continent and USA

THIRD: From 1875
Age of Steel, 
Electricity and 
Heavy Engineering
USA and Germany 
overtaking Britain

FOURTH: From 
1908
Age of Oil, the 
Automobile and 
Mass Production
In USA and 
spreading to Europe

Steam engines and 
machinery (made of iron; 
fueled by coal)
Iron and coal mining (now 
playing a central role in 
growth)*
Railway construction
Rolling stock production
Steam power for many 
industries (including textiles)

Cheap steel (especially 
Bessemer)
Full development of steam 
engine for steel ships
Heavy chemistry and civil 
engineering
Electrical equipment industry
Copper and cables
Canned and bottled food
Paper and packaging

Mass-produced automobiles
Cheap oil and oil fuels
Petrochemicals (synthetics)
Internal combustion engine 
for automobiles, transport, 
tractors, airplanes, war tanks 
and electricity
Home electrical appliances
Refrigerated and frozen 
foods

FIFTH: From 1971
Age of Information 
and Telecom-
munications
In USA, spreading 
to Europe and Asia

The information revolution:
Cheap microelectronics.
Computers, software
Telecommunications
Control instruments
Computer-aided 
biotechnology and new 
materials 

Railways (use of steam 
engine)
Universal postal service
Telegraph (mainly nationally 
along railway lines)
Great ports, great depots and 
worldwide sailing ships
City gas

Economies of agglomeration/industrial 
cities/ national markets
Power centres with national networks
Scale as progress
Standard parts/ machine-made machines
Energy where needed (steam)
Interdependent movement (of machines and 
of means of transport)

Worldwide shipping in rapid 
steel steamships (use of Suez 
Canal)
Worldwide railways (use of 
cheap steel rails and bolts in 
standard sizes).
Great bridges and tunnels
Worldwide Telegraph
Telephone (mainly nationally)
Electrical networks (for 
illumination and industrial use)

Networks of roads, highways, 
ports and airports
Networks of oil ducts
Universal electricity (industry 
and homes)
Worldwide analog 
telecommunications 
(telephone, telex and 
cablegram) wire and wireless

World digital 
telecommunications (cable, 
fiber optics, radio and 
satellite)
Internet/ electronic mail and 
other e-services
Multiple source, flexible use, 
electricity networks
High-speed physical transport 
links (by land, air and water) 

Giant structures (steel)
Economies of scale of plant/ vertical 
integration
Distributed power for industry (electricity)
Science as a productive force
Worldwide networks and empires (including 
cartels)
Universal standardization
Cost accounting for control and efficiency
Great scale for world market power/ ‘small’ 
is successful, if local 

Mass production/mass markets
Economies of scale (product and market 
volume)/ horizontal integration
Standardization of products
Energy intensity (oil based)
Synthetic materials
Functional specialization/ hierarchical 
pyramids
Centralization/ metropolitan centers–
suburbanization
National powers, world agreements and 
confrontations

Information-intensity (microelectronics-
based ICT)
Decentralized integration/ network 
structures
Knowledge as capital / intangible value 
added 
Heterogeneity, diversity, adaptability
Segmentation of markets/ proliferation of 
niches
Economies of scope and specialization 
combined with scale
Globalization/ interaction between the global 
and the local
Inward and outward cooperation/ clusters
Instant contact and action / instant global 
communications

Note:* These traditional industries acquire a new role and a new dynamism when serving as the material and the fuel of the world of 
railways and machinery
Source: Based on Pérez (2002) pp. 14 and 18

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A similar sequence of propagation24

The other recurring element is the sequence 

of  diffusion  of  each  technological  revolution 

in  the  core  country.  As  shown  in  Figure  1,  the 

overall  process  of  propagation  takes  the  shape 

of  the  logistic  curve  characteristic  of  epidemic 

models, as does the diffusion of most individual 

technologies  and  technology  systems.  However, 

in  the  case  of  a  whole  revolution,  the  process 

is  broken  in  two  halves  with  very  different 

characteristics.

Due  to  the  depth  of  commitment  to  the 

previous  paradigm  –on  the  part  of  institutions, 

companies,  individuals  and  the  economy–  the 

initial  decades  of  emergence  and  installation  of 

each  technological  revolution  are  a  turbulent 

battle  between  the  new  and  the  old,  involving 

Schumpeterian  creative  destruction  in  both  the 

economy  and  the  institutional  framework.  This 
first  half  of  each  surge  is  the  Installation  period. 
It  is  after  this  battle  against  resistance  has  been 

won that the decisions are taken –through various 

social  processes–  as  to  what  specific  shape  the 

fully-realised new potential will take. This usually 

happens  after  the  collapse  of  a  bubble  caused 

by  frenzied  investment  in  the  new  technologies 

and  infrastructures.  This  has  occurred  regularly 

midway  along  the  propagation  process  of  each 

technological  revolution:  canal  mania,  railway 

mania,  the  great  booms  in  Australia,  Argentina 

and other Southern countries, the roaring twenties 

and the euphoric 1990s

The following decades of diffusion constitute 
the  Deployment  Period;  the  “Golden  Age”  of 
each  great  surge,  such  as  the  boom  after  the 
Second World War, the Belle Époque at the turn 

Figure 1. The social assimilation of technological revolutions breaks each great surge of development 
in half

20 - 30 years

INSTALLATION PERIOD

???

Turning
Point

20 - 30 years

DEPLOYMENT PERIOD

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Previous
Great
Surge

Battle of the new
vs. the old paradigm
conducted by
FINANCIAL CAPITAL
ending in a bubble collapse

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big-bang

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Based on Pérez (2002) p.37

24  Pérez (2002), Ch. 4.

Full expansion of the
new paradigm
conducted by
PRODUCTION CAPITAL
from “Golden Age” to Maturity

Next
Great
Surge

Time

Next
big-bang

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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of the 20th Century or the British Victorian boom 
in mid-19th Century. It is no longer a time of easy 
millionaires  as  during  the  bubble,  but  rather  of 

increasing well being across a wider range of the 

social spectrum.

There  are  major  differences  between  these 

two periods, due to the relative roles and criteria 

of  finance  and  production,  which  operate  in 

capitalism as two distinct functions performed by 
two  different  sets  of  actors.  During  Installation, 
the  economy  is  typically  led  by  the  short-term 
criteria  of  financial  capital.25  Once  the  point  of 
exhaustion  of  a  techno-economic  paradigm’s 

potential  is  approached,  conditions  are  created 

the  articulation  of 

for 
the  existing  radical 
technologies  into  a  technological  revolution.26 
Finance capital breaks away from the now mature 

and  risk-averse  production  capital  and  goes  in 

search  of  extraordinary  profits  to  be  had  from 

backing new entrepreneurs. The new technologies 

and 

industries  can 

then  flourish  while 

the 

established  ones  are  forced  to  modernise  (or  be 

destroyed  as  obsolete).  It  is  the  time  when  the 

new  paradigm  emerges  and  the  old  one  needs 

to  be  “unlearned”.  These  early  decades  are 

marked  by  the  emergence  of  innumerable  new 

entrepreneurs, a small number of which will grow 

into new giants, destined to become the engines 

of growth in the following Deployment Period.

During Deployment, the economy will once 
again  be  in  the  hands  of  production  capital, 

now  renewed  and  strengthened.  The  focus  of 

attention  will  move  from  the  stock  market  to 

the  expansion  of  the  world  of  production  and 

employment, to growth and productivity as well 

as  to  its  consequences  in  terms  of  well-being.  It 

is these periods which have given rise to the term 

“golden  age”,  when  the  whole  potential  of  the 

technological revolution and its techno-economic 

paradigm  are  deployed  across  the  economy,  led 

by the longer-term criteria of production capital.

Historically,  Installation  and  Deployment 
have lasted around 20 to 30 years each, displaying 
deeply  different  characteristics.27  Between  these 
two periods, and after the frenzied bubble at the 

end  of  Installation,  there  is  a  lapse  of  uncertain 

duration  (from  two  to  thirteen  years,  the  last 

being  in  the  1930s  in  the  fourth  surge).  During 
this  lapse,  or  Turning  Point,28  the  tensions  left 
by the bubble need to be overcome. The way in 

which this is done, and the direction taken by the 

institutional changes and policy decisions, shape 

the  ensuing  Deployment  period. The  world  now 

is traversing the Turning Point after the collapse of 

the NASDAQ in 2000.

The  following  section  will  examine  some 

of 

the  relevant  characteristics  distinguishing 

Deployment  from  Installation  and  the  tensions 
that drive the shift from one period to the other.

Installation and deployment: different 
conditions and behaviours29

In the years preceding the first world war, 
there were in common use among economists 
a number of metaphors ... ‘Money is a wrapper 
in which goods come’; ‘Money is the garment 
draped round the body of economic life’; ‘money 
is a veil behind which the action of real economic 
forces is concealed’... 

During the 1920s and 1930s ... money, the 
passive veil, took on the appearance of an evil 
genius; the garment became a Nessus shirt; the 
wrapper a thing liable to explode. Money, in short, 
after being little or nothing, was now everything...

Then with the Second World War, the tune 
changed again. Manpower, equipment and organi-
zation once more came into their own. The role of 
money dwindled to insignificance..

Pigou (1949) pp.18-19

In order to find the source of the significant 

differences between the two halves of each surge, 

it  is  important  to  understand  the  power  of  the 

techno-economic  paradigm  in  influencing  the 

behaviour  of  all  agents  in  the  economy,  from 

25  The  terms  financial  capital  and  production  capital  are  used  in  the  great  surges  model  to  represent  the  two  complementary 
agents of the market economy: those that function by allocating or reallocating wealth in the form of money or paper assets 
and those that operate as generators of wealth by producing goods or services. For a full discussion, see Pérez (2002), Ch. 7.
For a discussion of why technical change occurs by revolutions, see Pérez (2002) pp. 27-32.

26 
27  A figure with the approximate dating of the five surges and their periods can be found in Pérez (2002) p. 57.
28  Pérez (2002) Ch. 11 and Epilogue.
29  This section is based on Pérez (2002) Chapters 8-12.

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engineers  and  managers,  through  investors  and 

become  over-adapted  to  the  previous  paradigm. 

bankers,  to  distributors  and  consumers.  In  the 

That  is  why,  it  takes  two  or  three  decades  of 

process  of  Installation,  the  shared  common 

Schumpeterian  creative  destruction  to  demolish 

sense  of  the  new  paradigm  becomes  embedded 

those  obstacles  and  to  prove  the  superiority  of 

in  the  minds,  in  the  actions  and  in  the  market 

the  new  technologies  and  their  capability  to 

behaviour  of  all 

the  economic  agents  and 

modernise  the  whole  economy  and  increase  its 

rooted in the territory, lowering transaction costs 

wealth  creating  capacities.  Deployment  is  the 

through  the  infrastructural  networks  –of  canals 

relatively peaceful period after the battle has been 

or  railways,  of  telegraph  or  telephone,  of  ports 

won,  when  the  paradigm  has  become  common 

and  steamships  or  roads,  airports  and  electricity 

sense and all its advantages can be exploited, only 

or digital telecoms and internet. Further still, the 

to  approach  exhaustion  in  two  or  three  decades 

whole  institutional  framework,  from  the  forms 

and create conditions for the next revolution and 

of  government  policies,  through  the  educational 

the next turbulent installation period.

systems  to  the  international  trade  and  legal 

measures, the whole conditioning context for the 

operation  of  markets  and  for  the  styles  of  living 

and production is gradually made more and more 

compatible  with  the  requirements  for  the  full 

exploitation of the potential of that particular set 

of all pervasive technologies and their “common 

sense” paradigm.

When the potential of that surge is exhausted, 

the  new  one  is  articulated  in  circumstances 

that  are  unfavourable  to  it,  because  they  have 

The basic differences

Since paradigms are all profoundly different, 

the  battles  waged  to  impose  the  new  over  the 

previous  –both  in  the  economy  and  in  the 

minds  and  institutions–  will  be  unique  each 

time  around.  Nevertheless,  with  many  caveats 

about its stylised nature, table 2 presents a set of 

features that, in general, can be said to distinguish 

the Installation and Deployment periods. History 

Table 2. The different features of the Installation and Deployment periods

INSTALLATION:
From irruption to Frenzy Bubble collapse
Financial; short-term. Stock market focus; aim 
for rapid capital gains (with any sort of financial 
instrument).

Main criteria for 
investment

Industry 
structures

Fluid, changing, unstable, constant challenges to 
incumbents; many participants.

Competition

Innovation

Productivity

Very intense, survival of the boldest: exploratory 
process; definition of dominant designs and best 
business models.

Constant, both real and sham. Forced by investor 
expectations and by fierce competition Accent on 
supply-pushed new products and services.

Divergent by sectors and within industries. Natural 
consequence of the power of the new paradigm in 
the new sectors.

Target markets

Very concentrated on top of the pyramid. 
Increasing sophistication.

2

Income 
distribution

Increasingly polarised: new rich, richer rich and 
poorer poor (persons, firms,regions).

Social climate

Individualism; complacency of the rich; increasing 
resentment of the poor; violence brewing.

Source: Based on Pérez (2002), chapters 5, 8-10 and 12

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DEPLOYMENT:
From “Golden Age” to maturity
Long-term growth; production and market 
expansion. Search for dividends. Conscious of 
“fundamentals” and real long-term returns.

Increasingly stable; few firms (tending to form 
oligopolies). Successful business models 
identified; growing barriers to entry.

Tempered by stable industry structures; battle for 
share of a growing market with dominant designs 
established.

Mainly real, in both products and processes; 
continuous improvement, driven by profit seeking 
and market expansion requirements.

Converging onto a higher plateau within and across 
sectors. Conditions for a conscious and successful 
drive to improve it in all sectors.

Wider and wider segments (homogenised or 
diversified depending on the paradigm); increasing 
functionality.

Improving distribution; incorporating more and 
more layers and regions into prosperity.

Growing social awareness; increasing “good 
feeling” opening of opportunities for the excluded. 
Conditions for peaceful growth.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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can  never  be  put  into  neat  and  tight  boxes,  but 

the  processes  of  abstraction  that  select  aspects 

associated with deeper causal chains can provide 

to  greater  attention  to  process  innovation  for 
accompanying  market  expansion.30  This  will 
influence  productivity,  which  during  Installation 

useful  heuristics  for  approaching  the  analysis  of 

changes very unevenly across and within sectors. 

complex  socio-economic  processes.  This  whole 

section is written in that spirit.

The  main  criteria  for  investment  initiate 

the  table  because  they  indicate  the  essential 

distinguishing  feature  of  the  two  periods:  the 

difference  between  the  aims  of  financial  and 

production capital, which are the leading agents 

in  one  and  the  other  period. The  criteria  driving 

During  Deployment,  as  the  paradigm  diffuses 
more  evenly  across  the  production  spectrum31 
and the transaction costs of the whole economy 

benefit  from  the  growing  externalities  provided 

by  the  infrastructure  and  better  services,  a 

synergistic  process  generates  a  more  convergent 

trend  towards  higher  productivity  levels  across 

the board.

growth during Installation are those aimed at short-

Finally,  the  last  three  aspects  indicated  in 

term quick gains through negotiating with paper 

the table are interrelated around a very important 

assets.  In  Deployment,  it  is  the  accumulation  of 

process that characterises the installation period: 

wealth creating power in the form of production 

the  polarisation  of  income.  The  extraordinary 

capacity –be it railways or a fleet of steamships, 
of  several  major  manufacturing  plants  or  of 

profits  that  become  possible  with  each  set  of 
revolutionary  technologies  generate  –with  the 

thousands  of  experts  organised  in  a  service 

intermediation  of  the  financial  agents  of  the 

producing  company.  It  is  not  the  stock  market 

period– a sort of whirlpool that gradually attracts 

index  but  the  steady  flow  of  dividends,  together 

all  available  money  (from  the  host  country  or 

with the growth of production, employment and 

from  abroad)  towards  those  new  technologies 

GDP  that  manifests  the  reality  of  that  growing 

power.

The  differences  in  industry  structures  and 

forms of competition are related to the exploratory 

mode  in  which  all  technological  revolutions 

develop  at  first.  It  is  market  competition  that 

determines  the  survival  of  the  fittest.  But  once 

the  process  has  resulted  in  defining  patterns  of 

production  and  consumption  based  on  the  new 

paradigm,  Schumpeter’s  defence  of  oligopolies 

comes into its own. It is difficult to make and put 

into effect long term plans of investment, growth 
or R&D under cut-throat competition conditions.

Thus  the  approach  to  innovation  will  be 

different in the two periods. It will go from high-

risk  “technology  push”  to  more  demand-pulled 

innovation  in  products  and  services  as  well  as 

and  to  the  geographic  regions  where  they  are 
developing.32 This concentration in certain sectors 
and  regions  starves  the  excluded  of  investment 

funds  (until  they  are  forced  to  modernise  with 

the new paradigm and join in, if they can). It also 

generates a centrifugal effect in the value of money 

separating the richer and richer asset owners from 

the poorer and poorer salaried and waged portions 

of  the  population. The  latter  are  even  worse  off, 

given  that  some  of  the  old  industries  have  been 

made obsolete and eliminated by the new, while 

those that have survived are modernised through 

greater productivity and process changes, which 

lead  them  either  to  shed  labour  or  to  replace 

part  of  it  with  different  skills  (sometimes  higher, 

sometimes  lower  skills,  but  often  different  from 
those of the incumbents).33

This  polarisation  of  income  will  be  at  the 

30  This shift of focus was shown by Abernathy and Utterback (1978) in relation to individual technologies.
31 

See an article by Hamm (2005) in Business Week, for an example of applying Toyota type methods for productivity increase in a 
service company doing outsourcing in India. This sort of cross-pollination of organisational models from sector to sector occurs 
also as personnel moves from one company to another and the new paradigm is increasingly socially assimilated.

32  The process overshoots the mark and soon there are not enough projects to absorb the money coming to the feast. This leads 
to excess investment (canals or railways from anywhere to anywhere; dot com proliferation or unused fiber optics) but also and 
very importantly to the creation of other instruments that will artificially offer equivalent profits (futures, derivatives, pyramid 
schemes, and so on). It is this combination that generates the hyper-inflation of assets that is characteristic of the bubble.
See Freeman and Soete (1997) Ch. 17.

33 

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source of the most important economic tensions 

and  socio-political  pressures  that  will  have  to 

be  faced  and  overcome  in  order  to  unleash  the 

services (what Veblen referred to as “conspicuous 
consumption”34 writing during the Installation of 
the third surge).

deployment period.

Since  the  contrasts  in  innovation,  target 

markets  and 

investment  criteria  will  be 

particularly  relevant  for  discussing  globalisation 

and respecialisation in the current paradigm, it is 

worth taking a closer look at those aspects.

From creating to spreading the new lifestyles

However,  in  practice,  the  concentration 

of  income  growth  in  the  upper  strata  during 

Installation  has  two  great  advantages  for  the 

new  producers:  it  provides  markets  ready  and 

avid  for  experimentation  with  the  new  products 

Shift in innovation and target markets

and  it  gives  the  opportunity  for  setting  the  new 

A  regressive 

income  distribution  has  a 

particularly  pernicious  and  unexpected  effect 

in  relation 

to 

the  direction  of 

innovation. 

Increasingly, the solvent markets that are available 

to acquire and test the new products are those at 
the  top  of  the  income  scale. This  is  the  normal 

course  of  events  in  many  consumer  product 

industries  and  happens  with  most  experimental 

products at all times. At first companies “cream” 

the expensive range, by aiming at the top of the 

income scale to get back some of the RD&E and 

standards  and  components  of  “the  good  life”. 

Both  the  products  and  the  style  of  life  that 

incorporates them will become the aspiration of 

the  rest  of  the  population.  Prosperity  is  likely  to 

depend  on  the  expansion  of  the  markets  of  the 

core industries of each revolution, since they will 

be  the  ones  capable  of  serving  as  the  engines 

of  growth  of  the  economy.  But  if  institutional 

mechanisms  to  redress  the  income  imbalances 

are not introduced, those wider markets will not 

develop.

introductory  marketing  expenditures.  Then  they 

One of the main features of the Deployment 

move on to the wider markets with higher volume 

period  is  precisely  market  expansion,  both  due 

production  and  reduced  prices.  The  problem  is 

to  the  further  reach  of  the  infrastructure  and  to 

that if income is strongly skewed, as happens at 

important  modifications  of  the  market  context 

Installation bubble times, then the wider markets 

through  the  introduction  of  policy  measures  to 

are  not  available  no  matter  how  low  the  prices. 

This forces a high rhythm of innovation trying to 

force rapid obsolescence in order to convince the 

same  high  income  consumers  again  and  again. 

This  happened  in  the  1920s  with  automobiles, 

radios and electrical appliances and in the 1990s 

with ever more powerful and smaller computers 

as well as with ever more versatile mobile phones. 

In  both  historical  cases,  though,  markets  for  the 

new  industries  reached  what  can  be  termed 
premature saturation, as those top income layers 
of the population became less interested in having 

more  technological  gadgets  or  in  once  more 

upgrading  the  products  they  already  possessed 

and began to turn to exclusive luxury goods and 

facilitate market growth in the directions required 
by the paradigm.35

These 

changed 

conditions 

for 

the 

deployment period, will also modify the direction 

of  innovation.  Once  the  paradigm  is  established 

and  the  styles  of  life  and  main  business  models 
are  more  or  less  known,  the  core  industries 

begin to make the transition from “supply push” 

innovation,  of  the  sort  that  needs  to  create  new 

markets  by  educating  consumers  and  producers 

to a completely new way of functioning, to more 

of a “demand pull” model, where attention moves 

towards  trying  to  fulfil  consumer  and  producer’s 

needs by completing the new life and production 

34  Veblen (1899).
35 

For a further discussion of paradigm-guided institutional innovation, see Chapter 13 in Pérez (2002).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
styles with interlinking innovations or improving 

business  in  the  new  conditions  and  the  massive 

the  ease  of  use  of  the  existing  products  through 

adoption of the emerging styles of life. In the mass 

complementary services and so on.

production  paradigm  these  induced  branches 

Thus,  while 

Installation  saw  a  strong 

concentration of innovation in the core industries 

and  their  surroundings  –including  the  basic 

modernisation  of 

the  rest  of 

the 

industrial 

structure–, Deployment will see a shift towards a 

wider range of innovation spaces while weaving 

a more harmonious and interlinked fabric of the 

economy.

The main innovation spaces are likely to be 

for new products, services, process technologies 

and business models:

- 

in the core industries (ICT in the current case), 

with  further  “user-oriented”  applications  for 

both producers and consumers,

- 

in  the  modernised  industries,  profiting  from 

further  applications  of  the  new  technologies 

and 

the  new  paradigm,  changing 

their 

product  profile  and  advancing  their  own 

technological frontier,

- 

in what can be called the induced branches 

that  flourish  by  supporting,  complementing 

and 

interlinking 

the 

fabric  of 

the  new 

economy and,

were related to the intense agglomerations of the 

high-rise  cities  and  to  the  sprawling  suburban 

way  of  life;  especially  construction,  retail  trade 

and services. It could be inferred that in the ICT 

paradigm  the  induced  branches  may  be  linked 

around 

the  requirements  of 

the  Knowledge 

Society  and  the  global  economy.  Among  the 

activities  associated  with  the  first  would  be 

education and training, intermediation in the use 

of the Internet, health, leisure and all the creative 

industries  and  services  of  what  we  could  call 

“good taste” in food and decoration, which have 

become central aspects of the new style of living. 

Those  in  connection  with  the  global  economy 

are  likely  to  include  the  systems  of  physical 

distribution  of  the  objects  of  e-commerce  and 

the environmental industries, among others. One 

important aspect of the induced branches is that 

they  tend  to  absorb  the  layers  of  unemployed 

created by the higher productivity in the new or 

modernised industries.

Not  all 

the 

induced  activities 

imply 

innovation coming from R&D. They may be more 

of  the  organisational  kind,  perhaps  in  the  form 

of  new  business  models  or  they  may  involve 

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in  the  radical  new  technologies  that  could 

design  and  creativity. What  is  very  likely  is  that 

become the next technological revolution.

The last two merit special attention here, the 

induced  branches  because  their  importance  for 

employment  may  warrant  measures  of  directed 

support,  and  the  radical  new  technologies  –

which in this case would be especially nano- and 

biotechnology–  because  the  great  surges  model 

provides  an  interpretation  of  their  role  that  can 

also be useful as an input to policy making.

they will become active markets for the products 

and services of the engines of growth of the time. 

The “Laundromats” or the local food stores with 

refrigerators that accompanied the suburban living 

styles of the 1950s used electrical appliances and 

electricity  services  and  served  as  test  beds  (and 

user  training)  for  home  washing  machines  and 

fridges. Something similar is likely to happen with 

the  role  of  ICT  in  rendering  efficient  front  end 

services of many sorts to people and businesses. 

What these new companies will certainly involve 

Complementary role of the induced branches

is entrepreneurship and risk. Given their probable 

The 

induced  branches  are  a 

typical 

phenomenon  of  Deployment.  They  consist  of 

all  the  activities  that  facilitate  the  functioning  of 

role in creating employment, the mechanisms to 

facilitate their emergence can make an enormous 
difference for the rest of the economy and for the 



general welfare of society.

 
 
 
 
 
 
 
 
 
 
 
Gestation of the next technological revolution

is  the  high  rate  of  return  in  the  stock  market, 

The 

historical 

precedents 

allow 

an 

informed  guess  around  some  combination  of 

biotechnology,  bioelectronics,  nanotechnology 

and  new  materials.  As  in  previous  cases,  the 

future  technologies  begin  –in  what  later  is 

understood as a primitive form– in the midst of the 

dominant paradigm. They are shaped by it and at 

first depend on the type of markets it has created. 

Stationary  steam  engines  were  successfully  used 

to  move  the  locks  of  the  very  canals  that  steam 

powered  railways  would  replace  in  the  future. 

Semiconductors  were  profitably  used  during 

the  mass  production  paradigm  to  make  radios 

and  other  appliances  portable  and  for  the  huge 

centralised mainframe computers. The companies 

that  incorporated  them  in  their  products  were 

extremely  successful,  but  no  one  could  have 

imagined laptops, mobile phones, i-pods or even 

e-mail,  without  the  major  breakthrough  of  low-

cost microprocessors.

These  industries  in  gestation,  in  contrast 

with  the  induced  branches,  do  increasingly  rely 

on  scientific  research  and  are  characterised  by 
very  high risks. They tend to  require  government 

–or  private–  subsidies  in  those  costly  early 

stages.  It  is  thus  crucial  for  both  venture  capital 

be  it  in  the  form  of  capital  gains  when  reselling 

stock  or  as  returns  on  the  many  other  forms  of 

derivative  investment  that  are  typically  invented 
–or  reinvented,  as  Galbraith37  shows–  in  order 
to  artificially  spread  to  all  financial  investment 

the  levels  of  profit  obtainable  in  some  of  the 

core  new  industries.  As  in  the  1990s,  1920s, 

1880s-90s,  1840s  and  1790s  there  is  a  “love 

affair”  with  technology  and  innovation,  which 

almost guarantees high profits to investors in the 

new things even if the actual firms are not even 

breaking  even  or,  in  some  cases,  are  still  in  the 

building process, as happened with many canals 

and  railways.  The  dot.com  bubble  is  perhaps 

the  most  extreme  example  of  financial  benefits 

without  real  productive  backing.  Many  of  the 

IPOs  left  the  financiers  with  a  huge  gain  and 

the entrepreneurs with a doubtful product and a 

company which could soon go bankrupt.

That  casino  atmosphere  orients  investment 

towards  short-term  gains  and  does  not  really 

engage  the  investor  fully  with  the  company 

whose  equity  is  being  acquired.  Often  in  fact, 

given  the  aggregate  nature  of  investment  funds, 

many  investors  have  no  idea  which  companies 

their money is going to.

and  governments  to  acknowledge  that  their  rate 

The  collapse  of  the  bubble  usually  brings 

of  success  is  likely  to  be  very  much  lower  than 

back some sanity into the direction of investment 

that  of  any  products  of  the  current  information 
revolution36  but  also  to  recognise  that  successes 
can be extremely profitable and will be a welcome 

while  investors  again  seriously  watch  the  so-

called “fundamentals”, which somehow serve as 

indicators of the true health of the companies. An 

contribution  to  growth.  In  addition,  the  resulting 

equivalent  phenomenon  is  bound  to  take  place 

alliances  and  connections  as  well  as  the  efforts 

themselves will strengthen the required links and 

in the practices of the publicly traded companies 
themselves.  During  the  bubble,  they  are  pushed 

capabilities  to  advantageously  participate  in  the 

to  attain  the  unattainable:  profits  at  the  same 

surge that may irrupt two or three decades hence.

level as in the core industries of the technological 

Shift in investment criteria

One  of  the  most  salient  characteristics  of 

revolution quarter after quarter. They may attempt 

to achieve this by cutting personnel below what 

would  be  optimal  or  by  selling  assets  or,  if  no 

legitimate means remain, then… by accountancy 

the  bubble  economy  at  the  end  of  Installation 

tricks and outright fraud.

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See an assessment in Nightingale and Martin. (2004)

36 
37  Galbraith (1990:1993) pp. pp.5 and 18.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deployment,  by  contrast,  sees  investment 

The strategic and policy decisions taken to face its 

become more sober and rational. The companies 

consequences  by  firms,  governments  and  supra-

that  emerged  successful  from  the  installation 

national  institutions  will  determine  the  way  in 

period invest to expand their scale of production 

which the potentials of ICT and its paradigm are 

and  markets  and  to  increase  their  productivity. 

deployed as wells the main trends in geographic 

The larger ones are likely to pursue mergers and 

and social distribution of production and wealth.

acquisitions to stabilise markets in their industry 

and  to  occupy  strategic  territories  to  strengthen 

their competitive positions. There is a clear long-

term view among decision-makers and innovation 

becomes a complement of such strategies.

This  switch  in  investment  behaviour  has 

a  positive  overall  effect  on  the  productivity 

performance of the economy, which is an issue of 

particular interest, not only in terms of potential 

growth  and  competitiveness  but  also  because  of 

its major influence on the capacity of a society to 
increase  the  economic  and  social  welfare  of  its 

population.

The  turning  point  as  the  space  for  the  role-
shift38

The discussion of the differences between the 

Positive legacy of the bubble: conditions for full 

expansion

Towards the end of Installation, in the midst 

of the bubble, the successful participants and their 

entourage  celebrate  the  times  as  extraordinarily 

prosperous  due  to  fundamental  changes  in  the 

economy. In fact, on every occasion, the idea of 

a “new economy” has been advanced in different 

ways.  In  1929,  a  couple  of  months  before  the 
crash, the so-called Hoover Report was at pains to 
argue against this widely held belief by showing 

that what was happening was nothing really new 

but only the intensification of pre-existing trends 

in the US economy. And yet, much of the report 

is  dedicated  to  celebrating  the  newly  achieved 
solid prosperity.39

two  halves  of  each  surge  opens  the  question  of 

Though  the  basic  rules  of  the  economy 

how the shift occurs between an economy led by 

do  not  change  during  the  bubble,  by  the  time 

finance  capital  and  increasingly  focused  on  the 

it  collapses 

the  economy 

is  usually  ready 

stock market and one where markets, expansion, 

for  the  full  flourishing  of  the  wealth  creating 

full  employment  and  growth  take  centre  stage, 

potential  provided  by  the  new  paradigm.  There 

with production capital at the helm.

is  enough  infrastructure  for  a  decade  or  more 

It  is  precisely  the  tensions  and  instabilities 

that  are  the  legacy  of  the  frenzied  bubble  years 

that  create  the  conditions  for  a  shifting  of  roles, 

usually  with  the  intervention  of  State  regulation 
to control the excesses of finance, to counter its 

short-termism  and  to  favour  demand  expansion 

and  stable  long  term  investment  in  production. 
That  is  the  reason  for  the  term  Turning  Point, 
referring  to  the  tilting  of  the  field  away  from 

favouring paper assets and towards favouring the 

flourishing of the real economy.

The  world  has  been  at  that  defining  stage 

since the collapse of the NASDAQ in April 2000. 

(because  bubbles  are  generally  associated  with 

overinvestment  in  the  new  networks),  the  new 

paradigm has been accepted as ‘common sense’, 

successful production, consumption and business 

models have been tested and copied, the winning 

companies in the core industries have become the 

new entrepreneurial giants and are ready to serve 

as engines of growth for the whole economy, while 

most  of  the  old  giants  are  rejuvenated. The  new 

paradigm has been installed in the territory, in the 

economy and in the minds of the participants; the 

job of financial capital is done. It is time to rein it 

in and to hand control over to production capital. 

But that is easier said than done.

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38  Pérez (2002), Ch. 11.
39  Hoover (1929).

 
 
 
 
 
 
 
 
 
 
 
…

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The  Installation  period  led  to  those  results 
through  a  process  of  massive  credit  creation40 
that attracted, created and destroyed millionaires 

rather  than  from  dividends,  profit  gains  come 

from  reselling  the  assets  or  from  participating  in 

the many instruments (futures, derivatives, hedge 

in  the  process  of  making  the  highly  risky 

funds  or  others)  that  are  created  in  the  casino 

experiments  required  to  define  the  trajectory  of 

economy that builds up during Installation.

the technological revolution. The belief that those 

extraordinary  profit  levels  are  due  to  the  free 

market itself (and to the entrepreneurial genius of 
the actors and investors in it)41 rather than to the 
opening of a major new innovation space, is by 

then  deeply  rooted  in  the  minds  of  most  of  the 

economic  and  political  “elites”,  but  especially 

among the successful participants.

Once  the  bubble  collapses,  this  tension 

should  disappear  and  the  values  should  come 

back into line. The major losses bring the investors 

back  to  reality  and  the  losers  are  likely  to  press 

for  regulation.  However,  if  the  collapse  is  not 

big enough (as the author believes was the case 

with the NASDAQ in relation to the whole stock 

market)  and/or  if  a  healthy  investment  climate 

What  prepares  the  terrain  for  accepting  the 

is  not  re-established  after  the  bubble  by  an 

policy  measures  that  will  achieve  the  shift  and 

exemplary  combination  of  punishment  of  fraud 

unleash  the  deployment  period  for  the  benefit 

and  “remedial”  regulation,  then  the  distorting 

of  the  many  are  the  tensions  inherited  from 
the  bubble  period,  which  gradually  become 

influence  of  the  financial  world’s  short-termism 
will  weigh  upon  the  economy  and  against 

serious obstacles to growth, resulting in political 

growth.

pressures  that  may  lead  to  a  consensus  about 

the  need  to  overcome  them.  It  is  only  by  doing 

so  that  society  can  pursue  the  social  welfare 

potential  implicit  in  the  higher  levels  of  wealth 

and productivity attainable across the board with 

the new paradigm.

At  present, 

the  CEOs  of  production 

companies find it extremely difficult and risky to 

embark upon long-term projects, not because of 

competition but because of the continued short-

term profit pressures of the finance world.

Negative  legacy  of  the  bubble:  three  tensions 

making obstacle to growth

The  building  of 

the 

technology-spurred 

financial bubble generates very serious distortions 

of  the  economy,  which  involve  three  tensions 

that  gradually  intensify  during  Installation  and 
become exacerbated with the bubble: 42

Tension  between  the  paper  and  the  real 

economy

The  first  tension  is  the  very  essence  of  the 

bubble: a process of asset inflation in which the 

stock  market  (paper)  values  decouple  from  the 

real value of the companies they represent. Thus, 

40  Pérez (2004).
41  Galbraith (1990:1993), pp. 20 and 95.
42  Pérez (2002), pp. 111-118 and Epilogue.

Tension between the size and profile of effective 

demand and those of potential supply

The second tension occurs in the market and 

is the consequence of the polarisation of incomes. 

It  means  that  as  long  as  the  strongly  skewed 

income distribution remains, the potential supply 

of the products associated with the technological 

revolution  will  be  disproportionately  larger  than 
effective  demand.  In  fact,  the  range  of  products 

and services that are possible with each paradigm 

could  cater  to  a  much  wider  profile  of  users 

than  those  targeted  during  Installation.  As  was 

discussed  above,  this  polarisation  ends  up  in 
premature market saturation.

This  tension  however  is  not  necessarily 

overcome by the collapse of the bubble. On the 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
contrary,  it  can  be  exacerbated  by  it,  because  it 

effects  major  destruction  of  wealth  in  the  most 

The  political  tensions  between  the  poorer  poor 
and the richer rich45

active section of a highly polarised market.

This  third  tension  is  the  inevitable  social 

It generally has required government policies 

consequence  of  income  polarisation.  It  is  of  a 

to begin redressing the balance by putting  more 

political nature but can have great influence over 

money into the hands of middle or lower income 

the  course  of  the  economy. The  chasm  between 

consumers,  be  it  through  salary  increases,  job 

the  richer  rich  and  the  poorer  poor  is  not  just 

creation,  tax  policy,  free  education  and  health 

about the profile of income distribution but about 

(thus  freeing  consumption  income)  or  whatever 

the direction in which that profile changes in time. 

redistribution measures, national or international, 

What happens during Installation is a centrifugal 

are  appropriate  to  the  specific  paradigm.  The 

process  that  gives  a  disproportionate  share  of 

Marshall  Plan,  established  by  the  US  to  help 

the  benefits  of  growth  to  those  at  the  top  of  the 

rebuild  Europe  after  WWII,  did  exactly  that 

income scale and leads to an actual worsening of 

–together  with  the  Welfare  State–  by  expanding 

the situation in the lower ranks of the scale.

the  markets  that  fed  growth  in  the  deployment 
period of the fourth surge.43

Figure  2  serves  to  illustrate  the  sorts  of 

processes  that  take  place  during  Installation  and 

In  this  particular  surge,  the  outsourcing 

Deployment. It shows the intense increases in the 

and  off-shoring  to  China  and  India  can  be  seen 

relative wealth of the top 0.1% of income earners 

as  a  “miracle  cure”  for  the  advanced  countries, 

especially  for  the  United  States.  Not  only  do 

these  practices  reduce  costs  and  lower  prices 

in the US during the two Installation bubbles (of the 
4th surge in the 1920s and of the current 5th in the 
1990s),  where  this  concentration  reaches  nearly 

to  expand  effective  demand  in  the  previously 

11%, while the moderation down to below 6% in 

saturated  markets,  but  also  –and  perhaps  most 

the  Deployment  period  suggests  a  reversal  of  the 

importantly—these  highly  populated  countries 

polarising trend and an improving distribution.

have become rapidly expanding markets in their 
own right. 44

This  overall  trend  can  also  be  seen  in  the 

behaviour  of  the  Gini  coefficients  of  inequality, 

As  a  result,  the  social  problems  at  home 

which  have  risen  during  the  Installation  of  the 

can  be  ignored  –and  even  increased  through 

present  surge  in  both  advanced  and  emerging 

greater  unemployment  and  downward  pressure 

countries  (with  some  interesting  exceptions), 

on  salaries–  while  the  paper  economy  can 

continue  producing  asset 

inflation 

(through 

while they had generally been decreasing in the 
previous Deployment period.46

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housing  bubbles,  derivative  mountains,  hedge 

fund pyramids, etc.) and intensifying the income 

polarisation  between  the  asset  holders  and  the 

wage earners.

The  phenomenon 

is  partly  due 

to 

the 

increasing  disparity  in  the  values  of  assets  vs. 

wages and partly to the uneven spread of the new 

industries and to the equally uneven destruction 

of pre-existing industries and jobs brought about 

by technical change and intense, often cut throat, 
competition.47

43  The  European  Union  in  the  current  fifth  surge  applied  successful  redistribution  measures  in  the  early  period  helping  to  lift 
Ireland and Spain as they joined. For an analysis of the consequences of abandoning that policy see Reinert and Kattel (2004). 
See also Reinert, Chapter 7 below.
In addition, the reinvestment of the commercial surplus of China, Japan and others in the US financial markets, has created a 
virtuous cycle between the US and Asia that could turn vicious if something went wrong.

44 

45  Tylecote (1985) called attention to the relationship between trends in income distribution and overall growth patterns.
46 
47 

See the WIDER-UNU (2005) database on inequality and Atkinson (1997).
See Freeman (2004). For the impact in the developing world see Palma (2005).

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Figure 2. Variation in the share of the nation’s income earned by the top 0.1 percent of U.S. taxpayers 
1920-2002

Installation
4th

Turning point
4th

Deployment
4th

Installation
5th

Turning
Point 5th

Percentage of income earned
by top 0,1% of taxpayers

TOP   0.01%

REST OF TOP 0.1%

10%

8%

6%

4%

2%

1920

‘30

‘40

‘50

‘60

‘70

‘80

‘90

2000

Source:  Johnston  (2005)  in The  New York Times  (based  on  US Treasury  data)  .  See  also  Piketty  and  Saez  2003. The  great  surge 
period indications are by the author

What  Installation  leaves  in  its  wake  is  the 

resentment  stemming  from  downward  mobility 

reactions to them.49 Whole regions of the planet 
have  been  excluded  and  allowed  to  descend  to 

in the face of affluence. The conviction that “my 

the levels they had forty years ago; other regions 

children  will  be  worse  off  than  I  have  been”, 

have  been  marginalised  such  as  most  of  Latin 

confronted with the conspicuous consumption at 

the other end, results in loss of hope and breeds 

anger,  violence,  problems  of  governance  and 

America where there has been a reversal of many 
of  the  achievements  of  the  1960s  and  1970s50. 
But, through organised terrorism, the violence fed 

an increase in the attraction power of messianic 

by global polarisation has reached the advanced 

leaders  who  thrive  precisely  on  intensifying  that 
resentment.48 There are also migratory pressures, 
as  the  most  positive  among  the  excluded  run 

unimaginable risks to reach a place where –often 
accepting  unacceptable  conditions–  they  can 

hope for a better future.

At  this  Turning  Point,  the  phenomenon 

is  of  a  global  nature,  both  in  terms  of  where  it 

takes  place  and  in  terms  of  access  to  means  of 

communication, information and transport. These 

can exacerbate the consequences as well as the 

countries 

too,  while 

the 

internal 

income 

disparities have begun to surface in various forms 

of political rejection.

Free markets as intensifiers of the problems

Though Installation may indeed have created 

all  the  conditions  for  unleashing  Deployment,  it 

also  resulted  in  these  three  tensions  that  can  in 

practice turn into formidable obstacles to growth. 

Overcoming them becomes therefore imperative 

for society and for the economy.

48  As was the case with Hitler, Mussolini and others in the previous surge.
49 
50  Palma about reversal of income achievements of 60s and 70s.

See Kaldor (1999) for the emergence, across the uneven global scene, of what she calls “new wars”.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
What  cannot  be  expected  is  to  achieve  this 

It may be useful to make some parallels with 

result  by  the  action  of  the  markets  alone.  Since 

the  tensions  are  already  the  consequence  of  the 

free  market,  its  continued  unrestrained  action 

the  first  globalisation  in  the  third  surge  –from 
the 1870s to WWI51– since similar features were 
present  in  the  technologies.  In  both  cases,  the 

will  only  make  them  worse.  Left  to  themselves, 

nature of the infrastructure facilitated –and indeed 

free  markets  will  continue  taking  production 

induced–  global  reach  in  those  industries  and 

to  China  and  India  and  feeding  the  housing, 

activities that can most benefit from such world-

derivatives  and  hedge  fund  bubbles;  they  will 

wide externalities. In both cases, the opportunities 

continue putting pressure on companies to have 

were taken and investment from the centre led to 

high profits every quarter by whatever means and 

significant leaps forward in faraway countries.

they will keep well away from the impoverished, 

within their countries and abroad.

This  means  that  there  is  bound  to  be  an 

increase  in  economic  instabilities  as  well  as  in 

various  forms  of  political  unrest,  from  the  anger 

of those losing their pensions (or their mortgaged 

homes in a bubble collapse) to outright violence 
from abroad or from within.

That  is  why  such  imbalances  must  be 

confronted through government intervention. Yet 

trying to halt globalisation is a self-defeating goal. 

The complex processes ahead need the action of 

free  markets;  no  other  agency  could  do  the  job. 

However,  there  is  enormous  scope  –and  need– 

for changing the context for the action of markets 

and  reversing  the  conditions  that  may  lead  to 

further  bubbles,  through  setting  up  an  adequate 

institutional  framework  –in  the  current  case, 

national,  supra-national  and  global.  Without 

such  a  framework,  the  growth  potential  already 

in place cannot be fully deployed and the present 

instabilities  are  likely  to  increase  with  possible 

catastrophic consequences.

Globalisation, market segmentation and 
the nature of the ICT paradigm

A look at the two globalisations

During  the  third  great  surge,  the  advent  of 

cheap  steel  allowed  the  development  of  three 

infrastructural networks that made world markets 

a  practical  reality:  trans-continental  railways  by 

land, rapid steamship transport by sea and global 

telegraph along the rails and by undersea cables.

The  extraordinary  possibilities  offered  by 

these  communications 

technologies  opened 

the  markets  of  the  North  to  counter-seasonal 

Southern hemisphere products. Refrigerated ships 

(using ice blocks from the Antarctic, for instance) 

facilitated developing Argentinean and Australian 

wheat and meat production for the world markets, 

while  they  could  bring  locomotives,  steels  rails 

and other equipment on the way over. And once 

those  railway  and  sea  routes  were  established 

it  was  easy  to  use  them  for  other  products  in 

both  directions  and  to  incorporate  neighbouring 

countries: New Zealand, South Africa, Chile (first 

exporting  saltpetre  as  natural  fertilizer  and  later 
copper for electrical networks) and others.52

Much  of  the  early  development  in  railways 

and  ports  in  these  countries  was  organised  by 

the  local  governments  and  financed  by  the  City 

One  of  the  basic  features  of  this  paradigm 

in  London,  which  gradually  also  organised  the 

is  the  trend  towards  globalisation,  which  is 

a  consequence  of  the  characteristics  and  the 

raising of equity funds for private projects, often 
promoted by foreign companies.53

potential of information and telecommunications 

technologies.

51  There is an overlap of about ten years between the third surge and the fourth, which begins in the US rather than Britain with 

the model-T in 1908. Pérez (2002), p. 56.

52  Wells (1889:1893), Hobsbawm (1987:1989).
53  A major study of this period is Davis and Gallman (2001).

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In that case, the bubble economy developed 

and  the  new  technologies.  It  may  also  serve  to 

mainly in these emerging countries or in relation 

warn that building finance-based empires abroad 

to investment in them. The Baring crisis of 1890, 

while neglecting advanced production investment 

for  instance,  related  to  their  investments  in 

in  the  home  economy  could  later  bring  very 

Argentina but practically brought down the whole 
British stock market.54

What is important for our purposes is that the 

provision of major externalities for the formation 

of  global  markets  led,  in  fact,  to  worldwide 

mobility  and  price  competition  for  agricultural 

and meat products and influenced the location of 

production and the expected productivity levels. 

Meanwhile,  international  cartels  and/or  giant 

multinational  firms  were  forming  in  the  control 

of  the  infrastructure  and  in  the  basic  materials 

industries, such as oil, steel, copper and others.

Another  aspect  of  interest  to  note  is  that 

though Britain was the unquestionable leader of 

that  globalisation,  with  the  Gold  Standard,  the 

Bank  of  England  and  the  Stock  Exchange  as  the 

centres of global finance, it failed to complement 

that global drive with equally intense investment 

at home in the core industries of that revolution: 

chemistry, electricity and steel. By contrast, the US 

and Germany did concentrate in those industries 

while  they  also  participated  in  the  globalisation 

process.  These  two  countries  ended  up  forging 
ahead of Great Britain.55

Historical parallels do not lead to predictions; 

every  paradigm  and  every  set  of  circumstances 

is  unique.  They  merely  provide  a  useful  frame 

of  reference  which  points  to  aspects  that  may 

merit attention when analysing the corresponding 

period  in  another  surge.  The  experience  of 

the  third  surge  shows  that  a  powerful  set  of 

technological  and 

infrastructural  conditions 

facilitating  worldwide  expansion  can  function 

as an irresistible driver for global investment and 

trade.  It  gives  a  precedent  showing  that  some 

well-endowed countries with appropriate policies 

can experience intense processes of catching up 

or forging ahead in connection with globalisation 

unfavourable consequences.

The ICT paradigm and globalisation

The  bottom  row  in  Table  1  above,  briefly 

summarised  the  main  features  of  the  current 

paradigm,  shaped  by 

the  requirements  and 

the  potential  of  the  Age  of  Information  and 

Telecommunications.  As  tends  to  be  the  case, 

they  are  a  coherent  set  of  mutually  reinforcing 
principles.  Knowledge  capital  and  intangible 
value  added  facilitate  heterogeneity,  diversity 
and  adaptability.  these  in  turn  lead  to  -and 
interact  with-  the  segmentation  of  markets  and 
the proliferation of niches. Globalisation leads to 
the interaction of the global and the local, both in 
terms  of  comparative  advantages  for  production 

and 

innovation  decisions  and 

in 

terms  of 

adaptability  of  global  products  to  local  markets. 

Production is then conceived in a complex range 

that may go from “mass customisation” achieving 
economies of scope and scale to multiple niches 
geared  to  attaining  economies  of  specialisation. 
These  complex  production  and  market  profiles 
are  achieved  through  decentralised  integration 
and  network  structures,  which  characterise  the 
organisation of giant global firms across the planet. 

Such  complexity  is  made  possible  and  efficient 
by  the  ease  of  instant  global  communications, 
allowing instant contact and action.

Still,  the  question  may  arise  as  to  why 

globalisation  should  be  inevitable.  The  answer 

is  that  reaching  for  giant  global  markets  is  a 

direct  consequence  of  applying  and  taking  full 

advantage  of  the  potential  and  characteristics  of 

information and telecommunications technologies 

(ICT).  Intangible  products,  not  only  recognise 

no  physical  frontiers  by  travelling  instantly  and 

54  Powell (1915:1966) p. 522.
55 

For a discussion of this issue see Freeman and Louçã (2001) pp. 248-256.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
invisibly  through  communications  channels,  but 

toward assessing the whole planet for comparative 

also have no marginal cost (or it is negligible) and 

advantages  and  estimating  production,  transport 

no structural limit to market growth. Yet they often 

and transaction costs “as if” the economic space 

have high research and development investment. 

were  unlimited  and  –through  investment  in  the 

Moreover,  the  greater  the  number  of  users  of 

ICT infrastructure– making sure that it is so.

a  particular  network  or  product  the  greater  its 

value and the lower the price of it can be, while 
maintaining growing profitability.56 Such features 
provide  a  very  powerful  incentive  to  overcome 

the limits of any national market, no matter how 

large.

In  terms  of  the  size  of  firm  that  can  be 

accommodated, 

ICTs 

offer 

coordination 

capabilities  that  go  well  beyond  the  maximum 

size  that  the  old  international  or  transnational 

corporations  were  able  to  achieve  with  their 

pyramidal structures. Not only is it now possible 
to  guide,  monitor  and  control  a  truly  giant 

organisation when it is networked, but territorial 

coverage  and  organisational  complexity  are 

relatively  easy  to  handle  with  ICT  and  are 

likely  to  become  much  more  so  with  further 

adaptive  innovation. The  technology  itself  is  all-

pervasive and can be incorporated into the most 

sophisticated processes for biotechnology, nano-

technology  or  space  travel  as  much  as  into  the 

most traditional production systems, from global 

geo-positioning  of  sheep  to  information  about 

fishing conditions for small fishermen.

But the maximum size of market for intangible 

products  is  defined  by  how  far  and  how  deeply 

the  possession  of  adequate  hard  and  software 

and  the  existence  of  communications  links  has 

reached,  both  socially  and  geographically.  This 
means  that  hardware  and  telecom  networks 

penetration  are  the  true  market  frontiers  for  the 

ICT industries, rather that the digitally transparent 

territorial  ones. The  reach  of  such  networks  also 

constitutes the frontier of the “global” economy.

Thus,  in  relation  to  the  size  and  scope  of 

global  firms,  the  logic  of  the  potential  leads 

In  this  respect,  it  is  interesting  to  note  that 

out of the ten forces that Tom Friedman identifies 

as the triggers of globalisation (or, as he says, of 

the flattening of the world), nine are either major 

ICT  innovations  or  business  behaviour  changes 

based on ICT. Only the fall of the Berlin Wall is 
outside those categories.57

ICT  and  the  hyper-segmentation  of  markets: 

outsourcing and off-shoring

Precisely  because  of  the  nature  of  ICT  and 
the sort of flexibility it facilitates, globalisation is 

not  necessarily  about  moving  whole  industries 

or  companies  to  other  countries,  but  rather 

about  disaggregating 

them  and 

relocating 

the  segments.  Seen  from  the  point  of  view  of 

a  global  corporation,  as  is  well  known,  the 

process 

involves  disaggregating 

the  business 

into  processes  and  these  into  ever  more  precise 

activities  in  order  to  assess  their  requirements, 

decide  where  each  would  be  most  efficiently 

and  profitably  performed  and  then  finding  the 

most effective ways of coordinating the resulting 

complex network that would span a good part of 

the planet, with infinitely varied nodes and many 

different types of links.

These outsourcing practices take place within 

the  countries  of  origin  and  across  frontiers  and 
they  multiply  the  opportunities  for  specialised 

micro-, mini-, small and medium firms, to perform 

activities  that  range  from  the  most  sophisticated 

R&D projects to cleaning services or call centres. 

They  also  represent  a  source  of  market  growth 

for  the  ICT  industries.  Both  the  disaggregated 

activities themselves and the links between them 

and  the  rest  of  the  value  network  are  almost 

56  These  changes  are  the  real  nature  of  the  “new  economy”  and  not  an  everlasting  bull  market,  as  many  believed  in  the  late 
1990s. See Soete (2000) about the new economics of the new economy and Kelly (1998:1999) on the “new rules” governing 
market behaviour in the ICT industries.
Friedman (2005) pp. 48-172.

57 

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certain to make intensive use of ICT to maximise 

that  are  producing  highly  specialised  materials 

efficiency and minimise transaction costs.

for  sails  or  extreme  sports,  which  increasingly 

Yet 

the 

industries 

that  are  being  so 

disaggregated  are  at  the  same  time  catering  to 

what  are  becoming  hyper-segmented  markets. 

separate them from their traditional industry base 

and  incorporates  them  into  the  networks  of  the 

sports equipment industry.

The  new  potential  for  diversity  and  adaptability 

One  can  further  analyse  the  process  by 

is dividing all industry markets in a kaleidoscopic 

distinguishing diversity from adaptability. The latter 

fashion,  where 

the  bottom  segment 

(which 

could  be  defined  as  front-end  customisation.  It 

is  the  bulk  of  production  in  terms  of  volume) 

involves catering to the specific demands of each 

is  the  standardised,  low  price,  narrow-profit-

individual user. In that sense it would seem to be 

margin part of the market. Above it, there are the 

the  opposite  extreme  of  mass  commoditisation. 

medium range segments gradually differentiating 

And  yet,  such  products  as  Dell  computers  and 

through  innovation  and/or  brands,  all  the  way 

“made-to measure” blue jeans are adapted to each 

to  the  splintering  of  the  topmost  range  into 

multiple  high-value 

specialised 

segments, 

adapted  to  specific  sets  of  users  and  following 

user but made from commodity components. It is 
what  has  been  called  “mass  customisation”.59  It 
also  includes  such  products  as  SAP  information 

their  preferences.  And  this  applies  as  much  to 
what used to be considered commodity markets, 

systems,  which  make  customised  packages 
for  companies  on  the  basis  of  a  set  of  standard 

which  were  primary  sector 

raw  materials, 

modules  or  many  software  packages  such  as 

through  manufacturing,  to  services.  “Boutique” 

those  for  e-government  functions,  which  also 

specialised  steels  are  not  commodities,  whereas 

take advantage of the economies of specialisation 

standard desktop computer components and call-

and  experience  acquired  in  previous  similar 

centre  services  definitely  are  (see  examples  in 

projects for other functions or other governments. 

figure 5 below).

This  new  potential 

for  upgrading 

raw 

materials,  not  by  fabrication  but  by  achieving 

special  qualities  that  will  command  a  premium 
–and  more  stable–  price,  is  seen  by  Kaplinsky58 
as  an  important  window  of  opportunity  for 

producers to escape the vulnerability of most raw 

materials markets.

At  the  meso  level,  this  diversity  dimension 

leads  to  diversified  industry  structures,  where 

certain segments can be “sold-off” to a company 
in  a  country  with  decisive  comparative 

advantages  for  that  segment;  others  can  be 

kept  as  core  activities  of  the  large  corporations, 

while  others  may  become  the  province  of  truly 

specialised  small  companies. There  are  likely  to 

be redefinitions of traditional industries, either by 

major  splits  or  by  technology-induced  merging 

of  previously  separate  industries.  There  are,  for 

instance, growing segments of the textile industry 

58  Kaplinsky (2005).
59  Davis and Pine (1992).

At  the  other  extreme  one  could  find  the  Bilbao 

Guggenheim  as  a  unique  product  designed  by 

a  uniquely  qualified  architect  or  the  airport  of  a 

major  city  or  perhaps  a  specialised  instrument 

for use in a new nanotechnology product or any 

R&D project requiring experts, but also products 

that,  though  being  in  a  traditional  industry  are 

unique in themselves, like tourism in the Vatican 

or  boating  in  the  Grand  Canyon.  In  between, 

there are the many services that require personal 

contact with the client and/or the premises, such 

as the installation, maintenance and service front 

end  of  many  products. The  modular  furniture  to 

build a beautiful kitchen may be manufactured at a 

great distance, the actual design for the particular 

kitchen could even be done by Internet, but the 

transportation  and  the  installation  can  only  be 

done in place. This sort of case will become more 

and more typical of many complex  products  for 

both businesses and consumers.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 3. Market segmentation and its differing conditions from raw materials to all manufacturing 
and services

It  is  important  to  note  that  what  opens  the 

paradigm  neither  the  market  nor  the  transport 

possibility  for  developing  niche  markets  and 

conditions favoured relatively small quantities of 

customised products is the shift towards intangible 

any good. Constant innovation was not facilitated 

value  characteristic  of  the  ICT  paradigm.  Both 

as it is now by ICT, nor were knowledge-intensive 

the creativity that leads to differentiation and the 

services valued generally by the market.

special  services  that  accompany  the  specialised 

or  customised  product  or  service  are  part  of  the 

general  trend  towards  privileging  intangibles  as 

sources  of  value.  During  the  mass  production 

Figures  3  and  4  are  an  attempt  at  mapping 

the  dimensions  of  this  hyper-segmentation  and 

giving  some  examples. The  distinctions  in  terms 

Figure 4. Some examples of products in different market segments

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of  competitive  factors  for  each  type  of  market 

place,  though  increasingly  concentrated  in  the 

segment  in  each  particular  sector  are  of  the 

massively populated low-cost conditions of China 

utmost  importance  for  companies  in  search  of 

and India.

advantageous  locations  as  well  as  for  regions 

to  position 

themselves  as  successful 
trying 
producers  or  attractive  locations.60  This  way  of 
understanding  the  impact  of  the  ICT  paradigm 

on  the  differentiation  of  markets  is  an  essential 

input for the discussion of global respecialisation 

patterns.

At  this  stage,  the  advanced  countries  find 

themselves  in  a  sorcerer’s  apprentice  situation. 

The bigger and stronger the national corporations 

become  by  globalising,  the  greater  the  potential 

trade  deficit,  the  more  domestic  unemployment 

problems this threatens to generate and the more 

unstable  the  economy  becomes  at  home,  while 

As  the  processes  of  disaggregation  and 

it  is  increasingly  dependent  on  decisions  taken 

diversification  become  more  and  more  complex 

abroad.

and  as 

the  various  competition 

factors 

in 

each  segment  become  defined,  so  the  relative 

advantages of the various regions, countries and 

companies  become  clearer  for  outsourcing  and 

off-shoring.  Thus,  a  feedback  loop  is  generated 
intensifying  the  advantages  of  those  initially 

successful in certain activities or segments, so that 

the  assessment  processes  undertaken  by  various 

global companies favour them  even further. This 

concentration eventually overshoots the mark and 

is,  in  turn,  likely  to  generate  new  disadvantages 

that open opportunities for those discarded in the 

early rounds.

The challenge of respecialisation in a 
globalised world.

The policy dilemmas and the way forward

The  process  of  globalisation  has  been  both 

made  possible  and  strongly  induced  by  the 

Neither  free  markets  left  to  themselves 

nor  setting  up  tariff  protection  can  provide  a 

sustainable  solution.  The  former  would  ignore 

the  unemployment  problems  in  the  advanced 

world  and  lead  to  serious  political  problems; 

the  latter  would  bring  loops  of  retaliation  with 

unpredictable  consequences.  The  only 

real 

solution is to lift all boats by moving globalisation 

forward to encompass more and more countries 

while  also  intensifying  investment  at  home. This 

will  open  the  space  for  growth  by  increasing 

demand  and  markets  for  all  (while  reducing  the 

twin  threats  of  violence  and  migration).  Such 

a  process  supposes  the  respecialisation  of  the 

advanced  countries,  which  is  likely  to  require 

building  a  consensus  vision  involving  business, 

government and society around a set of promising 

opportunities aiming at full-employment growth.

There  are  at  least  three  forces  creating 

opportunities  for  successful  respecialisation  in 

the  advanced  world,  all  within  the  conditions 

potential  and  characteristics  of  the  revolution 

facilitated by the ICT paradigm:

in 

information 

and 

telecommunications 

technologies. 

In 

the  early  stages, 

from 

the 

1980s  it  was  mainly  a  question  of  tearing  down 

all  barriers  to  trade  and  finance.  This  in  itself 

radically modified the map of world production, 

- 

the increasing segmentation of each industry’s 

market space,

the “push” from globalisation,

the  “pull”  from  culture  and  quality  of  life  at 

- 

- 

but it is only since the mid-1990s, and especially 

home.

since the turn of the Century, that the real process 

of  production  globalisation  has  been  taking 

Let  us  take  a  look  at  the  possible  effects  of 

each.



60 

For regions trying to position themselves as successful producers or attractive locations, see McGowan et al. Eds (2004).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Global  redistribution  of  market  segments  in  all 

more advanced countries and a certain proportion 

industries

of them scattered in the rest of the world.

This  process  induces  the  positioning  and 

repositioning of each company (and also of each 

There  is  also  likely  to  be  an  “80-20%”61 
distribution of the value chain in most industries: 

region and country) in those segments where they 

Coordination,  R&D  and  design  would  tend  to 

have advantages of one sort or another.

be  mainly  (but  not  only)  in  the  more  advanced 

The  present  “migration  to  China”  does  not 

mean that all of manufacturing will be globalised 

and  the  advanced  countries  will  have  “hollow 

corporations”.  The  process  of  segmentation  of 

all  industries  into  commodity  markets  at  one 

countries;  production  would  be  mainly  in  the 

emerging  countries,  whereas  the  front  end  of 

distribution, 

technical  services,  maintenance 

and  customising  would  be  in  each  country  in 

proportion to its consumption.

end  and  a  proliferation  of  specialised  niches  at 

As  mentioned  before,  the  present  obvious 

the  other,  will  lead  to  a  global  distribution  of 

advantages  that  China  and  India  have  with 

segments tending to have the bulk of commodity 

significantly  lower  labour  costs  will  be  partly 

production in the less advanced countries and the 

self-defeating  through  increasing  the  cost  of 

bulk of specialised niche production in the more 

advanced,  with  several  countries  in  between 

(though  every  country  is  likely  to  have  some 

proportion of each).

It  should  be  clear  that  even  in  the  mass 

production  world  of  the  post-war  golden  age, 

both  the  US  and  the  main  European  countries 

produced the bulk of their domestic automobiles, 

but  for  the  truly  high  end  luxury  or  racing  and 

sports  car  segments  it  was  Europe  that  kept  the 

expertise (Mercedes, Rolls Royce, Porsche, Aston 

Martin,  etc.).  Something  similar  happened  in 

relation  to  motorcycles,  where  it  was  Harley 

raw  materials  and  transport.  This  will  gradually 
tend  to  require  coordinating  the  redistribution 
of  manufacturing  across  the  planet  (looking  for 

proximity  to  raw  materials  and  markets  in  those 

products that warrant it) in order to optimise overall 

costs. Such a process will open opportunities for 

the many “middle countries” whose labour costs 

are  much  lower  than  in  the  advanced  countries 

but not as low as in China and India; who possess 

some  highly  skilled  labour  or  access  to  crucial 

raw  materials  (for  particular  products)  or  to 

energy supplies or are close to important markets 
and have good transport systems.62

Davidson,  the  US  firm  that  supplied  the  super-

Figure  5  presents  a  hypothesis  about  the 

specialised top end of the market.

way that markets could eventually be distributed 

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In  the  present  conditions,  one  can  expect 

that most commodity segments of the fabricating 

industries  will  tend  to  go  to  Asia,  those  of  the 

resource  based  process  industries,  are  likely  to 

go to Latin America, Russia, and other resource-

rich countries. But each of these industries has a 

whole range of specialised segments, from those 

with  medium  complexity  to  those  of  very  high 

complexity  and  customised.  What  is  likely  to 

happen is that the emerging countries will make 

every effort to climb up to higher value products 

and  will  succeed  in  some  of  them.  This  would 

leave the bulk of the higher end products with the 

by  type  of  country  or  region  in  a  process  of 

respecialisation. It suggests that global distribution 

of  production  may  be  more  by  type  of  segment 

than  by  type  of  product.  Each  country  or  region 

would  tend  to  cover  a  much  wider  part  of  the 

spectrum than its segments of specialisation would 

indicate, but in smaller relative proportions. This 

wider  range  not  only  stems  from  the  natural 

preservation  of  traditional  strengths,  but  also 

takes  into  account  the  complexity  of  innovation 

systems. To specialise in niche agriculture without 

biotechnology or in the bulk segment of chemical 
industries  without  the  capacity  to  build  basic 



process equipment would make little sense.

61  This  use  of  percentages  is  simply  a  convenient  way  of  expressing  a  strongly  skewed  distribution,  while  trying  to  distinguish 

between 60-40, 80-20 or 95-5%.

62  The location of a significant part of European automobile “off-shoring” in Eastern Europe already announces that trend.

 
 
 
 
 
 
 
 
 
 
 
…

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Figure 5. Possible trends in the global distribution of the hyper-segmented markets of each industry

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Advanced countries

Intermediate countries
with other advantages
(access, transport, specialisation, etc.)

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Countries with abundant low cost labour

BASIC

CUSTOM

Challenges and opportunities from “global push”

supply  chains, 

specifications,  compatibility, 

The  globalisation  process,  by  its  nature, 

generates  challenges  and  problems  which  turn 

into growth opportunities.

Global  distribution  and  transport:  Global 
dispersion  of  production  for  maximum  cost 

efficiency  plus  the  proliferation  of  e-commerce 

demands  an  urgent  increase  in  the  efficiency  of 

global  distribution,  massively  and  door  to  door. 

The productivity of distribution is at present very 

low  (while  it  is  labour  intensive  and  its  energy 
costs  are  high).  New  systems  of  packaging,63 
transportation by various means and distribution 

will become an increasing proportion of the local, 

national and global economies.

Global coordination: The more complex the 
globalised  networks,  the  more  they  will  need 

various  forms  of  coordination  and  management: 

research 

and 

design, 

global  marketing, 

distribution  chains,  data  sharing  and  storage, 

security, etc. This will in many cases be one of the 

main tasks of global corporate headquarters, but 

it will also be the object of service contracts from 

different  parts  of  the  world  and  one  of  the  core 

services of independent networks. The latter could 

become the business model for strengthening the 

competitiveness  of  individual  exporters  all  over 
the world.64

Major 

engineering: 

The  more 

that 

globalisation advances across the world, the more 

engineering will be necessary to design and build 

infrastructures,  from  basic  highways,  electric 

utilities, oil ducts and transport systems to bigger 

projects  such  as  hydroelectric  dams,  satellites, 

oil refineries, water treatment plants for growing 

63  At present packaging is extremely intensive in the use of materials and energy (directly or indirectly). It could be expected that 

64 

rising prices of both inputs may spur a wave of innovation in packaging.
For wide-ranging studies of the issue of systems integration see the work of the CoPS Project, of which Andrea et al. (2005) and 
Hobday et al (forthcoming 2006) are representative.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
cities,  bullet  trains,  major  bridges  and  tunnels, 

to stimulate it, the education industry is likely to 

intelligent  buildings,  major  airports,  automated 

grow  in  all  its  dimensions:  formal  and  informal, 

port  facilities,  etc.  Significant  innovations  in 

preparatory  and  life-long,  for  individuals  and 

vastly superior transportation systems are likely to 

groups, general and specialised, for work and for 

become an indispensable feature of a globalised 

leisure, at a distance and person-to-person, in the 

economy.

public and in the private sector, local and global.

Global  contracting:  The  various  processes 
related to global contracting are becoming more 

Environmental 

industries: 
India  and  other  developing  or  ex-

The  more 

China, 

and  more  complex  and  will  require  specialist 

socialist  countries  industrialise,  the  bigger  the 

support,  among 

them:  organising  bids  and 

environmental  problems  and 

the 

larger 

the 

evaluating proposals; locating potential suppliers 

market  to  prevent,  moderate  or  overcome  them. 

or  customers  and  assessing  relative  advantages; 

The  advanced  countries  have  the  technological 

evaluating  the  relative  advantage  of  alternative 

capabilities  that  can  be  concentrated  in  this 

locations; negotiating, preparing, applying and/or 

direction and the most environmentally conscious 

analysing contracts; monitoring commitments and 

populations.  Yet,  as  was  discussed  above,  the 

projects;  doing  arbitrage  in  conflicts  and  many 
other similar or related activities.65 This is already 
a big part of what big global corporations do and 

most powerful lobbies against regulation are also 

there:  the  present  energy  industry,  the  chemical 
industry, the automobile and air travel industries 

their demand for such services will grow. But next 

plus many minor ones from the mass production 

to  it,  a  significant  number  of  smaller  companies 

paradigm. The flourishing of the sector, which can 

entering the global arena will be requiring those 

be  absolutely  huge,  will  depend  on  increasing 

services  too  and  a  growing  demand  for  expert 

(and  ever  more  stringent)  national,  regional  or 

assistance will also come from abroad.

preferably global environmental regulation. This, 

Global  education:  The  more  countries 
the  globalisation  of 

involved 

in 

become 

production,  the  more  demand  there  will  be  for 

educational  services.  Up  to  now,  the  high  level 

universities have been attracting foreign students 

in turn may ultimately depend upon the growing 

seriousness of environmental problems, the level 

of pressure from public opinion and the political 

will  of  the  decision-makers  in  the  advanced 

world.

in growing quantities, and a trend is beginning to 

The example of the environmental industries, 

emerge whereby that is combined with exporting 

as  a  major  opportunity  for  growth  which  would 

education through expatriate teachers, university 

also  improve  the  quality  of  life  for  all,  offers 

affiliates  in  various  countries,  internet-based  or 

a  powerful  example  of  how  policy  actions  or 

TV-based courses and degrees, teleconferencing, 

inactions  can  determine  the  context  for  market 

virtual  systems  training,  etc.  Equally,  up  to 
now,  the  transfer  of  technical  skills  is  being 

done  through  internal  corporate  arrangements 

within  global  networks.  Eventually,  some  of  the 

displaced  specialised  and  highly  skilled  workers 

in  those  segments  of  industries  migrating  from 

the  advanced  world  could  turn  into  highly  paid 

international  technology  transfer  specialists.  In 

general,  and  depending  on  the  policies  adopted 

behaviour.

Opportunities created by “local pull”

The 

ICT 

techno-economic 

paradigm 

fosters 

two  apparently  contradictory 

trends: 

standardisation and adaptability. Both are global; 

both  affect  the  local  markets. They  are,  in  fact, 

complementary  and  can  even  be  combined  as 

65  This will pose the question of homogeneity and compatibility among national regulatory structures. It is not yet clear whether 

this will be a space for a standardising trend or the basis for national and regional differentiation (or both!).

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in  “mass  customisation”,  as  discussed  above. 

the advanced countries (and some of the middle-

The growing habit –and soon expectation– of the 

range  ones)  as  the  Knowledge  Society  becomes 

consumer to define the specifications of products 

established and intensifies. Such activities are all 

and  services  will  open  a  very  wide  space  for 

the  more  important  given  that  they  can  absorb 

local  front  end  businesses  based  on  fulfilling 

the personnel from the jobs lost to the lower cost 

this  expectation,  wherever  the  original  products 

countries.

may  come  from.  The  specific  values,  culture, 

lifestyles and demographic trends –resulting from 

the  history  of  each  country  and  shaped  by  the 

potential and character of the ICT paradigm– are 

already generating demands, which will increase 

with  time  and  will  create  a  wide  opportunity 

space for growth and entrepreneurship.

Many of the activities can be ranged among 

what was termed above (in section 3) as “induced 

branches”.  They 

facilitate  overall  growth 

in 

the  deployment  period  by 

intermediating, 

interlinking,  supporting  and 

facilitating 

the 

operation  of  an  increasingly  dense  fabric  of  the 

economy  and  the  more  fluid  functioning  of  the 

There  is  obviously  also  the  fact  that  many 

various markets. They also incorporate labour of 

services  do  absolutely  require 

the  personal 

all skill levels and, through their income, widen 

presence  of  the  provider  and  these  are  also 

the markets for the main products.

growing. Local culture and the need for personal 
contact  form  natural  barriers  to  entry  and/or 

make  many  products  and  services  non-tradable 

at a distance.

It  is  not  easy  to  predict  which  will  be  the 

induced  industries  that  will  complete  the  fabric 

of  the  economy  with  the  full  flourishing  of  a 

paradigm. In the USA during the 1930s and right 

Table  3  is  an  exercise  that  attempts  to 

up  to  the  first  year  or  two  after  the  war,  there 

indicate the sorts of activities that may expand in 

was  great  pessimism  about  the  space  for  further 

Table 3 The respecialisation of the advanced countries: Local specificity as one of the forces guiding 
investment for the domestic market

Local pull factor

Examples of industries

Capabilities and 
requirements of the 
Knowledge Society

Quality of life as defined by 
national culture and values 

RD&E and top-end high-tech in general
Expert services: Business and personal
Education for the Knowledge Society (recognising the end of the “education once-and-for-all” and 
“job for life” models)
Highly efficient physical distribution services to complement e-commerce
Intelligent buildings and living spaces
Special financial services geared to the new conditions: venture capital as a “normal” service; 
recognising the value of intangible products and assets, catering to highly irregular incomes and 
to the proliferation of micro and mini firms, etc.

Entertainment industries
Environment industry: Clean air and water, safer waste disposal systems, alternative energies, 
etc.
Creative industries
Health industries and services: Orthodox and alternative; preventive and curing.
Beauty, body care, sports and healthy living
Habitat: Architecture, landscaping, interior design the spread of good taste (fashion, home and 
office decoration, etc.)
Specialised tourism: for locals and foreigners
Food: convenience and gourmet foods (in-restaurant, in-store, home delivery, made-to-order, 
etc.)

0

Economic Growth and 
demographic trends

Old age care and leisure time use
Personal services
Business services for the self-employed, micro and mini firms
Construction and urban renewal
Infrastructure (new and old) extension, improvement and maintenance

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
innovation  and  for  full  employment.66 Yet,  after 
1947, there were three sectors that absorbed the 

ranks. Yet, the areas to develop and the trajectories 

to pursue in ICT itself will be strongly shaped by 

growth  in  the  active  population:  construction, 

the dynamic sectors or segments in the countries 

services and government, so that full employment 

in  question.  It  is  in  this  sense  that  the  context 

became possible even though both manufacturing 

matters. Knowing the areas of specialisation in the 

and agriculture were still shedding labour as their 

global division of production becomes a powerful 

productivity continued to increase.

guide for the direction in which to strengthen ICT 

Construction  is  likely  to  play  a  similar  role 

in the present case but it is not yet clear in which 

capabilities and in which to develop R&D in each 

case.

aspects. At the end of the mass production surge, 

It  should  be  clear,  then,  that  segmentation 

which  combined  the  development  of  urban 

and  the  activities  resulting  from  global  pull  and 

agglomerations  for  work  with  suburban  living, 

local  push  almost  without  exception  require 

there was a time when the energy crisis prompted 

ICT, both as supporting innovations and as basic 

a rethinking of those working and living patterns. 

platform  for  operation.  The  whole  idea  of  a 

Integrated living models, where people would walk 

techno-economic paradigm (as the tool-kit and the 

or cycle to work by daytime and to entertainment 

“common sense” of a technological revolution) is 

by night were proposed and experimented upon. 
The possible environmental and energy pressures 

that it is all-pervasive. All activities, from frontier 
research, through distribution and health –which 

resulting  from  full  globalisation  may  yet  revive 

will be more and more electronically tagged and 

those  attempts.  For  the  moment,  the  bubbles  in 

computer-optimised–  all  the  way  down  to  high 

many  housing  markets  are  perpetuating  the  old 

tech  crafts  or  work-from-home  arrangements, 

model. But, whatever happens in the housing and 

everything,  absolutely  everything  will  be  using 

office  areas,  global  transport  infrastructures  are 

information  technology  and  weaving  into  the 

sure to mobilise the construction industry and its 

fabric  of 

the 

information-based  Knowledge 

suppliers.

Society.

The  other  major  activities  related  to  the 

It will be like oil in the fifties and sixties. It was 

Knowledge  Society,  education  or  health,  as  in 

not possible to conceive of any transport system 

the  case  of  the  environmental  industries,  are 

without  gasoline  diesel  or  jet  fuel.  Materials 

likely  to  depend  very  much  on  the  policies  and 

were  generally  synthetics.  Electricity  (basically 

regulations  that  will  stimulate  –or  stifle–  their 

produced  with  oil  derivatives  or  coal)  moved 

intense development.

The role of ICT as the platform for the 
whole process

Given 

that 

digital 

information 

and 

communications  technologies  (ICT)  will  be  the 

shaping  force  for  whatever  course  the  economy 

takes,  its  strong  development  is  crucial  for  any 

country  or  region  that  wants  to  be  in  the  front 

production  machinery  and  home  appliances, 

down  to  the  electric  can-opener.  Agriculture 

used  oil-driven  machinery  and  petrochemical 

fertilizers, pesticides and herbicides.

That’s  how  the  core  –  cheap!  –  inputs  of 

each  technological  revolution  shape  product 

and process decisions and eventually also social 

decisions.  It  is  the  plentiful  availability  of  ever 

more  powerful  and  versatile  “cheap  chips”  that 
make the ICT world possible... and inevitable!67

66  The  debate  about  productivity  and  structural  unemployment  among  US  economists  in  the  30s  and  40s  was  still  present  in 
1947. For a sample see Ross (1937), Fleming (1939), Bakke (1941), Morgenstern (1941), Graham (1947). This last article was 
titled “National Productivity: its relationship to unemployment-in-prosperity”.
For the equivalent impact of cheap iron and cheap steel in earlier surges see Freeman and Louçã (2001) pp. 159-63 and 232-9.

67 

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2

So,  there  will  be  a  constant  need  for 

Three tensions: three policy areas

computer  savvy  companies  and  personnel  in 

the  advanced  world  or  anywhere  on  the  planet, 

at  least  for  the  next  two  or  three  decades  (until 

this  paradigm  reaches  maturity).  They  might  be 

innovating  at  the  frontier  or  doing  applications 

in  (and  for)  other  industries  and  activities  or  at 

the  front  end  services  of  ICT.  Those  industries 

are the engines of growth of the whole –world! – 

economy; their services are the lubricating agent 

of the globalisation process.

Faced by this scenario, there are three policy 

options  which  could  significantly  modify  the 

context  in  such  a  way  that  markets  will  find  it 

profitable to redirect investment towards greater, 

more  even  and  more  stable  global  growth 

paths.  Such  a  major  shift  in  policy  focus  would 

involve an intelligent combination of regulation, 

respecialisation and social-net policies.

Today, one could paraphrase Engine Charlie 

Regulation

Wilson,  the  President  of  General  Motors  in 

the  previous  surge,  and  say  that  in  the  Golden 

Age  that  may  lay  ahead:  what’s  good  for  global 

development  is  good  for  the  ICT  industries  and 
vice versa!

Policy actions towards a sustainable and 
cohesive globalisation

To begin redressing the balance between the 

paper and the real economy, regulation would be 

needed  to  discourage  short-term  financial  gain 

and  rapid  movements  of  capital  and  to  favour 

long-term  investment.  Lou  Gerstner’s  suggestion 
about high taxes for capital gains realised within 
one year and declining to zero at five years68 is an 
example of a possible measure in that direction. 

He argues that this would make investors act like 

As  discussed  in  section  three,  the  collapse 

owners and become interested in the future of the 

of the bubble leaves three tensions acting in the 

enterprises they fund, rather than see equity as a 

economy:  that  between  paper  and  real  values, 

source of quick gains. Such a policy, if extended to 

that  between  potential  supply  and  effective 

real estate, would help weed out the speculative 

demand  (or  premature  market  saturation),  and 

purchasers  from  the  genuine  home  buyers  and 

that  within  society  between  the  richer  rich  and 

help eliminate some of the bubble pressures.

the poorer poor.

Complementary  policies  would  be  needed 

Since 

these 

three 

tensions  define 

the 

to  moderate  excesses  in  the  derivative  markets 

conditions  under  which  markets  operate,  free 

and  other  systemic  threats  to  financial  stability. 

markets will only aggravate them. In the absence 

In  general,  given  the  ease  with  which  finance 

of  conscious  regulation  and  policies  that  will 

can move from one country or region to another 

create  conditions 

for  redirecting 

investment 

towards a truly positive sum-game and a virtuous 
feedback cycle of global growth, the instabilities 

underlying 

the  present  performance  of 

the 

various  economies  may  produce  collapses  that 

could  bring  the  world  economy  into  recession 

or  intensify  the  social  tensions  to  the  point  of 

generating serious social unrest.

without  any  possibility  of  national  controls, 
Soros’69  call  for  enforceable  regulation  at  the 
global level is the obvious condition for any such 
policies to be effective.70

Once the rules for stability are established one 

can expect a series of financial innovations that, in 

contrast with the current casino style derivatives, 

68  Gerstner (2002:2003), p. 261.
Soros (1998 and 2000).
69 
For an analysis of the sources of financial instability and the case for global regulation see Eatwell and Taylor (2000).
70 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
will  be  really  destined  to  serve  the  purposes  of 

problems and the opportunities and to create the 

economic  expansion,  locally  and  globally,  and 

to  cater  to  the  specific  needs  of  the  Knowledge 

conditions  to  overcome  the  first  by  taking  full 
advantage of the second.73

Society and the processes of respecialisation and 
globalisation of production.71

Respecialisation

National and global social net policies

In  order  to  remove  all  obstacles  to  the 

flourishing  of  investment  in  the  Information 

In  order  to  generate  a  virtuous  circle  of 

Revolution,  much  of  the  Keynesian  edifice  that 

growing  jobs  and  markets  both  in  the  advanced 

had  been  erected  to  facilitate  mass  production 

and  the  developing  world  investment  must  be 

was  demolished  or  weakened.  One  of  the  most 

high  on  both  sides.  This  means  that  the  higher 

dangerous  casualties  of  this  process  has  been 

productivity  possible  with  the  new  paradigm 

the  Welfare  State,  which  had  facilitated  mass 

would  be  accompanied  by  enough  additional 

consumption  and  fuelled  the  post  war  Golden 

investment 

in 

further  activities  so 

that 

full 

Age.  The  dismantling  has  been  uneven  among 

employment  –  or,  rather,  full-income  earning 

countries,  but  one  could  say  that  in  terms  of 

work,  because  the  self-employed  are  likely  to 

institutional creative destruction, what has mainly 

grow  in  proportion  –  can  once  more  become  a 

taken place is the “destruction” half. There is no 

reality  in  the  advanced  world  and  an  attainable 

reason  whatsoever  for  supposing  that  the  values 

goal in developing countries.

As  suggested  above,  it  would  seem  that 

the  way  to  move  towards  that  outcome  is 

conscious  policy-guided  and  consensus-driven 
respecialisation.72

As  the  various  parts  of  the  value  chain  and 

certain  segments  of  different  production  sectors 

are  relocated  in  successive  emerging  countries, 

the  advanced  ones  would  shift  their  pattern 

of  specialisation  towards  higher  value  added 

activities  and  to  those  services  that  define  the 

culture  and  give  support  to  the  expected  rise  in 

the style and standards of living for all.

Such  a  process  is  unlikely  to  take  place 

through the operation of markets alone, given that 

it implies a strong bias towards “real” production 

investment and a change in the rules of the game 

favouring  the  quality  of  life  and  the  long  term 

interests  of  society.  It  is  more  likely  to  occur  by 

a  consensus-building  process  with  ample  public 

and  private  participation  to  recognise  both  the 

of  societal  solidarity  should  be  abandoned  in 

order  to  foster  growth  and  globalisation.  What 

can  be  held  is  that,  when  there  is  a  paradigm 

shift,  just  as  business  changes  its  organisational 

forms to achieve greater profitability, so societies 

must find more effective ways of achieving greater 

cohesion and social well being for all.

Reinventing  the  social  net  in  a  manner 

consistent  with 

the  current  paradigm  will 

contribute to social justice in prosperous societies, 

will  increase  security  for  all  by  reducing  the 

conditions that can favour violence and through 

strengthening  the  wealth  creating  capabilities 

of  all,  including  the  weakest,  will  reopen  the 

ample  upward  mobility  routes  that  gave  strong 

cohesion  to  the  more  developed  societies  until 

very  recently.  Finally,  and  in  a  more  practical 

vein  in  relation  to  growth,  the  mechanisms  of 

social redistribution generate new market spaces 

across  the  income  spectrum  and  create  further 

possibilities for investment and employment.

For a set of proposals to create financial instruments meeting some of the new forms of risk, see Shiller (2003).

71 
72  Perhaps  the  time  has  come  to  revive  interest  in  the  participatory  processes  of  foresight  and  focusing  used  by  Japan,  Korea 
and  other  countries  that  successfully  reshaped  their  economies  leaping  forward  through  the  fourth  and  into  fifth  surge 
competitiveness.
In  a  more  ambitious  vision,  respecialisation  could  also  open  the  way  for  a  positive  sum  game  in  the  process  of  global 
development covering all continents and lifting all boats.

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But  in  the  present  globalising  economy,  the 

a huge innovation space where free markets could 

national  social  nets  are  not  enough.  Historically 

thrive, are seen as the creation of the market itself. 

the  income  polarising  trends  typical  of  the 

For  that  same  reason,  State  intervention  is  still 

installation  periods  had  been  generally  within 
each  core  country74  to  be  later  partly  or  wholly 
reversed  in  the  deployment  period  (or  Golden 

Age).  In  the  present  surge,  income  polarisation 

has occurred both within each country and across 

the  world,  in  some  cases  with  an  even  more 

acute  effect  at  the  global  than  at  the  national 

level.  As  a  consequence,  the  social  expression 

of  that  polarisation  has  been  global. The  whole 

world is witnessing – or suffering – the resentful 

violence and the desperate migratory pressures of 

the  excluded  as  well  as  other  phenomena  such 

as various forms of “fundamentalism”, including 

the success of messianic leaders or the search for 

fanatical religious identities.

Previous success as the main obstacle

Introducing  new  forms  of  State  intervention 

remembered as an obstacle for the free explosion 

of  the  ICT  revolution,  due  to  its  over-adaptation 

to the mass production paradigm.

In the present Turning Point it could be said 

that  excess  free  markets  are  as  obsolete  and 

represent  as  much  of  an  obstacle  to  maximise 

growth in Deployment, as excess State intervention 

was seen to be during early Installation.

Perhaps  only  serious  recessions  or  other 

difficult  circumstances 

that 

truly  constrict 

profitability  can  shake  the  confidence  in  the 

present  set  up  and  move  business  towards 

favouring  regulation  and  income  distribution 

measures.  But,  policy  makers  need  to  be  ready 

to  propose  and  promote  solutions  that  are  truly 

adequate for a modernised economy following a 

paradigm that is fundamentally different from the 
previous one.75

–national  or  global–  after  the  experience  of  the 

The  ‘other’  globalisation,  fully  compatible 

installation  period  is  difficult  because  of  excess 

with  the  paradigm  and  capable  of  unleashing 

business  confidence.  A  technological  revolution 

a  worldwide  steady  expansion  of  production, 

brings  such  a  wide  space 

for 

innovation 

markets  and  well  being, 

is  waiting 

to  be 

opportunities that it creates the perfect conditions 

formulated. 

It  would  be  production-centred 

for the success of free markets. When it gradually 

and  -led;  pro-growth  and  pro-development; 

becomes  an  obstacle  because  all  conditions  are 

with  dynamic,  locally  differentiated  markets, 

ready for longer term wider ranging stable growth, 

enhancing national and other identities. But it will 

the  business  world  is  not  ready  to  relinquish 

not be the creation of any invisible hand; it will 

the  “freedoms”  gained.  As  noted  before,  the 

work  with  the  market  but  will  require  plenty  of 

enormous successes of the installation period are 

human imagination, ample participation, intense 

seen  as  the  creation  of  the  market  itself,  rather 

negotiations, much determination and collective 

than being ascribed to the temporary existence of 

political will.



74  Though  many  impoverishing  processes  had  been  international,  such  as  the  ruin  of  the  Indian  textile  producers  by  British 
mechanisation from the 18th Century or the ruin of natural rubber producers by synthetic rubber in the 20th, those cases were 
directly the result of market displacement by technical change.
In the 1930s, during the Turning Point of the fourth surge, Keynes’ ideas and Roosevelt’s New Deal proposals were met with 
ferocious resistance from economists and from business as attempts at destroying the market and moving towards communism. 
After the war, the Keynesian measures that facilitated the Golden Age were, if anything, more radical than Roosevelt’s original 
ones, but were welcome after the war had shown the advantages of industry-government collaboration.

75 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3. From Industrial R&D to ICT-based Innovation:
    the Social Policy Challenge for Europe 

by Luc Soete76

Underlying  the  European  Lisbon  summit 

by  incentive  schemes  and  active  labour  market 

back  in  March  2000,  were  basically  two,  rather 

policy  tools  put  in  place.  Following  Becker  it 

different  views.  On  the  one  hand  the  view 

can be argued that with the average rise in hour 

that  probably 

the  most  straightforward  way 

wage, the welfare value of leisure and voluntary 

for  European  policy  makers  to  increase  their 

“non-work”  activities  has  also  risen.  In  short, 

individual  countries’  welfare  would  simply 

there  are  limits  to  further  raising  activity  levels 

consist  of  increasing  the  supply  input  factors. 

as sustainable engines for growth in high-income 

The input factor, which offered most scope for an 

societies.

easy and straightforward expansion, was, and still 

is  in  most  EU  countries,  of  course  labour.  From 

the  experiences  in  Scandinavian  countries,  the 

UK to the one in the Netherlands in the late 90’s, 

it  appeared  that  an  active  labour  market  policy 
aimed  at  raising  the  employment  activity  level 

could indeed result in an immediate improvement 

in  output  growth  performance.  Given  the  gap 

between  the  activity  level  targets  set  in  Lisbon 

and  current  employment  levels  in  many  EU 

countries, there are still today many job-extensive 

growth opportunities in EU countries based on a 

straightforward further expansion of employment, 

in  particular  to  underrepresented  groups  in  the 

labour 

force:  e.g.  women, 

immigrants,  55+ 

citizens, etc.

An  even  more  straightforward  economic 

argument  holds  with  respect  to  the  decreasing 

returns  accompanying 

the  accumulation  of 

capital,  the  other  traditional  production  input 
factor.  Less  and  less  profitable  opportunities  for 

capital  appear  available  in  the  most  developed, 

richest  EU  countries  and  European  citizens’ 

savings are actually looking towards new member 

countries  and  non-EU  emerging  economies  for 
profitable  opportunities.  Here  too  increasing 

simply  capital  accumulation  is  in  the  long  term 

not  a  sustainable  policy  to  be  pursued  so  as  to 

achieve economic growth and welfare. For high-

income  countries,  the  only  input  factor,  which 

promises  long  term  sustainable  output  growth  is 

ultimately  knowledge  accumulation.  Knowledge 

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Since  Lisbon  some  progress  in  increasing 

accumulation  in  its  various  forms:  embodied  in 

labour  force  participation  has  been  achieved 

more  efficient  capital  goods,  in  human  capital, 

but  is  has  been  a  piecemeal  progress  and  time 

in  organisational  methods,  in  new  production 

is  actually  running  against  continuous  further 

techniques or products.

improvements.  Indeed,  in  the  coming  decades 

such  further  labour  expansion  growth  in  a  high-
income,  ageing  setting  will  become  confronted 

with  decreasing  returns:  a  decline 

in 

the 

willingness of those “voluntary non-active” in the 
labour  force77  to  seek  formal  paid  employment. 
Exchanging the various activities they are involved 

in  outside  of  the  formal  wage  income  sphere  – 

not just leisure or time spent on hobbies, but also 

social  and  voluntary  work,  care,  household  and 
community activities – will barely be influenced 

There 

is 

thus  nothing  peculiar  about 

the  second  priority  given  to,  and  emphasis 

put  on  knowledge  and  innovation  as  engine 

for  sustainable  growth,  both  in  the  original 

and  recently  revised  official  Lisbon  strategy 

declarations  (EC,  2005).  As  a  matter  of  fact  this 

second view is much more crucial and essential 

for  Europe’s  long  term  future  than  the  first  one 

focusing on increasing labour force participation. 

Worse,  as  I  will  argue  under  the  next  headings 

the  mixing  up  of  those  two  policy  priorities 



76  Professor of International Economics, University of Maastricht and Director of UNU-MERIT, The Netherlands.
77 

I am hence not referring to the unemployed.

 
 
 
 
 
 
 
 
 
 
 
 
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is  at  the  centre  of  much  confusion  about  the 

on  research  and  innovation.  A  truly  integrated 

Lisbon  strategy  and  what  it  implies  for  Europe’s 

Lisbon  strategy  will  have  to  take  more  fully  into 

social  model.  But  before  entering  into  that 

account  these  implications  as  highlighted  in  the 

debate  I  draw  the  attention  in  a  first  section  to 

conclusions.

the  quite  fundamental  way  in  which  knowledge 

accumulation  and  innovation  has  changed  over 

the last Century and is different today from what 

it  was  forty  to  twenty  years  ago. This  change  is 

On the changing nature of technological 
accumulation and innovation

closely  related  to  the  particular  contribution  of 

From S&T to industrial R&D

information  and  communication  technologies  to 

knowledge  accumulation.  As  a  result,  realising 

the  welfare  and  efficiency  gains  resulting  from 

knowledge  accumulation  and 

innovation 

is 

today more closely and intractably linked to the 

dynamism  and  windows  of  opportunity  offered 

by  individual  European  countries’  social  model. 

The archetype of Europe’s social model (ESM) as 
represented  by  its  German  continental  version78 
was  first  and  foremost  an  industrial  society 

model: a model very much in line with a process 

of  technological  accumulation  characterized  by 

incremental innovations. Proposals for reform of 

the  ESM,  however  defined,  need  to  take  much 

more explicitly into account the changing nature 

of  such  technological  change.  Ideally  this  might 

well  involve  recognizing  more  explicitly  the 

emerging  dual  nature  of  the  labour  market.  It  is 

the “knowledge workers” segment of that labour 

market  which  seems  today  to  lack  dynamism  in 

Europe, worse which appears today to undermine 

the  financial  sustainability  of  the  ESM.  Reform 

policies should in my view focus on that particular 

segment of the labour force.

In short, the shift in the knowledge economy 

paradigm agenda has implications which go way 

beyond  the  traditional  research  and  innovation 

policy  agenda  discussed  by  European  member 

countries’ respective ministers and administrations 

Science and Technology has been the subject 

of  public  interest  and  support  for  centuries. The 

acceptance of a utilitarian argument for the public 

support  of  basic  scientific  research  predates  the 
Industrial Revolution itself.79 Although government 
and  university  laboratories  had  existed  earlier,  it 

was  only  in  the  1870s  that  the  first  specialised 

R&D  laboratories  were  established  in  industry 
(Mowery, 1983).80 What became most distinctive 
about  this  form  of  industrial  R&D  was  its 

scale,  its  scientific  content  and  the  extent  of  its 

professional specialisation. A much greater part of 

technological progress became now attributable to 

R&D work performed in specialised laboratories 

or pilot plants by full-time qualified staff. It is this 

sort of professional work, which is today recorded 

in  official, 

internationally  harmonized  R&D 

statistics.  Already  in  the  early  days  of  defining 

what was to become the OECD Frascati Manual 

definition of “R&D”, it was obvious that it would 

not  be  possible  to  measure  the  part-time  and 
amateur  inventive  work  of  typical  19th  century 
research.  The  present  industrial  R&D  statistics 

are  therefore  a  reflection,  and  also  a  measure 

of, the professionalisation of R&D activities. And 

while  the  extent  of  specialisation  should  not  be 

exaggerated – even today in many manufacturing 

firms 

the 

“technical” 

or 

“engineering” 

departments  or  “OR”  sections  contribute  far 



78 

Europe’s  social  model  cannot  be  described  in  precise  terms.  It  consists  of  rather  different  diversified  models  across  Europe. 
Broadly speaking though one might consider two main models: one financed through general taxation (the “Beveridge system”) 
and the other based on social security contributions (the “Bismarck system”). Denmark, Greece, Spain, Ireland, Iceland, Italy, 
Norway, Portugal, Finland, Sweden and the UK all belong more or less to the first system. The “Bismarck model” can be found 
in Belgium, Germany, France, Liechtenstein, Luxembourg, the Netherlands, Austria and Switzerland.

79  The first clear and forceful advocacy of a national S&T policy based on public support for research was attributed by Freeman 
to Francis Bacon (1627). In The New Atlantis, he advocated the establishment of a major research institute (“Salomon’s House”) 
which would use the results of scientific expeditions and explorations all over the world to establish the “knowledge of causes, 
and secret motions of things”. See also in more detail Freeman and Soete (1997) Part IV which gives a detailed overview of the 
historical development of public support for science, technology and innovation.
See Mowery, D. (1983).
See Mowery, D. (1983).

80 

 
 
 
 
 
 
 
 
 
 
 
 
 
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more to the technical improvement of an existing 

Industrial Revolution. The latter could be described 

process  than  the  formal  R&D  department,  more 

as a period of “industrial enlightenment” (Mokyr, 

narrowly  defined  –  the  balance  has  significantly 
changed  over  the  20th  Century  with  a  gradual 
further specialisation of the R&D function. It is the 

2005): a period of close and fruitful interactions 

between  industrialists  searching  for  a  better 

scientific  understanding  of  their  technological 

emergence of this particular function, which can 

inventions, and scientists keen on understanding 

be  most  closely  identified  with  the  emergence 

the  underlying  scientific  principles  of  those 

and growth of the industrial society.

new  industrial  technologies.  Thus  the  further 

This  industrial  research  “revolution”  was, 

however, not just a question of change in scale. 

It  also  involved  a  fundamental  change  in  the 

relationship  between  society  on  the  one  hand 

and  technology  and  science  on  the  other.  The 

expression “technology”, with its connotation of 

a  more  formal  and  systematic  body  of  learning, 

only came into general use when the techniques 

of  production  reached  a  stage  of  complexity 
where traditional methods no longer sufficed. The 

older, more primitive arts and crafts technologies 

continued  to  exist  side  by  side  with  the  new 

“technology”.  But 

the  way 

in  which  more 

scientific techniques would be used in producing, 

distributing and transporting goods led to a shift 

in  the  ordering  of  industries  alongside  their 

“technology”  intensity.  Thus,  typical  for  most 
Western  industrial  societies  of  the  20th  Century, 
intensive 
there  were  now  high-technology 

development  of  the  steam  engine  influenced 

thermodynamics,  whilst  scientific  knowledge 

of  electricity  and  magnetism  became  the  basis 

for  the  electrical  engineering  industry.  The  two 

bodies of knowledge were nevertheless generated 

by distinct professions in quite different ways and 

with largely independent traditions. The scientific 

community  was  concerned  with  discovery 

and  with  the  publication  of  new  knowledge 

in  a  form,  which  would  meet  the  professional 

criteria of their fellow scientists. Application was 

ultimately  of  secondary  importance  or  not  even 

considered.  For  the  engineer  or  technologist  on 

the other hand, publication was of secondary or 

negligible importance. The first concern was with 

the  practical  application  and  the  professional 

recognition, which came from the demonstration 

of a working device or design.

Elsewhere  I  have  described  the  growing 

industries, having as major sectoral characteristic 

dichotomy between science and technology over 

the heavy, own, sector-internal R&D investments 

the  last  two  decades  as  a  “Dutch  knowledge 

and 

low-technology 

intensive,  more  craft 

disease”  phenomenon  (Soete,  2004).  A  process, 

techniques based industries, with very little own 

which has been set in motion in the 1970/80s and 

R&D  efforts.  And  while  in  many  policy  debate, 

consisted of a dual “crowding out”. A “crowding 

industrial dynamism became as a result somewhat 

out” of fundamental, basic research from private 

naively  associated  with  just  the  dominance  in 

firms’  R&D  activities  on  the  one  hand  and  a 

a  country’s  industrial  structure  of  the  presence 

process  of  “crowding  out”  of  applied  research 

of  high-technology  intensive  sectors,  the  more 

from  public,  primarily  academic  university 

sophisticated  sectoral  studies  on  the  particular 

research. The first process found its most explicit 

features  of  inter-sectoral  technology  flows,  from 

expression in the reorganisation of R&D activities, 

Pavitt (1984) to Malerba (2004), brought back to 

from  often  autonomous 

laboratories  directly 

the  forefront  many  of  the  unmeasured,  indirect 

under the responsibility of the Board of Directors 

sources of technical progress in the analysis.

in the 60’s to more decentralized R&D activities 

At 

the  same 

time, 

the  “science”  and 

“technology”  parts  of 

research  developed 

increasingly autonomously and with an increasing 

degree of independence from each other, certainly 

when  compared  to  the  early  phases  of  the 

integrated and fully part of separate business units. 

Today  only  firms  in  the  pharmaceutical  sector 
and a couple of large firms outside of this sector 



are  still  involved  in  the  funding  and  carrying 

out  of  fundamental  research  (as  reflected  e.g.  in 

 
 
 
 
 
 
 
 
 
 
 
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the  number  of  scientific  publications  authored 

like the accumulation of any other capital good. 

by  private  firms).  For  most  firms  the  increased 

In short that economic principles can be applied 

complexity of science and technology has meant 

to  the  production  and  exchange  of  knowledge; 

a  greater  focus  on  applied  and  development 

and,  that  knowledge  is  intrinsically  endogenous 

research and a more explicit reliance on external, 

to  the  economic  and  the  social  system,  not  an 

university  or  other,  often  public,  knowledge 

external,  “black  box  factor,  only  to  be  opened 

centres  for  more  fundamental  research  input. 

by  scientists  and  engineers” 

in  Christopher 

Firms now “shop” on the world market for access 

Freeman’s (1974) celebrated words. Hence, while 

to basic and fundamental research and choose the 

knowledge has some specific features of its own, 

best locations to locate their R&D laboratories. In 

it can be produced and used in the production of 

doing  so  they  will  not  only  hope  to  make  their 

other goods, even in the production of itself, like 

own, in-house R&D more efficient, but also look 

any  other  capital  good  that  is  used  as  an  input 

to  the  efficiency,  quality,  and  dynamics  of  the 

in  the  production  process.  It  also  can  be  stored 

external universities and public R&D institutions.

and  will  be  subject  to  depreciation,  when  skills 

At  the  other  end  of  the  spectrum,  public 

research  investments  in  universities  and  other 

public  research 
advanced  countries, 

institutes  became, 

increasingly  subject 

in  most 
to 

national  public  scrutiny  over  the  80’s  and  90’s 

deteriorate  or  people  no  longer  use  particular 

knowledge and, in the extreme case, forget about 

it.  It  might  even  become  obsolete,  when  new 

knowledge  supersedes  and  renders  it  worthless; 

as in the case with leading-edge technologies.

through  systematic  performance  assessment  and 

However, 

there  are  some 

fundamental 

academic  peer  review.  As  a  result,  academic 

differences  with 

traditional 

industrial  capital 

performance  became  even  more  explicitly  the 

goods.  First,  and  foremost,  the  production  of 

dominant  incentive  in  public  research  institutes 

knowledge  will  not  take  the  form  of  a  physical 

while  applied,  or  more  immediately  relevant 

piece  of  equipment,  but  will  be  embedded 

research,  was  second  rated.  Hence,  in  many 

in  some  specific  blueprint 

form 

(a  patent, 

countries,  particularly 

in  Europe,  applied 

an  artefact,  a  design,  a  software  program,  a 

research became “crowded out” of the university 

manuscript,  a  composition),  in  human  beings 

environment.

These  opposing  “crowding  out”  trends  in 

the  nature  of  private  and  public  research  have 

to  some  extent  accompanied  the  gradual  shift 

in  the  economy  from  an  industrial  society  to  a 

more  service  based,  immaterial  economy,  in 

which  industrial  production  is  no  longer  the 
prime  recipient  and  carrier  of  technological 

improvement.

The emerging knowledge economy paradigm

There  has  been  over  the  last  twenty  years 

a  major  shift 

in 

the  understanding  of 

the 

relationships  between  research,  innovation  and 
socio-economic development.

First,  economists  have  come  to  accept  that 
knowledge accumulation might well be analysed, 

0

or  even  in  organisations.  In  each  of  these  cases 

there  will  be  so-called  positive  externalities:  the 

knowledge embodied in such blueprints, people 

or  organisations  cannot  be  fully  appropriated,  it 

will with little cost to the knowledge creator flow 

away  to  other  firms  or  to  the  public  knowledge 

stock. Knowledge is from this perspective a non-

rival  good.  Many  people  can  share  it  without 

diminishing  in  any  way  the  amount  available  to 

any one of them.

Second, the emergence of the cluster of new 
information  and  communication  technologies 

(ICTs)  has  also  had  a  direct  impact  on  research, 

international  knowledge  access  and  innovation. 

ICTs  are  in  the  real  sense  of  the  word  an 

information  technology,  the  essence  of  which 

consists  of  the  increased  memorisation  and 

storage,  speed,  manipulation  and  interpretation 

of  data  and  information.  In  short,  it  is  what 

 
 
 
 
 
 
 
 
 
 
 
 
 
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has  been  characterized  as  the  codification  of 

the  effects  produced  by  new  combinations  and 

knowledge.  As  a  consequence, 

information 

use of pieces in the existing stock of knowledge 

technology makes codified knowledge, data and 

(David and Foray, 2002). This new model, closely 

information  much  more  accessible  than  before 

associated  with  the  emergence  of  numerous 

to  all  sectors  and  agents  in  the  economy  linked 

knowledge  “service”  activities,  implies  to  some 

to  information  networks  or  with  the  knowledge 

extent  more  routine  use  of  a  technological 

how to access such networks. But ICTs have also 

base  allowing  for  innovation  without  the  need 

had  a  direct  impact  on  the  R&D  process  itself. 

for  leaps  in  technology,  sometimes  referred  to 

Research  laboratories  are  today  equipped  with 

as  “innovation  without  research”.  It  requires 

sophisticated 

ICT  equipment  allowing  more 

systematic 

access 

to 

the 

state-of-the-art 

precision, reliability and expanding dramatically 

technologies;  each 

industry  must 

introduce 

the scope for research in many different scientific 

procedures  for  the  dissemination  of  information 

fields.  The  intensive  use  of  sophisticated  ICT 

regarding  the  stock  of  technologies  available, 

instruments  in  the  process  of  R&D  is  one  of  the 

so that individual innovators can draw upon the 

major  factors  contributing  to  the  increase  in  the 

work of other innovators. This mode of knowledge 

efficiency in research over the last decades.

generation  --  based  on  the  recombination  and 

At  the  same  time,  the  increased  potential 
for  international  codification  and  transferability 

of  knowledge  linked  to  the  use  of  ICTs,  implies 

that  knowledge,  including  economic  knowledge 

becomes to some extent globally available. While 

re-use  of  known  practices  --  raises  also  much 

more  information-search  problems  and  must 

confront  the  problems  of  the  impediments  to 

accessing  the  existing  stock  of  information  that 

are created by intellectual property right laws.

the local capacities to use or have the competence 

The  new  concept  of  a  “science,  technology 

to  access  such  knowledge  will  vary  widely,  the 

and  innovation  system”  is,  in  other  words, 

access  potential  is  there.  ICT,  in  other  words, 

shifting 

towards  a  more  complex,  socially 

brings  to  the  forefront  the  enormous  potential 

distributed  structure  of  knowledge  production 

for  catching-up,  based  upon  cost  advantages 

activities,  involving  a  much  greater  diversity  of 

and economic transparency of (dis-) advantages, 

organizations  having  as  explicit  goal  knowledge 

while stressing at the same time the crucial tacit 

production. The old system reviewed above under 

and  other  competence  elements  in  the  capacity 

a), was, by contrast, based on a simple dichotomy 

to  access  international  codified  knowledge.  For 

between  knowledge  generation  and  deliberate 

technologically  leading  countries  or  firms,  this 

learning  (R&D  laboratories  and  universities)  and 

implies  increasing  erosion  of  monopoly  rents 

activities  of  production  and  consumption  where 

associated  with  innovation  and  shortening  of 

the motivation for acting was not to acquire new 

product  life  cycles.  Research  efforts  may  not 

knowledge but rather to produce or use effective 

be  profitable  anymore  in  this  setting,  from  the 

outputs.  The  collapse  (or  partial  collapse)  of 

perspective  of  a  single  firm. The  ability  of  each 

this  dichotomy  leads  to  a  proliferation  of  new 

economic  actor  to  innovate  single-handedly  in 

places  having  the  explicit  goal  of  producing 

such a global setting is becoming more risky, and 

knowledge  and  undertaking  deliberate  research 

stresses the role of strong technology clusters and 

activities,  which  may  not  be  readily  observable 

government investment in knowledge.

but  nevertheless  essential  to  sustain  innovative 

Third, 

the  perception  of 

the  nature  of 

activities in a global environment.

innovation  processes  has  changed  significantly 

To 

summarize, 

traditional  R&D-based 

over the last decade. Broadly speaking, innovation 

technological  progress  which  is  still  very  much 

1

capability  is  seen  less  in  terms  of  the  ability  to 

dominant in many industrial sectors ranging from 

discover new technological principles, but more 

the  chemical  and  pharmaceutical  industries  to 

in  terms  of  the  ability  to  exploit  systematically 

motor  vehicles,  semiconductors  and  electronic 

 
 
 
 
 
 
 
 
 
 
 
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2

consumer  goods  has  been  characterized  by  the 

force, a close and privileged interaction between 

ability  to  organise  technological  improvements 

firms  and  higher  education  establishments  (dual 

along clear agreed-upon criteria and a continuous 

learning  systems)  and  specialized 

industrial 

ability  to  evaluate  progress.  At  the  same  time  a 

R&D and engineering departments, guaranteeing 

crucial part of the engineering research consisted, 

a  continuous 

improvement 

in  production 

as  Richard  Nelson  put  it,  “of  the  ability  to  hold 

and  organisational  efficiency. 

It  resulted 

in 

in place”: to replicate at a larger industrial scale 

continuous  improvements  in  the  international 

and  to  imitate  experiments  carried  out  in  the 

competitiveness  (unit  labour  costs)  of  German 

research  laboratory  environment.  As  a  result  it 

production  as 

reflected 

in  German 

trade 

involved first and foremost a cumulative process 

surpluses, still the case today. It also explains the 

of  technological  progress:  a  continuous  learning 

from natural and deliberate experiments.

The  more  recent  mode  of  technological 

high expectations of economists in the 80’s of the 
German  (and  Japanese)  “Standort“  likely  to  take 
over US industrial technology dominance.

progress  described  above  and  more  associated 

Compared to the new mode of technological 

with  the  knowledge  paradigm  and  the  service 

progress, 

the  previous  advantages  of 

this 

economy,  with  as  extreme  form  the  attempts  at 

social  model  are  now  quickly  turning  into 

ICT-based  efficiency  improvements  in  e.g.  the 
financial  and  insurance  sectors,  the  wholesale 

disadvantages  primarily  associated  with  major 
emerging inflexibilities, which are to some extent 

and retail sectors, health, education, government 

at loggerheads with the newly required flexibility 

services, business management and administration, 

in the new knowledge paradigm.

is much more based on flexibility and confronted 

with  intrinsic  difficulties  in  replication.  Learning 

from  previous  experiences  or  from  other  sectors 

is  difficult  and  sometimes  even  misleading. 

Evaluation 

is  difficult  because  of  changing 

external environments: over time, among sectors, 

across  locations.  It  will  often  be  impossible  to 

separate  out  specific  context  variables  from  real 

causes and effects. Technological progress will in 

other words be much more of the trial and error 

base yet without as in the life sciences providing 

“hard” data, which can be scientifically analysed 

and  interpreted. The  result  is  that  technological 

progress will be less predictable, more uncertain 

and  ultimately  more  closely  associated  with 

entrepreneurial  risk  taking. Attempts  at  reducing 

such  risks  might  involve,  as Von  Hippel  (2004) 

has argued, a much greater importance given to 

users, already in the research process itself.

This shift as I will argue in the next section has 

major implications for the functioning of the ESM, 

as typified in the German version of that model. 

The  German  social  model  was  to  some  extent 

the  “ideal”  type  of  social  industrial  model  (with 

Japan) with strong incentives for firms to invest in 

the internal learning and upgrading of their work 

Reflecting on the implications for 
Europe’s social model

The  organisational  and  social  challenges 

associated  with  the  emerging  new  knowledge 

paradigm  described  above  and  also  closely 

associated  with  the  service  economy  and  the 

“e-conomy”,  have,  and  maybe 

somewhat 

paradoxically  given  the  original  emphasis  on  e-

Europe in Lisbon, not really been addressed in the 

discussions leading up to the Lisbon summit. Most 

of  the  discussions  focused  on  the  technological 

aspects of knowledge creation and development, 

the  lagging  position  of  the  EU  vis-à-vis  the  US, 

the need for a European research area and better 

coordination of member states research policies, 

the shortages of scientists and engineers, etc. The 

challenges of the emerging knowledge paradigm 

for the social models in European members states 

(MS) were barely addressed.

Yet  it  is  clear  that  in  a  knowledge-driven 
society as described above there are likely to be 

many institutional, social and cultural bottlenecks 

to  entrepreneurial  risk  taking,  trial  and  error 

innovation  and  the  ensuing  creative  destruction, 

 
 
 
 
 
 
 
 
 
 
 
 
 
which  touch  directly  on  the  functioning  of  the 

environment  putting  a  higher  premium  on  the 

ESM. To some extent the Lisbon declaration was 

security  of  employment,  internal  learning  and 

not  only  an  expression  of  a  political  desire  to 

efficiency  improvements  in  the  production  of 

strive for a Europe belonging to the world’s most 

existing  products. Viewed  from  this  perspective, 

knowledge-intensive  regions  in  ten  years,  but 

the  gap  between  Europe,  and  in  particular 

also  that  this  was  to  happen  within  the  context 

continental Europe, and the United States in terms 

of  a  strengthened,  ‘activated’  social  Europe  that 

of  innovative  capacity,  efficiency,  and  wealth 

would have an eye for past social achievements. 
The  question  that  was  not  addressed  was  how 
activating labour markets would enhance the shift 

creation  may  look  like  the  price  Europe  had  to 

pay for not wanting to give up the social securities 

and  achievements  associated  with  its  social 

towards the new knowledge paradigm.

model. Many of the proposals on “activating the 

Economists  such  as  Giles  Saint-Paul81  have 
analysed the relationship between labour market 

institutions,  and  in  particular  the  costs  of  hiring 

and dismissing employees, and the development 

of 

innovations 

from  a  purely 

theoretical 

perspective.  Hiring  and  firing  costs  are  in  many 
ways  the  most  explicit  manifestation  of  the 

industrial  employment  “security“  embedded  in 

European  continental  social  welfare  states  –  the 

labour  market”  with  by  now  popular  concepts 

like “empowerment” and “employability” appear 

to  go  hand  in  hand  with  innovation  and  growth 

dynamics, others though do not. Some European 

countries such as the UK and Denmark appear to 

have been more successful in reducing dismissing 

costs  than  others,  and  appear  to  have  benefited 

much  more  from  the  knowledge  paradigm  in 

terms of growth dynamics.

Bismarck  model.  They  have  led  to  stability  in 

The  central  question,  which  must  be  raised 

labour  relations  and  have  represented  a  useful 

within this context is whether the social security 

incentive  for  employers  and  employees  alike  to 

model  developed  at  the  time  of  the  industrial 

invest in human capital. However, in terms of the 

society  is  not  increasingly  inappropriate  for  the 

new  knowledge  paradigm  and  in  particular  the 

large  majority  of  what  could  be  described  as 

accompanying  process  of  “creative  destruction” 

“knowledge workers”: workers who are likely to 

which  might  accompany  the  development  of 

be less physically (but by contrast possibly more 

new  activities  –  whether  concerned  with  new 

mentally) worn out by work than the old type of 

product,  process  or  organisational  innovations 

blue collar, industrial workers. The short working 

– this model will raise dramatically the costs with 

hours,  the  early  retirement  schemes,  the  longer 

which  “destruction”  can  be  realized.  Thus  as 

holidays might well appear to knowledge workers 

shown in Saint-Paul’s model, the US, with lower 

less  of  a  social  achievement;  work  not  really 

firing  costs,  will  eventually  gain  a  competitive 

representing  a  “disutility”  but  more  an  essential 

advantage in the introduction of new, innovative 

motivating activity, providing even a meaning to 

products  and  process  developments  onto  the 

life.

market,  while  continental  Europe  will  become 

specialized  in  technology-following  activities, 

based  on  secondary,  less  radical  improvement 

innovations.

In other words, the dynamics of innovation, 

of  entrepreneurship,  of  creative  destruction 

thrives better in an environment providing higher 

rewards  for  creativity  and  curiosity  than  in  an 

There is in other words, I would argue a need 

for  a  fundamental  rethinking  of  the  universality 

of  social  security  systems  in  European  countries 

social  welfare  systems.  That  rethinking  should 

recognize  explicitly  the  emerging  duality  in  the 
labour  force  between  work  involving  “labour”, 
i.e. a physical or mental wearing out activity, and 
work involving “pleasure”, i.e. activities providing 

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

81 

Saint-Paul, G. (2002).

 
 
 
 
 
 
 
 
 
 
 
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primarily self-satisfaction in terms of recognition, 

knowledge  and  innovation.  Europe’s  failure  to 

realisation  and  creativity.  Workers  involved  in 

achieve  significant  progress  under  this  heading 

the  first  sort  of  activity  will  consider  the  social 

over the last five years has much to do with the 

achievements,  including  employment  security, 

interaction  between  knowledge  and  innovation 

a  relatively  short  working  life  and  short  weekly 

and the three other broad guidelines considered 

working hours, as important social achievements 

in  Table  1.  The  knowledge  society  which  has 

and  intrinsically  associated  with  their  quality  of 

emerged  in  Europe  is,  as  has  been  argued  here, 

life, which they will not be prepared to give up. 

indeed not an exogenous one, external to Europe’s 

Workers  involved  in  the  second  sort  of  activity, 

macroeconomic  policy,  competition  policy  or 

have  been  given  these  similar  social  rights  by 

social model, but fully endogenous to those other 

extension  because  of  labour  law  universality 

areas of economic policy.

principles.  At  the  same  time  such  an  automatic 

extension  of  social  rights  appears  by  and  large 

inappropriate  and  could  be  considered  to  be 

behind  the  lack  of  dynamism  of  knowledge 

workers 

in  Europe.  Furthermore, 

the 

full 

application  of  the  social  model  to  the  growing 

proportion  of  knowledge  workers  undermines 

the  sustainability  of  the  social  model  itself.  In 

short,  when  work  involves  significant  positive 

externalities as in the case of knowledge work, it 

appears particularly inappropriate to apply social 

“security”  guarantees  to  employment  aimed  first 

and foremost at reducing the negative externalities 

of physical work.

Conclusions

The  new  Lisbon 

strategy 

“Integrated 

Guidelines  for  Growth  and  Jobs”  consists  of 

24  guidelines  brought 

together  under  five 

broad  headlines  (see  Table  1).  Reflecting  the 

reformulation  of  the  political  priorities  of  the 

Lisbon  strategy  after  the  mid  term  review  (July 

2005)  under  three  headlines  (“knowledge  and 

innovation  –  engines  of  sustainable  growth”; 

“making  Europe  a  more  attractive  place  to 

invest  and  to  work”;  “more  and  better  jobs”) 

the  different  guidelines  appear,  I  would  argue, 

still  poorly  integrated.  In  this  paper  the  focus 

has been on the first of these political priorities: 

In  this  sense  our  discussion,  while  limited 

to  the  social  policy  implications  of  the  shift 

from 

industrial  R&D 

to 

information  based 

innovation,  highlights  nevertheless  the  complete 

lack  of 

integration  of 

the  knowledge  and 

innovation  Lisbon  priority  with  the  other  areas 
of  the  Lisbon  strategy.  Focusing  e.g.  on  the 

second  headline  in Table  1,  the  Lisbon  strategy 

interpretation  of  “knowledge  and  innovation  as 

engines  of  sustainable  growth”  represents  still, 

I  would  argue,  and  despite  brave  attempts  of 
the  Commission  to  proof  the  contrary82,  a  very 
segmented  policy approach, addressing first and 

foremost  the  traditional  R&D  and  innovation 
member countries and EC policy constituencies83. 
The proposed guidelines and the further detailed 

proposals  from  the  Commission  (EC,  2005)  are 

from  this  perspective  more  reminiscent  of  the 

old  industrial  R&D  model  than  of  the  emerging 

knowledge  economy  paradigm  model  described 

above.  The  only  shift  in  attention  paid  is  with 

respect to potential regulatory barriers to research 

and  innovation,  reflecting  the  broadening  of 

vision  no  longer  to  limit  support  policies  to  just 

R&D but also to include now more systematically 

innovation,  raising  at 

the  same 

time  new 

competition policy issues. However, no attention 

is paid to interactions with Europe’s social model, 

or  with  education  policy  buried  as  guideline 

23  under  the  “more  and  better  jobs”  headline 



82  As  in  the  case  of  the  recent  Communication  from  the  Commission  to  the  Council,  the  European  Parliament,  the  European 
Economic and Social Committee and the Committee of the Regions on More Research and Innovation - Investing for Growth 
and Employment: A Common Approach (EC, 2005).

83  These range from the Science, Technology or Research ministries and the various advisory committees to the Trade and Industry, 
Economic Affairs or Innovation ministries and their various advisory committees. Within the EC it are primarily the DG Research 
and DG Enterprise constituencies.

 
 
 
 
 
 
 
 
 
 
 
 
 
Table 1: Lisbon Strategy

THE INTEGRATED GUIDELINES FOR GROWTH AND JOBS

Macroeconomic policies for growth and jobs

1.  To secure economic stability for sustainable growth;
2.  To safeguard economic and fiscal sustainability as a basis for increased employment;
3.  To promote a growth-and employment-orientated and efficient allocation of resources;
4.  To ensure that wage developments contribute to macroeconomic stability and growth;
5.  To promote greater coherence between macroeconomic, structural and employment policies;

Ensuring a dynamic and well-functioning Euro Area

6.  To contribute to a dynamic and well-functioning EMU.

Knowledge and innovation –engines of sustainable growth

7.  To increase and improve investment in R&D, in particular by private business;
8.  To facilitate all forms of innovation;
9.  To facilitate the spread and effective use of ICT and build a fully inclusive information society;
10. To strengthen the competitive advantages of its industrial base;
11. To encourage the sustainable use of resources and strengthen the synergies between environmental protection and 

growth.

Making Europe a more attractive place to invest and work

12. To extend and deepen the Internal Market;
13. To ensure open and competitive markets inside and outside Europe and to reap the benefits of globalisation;
14. To create a more competitive business environment and encourage private initiative through better regulation;
15. To promote a more entrepreneurial culture and create a supportive environment for SMEs;
16. To expand and improve European infrastructure and complete priority cross-border projects;

More and better jobs

17. To implement employment policies aimed at achieving full employment, improving quality and productivity at work, and 

strengthening social and territorial cohesion;

18. To promote a lifecycle approach to work;
19. To ensure inclusive labour markets, enhance work attractiveness and make work pay for job-seekers, including disadvan-

taged people, and the inactive;

20. To improve matching of labour market needs;
21. To promote flexibility combined with employment security and reduce labour market segmentation, having due regard to 

the role of the social partners;

22. To ensure employment-friendly labour cost developments and wage-setting mechanisms
23. To expand and improve investment in human capital;
24. To adapt education and training systems in response to new competence requirements.

Source: Council of the European Union, 10667/05 and 10205/05

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in  Table  1.  The  result  of  this  relatively  narrow 

focus  is  that  the  proposed  integrated  guidelines 

are  anything  but  integrated  and  convey  an 
impression of “over-structure” with target setting 

work  involving  “labour”,  i.e.  a  physical  or 
mental  wearing  out  activity,  and  work  involving 
“pleasure”, i.e. activities providing primarily self-
satisfaction  in  terms  of  recognition,  realisation 

on a multitude of particular aspects of knowledge 

and  creativity.  As  I  argued  in  section  2  of  this 

and innovation which are by and large outside of 

paper, workers involved in the first sort of activity 

the control of policy makers.

Second,  there  is,  I  would  argue  a  need  for 

a  fundamental  rethinking  of  the  universality 

principles of social security systems as they were 

developed  in  Europe  last  Century,  in  a  variety 

of  ways,  in  broad  synergy  with  the  emerging 

industrial  society.  Such  a  rethinking  should 

recognize the duality in the labour force between 

are likely to consider the past social achievements 

of  the  European  social  model  as  important 

achievements  intrinsically  associated  with  their 

quality  of  life. They  will  consider  any  change  of 

those conditions as a clear deterioration in their 
quality  of  life  and  reject  it. Workers  involved  in 



the  second  sort  of  activity,  call  them  knowledge 

workers,  are  not  so  much  in  need  of  social 

 
 
 
 
 
 
 
 
 
 
 
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measures aimed at reducing negative externalities 

-  Griffith,  R.,  Harrison,  R  and  J.  Van  Reenen, 

of  physical  work.  Their  work  involves  primarily 

(2004).  “How  Special 

is 

the  Special 

positive  externalities.  Obviously  they  also  will 

Relationship?  Using  the  Impact  of  US  R&D 

appreciate  social  “security”  guarantees  to  their 

employment,  but  these  will  rather  be  used  as 

substitute rather than as complement for own life 

long learning efforts and investments. Effectively, 

knowledge  workers  are  “free  riding”  on  social 

“security”  guarantees  designed 

in  another 

industrial  age  and  aimed  at  a  different  category 

of  workers.  The  automatic  extension  of  social 

rights  to  knowledge  workers  appears  from  this 

perspective  not  only  unjustified,  undermining 

the financial sustainability of the European social 

model,  but  could  well  also  explain  the  lack  of 

dynamism of knowledge workers in Europe.

References

- 

Aiginger,  K.  and  A.  Guger  (2005),  The 

European  Social  Model.  Difference 

to 

the  USA  and  Changes  over  Time,  WIFO, 

September 2005, mimeo.

-  David,  P.  and  D.  Foray 

(2002),  “An 

introduction  to  economy  of  the  knowledge 
society “, International Social Science Journal, 
Vol 54, issue 171, pp. 9-23.

- 

European Commission (2005), Implementing 

the 

Community 

Lisbon 

Programme: 

Communication  from  the  Commission  to 

the  Council,  the  European  Parliament,  the 

European  Economic  and  Social  Committee 

and  the  Committee  of  the  Regions:  More 
Research  and  Innovation  -  Investing  for 

Growth  and  Employment:  A  Common 

Approach, SEC(2005), 1253

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Freeman,  C.  and  L.  Soete 
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Industrial 

(1997),  The 
Innovation,  3rd 

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Krugman,  P.  (1994),  “Competitiveness:  A 
dangerous obsession”, Foreign Affairs, March/
April 1994, Vol.73, nr. 2

-  Malerba,  F.  (Ed.)  (2004),  Sectoral  Systems 
of  Innovation,  Cambridge  University  Press, 
Cambridge MA.

-  Mokyr, J. (2005), The Enlightened Economy: 
An  Economic  History  of  Britain  1700-1850, 

Penguin  New  Economic  History  of  Britain, 

forthcoming.

-  Mowery, D. (1983), “Industrial Research and 

Firm Size, Survival and Growth in American 

Manufacturing,  1921-46:  An  Assessment,” 
Journal of Economic History, 1983.

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Pavitt,  K. 

(1984), 

‘Patterns  of 

technical 

change:  towards  a  taxonomy  and  a  theory’, 
Research Policy, vol. 13, no. 6, pp. 343-73.

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protection,  international  specialisation  and 
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international  trading  system:  where  do  we 
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Global  Framework 
for  High  Technology 
Competition, J.C.B. Mohr, Tübingen.

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designing policies that activate” in Liddle, R. 
and  M.  Rodrigues  (Eds.),  Economic  Reform 
in  Europe:  Priorities  for  the  Next  Five  Years, 
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edition, MIT Press.

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4. How do Wealthy Nations Stay Wealthy? Challenges 

for the European Policy Agenda
by John Zysman and Tobias Schulze-Cleven84

The  challenge  for  Europe  is  how  to  stay 

through a maze of fundamental uncertainty. Each 

wealthy  in  a  rapidly  evolving  and  ever  more 

company  effort,  and  the  efforts  of  competitors, 

competitive  global  economy.  In  the  digital  era, 

must  be  culled  and  systematically  assessed  for 

the  continuous  evolution  of  the  mechanisms  of 

lessons.  Governments  must  consider  what  an 

value  creation  –  i.e.  the  engines  of  productivity 

“experimental economy” will require, and how an 

and growth – calls into question both established 

environment  can  be  created  for  individual  firms 

company  strategies  and  public  policies.  There 

and  networks  or  clusters  of  firms  to  experiment 

exists broad agreement that the digital era requires 

effectively.

adaptation,  but  the  precise  ‘how  and  what’ 

remain unclear. This paper has the dual objective 

of  clarifying  the  character  of  competition  in  the 

digital  era  and  reflecting  on  European  attempts 

to  build  advantages  in  the  evolving  global 

marketplace. In short, the paper asks how wealthy 

nations  –  such  as  those  in  Europe  –  can  stay 

wealthy  in  a  global  economy  with  ever  shifting 

levers of advantage.

The  transformation  of  the  marketplace  in 

Our  analysis  of  the  challenges  raised  by 

the  digital  era  will  proceed  in  three  steps.  A 

first  section  will  review  the  historical  evolution 

of  production  paradigms  to  build  the  empirical 

basis for  the framework through  which  we  want 

to assess the transformations of the digital era. A 

second  section  considers  the  dynamics  of  value 

creation  in  this  digital  era  and  the  evolution  of 

business models. The third section considers what 
our analysis can contribute to the understanding 

the  digital  era  changes  both  the  traditional  tools 

of Europe’s adjustment to the marketplace of the 

of  corporate  strategy  and  the  agenda  of  public 

digital  era.  In  that  context,  we  will  revisit  the 

policy.  In  this  global  era,  characterized  by 

long-standing debate on the relationship between 

digital  technologies  that  as  “tools  for  thought” 

labor market flexibility and social protection.

transform  all  activities,  firms’  internal  functions 

suddenly  become  products  to  be  bought  in  the 

market,  products  that  generated  premium  prices 

suddenly become commodities, and the sources 

of  differentiation  for  products  and  production 
processes  evolve.85  It  is  not  just  that  there  is  an 
increased  pace  of  change,  but  that  the  market 
less  predictable. 
inherently 
environment 

is 

Conscious  experimentation  will  be  central 

to  both  corporate  and  national  adaptation. 

Companies  will  have  to  look  at  their  initiatives 

Evolving models of production and 
competition86

The  influence  of  the  technology  progress 

is  visible  in  the  economy  through  the  evolution 

in  the  production  and  distribution  of  goods  and 

services.  In  this  section,  we  distinguish  among 

historical  phases  that  involved  distinct  business 

problems,  a  changing  role  of  the  “international” 

in the dynamics of the national economy and the 

as  “experiments,”  attempts  to  find  their  way 

role of the state in the economy.

84  The interpretative framework for this paper was originally developed by John Zysman in his contribution to the forthcoming 
How Revolutionary was the Digital Revolution? National Responses, Market Transitions and Global Technology. A BRIE/ETLA/
HELSINKI Project. Stanford: Stanford University Press. We present it here in shortened and revised form. The application of this 
framework to the European Political Economy is based on dissertation research that Tobias Schulze-Cleven is conducting on the 
comparative politics of increasing labor market flexibility.
85  This section is based on (Cohen, DeLong and Zysman, 2000).
86  This section is based on (Zysman, 2004 and 2006).

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4

American  dominance:  Fordism  and  mass 

unemployment.  Demand  management  policies, 

manufacture

Mass  manufacture,  epitomized  by  Henry 

Ford  and  the  Model  T,  was  the  first  twentieth 

century  production  revolution,  though  its  roots 
lie earlier in the 19th century. In this system, large-
scale  manufacture  implied  rigidity.  Fixed  costs 

in  the  production  line  and  design  were  high; 

consequently changes in products or reductions in 

volume were difficult and expensive. This rigidity 

created  political,  not  just  technical,  problems. 

Mass manufacture is broadly understood to mean 

the  high-volume  output  of  standard  products 

made with interchangeable parts being connected 

by  using  machines  dedicated  to  particular  tasks 

and  manned  by  semi-skilled  labor.  Important 

features  include  a)  the  separation  of  conception 

from  execution  –  managers  design  systems, 

which are operated by workers in rigidly defined 

roles that match them to machine function; b) the 

“push” of products through these systems and into 

the market; c) large-scale integrated corporations, 

whose  size  and  market  dominance  reflect  mass 

manufacture’s  economies  of  scale  (Womack, 

Jones and Roos 1991).

There was a political consequence. Drops in 

demand  were  difficult  to  absorb  for  companies 

structured  according  to  Fordist  models,  leaving 

the  national  economy  rigid  as  well.  An  initial 

downturn in demand could cumulate into sharper 

economic  downturns.  Booms  and  busts  implied 

worker  dislocations,  and  the  national  economic 

policy  counterpart  of  the  corporate  business 

cycle  management  task  became  the  political 

debate about how to use public policy to cushion 

not  only  the  economic  dislocations  but  also 

the  political  dislocations  associated  with  mass 

the 

associated  with 
label  of  Keynesianism, 
were  born.  Fordism,  an  American  innovation, 
was  mass  production  with  Keynesian  demand 

management.

Challenges  from  lean  production  and  flexible 

specialization

Challenges 

to 

the 

long  dominance  of 

American manufacturing came from two different 

directions.  The  more  important  challenge  was 

the  interconnected  set  of  Japanese  production 
loosely  called  flexible  volume 
innovations, 
production  or  lean  production  Coriat  1990; 
Jaikumar 1988). From the 1970s onwards, Japanese 

consumer durables began to redefine the terms of 

competition  in  global  markets  establishing  new 

trajectories  of  innovation  and  new  standards  of 

quality  Success  in  the  complex  assembly  of  a 

large number of component parts for principally 

mechanical  and  electro-mechanical  goods  set 

American and European industrial establishments 

on  their  heels.  The  Japanese  lean  production 

system seemed to allow for rapid market response 

by providing both the flexibility to adjust output in 

existing lines as well as introducing new products 

(Tyson  and  Zysman  1989).  Most  importantly, 

it  seemed  to  deliver  high  quality  at  lower  cost. 

While 

the  Fordist  story  highlights  national 

strategies for demand management, the Japanese 

story  of  lean  production  highlights  the  role  of  a 

“developmental” state and the interaction among 

the  markets  and  producers  of  the  advanced 
international  competition.87  The 
Japanese  state  actively  promoted  domestic 

countries 

in 

development with closed markets at home, while 

‘free-riding’  on  the  international  system  to  use 



87  The distinctive features of the Japanese lean production system were a logical outcome of the dynamics of Japanese domestic 
competition during the rapid growth years, and this system was firmly in place by the time of the first oil shock in the early 
1970s. For example, Japan’s automobile and electronics firms burst onto world markets in the 1970s and consolidated into 
powerful conglomerates in the 1980s. The innovators were the core auto and electronics firms who, in a hierarchical manner, 
dominated tiers of suppliers and sub-system assemblers; the production innovation was the orchestration and reorganization 
of the assembly and component development process. The core Japanese assembly companies of the lean variety have been 
less vertically integrated than their American counterparts. Rather, they have been at the center of vertical Keiretsus, loosely 
speaking, Japanese conglomerates conventionally understood to be headed by a major bank or consisting of companies with 
a common supply chain linking wholesalers and retailers, that have tightly linked the supplier companies to their clients. It 
cannot  surprise  that  lean  production  became  a  focus  of American  policy  and  corporate  attention  because  it  represented  a 
direct challenge to both mass manufacturing and assumptions of American global economic policy.

 
 
 
 
 
 
 
 
 
 
 
 
 
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exports  for  stabilizing  the  domestic  economy. 

The combination of an open international system 

from  the  vertical  or  hierarchical  connections  of 
the  dominant  Japanese  companies.  The  flexible 

with  intense  but  controlled  competition  behind 

specialization model hinges on local institutions, 

managed  trade  borders  proved  decisive  in  the 

such  as  chambers  of  commerce,  vocational 

emergence  of  the  innovative  and  distinctive 

training  systems  and  public  research  facilities, 

lean  flexible  volume 

which  permit  the  continuous  combination  and 

Japanese 
production.88

system  of 

The  second  challenge 

to 

the  classical 

American  mass  production  model 
came 
from  Europe  under  such  labels  as  diversified 
quality  production  (Streeck  1991)  and  flexible 
specialization  (see  e.g.  Hollingsworth  and  Boyer 
1997)  at  about  the  same  time. The  “Third  Italy” 

and  the  Germany’s  Baden-Württemberg  were 

the  first  prominently  displayed  examples  of  an 

approach  in  which  craft  production,  or  at  least 

the  principles  of  craft  production,  survived  and 
prospered  in  the  late  twentieth  century.  The 

particular political economy of the two countries 

gave  rise  to  distinctive  patterns  of  company 

and  community  strategies  (Hirst  and  Zeitlin 

1997). Deploying flexible machinery and skilled 

workforces  rather  than  on  paying  low  wages, 

firms in these countries often competed in global 

markets  on  the  basis  of  quality  not  price.  Being 

able to produce short runs of semi-custom goods, 

the  companies  in  these  modern  versions  of 

traditional industrial districts could command an 

affordable premium for their products because of 

their  distinctive  performance  or  quality  features 

(Sabel  1994).  They  were  seen  to  be  able,  in  at 

least  some  markets  and  circumstances,  to  more 

effectively adapt to the radical uncertainties and 

discontinuities  of  global  market  competition 

than  larger,  more  rigidly  organized  companies. 

The  emphases  in  these  discussions  are  the 
horizontal  connections,  the  connections  within 
the  community  or  region  of  peers,  as  distinct 

recombination  of  local  activities.  Thus,  the  two 

innovative  challenges  to  American  production 

dominance each featured distinct roles for policy 

and the state.

The transition to a digital age and the American 

comeback:  Wintelism 

and 

cross-national 

production networks

The first chapter of the digital era can be best 

characterized by the emergence of Wintelism as 
a  strategic  stance  and  the  rise  of  Cross-National 
Production  Networks  (CNPNs) 
(Borrus  and 
Zysman  1997).  Wintelism  is  a  short-hand  term 
from  an  electro-
transition 
representing 

the 

mechanical to a digital era. It reflects the sudden 

importance  of  the  constituent  elements  and 

components in defining the terms of competition 

in the markets for the final products. This meant 

a consequent strategic shift in competition away 

from  the  vertical  control  of  production  by  final 

assemblers.  The  prominent  examples  from  the 
computer industry, the Windows operating system 
and Intel processors, have given the name to this 
new  production  and  competition  regime.  Cross-
National Production Networks was the label first 
applied  to  the  consequent  disintegration  of  the 

industry’s  value  chain  into  constituent  functions 

that  can  be  contracted  out  to  independent 
producers wherever those companies are located 

in  the  global  economy.  CNPNs  are  associated 

with  an  increasingly  fine  division  of  labor.  The 

88  The argument is simple: The relationships of production and development in the Japanese production system are so delicate that 
measures to steady and smooth the expansion of demand in sectors such as autos proved very important for the success of the 
production innovations (see Tate 1995). In Japan, public programs generated domestic rivalries that lead to over-investment and 
excess capacity. This excess capacity was then “dumped” off of on international markets. Just-in-time delivery, subcontractor 
cost/quality  responsibility  and  joint  component  development  pushed  on  to  the  subcontractor  considerable  risks  of  demand 
fluctuations.  It  remains  questionable  if  Japan’s  emerging  auto  sector  could  have  continuously  absorbed  the  stops  and  starts 
of the business cycle that typified Britain in the 1950s and 1960s. Would the trust relationships that are said to characterize 
Japan have held up? Could the fabric of small firms have survived to support just-in-time delivery and contractor innovation? 
Techniques to continuously reappraise demand levels and reduce unpredictability throughout the system as well as government 
and corporate programs to reduce the capacity break-even point in small firms only go so far.

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4

0

networks  permit  firms  to  weave  together  the 

Gateway  or  Hewlett  Packard  –  the  box  carries 

constituent elements of the value-chain into new 

the company logo. Much of the added value is in 

production  systems  that  facilitate  diverse  points 

the  components  or  subsystems:  the  chipset,  the 

of  innovation.  They  also  turned  large  segments 

screen, and the operating system. This has several 

of  complex  manufacturing  into  a  commodity 

implications:

available  in  the  market.  The  rise  of  CNPNs 

marked  the  arrival  of  a  truly  global  economy, 

one  in  which  competition  and  the  critical  final 

markets  were  in  the  advanced  countries,  but 

production – while organized by firms from these 

same  advanced  countries  –  was  spread  across 

borders, principally through Asia.

Wintelism emerged as a strategic response by 
American  producers  to  the  Japanese  production 

- 

Producers  from  different  nodes  in  the  value 

chains compete over control of the evolution 

of 

technology  and  final  markets.  Some 

component companies succeeded in shaping 

market  segments.  Prominent  examples  are 

Microsoft  and  Intel,  which  set  the  pace  of 

technological  evolution  in  the  personnel 

computer  segment,  and  the  independent 

networking equipment provider Cisco, which 

challenge during the 1980s. As the semiconductor 

drove the emergence of internet technology.

industry 

joined  consumer  electronics  and 

automobiles as sectors under intense competitive 
pressure  in  the  late  1980s,  it  seemed  that  the 

fabric of advanced electronics was unraveling. At 

that  time,  the  erosion  of  equipment  suppliers  to 

the  semiconductor  industry  was  making  it  more 

difficult for American semiconductor producers to 

hold market position. With the weakening position 

of  the  semiconductor  makers,  many  feared  that 

final-product producers would not have access to 

the most innovative chip designs needed in their 

final  products.  However,  suddenly,  American 

producers  rebounded.  They  had  not  reversed 

the  loss  of  production  advantage  in  electro-

mechanical  products,  but  rather,  a  new  sort  of 

consumer  electronics  product  had  emerged, 

defining a new segment of the industry. The then 

‘new’  consumer  electronics,  as  Michael  Borrus 

(1997) argued at the time, were networked, digital, 

and  chip-based.  The  have  included  products 

from personal computers to mobile devices. The 

nature  of  production  changed  dramatically  from 

the  complex  mechanical  or  electro-mechanical 

assembly  to  electronic  chip  production,  board 

stuffing, and packing the boards into boxes.

Wintelism 

involved  both  new 

terms  of 

competition  and  a  new  model  of  production. 

Consider  the  PC;  what  part  of  the  value  chain 

confers the most value added and leverage in the 

market? It is not the producer of the final product, 

the  metal  box  we  call  the  PC,  even  if  –  like 

- 

Competition in the Wintelist era tends to be a 

struggle over the setting and evolution of de 

facto product market standards. Components 

and subsystems are built to generally agreed 

standards  that  emerge  in  the  marketplace, 

with the market power over those standards 

lodged anywhere in the value chain, including 

product  architectures,  components,  and 

software.  Open  but  owned  standards  create 

de 

facto 

intellectual  property 

(IP)-based 

monopolies or dominant positions.

- 

As  the  fundamentals  of  Wintelism  have 

evolved,  the  constituent  elements  of  the 

product  value  chain  have  become  modules. 

While  distinctive  intellectual  property  might 

remain in the modules, the knowledge about 

how  they  inter-connect  becomes  codifiable 

and will be diffused.

-  With  products  being  built  as  modular 

systems  with  clearly  defined  components 

and  subsystems, 

the  actual  production/

manufacturing 

can 

be 

outsourced. 

Outsourcing evolved from a tactical response 

aimed  at  cost  reductions  by  procuring  a 

particular  component 

from  outside 

the 

organization  into  cross-national  production 

networks that can produce the entire system 

or final product.

- 

The  core  engineering  skills  moved 

from 

mechanical  to  chip-based  systems  that  are 

 
 
 
 
 
 
 
 
 
 
 
 
 
given  functionality  by  software.  The  range  of 

the  world  has  witnessed  a  “globalization  with 

production  skills  to  produce  an  optical  film 

borders” (Borrus and Zysman 1997).

camera  is  much  greater  than  to  produce  a 

digital camera, whether in a cell phone or not.

In  the  following  section  of  the  paper,  we 

will  turn  to  the  chapter  of  the  digital  era  that 

The Wintelist era of the 1980s and 1990s – the 

the  world  is  currently  entering. Again,  as  it  was 

moment of the American comeback in electronics 

true  in  earlier  periods,  dramatic  marketplace 

–  turned,  politically,  on  domestic  deregulations 

developments  are  cooking  inside  of  national 

and  international  agreements  that  created  an 

systems  of  innovation  and  competition,  largely 

ever  more  open  international  trade  system.  At 

unobserved  by  the  outside. They  burst  onto  the 

home in the United States domestic deregulation 

global  marketplace  as  unexpected  competitive 

and  competition  policy  in  a  variety  of  sectors 

challenges at a seemingly increasing pace.

–  especially  telecommunications  and  computers 

–  contributed  to  significant  market  competition 

among,  and  a  shift  in  market  leverage  toward, 

component  makers.  These 

initially  domestic 

phenomena  eventually  reshaped  the  electronics 

industries  worldwide.  Ever  more  extensive  and 
dispersed  networks  of  investment,  trade  and 

production were the first step in an evolution of 

complex  production  networks  and  supply  chain 

management.  The  emerging  production  and 

trade  structure  contributed  to,  if  not  drove,  the 

expansion  of  something  we  might  loosely  call 

Globalism.

Globalization with borders

Value creation in a digital era89

The  current  phase  of  the  digital  era  is  best 

characterized  by  possibilities  associated  with 

a  new  set  of  distinctive  tools,  tools  for  thought. 
These tools amplify brainpower by manipulating, 

organizing,  transmitting,  and  storing  information 

in  the  way  the  technologies  of  the  Industrial 

Revolution  amplified  muscle  power  (Cohen, 

Delong, and Zysman 2000, 7-8). The tool set rests 

on  a  conception  of  information  as  something 

that  can  be  expressed  in  binary  form,  open  to 

subsequent  manipulation  (see  Shannon  1993). 

It  consists  of  the  hardware  that  executes  the 

processing instructions and the software, i.e. the 

The  classic  version  of  the  globalization 

written  programs  defining  the  procedures  and 

story  stresses  how  the  internationalization  of 

rules,  that  guide  how  the  hardware  equipment’s 

business  –  enabled  by  lower  “transaction  costs” 

information  processing.  In  addition,  it  includes 

associated  with  technological  change  –  has 

the  data  networks  that  interlink  the  processing 

severely constrained active government policy. In 

nodes,  and  the  network  of  networks,  which 

contrast,  the  evolution  of  production  paradigms 

together create a digital community and society.

sketched  out  above  suggests  a  different  take 

on  globalization.  The  paradigms’  power 

in 

international competition rested on their national 

bases  and/or  explicit  government  action.  From 

this  alternate  vantage,  globalization  is  a  story  of 

national innovations played out on a larger stage. 

A  sequence  of  new  competitors,  new  and  often 

unexpected  loci  of  innovation  and  production, 

bring  new  processes,  products  and  business 

models to the international marketplace. Indeed, 

The digital revolution is transformative, it has 
become  conventional  to  observe,  changing  the 

character  of  products,  processes,  marketplaces 

and  competition  throughout  the  economy.  The 

capabilities to process and distribute digital data 

multiply  the  scale  and  speed  with  which  ideas 

and  information  can  be  applied.  It  affects  both 

traditional  goods,  communication  sectors,  and 

services. Information technology has moved both 
inside of machines, controlling their functionality, 

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89  This section is adapted from (Zysman, 2006).

 
 
 
 
 
 
 
 
 
 
 
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2

and  into  the  communications  networks,  altering 

arguments  by  Shapiro  and  Varian  (1999).  But 

not only how and at what price we talk, but how 

when  does  that  logic  apply?  Certainly  the  logic 

we  share,  store,  and  use  information.  Because 

applies in the competition over internet browsers. 

the  expression  and  manipulation  of  information 

It  may  apply  in  the  case  of  search  engines.  But 

is  now  possible  in  a  common  digital  electronic 

which  elements  of  information  goods,  or  digital 

form, a range of previously separate information 

tools or network economics apply in the case of 

and  communication  sectors  merge  or  become 
more  intimately  entangled.90  Just  as  important, 
the knowledge component of much of industrial 

the automobile industry? And how do we decide 

which issues matter in a particular setting? If we 

cannot deduce the answers from first principles, 

activity, and indeed an array of service activities, 

we  need  an  alternative  strategy  to  understand 

can now be formalized, codified, and embedded 

value creation in a digital era.

in equipment.

The logics of cost and functionality change. 

The  cost  of  creating  digital  information  remains 

fixed  at  often  high  cost,  while  the  cost  of 

reproducing  and  transmitting  content  in  digital 

form  drops  toward  zero.  The  consequences  of 
often non-existent replication costs are amplified 

by the very nature of information goods. How do 

I price and value what you know and want to sell 

to me without me seeing it? But if I see it, and thus 

possess  it,  how  can  you  still  sell  it  to  me?  And 

if I can reproduce and distribute that knowledge 

widely at low cost, what happens to your market? 

New  business  models  have  to  be  invented;  the 

forms of distribution and IP of older models have 

to be defended through contracts and courts.

All of this tells us that information technologies 

alter  the  product  development,  production  and 

competition throughout the economy. It does not 

tell  us  how  companies  might  take  advantage  of 

these changes, or how governments might support 

IT  development  and  diffusion  to  benefit  their 

societies. One might list the mechanisms through 
which  the  digital  tools  affect  business  strategy, 

noting  in  turn  network  effects  and  the  changing 

character of content products. But this approach 

is  rather  limited.  Information-based  tools  and 

goods  have  a  distinctive  logic,  “information 

rules”  to  use  the  clever  phrasing  and  insightful 

Of  products,  commodities,  and  differentiated 

assets

These basic features of digital era profoundly 

affect the dynamics of competition and strategy in 

the global market. They change profoundly what 

must be done to assure real rising incomes for the 

community. Created market value, oversimplified, 
is  price  minus  cost.91  If  we  are  to  locate  the 
influence  of  digital  tools,  there  are  two  obvious 

questions  about  value  creation.  First,  how  do 

digital tools and information products change the 

task of generating something for which consumers 

will  pay  a  premium?  In  other  words,  how  does 

a  company  avoid  having  its  products  become 

commodities?  How  does  the  company  create 

unique or differentiated goods so that a premium 

price can be charged? There is an array of means: 

the creation of distinctive products, early market 

entry, and ownership of product design standards. 

Second,  how  do  these  tools  affect  the  cost  of 

providing  a  product  or  service  to  customers;  if 

you cannot charge a premium, can one generate 

distinctive margins by being a low cost producer? 

The  argument  here  is  that  for  a  firm  the  points 

at  which  it  can  exercise  competitive  leverage  to 

create  strategic  advantageare  now  constantly 

shifting and moving.

90 

For  example,  print,  broadcast,  and  communications  suddenly  become  integrated  with  the  possibilities  of  search  and  storage 
of information thrown in. Some argue that the moveable type contributed to the social revolution of the Renaissance, with the 
obvious question of whether the social consequences of these radical information technologies will be of similar historical scale.

91  Thanks to Stuart Feldman of IBM for his presentation at the Innovation Alliance: Succeeding in an Evolving Global Economy 

conference, Berkeley Roundtable on the International Economy, Berkeley, August 27, 2004.

 
 
 
 
 
 
 
 
 
 
 
 
 
To address these questions we need to define 

or in carefully nurtured supply relationships. R & 

explicitly  three  notions  we  are  generally  familiar 

D  and  production  provide  examples  of  internal 

with: product, commodity, and differentiated asset.

company  operations  becoming  either  a  strategic 

- 

- 

A  product,  whether  object  or  service,  is 
an  item  that  can  be  bought  and  sold  in  the 

market,

A  commodity  is  a  good  or  service  that  is 
exchanged in competitive markets with little 

advantage  to  any  particular  buyer  or  seller. 

A  product  becomes  a  commodity  when 

it  is  generally  available  from  a  number  of 

suppliers on common terms in the market,

- 

A  differentiated  asset  creates  the  basis  for 
premium price, distinctive sales advantage, or 

cost advantage in production or distribution.

There 

is  a  constant  reshuffling  among 
products, commodities, and differentiated assets. 

As  reshuffling  occurs,  business  models  must 

change  as  well.  Globalization  accelerates  the 

reshuffling, and digital tools often are the means 

of  accomplishing  the  reshuffle.  Globalization 

represents  new  competitors  who  may  transform 

a  premium  good  into  a  commodity  with  low 

cost production or generate advantage by adding 

value to what seemed to be a commodity good as 

when  the  Japanese  made  quality  a  “free”  good. 

Digital tools change the levers of advantage and 
value creation.92 The continuing reshuffle includes 
the transformation of internal company functions 

into  products  available  on  the  market.  There  is 

a  constant  question  of  whether  the  function  is  a 

commodity that should be sourced in the market 

or a strategic asset that must be developed in house 

asset or a vulnerable commodity.

Traditionally 

an 

internal 

function 

differentiating a company’s products from its rivals, 

R & D can now be sourced outside the company. 

The  original  presumption  has  been  that  product 

development,  and  the  research  to  support  that 

development,  is  at  its  core  a  strategic  asset,  the 

foundation of innovation and a powerful antidote 

to commodification. But even as innovation and 

continuous  product/production 

improvement 

become  more  critical,  major  corporations  are 

shrinking  their  core  research  departments.  They 

are  choosing  to  buy  in  R  &  D  from  universities 
or  start-ups  and  spin-outs.93  In  addition,  they 
source  from  joint  product  development  projects 
and  technology  development  outposts.94 A  wide 
range of countries are entering the development 

game by investing into R & D in both public labs 

and in support of industrial labs, thus growing the 

number of points of purchase for “technology” and 

“development” has grown. Major firms become, 

at  least  in  part,  technology  integrators,  and  not 

just technology developers. Firms cannot be at the 

cutting edge in all the technology developments 
that  affect  them,  and  must  look  outside.95  Firms 
have to decide, and continuously reassess, what 

elements of development are effectively high-end 

commodities,  which  technologies  are  strategic 

assets  best  acquired,  procured  on  an  exclusive 

basis or developed in house, and how to move to 

capture those distinctive technological assets.

92  Consider finance where the application of sophisticated mathematical tools to the creation of financial products and online 
transactions replace the ties to our local banker, transforming distinctive advantages into commodities and creating a new basis 
for premium products.

93  Many  of  the  engineering  schools  are  rooted  in  science  based  engineering,  solving  engineering  problems  by  working  with 
fundamental principles. The Bayh-Dole Act pushed universities into “marketable” technologies developed with federal funding. 
An  array  of  mechanisms,  from  licensing  through  facilitating  “spin-offs”  to  institutions  for  joint  development,  have  been 
established at the major technology universities to facilitate ties to industry. In addition, companies turn to the start-ups or spin-
out the development of particular elements of products or services, because they feel that many projects are best developed 
outside the traditional hierarchy of a major company. Firms from Intel through Nokia to IBM establish mechanisms, including 
their own investment companies, support startups as an approach to technology development and an alternative to internal 
development.

94  Companies set up joint product development projects with other companies, basically combining technology strengths. They 
also establish technology development outposts both to monitor developments and to tap into distinctive pools of talent and 
technology around the world.

95  Often disruptive technologies, which are capable of supporting newcomer entry into the market, are difficult to develop by 

established companies in-house (see Christensen 1997).

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Similarly,  production  has 

increasingly 

central  to  the  products  in  the  digital  sector. 

become  a  commodity 

in  a  digital  era. 

Furthermore,  we  can  now  ask  corporate  strategy 

Manufacturing  firms  went  offshore 

for  cost 

questions  –  such  as  what  should  be  produced 

reasons  or  to  have  access  to  local  markets,  but 

discovered  abroad  a  widely  distributed  capacity 

for 

technical  and  management 

innovation. 

or  built  in  house  and  which  can  be  outsourced 
–  for  the  new  digital  context.97 There  are  at  least 
three  circumstances  when  in-house  control  of 

Outsourcing  led  to  cross-national  production 

production,  or  elements  of  production,  can  be  a 

networks  and  eventually  skills  of  supply  chain 

strategic  advantage:  first,  if  the  in-house  control 

management,  each  step  making  the  next  phase 

of  production  provides  advantage  in  cost,  timing 

of  outsourcing, 

i.e. 

the  commodification  of 

of goods to market, quality, or of distribution that 

production,  easier.  Consequently,  it  may  be 

cannot  be  obtained  by  outsourced  production; 

easier for services to move offshore today than it 

second,  if  knowledge  about  existing  production 

was for manufacturers to do so twenty years ago. 

processes is required to develop “next generation” 

The  required  tool  set  consisting  of  computers, 

product  entry,  whether  design  of  the  products 

software, and communications are available in the 

themselves or of the processes to produce them, or 

market  and  easily  transported. These  are  largely 

put  differently,  in-house  production  mastery  may 

general-purpose  tools  that  can  be  adapted  to 

be required for rapid product innovation; third, if 

particular service tasks. How far, we may ask, will 

critical  intellectual  property  about  the  products 

this  geographic  dispersion  go?  Can  all  activities 

themselves is so tightly woven into the production 

be placed just anywhere? Is there any geographic 

process that commodity outsourcing is tantamount 

stickiness  to  production?  While  acknowledging 

to transferring product knowledge to competitors.

that not all production is a commodity, we need 

to ask these questions, both in the context of the 

entire  production  processes  and  each  individual 

element  of  a  potentially  segmented  process.  In 

turn, a nation/region should ask what it could do 

to  make  itself  attractive  as  a  location  for  world-

class manufacturing.

As  noted  before,  the  rapid  entry  of  diverse 

new competitors into global markets contributes 

to  the  process  of  commodifying  production  and 

the  transformation  of  “innovation  /  R&D”  into  a 

product that can be purchased in the market. The 

new  entrants  into  markets  and  the  ever-evolving 

competitive  position  of  others,  globalization, 

In  a  world  in  which  services  as  well  as 

represent  new  opportunities,  challenges  and 

manufacturing  are  being  outsourced  and  old 

threats  that  come  from  unexpected  directions. 

distinctions  between  services  and  manufacturing 

Following the early challenges posed by Japanese 

are  breaking  down,  we  need  to  be  clear  on 

producers  and  the  later  rise  of  other  Asian 

definitions.  We  propose  to  talk  of  production  as 

producers  (e.g.  Korea,  Taiwan,  Hong  Kong  and 

the  general  case,  the  organized  action  of  making 

Singapore),  now  India,  China,  and  the  countries 

goods and services for sale, and of manufacturing 
as  the  specific  case  of  physical  production.96  In 
that  case,  production  –  the  know-how,  skills, 

from the former Soviet Bloc all find their position 

in world markets. The new entrants represent both 

new  markets  and  new  competitors  representing 

and  mastery  of  the  tools  required  –  is  absolutely 

not only new sources of production and R & D but 



96 

“Manufacture: To  make  or  process  (a  raw  material)  into  a  finished  product,  especially  by  means  of  a  large-scale  industrial 
operation. To make or process (a product), especially with the use of industrial machines. To create, produce, or turn out in a 
mechanical manner. To concoct or invent; fabricate. To make or process goods, especially in large quantities and by means of 
industrial machines.” Source: The American Heritage® Dictionary of the English Language, Fourth Edition (Houghton Mifflin 
Company, 2000).

97  The critical question, once we acknowledge that software production is a form of manufacturing, is what are the most effective 
ways  of  organizing  software  production.  For  this  discussion,  the  list  begins  with  the  conventional  questions  of  whether  to 
outsource, of where, geographically, to locate software development. The story becomes interesting when we ask whether to 
choose conventional hierarchical production structures typified by Microsoft or new alternatives such as the commercialization 
of Linux products developed in an open source model.

 
 
 
 
 
 
 
 
 
 
 
 
 
often new product, production, and management 

might  otherwise  be  fundamentally  commodities. 

strategies.

Creating  differentiated  assets:  segmentation 

strategies

How, then, can firms escape from the world of 

commodities,  escape  from  new  competitors  from 

new  places  nipping  at  their  heels?  A  traditional 

The  Danes  for  decades  have  been  selling  the 

Bauhaus,  the  source  of  Danish  modern  product 

style.  An  extreme  example  of  value  created  by 

design is the Danish company Bang and Olufson, 

which  sells  high-end  commodity  technology 

at  extraordinarily  high-price  as  a  lifestyle  good. 

The  “brand”  identity  is  based  on  its  exceptional 

electro-mechanical  characteristics  and  pure 

analytic approach to strategy will only be a starting 

design.

point  in  the  process  of  corporate  adaptation. 

Companies will have to look at their initiatives as 

“experiments,” attempts to find their way through 

a maze of uncertainty. They will need to learn how 

to  evaluate  their  own  experiments  and  interpret 

experiments of others. Doing so, of course, creates 

dilemmas. We address them in turn below.

The 

increasing 

importance 

of 

the 

classical  approaches,  branding  and  design, 

to  differentiation  needs  to  be  acknowledged. 

They  become  critical,  because  in  the  digital  era 

many  electronic  products  are  constructed  from 

very  similar  modules  achieving  very  similar 

functionality. Branding, the creation of an identity 

for a product or set of products, serves as a critical 

instrument to differentiate branded products from 

a  pool  of  commodities.  For  example,  amongst 

an  array  of  similar  products  tending  toward 

commodity,  the  question  of  whom  you  trust 

matters.  Hyundai’s  efforts  to  establish  the  once 

low-end  Korean  cars  as  high  quality,  or  GM 

Saturn’s  efforts  to  establish  a  no-trickery  sales 

identity, are examples of an effort to create trust 
through  branding.98  Additionally,  ever  greater 
arrays  of  products  are  fashion/identity  products 

that  give  expression  to  a  customer’s  sense  of 

self (often through the perception of the product 

through a third party). The “brand” identity in part 

states  the  “presentation  of  self”  that  the  client 

chooses.  Similarly,  design  takes  on  ever-greater 

importance 

in  differentiating  products 

that 

In  contrast,  alternative,  “new”  segmentation 

strategies  involve  digital  tools,  the  “tools  for 

thought”  that  underpin  the  digital  revolution.  It 

remains  on  open  –  and  critical  –  question  how 

to  use  their  underlying  capacities  to  their  fullest 

potential  and  capture  competitive  advantage 

or  generate  productivity  gains  in  the  process. 
Investments in training, in reorganization, and in 

strategic  reorientation  are  likely  to  be  required 

(Brynjolfsson  and  Hitt  2004).  Some  of  the  new 

approaches to creating value and to differentiating 

products  have  become  very  well  known.  First, 

and now widely understood, are those to segment 

the  market  and  then  attack  specific  segments 

with functionally varied, and usually distinctively 

branded,  products.  A  fundamental  feature  of 

the  digital  era  is  that  analytic  tools  of  database 

management  permit  the  consumer  community 

to  be  segmented  into  sub-components,  each 

with  distinct  needs  and  wishes.  At  an  extreme, 

individuals  and  their  particular  needs  can  be 

targeted. Early on, the insurance industry moved 

from using computers exclusively for back office 

operations  to  using  them  to  create  customized 

products  for  particular  consumers  (Baran  1986). 

Thus  collecting  detailed 

information  about 

customers as groups or individuals in a variety of 

forms, credit cards or grocery store purchases are 

obviously  very  important  to  companies  having 
chosen this particular strategy.99 Once the market 
segments are defined, then digital tools help firms 

98  On-line  the  issue  of  trust  is  even  more  important.  Here  the  possible  anonymity  of  the  market  participants,  the  difficulty  of 
imagining recourse to a virtual participant, makes trust essential. It is that problem which E-bay has so cleverly addressed.
99  The  result,  of  course,  is  a  policy  struggle  about  what  information  can  be  gathered,  shared  and  combined. The  wishes  of 
companies and governments to assemble information from diverse sources into consumer profiles or threat assessments is set 
against individual rights for privacy and community needs for the integrity of the individual.

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

create  functional  variety  in  products.  Standard 

more  closely.  The  notion  of  “value  domain” 

products  can  be  given  diverse  functionality. The 

points to the array of digital functions that can be 

coffee  maker  that  automatically  turns  on  at  a 

embedded in a small chunk. Canon’s challenges 

particular time in the morning depends on simple 

go  beyond  competition  from  camera  makers, 

digital functionality. The difference between many 

but  to  the  very  question  of  how  photography  is 

higher  speed,  higher  price,  printers  and  their 

slower,  lower  price,  brethren  is  in  the  software 

that tells the printer how to operate (Shapiro and 

used and how its tools are provided. In one sense 
Canon’s worst competitor is Nokia.100 And Nokia, 
which  can  provide  music  on  its  cell  phones, 

Varian  1999).  Firms  have  new  ways  to  identify 

faces  competition  from  Apple  iPod,  expressed 

who will pay how much for what, and then create 

concretely  in  a  new  Motorola  phone. That  bloc 

products  or  give  functionality  to  commodity 

of electronics encased in plastic can be a PDA, a 

products that people are willing to pay for.

phone, a camera, a music device, a television. It 

Second,  digitally 

rooted  online 

sales/

marketing and supply chain management alter the 

links between a firm and its customers as well as 

suppliers. The Dell story tells how innovative uses 

of  the  net  that  tie  customers  from  sales  through 
production  can  create  dramatic  advantage 

is a “value domain”, in which the products, and 

their functionality and design, can be defined in 

a whole variety of ways. But how to address that 

value  domain?  Which  functionalities  should  be 

given priority?

This captures an important catch with using 

(Fields  2003,  Kenney  and  Mayer  2002).  And, 

digital  tools  in  addressing  value  domains.  It  is 

as  development  and  production  processes  are 

just  not  always  evident  what  needs  to  be  done, 

woven  together  to  speed  up  the  time  to  market 

what  strategies  and  organizations  are  required 

and  improve  design  choices,  the  lines  between 

to  create  value  or  generate  productivity.  What 

production,  design,  and  development  blur  even 

matters  for  productivity  increases  and  growth 

more.

Let us come at this problem of the changing 

character of business competition from a different 

angle. It was long conventional to consider market 

competition  within  sectors  -  defined  market 

segments with understandable sets of competitors, 

terms  of  market  entry  and  competition.  There 

was the auto sector, the machine tool sector, the 

textile or apparel sector and the like. Then along 

with  the  dot  com  boom  the  language  changed 

and  the  supposedly  clever  and  astute  began  to 
refer to “spaces”, asking what “space” are you in. 

Many  of  us,  myself  included,  dismissed  this  talk 

as  calling  sectors  by  another  name,  as  a  clever 

linguistic differentiation of the dot com era from 

predecessors.  Perhaps  we  did  so  too  quickly. 

“Spaces” turns out to be a transition word. Now 

one hears of the talk of “value domains”, which 

at  first  glance  might  seem  to  be  the  notion  of 

spaces by a different vocabulary. But let us look 

is  the  capacity  to  imagine  how  the  underlying 

digital technology can be used. The imagination 

and  the  applications  evolve  as  an  array  of 

experiments, both in technology/tools and also in 

the  organizations  that  employ  the  tools  and  the 

business models to establish new ways of creating 

value.  Undoubtedly,  many  of  those  experiments 

will fail, but some will succeed. Rather than just 

adding  up  anecdotes  of  success  and  failure,  we 

will  proceed  by  considering  three  categories 

of  experiments:  work  organization,  the  use  of 

knowledge, and business strategy.

Reinventing  production:  work  organization  and 

knowledge management

In  the  continuing  reshuffle  of  the  levers  of 

advantage,  the  reorganization  and  reinvention 

of  production  represents  a  first  category  of 

experimentation. The introduction and application 

100  Thanks to Emilie Lasseron for this observation. She is currently developing these ideas further in her work on user-centered 

design in a digital age.

 
 
 
 
 
 
 
 
 
 
 
 
 
of networks that permitted easier communication 

competitors. Hence the issues of who experiments 

and  exchange  of  data,  even  in  the  years  before 

and learns, what should be done in-house, what 

the  Internet,  followed  a  clear  three-step  pattern. 

outsourced, all re-emerge with each step.

Bar  and  Borrus  (1993)  pointed  out  that  first 

existing  processes  were  automated;  secondly, 

from  the  initial  but  automated  base  experiments 

in  the  use  of  the  new  networks  were  launched; 

finally, work processes were reorganized. Critical 

in  their  story  is  the  question  of  where,  and  by 

whom, experimentation and learning takes place. 

The  same  processes  are  evident  now.  Consider 

production  and  the  drive  to  outsourcing  work  in 

the service sector. Evidently the digital capacity to 

store and transmit information means companies 

can  segment  and  distribute  work  geographically 

and organizationally. And in the current round in 

the United States of outsourcing service functions 

offshore,  lower  wages  have  been  the  primary 

driver.  Kenney  and  Dossani  (2004)  have  argued 

in  the  case  of  India,  although  lower  costs  drove 

the  initial  move  offshore,  which  largely  meant 

reproducing  existing  activity  at  lower  cost  as  it 

did in the early days of offshoring manufacturing, 

many companies found that possibilities for higher 

quality emerged abroad. Yet management capacity 

of  the  contract  producer  to  manage  outsourced 

offshore projects is as critical a variable as cost in 

explaining the location of tasks.

When  an  Indian  company  such  as  Wipro 

opens  outsourced  production  activities  in  the 

United States, it is clear that management skill and 

experience  with  outsourcing,  experimentation 

with  automation  of  existing  processes,  rather 

than the cost of labor alone underlies the move. 

The  conclusion  must  be  that  the  service  sector 

reorganization  afoot  is  only  partly  about  cost, 

but  more  fundamentally  about  imagining  and 

implementing new approaches to the organization 

of  production.  Sometimes  for  the  buyer  of 

outsourcing  services,  outsourcing  is  an  excuse 

to  avoid  tough  internal  choices  about  product 

strategy  or  internal  organization.  Sometimes,  as 

in  finance,  outsourcing  obscures  the  possibility 
of  delivering  distinctive  services.  Sometimes,  as 

in  software  development,  outsourcing  creates 

risks of losing intellectual property or propagating 

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But,  of  course,  there  are  also  radically  new 

production  systems,  such  as  lean  production 

systems  in  the  1980s  and  perhaps  open  source 

software  in  the  digital  era.  Open  source  as  a 

principle  of  organization  hinges  on  distinct 

approaches  to  mobilization  and  coordination  of 

work, not a vague voluntarism but replicable rules 

of participation and gain. But the principles and 

rules  on  which  it  rests  are  new.  For  example,  it 

rests on foundations that turn notions of property 

from  ones  of  control  of  the  use  of  an  object,  or 

an  objectified  body  of  code  or  knowledge,  into 

control  of  the  processes  of  distribution.  The 

collaborative  work  arrangements  it  points  to  are 
both  about  production  of  software  and  made 

possible by the digital networks (Weber 2004).

Let  us 

turn 

to  question  of  knowledge 

management. Knowledge, particularly theoretical 

knowledge, has been recognized as an essential 

element of the contemporary economy. Critically 

though  it  is  the  expression  of  information,  data, 

and  knowledge  in  digital  form  that  is  truly 

distinct,  permitting  the  application  of  digital 

tools,  the  suite  of  tools  for  thought.  In  a  digital 

form  information  can  be  formalized,  stored, 

searched,  transmitted,  and  used  to  control  the 

operations of physical processes (Cohen, DeLong 

and  Zysman  2000).  We  can  put  the  Library  of 

Congress onto a single digital memory stick and 

transmit  it  in  flash.  The  complex  relationships 

on  which  engines  operate  or  planes  fly  can  be 
stated as algorithms, represented in digital form. 

In one sense the flood of data made possible by 

these tools can drown the recipient, but oddly the 

same “tools for thought” make easier the creation 

of meaningful information and the generation of 

knowledge  from  that  flood  of  data.  But  codified 

knowledge, whether stored digitally or embedded 

in equipment, is only a piece of knowledge that 

cannot stand alone. For example, how do we know 

in an avalanche of facts and stated relationships 



which ones we care about? Analytically, there are 

limits to both the value of piling up and searching 

 
 
 
 
 
 
 
 
 
 
 
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documented  knowledge  and 

to 

formalizing 

in new business models, the underlying strategies 

the  tacit  knowledge  embedded  in  individuals 

for  creating  and  capturing  value.  Those  new 

and  communities  of  practice.  Experiments  with 

business models must reflect the shifting location 

knowledge  management  in  this  information  rich 

of  leverage  in  creating  value.  The  mistakes  of 

era force open the very fundamental question of 

conception  and  execution  in  many  of  the  failed 

what  knowledge  is.  According  to  Nielsen  and 

bubble-era  business  strategy  experiments  prove 

Nielsen (2006), knowledge unfolds in the iterative 

that  this  is  not  easy.  Recall  that  the  dotcom 

processes  between  tacit  and  codified  forms, 

investment  wave  hinged  on  the  notion  that  the 

and  optimizing  knowledge  in  organizations  is 

network tools would “disintermediate” traditional 

essentially  an  issue  of  optimizing  these  iterative 

distributors,  that  brick  and  mortar  relationships 

processes.

There  is  an  organizational  implication  of 

this  consideration  of  the  nature  of  knowledge. 

Internally,  the  company  organizations  required 

for  most  efficient  manufacturing  may  not  be  the 

same as those required for effective exploitation of 

knowledge. In the 1980s the Japanese innovations 
of flexible volume production using lean, just-in-

time  techniques  created  distinctive  production 

advantage  and  rocked  market  competition.  Is 

would  be  replaced  by  electronic  links,  or  that 

wholesale  intermediaries  would  be  eliminated 

by electronic markets. Often the fantasy was that 

new entrants, new companies, using these digital 

tools  could  displace  established  companies. 

There  are  some  evident  successes;  the  travel 

industry  from  travel  agents  through  airlines  is 
being  reformed  by  online  operations,  but  the 

venture  capital  community  made  a  whole  array 
of largely unsuccessful bets.101

there  a  similar  revolution  afoot  now?  Lorenz 

By contrast, consider IBM’s two fundamental 

and  Valeyre  (2004)  claim  to  have  identified  a 

shifts.  IBM’s  first  fundamental  shift  is  from  a 

new  learning  model  of  corporate  organization, 

product  company  wrapping  its  products  in  high 

that  significantly  departs  from  traditional  craft 

value  service  support  into  a  service  company 

organization,  taylorist  organization  and  lean 

selling  solutions  that  embed  its  products.  As 

production 

systems;  particularly, 

they 

see 

IBM migrated from electro-mechanical to digital 

this  distinctive  organizational  form  emerging 

information  processing,  it  established  itself  as 

in  Northern  Europe,  principally 

the  Nordic 

the dominant player in the market. Consequently 

countries.  We  can  only  speculate  as  to  why, 

its  per  unit  development  costs  were  radically 

pointing  to  experiments  in  work  organization  in 

lower  than  its  competitors,  making  its  margins 

an era of mass manufacturing that may be paying 

substantial.  That  allowed  “service” 

to  be 

off in a knowledge era.

Experiments in business strategy

The tactical experiments – branding, design, 

versioning,  production 

reorganization,  and 

knowledge management – have to find expression 

bundled  into  costs,  offering  a  sense  of  certainty 

and  reliability  to  its  customers.  Its  market  share 

allowed  it  to  keep  its  core  software,  operating 

systems  and  the  like,  closed  and  privileged. 

That model of competition was no longer viable 

as  the  era  of  the  mainframe  and  even  the  mini 

computer  passed.  Networks  emerged  supporting 



101  In the bookseller market, the Borders and Barnes and Noble chain stores in their brick and mortar form are more of a threat to the 
local vendor than Amazon. Indeed, venture capitalists behind Amazon report that the original investment was an “experiment” 
in the consequences of internet-based retail marketing by new entrants, disintermediation. The conclusion they drew early on 
from Amazon was that there were sharp limits to the retail possibilities the tools provided. Similarly, the telecom collapse hinged 
on faulty notions of how data networks would be used. A most evident false notion was the asserted belief in the staggering 
and  continuing  expansion  in  the  use  of  bandwidth  to  carry  entertainment  content. The  image  was  often  that  the  consumer 
net would become a sophisticated vehicle for centrally distributed content. However, the error is evident in the history of the 
American post office. The post office in the United States was established to distribute newspapers, but the killer application 
that supported the system was letters, peer-to-peer communication to use today’s vocabulary (Zysman 1998). Communication, 
not just voice but messaging and video meetings, and peer-to-peer exchanges are likely to be the killer applications.

 
 
 
 
 
 
 
 
 
 
 
 
 
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business services comprised of multiple networks 

Assume  business 

strategies 

to  capture 

and  varied  suppliers.  IBM  began  to  offer  service 

the  evolving  advantages  of  the  digital  era  are 

solutions.

More  generally,  the  IBM  story  points  to  the 

blurring  of  the  distinction  between  services  and 

products in a digital era. The distinction between 

service  and  product  has  never  been  very  clear. 

Once, national accounts categories obscured the 

relative  importance  of  services  and  production 

in  an  evolving  economy  (Cohen  and  Zysman 

1987).  A  window  washer  at  Nokia  or  GM  is  a 

manufacturing employee; if Ace Window Washers 

contracts to outsource the washing of Nokia’s and 

GM windows the same employees are counted in 

the service sector. Now the blurred line between 

product and service becomes a matter of strategic 

importance.  Consider  accounting:  Accounting 
is  a  personal  service  provided  by  accountants 

utilizing  tools  from  the  original  double-entry 

bookkeeping  system  to  computers.  But  if  you 

create a digital accounting program and put it on 

a CD, put it in a box, call it Quicken, and allow 

its unlimited use by the purchaser, then you have 

a product. If you put the program on the Web for 

access  with  support  for  use  on  a  fee  basis,  then 
you likely offer a service.102

IBM’s  second  fundamental  shift  was  to 

support  “open  source”  software,  rather  than 

proprietary  software  and  the  development  of 

frameworks  and  tools  to  implement  solutions 

within 

that 

framework.  Microsoft  and  Unix 

provided  common  platforms 

through  which 

competitors  could 

integrate 

their  offerings, 

limiting  IBM’s  leverage.  Selling  solutions  in  a 
multi-vendor environment suggested that a move 

away  from  closed  proprietary  systems  might  as 

well  be  to  one  of  hyper-openness  in  which  a 

capacity to define solutions, provide an integrated 

offering, and embed some distinctive proprietary 

modules would be decisive in keeping customers 

tied to IBM.

experiments or bets with uncertainty about their 

success, not investments with predictable returns. 

Then  the  question  is,  of  course,  why  some 

companies make better  bets, or  more effectively 

conduct the process of experimentation that must 

carry  them  into  the  future.  Possibilities  must  be 

seen  as  just  that,  hypotheses  about  the  future 
to  be  continuously  evaluated.103  Each  era,  one 
must note, has its own uncertainties and its own 

risks,  whether  it  was  the  weather  threatening 

ships or technical and business concerns shaping 

the  build-out  of  electricity  and 

telephone. 

Entrepreneurs in each epoch confront those risks 

and  transform  the  possibilities  into  profits  and 

growth.  What  is  distinctive  about  this  era  is  the 
pervasive and continuous uncertainty, in technical 

terms 

across 

technologies, 

infrastructures, 

sectors  and  products,  and  with  respected  to  the 

competitive  environment,  as  competitors  reach 

out for the strategy that will overturn the character 

of industry competition.

Towards the experimental corporation

In 

short,  we  conceive  of  digital-era 

corporations  as  fundamentally  experimental  in 

character. They have to maneuver in a competitive 

environment,  in  which  the  “sweet  spots”  for 

corporate  success  are  constantly  changing  as 

company  internal  functions  become  products, 

products  become  commodities,  and  the  sources 

of  differentiation  for  products  and  processes  are 

constantly evolving. To deal with this fundamental 

uncertainty,  companies  need 

to  go  beyond 

standard  planning  techniques  and  conceive  of 

corporate strategy as a portfolio of “experiments” 

akin  to  the  business  model  of  venture  capital 

firms, which succeed by managing a portfolio of 

investments to spread risk. In their quest to create 

102  Alternatively,  consider  pharmaceuticals.  If  NextGenPharma  sells  a  drug  to  be  dispensed  by  a  doctor  or  hospital,  or  sold  in  a 
pharmacy,  it  is  producing  a  product. With  gene  mapping  and  molecular  analysis,  we  are  moving  toward  the  possibility  of  a 
service model of therapies adapted to particular physiologies. If NextGenPharma really is a database company with a store of 
detailed molecular-level drug information and genome functionality, it could sell an online service to customize drugs or therapy.
103  Certainly the dotcom era bubble reflected greedy projections of assumption rarely reassessed of greed and hope. In fear that 

the “moment” would pass by, images that were projections of possibilities were taken as solid facts.

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0

value  and  search  for  the  levers  of  advantage 

steadily increase productivity even as they remain 

as  traditional  notions  of  stable  “sectors”  are 

competitive  in  the  marketplace.  The  capacity 

dissolving,  companies  need  to  develop  business 

of  the  firms  to  create  value,  and  to  increase 

cases  on  the  basis  of  different  readings  of  the 

the  value  they  create,  must  grow  if  they  are  to 

future’s strategic landscape. Investments into these 

remain capable of creating substantial and rising 

business  cases  will  turn  them  into  experiments. 

incomes.

However, 

these  experiments  remain 

largely 

“contained”,  because  they  will  only  be  pursued 

as long as their underlying assumptions have not 

been proven wrong. Constant review procedures 

that  monitor  the  continued  viability  of  both  the 

theoretical  business  case  and  its  early  practical 

application  are  called  for.  Managers  must  cull 

and systematically assess for evidence their own 

company’s  efforts  and  those  of  its  competitors. 

As experiments in the face of quite fundamental 

uncertainty, 
these  strategic  choices  are  not 
bets  and  gambles.104  Rather,  the  formulation 
of  corporate  strategy  becomes  a  consciously 

emerging iterative process.

The European social model challenged 
and sustained?

The ever-evolving marketplace of the digital 

era  will  require  companies  to  frequently  re-cast 

themselves,  what  they  produce,  which  markets 

they  address,  how  they  produce  and  deliver  the 

good  or  service,  how  they  are  organized,  and 

indeed, with more difficulty, whom they employ 

and  where  they  employ  them. The  flexibility  to 

move  and  to  move  quickly  is  key,  but  that  puts 

great  pressure  on  communities  and  polities. 

The  final  section  of  this  paper  argues  European 

traditions  of  social  protection  can  be  consistent 

with 

the  flexibility 

required 

for  successful 

adaptation to the global economy.

What 

is  called 

for 

from  governments? 

Policy,  of  course,  has  a  contribution  to  make 

to  assuring  the  resources  and  building  the 

capacities  for  corporate  experimentation  and 

strategic  adaptation  in  the  ever-shifting  global 

era. Necessary policies range from the innovative 
to  the  obvious.105  It  is  conventional  to  stress  the 
centrality  of  state  action  in  providing  the  secure 

infrastructure  of  the  economy,  both  physical 

such  as  broadband  lines,  road  and  bridges,  and 

in  terms  of  the  political  and  social  institutions 
of  the  marketplace.  The  latter  is  particularly 

important;  it  encompasses  the  rules  that  permit 

companies to innovatively deploy resources and 

be rewarded for successful implementation in the 

face  of  risk  and  imagination.  Good  protections 

of  intellectual  property  are  basic  provisions  in 

this  context.  Furthermore,  most  analysts  agree 

that  state  action  can  play  a  role  in  supporting 

the  availability  of 

those  resources 

that  are 

important  for  companies’  experiments.  To  that 

end, governments are often called to support the 

provision of a skilled workforce, i.e. the talented, 

trained  and  educated  people  that  corporations 

need.  Ideally,  governments  would  also  provide 

centers of technology development and diffusion, 

at  which  some  of  the  valuable  human  capital 

would  work  to  reach  out  to  companies  and 

build – on the basis of public-private partnership 

–  effective  centers  of  creative  imagination  in 

support of formulating effective strategies of value 

Certainly,  the  ability  of  wealthy  nations 

creation. All this is, perhaps, obvious.

to  stay  wealthy  in  the  digital  era  turns  on  the 

capacity  of  companies  to  adapt  and  adjust,  to 

Crucial  as  well  is  the  social  flexibility  and 

adaptability,  the  capacity  to  support  and  absorb 

104  Op. cit. Eliasson. Note that this argument is consistent with and now draws on the framing argument of Gunnar Eliasson (1991).
105  However, state action is not the solution; indeed, it never was. It is an important part of a regional development strategy that 
needs to span both the public and private sectors. The history of most crucial developments in the digital era – the development 
of the internet being among them – is one of the interplay of both public purposeful action and user-driven innovation enabled 
by deregulation. Private actors will (have to) continue to be the source of much of the needed entrepreneurialism.

 
 
 
 
 
 
 
 
 
 
 
 
 
the  continuous  change  that  the  competitive 

challenge  as  a  primarily  technical  issue  avoids 

companies  will  require.  In  an  era  of  constantly 

engaging  with  the  central  issues  of  the  labor 

shifting advantage and sustained experimentation, 

market adjustment in the digital era. To argue that 

national  performance  in  the  digital  economy 

in the experimental economy, workers have to be 

increasingly  rests  on  the  two  social  capacities, 

ready to switch their focus (and potentially locus) 

each  of  which  require  considerable  flexibility. 

of  activity  at  high(er)  rates  is  one  thing.  To  get 

They  are  a  country’s  ability  to  sustain  individual 

workers to accept this reality and democratically 

and  collective 

learning  processes  and 

to 

support those public policies that sustain such a 

implement – in a manner that assures real rising 

labor  market  regime  is  quite  another. A  narrow, 

incomes – the business, social and technological 
innovations generated by these processes.106

Public  policies  for  the  digital  era:  towards  a 

politics of experimentation

But  how  do  we  achieve  social  flexibility? 

The  fear  is  that  the  goal  of  social  flexibility 

for  economic  adaptation  may 

require 

the 

destruction  of  social  protections.  Or  can  social 

protections  be  the  basis  of  flexibility?  Let  us 

consider  the  question  by  revisiting  the  long-

standing  policy  debate  on  the  relationship  of 

labor  market  flexibility  and  social  protection.  In 

the  experimental  economy,  high-skilled  labor 

will  be  necessary  but  not  sufficient.  Importantly, 

it  will  need  to  be  sufficiently  flexible  to  support 

the  continuous  corporate  re-organization  made 

necessary by experimentation.

technical  conception  of  increasing  labor  market 

flexibility tends to produce analyses that fall into 

one  of  two  camps  pitted  against  each  other.  On 

the one side, there are those that equate increasing 

flexibility  with  the  deregulation  of  the  labor 

market,  the  removal  of  employment  protection 

rules  and  welfare  state  retrenchment.  On  the 

other side, there are those that want to protect the 

welfare state as a cornerstone of postwar models 

of  European  democracy,  which  underwrites 

individual  rights  to  liberty  and  equality  through 

its property of selectively de-commodifying labor 
(see Schulze-Cleven 2005).107

Do  we  need  to  make  a  choice  between 

establishing  the  flexibility  needed  to  adapt  to 

the  evolving  economy  and  sustaining  social 

protections against the vagaries of the market that 

make economic growth worthwhile? We propose 

that the mechanisms of social protection can be 

Simple  economic  models  referenced  in  the 

the foundations of market flexibility.

policy debate tend to treat labor as a commodity, 

as  one  of  two  or  three  key  inputs  into  the 

production  process.  Policy  recommendations 

formulated on the basis of such models stress the 

Social  protections  in  support  of  labor  market 

flexibility

necessity of increasing the efficiency of resource 

Social 

protections 

against 

market 

allocation  by  removing  rigidities  that  inhibit  the 

dislocations, 

in  some  cases  coming 

in 

the 

matching of supply and demand through the price 

form  of  agricultural  protections  and  in  others 

mechanism.  However,  this  set-up  of  the  policy 

coming  as  welfare  state  programs,  have  played 

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106  See Cohen et al (1984); This argument is also being developed in work on regional growth by Stowsky, Nielsen, and Zysman. A 

current take can be found in Zyman and Newman (2006).

107  Framing  the  debate  about  increasing  labor  market  flexibility  as  one  of  maintaining-versus-retrenching  the  welfare  state  is 
unfortunate, because it masks the real issues. Labor as a commodity has such special properties that the existence of regulating 
institutions  can  actually  increase  the  efficiency  of  labor  allocation,  especially  in  the  widespread  presence  of  information 
asymmetries (Spence 1972). For example, it is a highly differentiated commodity, because human beings differ greatly in both 
their accumulated skill sets and willingness to employ them (Iversen 2005). Furthermore, Polanyi (1944) argues that labor is 
merely “fictitious commodity”, because it that is not produced for sale. Neither from a theoretical vantage (Marsden 2003), 
nor from an empirical perspective (Freeman 2005), do deregulation and reductions in social benefits seem to increase labor 
market performance. The debate, as it often structured, fails to recognize the positive incentives provided by many welfare state 
programs. Indeed, they are incentives that will prove important for companies’ success in the digital era.

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an  important  role  for  legitimizing  markets  and 

The 

level  and  distribution  of 

social 

facilitating  resource  transfers.  Systems  of  social 

protection,  who  gets  how  much,  is  not  the  only 

programs  have  often  facilitated  the  evolution  of 

issue.  The  mechanisms  of  providing  it  have 

different  country’s  agriculture-based  economies 

distinct  consequences  for  the  operation  of  labor 

to the industrial powerhouses they have become 

markets  and  the  political  dynamics  sustaining 

today.  Particularly  important,  they  have  de-

economic  adjustment. Take,  for  example,  Japan, 

politicized  the  social  transformation  associated 

France  and  Spain.  In  Japan,  social  protection 

with economic development and modernization. 

is  often  embedded 

in  private  employment 

Social  protections  have  both  pacified  the  losers 

structures.  One  consequence  is  that  firm  failure 

of economic change and provided the population 

is “socially too expensive”, in turn often leading 

with  an  incentive  structure  that  supported  the 

to continued bank financing to prop up troubled 

competitiveness  of  a  country’s  economy.  Often, 

companies. Achieving  flexibility  in  the  Japanese 

social  protection  systems  themselves  enjoyed 

context  would  require  unwinding  the  nexus  of 

broad  based  political  support.  A  prominent 

company/finance/social  protection 

institutions 

example  is  the  set  of  welfare  state  programs, 

(Levy,  Miura,  and  Park  2006).  In  France,  apart 

which  for  a  long  time  could  offer  something 

from  the  formal  system  of  government  finance 

for  all  stakeholders.  These  programs  offered 

social protections, the economy abounds with an 

benefits (such as redistribution and/or insurance) 

array  of  “acquired  rights,”  situations  that  embed 

for 

the  entire  population  and 

supported 

privileges from taxi licenses through café licenses 

businesses’ attempts to adapt to changing market 

to protection of job locations. Social protection is 

environments,  either  at  the  micro-level  of  the 

embedded in the defence of particular social and 

firm or at the macro-level by de-radicalizing the 

employment  arrangements  (Cahuc  and  Kramarz 

national political game.

Many  welfare  state  programs,  which  were 

originally conceived in a pre-digital era to support 

older  production  strategies,  have  now  become 

dysfunctional,  undermining  rather  than  boosting 

current  strategies  of  value  creation.  While  the 

success  of  Fordist  systems  required  Keynesian 

policy  buffers  to  offset  systemic  political  and 

production  rigidity,  the  digital  era  poses  a  new 

set  of  political  and  production  challenges.  But 

the  basic  historical  lesson  for  the  public  policy 

challenge still holds: Systems of social protection 

can play an important role in supporting economic 

adjustment. The  processes  of  cushioning  market 

shocks  might,  under  certain  circumstances, 

facilitate  the  workings  of  the  market;  or,  to 

invoke a metaphor, there is no doubt that shock 

absorbers  in  cars  do  actually  increase  the  cars’ 

driving performance. We believe that systems of 

social  protection  continue  to  have  a  role  in  the 

2004).  In  Spain,  from  the  late  1970s  onwards, 

the  level  of  social  protection  and  employment 

security  has  greatly  diverged  between  labor 

market 

insiders  and  ever-larger  numbers  of 

outsiders, such as the unemployed and temporary 

workers.  In  the  aftermath  of  Spain’s  transition 

to  democracy,  the  first  government  introduced 

a  set  of  wage-bargaining  institutions  that  did 

not  permit  firms  to  set  wages  reflecting  firm-

level  differences 

in  productivity.  Combining 

with  a  legal  system  that  constrained  firms  from 

easily  shedding  excess  labor,  these  institutions 

led  to  frequent  company  bankruptcies,  a  fall  in 

output  and  spiraling  unemployment.  When  in 

1984 the government made it easier for firms to 

fire  workers,  these  attempts  strongly  increased 

labor  market  segmentation,  i.e.  reinforcing  the 

bargaining  power  and  wages  of  insiders  while 

concentrating economic insecurities among rising 

numbers of temporary workers (Watson 2006).

2

current era. Of course, the displaced may fear and 
resist, but accepting the necessities of the broader 

At  the  issue’s  most  narrow  framing,  we  can 
distinguish  between  two  fundamental  ways  of 

economic adjustment is always easier if one see 

protecting  workers’  against  uninsurable  labor 

the possibilities of one’s own place in that future.

market  risk,  either  preventing  worker  lay-offs 

 
 
 
 
 
 
 
 
 
 
 
 
 
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through  employment  protection 

legislation 

obvious  aspects  of  these  different  ways  are  not 

(EPL)  or  provide  unemployment  benefits  (UB) 

always  the  most  important  ones. The  politically 

(Boeri  2002).  More  generally,  social  protection 

most  difficult  controversies  are  often  about 

systems  can  either  substitute  for  the  market, 

social identity. Often what is in dispute is not just 

i.e.  discouraging  structural  change,  or  allow 

economic  well-being,  the  level  of  support,  but 

the  market  to  allocate  resources  and  provide 

the social place of particular groups and jobs in 

security  through  benefits  post-allocation,  i.e. 

the economy that turns on the character and form 

encouraging  structural  change.  In  Continental 

of  protection.  Social  protection  systems  are  not 

European countries such as Germany and France, 

created  equal,  and  while  some  definitely  act  as 

social  protection  systems  are  structured  so  as  to 

barriers  to  labor  market  flexibility,  others  might 

protect  the  job-insiders  with  strict  employment 

actually increase both the legitimacy of a flexible 

protection rules and shield the self-employed from 

labor  market  regime  and  the  actual  mobility 

competition. Outsiders – while often recipients of 

of  the  workforce.  While  particular  systems  of 

public social assistance benefits – tend to remain 

social  protection  facilitate  the  social  adjustment 

unemployed  with  little  chance  of  re-integration 

necessary  for  the  experimental  economy,  others 

into 

the  workforce. 

In  contrast,  universalist 

hinder it. As a result, stripping social protections 

systems  such  as  the  Danish  one,  tend  to  allow 

the  market  mechanism  to  efficiently  allocate 

represents  only  one  possible  way  of  increasing 
labor market flexibility.108

resources while “embedding” its workings within 

an environment that provides significant levels of 

social security.

To  gain  analytic  leverage  on  this  diversity, 

we  need  to  distinguish  the  different  dimensions 

of  social  protection  systems.  They  diverge  in  at 

least four respects:

-  Who is protected;

Security, flexibility and skills

The  capacity  to  reconcile  market  flexibility 

and  the  social  principles  of  security  hinges  very 

powerfully on how social protection is provided, 

not  just  who  receives  it  or  how  much.  This  is 

evident  when  we  consider  two  different  aspects 

of  labor  market  adaptation.  One,  already  noted, 

- 

The level and form of protection, an issue not 

is  the  question  of  providing  social  security  to 

just about the monetary amount but a matter 

facilitate  market  functioning,  the  notion  that 

of  whether  particular  jobs  or  positions  are 

labor  market  flexibility  can  be  achieved  with 

supported;

- 

The  mechanism  of  delivery,  i.e.  whether 

services are administered or cash granted;

and  perhaps 

through  social  protection.  The 

other related matter is that of training, i.e. who is 

trained, in what form, and paid by whom as part 

of  labor  adjustment. We  use  the  Danish  case  to 

- 

The influence on the operations of adjustment 

consider each in turn.

in the economy.

The  same  level  of  protection  for  the  same 

groups of people can be delivered in very different 

ways  with  very  different  consequences. And  the 

The  Danish  notion  of  “flexicurity”, 

i.e. 

combining the promotion of labor flexibility with 

the  provision  of  social  security,  has  attracted 

considerable  attention  in  Europe  (Sapir  2006, 

108  The academic literature on the different regimes of welfare capitalism provides a good starting point for an inquiry into the 
different  incentives  for  social  mobility  provided  by  countries’  systems  of  social  protection  (see  especially  Esping-Andersen 
1990).  Importantly,  in  the  process  of  studying  this  literature,  we  do  not  need  to  buy  into  the  literature’s  frequent  normative 
biases  that  prompted  Philip  Manow  (2002)  to  invoke  the  title  of  one  of  Sergio  Leone’s  famous  Spaghetti  Westerns  for  his 
characterization  of  the  comparisons  between  the  universalist  Social  Democratic  regimes  of  Scandinavia,  the  low-spending 
Liberal Anglo-Saxon countries and the high-spending but stratifying conservative systems of Continental European countries 
as a competition between “The Good, The Bad, and The Ugly.” Protecting current employment turns out to be harmful with 
respect to both efficiency targets and the legitimacy of a flexible labor market regime, while protections against the negative 
effects associated with unemployment can jointly enhance mobility and efficiency (Hall 2006).

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

Zysman  2006).109  In  Denmark,  a  Scandinavian 
country with a long Nordic tradition of providing 

wage,  systems  of  social  protection  can  –  if 

designed  correctly  –  underwrite  a  flexible  labor 

social protection as part of citizenship rights, the 

market regime by both increasing the legitimacy 

broad  social  foundation  of  protections  seem  to 

of  the  economic  system  and  delivering  actual 

have  contributed  to  sustaining  a  political  deal 

outcomes.

that makes it is easy for companies to adjust the 

sizes of their workforce due to the relative lack of 

employment protection legislation or collectively 

mandated  rules.  It  is  a  system  that  is  supported 

broadly  by  the  various  sections  of  society,  not 

least because easy firing often translates into easy 
hiring.110  As  a  result,  Danish  job  mobility  levels 
match those of the United States and Britain, with 

median  job  tenure  in  Denmark  at  a  relatively 

short  4.4  years,  compared  to  10.7  years  in 

Germany and 7.8 years in Sweden. Interestingly, 

the Danes do not seem to fear the flexibility that 

companies expect from them. In an OECD survey 

conducted  in  1996,  the  proportion  of  Danish 

workers not strongly agreeing with the statement 

“my job is secure” was considerably lower in all 

other  sampled  countries  (OECD  1997,  quoted 

in  Madsen  2006).  It  thus  seems  clear  that  far 

from  always  acting  as  rigidities,  which  hinder 

the  workings  of  the  market  mechanism  through 

distorting price signals and raising the reservation 

In  our  view,  the  Danish  case  can  act  as  a 

demonstration  for  the  possibility  of  combining 

European 
economic  modernization  with 
traditions of social protection.111 In fact, the Danes 
might  have  successfully  updated  the  production 

paradigm of flexible specialization for the digital 

era. Denmark seems to have leveraged both long-

standing  historical  legacies  and  more  recent 

reforms of established systems of social protection 

for  creating  an  environment 

that  provides 

companies with the flexibility to experiment and 

facilitates both individual and collective learning 
(Campbell  and  Hall  2006,  Lundvall  2002).112 
Reforms  in  the  mid-1990s  updated  a  set  of 

institutions, which had sustained a high degree of 

fluidity in the Danish labor market during the last 

70+ years, through selective decentralization and 

the  introduction  of  more  competitive  elements 
into a highly cooperative system.113 Consequently, 
the  Danish  policy  regime  has  become  widely 

known as one delivering “flexicurity” (Wilthagen 

109  For a good overview piece on the Danish “flexicurity” regime, see Marsden (2006); for a more theoretical and comparative 

perspective, see Wilthagen and Tros (2004).

110  The Danish Confederation of Trade Unions stresses that “Danish companies are more willing to hire new employees in times 
of economic revival than their European competitors, who have trouble letting off workers when the economy goes downhill 
again (Fuller 2004).”

111  The economic success of Denmark in the current market environment has come as a surprise to many analysts. As recently as 
in 1990, influential business analyst Michael Porter predicted Denmark’s certain decline on account of its outdated political 
economy. Now, with employment and growth numbers envied by many other European countries, politicians and academics 
have started to speak of the Danish ‘miracle’ (Nielsen and Kesting 2003, Schwartz 2001). Such talk is partially due to the relative 
inability  of  established  frameworks  to  account  for  the  Danish  success  story.  Denmark  could  not  build  on  a  legacy  of  high-
technology industries or homegrown multi-national corporations such as neighboring Sweden. Rather, Denmark’s performance 
largely  rests  on  small  and  medium-sized  enterprises  in  sectors  that  were  originally  seen  as  being  mature,  generating  slow 
growth and exhibiting low technological intensity. With the analytic framework developed in this essay, we can get a handle on 
understanding why the country was able to weather the storms of the digital era.

112  Among the legacies being invoked by various analysts are the social cohesion stemming from the particulars of the Danish 
history  of  nation-building  (Campbell  and  Hall  2006)  and  the  high  degree  of  concertation  flowing  from  Denmark’s  small-
country size (Katzenstein 2006, Nielsen 2003). Kristensen (2006) stresses the role played by Denmark’s worker training systems 
and the peculiar organization of the systems of social protection in creating the high degree of fluidity that has characterized 
the Danish labor market for almost 75 years.

113  In the process, the degree of strategic rationality displayed by Danish elites in their reflection on the Danish performance in the 
digital era is most remarkable (see Innovation Council 2004, FORA 2005). On the basis of the country’s small size and a strong 
corporatist tradition, Denmark’s policy networks display strong public-private links and a high degree of coherence. In such 
a context, formulating a “national strategy” seems an entirely realistic vision, an assessment shared by many Danish decision 
makers. This  outcome  has  been  achieved  in  an  environment,  in  which  76  percent  of  Danish  workers  were  union-members 
in  the  mid-1990s,  and  collective  wage-bargaining  has  a  very  strong  tradition.  Indeed,  while  recently  yielding  more  scope 
for  decentralized  decision-making,  collective  agreements  have  played  an  important  role  for  delivering  flexibility  in  another 
dimension  of  labor  deployment.  Since  1965,  these  agreements  have  included  provisions  for  flexible  working  hours,  which 
– after further expansion in 1995 – also place the Danish labor market among the most flexible in Europe with respect to work 
scheduling (Campbell and Pedersen 2005, 16-20).

 
 
 
 
 
 
 
 
 
 
 
 
 
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and  Tros  2004),  i.e.  combining  the  promotion 

incentives to invest into skill sets that are specific 

of  labor  flexibility  with  the  provision  of  social 
security.114

Encouraging skill investments in the face of labor 

market flexibility

The  story,  of  course,  is  not  just  one  of 

‘protection 

from  change’  but 

‘preparation 

for  change’.  That  the  skills  required  by  future 

workforces  will  evolve  constantly  over  the  next 

years,  it  is  well  understood.  Lifetime  jobs  are 

giving  way  to  careers  of  shifting  position.  The 

knowledge one has at entry in the workplace will 

not suffice. Skills, and skill training, will become 

all  the  more  important  as  lifetime  employments 

give way to a sequence of shifting positions.

Investment  in  skills  is  an  important  aspect 

of the ability of workers, of any sort, to adapt to 

changes in job requirements. It is, as we all know, 

a  real  element  of  labor  market  flexibility. Again, 

as  with  security  against  the  dislocations  of  the 

marketplace, the absolute level of spending is only 

one part of the story. Again, the questions relevant 

to labor markets include not just whether there is 

investment in skills or what the level of spending 

is. Rather, it is important who pays, what kind of 

training is provided, and which obligations might 

be  involved.  Our  intent  here  is  not  to  propose 

a  “correct”  scheme  of  training,  or  explore  the 

proper  balance  between  “general  knowledge” 

and  “firm  specific  skills”. The  purpose  is,  rather, 

to  emphasize  that  “how”  training  or  skilling  are 

provided is a central matter.

As  a  means  to  emphasize  the  importance 

of  the  mechanisms,  the  how  of  delivery,  let 

us  consider 

the  balance  between  “general 

knowledge”  and  “firm  specific  skills”.  Recent 

research  has  pointed  out  that  systems  of  social 

protection  can  provide  workers  with  important 

to companies or sectors (Estevez-Abe et al 2001). 

Prominent  examples  range  from  the  study  of 

certain  engineering  methods  at  the  university 

level  to  the  completion  of  narrowly  defined 

apprenticeships.  In  the  absence  of  generous 

unemployment  insurance  schemes,  a  rational 

worker  would  choose  to  invest  in  general  skills, 

such as they are provided in management training. 

The  reasoning  is  simple:  The  more  general  the 

skill set, the easier it is to find a job and minimize 

dependency  on  unemployment  benefits;  also, 

more  general  skill  sets  are  less  threatened  to 

become  outdated  by 

technological  change 

(Iversen 2005). However, the aggregation of these 

rational  individual  choices  presents  a  collective 

action problem. Economies, experimental or not, 

need workers with highly specific skills to develop 

new products in support of economic growth.

Workers’ incentives for skill investments are 

arguably  becoming  more  important  than  they 

have always been, because employers’ incentives 

to  invest  in  training  are  likely  being  reduced 

in  the  new  age  of  labor  market  flexibility.  At 

least  this  is  a  possible  and  logical  conclusion 

to  draw  from  the  empirical  findings  of  another 

body  of  comparative  empirical  research  on  the 

political economic consequences of the positive 

relationship  between  employers’  incentives  for 

human  capital  investment  and  the  stability  of 

employment  relationships.  In  the  digital  era, 

experimental  companies  desperately  need  a 

high-skill  workforce,  but  they  continue  to  want 

their  investments  in  human  capital  to  pay  off 

for  them  and  not  their  competitors  to  which 

their  employees  might  well  move.  A  standard 

comparison  has 

long  been 

that  between 

Germany and Britain. In Germany, a high degree 

of employer coordination has long sustained both 

industry-wide  collective  bargaining,  which  has 

114  This outcome has been achieved in an environment, in which 76 percent of Danish workers were union-members in the mid-
1990s, and collective wage-bargaining has a very strong tradition. Indeed, while recently yielding more scope for decentralized 
decision-making, collective agreements have played an important role for delivering flexibility in another dimension of labor 
deployment. Since 1965, these agreements have included provisions for flexible working hours, which – after further expansion 
in 1995 – also place the Danish labor market among the most flexible in Europe with respect to work scheduling (Campbell 
and Pedersen 2005, 16-20).

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encouraged longer job tenures through restricting 

the  maintenance  of  the  wages  and  benefits  of 

the  scope  of  worker  poaching  by  competing 

current  workers.  Although  Portugal’s  ‘flexible’ 

companies,  and  a  vocational  training  system 

strategy  of  low-wage  economic  growth  has 

run  jointly  with  unions  and  state  authorities, 

arguably  limited  the  spread  of  unemployment 

which provides even smaller companies with the 

by  maintaining  employment  in  low-skill,  labor-

capacities to train their new workers. In contrast, 

intensive  sectors  such  as  textiles  and  ceramics, 

companies  in  the  flexible  British  environment 

it  has  not  provided  a  stable  basis  for  growth  in 

never  successfully  solved  their  collective  action 

high  value-added  sectors.  As  a  result,  Portugal 

problem  of  investing  into  the  broad  up-skilling 

faces rising competition from new EU and other 

of the national workforce (see e.g. Thelen 2004). 

industrializing  countries,  which  have  higher-

The  respective  success  of  national  business 

skilled  workforces  and  lower  wages  (Watson 

communities  in  generating  high-skill  workforces 

2006).

have  deeply  affected  the  production  strategies 

that  individual  companies  could  adopt  and  the 

types  of  wages  they  were  able  to  pay.  While 

German companies could embrace the strategies 

later  described  as  diversified  quality  production 

and flexible specialization (Streeck 1991), British 

companies have tended to go the low-skill, low-

cost Fordist route that very quickly brought them 

in direct competition with producers from newly 

industrializing countries (King and Wood 1999).

However,  the  contrasts  between  high-skill 

and  low-skill  production  strategies  might  at 

least  be  partially  over-drawn,  and  rather  than 

reducing  company-sponsored  skill  investment, 

shorter  job  tenures  will  merely  be  associated 
with  new  forms  of  employer-sponsored  skill 

investments.  In  combination  with  the  increasing 

pace  of  technological  change  that  leads  to 

accelerated  outdating  of  skill  sets,  shorter  job 

tenure  rates  might  make  unsustainable 

the 

With  shorter  job  tenures  in  the  digital  era, 

heavy  reliance  on  intensive  skill  investment  at 

employers’  human  capital  investment  decisions 

the  beginning  of  workers’  careers  of  German-

are  made  on  the  basis  of  shorter  time  horizons 

style  two  to  three-year  apprenticeships.  At  the 

for potential amortization. This development can 

same  time,  efforts  to  frequently  re-skill  worker 

have  important  consequences.  An  undesirable 

might  remain  viable  and  indeed  very  important, 

scenario  would  be  the  one  that  has  played 

in  particular  as  these  are  focused  on  specific 

itself  out  on  the  Iberian  Peninsula. With  strong 

tasks  in  the  spirit  of  continuous  employee  and 

incentives  to  reduce  labor  costs  through  using 

organizational learning. Interestingly, continuous 

temporary  workers,  Spanish  companies  are 

re-skilling  is  another  area  in  which  Denmark 

much  more  likely  to  adopt  a  low-wage/skill 

excels.  In  contrast  to  other  European  countries’ 

production  strategy.  In  turn,  their  productivity 

apprenticeship  programs,  the  Danish  system 

has slipped. In contrast to the Spanish trajectory 

does  not  concentrate  on  vocational  education 

of  consolidating  the  position  of  labor  market 

and training at the beginning of workers’ careers. 

insiders at the expense of ever-larger numbers of 

According 

to  EU  statistics,  Danish  workers 

outsiders such as the unemployed and temporary 

spend  more  time  in  training  and  skill  formation 

workers,  Portugal  adopted  a  set  of  policies  that 

facilitated  employment  adjustment  rather  than 

programs than workers in any other member state 
of the European Union.115



115  Importantly,  three  changes  in  the  1990s  have  further  increased  the  efficacy  of  these  programs.  First,  the  vocational  training 
system  was  opened  to  the  unemployed  with  the  goal  of  using  the  economic  downturns  to  upgrade  their  skills,  making  it 
in  turn  more  attractive  for  companies  to  hire  them  during  the  next  upswing.  Second,  union-employer  negotiations  over  the 
organization  of  the  blue-collar  training  curriculum  were  decentralized,  so  as  to  target  skill  acquisition  more  effectively  to 
local needs. Third, new skill upgrading programs were introduced to allow workers to spend more time away from work. This 
measure increased the level of competition among technical schools and raised the quality of the training provided (Campbell 
and Pedersen 2005, 21-26).

 
 
 
 
 
 
 
 
 
 
 
 
 
Again,  Denmark  serves  to  demonstrate  that 

organizational features is more prevalent in those 

a tradition of social protection can be reconciled 

with the necessities of market flexibility. Flexibility 

does  not  require  removing  social  protections. 

Consider  that  Denmark  is  the  country  with  the 

highest  labor  market  mobility  and  training  rates 

on  the  European  continent  and  also  the  OECD 

countries  with  universalist  systems  of  social 
protection.116  Through  tapping  into  individuals’ 
knowledge  to  provide  organizational  flexibility, 

the  learning  model  provides  a  good  basis  for 
experimental  corporate  strategy.117  For  instance, 
Campbell  and  Pedersen  (2005,  25)  invoke  the 

country  with  the  highest  level  of  employment 

characteristics  of  the  learning  organization  in 

policy  expenditures.  In  cases  of  unemployment, 

their explanation of the Danish success in niche 

the  Danish  system  offers  generous  replacement 

market  opportunities  in  the  global  economy. 

levels 

for 

limited  periods  of 

time,  so 

that 

They  attribute  Denmark’s  position  as  a  world 

individuals  can  search  for  the  most  suitable  job 

leader  in  the  production  of  wind  turbines  to 

for  themselves  rather  than  having  to  take  the 

the  “incremental  innovations  in  wind  turbine 

first  available  one  for  lack  of  personal  financial 

technologies that Danish firms developed through 

liquidity.  Furthermore, 

individuals,  who  do 

close  collaborations  with 

their  customers, 

not  find  new  employment  within  this  period, 

production  workers, 

and 

engineers  who 

are  required  to  join  training  schemes  to  remain 

continuously  experimented  with  and  developed 

eligible  for  public  support.  Public  expenditures 

improved  blade  and  turbine  technologies  over 

for training and unemployment benefits are high, 

the years.”

but they constitute an investment into the future 

of  the  affected  individuals  and  the  productivity 

of  the  country.  In  contrast  to  the  mixed  record 

of  active  labor  market  policy  in  other  countries, 

the Danish system seems to work well, not least 

because  companies  can  shape  the  programs  to 

meet their local needs.

In turn, on the micro-level, Danish businesses 

seem  to  have  an  extended  set  of  options  for 

organizing their activities. In comparison to their 

competitors,  they  can  grant  their  workers  more 

autonomy, leaving them with more discretion for 

decision-making  unconstrained  by  hierarchical 

supervision  systems 

(Dobbin  and  Boychuk 

1999).  Lorenz  and  Valeyre’s  recent  analysis  of 

European  data  demonstrates  convincingly  how 

a  new  corporate  ‘learning’  model  with  these 

In lieu of a conclusion: the agenda for 
Europe

This  essay  makes  two  arguments.  First, 

countries  and  companies  face  an  ever  more 

volatile  competitive  marketplace.  They  have 

to  maneuver  in  a  competitive  environment,  in 

which  the  “sweet  spots”  for  corporate  success 

are  constantly  changing  as  company  internal 

functions  become  products,  products  become 

commodities, and the sources of differentiation for 

products  and  processes  are  constantly  evolving. 

This new “formula” for corporate success requires 

a  social  capacity  for  flexibility  and  adaptation. 

Second, social protections often serve as essential 

sources  of  social  capacity  for  adaptation  and 

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116  The analysis was conducted using data from the third European Survey on Working Conditions (Paoli and Merllié 2001). To 
arrive at this conclusion, the authors distinguish between the ‘lean’ production model, originally theorized by Womack et al 
(1991), and the newly conceptualized ‘learning’ model as corporate organizational templates geared towards the competitive 
marketplace of the digital era. While both models display stronger learning dynamics and higher problem-solving activity on 
the  part  of  employees  than  either  taylorist  or  pre-Fordist  traditional  organizations,  the  learning  model  constitutes  a  distinct 
way  of  delivering  flexibility  and  cooperation  within  the  company.  Companies  organized  along  the  lines  of  the  lean  model 
display such attributes as the strong use of teamwork, job rotation, quality management and multiple work pace constraints. 
In  contrast,  the  uniquely  socially  embedded  learning  model  is  more  decentralized  and  grants  employees  a  high  degree  of 
autonomy. According to Lorenz and Valeyre, the learning model building on local traditions in work organization, for example, 
the Swedish socio-technical principles of the 1970s. For a review of Lorenz and Valeyre’s findings and a discussion of their 
implication for research in Comparative Political Economy, see Schulze-Cleven (2006).

117  For example, Sabel (1994, 136) reports that shop stewards in the metalworking industry invented new payment, training, and 

job classification systems to increase the flexibility of production and the general skill level among workers.

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4

change.  There  is  not  an  inherent  contradiction 

A  Case  Study  of  the  Insurance  Industry. 

between social protections and market flexibility. 

PhD  Dissertation.  Berkeley:  University  of 

The  essential  issues  are  how  those  protections 

California.

are  organized  and  delivered.  The  dilemma  of 

many continental European countries to provide 

“welfare  without  work”  (Esping-Andersen  1996, 

Scharpf 2001) after a history of “adjusting badly” 

(Manow  and  Seils  2000)  is  only  one  possible 

outcome. To  the  contrary,  if  adapted  rather  than 

abandoned,  European  traditions  can  be  the 

basis  of  continued  growth  and  productivity  in  a 

competitive marketplace.

It  has  always 

remained  outside 

the 

scope  of  this  paper  to  advance  specific  policy 

recommendations.  Writing  in  the  United  States, 

we  feel  hesitant  to  prescribe  solutions  –  for  that 

task  we  defer  to  our  European  friends.  In  an 
insightful recent piece that appeared as we were 

editing  this  essay,  André  Sapir  (2006)  advances 

policy  recommendations  on  the  basis  of  an 

intellectual  framework  that  seems  compatible 

with  ours.  In  his  view,  only  the  Scandinavian 

and Anglo-Saxon variants of the European Social 

Model will in the end be sustainable, leaving those 

countries that make up two-thirds of the GDP of 

the entire EU-25 with a list of necessary reforms. 

- 

Bell,  Daniel.  1973.  The  Coming  of  Post-

Industrial  Society.  A  Venture 

in  Social 

Forecasting. New York: Basic Books.

- 

Boeri,  Tito.  2002.  Let  Social  Policy  Models 

Compete  and  Europe  Will  Win.  Paper 

presented  at  a  Conference  hosted  by  the 

Kennedy  School  of  Government,  Harvard 

University, April 11-12.

- 

Borrus,  Michael.  1997.  Left  for  Dead:  Asian 

Production  Networks  and  the  Revival  of 

US  Electronics.  BRIE  Working  Paper  100. 

Berkeley:  Berkeley  Roundtable  on 

the 

International Economy.

- 

Borrus,  Michael  and  John  Zysman.  1997. 

Globalization  with  Borders:  The  Rise 

of  Wintelism  as  the  Future  of  Industrial 

Competition. Industry and Innovation, 4 (2).

- 

Boyer,  Robert  and  J.  Rogers  Hollingsworth. 

1997.  Contemporary  Capitalism: 

The 

Embeddedness  of  Institutions.  New  York: 

Cambridge University Press.

Sapir seems to agree with us that Denmark might 

- 

Brynjolfsson,  Erik  and  Lorin  M.  Hitt.  2004. 

have valuable lessons to offer. While reforms will 

in  the  end  involve  a  fair  share  of  deregulation 

and  liberalization,  we  strongly  believe  that  one 

should  not  forget  about  the  potential  efficiency-

enhancing  benefits  of  pre-exiting  institutions 

such as the systems of social protection (see e.g. 

Ornston  and  Rehn  2006).  Europe  has  benefited 

from  them  in  the  past.  Our  analysis  leads  us  to 

believe  that  reforming  –  rather  than  scrapping 

– them will best support economic adjustment in 

the digital era.

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Changed  the  World.  New  York:  Harper 

Automotive 

Industry.  Berkeley:  Berkeley 

Perennial.

Roundtable on the International Economy.

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Zysman,  John.  2004a.  Manufacturing  in  a 

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Thelen,  Kathleen.  2004.  How  Institutions 

Digital  Era:  Strategic  Asset  or  Vulnerable 

Evolve:  The  Political  Economy  of  Skills  in 

Commodity?” 

New 

Directions 

in 

Germany,  Britain,  Japan  and  the  United 

Manufacturing:  Report  of  a  Workshop. 

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Washington  DC:  The  National  Academies 

Press.

Press.

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Tyson,  Laura  and  John  Zysman.  1989.  The 

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Zysman, John. 2004. Transforming Production 

Politics  of  Productivity:  Developmental 

in  a  Digital  Era.  In  William  Dutton,  Brian 

Strategy and Production Innovation in Japan. 

Kahin,  Ramon  O’Callaghan,  and  Andrew 

In Chalmers Johnson, Laura Tyson, and John 

Wyckoff 

(eds.),  Transforming  Enterprise. 

Zysman (eds.), Politics and Productivity: The 

Cambridge, MA: MIT Press.

Real Story of How Japan Works. New York: 

Ballinger.

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Zysman, 

John  and  Abraham  Newman 

(eds.).  2006.  How  Revolutionary  was  the 

-  Watson,  Sara.  2006.  Party  Strategies  and 

Revolution?  National  Responses,  Market 

the  Politics  of  Social  Protection  in  Post-

Transitions  and  Global  Technology  in  the 

Authoritarian 

Southern 

Europe. 

PhD 

Digital  Era.  A  BRIE/ETLA/HELSINKI  Project. 

Dissertation  in  Political  Science.  Berkeley: 

Stanford: Stanford University Press.

University of California.

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Zysman,  John.  2006.  Creating  Value  in  a 

-  Weber,  Steven.  2004.  The  Success  of  Open 

Digital  Era 

(Exploring 

the  Experimental 

Source. Cambridge, MA: Harvard University 

Economy:  How  Do  Wealthy  Nations  Stay 

Press.

-  Wilthagen,  Ton  and  Frank  Tros.  2004.  The 

Concept of “Flexicurity”: A New Approach to 

Regulating  Employment  and  Labor  Markets. 

Transfer 2(4).

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Newman  (eds.),  How  Revolutionary  was 

the  Revolution?  National  Responses,  Market 

Transitions  and  Global  Technology  in  the 

Digital  Era.  A  BRIE/ETLA/HELSINKI  Project. 

Stanford: Stanford University Press.

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5. Beyond the Lisbon Strategy: Information Technologies 

for the Sustainable Knowledge Society
by Emilio Fontela

Although the time required for a technological 

averages.  This  second  (‘endogenous’)  model 

development to move from the laboratory to the 

of  technological  change  led  to  Schumpeter 

market  is  shortening,  it  still  remains  true  that 

being  characterised  as  a  promoter  of  large 

broad technological change is a long-term affair. 

corporations with high market power.

For  example,  the  successful  implementation  of 

the  innovation  of  mobile  phones  has  required 

more than twenty years to achieve maturity in the 

advanced industrial countries.

In  some  respects,  these  two  views  of  the 

entrepreneur’s  strategies  reflect  what  are  now 

known  as:  (i)  the  ‘supply–push’  conception  of 

technological change (analogous to the ‘pool’ of 

Although  many  economists  had  been 

available  technologies  noted  in  the  first  model 

interested  in  the  great  fluctuations  that  were 

above); and (ii) the ‘demand–pull’ conception of 

observable in prices and rates of economic growth 

such change (analogous to the conscious research 

over the first two centuries of the industrial era, it 

investments for ‘endogenous’ technologies noted 

was Schumpeter who associated business cycles 

in the second model above).

with the discontinuous behaviour of technological 

developments  and  innovation  (Freeman,  1996; 

Fontela  &  Pulido,  1991).  Schumpeter  had  been 

in contact with Walras, and was sceptical of the 

prevailing  notion  of  ‘static  general  equilibrium’. 

Since  his  early  doctoral 

research  project, 

Schumpeter  had  been  of 

the  opinion 

that 

economics  had  to  incorporate  more  dynamic 

considerations and that economic dynamism was 

linked to entrepreneurial innovative capacity. He 

envisaged  two  possible  models  for  the  role  of 

technology  in  these  entrepreneurial  innovative 

strategies. These can be summarised as follows:

Although  there  are  no  special  references 

in  these  models  to  factors  that  could  cause 

sudden  discontinuities,  Schumpeter’s  intuitive 

belief  that  technological  change  is  linked  to 

long-term  cycles  requires  analysis  that  takes 

into  account  the  essential  characteristics  of  the 

technological  production  system—in  particular, 

the  existence  of  links  between  technological 

innovative developments and economies of scale 

and  economies  of  scope  (Wolff,  1997).  In  this 

regard,  the  concept  of  ‘clusters  of  technologies’ 

has  been  used  by  neo-Schumpeterians,  such  as 

Pérez  (2002),  in  their  analyses  of  cyclical  paths 

- 

The  first  was  that  technology  emerged  from 

and technological discontinuities. Similarly, neo-

science  without  further  explanation,  and 

classical  scholars  have  conceived  the  notion 

was  available  to  innovating  entrepreneurs 

of 

technological 

‘chocks’  causing 

temporary 

in  a  ‘pool’  of  technological  opportunities—

disturbances  of 

the  general  equilibrium  of 

a  view  that  was,  in  a  sense,  coherent 

economic systems (Adelman, 1965; Verspagen & 

with  the  classical  economic  idea  of  small 

Werker, 2003).

entrepreneurs acting in free competition.

Allowing for the limits of historical analysis, 

- 

The  alternative  model  was  that  technology 

and  assuming  that  the  past  existence  of  these 

resulted from a conscious research investment 

technological 

‘clusters’  can  be  established 

on the part of the entrepreneurs. This was part 

(Bruland, 1998), the question arises as to whether 

of  their  quests  for  temporary  monopolistic 

future technological clusters can be predicted for 

positions  that  would  allow  them  to  increase 

the first half of the twenty-first century. If so, can 

their  profit 

rates  above  market-driven 

these clusters provide a reasonable basis for a long 



 
 
 
 
 
 
 
 
 
 
 
 
wave of economic growth? Moreover, what public 

on)  if  such  foresight  was  to  complement  the 

policies could support these long-term evolutions 

more traditional methods of trend modelling and 

in science, technology, and economics?

extrapolation  (S-curbs,  system  dynamic  models, 

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5

The  first  part  of  the  present  paper  posits 

the  emerging  concept  of  ‘nano-bio-info-cogno 

convergence’  (so-called  ‘NBIC  convergence’)  as 

providing a basis for a new cluster of technological 

innovations  for  human  enhancement  and  social 

change in the context of modern developments in 

information technology.

The  second  part  of  the  paper  reviews  some 

deep  economic  and  social  trends  that  pertain 

to 

the  emerging  concept  of  a 

‘Sustainable 

Knowledge  Society’  (SKS).  These  trends  include 

the  nature  of  work,  global  environmental  and 

ecological issues, education and learning, the role 

of  services,  and  the  nature  of  the  welfare  state. 

The  paper  considers  the  consequences  of  these 

trends in terms of possible changes in large socio-

technical  systems  (including  health,  education, 

security, and so on).

The final part of the paper is devoted to the 

economic implications of these new technological 

and 

socio-economic 

scenarios.  The  paper 

considers these matters in: (i) general terms (at the 

macro-, meso-, and micro- levels) and (ii) in terms 

of  applied  policy  recommendations  (including 

the role of the state and market mechanisms).

Technology trends and key new 
technologies

Because 

technological  advances  play  a 

central role in shaping the future, the forecasting 

of technological change has received considerable 

attention. This has been particularly so since the 

Second  World  War,  when  the  rate  of  economic 

growth  has  increased  in  the  advanced  industrial 

countries well above that achieved in the previous 

two  centuries.  An  influential  OECD  report  by 

Jantsch (1967) on technological forecasting gave 



impetus to the concept of ‘future scenarios’. This 

report  emphasised  the  importance  of  rigorous 

methodology  in  achieving  consensus  among 

expert opinions on future developments (Delphi, 

morphological  analysis,  cross-impact,  and  so 

causal  econometrics,  and  so  on).  The  future  is, 

and will remain, unknown; however, the analysis 

of  alternative  futures  and  the  development  of 

hypotheses  about  trends  and  events  (including 

purposeful  actions)  can  be  of  great  importance 

in 

decision-making 

processes—including 

those  relating  to  research  investments  for  the 

development of new technologies.

Jantsch  (1967)  made  a  clear  distinction 
between exploratory scenarios (possible and more-
or-less probable future alternatives emerging from 
current  anticipations)  and  normative  scenarios 
(desirable futures in relation to some set of social 

values,  and  often  linked  to  clearly  stated  policy 
aims). This  distinction,  although  essential  for  all 

exercises  in  foresight,  is  not  always  made.  For 

example,  the  Lisbon  Strategy  of  the  European 

Union  envisaged  the  scenario  of  an  ‘SKS’,  but 

it  is  often  unclear  whether  this  was  intended  to 
be  an  exploratory  scenario  derived  from  current 
trends (and therefore seeking reactive decisions), 
or  a  normative  scenario  establishing  clear  aims 
for  European  policies  (and  therefore  seeking 

proactive decisions).

In 

the  area  of 

technological 

foresight, 

research  effort  in  recent  years  has  concentrated 

on collecting the views of experts, usually through 

Delphi consultations. The process has thus been 
essentially exploratory. Many countries (including 
the  United  Kingdom,  Japan,  Germany,  France, 

and  most  other  EU  members)  have  engaged  in 
large  Delphi  exercises  in  technological  foresight 

or  have  established  groups  of  experts  to  identify 

key  future  developments  in  technology. The  fact 

that  these  various  studies  have  produced  many 

similar  results  is  clearly  a  consequence  of  the 

globalisation  of  scientific  and 

technological 

information.

In a recent initiative by the EU Commission, 
a high-level group of experts synthesised the core 

of  the  available  foresight  information  to  present 

a  set  of  ‘New Technologies’  that  were  expected 

to have significant potential for future innovations 

 
 
 
 
 
 
 
 
 
 
 
 
(EC  2005).  This  selection  of  technologies,  well 

adapted  to  the  current  practice  of  EC  research 

policies,  included  research  activities  that  were 

both  ‘supply-pushed’  (scientific  developments 

and  scientific  domains  of  nanotechnology, 
biotechnology,  infotechnology,  and  the  cognitive 
sciences are likely to lead the supply side of the 
next wave of innovations. Each of these is briefly 

likely to lead to new technological proposals) and 

explored below.

‘demand-pulled’ (social and economic problems 

that  required  new  technological  solutions).  The 

distinction  is  not  always  clearcut,  but  those  that 

can  be  described  as  mainly  ‘supply-pushed’ 

(in  which  creativity  is  driven  from  inside  the 

discipline) include:

- 

- 

- 

- 

- 

nanotechnologies,

biotechnologies,

infotechnologies,

cognitive sciences, and

the methodological area of complexity.

Those  that  can  be  described  as  essentially 

‘demand-pulled’  (in  which  the  more  creative 

aspects  rely  on  the  application  of  available 

knowledge) include:

-  manufacturing,

- 

- 

- 

- 

- 

- 

- 

- 

agriculture,

services,

environment,

communication,

transport,

energy,

health, and

security.

In  this  schema,  the  social  sciences  and  the 

humanities (which are here characterised as part 

of  the  ‘cognitive  sciences’)  are  expected  to  fulfil 

the difficult task of establishing bridges between 

supply and demand of future technologies.

Trends in supply-pushed technologies

The  reports  of  the  experts  in  each  of  the 

broad domains of technology and science provide 

useful  orientation 

regarding  possible 

future 

developments (EC, 2005). The four technological 

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The biotechnologies appear to be responding 
to  the  demands  and  financial  stimuli  of  the 

pharmaceutical, 

agrochemical, 

food, 

and 

chemical  sectors.  However,  their  more  recent 

developments 

depend 

on 

breakthroughs 

from 

fundamental 

research—including 

the 

discovery  of  recombinant  DNA  and  nanoclonal 

antibodies,  and  the  mapping  of  the  human 

genome.  New 

‘supply-pushed’  developments 

are  expected  in  such  areas  as  ‘gene  silencing’, 

antibody  engineering,  macromolecular  structure 

determination, and embryonic stem cells.

In  the  area  of  nanotechnologies,  the  recent 
possibilities for ‘seeing’ (and even manipulating) 

atoms  and  molecules  has 

led 

to  a  better 

understanding  of  the  composition  of  materials 

and has opened the door to the development of 

materials with new properties. Indeed, it is even 

possible to envisage the creation of entirely new 

materials  previously  unknown  in  nature  (for 

example, carbon nanotubes).

In 

the  area  of 

infotechnologies, 

the 

emphasis  has  been  on  research  applications  in 

computing and in communications. Fundamental 

developments in hardware and software continue 

to  open  opportunities,  especially  in  high-level 

computation and mobile networks that are likely 

to push the Internet to new frontiers.

Finally, in the area of the cognitive sciences, 
the  scientific  understanding  of  the  brain  is 

opening  wider  perspectives.  The  application  of 

new  imaging  tools  in  neuroscience  is  especially 

are  closer 

important  in  this  regard. The  cognitive  sciences 
to  determining  what 
does  (psychology,  linguistics,  social  sciences, 
philosophy) and how it does it (neuroscience).

the  brain 

As noted above, these four great domains in 



science  and  technology  (‘nano-bio-info-cogno’) 

are likely to be leading the supply side of the next 

wave  of  innovations. Two  characteristics  can  be 

 
 
 
 
 
 
 
 
 
 
 
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

identified in the evolution of these domains:

new  materials.  In  more  general  terms,  the 

- 

they  have  adopted  systems  models  of 

connections  and 

interactions 

that 

rely 

heavily  on  complexity  theory;  higher-level 

information  tools  are  essential  for  these 

developments; and

- 

because  the  connections  and  interactions 

are multidimensional, the disciplines tend to 

converge; again, advanced information tools 

are essential for this convergence.

expected  progress  of  enterprise  simulation 

and modelling is likely to be associated with 

developments in the areas of complexity and 

systems  thinking,  as  well  as  in  the  cognitive 

sciences  and  information  technologies.  As 

noted  above,  several  industrial  sectors  (for 

example, pharmaceuticals) are heavily reliant 

on new bio-technological outputs. In addition, 

computer manufacturing and the electronics 

industry demand new bio-nano technologies 

The nature of a so-called ‘technology wave’ 

if they are to remain competitive.

is  affected  by  complexity  and  convergence. 

More  challenging  developments  occur  at  the 

interdisciplinary  frontiers  (for  example,  at  the 

bio–info 

frontier, 

the  bio–nano 

frontier,  or 

the  bio–info–nano  frontier).  Higher  levels  of 

convergence—such  as  those  involving  several 

frontiers (the ‘nano-bio-info-cogno convergence’, 

or 

‘NBIC  convergence’)—offer 

the  potential 

for  substantial  and  dramatic  changes  to  human 

capabilities and societal functions.

It  is  clear  that  such  convergence  is  already 

taking  place  at  the  molecular  level—where 

animate  matter  meets 

inanimate  matter. 

However, it is also increasingly evident that such 

convergence  is  likely  to  raise  more  fundamental 

questions at the level of the human mind. At this 

level,  the  contribution  of  the  cognitive  sciences 

will play an essential role in the new technological 

wave and in the advent of the knowledge society.

Trends in demand-pulled technologies

Whereas  the  ‘pushed’  agenda  does  not 

need a specific timetable, the ‘pulled’ agenda is 

subject to constraints of space and time. There is 

some sense of urgency in strengthening European 

competitiveness,  and  in  increasing  economic 

growth  and  employment.  Within  the  overall 

concept  of  a  ‘knowledge  society’,  some  of  the 

lines of technological action that will be required 
include the following.

- 

In manufacturing, the specific development of 
submicron  manufacturing  is  directly  related 

to  the  progress  of  nano-technologies  and 

- 

In  the  agri-food  industries,  the  concept  of 
multifunctional agriculture requires advances 

in  plant  and  animal  sciences  to  keep  pace 

with  the  developments  in  biotechnologies. 

Moreover,  the  food  industry  is  continuously 
looking  for  new  products  and  processes 

in  accordance  with  the  developments  and 

demands of the health industry.

- 

In  the  fast-growing  and  multidimensional 
services  sector,  the  emphasis  is  on  the 
efficiency  of  production  processes  (service 

engineering)  and 

the  measurement  of 

productivity  and  quality.  These 

require 

ongoing  developments 

in 

information 

technology,  and  in  the  cognitive  and  social 

sciences.

- 

In  relation  to  the  environment,  there  is  a 
interactions 
growing  need 

for  modelling 

between  society  and  ecology.  There  is  also 

a need for: (i) systems management (an area 

of  application  for  complexity  and  systems 

research); (ii) generic technologies (nano- and 

bio-, with a special interest in new materials 

and  information);  (iii)  specific  technologies 

(for industrial flows in many sectors); and (iv) 

‘green’  products,  ‘green’  product  services, 

and ‘eco-design’.

- 

In  the  area  of  security,  there  is  a  growing 
demand  for  surveillance  and  recognition 

systems,  modelling  of 

such 

systems, 

and  associated 

logistics.  Most  of 

these 

requirements  are  associated  with  new 

applications of infotechnologies, complexity, 

 
 
 
 
 
 
 
 
 
 
 
 
systems, and cogno- sciences. There are also 

between  supply-pushed  and  demand-pulled 

expectations for new materials.

- 

In the area of transport, the perceived needs 
are in the management of mobility, transport 

equipment,  environmental 

impacts,  and 

energy  efficiency.  In  many  cases,  these 

developments  are  linked  to  information  and 

communication 

technologies 

(ICTs),  and 

they  often  require  techniques  for  managing 

large-scale systems. There are already nano-

materials  and  nano-technologies  associated 

technologies. Moreover, these disciplines will 

be  responsible  for  internal  consolidation  of 

the growing information requirements of the 

complexity and systems approaches that will 

become  more  prominent  in  future.  Social 

sciences and the humanities are essential for 
the  full  development  of  education—another 
demand-pulling  sector  for  new  technologies 

that could provide a major area of application 

for the outputs of NBIC convergence.

with 

future 

transportation  development 

This brief survey of expected key technologies 

aspects (for example, nano-instrumentation).

has  identified  the  key  elements  of  the  ‘pushed’ 

- 

For  energy,  in  connection  with  transport, 
there is a demand for: (i) biofuels (especially 

from  cellulose-containing  raw  materials);  (ii) 

sustainable ‘clean’ energy technologies (such 

as  biomass,  hydrogen  cells,  and  other  fuel 

cells);  and  (iii)  alternative  renewable  energy 

resources.

- 

Communication 
enabling  technologies  for  security  and  other 

is  expected 

to  provide 

and ‘pulled’ agendas—as well as the many links 

that  exist  between  them.  Detailed  research  in 

individual fields of study could doubtless fill the 

cells of a matrix of the relationships—in terms of 
precise  contents  and  necessary  resources,  and 

in  terms  of  urgency  and  complexity.  However, 

even  in  the  absence  of  such  detailed  analyses, 

the main structural characteristics of the coming 

‘technology wave’ are becoming reasonably clear 

at the beginning of the twenty-first century.

activities—including  a  complex  agenda  of 

applications  in  areas  such  as  e-commerce, 

network design, and architecture. Moreover, 

Economic and social trends

advances in communication are crucial to the 

development of models for understanding the 

networks of today and tomorrow.

- 

In health care, growing interest in preventive 
medicine,  screening,  and  self-care  presents 

For a new technology wave to develop, it is 

not sufficient to have supply-pushed technologies. 

Nor  is  it  sufficient  to  have  a  clear  picture  of 

where demands for innovation reside. Rather, the 

new technologies have to be adopted by society, 

a  wide  range  of  opportunities  for  new 

by  culture,  and  by  institutions.  Growth  and 

developments  in  bio-,  nano-,  info-,  and 

development can be achieved only when a perfect 

cogno-technology.  NBIC  convergence  can 

match is achieved between new technologies and 

be seen in areas such as pharmacogenomics, 

the  economic  and  social  context  in  which  they 

gene 

therapy,  genetic  diagnostics,  stem 

are to be applied (Fontela, 1998).

cells, 

telecare, 

telemedicine, 

e-health, 

bioinformatics,  minimally  invasive  surgery, 

medicinal  nanotechnology, 

regenerative 

medicine,  artificial  and  bioartificial  organs, 

tissue engineering, rational drug design, and 

xenotransplantation.

- 

Social  sciences  and  the  humanities  will  be 
required  to  provide  a  smooth  transition 

A ‘new wave’ necessarily concerns the future. 

It is therefore necessary to investigate the changing 

nature of the economic and social context, and to 

identify possible long-term trends. The following 

account  describes  the  present  situation  in  terms 

of  a  ‘New  Economy’  model  that  appears  to 
be  instrumental  for  the  full  development  of  a 

‘Sustainable Knowledge Society’.

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From the industrial model to the ‘New Economy’ 

The scarcity of relevant statistics means that 

model

The  EU  ‘Lisbon  Strategy’  states  long-term 

aims  for  European  growth  and  employment. 

In  defining  an  ‘SKS’,  the  strategy  is  stating  a 

it is more difficult to document the earlier phases 

of  industrial  society  in  the  nineteenth  and  early 

twentieth centuries. However, it could reasonably 

be argued that this phase was characterised by:

desirable and normative future for the economy 

- 

low  prices  of  (indeed,  even  free  access  to) 

and  for  society—a  future  to  be  matched  with 

non-renewable resources—which effectively 

feasible 

technological  developments.  The 

stimulated  a  non-sustainable  pattern  of 

concept  of  an  SKS  is  not  utopian;  rather,  it  is  a 

production and consumption,

logical  step  in  a  process  of  social  change  that 

started with the Industrial Revolution more than 

two centuries ago.

- 

decreasing  relative  prices  of  manufactured 

objects  compared  with  services  (because 

production processes allowed for a continuous 

The early stages of the industrial process were 

flow  of  innovations  stimulating  productivity 

characterised  by  growing  capital  accumulation 

gains  in  industry,  whereas  services  where 

that fostered workers’ productivity and improved 

characterised  by 

traditional  production 

living  standards. The  process  was  stimulated  by 

processes and stagnant productivity), and

public  policies  and  market  mechanisms,  and 

by the relative costs of production and prices of 

goods  and  services.  In  general,  environmental 

protection  and  sustainability  were  disregarded, 

and  knowledge  focused  on  the  capital  to  be 

gained  through  new  products  and  production 

processes.

Towards  the  end  of  the  twentieth  century, 

several  aspects  of  this  growth  process  in  the 

advanced  industrial  countries  began  to  change, 

and  a  new  direction  pointed  towards  the  issues 

of  sustainability  and  knowledge  development. 

In  summary,  the  following  changes  can  be 

documented:

- 

decreasing  relative  prices  of  mass-quantity 

outputs  compared  with  quality  outputs 

(because  quantity  was  associated  with 

economies  of  scale  in  cheaper  products, 

whereas  quality  was  associated  with 

expensive custom-made production).

Labour  productivity  growth  (the  ratio  of  the 

output of objects per unit of human input), which 

is an end product of new technologies, contributed 

to  relative  costs  and  prices.  The  products  of 

highly  productive  activities  were  decreasing  in 

price, whereas the prices of stagnant productivity 

activities  were 

increasing. 

Sustainability, 

services,  and  quality  were  becoming  relatively 

- 

the  introduction  of  environment-protection 

more  expensive  in  the  markets.  These  deep-

policies,

- 

a  new  wave  of  innovations  associated  with 
information and communication technologies 

(relying on computers and microelectronics),

- 

improving  educational  levels  and  research 

capabilities,and

- 

a  greater  proportion  of  services  (compared 
with  goods)  in  economic  production  and 

consumption.

Economic  analysis  of  this  process  reveals 
that prices provided the signals to both producers 
(cost  of  input  factors)  and  consumers  (prices  of 

the goods and services).

seated  drivers  of  relative  prices  were  forcing 

the  advanced 

industrial  economies 

towards 

ecological  imbalances.  Economic  growth  was 

dependent  on  increasing  use  of  non-renewable 

energy  and  materials  through  consumption  and 

accumulation  of  objects,  and  environmental 

decay  became  apparent  through  pollution  and 

over-use.

The  advanced  industrial  economies  also 

began  to  suffer  from  the  so-called  ‘Baumol 
syndrome’ of unbalanced growth (Baumol, 1967), 

and  from  a  consequent  move  of  employment 

towards  the  less  productive  services  sector.  As 

anticipated  by  Baumol  (1967),  this  produced 

 
 
 
 
 
 
 
 
 
 
 
 
a  slow  down  in  the  overall  rates  of  growth  of 

productivity  and  of  the  economy—as  activities 

addressed  the  information  content  of  objects, 
and this came to represent a larger share of their 

with high rates of productivity growth lost ‘weight’ 

added value. Information technologies generated 

in  the  total  structure,  and  as  the  responsibility 

income  and  wealth  with  less  pressure  on  the 

for  growth  leadership  was  transferred  to  sectors 

finite resources of the earth.

with  low  average  productivity  and  slow  rates  of 

productivity  growth. The  growth  process  peaked 

in the advanced industrial countries at the end of 

the 1960s.

BAUMOL’S DISEASE

‘Some years ago, Baumol (1967) presented a model 
of  unblanaced  growth  in  which  an  oversimplified 
economy was divided into productivity growth sectors, 
one ‘stangnant’ and one ‘progressive’.  It was argued 
that  relative  cost  and  prices  in  the  stagnant  sector 
would  tend  to  rise  persistently  and  cumulatively, 
and that if the output proportions of the two sectors 
happened to remain fairly constant, the share of the 
economy’s  inputs  used  by  the  stagnant  sectors  and 
the share of consumer expenditure devoted to outputs 
of  the  stagnant  sector  must  both  rise  towards  100 
percent.  Finally, it was concluded that the net result 
must  be  a  ceteris  paribus  decline  in  the  economy’s 
overall productivity growth rate’.

‘The  output  shares  of  the  progressive  and  stagnant 
sectors have, in fact, remained fairly constant in the 
postwar  period,  so  that  with  rising  relative  prices, 
the  share  of  total  expenditures  on  the  (stnagnant) 
services  and  their  share  of  the  labour  force  have 
risen  dramatically  (their  productivity  lagged  behind 
the progressive sectors), just as the model suggests.  
Similar trends are also found internationally.’

Source: Baumol, Batey Blackman, Wolff (1985)

At 

the  end  of 

the 

twentieth  century, 

the  emerging  paradigm  of 

information  and 

communication technologies profoundly affected 

these  long-term  evolutionary  processes  within 
advanced  industrial  societies.  Three  significant 

effects can be discerned.

First,  the  new  paradigm  of  information 
information  products  at 

technology  placed 
the  centre  of  the  production  and  consumption 
models.  In  so  doing,  energy  and  resources  no 
longer  represented  the  core  factor  in  advanced 

industrial models. The new information activities 

were relatively more intangible than the erstwhile 

emphasis  on 

the  physical  production  and 

consumption  of  objects.  Information  technology 

Secondly, 

technologies 
previously 

the  new  paradigm  produced 
in 

that  enhanced  productivity 
activities. 

Information 

stagnant 

technologies  have  profoundly  changed  many 

basic  services  in  networks  (communications, 

trading, transportation), business services (finance, 

insurance, consulting, auditing, advertising), and 

many personal services (medicine, health care).

Thirdly,  the  new  paradigm  has  stimulated 
institutional change by promoting global efficiency 
in  the  meeting  of  supply  and  demand.  The 
‘big  bang’  of  financial  globalisation  is  the  pre-

eminent example of this phenomenon—with the 

combination of financial market liberalisation and 

information technology producing a revolution in 

international financing.

These  profound  changes  fully  justify  the 

emergence  of  the  concept  of  a  ‘New  Economy’ 

at  the  end  of  the  twentieth  century  in  the  USA. 

The  concept  came  to  be  erroneously  associated 

with 

the  speculative  financial 

‘bubble’ 

that 

accompanied  numerous  failed  information  and 

telecommunications ventures. But this erroneous 

association masked the real (and valid) content of 

the concept (as will be explored in the following 

paragraphs).

Under 

the 

‘New  Economy’  model, 

the 

‘Baumol disease’ seems to have found a cure. After 

the long (predicted) productivity slowdown of the 

1970s and 1980s, US productivity has started to 

increase. A close analysis of the US model shows 

that  large  productivity  gains  in  the  industrial 

sectors  have  been  directly  associated  with  the 

production  of  information  and  communication 

‘objects’.  This  has  been  complemented  by  a 

productivity upsurge in many service sectors that 

were  previously  part  of  the  ‘stagnant’  economy, 

but  which  have  now  become  highly  innovative 

users of the new technologies.

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

 
 
 
 
 
 
 
 
 
 
 
 
The  growth  model  of  the  ‘New  Economy’ 

advanced  industrial  societies—basically  relying 

synthesises  the  convergence  of  the  three  main 

on  an  increase  in  the  efficiency  of  service 

schools of contemporary economic thinking:

activities. However, this new growth model is not 

from  the  Schumpeterians,  the  model  takes 
the leading role of entrepreneurial innovation 

necessarily sustainable because:

- 

the  model 

forces  changes 

in  world 

and the functioning of technological systems, 

specialisation that could be socially costly,

- 

- 

- 

and  confers  high  priority  to  research  and 

development (R&D) policies,

from the neo-classicists, the model takes the 
‘perfect market’ idea for the allocation of the 

dividends of innovation, and heavily relies on 

intensive competition, and

from the Keynesians, it takes the driving role 
of  new  demands  and  income  multipliers, 

operating 

in  an  expansionary  macro-

economic context.

Through  the  new  paradigm,  these  three 

economic  mechanisms  are  thus  related  in  what 

appears  to  be  a  ‘virtuous  circle’  leading  to 

economic  growth.  The  ‘New  Economy’  model 

suggests  that  the  appropriate  use  of  information 

and  communication  technologies  can  stimulate 

a  new  wave  of  growth  and  employment  in  the 

The virtuous circle of the new economy

- 

it creates new disparities (the so-called ‘digital 

divide’), and

- 

it  does  not  produce  sufficient  reduction 

in  the  various  pressures  that  exist  on  the 

environment, energy, and materials.

Nonetheless, the model clearly points to the 

fundamental  economic  reality  of  post-industrial 

society in the following respects. The model:

- 

suggests  ways  of  increasing  the  size  and 

productivity  of  service-oriented  activities 

(including those performed in the process of 

industrial or agricultural production);

- 

- 

opens the door to an economy of ‘quality’; and

offers opportunities for full employment.

The  way  towards  a  ‘Sustainable  Knowledge 

Society’ has been identified.

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100

Source: Fontela, 2000.

 
 
 
 
 
 
 
 
 
 
 
 
From 

the 

‘New  Economy’  model 

to 

the 

point,  price  mechanisms  are  expected  to  reflect 

‘Sustainable Knowledge Society’

such  scarcities,  but  these  same  mechanisms 

The  ‘New  Economy’  model  is  characterised 

by  highly  competitive  market 

frameworks, 

constant  flows  of  innovations,  and  powerful 

cannot  anticipate  the  final  substitution  costs  for 

these  undesirable  developments  (because  the 

market is necessarily short-sighted).

property  rights. 

In 

the  advanced 

industrial 

As  a  consequence,  long-term  extrapolation 

economies,  the  model  has  implied  increased 

of 

the 

‘New  Economy’  model 

leads 

to 

liberalisation  and  deregulation  of  markets,  as 

unsustainability—not  so  much 

in  economic 

well as the privatisation of many public functions. 

competitiveness,  but  in  terms  of  social  and 

According  to  this  model,  economic  growth  is 

environmental problems.

associated  with  increasing  disparities  in  income 

and  wealth,  and  although  this  might  encourage 

entrepreneurship  it  might  also  induce  a  loss  of 

social cohesion.

Since  the  Second  World  War,  with  the 

adoption  of  the  model  of  the  ‘Social  Market 

Economy’ in Germany (Nichols, 1994; Hieronymi, 

2002),  and  with  the  successful  example  of  the 

Because  the  fundamental  growth  process 

‘Nordic  Welfare  State’  (Buhigas  &  Martens, 

of  this  model  depends  on  the  rate  of  innovation 

2005), Europe has shown a preference for a more 

(especially in the low-productivity sectors of the 

sustainable  development  model—a  preference 

early  industrial  model),  the  process  of  capital 

that  has  become  more  marked  in  the  latter 

accumulation  that  is  characteristic  of  the  model 

decades  of  the  twentieth  century  with  growing 

of  industrial  growth  has  been  broadened  and 

public  concern  for  environmental  issues.  The 

includes three additional classes of capital:

‘New Economy’ model has thus become oriented 

• 

technological capital,

•  human capital, and

• 

social capital.

These 

three 

forms  of 

accumulation 

benefit  from  flows  of  research,  education,  and 

organisational  experience,  and  are  subject  to 

continuous  obsolescence.  The  economic  gains 

from innovations (Carter, 1990; Fontela, 1994), as 

portrayed by the growth of total factor productivity 

in  Europe  towards  a  ‘Sustainable  Knowledge 

Society’ (SKS).

The three pillars of the SKS model are: (i) the 

economy;  (ii)  society;  and  (iii)  the  environment. 

From this conceptualisation, it is possible to derive 

three long-term objectives for sustainability:

- 

- 

innovation and growth in the economy,

creativity and human development in society, 

and

(the surplus of production over the increased use 

- 

protection  and  ecological  balance  in  the 

of manpower, equipment, and material or service 

environment.

intermediate  inputs),  are  a  direct  result  of  these 

three  new  processes  of  capital  accumulation. 

Here  again,  the  processes  of  accumulation  that 

are  characteristic  of  the  ‘New  Economy’  model 

have  the  potential  to  produce  disparities  in 

income and wealth that, especially in the case of 

human capital, are linked to differences in access 

to knowledge by individuals.

Furthermore, according to this model, there 

is no inherent reason to adopt policies to protect 

the  environment  or  to  reduce  the  use  of  non-

Although  these  objectives  have  received 

considerable attention and have been increasingly 

incorporated in European policy statements, such 

as  those  made  at  the  Lisbon  and  Barcelona  EU 

Council  meetings,  there  is  less  clarity  regarding 

the instruments to be used to meet the objectives. 

Emphasis has certainly been put on science and 

technology policies (for example, the importance 

given to the European Research Area). However, 
it must be recognised that appropriate technology 
is a necessary, but not sufficient, condition for the 

renewable  energy  and  materials.  At  a  certain 

successful development of an SKS.

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101

 
 
 
 
 
 
 
 
 
 
 
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Sustainable Knowledge Society (SKS)

Source: A. Pulido, E. Fontela (2004).

The  two  other  necessary  conditions  are 
values  and  prices.  These  are  more  difficult  to 
define  and  implement. The  term  values  refers  to 
citizens’ preferences for cohesion, public services, 
quality, security, and so on. The term prices refers 
to  the  relative  prices  of  ‘quality’  and  ‘quantity’, 

of  ‘green’  products  and  ‘dark’  products,  and  of 

‘income’  and  ‘leisure’.  Recent  trends  in  ‘values’ 

and ‘prices’ have not necessarily been conducive 

to  an  SKS,  and  policies  in  these  areas  are  not 

usually  incorporated  in  the  European  `political 

agenda.  However,  only 
through  a  perfect 
matching of prices, values, and technology can a 
successful SKS develop. The stark reality is that an 
SKS is not in the mainstream of European society.

To bring it into the mainstream, other essential 

features of an SKS include the following:

102

• 

• 

labour as a product,

knowledge as a factor of production, and

•  public services as a dynamic driver.

Each of these is briefly discussed below.

Labour as a product

Baumol 

(1967)  perceived 

that  human 

activities with little requirement for ‘instrumental’ 

labour  represented  the  ‘stagnant’  productivity 

sector.  These  activities  essentially  use  labour  as 

a ‘product’—as is the case with artists, scientists, 

and  professionals  of  various  sorts.  In  making 

this  association  between  stagnant  productivity 

and  labour  as  a  ‘product’,  Baumol  (1967)  did 

not  directly  equate  the  stagnant  sector  with  the 

services  sector—and  in  this  he  has  been  proven 

correct,  as  the  information  technologies  have 

demonstrated  in  enhancing  the  productivity  of 

certain key services (such as trade and finance).

When  labour  is  a  ‘product’,  its  value  and 
price  is  essentially  determined  by  its  knowledge 
content.  Knowledge  is  therefore  a  production 
factor  of  increasing  significance  as  an  economy 
moves  to  higher  levels  of  the  ‘Baumol  disease’. 

An  SKS  is  expected  to  be  a  society  with 

knowledge  workers 

(‘brainworkers’), 

and 

some  studies  show  that  these  workers  are  quite 

 
 
 
 
 
 
 
 
 
 
 
 
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different  from  traditional  ‘instrumental’  workers 

the  ‘information  wave’  of  the  ‘New  Economy’) 

in  their  individual  behaviour  and  in  their  social 

to  rely  heavily  on  technologies  and  innovations 

behaviour (von Gizychi & Ulrici, 1988). An SKS 

associated with knowledge processes. This is the 

thus  requires  a  profound  transformation  of  the 

challenge implicit in the Lisbon strategy and the 

concept  of  labour  ‘markets’—markets  that  were 

policies it requires.

essentially  designed  for  the  instrumental  work 

required in the industrial economy.

Knowledge as a factor of production

If knowledge is to be a main primary factor in 

the economy, subject to an accumulation process, 

the need for research, education, and continuous 

learning will place higher education at the heart 

of the growth process. Important innovations are 

expected to foster the productivity of the higher-

education system in ways that are comparable to 

the productivity gains observed in the ‘enterprise’ 

system (EC, 2003).

Economic implications and policies for 
the new technology wave

European policies of science and technology

In 

the  period  of 

reconstruction  after 

the  Second  World  War, 

the  European  and 

Japanese  economic  models  included  the  active 

participation  of  public  administrations  in  the 

development of productive structures. In a context 

of  market  economies,  it  was  still  considered 

necessary  that  public  administration  took  part, 

directly or indirectly, in investment processes—to 

reduce enterprise risks and to guarantee the good 

Public services as a dynamic driver

operation of infrastructure, basic industrial sectors, 

The more ‘intensive’ knowledge products are 

public goods. This is clearly the case for science—

which  is,  in  a  sense,  ‘owned  by  humanity’.  But 

it  is  also  largely  the  case  in  education,  health, 

and  general  public  services.  This  intervention 

was coherent with Keynesian policies of demand 

management,  and  with  social  protection  and 

redistributive fiscal policies.

and  environmental  services.  Whether 

these 

With the liberalisation of the capital markets 

‘public  goods’  are  to  be  provided  by  the  public 

from  the  1970s  onwards,  economic  policies 

sector  or  the  private  sector  is  a  question  that 

began  to  favour  privatisation,  deregulation,  and 

is  open  to  social  choice.  However,  if  Europe 

increasing  competition.  In  these  circumstances, 

maintains  the  role  of  the  state  in  these  areas, 

the  border  between  market  and  non-market 

public administrations will have to increase their 

activities  was  reconsidered.  The 

institutional 

productivity  along  paths  comparable  to  those 

evolution  of  the  European  Union—with  the 

observed in the ‘enterprise’ system.

creation of a single internal market, the Maastricht 

‘Brainworkers’,  universities,  and  public 

administrations  will  play  more  dynamic  roles  in 

Treaty, and a single currency—also contributed to 
the redefinition of public functions.

the SKS than they played in the industrial era or 

Traditional  post-war 

industrial  policies 

under  the  enterprise-driven  ‘New  Economy’.  As 

have 

thus  evolved  with  public 

intervention 

a  consequence,  ‘brainworkers’,  universities,  and 

being concentrated on keeping a balance in the 

public  administrations  are  expected  to  provide 

macroeconomic  framework.  This  public  role  in 

substantial  leadership  in  technologies,  values, 

the  macro-economy  continues  in  all  countries 

and  prices. This  leadership  will  be  built  on  the 
production, distribution, and use of knowledge.

A  perfect  match  between  technologies  and 

institutions  in  the  SKS  therefore  requires  the 

‘technological wave’ (which is expected to follow 

of  the  OECD.  However,  new  micro-economic 

support  policies 

for  some  sectoral 

interests 

are  being  increasingly  adopted—for  example, 

policies  for  the  promotion  of  the  ‘Information 

Society’  (which  have  many  aspects  in  common 

10

 
 
 
 
 
 
 
 
 
 
 
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with  earlier 

industrial  policies).  These  new 

respect  to  such  appropriation  becomes  more 

microeconomic policies attempt to stimulate the 

difficult to establish.

competitive capacity of certain firms, but they do 

not  include  financial  assistance  that  distorts  the 

functioning of markets.

OECD  countries  are  presently  approaching 

this  subject  pragmatically,  and  there  is  a  certain 

degree of competition among national systems of 

In 

this  new  context, 

scientific  and 

incentive  to  innovation. There  are  thus  constant 

technological  policies,  especially  research  & 

fluctuations 

in  scientific  and 

technological 

development  (R&D)  policies,  have  played  a 

policies—with  ministries  being  created  and 

central role among public-policy instruments for 

disbanded,  decisions  being  concentrated  and 

enterprise development. The justification for these 

decentralised,  fiscal  incentives  being  introduced 

policies  can  be  summarised  in  the  following 

and withdrawn, and so on.

logical steps:

Because  evaluation  of  the  results  of  such 

1.  Globalisation:  The  well-being  of  countries 
depends  on  the  capacity  of  companies  to 

policies  is  difficult,  decisions  are  often  taken  on 

the basis of suggestions from pressure groups, or 

compete in global markets.

2.  Competitiveness:  The  competitiveness  of 
companies  in  these  markets  depends  on 

constantly 

changing 

factors—especially 

rapidly changing supply and demand.

3.  Adaptation: Success depends on the capacity 
of companies to promote or adapt to change, 

and the capacity to take reactive or proactive 

decisions with respect to innovation.

4. 

Innovation:  Access  to  new  processes  and 
new products is the key to innovation.

5.  Technological change and human capital: The 
technological changes that are required occur 

through  the  accumulation  of  technological 

capital and human capital.

6.  Research and higher education: The scientific 
and  technological  policies  of  government 

with 

respect 

to 

research  and  higher 

education provide generic knowledge for the 

accumulation  of  technological  and  human 

capital within companies.

The  results  of  ‘pure’  research  in  the  basic 

sciences  continues  to  spread  without  barriers 

to 

the  scientific  community  worldwide—as 

it  has  always  traditionally  done.  However,  as 

‘pure’ scientific research draws closer to applied 

10

technological  innovation,  the  results  of  basic 

science  become  capable  of  being  appropriated 

by  individuals  or  particular  groups,  and  the 

economic  justification  of  public  policies  with 

on the basis of comparisons between countries. In 
general, these ad hoc decisions make little sense 
when  the  institutional  foundations  of  countries 

are as disparate as those of the various European 

countries.

In addition to having responsibility for trade 

policy and agricultural policy, the European Union 

has policy responsibilities in the area of scientific 

and technical research. These policies, supported 

with  relatively  modest  budgets,  have  promoted 

greater  cooperation  among  national  research 

institutions,  and  especially  between  universities 

and  business.  However,  there  is  an  increasing 

awareness that, compared with the United States, 

Europe has been tardy in developing information 

technologies  and  in  applying  these  technologies 

economically.  This  has  motivated  concern 

regarding  the  role  of  science,  technology,  and 

innovation in European public policies.

In  March  2000,  at  the  Summit  of  Lisbon, 

the European Union established, as an objective 

for  2010,  to  become  “…  the  most  dynamic  and 

competitive  knowledge-based  economy  in  the 

world,  capable  of  sustainable  economic  growth 

with  more  and  better  jobs  and  greater  social 

cohesion,  and  respect  for  the  environment”. 

In  support  of  this  objective,  the  Lisbon  Strategy 

developed  a  set  of 

interdependent  reforms 

for  an  SKS.  Although  the  objective  of  the 

projected  “knowledge-based  economy”  was 

not  specifically  defined,  most  interpretations 

 
 
 
 
 
 
 
 
 
 
 
 
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refer,  in  general  terms,  to  an  economy  in  which 

investment  in  R&D  and  encouragement  of 

innovative  companies  stimulate  dynamism  and 

industrial applications of ICT; and (iii) making 

competitiveness.

However, the reality in 2005 (at the midpoint 

of the process envisaged by the Lisbon Strategy) is 

- 

that the situation is not very different from what it 

was  at  the  beginning:  economic  growth  is  slow, 

the European Information Society as inclusive 

and accessible as possible.

Strategic  orientations 
employment  (2005–2008):  COM 
141,  April  2005—which  recommended:  (i) 

for  growth  and 

(2005) 

unemployment  of  human  resources  is  high,  and 

increased  investment  in  R&D  (restating  the 

there  is  a  large  deficit  in  the  technology  trade 

objectives  of  Lisbon  in  terms  of  an  R&D/

balance. In response to this, the EC has prepared 

GDP ratio of 3% and a private/total research 

several documents that propose new policies for 

expenditure of 66% by 2010); (ii) reinforcing 

the future. These have included the following (all 

centres  of  excellence; 

(iii) 

increasing 

available on the Internet).

- 

Kok 

report: 

‘Facing 

the  Challenge,  a 

Report  from  High  Level  Groups’,  chaired 

by  Wim  Kok,  November  2004—which 

recommended:  (i)  attracting  and  retaining 

world-class  researchers;  (ii)  making  R&D 

a  top  priority;  (iii)  promoting  broadband 

communication to reach a penetration rate of 

50% by 2010; (iv) reaping the full benefit of 

ICTs; and (v) protecting intellectual property 

to promote innovation.

- 

Barroso  Communication:  ‘Working  Together 
for  Growth  and  Jobs:  A  New  Start  for  the 

Lisbon  Strategy’,  COM  (2005)  24  February 

2005—which 

recommended: 

(i) 

reform 

of  state  aid  policies  to  support  research 

and 

innovation  by  small  and  medium 

enterprises;  (ii)  support  and  encouragement 

for  the  development  of  ‘innovation  poles’ 

designed to help regional actors move ideas 

from  the  laboratory  to  the  workshop;  (iii) 

the  promotion  of  European  technological 

initiatives 

in  public–private  partnerships; 

(iv)  the  promotion  of  ‘eco-innovation’;  and 

(v)  the  creation  of  a  European  Institute  of 

Technology  to  attract  ‘brains’,  ideas,  and 

activities to Europe.

- 

i2010:  the  new  European  program  for  the 
competitiveness of ICT, January 2005—which 

recommended:  (i)  a  borderless  European 

information  space  with  an  internal  market 

for  electronic  communication  and  digital 

services;  (ii)  stimulating  innovation  through 

fiscal  incentives;  (iv)  promoting  scientific 

and  technical  training;  (v)  improving  the 

social  status  of  researchers;  (vi)  stimulating 

innovation  and  the  adoption  of  ICTs;  (vii) 

developing  business  services,  technological 
poles,  and  networks  of  innovation;  (viii) 

transferring  knowledge  derived  from  foreign 

direct investments; (ix) financing risk capital; 

(x)  improved  definition  of  property  rights; 

and (xi) the creation of a solid industrial base 

by  developing  public–private  partnerships, 

encouraging 

European 

technological 

initiatives, and developing regional and local 

innovation poles.

This  last  orientation  (‘Strategic  orientations’) 

opens 

the  door 

to  sectoral  and 

territorial 

mesoeconomic  policies,  and  appeals  to  the 

development  of  new  mechanisms  for  public 

action  to  compensate  for  the  poor  performance 

of  some  market  mechanisms.  Indeed,  European 

scientific  and  technological  public  policies  are 

often  declared  to  be  a  high  priority  if  economic 
growth  and  employment  are  to  be  stimulated. 

There might even be a reorientation of the sectoral 

priority of common European policies—such that 

expenditures  and  investments  are  moved  from 

the  primary  sector  (the  common  agricultural 

policy,  CAP)  to  the  quaternary  sector.  However, 

the  definite  lines  for  this  possible  profound 

transformation are still not decided.

In  all  of  these  European  proposals,  it  is 

10

apparent  that  there  is  often  confusion  between 

the  ‘Information  Society’  and  the  ‘Sustainable 

 
 
 
 
 
 
 
 
 
 
 
Knowledge 

Society’.  Although  production 

information  and  data-processing  are  essential 

ingredients  for  a  ‘knowledge  economy’,  a  true 

SKS  has  other  characteristics  that  have  to  be 

- 

- 

- 

socio-technical systems,

research production structures,

cooperation processes, and

taken  into  consideration  in  a  modern  European 

-  measurement issues.

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competitive strategy. These aspects are concerned 
with the matching of knowledge with quality, and 
they  require  an  in-depth  revision  of  the  familiar 

maximisation process that orients economic life. 

In  an  SKS,  social  cohesion  and  sustainability 

are  fundamental  concepts,  and  this  means  that 

the  maximisation  of  utility  and  profit  must  be 

accompanied  by  a  parallel  maximisation  of: 

(i)  the  quality  of  life;  (ii)  the  creative  capacity 

of  individuals;  and  (iii)  the  development  of 

intelligence.

Structured  on  the  basis  of  ‘work  as  a 
product’,  rather  than  ‘instrumental  work’,  an 

SKS  thus  requires  a  greater  contribution  from 

the  social  and  cognitive  sciences,  in  addition  to 

the expected new technological convergence. In 

this  respect,  the  concept  of  an  SKS  still  lacks  a 

comprehensive design.

Nevertheless,  because  progress  towards  an 

economy  of  knowledge  implies  technological 

developments in education, health, security, and 

protection  of  the  environment—sectors  that  are 

all  part  of  public  responsibilities  in  European 

countries—a greater public role in R&D policies 

is justified.

Policies for a sustainable knowledge society

The  previous  sections  have  described  a 
long-term  future  scenario  for  society  (the  SKS) 

and  for  technology  (the  ‘new  wave’  of  NBIC 

convergence).  For  convenience,  this  can  be 

referred  to  as  the  ‘SKS–NBIC’  scenario.  In  this 

long-term  scenario  (of  perhaps  fifty  years),  the 
Lisbon  Strategy  can  be  considered  as  the  policy 
agenda for the first decade.

10

In  line  with  this  scenario,  four  main  policy 

fields  that  require  consideration  (and  possibly 

urgent attention) can be identified:

Each of these is discussed below.

Socio-technical systems

Under 

the  SKS–NBIC  scenario,  socio-

technical systems will be quite different from what 

they are today. Some examples can be provided 

of the way in which human needs will be met by 

the new technological structures of production.

The  health  of  citizens  is  affected  by  many 

sectors—including 

the 

agro-food 

industry, 

leisure and tourism services, the pharmaceuticals 

industry,  hospital  services,  and  so  on.  Many  of 

these  are  presently  unconnected.  Under  SKS–

NBIC,  these  sectors  will  probably  interact  in  a 

different  way  to  provide  personal  enhancement, 

longer  life,  knowledge  for  self-diagnosis,  and  so 

on. Similarly, the mobility of citizens is provided 

by  a  complex  cluster  of  sectors  (motor  vehicles, 

energy, transportation services, communications, 

and  so  on).  These  will  also  be  subject  to 

reconsideration under the pressure of social and 

environmental constraints. Mobility in the future 

is likely to be significantly changed—for example, 

by involving short-distance mobility in the cities, 

or  high-speed  long-distance  systems.  Under  the 

SKS–NBIC scenario, both health and mobility will 

thus  need  to  become  more  efficient  in  terms  of 

users’ utility, objective quality, and environmental 
protection. It is hard to imagine that such massive 

structural changes could result from market forces 

alone—particularly  when  financial  efficiency 

is  only  one  of  the  components  of  the  required 

economic and social efficiencies.

Europe  already  contains  different  socio-

technical  systems—such  as  those  in  the  Nordic 
the  Mediterranean 
countries  and 

those 

in 

countries.  The  variations  correspond  to  cultural 

diversity and to the varying roles accorded to the 

 
 
 
 
 
 
 
 
 
 
 
 
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market in different political systems. If alternative 

activity.  In  this  context,  it  should  be  possible  to 

complex 

futures  and 

their  corresponding 

find ways in which competition and cooperation 

operational systems are to be properly understood, 

can interact positively (Fontela, 1998).

this diversity in socio-technical systems demands 

extensive  multi-disciplinary  research 

towards 

a  comprehensive  ‘science  of  design’.  Such  a 

science  of  design  will  probably  require  a  new 

research  structure  devoted  to  multi-disciplinary 

futures.  This  will  facilitate  optimum  synergies 

among social scientists, engineers, and scientists 

from  other  disciplines—all  working 

together 

with  entrepreneurs,  public  administrators,  and 

representatives of civil society.

Research production structures

Research 

is, 

itself,  a  service-production 

activity that utilises a large proportion of productive 

agents  who  could  be  described  as  ‘labour  as 

product’. This productive sector is essential for an 

SKS  and,  because  research  is  the  main  input  for 

knowledge,  this  sector  will  represent  a  growing 

share of economic production.

Research is performed in a variety of settings 

(corporate  research  departments,  universities, 

private  laboratories,  public  laboratories,  and 

so  on),  and  it  requires  particular  forms  of 

organisation and management that promote self-

development  and  creativity.  The  productivity  of 

research will be crucial to innovation in an SKS; 

indeed,  such  productivity  should,  itself,  be  the 

subject of research (so-called ‘R²’).

In  view  of  the  fact  that  an  SKS  attaches 

special importance to the development of public 
‘goods’ in such areas as education, health, and the 

environment,  it  is  essential  that  public  research 

capabilities  be  strengthened  in  these  areas—in 

accordance  with  the  planned  multi-disciplinary 

approach described above.

Competitive  corporations  and  cooperative 

universities  and  administrations  interact  more 

positively  in  small  territories  that  have  strong 

cultural  ties  (such  as  regions  and  nations).  The 

varying  nature  of  these  interactions  (and  the 

varying nature of the resulting processes of social 

capital accumulation) are already apparent in the 

territorial diversity of Europe.

For  the  ‘demand-pulled’  aspects  of  new 

technologies, 

the  required  synergies  among 

corporations, universities, and administrations are 

best  developed  at  the  national  and  sub-national 

levels,  whereas  for  the  ‘supply-pushed’  aspects 

they are best developed at the supranational level 

(European, world).

Measurement issues

The  post-war  national  accounting  system 

was  designed  to  measure  an  ageing  industrial 

society,  and 

it  already  has  difficulties 

in 

accounting 

for 

the 

‘New  Economy’  model. 

When  it  comes  to  a  proposed  SKS  model,  the 

accounting  system  will  be  quite  inadequate  for 

the purpose. Key computations (such as constant 

price  productivities  and  production  aggregates) 

are rendered meaningless by the changing nature 

of  outputs  and  inputs  and  by  the  emphasis  on 

quality and environmental protection.

The increasing recognition of the limitations 

of  current  accounting  and  the  unsatisfactory 

results of partial solutions (for example, hedonic 

prices in the US and satellite accounts in Europe) 

are encouraging the use of ‘indicators’ of doubtful 

relevance  that  are  usually  unable  to  identify 

knowledge  as  a  factor  of  production  and  value 

aggregation.

Cooperative processes

An SKS requires a complete re-thinking of the 

In  an  SKS,  the  market  process  is  driven 

by  both  economic  objectives  and  knowledge 

objectives. Economic wealth and knowledge thus 

provide  a  dual  process  of  evaluation  of  human 

economic, social, and environmental accounting 

framework.  This  represents  another  essential 

10

subject for research in coming years.

 
 
 
 
 
 
 
 
 
 
 
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10

Final remarks

The 

‘Lisbon  Strategy’ 

for  developing  a 

European  ‘Sustainable  Knowledge  Society’  (SKS) 

has  to  incorporate  a  long-term  design.  Such  a 

design  must  describe  aims  and  objectives  that 

go  well  beyond  the  current  expectations  of  the 

‘Information Society’. An SKS cannot be expected 

to  develop  merely  through  the  extrapolation 

of  current 

trends—which  already  point 

to 

unsustainable 

long-term  social  divides  and 

ecological catastrophes.

Nevertheless,  the  ‘New  Economy’  model  is 
oriented towards the objectives of an SKS and it 
can  provide  an  excellent  economic  framework 
for  long-term  growth  and  employment.  But,  to 

be  successful,  the  orientation  of  the  economic 

system  will  require  conscious  public  policies  in 

areas  such  as  health,  education,  environmental 

protection,  and  security.  Such  policies  should 

- 

- 

- 

- 

- 

Baumol  W.J.,  Batey  Blackman  S.A.  &  Wolff 
E.N.  (1985),  Unbalanced  Growth  Revisited; 
Asymptotic  Stagnancy  and  New  Evidence, 
American Economic Review, Sep, 806–17.

(ed.) 

(1998),  Technological 
Bruland,  K. 
Revolutions in Europe, Historical Perspectives, 
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Buhigas  Schubert  C.  &  Martens  H.  (2005), 
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incorporate  the  potential  benefits  of  the  coming 

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EC (2004), Converging Technologies, Shaping 

new  ‘technological  wave’  induced  by  nano-bi-

the  Future  of  European  Societies,  New 

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- 

ht t p : / / euro pa.eu.int / comm. / re s earch /

European  competitive  handicaps—such  as  the 

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lack  of  market  size  due  to  significant  cultural 

en.pdf

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10

 
 
 
 
 
 
 
 
 
 
 
110

6. European Integration, Innovations and Uneven 

Economic Growth: Challenges and Problems of    
EU 2005 
by Erik S. Reinert 118

At the end of 2005 the process of European 

‘Growth,  Competitiveness  and  Employment’ 

integration seems to have reached a serious crisis. 

envisioning 

an 

innovation-based 

Europe 

The rejection of the European Constitution by the 

had  been  critically  received  by  mainstream 

French and Dutch voters indicates a strong distrust 

economists.  Learning  from  this  experience,  the 

of the way the integration is proceeding. A survey 
conducted recently for the Polish Rzeczpospolita 
newspaper  found  widespread  admiration  for  the 

Lisbon  process  was  carried  through  cautiously, 

avoiding  the  ministries  of  finance  that  had  sunk 

the Delor paper, and this saved it from falling into 

achievements of winning freedom of speech and 

the same trap. A victory of these tactics, however, 

leading  the  country  into  NATO  and  the  EU,  but 

may  have  backlashed,  creating  problems  for 

85 per cent of those polled blamed the Solidarity 

the  long-run  strategy.  Coupling  innovation  and 

movement for setting in motion the liberalisation 
that has put many Poles out of work. What went 

social cohesion makes eminent sense: In an STE 
framework,  however,  both  these  concepts  are 

wrong?  Why  do  workers  not  only  in  the  old 

exogenous  elements,  and  above  all  they  do  not 

EU,  but  also  in  the  new  member  states  (NMS) 

belong together. In STE the market is supposed to 

feel betrayed? The fact that this change of mood 

create  economic  harmony,  and  the  losers  in  the 

surfaces after merely a year has passed since the 

game are an object of concern for social workers, 

euphoric  celebrations  of  the  enlargement  of  the 

not  for  economists.  Both  “innovations”  and 

Union makes it even more surprising. The aim of 

“social  cohesion”  are  essentially  alien  elements 

this paper is a preliminary exploration of factors 

in equilibrium standard textbook economics. The 

rather than a complete analysis.

mainstream  economic  profession  predictably 

As a starting point I would argue that the EU 

Lisbon Strategy – the European Union economic 

strategy launched in 2000 – represents a healthy 

theoretical  shift  towards  a  dual  emphasis  on 

reacted to this a bit like chess players would react 

if  outsiders  tried  to  introduce  new  categories  of 

pieces  into  the  game  to  change  the  rules:  with 

indignation and an inclination towards sabotage.

innovations  as  the  basic  engine  of  economic 

In  Europe  economic  policy-making  is  more 

growth  and  on  social  cohesion  in  order  to 

closely  tied  to  and  dependent  on  STE  than  in 

mitigate 

the  uneven  economic  growth 

that 

the United States. This has its positive sides. It is 

necessarily  follows  in  a  dynamically  innovative 
society.  Europe  left  behind  the  neo-classically 

difficult to envision that the fiscal irresponsibility 
exercised  by  the  present  Bush  administration 

based  standard  textbook  economics  (STE)  in 

could ever have happened in Europe, as it would 

favour of Schumpeterian evolutionary economics 

have been stopped by professional economists in 

(Rodrigues 2003). As I see it, this shift, however, 

the administration and in the central banks. When 

carried  with  it  several  problems;  of  theoretical, 

it comes to industrial policy, however, the strong 

contextual and didactical nature.

dependence  on  STE  clearly  puts  Europe  at  a 

First of all a problem of theoretical mismatch 

occurred.  Jacques  Delor’s  1993  white  paper  on 

disadvantage. The Chicago economists abhorring 

state  intervention  at  any  level  does  not  prevent 

118  This chapter paper is dedicated to Prof. Hans Singer – who taught us that innovation and technological change do not necessarily 
lead to higher real wages to the producers - on his 95th birthday November 29, 2005. The author is grateful to Christopher 
Freeman, Carlota Pérez and Rainer Kattel for perceptive comments. A special thank you goes to Wolfgang Drechsler for his 
assistance. The usual disclaimer applies.

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6

Mayor Daley of Chicago investing heavily in high-

model reconstruction of all kinds of infrastructure 

tech  incubators.  It  is  also  important  to  note  that 

–  the  industrial  fabric  was  not  replaced.  It 

the kind of selective industrial policy not allowed 

became a ‘region on the dole’. It is as if the vision 

in international agreements, in the United States 

of  an  enlarged  Europe  of  2004  considered  this 

tends  to  be  carried  out  by  the  individual  state 

integration  of  East  Germany  as  a  huge  success 

governments rather than the Federal Government. 

that  should  be  uncritically  copied  on  a  larger 

For  close  to  200  years  US  industrial  policy  has 

European  scale.  Compared  to  the  previous  pace 

been torn between Alexander Hamilton’s theories 

and form of European integration, I argue below 

and ideas of an active state and Thomas Jefferson’s 

that  the  recent  integration  processes  have  been 

ideas  that  ‘a  government  that  governs  the  least, 

unwise  moves  in  terms  of  speed  and  timing.  In 

governs the best’. In reality this tension has been 

order  to  repair  the  damages  it  is  necessary  to 

pragmatically  solved  by  combining  Jeffersonian 

understand what went wrong.

rhetoric with Hamiltonian practices.

The  very  influential  US  economist  Paul 

Krugman  puts  it  this  way:  ‘the  view  of  trade  as 

a  quasi-military  competition  is  the  conventional 

wisdom  among  policy-makers,  business  leaders, 
and  influential  intellectuals…It  is  not  just  that 
economics  have  lost  control  of  the  discourse; 

the  kind  of  ideas  that  are  offered  in  a  standard 

economics  textbook  do  not  enter  into  that 
discourse at all…’ (Krugman quoted in Reder 1999: 
6).  If  we  ask  ourselves  to  whom  the  economists 
have lost control in the US policy-making process, 

Krugman  lists  an  alliance  of  ‘policy  makers, 

business  leaders  and  influential  intellectuals’.  In 

my  view,  more  attention  should  be  paid  to  the 

qualitative  differences  between  Europe  and  the 

United States in the policy-making process. If the 

goal  is  to  create  an  innovative  Europe,  STE  is  a 

factor  that  prevents  needed  changes  in  the  rules 

of  the  game  more  in  Europe  than  in  the  US.  In 

fact  the  2005  version  of  the  Lisbon  Strategy  is 

much closer to STE than its predecessors.

The  most  serious  problem  of  the  Lisbon 

Strategy is the context – a result of past political 

decisions – in which it is carried out. The shock 

therapy  that  was  imposed  on  most  of  the  New 

Member  States  in  the  early  1990s  produced 

what  in  Schumpeterian  terms  could  be  called 

destructive  destruction:  a  large-scale  destruction 

of 

the  existing 

industrial 

fabric  which  was 

112

not  sufficiently  replaced  by  new  activities. 

The  integration  of  former  East  Germany  was 

an  extremely  expensive  and  economically 

unsuccessful  strategy  because  –  in  spite  of  a 

What is the situation in 2006?

This  paper  suggests 

three  parallel  and 

complimentary  explanations  as  to  what  created 

the present tensions within the European Union. 

Briefly, these factors are seen as having interacted 
to create a European Community Zeitgeist which 
by a large number of the populace has not been 

perceived as being in line with increased ‘public 

happiness’,  the  maximum  goal  of  economic 

theory in the past.

I.  The deviation from successful principles of 

the past. I argue that with the decision of the 

2004 enlargement three important principles 

were  abandoned  that  had  been  key  to  the 

previous successful building of the European 

Union,  based  on  the  principles  of  Friedrich 

List, since its very inception.

II.  The 

theoretical 

framework.  European 

innovation policies have been introduced on 

top of a Smithian-Ricardian standard theory, 
as  a  Schumpeterian  icing  on  a  solidly  neo-

classical  cake.  This  has  made  ‘innovation’ 

too  much  of  a  cure-all,  creating  a  discourse 

on  a  generalised  and  abstract  level  where 

‘innovation’  and  ‘learning’  have  taken  the 

places  of  ‘savings’  and  ‘investment’  in  the 

standard  equilibrium  framework.  We  argue 

that 
discussion  of 

this  approach  prevents  a  sufficient 
the  qualitatively  different 

ways 

innovation 

impacts 

the  economy 

–  e.g.  in  terms  of  imperfect  or  more  perfect 

competition  –  in  the  foresight  exercise. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Probably  the  theoretical  approach  behind 

the  Frascati  and  Oslo  manuals,  essentially 

counting R&D and innovations without much 

attention  to  their  qualitative  and  contextual 

merits, has contributed to this. The alternative 

to  this  approach  is  to  see  innovation  in  a 

framework of uneven economic development 
where  economic  growth  is  activity-specific, 
policies  necessarily  context-specific,  where 
the windows of opportunity for innovation119 
are  a  moving  target  and  depend  on  the 

industrial  structure  of  a  nation,  and  where 

some  innovations  increase  the  welfare  of 

the  producers,  whereas  other  innovations 

–  particularly  those  produced  by  ICT  –  in 

fact  may  decrease  the  welfare  of  the  same 

producers.  We  discuss  why  a  learning-  and 

innovation-based Europe should be discussed 

in  the  non-equilibrium  tradition  of  Milanese 

economist  Pietro  Verri  (1728-1797)  and  his 

continental  contemporaries  rather  than  in 

the Anglo-Saxon tradition based on how we 

today  interpret  Adam  Smith  (1723-1790), 

but  is  partly  very  different  from  what  Smith 

actually preached.

III.  The wider context of innovation. It is further 

argued  that  the  approach  taken  has  been 

excessively  technical  and  economistic,  void 

recommend  a  very  perceptive  article  in  the 
New York Review of Books on this important 
subject (Judt 2005).

In  the  42  points  of  the  European  Council 

Conclusions  on  the  Stability  and  Growth  Pact 

and  the  Lisbon  Strategy  from  March  22  and  23, 

2005,  the  underlying  problems  of  the  present 

situation of Europe are not raised. The discussion 

appears  as  a  long  list  of  good  intentions  which 

– it seems implicitly to be assumed – necessarily 

will lead to success. The Lisbon Strategy appears 

to have been superimposed on the neo-classical 

economic  framework  dominating  in  the  1990s, 

where the market is a great equaliser and creator 

of economic order and harmony. In many parts of 

the  global  periphery  it  is  increasingly  clear  that 

globalisation creates more poverty, not less. It is 
reasonably  clear  that  such  trends  –  exemplified 

by  East  Germany  –  may  be  found  within  the 

EU.  As  I  see  it,  the  further  debate  ought  to  be 

based on an analysis of what went wrong in the 

past,  and  it  should  move  away  from  the  neo-

classical tradition of discussing policy void of its 

context. A policy may be excellent in one set of 

circumstances, but counterproductive in another. I 

argue for bringing back the Continental European 
economic tradition that created Rhine Capitalism: 
a  society  where  the  market  is  a  tool  rather  than 

of  a  broader  cultural  and  societal  context. 

a goal in itself, and where economics is defined 

The  spectre  of  American  efficiency  and 

as  the  study  of  the  economy  as  a  real  object  in 

productivity and European lagging has been 

a  specific  context,  not  defined  in  terms  of  the 

held up to Europeans. It has not been argued 

adoption of core assumptions and techniques.

enough that innovation is a way to preserve 

European quality of life, the Americanization 

of working life has been an underlying threat. 

We  have  not  sufficiently  integrated  the  high 

value  of  the  European  way  of  life  into  the 

discussion,  although  this  aspect  has  been 

well  expressed  by  US  authors  (Rifkin  2004, 

Reid  2004).  There  is  not  time  or  space  in 

this paper to discuss this further, but I would 

Given the strong internal and external forces 

to which the Lisbon Strategy is subject – discussed 
under  points  5  and  6  below  –  it  is  in  my  view 

overly optimistic to think that the Lisbon strategy 

can  be  successfully  carried  out  with  its  present 

toolbox.  Today’s  ideology  also  limits  the  use  of 

policy tools that traditionally have been important 

in the construction of a united Europe.

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11

119  As described by Carlota Pérez.

 
 
 
 
 
 
 
 
 
 
 
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6

The global context: the backlash of 
globalization and the backlash of 
European integration as two sides of the 
same coin

In  1338  Ambrogio  Lorenzetti  finished  his 
frescoes  Allegory  of  Good  and  Bad  Government 
in the Town Hall of Sienna. The fresco symbolising 
good  government  shows  thriving  shops,  fine 
buildings  and  dancing  citizens  enjoying  their 
leisure.  Bad  government  is  shown  as  ruin,  rape, 
robbery  and  murder.  To  Lorenzetti  and  his 

balance of economic activities in the nation, but 

also  secure  a  reasonable  distribution  of  income 

and services. The regulation of foreign trade was 

a  key  variable  in  this  policy.  In  was  understood 

that the market would not, by itself, create neither 

spontaneous  order  nor  an  optimal  economic 

structure.

Economic 

terminology  often  obfuscates 

rather  than  illuminates  present  problems.  The 

frequently  misused  term  ‘competitiveness’  adds 

to  today’s  theoretical  confusion  (Reinert  1995). 

contemporaries  “public  happiness”  –  as  it  later 

Originally  defined  by  the  OECD  as  a  nation’s 

was called in Italy (Muratori 1766, Bidussa 1977) 
–  was  the  result  of  conscious  policy,  of  buon 
governo.  We  suggest  that  buon  governo  implies 
a  qualitatively  different  understanding  of  the 

economy than today’s ‘good governance’.

German writers later coined their own terms 
for  good  policy:  Staatsklugheit,  ‘state  wisdom’ 
(Justi  1741,  Achenwall  1763)  and  Staatskunst, 
’state  art’  (Justi  1761-64,  Mauvillon  1776-1777, 

Müller  1809).  Later  this  state  art  was  built  into 

the theories of Friedrich List (1841), an important 

part of which was to appreciate and draw policy 

conclusions from the fact that economic activities 

differed  qualitatively  as  regards 
innovations 
(Reinert 1999). In the 20th century this economic 
tradition  was  continued  in  the  works  of  Werner 

ability  to  increase  real  wages  while  at  the  same 

time  remaining  competitive  on 

international 

markets, the term is now seen in order to advocate 

the  complete  opposite  effect.  A  nation  is  called 

upon to reduce wages in order for firms to remain 
competitive. Compared to the perfect competition 

of  STE,  the  kind  of  Schumpeterian  competition 

Europe  needs  –  product  innovations  producing 

higher  real  wages  –  in  effect  represents  a  kind 

of market failure. What we want to produce are 

‘market  failures’,  which  combines  very  poorly 

with basic logic of STE.

In  the  historical  debate  on  ‘free  trade’,  the 

term  meant 

‘absence  of 

trade  monopolies’. 

Only recently the term came to signify ‘absence 

of  tariffs’.  In  fact,  fine-tuning  tariff  policy  has 

Sombart,  whose  path  breaking  works  include 

played  a  major  role  in  the  construction  of  post-

how  war  and  luxury  historically  have  been  key 

was  Europe.  The  European  Union  grew  out  of 

driving forces of innovation (Sombart 1913a and 

the extremely successful Marshall Plan, the main 

1913b).  Large  parts  of  his  masterly  volumes  on 

goal of which was to re-industrialise Europe after 

the  capitalist  system  (Sombart  1927)  have  been 

World War II. At the core of the Marshall Plan was 

translated  into  French,  Italian  and  Spanish  (see 
the bibliography of this paper).120 The tradition of 
‘economic  state  art  (wirtschaftlicher  Staatskunst) 
was also continued (Wagemann 1937).

a trade policy that rebuilt the industrial structure 
of all countries involved, often behind large trade 

barriers. Only after a symmetrical industrialisation 

had been achieved did full economic integration 

An important part of this ‘state art’ over the 

take place.

centuries was what Robert Wade calls ‘governing 

Up  until  and  including  the  integration  of 

the  market’  (Wade  1990),  similar  to  what  Alice 

Spain  and  Portugal,  European  Union  policy 

Amsden  calls  ‘getting  the  prices  wrong’(Amsden 

11

1992):  employing  market 
regulations  and 
institutions  that  not  only  create  an  optimal 

has  followed  this  Listian  policy  of  opening  up 
for  free  trade  between  symmetrical  partners  all 
with  a  healthy  industrial  fabric.  A  slow  pace  of 

120  Since English speaking economists at the time tended to read German (German was a mandatory part of economics studies in 
the United States until after World War II), an English translation was not published. However, see an excellent book review by 
the leading historian of economic thought in the US at the time (Mitchell 1929).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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integration,  building  down  tariff  barriers  slowly, 

level”  Ruggiero  says,  “old  divisions  between 

was done with the preservation and strengthening 

North  and  South  are  being  superseded  by  new 

of  the  industrial  symmetry  in  mind,  in  order 

distinctions - between those countries embracing 

to  avoid  the  economic  horrors  created  by  the 

technology  and  globalization,  and  those  that 

Morgenthau Plan – consciously de-industrializing 

remain  behind  ...”  (Ruggiero  1998:  130-131). 

Germany  from  1945  to  1947  –  in  mind  (Reinert 

As  I  see  it,  the  European  Union  strategy  is  too 

2003, 2004).

As 

the 

fact-based  economics  discourse 

slowly  yielded  to  mathematization  of  the  neo-

simplistically  based  on  this  view:  regardless  of 

context, technology and innovation is enough to 

solve most problems.

classical  synthesis 

in  post-war  Europe, 

the 

At  the  global  level,  the  most  populated 

traditional continental tradition disappeared from 

nations on the planet – China and India – had for 

the economics curriculum to be replaced by US 

more than 50 years followed a Listian economic 

standard  textbook  economics  (STE). The  curious 

policy  protecting  industry.  They  could  benefit 

thing here, however, is that in terms of economic 

from  globalisation,  while  many  small  nations, 

policy  the  US  STE  tradition  had  more  influence 

in Latin America, in Africa and in Asia were de-

on actual European policy than on US policy (see 

industrialised  as  if  they  had  been  subject  to  the 

discussion above).

Fuelled  both  by  the  Cold  War  conflicts 

and 

the  push 

to  mathematize  economics, 

European  economics  in  the  post-WW  II  period 

slowly  drifted  back  to  the  situation  of  the 

1840s:  Ricardian  economic  tradition  came  to 

type of Morgenthau Plan that devastated Germany 
between 1945 and 1947 (Reinert 2003). Ruggiero 

further  talks  about  ‘the  potential  for  eradicating 

global poverty in the early part of the next century 

- a utopian notion even a few decades ago, but a 

real possibility today.’

dominate  with  its  basic  position  of  the  market 

Both in Europe and in the global periphery, 

as  a  harmony-making  machinery.  The  lag  in 

the  optimistic  views  based  on  STE  were 

this  process  is  interesting:  European  integration 

shattered. As I se it, our present collective failure 

policy  continued  its  Listian  principles  until  the 

to  understand  both  Europe’s  problems  and 

end  of  the  1980s,  much  after  Friedrich  List  and 

why  so  many  countries  stay  poor  is  intimately 

his teachings had been eradicated from Europe’s 

tied  to  a  number  of  blind  spots  on  the  retina  of 

faculties  of  economics.  Only  with  the  2004 

standard  economics.  These  blind  spots  make  it 

enlargement  European  integration  was  based 

extremely  difficult,  if  not  impossible,  to  create 

on  neo-classical/Ricardian/STE  principles.  This 

a  theory  of  uneven  economic  development.  As 

change  to  Ricardian  principles  of  integration  is, 

Lionel  Robbins  wrote  more  than  50  years  ago, 

in my view, at the very root of Europe’s problems 

today. From the point of view of many of Europe’s 
citizens,  there  are  more  elements  of  Lorenzetti’s 

the  basic  features  of  the  neoclassical  paradigm 
produce  a  Harmonielehre,  a  theory  –  one  might 
add – where economic harmony is already built 

‘bad  government’  present  today  that  before  this 

into  the  assumptions  on  which  the  theory  rests. 

change of basic economic theory.

Today,  this  paradigm  hinders  rather  than  helps 

The  vision  of  WTO’s  first  director  Renato 

Ruggiero  on  the  operation  of  the  world  market 

may  stand  as  a  prototype  for  the  new  view  that 

also  penetrated  European  Union  thinking.  This 

global vision was centred around “the borderless 
relations 
economy’s  potential 

to  equalise 

between  countries  and  regions.  At  the  global 

our understanding of the reasons behind poverty. 

As Thomas  Kuhn  says,  ‘A  paradigm  can,  for  that 

matter,  even  insulate  the  community  from  those 

socially important problems that are not reducible 

to the puzzle form, because they cannot be stated 

in terms of the conceptual and instrumental tools 
the paradigm supplies.’ 121

11

121  Thomas Kuhn, The Structure of Scientific Revolutions, p. 37.

 
 
 
 
 
 
 
 
 
 
 
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6

Any long-term solution both for Europe and 

for the poor nations of the world will have to rest 
on  a  theory  of  uneven  development  –  a  theory 
which  addresses  these  blind  spots  of  economics 

which obfuscate our collective view. Such a theory 

once existed at a level complete enough to create 

successful economic policy for 500 years – from 

Henry VII’s England in 1485 to the integration of 

Spain  and  Portugal  into  the  European  Union  in 

1986 – but is now virtually extinct in any faculty 

of economics.

Europe’s deviation from Listian 
principles

The  problems  created  by  today’s  economic 

theory,  where  the  market  is  seen  as  a  harmony-

creating  machinery,  are  therefore  found  both 

globally  and  within  Europe.  In  the  case  of  the 

European  Union,  the  alternative  experienced-

based  theory  was  kept  alive  much  longer  in 

Europe’s  own  policy  than  in  Europe’s  approach 

towards  the  Third  World.  At  the  national  level, 

most – if not all – developed nations experience 

Today’s  approach  towards  the  Third  World 

increasing  economic  inequalities  internally.  The 

suffers  from  two  main  defects.  First  the  balance 
is  extremely  tilted  towards  palliative  economics, 
to  ease  the  pains  of  poverty  rather  than  to 

same  type  of  problems  is  experienced  on  three 

levels:  Globally,  with  the  European  Union,  and 

within most developed nations. The basic causes 

eradicate poverty permanently through economic 

behind  these  developments  are  the  same:  old 

development. 
approach 
makes  it  possible  to  continue  and  even  extend 

Secondly, 

today’s 

(as  in  the  WTO  negotiations)  present  practice 

without  investigating  what  went  so  wrong  with 

globalization  in  the  periphery.  Palliative  rather 

than  curative  measures  –  debt  cancellation  and 

Millennium  Goals  –  make  it  possible  for  the 

world economic order to continue to be based on 

the  theory  that  created  the  problems  in  the  first 

place. The same myths based on ideology rather 

than  on  experience,  the  same  policies,  and  the 

same  people  that  created  the  problems  are  still 

in  charge.  To  use  a  medical  metaphor:  we  are 

giving  the  patients  –  the  poor  countries  –  blood 

transfusions  in  terms  of  cash  and  debt  relief 

without  having  asked  the  basic  question  as  to 

why the loss of blood occurs in the first place. It 

has been a key mistake to keep the same people 

in  power  who  brought  in  neoclassical  shock 

therapy,  the  measures  responsible  for  much  of 

the  problems.  Just  as  in  the  case  of  Europe,  this 

way  of  operating  virtually  guarantees  that  we 

do  not  face  the  quite  fundamental  discussion  of 

what went wrong. What is needed is a theory that 

explains why economic development, in its very 

nature, is such an uneven process. Only then can 

11

the  appropriate  policy  measures  be  put  in  place 
both in Europe and in the poor peripheries of the 

world.

theories  that  worked  for  centuries  have  been 

abandoned.

Tensions  within  the  European  Community 
that  resulted  in  votes  of  no  to  the  European 
Constitution  are  results  of  the  same  economic 

forces that create poverty in the world periphery. 

People in the old member states in the European 

Union  feel  betrayed  because  their  welfare  is 
being  eroded, while  people  in  the  new  member 

states  feel  betrayed  because  welfare  is  not 

arriving  as  fast  as  expected.  Not  unexpectedly, 

this  completely  new  and  unexpected  situation 

causes people to ask in the same way as they ask 

about globalization: what went wrong?

German  economist  Friedrich  List  (1789-

1846) is no hero in today’s economics textbooks, 

but it was his economic principles that not only 
industrialized  Continental  Europe  in  the  19th 
century, but also built European integration from 

the early 1950s until and including the successful 

integration  of  Spain  and  Portugal  into  the  EU  in 

1986.  For  a  long  time  the  division  of  labour  in 

Europe was clear, Friedrich List ruled the field of 

practical  policy,  while  neo-classical  economics 

ruled  in  the  economics  textbooks.  Not  until  the 

2004 integration were List’s principles abandoned 

in  favour  of  the  same  textbook  economics  that 

dominates the Washington Consensus. The result 

was  increased  unemployment  and  poverty  in 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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the  old  core  countries  inflaming  the  debate  that 
produced the ‘no’ to the constitution.122

this  same  principle  was  rediscovered  by 

George Marshall in 1947 and quoted above.

A  worrying  aspect  of  this  is  that  even  the 

-  Neoclassical 

principle: 

all 

economic 

countries  that  are  hailed  as  success  stories  of 

activities  are  qualitatively  alike,  so  it  does 

the  recent  European  integration  have  serious 

not  matter  what  you  produce.  Ideology 

problems  of  social  cohesion:  successful  urban 

based  on  ‘comparative  advantage’  without 

centres  contrast  starkly  with  rural  poverty.  With 

an  understanding  that  it  is  actually  possible 

my  Estonian  colleague  Prof.  Rainer  Kattel,  I 

for  a  nation  to  specialise  in  being  poor 

have started looking at a new index for regional 
inequality.  Based  on  the  monthly  rent  of  a  city 
apartment  of  100  square  meters  in  the  national 

and  ignorant,  in  economic  activities  that 

require 

little  knowledge,  operate  under 

perfect competition and diminishing returns, 

capital,  we  measure  the  distance  to  the  area 

and/or  bereft  of  any  scale  economies  and 

where, with the same amount of money, you can 
purchase a whole house. In Norway this “monthly 
rental  to  full  ownership  index”  lies  at  around 

2.000 kilometers, from Oslo to Vardø at the Arctic 

Sea in the extreme North. In Estonia, this distance 
is down to less than 100 kilometres from Tallinn. 

Estonia is also the nation in Europe with the worst 

income distribution and where the demographic 

development suggests that the population will be 

halved by 2050. It is unfortunate that rather than 

Europe  facing  up  to  these  problems,  the  present 

mood is to gloss over reality and present Estonia 

as an unmitigated European success story.

Below  are  three  of  List’s  key  principles 
–  they  are  in  reality  much  older  123  –  contrasted 
with  standard  textbook  economics.  The  present 

neoclassical  economic  principles  must  be 

abandoned in favour of the old Listian principles.

- 

Listian  principle:  The  preconditions 
wealth,  democracy  and  political  freedom 

for 

are all the same: a diversified manufacturing 
sector subject to increasing returns124 (which 
would  historically  mean  manufacturing,  but 

also  includes  a  knowledge-intensive  service 

sector). This was the principle upon which the 

United States economy was built, this was the 

principle promoted by the first US Secretary 
of  the  Treasury,  Alexander  Hamilton,125  and 

technological change.

- 

Listian  principle:  A  nation  first  industrialises 
and is then gradually integrated economically 

into  nations  at 

the 

same 

level  of 

development.

-  Neoclassical  principle:  Free  trade  is  a  goal 
per  se,  even  before  the  required  stage  of 

industrialisation  is  achieved.  The  2004  EU 

enlargement  went  directly  against  Listian 

principles.  First 

the 

former  communist 

countries 

in  Eastern  Europe 

(with 

the 

exception  of  Hungary)  suffered  dramatic 

deindustrialisation, 

unemployment 

and 

underemployment.  These  countries  were 

then abruptly integrated into the EU, creating 

enormous  economic  and  social  tensions. 

From  the  point  of  view  of  Western  Europe, 

the  factor  price  equalisation  promised  by 

international  trade  theory  proved  to  be  an 

equalisation downward.

- 

Listian  principle:  Economic  welfare  a  result 
of  synergy.  Already  in  the  13th  century 

Florentine  Chancellor  Brunetto  Latini  (1210-

1294)  explains  the  wealth  of  cities  as  a 

common  weal  (‘un  ben  comune’)  (Reinert 

1999). 

Investments 

in 

infrastructure, 

education and science are an integral part of 

this type of policy.

122  This  negative  development  in  Europe  is  discussed  in  Reinert,  Erik  S.  and  Rainer  Kattel  ‘The  Qualitative  Shift  in  European 
Integration: Towards Permanent Wage Pressures and a ‘Latin-Americanization’ of Europe?’, Praxis Working Paper no. 17, Praxis 
Foundation, Estonia: www.praxis.ee/data/WP_17_2004.pdf .

123  See several of the papers in Jomo & Reinert (2005).
124  The works of Jane Jacobs on the role of the cities arrive at the same conclusion as List from a different starting point (Jacobs 1984).
125  In his 1791 Report on the Subject of Manufactures.

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11

-  Neoclassical principle: ‘There is no such thing 

wages  and  profits.  Using  the  standard  definition 

as society’, Margaret Thatcher (1987).

of the term ‘competitiveness’ – its ability to create 

Just  as  Kuhn  describes  above,  these  Listian 

principles cannot be captured by the tools of the 

ruling  economic  paradigm.  Understanding  List 

requires  understanding  qualitative  differences 

between 

economic 

activities, 

diversity, 

innovations,  synergies  and  historical  sequencing 

of processes. These are all blind spots in standard 

economics,  especially  in  their  interacting  and 

cumulative totality.

Failure  to  understand  the  wisdom  of  the 

Listian  principles  which  previously  upgraded 

the  common  interests  of  Europe  has  produced 

what  to  many  –  economically  and  socially  – 

becomes a race to the bottom. The same abstract 

theory  has  recreated  the  same  type  of  ‘social 
question’  that  plagued  Europe  during  the  19th 
Century,  also  then  a  result  of  policies  based  on 

Ricardian  economics.  It  was  only  by  getting  rid 

of  abstract  theories  both  left  and  right  that  the 
social problems of the 19th century were solved. 
Gustav  Schmoller’s  speech  on  becoming  Rektor 
of the University of Berlin in 1897 testifies to this 

process  where  fact-based  economics  wins  over 

highly  abstract  models  (Schmoller  1897).  Two 

years later, Cambridge economist Herbert Foxwell 

describes the very same process of getting rid of 

Ricardian  economics  in  favour  of  what  Foxwell 

himself call ‘the realistic school’ (Foxwell 1899).

IST, different types of innovations and 
different effects on real wages

In  my  view  the  vision  of  the  innovation-

based  society  has  been  based  on  an  insufficient 

qualitative  understanding  of 

the  different 

ways 

innovations  affect  different  businesses. 

Information  technology  creates  very  different 

results around Microsoft’s headquarters in Seattle 

than what the same information technology does 

in the hotel industry in Venice or on the Costa del 
Sol.  In  the  hotel  business  as  well  as  in  the  used 

book  business  across  Europe,  IST  has  caused 

more  perfect 

information 

leading 

to 

falling 

margins  and  increased  downward  pressures  on 

higher real wages – in these industries in isolation, 
IST-based  innovations  have  caused  decreased 
rather  than  increased  competitiveness.  Although 
it  is  well  known  in  innovation  economics  that 

product  innovations  and  process  innovations 

often  have  different  effects  on  employment 

(see.  e.g.  Fagerberg,  Guerreri  & Vespagen  1999, 

Gambardella  &  Malerba  1999,  Vivarelli  & 

Pianta  2000,  Reinert  2000,  Pianta  2005),  not 

enough emphasis has been given to the fact that 

innovations  actually  may  reduce  value  added  in 

certain industries and geographic areas.

Carlota  Pérez  considers  that  every  techno-

economic  paradigm  has 

two  very  different 

aspects:  a)  a  cluster  of  new  basic  innovations 
creates  distinct  dynamic  technologies,  and  b) 

the  way  these  new  generic  technologies  change 

the  way  the  rest  of  the  economy  goes  about  its 

businesses. Figure 1 illustrates these two aspects 

of paradigm shifts.

The  two  aspects  of  the  paradigm  shift 

produce  very  different  types  of  innovations. 

The  paradigm  carrying 
produce  product 
dynamic imperfect competition. In the rest of the 

industries  generally 

innovations 

create 

that 

economy  the  paradigm  shift  tends  to  produce 
process  innovations  that  either  do  not  shift  the 
degree  of  imperfect  competition,  or  –  as  in  the 

case  of  the  airline  industry  –  may  unleash  a 

price  and  productivity  competition  that  will 

benefit  consumers  rather  than  producers.  Such 

innovations  may  produce  lower  rather  than 
higher  monetary  wages  in  the  industry  affected, 

but  will  create  higher  real  wages  to  the  people 

consuming  their  services.  Should  one  group  of 
nations  specialize  in  product  innovations  while 
the  other  specializes  in  process  innovations,  the 
standard  of  living  is  very  likely  to  raise  much 
faster in the product-innovating country compared 
to the process-innovating country.

This 

is  because 

the 

increased  wealth 

produced  by  innovations  may  reach  us  in  two 

different ways, either through increased monetary 

wages  or  through  lowered  prices  for  what  we 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 1: The two main aspects of a techno-economic paradigm shift.

A powerful cluster of
new
and dynamic
technologies,
products
and industries

Explosive
growth and
structural
change

An interrelated set of
generic technologies  and
organisational principles

Quantum
jump in
potential
productivity
for all

Change in techno-economic
paradigm

(New best practice “common sense”)

Source: Carlota Pérez.

consume. To the classical economists, productivity 

take  continuous  pay  cuts  that,  in  spite  of  these 

improvements would show up in the economy as 

pay  cuts,  they  were  still  getting  richer,  because 

lowered prices for the goods which experienced 

the  price  of  the  goods  they  purchased  fell  at  an 

these improvements (Smith 1776/1976: 269, and 

even  faster  rate  than  their  wages. The  monetary 

Ricardo 1817/1973: 46–7). This is the focus also 

policy  which  followed  after  the  gold  standard 

of today’s public choice theory which ignores the 

was abolished became, from the point of view of 

benefits coming from higher wages.

the  industrialized  nations,  a  more  sensible  one: 

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At  the  time  of  Smith  and  Ricardo,  the  gold 

standard facilitated the result they predicted. In a 

closed  economy,  holding  velocity  of  circulation 

constant,  the  increase  of  goods  in  the  economy 

resulting from technological progress would chase 
only  the  same  amount  of  bullion.  Prices  would 
have  to  fall.  Rapid  technological  progress  would 
therefore lead to deflation – which in fact it often 

did until the gold standard was abolished.

When  the  gold  standard  was  abolished, 

people in the industrialized countries got rich in 

a different way than before – instead of seeing the 
price  of  industrial  goods  fall  as  it  used  to,  they 

now saw their monetary income rise. Previously 

deflation  had  caused  awkward  social  problems: 

it  was  difficult  to  convince  people  who  had  to 

money  supply  kept  rising  with  the  amount  of 

goods in the economy, or slightly faster, creating 

a  small  inflation  which  seems  to  have  served 

to  oil  the  machinery  of  development.  Now  the 
producer in an activity not exhibiting productivity 
improvements  –  e.g.  the  barber  –  got  rich  by 

raising  his  prices  at  the  rate  everybody  else  had 

their salaries raised, not only by having the price 

of manufactured goods lowered.

As  shown  in  Figure  2,  from  1899  through 

1937,  within  the  US,  labour  productivity  in  the 

automotive  industry  increased  by  about  900%, 

and many other industries recorded productivity 

improvements  exceeding  100%.  However, 

11

in  many  US  industries:  meat  packing,  hats, 

railroad  cars,  lumber-mill  products  and  others, 

 
 
 
 
 
 
 
 
 
 
 
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labour  productivity  did  not  change  at  all  in  the 
same period.126 Yet, the workers in the industries 
which  had  no  productivity  increase  at  all  over 

unprecedented  growth  in  the  US  economy  over 

that period. But, as opposed to what was expected 

in the classical model, this did not come through 

this  40-year  period  had  their  good  share  in  the 

an improvement in their terms of trade.

INDIVIDUAL MANUFACTURING INDUSTRIES

Change in Physical Output, Wage Earners Employed, and
Wage Earners Employed per Unit of Product, 1899-1937

Output
Wage earners
Wage earners per unit

Figure 2.

Percentage
change

200,000

20,000

10,000

8,000

6,000

4,000

2,000

1,000

800
600

400

200

100

0

-20

-40

-60

-80

-90

-95

Ratio scale

120

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Industry

126  Data from Fabricant (1942), pp. 90–91.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 2. (Continued)

INDUSTRY

INDUSTRY

1 Automobiles, incl. bodies and parts
2 Chemicals, industrial, incl. compressed gases and rayon
3 Petroleum refining
4 Beet sugar
5 Fruits and vegetables, canned
6 Ice
7 Glass
8 Paper and pulp
9 Silk and rayon goods
10 Knit goods
11 Printing and publishing, total
12 Butter, cheese and canned milk
13 Cigars
14 Rice
15 Paints and varnishes
16 Coke-oven products
17 Zinc
18 Liquors, distilled
19 Steel - mill products
20 Tanning and dye materials
21 Copper
22 Explosives
23 Wood - distillation products
24 Fertilizers
25 Blast - furnace products
26 Jute goods

27 Cotton goods
28 Hats, wool - felt
29 Shoes, leather
30 Cane sugar
31 Salt
32 Meat packing
33 Cottonseed products
34 Leather
35 Woolen and worsted goods
36 Liquors, malt
37 Shoes, rubber
38 Carpets and rugs, woof
39 Lead
40 Cordage and twine
41 Gloves, leather
42 Hats, fur - felt
43 Chewing and smoking tobacco
44 Flour
45 Ships and boats
46 Cars, railroad
47 Lumber - mill products
48 Turpentine and rosin
49 Linen goods
50 Locomotives
51 Carriages, wagons and sleighs

Percentage
change

200

100

0

-20

-40

-60

-80

-90

-95

Based on Table 6

27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51

Industry

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The increase in real wages came essentially 

in output – i.e. new products like cellular phones 

through increased monetary wages as the national 

today – are also the products that show the highest 

stock of money grew, not through improvements 

growth of productivity due to increasing returns. 

in the terms of trade in the ‘dog’ industries. In this 

We  can  observe  how  the  industries  with  the 

way  the  huge  productivity  advances  in  the  ‘star’ 
industries  spread  to  a  much  larger  extent  inside 
the  producing  nation  than  to  customers  abroad. 
A similar view on wage determination is held by 

highest increase in physical output (the industries 

with the lowest sequential number) also tend to be 

the industries with the highest increase in labour 

productivity (where the number of wage earners 

the French regulation school (see Boyer 1988).

per unit of output has been most reduced).

The  benefits  of  technology  clearly  spread 

By  increasing  barriers  to  entry  into  the 

in  the  economy  in  a  different  pattern  from  what 

industry, 

the  combination  of 

technological 

the classical and neoclassical economists expect. 
I  call  this  the  collusive127  mode  of  diffusing  the 
benefits  from  technological  change:  the  benefits 

are  divided  among  the  capitalists,  the  workers, 
and the government in the producing nation. (The 
word collusive does not imply a conspiracy. This 
collusion comes about by the normal working of 

change  and  increasing  returns  –  a  combination 
Schumpeter  referred  to  as  historical  increasing 
returns  –  acts  as  a  powerful  boost  for  real 
wages.  This  ‘catapult  effect’  of  real  wages  is 

the  mechanism  that  caused  fast  increases  in 

real  wages  in  the  two  last  colonies  of  Europe  – 
Ireland and Finland – over the last decades. The 

the economic, social, and political forces.) Inside 

mechanism  works  both  directly  through  labour 

a  nation,  social  and  democratic  forces,  labour 

power,  tight  labour  markets  and  high  demand 

mobility,  and  the  distributive  effects  of  a  huge 

for high-skilled workers, and through the foreign 

government sector ensure that the wage level and 

exchange  markets  where 

the  currencies  of 

standard  of  living  in  the  ‘dog’  industries  do  not 

successful  nations  increase  in  value  (historically 

lag too far behind those of the ‘star’ industries.

Germany,  Switzerland  and Taiwan  are  examples 

Inter-industry  differences  are,  of  course, 

of this foreign exchange mechanism).

much  greater  in  a  society  like  the  US  than  in  a 

A  classical 

spread  of  benefits 

from 

‘wage  solidarity’  culture  like  the  Scandinavian, 

innovations is the result of the usual assumptions 

but the same mechanisms are at work.

in  neoclassical  economics.  However,  with  a 

Faced with a collusive spread, the US during 
the period covered in Figure 2 would grow richer 

if  it  could  move  workers  from  the  hat  industry 

to  the  automotive  industry.  Importing  hats  and 

exporting cars will – under the collusive diffusion 

of 

technological 

improvements 

that 

in 

fact 

happened  –  improve  the  US  welfare  position  as 

compared to autarky. This opportunity is created 

by  the  fact  that  not  all  economic  activities  are 

mechanized  at  the  same  time  and  to  the  same 

extent.

Figure 2 also very well illustrates Verdoorn’s 

Law,  another  phenomenon  that  adds  to  the 

desirability  of  product  innovations.  This  law 

shows that the products with the largest increase 

122

127  This matter is discussed more in detail in Reinert (1994).

Schumpeterian  world  view,  a  purely  classical 

spread  is  hardly  plausible. The  dynamics  of  the 

system are generated by the technological change 

which  creates  disequilibria  –  and  the  higher 

profits  created  in  the  industries  experiencing 

technological  change  are  necessary  in  order 
to  draw  capital  to  these  higher  risk  and  more 

capital-intensive activities. In addition, a classical 

spread of the benefits – only in the form of price 

reductions  to  customers  at  home  and  abroad 

– would not be seen as fair and democratic in the 

producing  country.  That  industrialized  country 

workers  receive  their  share  in  the  productivity 

improvements  in  terms  of  higher  wages  is  an 

integral  part  of 

the  credo  of 

industrialized 

societies.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
In this case as in so many others, economics 

Clearly,  in  most  industries,  the  benefits  of 

is about reinventing wheels. Similar contexts give 

birth to similar ideas that have been lost for lack 

of demand. The problems of the 1930, e.g. how 

technological development spread with elements 
of  both  modes.  Distribution  problems  within  a 
nation,  which  was  the  object  of  the  Brookings 

differently  the  crisis  affected  manufacturing  and 

Institution  study,  will  be  alleviated 

through 

agriculture,  raised  this  same  questions  on  how 

competition in the labour market, through labour 

technical change spreads in the economy. Thus, in 

mobility,  through  the  high  government  share  in 

the late 1930s, the Brookings Institution published 

GNP, through the relocation of industry to areas 

a  series  of  books  aiming  at  ‘nothing  less  than  a 

in  the  country  with  less  expensive  labour,  and, 

general  re-examination,  in  the  light  of  modern 

particularly  in  the  case  of  Europe,  through  the 

developments, of the operation of the capitalistic 

‘wage solidarity’ of labour unions. Internationally, 

system of wealth production and distribution’. The 

these mechanisms work in a very limited way, as 

studies  conclude  that  the  benefits  of  innovation 

does the huge redistributive machinery of national 

and technological progress may be spread in the 

US economy in two different ways:

1.  Raising  money  wages  (my  collusive  mode). 

‘The  most  obvious  method  by  which  the 
income  of  the  masses  might  be  expanded... 

it  is  the  method  which  has  been  steadfastly 

pursued  by  labor  organizations...  and  it 

is  the  method  which  has  been  officially 

experimented  with  under  the  auspices  of 

the  National  Recovery  Administration.’.  It 

governments.  The  inevitability  of  a  ‘collusive 
spread’  makes  a  nation’s  choice  of  economic 
activity  so  crucial.  As  a  result  of  the  collusive 
spread  of  technological  progress,  the  world’s 

most  efficient  baseball  producer  –  an  economic 

activity  which  all  the  technology  and  capital  of 

the  US  has  not  managed  to  mechanize  –  makes 

30  US  cents  an  hour  in  Haiti,  and  the  world’s 

most efficient golf ball producer makes 40 times 

as much in an industrialized country.

is  recognized,  however,  that  this  gives  a 

The  two  different  ways  innovation  spreads 

disproportionate wage lead for manufacturing 

was  an  important  part  of  classical  development 

and railway workers.

2.  Price  reductions  (my  classical  mode).  The 
series  of  studies  concluded  that  ‘the  most 
advantageous  means  of  broadly  distributing 
the  benefits  of  technological  progress  was 

by  reducing  prices  in  line  with  increasing 

efficiency 

in  production’.  The  practical 

difficulties in achieving this were recognised 
and  outlined  in  a  volume  entitled  Industrial 
Price  Policy  and  Economic  Progress  (Nourse 
and Drury 1938). The conclusion was that in 

a market where both the industry in question 

and the labour unions charge what the market 

can take for products and labour respectively, 

a large amount of what from an international 

trade  point  of  view  is  a  ‘collusive  spread’  is 

inevitable in a market economy.

economics.  Hans  Singer,  a  former  student  of 

Schumpeter,  raised 

the  distribution 

issue  of 

technological  progress  in  his  paper  to  the  1949 

meeting  of  the American  Economic Association. 
Singer  128  pointed  out  unquantifiable  factors, 
however, and in the ensuing debate his important 

insight drowned in the attention paid to the terms 

of  trade  argument  presented  by  Raul  Prebisch. 

Measuring  prices  –  terms  of  trade  –  appealed 

to  the  traditions  and  static  world  view  of  the 

economics  profession.  The  remarkable  lack  of 

change  in  terms  of  trade  between  industrialized 

and  primary-producing  nations  over 

time, 

showed by Kindleberger and others, really served 

to reinforce Singer’s point: each group of nations 

is able to keep its own productivity improvements 

as an increase in national welfare.

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128  Published as Singer (1950).

 
 
 
 
 
 
 
 
 
 
 
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12

Table 1. Characteristics of the two modes of diffusion of productivity improvements

Characteristics of mode

The Collusive Mode

The Classical Mode

Divisibility of investments
Degree of perfect information

Indivisible, comes in ‘chunks’
Imperfect (e.g., patents, internal 
R&D)

Divisible
Perfect (competitive market for technology itself)

Source of technology from user 
company point of view

Internal, or external in big chunks = 
high degree of economies of scale

External

Type of innovation

Product innovation

Process innovation

Barriers to entry 
Industry structure
Economies of scale
Market shares
How benefits spread

Increase
Increases concentration
Increase
Very important

GNP as measured

Highly visible

No change
Neutral
No change
Unimportant

Tends not to appear 
(Solow-paradoxes)

Profits level

Increases stakes: possibilities for 
larger profits or losses

No change

Monetary wages
Real wages (nationally)
Price level
Terms of trade

Increase
Increase
No change
No change

No change
Increase
Decreases
Turns against industries experiencing 
technological progress

Examples of innovations in the 
two groups

New pharmaceuticals, mainframe 
computers, automotive paint 
production

Electricity, telephones, sewing machines, use of 
PCs, dispersion paint production, containers

Where found

Mainly in industry, in recent products 
and processes

In primary and tertiary sectors, use of new generic 
technologies, mature industry

Source: Reinert (1994) slightly modified.

Table  1  shows  the  characteristics  of  the 
classical mode (price reduction) and the collusive 
mode (raising money wages). In a truly classical 

spread,  the  innovation  immediately  falls  to  the 
lower  level  of  what  I  call  The  Quality  Index 
of  Economic  Activities  (Reinert  1994).  The  use 
of  containers  could  be  an  example  of  such  an 

innovation.  The  two  modes  are  not  mutually 

exclusive  –  in  most  cases  they  are  both  present 

to  some  degree.  Under  autarky,  it  makes  no 

immediate difference to GNP whether the benefits 

spread in a classical or in a collusive way. In an 

open  economy  with  restricted  labour  mobility  it 

makes all the difference in the world.

The  main  point  here  is  that  the  ability  of 
product  innovations  (collusive  spread)  to  create 
higher real wages in a nation is much larger than 
that  of  process  innovations  (classical  spread). 
Process  innovations  tend  to  make  all  consumers 

of a product richer through lowered prices, while 

product innovations tend to enrich the producing 

countries though higher wages.

Internal factors that determine the 
feasibility of the Lisbon Strategy.

Standard 

textbook  economics  generally 

operates  void  of  any  context.  However,  the 

context  in  which  the  2004  enlargement  of  the 

European  Union  took  place  was  a  very  unusual 

one.  During  the  preceding  decade  the  new 

member states from the former communist block 

had  been  subject  to  a  shock  therapy  that  had 

severely changed their economic structure. With 
the  exception  of  Hungary,  all  former  Second 

World  nations  experienced  de-industrialization 

– partly severe – after the fall of the Berlin Wall.

Table  2  shows 

the  extent  of 

this  de-

industrialization  in  the  Second  World,  including 

in  some  new  European  Union  member  states.  It 

is interesting to observe that in the most recently 

industrialized  countries 

the 

labour  shed  by 

industry  returned  to  agriculture,  while  in  the 

more  advanced  countries  industrial  labour  was 

incorporated  into  the  residual  service  sector.  A 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Table 2. Integration and Deindustrialization 1990-2001: Employment Structure by Sector, Selected 

Transition Economies, 1990 and 2001 (per cent).129

Country

Armenia

Azerbaijan

Bulgaria

Czech Republic

Estonia

Hungary

Kazakhstan

Kyrgyzstan

Latvia

Poland

Romania

Russian Federation

Slovakia

Slovenia

1990

2001

Agriculture

Industry

Services

Agriculture

Industry

Services

17.7

30.9

18.5

12.3

21.0

8.7

22.3

32.7

17.4

25.2

29.1

13.9

10.1

10.7

30.4

22.9

44.2

45.5

36.8

30.0

31.5

27.9

37.4

37.0

43.5

40.2

39.6

44.1

38.3

31.1

37.3

42.2

41.8

58.1

40.7

39.4

45.2

35.8

27.4

45.6

50.0

45.1

44.4

40.0

26.3

4.8

6.9

6.2

22.0

52.4

15.0

19.1

42.3

11.8

6.1

9.8

14.1

10.8

27.6

40.4

33.0

34.7

18.3

11.6

25.6

30.5

26.2

29.4

37.6

38.1

37.2

49.3

46.0

54.8

60.1

58.9

59.8

36.1

59.4

50.4

31.5

58.8

56.2

50.8

Source: International Labour Office 2004.

turn to the service sector in a poor deindustrialized 

seem  to  be)  absolutely  destructive  forces  under 

nation is qualitatively a very different process from 

whose  hoofs  no  grass  grows’,  writes  Burckhardt 

the turn to a knowledge-intensive service sector in 

(1943: 214). This is an aspect generally forgotten 

a  wealthy  country.  Both  when  the  people  whose 

in economics.

jobs were lost by fast deindustrialization go back to 

agriculture and when they go into the service sector 

we  can  assume  that  severe  underemployment 

accompanied the process (Reinert 2004).

Creative  destruction  is  an  important  term  in 
Schumpeterian  innovation  economics.  We  have 

Destruction  and  creativity  produced  by 

innovations  may  take  place  in  entirely  different 

parts  of  the  globe,  as  when  the  textile  mills  of 

Manchester replaced the weavers of Bengal. ‘The 

bones  of  the  cotton-weavers  are  bleaching  the 

plains of India’ the Governor-General wrote home 

argued  that  this  term  entered  economics  via 

to England in 1835. In Europe the effects are less 

Friedrich Nietzsche and Werner Sombart (Reinert 

dramatic,  but  they  are  still  there.  In  the  case  of 

&  Reinert  forthcoming  2006).  We  also  have  to 
open  our  minds  to  the  existence  of  destructive 
destruction.  I  have  argued  that  the  case  of 
Mongolia in the 1990s is a particularly ugly case 

the  new  member  states  the  deindustrialisation 

of  the  1990s  had  two  lasting  effects.  First  of  all 

both  employment  and  purchasing  power  were 

permanently  lost,  at  least  for  the  foreseeable 

of destruction of human welfare (Reinert 2004). As 

future.  Secondly,  a  main  beneficial  effect  of 

Schumpeter, Nietzsche himself saw the process of 

the  shift  in  techno-economic  paradigm  –  the 

creative destruction solely as a positive one. The 

upgrading  of  already  existing  industry  –  failed 

eminent  Renaissance  historian  Jacob  Burckhardt 

much  of  its  effect  because  there  was  little  old 

– Nietzsche’s teacher, friend and colleague at the 

industry left for upgrading.

University of Basel – was, however, of a different 

opinion. ‘…by no means every destruction entails 

regeneration….  there  are  (or  at  any  rate  there 

An abrupt integration of these countries in the 
European Union put a heavy burden on the system 

12

as a whole. The integration of Spain and Portugal 

129  Numbers do not add up to 100% because some industries are ‘not adequately defined’.

 
 
 
 
 
 
 
 
 
 
 
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Figure 3. Adjusted Wage Share in the European Union 1960-2000.

78.0

76.0

74.0

72.0

70.0

68.0

66.0

64.0

0
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9
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2
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8
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7
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7
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7
9
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8
7
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8
9
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2
8
9
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4
8
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8
8
9
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8
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9
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2
9
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4
9
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9
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8
9
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Adjusted wage share = percentage of GDP at factor costs
Source: European Commission; European Economy No. 68 (1999); Statistical Annex

Adjusted wage share

Source:  European  Industrial  Relations  Observatory  On-line,  http://www.eiro.eurofound.eu.int/2000/07/study/tn0007402s.html, 
based on European Commission 1999.

– following the old Listian principles – had been 
win-win  situations.  Several  aspects  of  the  2004 
integration  are  characterized  by  processes  more 
of  the  lose-lose  kind,  the  downward  pressure  of 
wages in Western Europe are not compensated by 

advantage  –  the  wealthy  first  world  reinforces 

its  comparative  advantage  in  higher  skills  in 

increasing-return  industries,  while  poor  nations 

fall  back  on  their  comparative  advantage  in 

diminishing-return 

industries.  A  comparative 

a marked increase in welfare in the New Member 

advantage 

in  a  diminishing-return  activity 

States. The set of forces governing this is outlined 

is  a  ‘natural  advantage’,  based  on  nature’s 

in point 6.

The free trade shock experienced by Eastern 

Europe in the 1990s had the same effect typically 

observed  when  free  trade  is  suddenly  opened 
between  a  relatively  advanced  nation  and  a 

bounty,  whereas  a  comparative  advantage  in  an 

increasing-return activity is a ‘created advantage’, 

based on human innovation and skill.

Another  factor  which  is  adding  to  popular 

discontent 

is 

that  an 

increasingly 

lower 

relatively  backward  one.  Experience  shows  that 

percentage  of  European  GDP  is  allocated  to 

the  first  casualty  of  free  trade,  the  first  industry 
to close, tends to be the most advanced industry 
in  the  least  advanced  country.  I  call  this  effect 
the  Vanek-Reinert  effect  or  the  ‘winner-killing 

wages  (Figure  3).  The  share  of  wages  in  the 

economy  peaked  during  the  golden  age  of 
production  capitalism,  in  the  1970s.  This  is  a 

global  trend  accompanying  the  rise  of  financial 

effect’ of free trade. This was the case both in the 

capitalism, and reflects a number of interrelated 

nineteenth-century unification of Italy and in the 

factors including the loss of labour union power 

Czech computer industry after the fall of the Berlin 

and the abolition of tariffs that could previously 

wall. This  effect  easily  develops  into  a  variation 

be used to protect national wage levels.

of destructive destruction (Reinert 1980). The last 

economic activity to survive in the poor country 
is generally subsistence agriculture.

12

The Vanek-Reinert  effect  is  fully  compatible 

with  standard  international  trade  theory:  Under 

free trade each nation reinforces its comparative 

External factors that determine the 
feasibility of the Lisbon Strategy.

We  would  argue  that  the  basic  problem  of 

Europe’s economic strategy is that ruling economic 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ideology  has  unlearned  the  logic  and  wisdom 

1.  The degree of dynamics in the wealthy core, 

of  Listian  integration.  A  main  characteristic  of 

relative to the other world players (US, China, 

reigning  standard  textbook  economics  is  a  lack 
of  consideration  of  context.  My  view  is  that  a 
number  of  external  factors  –  numbered  1  to  5 

below – will determine the degree of success of 

the Lisbon strategy. Not paying enough attention 

to  these  external  factors  will  jeopardize  the 

process itself.

East Asia). Here Europe scores relatively low, 

in spite of considerable efforts,

2.  The  timing  of  this  event  in  the  techno-

economic  paradigm.  With  the  Fordist  mass 

production  wave  near  its  crest  during  the 

1950s and 1960s, a radical integration would 

have been easier almost anywhere than now, 

In  evaluating  these  factors  we  must  also 

in the post-financial crisis, deflationary period 

qualitatively  evaluate 

the  degrees 

to  which 

of the paradigm, resembling in so many ways 

certain  phenomena  or  certain 

factors  are 

the  1930s,  including  politically  (Pérez  2002, 

desirable. In human  nature as  well  as  in human 

societies,  there  can  be  both  too  little  and  too 

much  of  a  good  thing. Vitamin  A  is  essential  to 

2004).  That  financial  capitalism,  rather  than 
production  capitalism130,  is  in  charge  during 
such  periods  further  aggravates  the  problem 

human development. Excess doses of this vitamin 

(Hilferding  1910,  Veblen  1914,  1919,  1921, 

may, however, be fatal. Economic dynamics that 
normally  are  quite  healthy  can,  if  they  are  too 

1923). Both the attention of economists and 
of  financial  markets  is  carried  away  from 

strong,  also  produce  negative  effects.  Economic 

production to studying finance.

activities moving to low-cost areas is a completely 

normal, and even necessary, process in the history 

of capitalism, and is an integral part of capitalist 

dynamics.  Too  high  wages  in  London  was  the 

reason  why  English  textile  industry  moved  out 

of  that  city  many  centuries  ago. The  same  thing 

applies  to  the  growth  of  the  service  economy. 

William  Petty  (1623-1683)  formulated  what  is 

called  Petty’s  Law,  that  economic  development 

changes  economic  structure  over  time:  first 

agriculture dominates, then industry, and then the 

service sector takes over. However, this does not 

mean that all de-industrialization is healthy. And, 

a  knowledge-intensive  service  sector  certainly 

needs  high-quality  demand  from  an  advanced 

service  sector.  The  inability  to  see  these  types 

of  synergies  is  another  important  blind  spot  of 

standard textbook economics.

The  external  variables  that  cause  these 

moves to be problematic and damaging or not to 

the creation and even maintenance of real wealth 

are the following:

3.  The 

size  of 

the  poor/unemployed/

underemployed population to be integrated 

compared  to  the  population  of  the  core 

countries.  Here 

integrating  Portugal  and 

Spain  was  relatively  easy,  but  again  Europe 

now faces a problem.

4.  The  ability  of  the  industrial  structure  in 

the  poor  countries  to  upgrade.  Compared 

both  to  the  post-WW  II  situation  and  to  the 

integration  of  Spain,  Portugal  and  Greece, 

the  situation  in  the  CEE  is  very  problematic. 

Instead  of  the  slow  reduction  of  tariffs  that 

made  the  Spanish,  Portuguese  and  even 

Greek industries survive and upgrade, the CEE 

countries  –  with  the  exception  of  Hungary 

– had to varying degrees been subject to de-

industrializing that had Morgenthau Plan-like 

effects, also creating havoc in the agricultural 

sector.

5.  The wage dynamics of the rest of the world. 

Here  the  dynamics  are  generally  strongly 

in  disfavour  of  European  wages.  The  Unites 

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130  The relationship between financial capitalism and production capitalism is discussed in Reinert & Daastøl (1998) providing an 

extensive bibliography on the subject.

 
 
 
 
 
 
 
 
 
 
 
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12

States  is  an  innovation  powerhouse  with 

The  first  age  of  globalisation  ended  with  a 

creeping  Wall-Martization  of 

the 

labour 

return to tariff protection. ‘The Rise and Fall of the 

market,  increasing  illegal  immigration,  and 

Free Trade  Movement’  was  the  appropriate  title 

falling  real  wages.  China  is  rapidly  catching 

of  a  book  published  by  Cambridge  economist 

up  technologically  with  minimal  increases 

William  Cunningham  in  1905. Today  it  is  clear 

in  real  wages,  and  a  virtually  unlimited 

that while the world took for granted that the factor 

supply  of  labour  from  the  interior  at  very 

price equalisation produced by free trade would 

low  prices.  The  weakness  of  labour  unions 

mean  an  upward  adjustment  of  real  wages  for 

in both these countries will – combined with 

the  other  factors  on  this  list  –  automatically 

lead to wage pressures in Europe. The efforts 

all, in reality there are strong pressures the other 
way:  for  a  factor-price  equalisation  downwards 
combined  with  increased  unemployment.  This 

needed, and the bottlenecks that will appear, 

produces  a  wake-up  call  both  for  the  global 

in  order  to  upgrade  the  Chinese  workforce 

economy and for the European economy.

fast  enough  will  be  a  factor  working  in  the 

other direction, in favour of a better European 

wage level.

In 

this  situation  both  businesses  and 
macroeconomic  variables  may  be  doing  very 

well,  but  not  the  nations’  inhabitants.  Germany, 

for  instance,  is  now  getting  into  the  situation  of 

profitable businesses, jobless growth, and falling 

real  wages.  This  is  the  same  pattern  of  ‘jobless 

‘Because 

the  private 

interest  of  each 
individual,  when  it  coincides  with  the  public 
interests, 
the  safest  guarantor  of 
public  happiness’  says  Pietro  Verri  (Verri  1771: 
42)131  Adam  Smith’s  followers  (more  than  Smith 
himself) changed this into a system where private 

is  always 

interests – by definition and in any context – not 
only coincided with the public interest, but alone 
were sufficient to create public happiness. In the 

growth’  that  for  a  long  time  has  been  typical  of 

1990s it looked as if Smith had been right, now it 

Latin America.

is increasingly clear that we have to modify this 

Conclusion: A plea for the return to 
Continental European economics.

As  Paul  Krugman  says,  there  are  periods 

when old economic wisdom is unlearned and has 

to  be  rediscovered  (Krugman  1996).  Or  as  John 

Stuart  Mill  expresses  it,  much  stronger,  ‘It  often 

happens  that  the  universal  beliefs  of  one  age  of 
mankind – a belief from which no one was, nor 
without  an  extraordinary  effort  of  genius  and 
courage could at the time be free – becomes to a 
subsequent age so palpable an absurdity, that the 

only difficulty then is to imagine how such a thing 

can  ever  have  appeared  credible...It  looks  like 

one  of  the  crude  fancies  of  childhood,  instantly 

corrected  by  a  word  from  any  grown  person.’ 

(Mill 1848/1929: 3, emphasis added).

view.

The  conclusions  of  the  March  22  and 

23,  2005,  meetings  of  the  European  Council 

correctly  and  importantly  state:  ‘Europe  needs 

a  solid  industrial  fabric  throughout  its  territory’ 

(point 15). In 1841 Friedrich List gave Continental 

Europe a theory on how to achieve this, how to 

industrialize  against  the  fierce  ‘competitiveness’ 

of  England.  As  already  said  in  section  3  of  this 

paper,  the  tools,  goals  and  formulas  crated  by 
List were followed loyally until and including the 

successful integration of Spain and Portugal into 

the  European  Union.  Friedrich  List  told  us  that 

symmetrical integration, by industrialized nations 

where  everyone’s  industrial  structure  survived, 
would  be  beneficial  to  all  parties,  a  win-win 
situation.132 Today  Europe  has  crated  a  situation 
which to many of its inhabitants, both in the old 

131  ‘Perché  l’interesse  privato  di  ognuno  quando  coincide  col  pubblico  interesse  è  sempre  il  più  sicuro  garante  della  felicità 

pubblica

132  Today  also  advanced  services  play  a  very  important  part. These  services,  however,  seem  to  depend  on  the  demand  from  a 

strong industrial sector.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
and  new  member  states,  appears  as  a  lose-lose 
situation. As I see it, these are problems that will 

to  us  who  are  apt  to  agree  with  him  much 

more  than  we  do  with  A.  Smith,  his  (Justi’s) 

require  the  resurrection  of  some  of  the  recently 

vision  of  economic  policy  might  look  like 

abolished tools from the policy toolbox, together 

laissez-faire with the nonsense left out.’

with  the  factually  based  continental  economic 

theories that created them.

In the 1840s the economic wisdom of Verri, 

Justi and their contemporaries had been replaced 

Joseph  Schumpeter  provides  a  description 

by  Ricardian  economics  where  the  market  was 

of  this  type  of  economics,  when  he  contrasts 

seen  as  producing  harmony.  Contrary  to  the 

the work of German economist Johann Heinrich 

predictions  of  Ricardian  economics,  what  was 

Gottlob von Justi (1717-1771) with that of Adam 

then called ‘the social question’ shattered Europe 

Smith:

’He  (Justi)  saw  the  practical  argument  for 

laissez-faire  not  less  clearly  than  did  A. 

Smith,  and  his  bureaucracy,  while  guiding 

and  helping  when  necessary,  was  always 

ready  to  efface  itself  when  no  guidance  or 

help seemed needed. (Schumpeter’s footnote 

here:  ’This  was  not  merely  a  dream.  It  will 

be  pointed  out  below  that  the  bureaucracy 

in  the  typical  German  principality  actually 

tried  to  behave  like  this’).  Only  he  saw 

and  led  to  revolutions  in  all  large  European 

countries  with  the  exception  of  England  and 

literary 

the  Association 

Russia.  However,  Marx’  spectre  of  communism 
sparked  economic  reform,  where  the  Verein 
für  Sozialpolitik, 
for 
Social  Policy,133  produced  economic  and  social 
institutions  that  created  the  European  welfare 
state.  Gustav  Schmoller,  quoted  above,  took  the 
leadership  of  the  Verein  from  the  start  in  1872. 
Chancellor  Bismarck’s  support  of  this  line  of 

economic research was key to its success.

much more clearly than did the latter all the 

Following  the  1848  upheavals,  timely  fact-

obstacles that stood in the way of its working 

based,  context-specific  and  problem-oriented 

according to design. Also, he was much more 

economics  –  rather  than  Ricardo’s  assumption-

concerned  than  A.  Smith  with  the  practical 

based,  context-free  and  highly  abstract  theories 

problems of government action in the short-

–  chased  away  the  ‘spectre  of  communism’  and 

run vicissitudes of his time and country, and 

laid the foundations for democratic social market 

with  particular  difficulties  in  which  private 

initiative  fails  or  would  have  failed  under 

the  conditions  of  German  industry  of  his 

time. His laissez-faire was a laissez-faire plus 

economies. As Keynes wisely said, the real issue 
was  ‘not  one  between  collectivism  and  laissez-
faire,  but  between  targeted  state  action  and  a 
socialism which was out of date and contrary to 

watchfulness, his private-enterprise economy 

human nature’.

a  machine  that  was  logically  automated  but 

exposed to breakdowns and hitches which his 
government was ready to mend. For instance, 

he  accepted  as  a  matter  of  course  that  the 

introduction  of 

labour-saving  machinery 

would  cause  unemployment:  but  this  was 

no  argument  against 

the  mechanization 

of  production  because,  also  as  a  matter  of 
course,  his  government  would  find  equally 
good employment for the unemployed. This, 
however, is not inconsistency, but sense. And 

In  this  long  term  perspective,  however, 

today’s  political  situation  in  Europe  carries  with 
it a strong sense of déjà vu. The August 22 (2005) 
cover  of  the  influential  German  newsmagazine 
Der  Spiegel  shows  a  portrait  of  Karl  Marx 
making  a  ‘V’  sign  for  Victory,  accompanied  by 

the  text  ‘A  spectre  returns.  The  new  power  of 
the  left’134  Again  Europe  seems  to  be  squeezed 
between  two  extreme  economic  models  as  in 

the  1840s,  extreme  liberalism  and  Marxism.  It 

133  Active from 1872 to 1932.
134  ‘Ein Gespenst kehrt zurück. Die neue Macht der Linken’

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10

appears  we  may  be  doomed  to  repeat  conflicts 

employment  that  dominated  the  period  after 

that  we  had  previously  managed  to  solve.  One 

World War II. It also means a qualitatively much 

important reason for this retrogression is that the 

more  profound  and  differentiated  analysis  of 

triumphalism following the fall of the Berlin Wall 

technology  and  innovations  and  their  economic 

made us collectively forget the wise targeted state 

consequences  on  both  wages  and  employment, 

actions  that  modified  the  pure  market  economy. 

at  company,  national  and  community  levels. 

If  communism  failed,  so  Europe  seems  to  have 

Furthermore, studying the phenomena that create 

reasoned  in  the  1990s,  the  market  had  to  be 

the economic differences that now haunt Europe 

perfect. Based on this the 2004 enlargement was 

is  not  meaningfully  carried  out  in  a  framework 

agreed.

The  European  mood  carries  with  it  an 

element  of  what  Albert  Hirschman  –  in  a  Latin 
American  context  –  referred  to  as  fracasomanía, 
a  failure  complex  amongst  the  leadership  who 

are  convinced  that  everything  is  going  wrong 

(Hirschman  1970).  This  gloom  is  particularly 

well  represented  in  Germany  (Steingart  2004, 
Prantl  2005,  Sinn  2005),  with  the  scattered 

analyst  actually  re-inventing  Hirschman’s  point 

(Schumacher 2005). Compared to the rest of the 

world, many things are not really that bad. If we 

compare  European  productivity  data  compared 

to those of the United States and  correct  for  the 

hours worked, we find that European productivity 

is in fact doing well. The biggest problem is self-

inflicted:  the  downward  pressure  on  real  wages 

and  the  welfare  system  in  ‘old  Europe’  coupled 

with extremely low real wages and huge un- and 

underemployment  in  the  new  member  states. 

These  problems  are  two  sides  of  the  same  coin. 

A  widely  proclaimed  success  story  in  the  new 

member  states,  Estonia’s  electronic 

industry, 

produces hourly wages of about 1 Euro, only 10 

per cent of the earnings of someone sweeping the 

streets  of  Paris  or  Frankfurt. Tensions  are  too  big 

and the number of people involved is too high for 

the  market  alone  to  create  a  happy  end.  In  fact 
what  is  missing  is  old  fashioned  Staatsklugheit, 
or experience-based wisdom among the political 

elites.

The  present  situation  of  Europe  requires 

more  than  the  Lisbon  Strategy’s  list  of  good 

intentions  focusing  around  innovations,  it  needs 

to  bring  back  economic  thinking  and  economic 

tools  that  had  been  abandoned  with  the  1990s. 

This  includes  bringing  back  the  earlier  focus  on 

of  equilibrium  theory. The  now  virtually  defunct 

continental  European  tradition  of  economics  is 

much better suited to such a task. Above all, the 

discussion  of  the  Lisbon  Strategy  must  be  lifted 

out  of  the  generic  and  context-free  and  into  a 

context  where  present  problems,  many  of  them 

created by the shock therapies of the 1990s, are 

recognised as being real challenges.

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Mathias  Hirsch  The  Uruguay  Round  and 
Beyond - Essays in Honor of Arthur Dunkel, 
The University of Michigan Press, 1998.

- 

Schmoller,  Gustav 
Theorien  und 

(1897),  Wechselnde 
feststehende  Wahrheiten 

im 

Gebiete 

der 

Staats- 

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Socialwissenschaftlichen  und  die  heutige 

deutsche  Volkswirtschaftslehre.  Rede  bei 
Antritt des Rectorats, Berlin, Büxenstein.

- 

(2005),  Kopf  hoch, 
Schumacher,  Hajo 
Deutschland. Optimistische Geschichten aus 
einer verzagten Republik, Blessing, Munich.

- 

Singer,  Hans  (1950),  “The  Distribution  of 

Gains  between  Investing  and  Borrowing 
Countries”,  in  American  Economic  Review 
40: pp. 473-485.

- 

- 

- 

- 

Sinn,  Hans-Werner  (2005),  Ist  Deutschland 
noch zu retten?, Berlin, Ullstein.

Smith, Adam (1776/1976), An Inquiry into the 
Nature and Causes of the Wealth of Nations, 

University of Chicago Press, Chicago.

(1913a),  Krieg  und 
Sombart,  Werner 
Kapitalismus,  Munich  &  Leipzig,  Duncker  & 
Humblot.

Luxus  und 
Sombart,  Werner 
Kapitalismus,  Munich  &  Leipzig,  Duncker  & 
Humblot.

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- 

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- 

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Sombart,  Werner 
Kapitalismus,  Munich  &  Leipzig,  Duncker 
&  Humblot.  6  volumes.  Partial  Spanish 
translation:  El  Apogeo  del  Capitalismo, 
Mexico,  Fondo  de  Cultura  Economica, 

1946,  2  volumes.  Partial  Italian  translation, 
Il  Capitalismo  Moderno,  Torino,  Unione 
Tipografico-Editrice  Torinese,  1967  partial 
French translation,  L‘Apogée du Capitalisme, 
Paris, Payot, 1932. (2 volumes).

Steingart,  Gabor  (2004),  Deutschland  -  Der 
Abstieg eines Superstars, Munich, Piper.

Veblen,  Thorstein  (1914),  The  Instinct  of 
Workmanship, New York, Macmillan.

Veblen, Thorstein (1919), The Vested Interests 
and the State of the Industrial Arts, New York, 
Huebsch.

Veblen,  Thorstein  (1921),  The  Engineers  and 
the Price System, New York, Huebsch.

Veblen, Torstein (1923), Absentee Ownership 
and Business Enterprise in Recent Times, New 
York, Huebsch.

Verri,  Conte  Pietro  (1771),  Meditazioni  sulla 
economia  politica,  Genova,  Ivone  Gravier 
nella tamperia di Adamo Scionico.

Vivarelli,  Marco  and  Mario  Pianta  (eds.) 
(2000),  The 
Impact  of 
Employment 
Innovation:  Evidence  and  Policy,  London, 
Routledge.

-  Wade,  Robert 

(1990),  Governing 

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Market:  Economic  Theory  and  the  Role  of 
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wirtschaftlicher 

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1

 
 
 
 
 
 
 
 
 
 
 
1

7. The Business and Economic Implications of ICT Use: 

Europe’s Transition to the Knowledge Economy 
by Jeremy Millard

The policy background

Globalisation,  rapid  technological  change 

and  extensive  knowledge 

innovations  and 

exchanges are the hallmarks of the transition to a 
knowledge-based economy at the start of the 21st 
Century. At the Lisbon European Council in March 

2000, Europe’s Heads of State and Governments 

set an ambitious strategic goal for the EU in order 

to  strengthen  employment,  economic  reform 

and  social  cohesion  as  part  of  this  knowledge-

based economy over the next decade (European 
Commission,  2000):  “…to  become  the  most 
competitive  and  dynamic  knowledge-based 

economy  in  the  world,  capable  of  sustainable 

economic growth with more and better jobs and 
greater social cohesion.”

This  more  precise  prioritisation  arose  from 

the realisation that since 2000 the policy agenda 

had  become  overloaded  and  sometimes  had 

conflicting  aims.  It  also  reflected  an  emerging 

consensus  that  economic  growth  is  necessary 

to  promote  competitiveness  and  jobs,  as  well 

as 

for  providing 

the 

foundation 

for  social 

cohesion  and  environmental  sustainability.  In 

one  sense,  therefore,  the  original  three  pillars 

of  the  Lisbon  Strategy  and  its  follow-up  by  the 

Göteborg Strategy in 2001 (economic, social and 
environmental)  were  re-ordered  with  a  sharper, 

stronger and more immediate focus on economic 

growth in order, in turn, to provide the means to 

realise the other two. Thus, the EU and Member 
States  are  advised  to  (Kok,  2004,  p.39):  “focus 
on growth and employment in order to underpin 

This  so-called  Lisbon  Strategy  went  on 

social cohesion and sustainable development.”

to  outline  a  series  of  reforms  at  national  and 

European  level  designed  to  achieve  these  goals. 

However, unsatisfactory progress over its first four 

years led the High Level Group chaired by Wim 

Kok  to  issue  a  wake  up  call  In  November  2004 
(Kok,  2004,  p.  39):  “The  Lisbon  strategy  is  even 
more urgent today as the growth gap with North 

America and Asia has widened, while Europe must 

meet the combined challenges of low population 

growth and ageing.”

This  was  quickly  followed  by  the  Mid-Term 

Review  of  the  Lisbon  Strategy  which  concluded 

that a refocus of tasks was necessary. The February 

2005  Communication  to  the  Spring  European 

Council  “Working  together  for  growth  and  jobs 

–  a  new  start  for  the  Lisbon  Strategy”  proposed 

a  re-launched  Lisbon  Strategy  focussing  on  two 
priorities  (European  Council,  2005):  “delivering 
stronger,  lasting  growth  and  creating  more  and 
better jobs.”

It is now commonly accepted that economic 

growth  relates  to  more  than  just  the  idea  of 

markets.  The  Renewed  Lisbon  Agenda  links  it 

directly  to  competitiveness  and  employment, 

which are in turn supported, amongst others, by 

knowledge  and  innovation,  institutional  reform 

and  better  regulation  (European  Council,  2005, 

p. 10).

Competitiveness  was  also  an  issue  that  was 

prominent  in  the  original  Lisbon  Agenda,  and 
the more recent plans for a Competitiveness and 

Innovation  Programme  and  the  Commission’s 

action  plan  for  the  Renewed  Lisbon  Agenda 

outline  the  way  in  which  Community  support 

programmes can be brought together for “boosting 

European  productivity, 

innovation  capacity 

and  sustainable  growth,  whilst  simultaneously 

addressing 

complementary 

environmental 

concerns.” European Commission, 2005a, p. 2)

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1

 
 
 
 
 
 
 
 
 
 
 
 
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.

7

The 

role  of 

ICT 

in  Europe’s  economic 

employment, skills and work organisation. In the 

revitalisation

Kim  Kok’s  High  Level  Group  linked  its 

recommendations  concerning 

the  economy 

strongly and directly to the role Information and 

Communication Technology  (ICT)  could  play  in 

meeting the Lisbon goals (Kok, 2004):

“In order to ensure future economic growth, 

the  EU  needs  a  comprehensive  and  holistic 

strategy  to  spur  on  the  growth  of  the  ICT 

sector and the diffusion of ICT in all parts of 

the economy.”

context of Lisbon, there is awareness that Europe 

is  increasingly  dependent  on  both  the  effective 

use  of  ICT  for  industrial  and  business  processes 

and  on  the  knowledge,  skills  and  competencies 

of the workforce. At the same time, it is necessary 

for  Europe  to  respond  to  global  competitive 

pressure by focusing – more strongly than before 

– on its strengths and assets, including a thriving 

R&D  base  and  the  availability  of  a  breadth  and 

depth of skilled labour, performing well with the 

latest ICT tools and services.

To  achieve  this,  policy  efforts  are  being 

This  reflected  the  emerging  evidence,  after 

made  to  increase  investments  in  education  and 

a  long  period  of  uncertainty  and  conflicting 

training, improve cooperation between the public 

views, that economic development generally and 

and  the  private  sectors,  and  ensure  a  seamless 

productivity  growth  specifically  were  strongly 
linked  to  innovations  in  and  the  application  of 

framework linking basic eSkills training and more 
advanced  vocational  training,  higher  education 

ICT,  coupled  with  organisational  and  market 

and professional development. (European eSkills 

innovations. (OECD, 2004b)

Forum, 2004b and 2004c).

The  Spring  European  Council  Review 

itself  explicitly  lists  four  Information  Society 

policy areas, i.e. involving ICT, each of which is 

translated into specific ‘work programme’ topics 

in the Review (European Council, 2005):

- 

- 

- 

- 

ICT research and innovation

content industry development

security of networks and information

convergence and interoperability.

Research and Development (R&D) investment 

and  innovation  are  seen  as  the  main  tools  to 

achieve  growth,  whereby  the  emphasis  seems 
to  be  on  exploiting  Research  and  Technology 

Context and purpose of this paper

This  paper  is  one  of  a  number  arising  out 

of  the  FISTERA  thematic  network  of  researchers 
(FISTERA,  2005),135  which  aims  to  offer  insights 
on the prospects of ICT through an understanding 

of  the  underlying  factors  and  environments 

that  influence  ICT  research,  development  and 

deployment.  The  main  factors  examined  by 

FISTERA  are  technological  (e.g.  miniaturisation), 

social  (e.g.  increasing  demand  for  mobility), 

economic  (e.g.  reduction  of  the  cost  per  unit  of 

functionality),  and  political  (e.g.  governmental 

efficiency  and  security),  although  these  are  not 

Development  (RTD)  results  to  develop  value 

often easily reconciled.

added  products  and  services.  In  this  context 

innovation is defined as the transformation of RTD 

and  technology  (including  ICT)  into  commercial 

activity.

In  addition 

to 

these  broader  policy 

developments,  a 

specific  European  policy 

1

focus  has  also  been  developing  in  relation  to 

The  present  paper  explores  some  of  the 

economic  factors  of  relevance  to  FISTERA,  and 

specifically focuses on the role that ICT can play 

in  assisting  Europe  to  re-vitalise  its  economy. 

Much  of  the  evidence  used  is  derived  from 

research projects sponsored and supported by the 
European  Commission,  including  those  funded 

135  FISTERA  has  been  established  by  the  European  Commission’s  DG  Information  Society  and  Media  to  support  the  creation  of  a 

European Research Area (ERA) in ICT by providing new elements for the definition of a European vision and approach in the field.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
by  the  Information  Society  Technologies  (IST) 

regional  or  national  to  global  scale,  the  greater 

Programmes between 2000 and 2005.

sophistication  and  differentiation  of  markets, 

This  paper  examines  both  the  micro-  and 

macro-level  economic  impacts  of  ICT,  with  a 

focus  on  the  European  realm,  and  examines 

and  the  need  for  economic  players  to  focus  on 

completely new combinations of factors in order 

to retain or generate comparative advantage.

the  burgeoning  empirical  evidence  that  ICT 

In 

the  context  of  examining  economic 

can  be  an  extremely  important  component  of 

growth in the EU compared to the US, the recent 

economic  vitality,  and  why  this  is  so.  First  of 

Sapir Report summed up some of these changes: 

all  it  summarises  some  of  the  main  features  of 

“It  has  now  become  clear  that  the  context  in 

economic  development  in  the  ‘new’  knowledge 

which  economic  policies  have  been  developed 

economy as compared to the ‘old’ economy, and 

changed fundamentally over the past thirty years. 

analyses the increasing role that ICT plays in value 

A system built around the assimilation of existing 

chains, networks and markets. It then summarises 

technologies,  mass  production 

generating 

the main features of knowledge and skills in the 

economies  of  scale  and  an  industrial  structure 

new  economy,  and  analyses  the  impact  ICT  has 

dominated by large firms with stable markets and 

on  jobs  and  the  organisation  of  work.  Next,  it 

long term employment patterns no longer delivers 

focuses on the use of ICT at the level of the firm, 
the  business  impacts  of  this,  and  specifically  on 

in the world of today, characterised by economic 
globalisation  and  strong  external  competition. 

innovation  in  a  knowledge  economy  context. 

What  is  needed  now  is  less  vertically  integrated 

The paper analyses how ICT can lead to the de-

firms,  greater  mobility  within  and  across  firms, 

localisation of economic activities, including the 

more  retraining,  greater  flexibility  of  labour 

local and regional contexts, and the implications 

markets, greater availability of external finance, in 

this has in the context of economic globalisation. 

particular  equity  finance,  and  higher  investment 

Finally,  the  paper  examines  how  the  role  of  ICT 

in  both  R&D  and  higher  education.  In  other 

in  the  economy  is  analysed  and  measured,  the 

words,  what  is  required  is  a  massive  change  in 

difficulties  and  debates  surrounding  this,  and 

economic  institutions  and  organisations,  which 

why Europe has not been exploiting ICT as well 

has not yet occurred on a large scale in Europe.” 

as it might over the last ten years, particularly by 

(Sapir, 2003, p. 2)

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comparing  its  performance  in  this  regard  with 

the performance of some of its main competitors. 

The  paper  concludes  by  summarising  the  main 

factors important for achieving economic benefits 

through  ICT  use,  and  highlights  a  number  of 

issues  which  it  is  suggested  are  important  in  a 

European policy context.

The new knowledge economy

‘Old’ and ‘new’ economies

Although  the  fundamentals  of  economic 

growth  and  competitiveness  do  not  change 

themselves,  it  is  becoming  increasingly  clear 
that  their  context  and  parameters  are  currently 

changing quite dramatically. This arises out of the 

expansion of economic competitive systems from 

This  seismic  shift  reflects  a  wider  change 

from  the  so-called  ‘industrial’  economy  to  a 

new 

‘knowledge’  economy.  All  economies 

have,  of  course,  always  been  based  to  a  greater 

or  lesser  extent  on  information  and  knowledge. 

What  is  different  in  the  knowledge  economy 
is  that  commercial  processes  are  increasingly 

based  on  the  conscious  extraction,  creation, 

manipulation  and  embedding  of  knowledge  in 

new  products  and  services,  and  coupling  this 

with  much  greater  knowledge  about  markets, 

consumers, competitors, and regulatory and other 

contextual  conditions.  The  result  is  often  that 

several  economies  exist  side-by-side,  depending 

on  location  and  context,  including  knowledge, 

1

industrial  and  agrarian  types,  but  the  balance 

across  much  of  the  world  is  shifting  inexorably 

towards the knowledge end of the spectrum.

 
 
 
 
 
 
 
 
 
 
 
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.

7

1

For  example,  one  of  the  clearest  signs  is 

seen  as  constituting  a  holistic  foundation  for 

the  shift  from  manufacturing  to  service  jobs  in 
advanced  economies,  The  Economist  recently 
reported  on  the  “great  jobs  switch”  (Economist, 

European policymaking in a knowledge economy. 

In  essence,  the  competitiveness  of  an  economy 

has  two  complementary  dimensions  which  may 

2005) in which manufacturing jobs now account 

in some cases appear as contradictory (European 

for  less  than  10%  of  total  jobs  in  the  US, 

Commission, 2005b, p. 7):

compared with 25% in 1970, closely followed by 

many  other  rich  countries  such  as  Britain  (from 

35%  to  14%)  and  Japan  (from  27%  to  18%). 

However, in these countries manufacturing output 

continues to expand because workers have been 

replaced  by  new  technology  (including  ICT)  to 

boost  productivity,  and  have  shifted  production 

from labour-intensive products such as textiles to 

higher-tech,  higher  value-added,  sectors  such  as 

pharmaceuticals. At the same time, within firms, 

low-skilled  jobs  have  started  to  move  offshore, 

whilst  higher  value  R&D,  design  and  marketing 

have stayed at home.

It has generally been much easier to automate 

manufacturing  than  services,  replacing  men  by 
machines. However, the Economist argues that the 
distinction  between  manufacturing  and  services 

is,  in  fact,  no  longer  very  helpful,  especially 

given the fact that many so-called manufacturing 

firms include a large number of service-type jobs 

from cleaners to designers. A more sensible split 

now is between low- and high-skilled jobs. And, 

increasingly,  even  many  aspects  of  service  jobs 

are also becoming subject to automation. There is 

some evidence that we are on the edge of a major 

move  towards  the  commoditisation  of  business 

processes  in  which  many  types  of  business 

processes,  from  developing  software  to  hiring  a 

CEO, are being analysed, standardised and quality 

1. 

the  ability  of  firms  to  compete  in  the  global 

market  place,  leading  to  overall  economic 

growth

2.  general  increases  in  living  standards  and 

employment 

opportunities 

across 

the 

population.

Meeting  global  market  requirements,  where 
cost is often a key factor,136 while simultaneously 
achieving  rising  real  incomes,  is  a  real  and 

pressing  challenge.  The  key  to  simultaneously 

achieving  both  low  costs  and  high  wages  is 

productivity, not only labour productivity but also 

the  productivity  of  other  factors  such  as  capital, 

resources,  knowledge,  etc.,  hence  total  factor 

productivity. (European Commission, 2005b, pp. 

7-8).  Productivity  growth  is  thus  the  key  driver 

for economic competitiveness and growth. Apart 

from  the  element  of  potential  trade-off  between 

global market requirements and living standards, 

they are of course also mutually supportive, given 

that  the  growth  in  international  competitiveness 

will itself tend to lead to a growth in real incomes 

as more market share and trade are achieved.

Transaction  costs,  value  chains  and  flexible 

specialisation

Many  of 

the 

impacts 

ICT  has  on 

the 

checked, as more and more knowledge becomes 

economy  are  driven  by  dramatic  reductions  in 

codified and facilitated by ICT (Davenport, 2005). 

so-called  transaction  costs,  which  result  from 

This  could  lead  to  process  commoditisation  and 

the  rapidly  falling  costs  of  information  and  of 

outsourcing on a massive scale in the future.

As  outlined  above,  economic  growth, 

competitiveness,  jobs  and  innovation  are  now 

communication,  making  it  much  cheaper  to 

interact  both  within  and  between  organisations. 

Low  transaction  costs  also  make  it  possible  to 

outsource or insource certain functions to highly 

136  However,  as  implied,  and  although  cost  is  a  very  important  component  in  international  competitiveness,  other  factors  are 
also  crucial,  including  user-driven  and  R&D/research  driven  competitiveness  and  innovation.  See  section  7.3,  and  Danish 
Technological Institute, 2004.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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specialised  units  or  firms.  By  serving  a  large 

different chains, to be established. The result can 

number of clients, such units or firms can achieve 

be  economies  of  scope  through  specialisation 

high levels of economies of both scale and scope 

within  and  between  relatively  complex  chains, 

through  specialisation,  compared  to  a  situation 

rather  than  economies  of  scale  through  mass 

where  such  functions  are  retained  in-house  by 

replication  in  relatively  simple  chains.  This, 

each  company.  (See  Williamson,  1986a  and 

in  turn,  goes  hand  in  hand  with  dynamic  and 

1986b).  This  is  possible  because  instantaneous 

networked  organisational  structures,  no  longer 

transactions  and  low  or  negligible  transaction 

hierarchically  fixed  but  based  on  flexible  intra- 

costs  also  lead  to  very  low  resource  switching 

and 

inter-organisational 

collaboration 

and 

costs,  and  thus  to  easy  resource  switching  to 

competition.

alternative  suppliers  or  processes  which  are 

cheaper, more efficient or closer to markets.

Vertical  disintegration  within  and  between 

firms  is  part  of  this  process,  so  that  one  link  of 

The  OECD  (2004b)  showed  that  ICT,  by 

the value chain may be geographically removed 

lowering transaction costs, can also improve the 

from  central  firm  activities,  such  as  marketing, 

functioning of markets by improving the matching 

administration, production, ICT management, etc. 

process,  and  make  new  markets  possible.  ICT 

Such  strategies  tend  to  be  internally  integrated 

also  has  an  impact  on  knowledge  creation 
and  innovation  as  it  enables  more  data  and 

and holistic in their approach, i.e. not focused on 
one factor only, and often rely on digital networks 

information to be processed at a higher speed and 

and digital integration across different economic 

can thus increase the productivity of the process 

sectors  and  types  and  sizes  of  firms,  as  well  as 

of knowledge creation. A greater use of ICT may 

across  public,  private  and  civil  sectors.  Flexible 

thus gradually improve the overall functioning of 

specialisation  also  implies  being  able  rapidly 

the  economy  through  such  spillover  effects,  as 

to  change  or  deepen  the  specialisation  to  meet 

already  seems  to  be  the  case  in  the  US,  but  not 

new needs, to change roles within a value chain, 

yet in other countries.

According to Porter (1985), macro-economic 

systems  consist  of  a  complex  system  of  value 

chains  linking  together  the  different  steps  in  the 

economic  process,  so  that  each  step  adds  new 

change value chains or create new value chains, 

often by rapid resource switching. It must also be 

seen  in  the  context  of  diversification  strategies 

which  many  countries  and  especially  regions 

have pursued.

value to the whole chain. For example, possible 

Although  informational  linkages,  enabled 

steps  include  extractor,  supplier  /  transporter, 

by 

the 

falling  costs  of 

information  and 

manufacturer  /  producer,  transporter,  customer 

communication,  provide  the  ‘glue’  in  flexible 

/  buyer,  etc.  A  basic  hypothesis  is  that,  whilst 

specialisation,  this  does  not  go  even  half  way 

the industrial economy was based on the use of 
specific  technologies  in  specific  steps  in  such  a 

to  explaining  why  firms  (dis)integrate,  so  that 
it  is  necessary  to  look  “beyond  the  firm  or  the 

chain (and mainly in the production step), in the 

sector to all institutions involved in the complex 

knowledge  economy,  technologies  (especially 

process  of  ‘making  markets’  in  national  and 

ICT)  are  used,  in  principle,  in  all  steps  of  the 

regional  economies.  These  institutions  include 

value  chain  and 

(perhaps  more 

important), 

industry  associations,  labour  unions,  consumer 

in  all  transactions  between  the  steps,  such  as 

organisations,  the  local  and  central  state,  all  of 

management,  marketing,  administration,  sales, 

whose regulatory activities have a direct bearing 

R&D, etc.

This can lead to what Sabel (1994) has called 

a flexible specialisation strategy to be adopted, in 

which  ICT  enables  new  links  between  different 

steps of a given chain, and new linkages between 

on  the  level  of  transaction  costs  and,  more 

importantly,  how  these  costs  are  distributed 

1

between  firms  (large  and  small),  between  firms 

and  government,  between  capital  and  labour, 

between 

labour  and  government,  between 

 
 
 
 
 
 
 
 
 
 
 
different  parts  of  the  labour  force,  and  also 

software  account  for  the  largest  proportion  of 

between producers and consumers.” (Hepworth, 

fixed  costs.  The  marginal  costs  of  providing  an 

1989, pp. 213-4).

additional unit of information are very low, if not 

The OECD also showed that firms using ICT 

zero.

may not be the largest beneficiaries of investment 

ICT  has  significant  economies  of  scale  and 

in ICT. Consumers may extract a large part of the 

scope that enhance the network and system effects 

benefits, in the form of lower prices, better quality, 

of  economic  interaction  on  the  demand-side  of 

improved convenience, and so on. In other cases, 

the  economy.  Network  effects  occur  if  demand 

firms  that  are  upstream  or  downstream  in  the 

for  a  good  depends  on  the  number  of  people 

value chain from the firms using ICT might benefit 

that  purchase  it.  There  is  a  distinction  between 

from greater efficiency in other parts of the value 

direct  and indirect network  effects, where  direct 

chain.  For  example,  productivity  impacts  seem 

effects  relate  to  the  good  or  application  itself 

to  accrue  to  firms  purchasing  through  computer 

and  indirect  effects  occur  in  the  interaction 

networks,  not  for  firms  selling  through  networks 

between  the  good  and  its  applications  (Varian 

(OECD, 2004b, p. 15).

Networking and markets

Networks  provide  positive  exponential 

benefits  because  every  time  a  person  or  an 

organisation  joins  a  network  or  system  to  gain 

certain benefits, this act simultaneously increases 

the interaction potential (the networking benefits) 

of  all  existing  network  members.  ICT  networks 

exploit this potential even faster and more cheaply 

than  traditional  infrastructures.  These  additional 

benefits  (i.e.  over  and  above  those  accruing  to 

new  members)  amount  to  externalities,  and  in 

this case these can be termed positive.

ICT  has  enabled  the  speed  of  economic 

transactions to increase enormously. Information 

is  more  easily  available,  at  a  lower  price,  and  it 

2001).  System  effects  occur  when  a  product  is 

useless  unless  it  is  combined  with  other  goods, 

services  or  applications:  for  example  hardware 
needs  software,  DVD  players  need  content,  and 

broadband  needs  applications  that  feed  off  the 

specific advantages that broadband has to offer.

On the supply-side the development of global 

computer  networks has created  a highly  volatile 

‘virtual’  market. This  market  is  characterised  by 

intense  competition  between  suppliers  who  aim 

to build market share and attach customers to their 

service (to ‘own’ them), for example by providing 

customised  or  personalised  services.  ICT  has 

reduced the minimum efficient scale of operation 

in many markets (e.g. in desktop publishing). Part 

of the rapid technological progress in ICT and the 

volatility of the market is the development of new 

products and services with a higher value added 

covers a much larger proportion of the market than 

per unit of labour and capital input.

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before. (Horlings et al, 2002). The Internet allows 
consumers to search the market more completely 

(on  a  global  scale)  in  less  time  and  at  lower 

costs than ever before. Conversely, suppliers can 

collect  information  on  their  customers  and  can 
adjust their marketing and prices accordingly.137

Transaction costs have declined considerably 

due to negligible marginal costs. The construction 

10

of the Internet infrastructure (cables, connectors, 

computers,  modems,  etc.)  and  the  purchase  of 

The specific features of ICT, particularly their 

pervasive  nature  and  their  network  externalities, 

can make the application of ICT a self-reinforcing 

process. The long-term impact of the application 

of 

ICT  on  macroeconomic  development 

is 

that  “if  ICT  makes  the  innovation  process  itself 

more  productive 

then  productivity  growth 

rates  could  be  permanently  faster  over  the  long 

term.”  (Wiel,  2001).  ICT  can  affect  productivity 
growth  but  conversely  firms  that  experience 

137  This is referred to as mass customization or personalisation (Varian, 2001).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
strong  productivity  growth  may  invest  more  in 

2002). A spatial re-sorting of value chain functions 

ICT  to  reinforce  their  performance.  Strong  ICT-

can  take  place  if  significant  cost,  efficiency, 

driven growth can create the financial room and 

quality  or  other  advantages  can  be  found  in 

willingness to pay for more ICT investments.

other  locations.  This  is  possible  because  ICT  is 

The  realisation  of  the  economic  and  social 

benefits  of  ICT,  and  of  networking  in  particular, 

depends crucially on the development of market 

increasingly able to bind together many (though 

almost certainly not all) parts of the value chain 

no matter where they are located.

structures  and  pricing  mechanisms.  This  is  also 

On  the  one  hand,  this  can  favour  the 

where the threats are located.

Changing 

technologies 

or 

software 

environments  involves  time,  effort  and  high 

costs,  sometimes  even  infrastructure  upgrades, 

consultancy,  and 

retraining 

(Varian  2001). 

Switching  costs  can  be  so  high  as  to  become 

prohibitive,  which  is  referred  to  as  a  ‘lock-in’ 
effect.138  Lock-in  effects  often  occur  when  users 
are obliged to invest in complementary products 

spatial  de-concentration  (dispersal)  of  economic 

activities  previously  co-located.  Such  de-

concentration  most 

typically  occurs  where 

dispersed sites can offer labour and/or production 

cost  advantages,  pools  of  excess  labour  supply 

for activities confronting labour shortage or high 

labour competition in existing sites, proximity to 

significant markets or clusters of activity, etc.

On  the  other  hand,  spatial  concentration 

without which their good or application is useless 

(centralisation  or  agglomeration)  can  occur 

(e.g. training or software).

Open  standards  allow  many  firms 

to 

interconnect and benefit from economies of scale 

and  scope,  whereas  proprietary  standards,  such 

when activities previously dispersed find that the 

advantages of new forms of geographic proximity 

outweigh  the  need  for  physically  close  links  in 

their present locations.

as exist in software, can create a situation where 

For example, the benefits of building highly 

a  single  firm  dominates  the  market  due  to  lock-

specialised  teams  involved  in  R&D,  business 

in effects and at the expense of lower consumer 

services,  high-tech  manufacturing,  access 

to 

welfare.  Suppliers  try  to  bind  their  customers  to 

specialised  and  fast  changing  knowledge,  etc., 

them  by  customizing  their  services,  for  example 

not just within a given company but, often more 

by monitoring their purchases and adjusting their 

important,  between  similar  or  complementary 

offers  and  prices  accordingly.  A  combination  of 

companies,  can  be  decisive.  In  such  situations, 

(i)  applications  barriers  to  entry  (e.g.  proprietary 

high  levels  of  face-to-face  interaction,  spanning 

standards in software), and (ii) increasing returns to 

commercial, social and cultural contact, can add 

scale as sales increase, prices fall, and the appeal 

much value, particularly where there is high risk 

to  new  customers  grows,  can  result  in  strong 

and  uncertainty,  and  where  the  advantages  of 

market  dominance  which  can  be  detrimental  to 

collaborative learning and collaborative action to 

technological and institutional innovation.

influence the territorial milieux are significant.

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The de-localisation of economic activities

Flexible 

specialisation 

and 

vertical 

disintegration,  coupled  with 

the  networking 

possibilities  presented  by  ICT,  can  lead  to  the 

de-localisation  of  economic  activities.  (Millard, 

In 

such  zones  of  concentration, 

so-

called  organisational  reflexivity  tends  to  be 

an 

important  characteristic  of 

the  regional 

economy: “…unlike transactions of standardised 

and  substitutable  goods, 

factor 

inputs  and 

information,  transactions  associated  with  many 

kinds  of  organisational 

reflexivity 

involve 

11

138  Also referred to as path dependency: once a technology or software environment has been selected, vested interests accumulate 
in the shape of human capital, physical capital and other investments, to the point where a switch to another environment or 
technology becomes extremely difficult and costly or even simply impossible.

 
 
 
 
 
 
 
 
 
 
 
mutually consistent interpretations of information 

Breschi  &  Lissoni  (2001)  have  contended  that 

which  is  not  fully  codified,  hence  not  fully 

interpersonal  knowledge  sharing  does  not  point 

capable  of  being  transmitted,  understood  and 

to physical proximity as a necessary requirement, 

utilised  independently  of  the  actual  agents  who 

arguing  that  non-spatially  defined  knowledge 

are  developing  and  using  it.  (Storper,  1996). 

communities can be important. Here, of course, 

The  regional  and  global  consequences  of  ICT-

the  role  of  ICT  is  important.  Antonelli  (1999) 

supported  de-localisation  are  looked  at  in  more 

stresses  the  difference  between  information  and 

detail in sections 6 and 7 below.

knowledge,  where  knowledge  is  the  result  of  a 

Knowledge and skills in the new 
economy

Knowledge and learning

As  mentioned 

above,  distinction 

is 

frequently  made  between  explicit  (or  codified) 

and  implicit  (or  tacit,  non-codified)  knowledge, 

the  latter  being  highly  contextual,  not  lending 
itself  to  codification  (Polany,  1966,  and  Amin 

and Wilkinson, 1999). Tacit knowledge is argued 

to  be  organisationally  and  locationally  specific, 

reinforcing  the  need  for  face-to-face  contacts 

to  ensure  its  successful  transmission.  However, 

The knowledge pyramid

creative process involving information, “localised 

in  a  tacit  learning  process  embedded  in  the 

background  and  experience  of  each  innovator”. 

It is this fact which, he argues, makes the use of 

knowledge both excludable and non-rivalrous.

However, it is the explicit end of the implicit-

explicit  knowledge  spectrum  which  is  most 

directly,  most  easily  and  most  often  susceptible 

to  digitisation,  and  hence  capture,  manipulation 
and  transmission  by  ICT  (see  diagram  below). 

The  use  of  ICT  relates  primarily  to  the  process 

of  knowledge  creation  and  diffusion  within 

the  economy.  Codified  knowledge 

is  easily 

transmittable  in  formal  and  systematic  language 

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12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(such as words, diagrams, models, data, software, 

clear  that  geographic  proximity  and  interaction, 

etc.),  whereas  tacit  knowledge  always  has  an 

although  far  from  universally  necessary,  can 

implicit  or  individual  character,  often  strongly 

often  be  decisive  for  sustained  innovation.  The 

based on individual experience and/or on shared 

authors  conclude  that  the  relationships  between 

organisational  experience,  which  makes 

its 

actors  in  a  successful  innovative  system  are  just 

formalisation  and  exchange  difficult  to  others 

as important as the individual actors themselves. 

or  outside  the  organisation.  The  Retine  project 

ICT,  as  we  have  seen,  is  the  most  powerful  tool 

(2001) 

represented 

the  distinction  between 

for  establishing,  developing  and  maintaining 

explicit  and  implicit  knowledge  in  the  so-called 

relationships  between  actors,  whether  or  not 

‘knowledge pyramid’, which also emphasises that 

these are in geographic proximity.

the  two  are  complements  rather  than  substitutes 

for  each  other.  In  fact,  they  tend  to  co-evolve: 

the  process  of  codification  generating  new  tacit 

knowledge  in  a  type  of  virtuous  circle  in  which 

knowledge  transforms  along  the  explicit-implicit 

knowledge spectrum (see diagram on page 142).

An  OECD  study 

(1997) 

looked  at 

the 

concept  of  regional  competitiveness  to  explain 

why  some  regions  successfully  develop  clusters 

and  networks,  a  wide  variety  of  manufacturing 

activities  and  of  services  for  businesses  and 

consumers, along with educational, research and 

The  dichotomy  between  explicit  and 
implicit  knowledge  is  also  reflected  in  the 

cultural institutions, and why some must grapple 
with industrial and institutional imbalance and a 

creation  and  dissemination  of  the  two  types  of 

lack of resources necessary to adapt. A territory’s 

learning  identified  by  the  OECD  (2001b)  when 

indigenous  capacity  for  development  is  linked 

examining  the  notion  of  the  learning  economy 

to  the  productivity  of  enterprises,  their  ability  to 

and its implication for economic development at 

join  networks,  the  skills  of  the  labour  force  and 

European, national and regional levels. (See table 

the  strength  of  institutional  resources.  Such  an 

below).  When  related  to  the  ability  to  innovate 

approach stresses the (mainly) endogenous task of 

(understood  as  the  creation  of  new  knowledge), 

creating  networks,  partnerships  and  cooperation 

the  necessary  interaction  between  individuals 

within  the  region  as  well  as  more  widely. These 

and  organisations  is  much  more  likely  to  occur 

elements  were  incorporated  into  the  OECD’s 

in locations with high physical densities of skills 

learning 

region  concept 

(OECD,  2001b), 

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and specialised firms.

For example, in a study of the 50% of firms 

in the East Sweden region which innovated, 76% 

of these did so in collaboration  with  other  firms 

and  organisations  within  the  region  (Edquist 

et  al,  2001).  Clearly,  the  scale  of  analysis  and 
where  the  borders  of  the  region  are  drawn  are 

which  underlines  the  essential  role  of  human 

resources,  skills  and  competencies,  in  addition 

to  infrastructures  (ICT  and  others),  in  network 

creation  and  the  enhancement  of  innovative 

capacity and competitiveness.

The 

seen 
as  a  heuristic  framework  for  analysing  key 

region  concept 

learning 

is 

important  in  this  context,  but  the  message  is 

relationships  and  developing  effective  strategies 

Categories of learning

Individual learning
(resulting in human 
capital)

Organisational learning
(resulting in structural 
capital)

Dissemination of existing knowledge

Creation of new knowledge

e.g. schooling; vocational training; “learning-
by-doing” in the workplace

e.g. university-based research by PhD student; 
“learning-by-doing” in the workplace

e.g. building data bases, creation of routines 
and manuals; appropriation of technological 
licences from other firms; recruitment of 
highly qualified staff by firms

e.g. [“learning by interaction”]; R&D in 
universities by research groups; R&D within 
firms; collaborative R&D between firms and 
research institutes

1

Source: OECD (2001b, p. 15).

 
 
 
 
 
 
 
 
 
 
 
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7

for  national  and  regional  policy.  At  base, 

ii)  at  inter-firm  level  between  firms  interacting 

economic  competitiveness  is  determined  by  the 

within a cluster

quality of social capital, defined as the institutions, 

relationships,  and  social  norms  impinging  upon 

the  quality  and  quantity  of  social  interactions 

within a society. In a broad sense it includes the 

social  and  political  framework  that  shapes  both 

these norms but also the relevant social structures. 

Social  capital,  in  turn,  moulds  the  types  of 

learning and the use and creation of knowledge 

which  take  place  in  the  economic  sphere, 

resulting  in  economic  competitiveness,  but  also 

in social inclusion if long term sustainability is to 

be ensured. See the diagram below.

The essential point about the learning region 

is  that  policy  can  in  fact  address  organisational 

change  in  a  region  as  well  as  more  widely, 
which  itself  has  implications  for  the  use  and 

development of ICT. Such organisational change 

can  promote  regional  actors’  abilities  to  learn, 

imitate  and  innovate.  Asheim  (1996),  Morgan 

(1997).  Maskell  and  Törnqvist  (1999)  define  a 

learning region as one where an industrial cluster 

becomes a collective learning system, a concept 

drawing heavily on Lundvall’s concept of national 

systems  of  innovation,  fleshed  out  at  local  and 

regional levels. Asheim (1966) argues that in such 

regions,  learning  organisations  develop  at  three 

levels:

i) 

at  intra-firm  level  (with  flatter  organisational 

structures)

The learning region model

iii)  at  the  institutional  level,  through  public 

intervention 

to 

support  organisational 

innovation in business services, research and 

training.

It is argued by some that the learning region 

need  not  necessarily  be  high-tech  (Maskell  and 

Törnqvist,  1999),  and  that  a  learning  region 

can  be  based  upon  one  or  more  traditional 

manufacturing  sectors.  The  learning  region  is 

alleged to have many advantages over traditional 

industrial  districts,  particularly  the  avoidance 

of  being  locked-in  to  a  path-dependent  and 

increasingly  obsolete  technological  trajectories. 

Permanent 

innovation  based  upon 

learning 

and  knowledge  creation  is  the  means  by  which 

regional comparative advantage can be preserved 

and  enhanced  in  a  globalised  economy.  It  is 

essentially a non-mobile resource.

Malmberg  and  Maskell  (1999)  argue  that 

the 

learning  region  permits 

the  acquisition 

of  monopoly  rents,  so  that  they  become  the 

basis  of  comparative  advantage  based  on  three 

characteristics of resource immobility:

i) 

asset-mass  efficiency 

(clusters  with  a 

large  stock  of  knowledge  produce  more 

innovations)

Individual
learning

Economic
competitiveness

Social
capital

1

Organisational
learning

Social inclusion

 Source: OECD (2001), p. 31.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ii) 

time compression economies (it takes a long 

6. 

interpersonal and civic competences

time  for  a  learning  region  to  develop,  so  by 

locking in to an existing learning region much 

time can be saved)

7. 

entrepreneurship

8.  cultural awareness.

iii) 

the interconnectedness of asset stocks (single 

components  of  a  learning  economy  cannot 

be  easily  imitated  or  detached  from  the 

whole).

eSkills and eLearning

Of  these,  eSkills  are  critical,  and  do  not 

only  encompass  ICT  skills  but  also  other  skills 

necessary  for  optimising  the  use  of  ICT  and 

working  in  a  knowledge  economy  context.  The 

European  eSkills  Forum  (2004a)  defines  three 

main types of eSkills:

• 

ICT  practitioner 

skills: 

the  capabilities 

According  to  the  European  eSkills  Forum 

required  for  researching,  developing  and 

(2004a),  as  education  and  training  become 

designing,  managing,  producing,  consulting, 

more  flexible  and  available  on  demand  and 

marketing  and  selling,  integrating,  installing 

in  smaller  and  more-tailored  packages,  so  the 

and  administrating,  maintaining,  supporting 

rapid  changes  in  technology  and  the  economy 

and servicing ICT systems.

(products,  legislation,  working  methods)  make 
greater demands for an extensive basic education 

to enable future flexibility. It is no longer enough 

to  assume  that  the  initial  full  time  education 

of  those  entering  the  labour  market  will  serve 

workers  adequately  for  the  rest  of  their  working 

lives.  Training,  retraining,  and  lifelong  learning, 

are needed to enable skills to remain up-to-date, 

and to enable mid career changes and continued 

employability.  In  the  knowledge  economy,  not 

only  are  new  types  of  skill  sets  required,  but 

lifelong  learning,  often  supported  by  ICT  itself 

(i.e. eLearning), is already becoming a prominent 
feature of work in the 21st Century.

The EU has identified eight key competence 

domains 

(covering  knowledge, 

skills  and 

attitudes) which should be acquired by the end of 

compulsory  education,  and  achieved  (if  absent), 
maintained and updated in lifelong learning:139

1.  communication in mother tongue

2. 

foreign languages

3.  mathematical literacy and basic competences 

in science and technology

4. 

ICT skills

5. 

learning-to-learn

• 

ICT  user  skills:  the  capabilities  required  for 

effective  application  of  ICT  systems  and 

devices  by  the  individual.  ICT  users  apply 

systems  as  tools  in  support  of  their  own 

work, which is, in most cases, not ICT. User 

skills cover the utilisation of common generic 

software tools and the use of specialised tools 

supporting  business  functions  within  sectors 

other than the ICT industry.

• 

eBusiness  skills:  the  capabilities  needed  to 

exploit  the  opportunities  provided  by  ICT, 

notably the Internet, to ensure more efficient 

and  effective  performance  of  different  types 

of  organisations, 

to  explore  possibilities 

for  new  ways  of  conducting  business  and 

organisational  processes,  and  to  establish 

new businesses.

The  STAR  project  (STAR,  2001)  looked 
inter  alia  at  the  impact  of  ICT  on  applied  skills 
and  work  content  in  the  Information  Society, 

and  found  clear  distinctions  between  higher- 

and  lower-skilled  jobs. At  the  higher  end  of  the 

skills/qualification  spectrum,  there  has  been  a 

clear trend to enable the employee to gain more 

responsibility  over  structuring  his/her  work. 

As  boundaries  of  work  relationships  become 

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1

139  http://europa.eu.int/comm/education/policies/lll/lll_en.html

 
 
 
 
 
 
 
 
 
 
 
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7

blurred  and  management  by  objectives  instead 

skills, dealing with unexpected rather than routine 

of  instructions  is  introduced,  skilled  employees 

situations, greater initiative and self reliance, etc.

gain  freedom  of  action,  but  have  to  pay  for  this 

by taking on greater responsibility for organising 

their  own  work  and  ensuring  that  it  is  effective, 

often  in  the  form  of  ‘project’  work  where  they 

take  responsibility  for  the  whole  project.  These 

changes do take place inside existing, traditional 

employment  relationships,  although  they  may 

to  some  extent  prepare  employees  for  working 

as  self-employed  or  as  free  agents.  (Pink,  1997) 

At  the  lower  end  of  the  qualification  spectrum, 

deskilling can be observed as the know-how that 

was  formerly  embodied  in  employees  has  often 

been  codified  and  automated  in  ICT  systems. 

Such deskilling benefits companies because they 

can now draw a greater share of their staff from 

the  contingent  workforce  which  enables  them 

to cut their payroll. So, in the case of the lower- 

and  unskilled  workforce,  ICT  increases  only 

company-centred flexibility, ´whilst such workers 

lose bargaining power.

Much  work  is  increasingly  being  organised 

on a ‘project’ basis, i.e. individuals or teams are 

given  a  specific  task  or  project,  some  resources, 

quality requirements and a deadline. How, where 

and  when  the  work  is  carried  out  in  detail,  as 

long  as  these  requirements  are  met,  is  left  to 

the  workers  themselves.  Coping  with  the  extra 

responsibility, and perhaps stress, this can cause 

needs  to  be  acquired  as  a  skill  in  its  own  right. 

Although  many  work  processes  remain  routine, 

most  workers  are  being  exposed  to  these  new 

demands on their abilities. Indeed ICT can, in the 

best  circumstances,  take  over  routine  functions 

leaving workers free to undertake more interesting 

work.

ICT thus has a somewhat paradoxical effect 

on  skills  and  competencies,  leading  to  both  de- 

and  re-skilling  depending  on  the  initial  skill  set. 

the  market  conditions  and  organisational  and 

labour  market  strategies.  It  often  also  requires 

both  more  and  less  independence  on  the  part 

Skills and knowledge management

of  the  individual  worker  at  the  same  time.  On 

As described above, among the direct affects 

of  ICT  are  impacts  on  skill  requirements  and 

the  skill  acquisition  process,  which  are  of  vital 

importance for the competitiveness and efficiency 

of  organisations.  Basic  ICT  skills  (such  as  use  of 

a PC, mobile devices, standard programmes) are 

a  precondition.  More  advanced  ICT  skills  (e.g. 

software  development,  web-design,  database 

design,  the  use  of  specialised  programmes,  etc.) 

can be required depending on the type of work to 

be performed.

the  one  hand,  ICT  contributes  to  placing  more 

responsibility  on  individuals  to  enhance  their 

own  skills  profiles,  especially  in  contexts  where 

there  is  more  independent  working  (including 

at  a  geographical  distance),  and  where  each 

employee has specific responsibility to complete 

her or his work successfully. On the other hand, 

the  complex  nature  of  new  types  of  work,  and 

the knowledge needed to successful complete it, 

often requires greater inter-working, cooperation 
and team work, i.e. more reliance on others both 

within  and  outside  the  organisation.  (Millard, 

In  addition,  however,  modern  working 

2002)

conditions  often 

require 

further  mixes  of 

generalised  and  more  advanced  skills  and 

competencies. 

In  a 

fast  changing  work 

environment,  with  a  wide  variety  of  work 

forms  and  contractual  arrangements, 

there 

is  an  increasing  need  for  individuals  to  take 

responsibility  for  their  own  work  and  skills 

development. This includes fostering abilities like 

self-organisation and management, inter-personal 

1

Thus,  although  companies  are  increasingly 

pressured 

to  provide  continuous 

learning 

for  individual  employees  in  order  match  the 

fast  changes  taking  place  in  the  competitive 

to  enhance 
they  also  need 
environment, 
organisational  learning,  i.e.  the  management 

of  knowledge  in  a  company  or  organisation 

as  described  above.  (OECD,  2001b)  Only  if 

organisations  are  able  to  systematically  preserve 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and  exploit  the  collective  and  interchangeable 

retailing). Job losses also occur, but the net effect 

know-how  of  their  workforce,  thereby  reducing 

appears to be positive where the right conditions 

the  threat  posed  by  departing  employees  as 

are  created. These  conditions  include  (European 

well  as  ensuring  that  the  competitive  potential 

eSkills Forum, 2004b, p. 14):

of  the  organisation  is  fully  exploited,  will  they 

be  inclined  to  invest  in  training  activities. Thus, 

knowledge management is closely related to the 

continuous  learning  of  the  workforce.  (Senge, 

1990, and Nonaka, Takeuchi, 1995)

The impact of ICT on jobs and work 
organisation

Creating jobs in the knowledge economy

• 

access to high level skills, expertise, training 

and research

• 

environments that attract exceptional people 

and encourage innovation and collaboration

• 

clusters  of  a  critical  mass  of 

related 

organisations and services

• 

access to resources, facilities and markets.

The  EU’s  main  policy  response  is  mainly 
through  the  so-called  Luxembourg  Process141  in 
which  Member  States  prepare  an  annual  Joint 

According  to  the  European  eSkills  Forum 

Employment Report focusing on (European eSkills 

(2004b),  sustainable  jobs  are  created  mainly  by 

Forum, 2004b, p. 14):

growth  in  economic  activity.  Government  can 

also create jobs, for example by financing public 

infrastructure, or increasing defence or regulation 

workforces.  Increasing  the  availability  of  skilled 

people  may  itself  create  jobs,  by  removing 
‘creative  destruction’,140  or 
increasing competitiveness by reducing excessive 

constraints  on 

wage levels in areas of shortage.

As  also  demonstrated  in  section  8.2,  ICT 

is  a  major  driver  of  economic  growth  and  can 

contribute to more and better jobs under certain 

conditions. This takes place not only through the 

development  of  new  products  and  services,  but 

also  by  enabling  existing  tasks  to  be  performed 

more  efficiently  or 

to  a  higher  standard. 

Considerable  scope  remains  for  applying  ICT  to 

existing  tasks  which  requires  specialist  eSkills 
initially  to  develop  the  application,  and  then 

• 

increasing  adaptability  of  workers  and 

enterprises  –  eSkills  and  eBusiness  clearly 

have important roles in this

• 

attracting  more  people 

to 

the 

labour 

market,  and  making  work  a  real  option 

for  all  –  eInclusion  may  provide  the  means 

to  accessing  disadvantaged  groups  and 

teleworking can reach remote locations

• 

investing  more  and  more  effectively 

in 

human capital – ICT skills will figure strongly 

amongst  required  skills,  and  eLearning  will 

contribute to their delivery

• 

ensuring effective implementation of reforms 

through better governance – eGovernment is 

important in this context.

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requires both specialist and user eSkills across all 

The  use  of  ICT  and  the  digitisation  of  work 

sectors for on-going operation and maintenance. 

process

This  has  created  the  need  for  those  with  sector 

expertise  to  develop  eSkills  as  well,  and  for 

professionals from other sectors to move into ICT.

How  ICT  is  used  in  organisations  and  how 

precisely  it  impacts  work  depends,  of  course, 

upon  the  type  of  economic  activity  involved 

There  is  a  multiplier  effect  creating  jobs  in 

and  the  way  the  work  is  organised.  Specially, 

other  sectors  (from  packaging  to  education  to 

it  depends  upon  the  extent  to  which  the  work 

1

140  A term first coined by economist Joseph Schumpeter; see OECD (2003), OECD (2004), Economist Intelligence Unit (2004), 

Department of Trade and Industry, UK (2005).

141  Agreed at the Luxembourg European Council, November 1997.

 
 
 
 
 
 
 
 
 
 
 
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7

can  be  standardised  (codified)  into  digital  form. 

and  exploitation  of  highly  tacit  and  experiential 

The  distinction  between  explicit  or  codifiable 

knowledge. (Millard, 2002)

knowledge,  on  the  one  hand,  and  implicit  or 

tacit  knowledge  on  the  other  can  be  important 

in understanding the potential application of ICT. 

ICT,  as  a  medium  of  digital  communication  and 

manipulation, is often eminently suitable for the 

successful handling of highly-codified knowledge. 

The  greater  the  codification  of  knowledge  into 

digital  format,  the  more  likely  it  is  that  (Flecker, 

Kirschenhofer, 2002):

Despite this, many aspects of service jobs are 

today becoming subject to codification and hence 

automation. So the boundary between what can 

be codified and captured by ICT and what cannot 

is  constantly  moving.  There  is  some  evidence 

that we are on the edge of a major move towards 

the  commoditisation  of  business  processes  in 

which  many  types  of  business  processes,  from 

developing  software  to  hiring  a  CEO,  are  being 

• 

the  de-localisation  of  work  takes  place,  i.e. 

analysed,  standardised  and  quality  checked,  as 

the work can easily be done in many places 

more and more knowledge becomes codified and 

• 

the monitoring of staff and the work they do 

will be undertaken by the employer

• 

the 

transformation  of 

tacit,  experiential 

knowledge  into  more  formalised  objective 

knowledge,  documentation  and  digitisation 

will be encouraged

• 

a  formalisation  of  work  processes  will  take 

place which itself could become a trigger for 

work de-localisation.

ICT’s  success  with 

tacit  knowledge 

is, 

however,  considerably  less.  Despite  constant 

improvements  in  the  ability  of  ICT  to  support 

intimate  communication  between 

individuals 

and  groups  (e.g.  through  video-conferencing, 

shared digital workplaces, etc.), it seems unlikely 

that  ICT  will  ever  be  able  to  fully  replicate  the 

quality  of  physically  interactive  group  work 

when such work relies upon the large amounts of 

unstructured,  intuitive,  creative  and  specialised 

knowledge  necessary  for  functions  like  research 
innovation,  consultancy, 
and  development, 

strategic  management  and  decision-making,  etc. 

ICT  can,  of  course,  supplement  such  work  and 

enrich  it  (for  example  via  databases,  knowledge 

management  systems,  expert  systems,  regular 

communication  with  similar  knowledge-rich 

facilitated  by  ICT.  (Davenport,  2005) This  could 

lead to process commoditisation and outsourcing 

on a massive scale in the future.

In  addition,  improvements  in  ICT  within 

a  highly  codified  knowledge  context  can  also 

lead  to  the  spinning  off  of  activities  requiring 

more  tacit  knowledge  and  skills.  For  example, 

call  centre  customers  can  be  provided  with 

increasingly  sophisticated  ICT-based  self-service 

facilities  directly  accessing  larger  amounts  of 

standardised  information.  This  has  the  potential 

to  reduce  existing  routine  call  centre  functions 

and  jobs,  but  in  turn  gives  greater  scope  for  the 

development and use of higher tacit skills by the 

call  centre  operatives  who  remain.  Call  centres 

could  thus  become  more  like  help  desks  in  the 

future with fewer staff but more highly paid and 

less routine jobs. Such call centres/help desks are 

likely  to  become  re-concentrated  into  core  and 

urban  areas  where the necessary  skills  are  more 

readily  available.  Further  into  the  future,  when 
ICT assists in codifying and digitising even some 

of these higher level functions, de-localisation is 

again likely. In the right conditions, ICT plays an 

interesting role overall, helping to drive around a 

virtuous circle which feeds, in turn, both explicit 

and tacit knowledge/skill developments. (Millard, 

groups  in  other  parts  of  the  world,  etc.),  but 

2002, and Gillespie et al, 2001).

1

it  cannot  completely  replace  it.  Neither  will 
ICT  be  able  to  totally  replace  the  cultural  and 

social  frameworks  of  such  knowledge-rich  work 

The flexibilisation of work organisation

regimes which are just as important as economic 

There  are  many  examples  of  how  ICT  has 

factors  in  ensuring  the  successful  development 

made  possible  totally  new  models  of  how  to 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
organise work processes in both space and time 

employer, for example, through outsourcing, 

(See,  for  example,  EMERGENCE,  2002).  These 

i.e. 

the 

transfer  of  activities 

formerly 

are also related to new contractual employment 

undertaken in-house to the free market.

forms and changes to the content of work. This 

has  put  into  question  ‘traditional  employment 

relationships’,  often  characterised, 

in 

their 

broadest  sense,  by  full-time,  permanent  jobs 

with a contract of employment, even and stable 

distribution of working hours over a fixed number 

of  days  per  week,  stable  skill  requirements  and 

long  job  tenures.  (Handy,  1995,  and  Dostal, 

1999.)

Above  all,  ICT  seems  to  be  contributing 

directly  to  the  greater  flexibility  of  working 

processes and the organisation of work. Here, it 

can  be  useful  to  distinguish  between  two  types 

(Rowntree Foundation 1999, FAMILIES 2002):

•  The 

increasing  number  of 

innovative 

business  models 

(especially 

for 

small 

companies)  based  on  ICT,  and  the  falling 

barriers  of  entry  into  sectors  that  have 

traditionally been protected by requirements 

for  major  capital  investment  and  by  heavy 

state  regulation,  again  attributed  in  part  to 

the application of ICT.

•  The 

‘distance-bridging’  potential  of 

ICT 

which increases the de-localisation potential 

of work functions as well as of workers. This 

makes  it  possible  to  choose  locations  for 

work  processes  more  freely,  thus  enabling 

companies  to  become  more  adaptable  to 

•  worker-centred  flexibility  – 

this 

involves 

changes in their environment.

adapting  regulatory  frameworks  and  work 

organisation  in  order  to  give  workers  more 

choice,  such  as  the  ability  to  fit  working 

hours around family life.

The STAR project (STAR, 2001) looked at the 

impact  of  ICT  on  working  time,  working  place, 

type of contract and applied skills (work content), 

and  generally 

found  much  more  flexibility 

• 

company-centred  flexibility  –  this  tends  to 

overall  but  (in  2001)  little  evidence  of  profound 

require  workers  to  adapt  to  the  changing 

widespread  changes  to  existing  arrangements. 

requirements of companies regardless of the 

There  was  no  clear  sign  that  employee  status  is 

effect on working conditions.

eroding,  but  rather  that  dependent  employment 

Both  types  are,  of  course,  interrelated,  and 

can  arguably  only  be  increased  in  a  socially 

sustainable way if a balance is struck between the 

two, as in attempts to develop a work-life balance 

approach to work flexibility.

arrangements  are  adapting 

to  new  flexible 

requirements. Similarly, although there was some 

increase  in  self-employment  in  the  European 

economies  overall,  this  did  not  appear  to  be 

driven  by  ICT  or  so-called  eLancing  (i.e.  free-

lancers  selling  their  services  and  work  over  the 

The overall effects of ICT on work processes 

Internet).

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and organisation can be summarised as (BISER, 
2002):

• 

Flexitime  and  part-time  working  models,  as 

ICT  has  gradually  lessened  dependence  on 

routine  communication  and  workflow  in 

organisations  using  face-to-face  interaction 

and,  by  implication,  on  fixed  and  universal 

working times.

•  Decreases in transaction costs, such as those 

caused  by  the  application  of  ICT,  tend  to 

result  in  the  increasing  importance  of  self-

employment  compared  to  working  for  an 

STAR  also  reported  that  job  tenure  has 

remained largely unchanged in almost all OECD 

countries  (with  the  exception  of  the  USA).  This 

may  be  explained  by  the  increasing  need  to  tap 

the tacit knowledge of the workforce and develop 

work environments that foster innovation. Both are 

made easier by a workplace culture in which trust 

and  experimentation  can  simultaneously  occur. 

The  need  for  trust  within  groups  of  cooperating 

individuals acts as a limit to the spread of atypical 

employment  forms  such  as  short-term  work 

contracts,  but  also  freelancing.  Labour  markets 

1

 
 
 
 
 
 
 
 
 
 
 
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7

that  rely  on  electronic  representation  of  market 

2.  concentration within a group of companies

participants in general present a magnified ‘trust 

dilemma’  because  obtaining  the  information 

needed to assess someone’s characteristics is even 

more difficult due to the diminished information 

richness  of  the  electronic  medium  as  compared 

to face-to-face communication.

Overall,  STAR  (2001,  pp.  54-55)  concluded 

that there is no evidence for the extinction of the 

regular  employment  relationship,  and  foresaw  a 

gradual change towards a redefinition of regular 

employment models which then will encompass 

patchwork  careers,  stints  in  self-employment  as 

well  as  dependent  employment,  different  work 

time models, etc., without sacrificing basic social 

insurance  standards.  One  argument  against  a 

proliferation  of  freelance  work  is  that  European 
economies  (as  well  as  individual  companies) 

will  increasingly  rely  on  highly-skilled  human 

capital as their main competitive advantage, and 

will  thus  try  to  keep  and  nurture  such  resources 

inhouse.  While  there  can  be  no  doubt  that 

trends  point  towards  increasing  self-dependence 

and  managerial  participation,  this  might  also 

occur  inside  regular  employment  relationships 

(‘intrapreneurs’,  see  Pongratz  and  Voß  1998). 

Traditional  employment  contracts  have  proven 

to  be  adaptable  to  rapid  changes  in  company 

environments; they have also proven to be able to 

3.  outsourcing of specific functions or tasks.

In  the  first  two  situations,  the  existing 

locations of the actual companies concerned are 

powerful inertial determinants of both the source 

and  destination  of  any  work  relocations.  In  the 

third situation, normally one in which a specific 

function  or  task  is  relocated  without  affecting 

the source company organisation (except maybe 

the  loss  of  a  function),  decision-making  focuses 

upon  finding  the  right  company  to  do  the  work 

regardless  of  where  that  company  is  located 

(so  that  regional  characteristics  are  not  directly 

considered).

In  each  of 

these 

three  situations,  but 

especially in the first two, a successful relocation 

often  seems  to  depend  on  an  organisational 

learning  process  taking  place.  In  this  context, 

EMERGENCE  identified  a  number  of  important 

organisational facilitators:

• 

Existing contacts and support from parent or 

partner companies.

•  Clearly delineated tasks or projects, including 

a high degree of standardisation, codification 

and  formalisation,  plus  as  exact  as  possible 

specification  and  documentation  of 

the 

eWork to be undertaken.

allow a considerable degree of flexibility without 

•  Worker  involvement  in  the  preparation  and 

becoming superfluous.

implementation of the relocation.

Organisational and workforce factors

In the context of the re-organisation of work 

and jobs in the knowledge economy, the findings 

of  the  EMERGENCE  project  (2002)  clearly  show 

that  existing  and/or 

internal  organisational 

•  Adaptation  of  work  routines,  organisation 

and 

technology 

to 

the  new 

relocated 

environment.

•  Organisational  change  in  the  source  region, 

as well as at the destination, to adapt to the 

new overall division of labour.

and  workforce  factors  are  highly  significant 

•  Dedicated  and  extensive  efforts  regarding 

in  determining  new  economic  or 

spatial 

configurations,  and  are  often  more  important 

knowledge  transfer  and  training  through 

as  much  codification  as  is  possible  and 

than  locational  or  geographic  characteristics. 

desirable.

10

EMERGENCE examined three important company 

and organisational factors:

It  is  also  important  to  take  account  of  the 

actual  workforce  involved  for  successful  eWork 

1. 

relocations  supported  by  parent  companies, 

relocation, particularly characteristics like gender, 

alliances of associations of firms, etc.

age,  skills,  career  stage,  wages,  etc.  However, 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
when  relocation  is  due  to  cost  savings  this  can 

2.  The  ability  of  the  virtual  smart  organisation 

result in a worsening of working and employment 

to 

turn  collective 

information  and 

tacit 

conditions  through  the  imposition  of  longer 

knowledge  into  operational,  tactical  and 

hours,  more  flexibility  for  the  employer,  greater 

strategic  knowledge  and  insights,  is  critical 

workload, and a likelihood of more stress for the 

to  its  competitiveness.  We  need  a  deeper 

workers.  One  somewhat  surprising  finding  from 

understanding of how these knowledge flows 

EMERGENCE is that eWork relocations can result 

are  enabled,  for  example  what  is  system 

in the increased geographic mobility of personnel. 

(ICT)  specific,  what  is  determined  by  the 

Apart  from  increased  commuting  (which  is  only 

economic  milieu,  what  is  tied  to  the  social 

relevant  for  short  distance  relocations),  this  can 

and cultural fabric, and to which extent can 

take one of two forms:

these  be  enabled  by  policy  and  institutional 

• 

a permanent move by staff to stay with their 

interventions?

relocating  job  –  this  sometimes  also  means 

3. 

Inter-corporate  relationship  management  is 

a  new  employer  for  the  staff  member  if 

vital  to  the  organisation’s  ability  to  position 

outsourcing is involved

• 

temporary  moves  of,  for  example,  managers 

and  trainers  to  set  up  the  relocated  facility, 

plus of staff members generally who require 

more  travel  to  meet  colleagues  in  the  new 

itself within e-enabled communities. Creative 

interaction  between  employees,  systems 

and  extra-corporate  entities  facilitates  the 
competitiveness  and  the  uniqueness  of  the 

organisation.

locations  for  regular  or  occasional  face-to-

It 

should  be 

remembered 

that 

the 

face encounters.

discussion  of  globalisation  is  much  more  than 

just outsourcing and offshoring, although this is 

very a important component. It is also about a 

Organisational collaboration

focus on:

A  particular 

feature  of 

globalisation 

which  derives  from  ICT  developments  is  the 

dramatically  increased  ability  of  organisations 

to  collaborate  across  both  internal  and  external 

boundaries  in  new  forms  of  e-enabled  value 

chains and knowledge networks. In this context, 

and  through  extensive  case-based  research  and 

literature  review,  the Virtual  Smart  organisations 

(VSO,  2003)  study  made  some  of  the  following 

observations:

•  The  change  from  a  situation  10-20  years 

ago  where  specific,  relatively  self-contained 

functions  could  be  relocated  to  exploit 

other  location’s  advantages  (whether  price, 

skills,  (lack  of)  legislation,  grants,  etc.),  and 

could  be  centrally  coordinated 

through 

simple  communications 

structures  and 

pre-determined  production  and 

service 

agreements,  and  then  brought  together  in 

finished products.

1.  The  ability  of  the  virtual  smart  organisation 

•  To the situation today where coordination is 

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to  understand  its  own  processes  and  re-

configure  these  in  relation  to  their  overall 

purpose  is  the  key  to  competitiveness.  The 

ability to re-configure systems and processes 

and  behaviours  is  based  upon  the  intra-

network of the organisation and its flexibility. 

This is enhanced through the use of corporate 

knowledge-based  systems,  which  becomes 

the organisation’s repository of learning.

complex  and  real  time  involving  advanced 

ICT-based communications enabling intimate 

integration  and  dynamic  reorganisation  of 

processes and value chains between global 

facilities,  both  serving  and  collaborating 

with  local  markets  but  also  exploiting  the 

global  resources,  knowledge  and  skills  of 

the  entire  organisation  or  partnership  –  the 

latter  is  itself  constantly  changing  to  reflect 

11

 
 
 
 
 
 
 
 
 
 
 
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changing  market  signals,  new  production 

as  through  the  introduction  of  new  processes, 

and  process  innovation  and  global  political 

products and applications.

and economic events.

Main  firm  level  ICT  impacts  found  by  the 

•  This transformation from simple coordination 

OECD (2004b) include:

to deep collaboration also typically involves 

the  development  of  highly  specialised 

clusters  which  both  have  a  global  place  in 

the  international  division  of  labour,  but  at 

the  same  time  also  reflect  and  exploit  the 

local  labour  and  demand  markets  and  the 

politico-economic situation.

•  Positive 

links  between 

ICT  use  and 

productivity  growth  (especially  in  certain 

sectors  such  as  finance  and  insurance,  but 

also in many other manufacturing and service 

sectors as well), but that these taper off over 

time,  so  that  the  ultimate  productivity  effect 

from  adoption  of  ICT  is  thus  a  step  up  in 

•  The  instantaneous  global  flows  of  capital, 

levels,  rather  than  a  permanent  increase  in 

knowledge and decisions, global value chains 

the rate of growth. (Evidence from Australia.)

(supply and demand chains), insourcing and 

offshoring.

Firms, business impacts and innovation

ICT impacts at firm level

The  OECD  (2004b)  study  on  the  economic 

impact of ICT showed very clear and unambiguous 

impacts  on  the  economic  performance  and 

the  success  of  individual  firms,  in  particular 

when  it  is  combined  with  investment  in  skills, 

organisational  change  and  innovation.  These 

impacts  can  be  observed  in  firm-level  studies 

for  all  OECD  countries,  but  have  not  yet  been 

translated  into  better  economic  performance  at 

the industry or economy-wide level in all OECD 

countries. The OECD points to some factors that 

may  explain  this  gap  between  firm-level  and 

aggregate  performance,  such  as  aggregation 

effects, time lags and measurement.

Moreover,  the  use  of  ICT  by  firms  is  only 

part  of  a  much  broader  range  of  changes  that 

helps  them  enhance  performance. This  includes 

complementary 

investments, 

for  example 

in 

appropriate  skills,  and  organisational  changes, 

such  as  new  strategies,  new  business  processes 

and  new  organisational  structures. 

ICT  use 

12

by  firms  is  also  often  linked  to  the  ability  of  a 

company  to  innovate.  Users  of  ICT  often  help 

make  their  investments  more  valuable  through 

their  own  experimentation  and  innovation,  such 

• 

ICT  capital  deepening 

raised 

labour 

productivity in service firms. (Evidence from 

the  Netherlands,  Germany,  Canada  and 

Switzerland).  In  Finland,  labour  productivity 

increased  between  8%  and  18%,  and  is 

much higher in younger firms and in the ICT-

producing  service  sector  itself.  Overall,  the 

higher  productivity  induced  by  ICT  seems 

to  be  somewhat  greater  in  services  than  in 

manufacturing.  Manufacturing  firms  benefit 

in  particular  from  ICT-induced  efficiency  in 

internal  communication,  which  is  typically 

linked  to  the  use  of  local  area  networks 

(LANs),  whereas 

service  firms  benefit 

from  efficiency  gains  in  external  (Internet) 

communication.

•  Positive effects on firm productivity associated 

with the use of computer networks for trading. 

However,  there  is  an  important  difference 

between  eBuying  and  eSelling,  with  the 

former  having  positive  impacts  on  output 

growth and the latter typically having negative 

impacts.  This  is  likely  due  to  pricing  effects, 

since at least part of the gain from investment 

in  electronic  procurement  by  firms  comes 

from the ability to use the price transparency 

offered  by  eProcurement  to  secure  more 

competitive  deals.  Part  of  this  comes  from 

efficiency gains, but part is likely to be at the 

expense  of  suppliers.  Overall,  it  seems  that 

the  effects  of  reduced  search  costs,  price 

transparency  and  rapid  supplier  reaction 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
associated with electronic marketing and sale 

particularly 

after 

computer 

network 

of goods are likely to have a negative impact 

introduction.  In  Japan,  firms  with  computer 

on  prices.  However,  there  is  a  great  deal 

network  use  achieved  a  less  sharp  drop  in 

of  variation  across  industries  depending  on 

labour  productivity  growth  after  computer 

market conditions. (Evidence from the UK.)

network  introduction  as  compared  to  non-

• 

In  another  study  of  the  effect  of  computer 

users.

networks,  this  time  in  the  US,  Denmark 

and  Japan,  the  estimates  show  that  labour 

productivity in US manufacturing plants with 

computer networks is about 5% higher than 

in  plants  without  computer  networks  if  the 

productivity measure is based on gross output. 

Estimates  based  on  a  value-added  measure 

show  that  labour  productivity  is  about  11% 

higher  in  plants  with  computer  networks.  It 

also finds that a plant that would move from 

“less likely to having a computer network” to 
“more likely to having a computer network” 

would  increase  its  labour  productivity  by 

6.3%.  This  effect  persists  when  controlling 

for a range of firm conditions.

• 

In  an  Italian  study,  there  was  growth  in 

multifactor  productivity 

(MFP)  positively 

related to the increased intensity of ICT use. 

These  impacts  are  not  only  found  in  high-

technology sectors or sectors that are intensive 

users  of  ICT,  but  also  in  the  construction 

sector  and  other  community  and  social 

services,  sectors  that  are  not  particularly 

intensive  users  of  ICT.  Despite  the  positive 

impacts  of  ICT,  the  overall  performance 

of  Italy  over  this  period  was  characterised 

by  negative  MFP  growth,  which  the  study 

attributes  to  the  limited  scale  of  investment 
in ICT and the costs of adjustment to the new 

technology.

Business impacts

The  SEAMATE  project  (SEAMATE,  2003) 

provided a comprehensive summary of the main 

business  benefits  associated  with  ICT,  based  on 

their  own  surveys  and  analyses,  but  which  tend 

in most cases to corroborate other findings, such 

as those above from the OECD.

SEAMATE found that overall business impacts 

encompassed:

•  The  overall  transformation  of  production 

and  value  chains  from  traditional  to  digital 

business  is  clear,  as  is  the  importance  of 

new  forms  of  collaboration,  like  business 

networking, and how ICT affects productivity, 

firm  performance  and  innovation,  although 

company  size  and  time  aspects  for  ICT 

adoption  are 
important.  The  degree  of 
the  impact  of  ICT  on  enterprises  is  also 

dependent on the product area and sector in 

which the new technology is integrated.

•  An  important  motor  of  ICT  adoption  is 

the  competition  between  actors  in  a  given 

market sector. The higher the competition is 

(for  example,  in  the  automotive  sector),  the 

greater  are  the  efforts  to  optimise  logistical 

processes within the supply chain. However, 
in most cases, eCommerce was implemented 

as a response to a problem, rather than as a 

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•  The  use  of  both  intra-firm  and  inter-firm 

strategic tool in its own right.

computer  networks  is  positively  correlated 

with MFP levels at the firm level. Positive and 

statistically  significant  coefficients  are  found 

for  several  types  of  computer  networks, 

including  open  computer  networks 
Internet),  CAD/CAM 

(the 
technologies  and 

electronic  data 

interchange 

(EDI). 

In 

Denmark,  firms  with  computer  networks 

achieved  higher  growth  of  value  added, 

•  The  knowledge  economy 

is  driven  by 

new  factors  of  production  and  sources  of 

competitive  advantages  such  as  innovation, 

design, branding and know-how. These factors 

are  valid  for  all  industries  from  retailing  and 

car  manufacturing  to  finance  and  software. 

1

As  ideas,  information  and  knowledge  for 

the  production  of,  for  instance,  a  car  are 

 
 
 
 
 
 
 
 
 
 
 
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7

seldom held by one single person or a single 

of  eCommerce  often  fails  to  be  followed 

company,  collaborative  networks  are  fast 

by  the  necessary  reorganisation  of  existing 

becoming the basic units for innovation and 

procedures (business process reengineering).

production in this new economy. Companies 

are  embedded  within  networks,  such  as  the 

supply  chain,  technology  transfer  brokers, 

board  members,  and  investors,  which  all 

contribute to corporate knowledge.

•  The next stage and challenge in the eBusiness 

(r)evolution,  which  many  companies  will 

have  to  manage,  is  to  integrate  the  ‘e’  into 

their  general  business  processes,  instead 

of  conducting  eCommerce  as  a  separate 

•  Traditional 

ingredients 

to 

the  networked 

business activity.

economy  have  been  innovation  and  R&D, 

efficient  processes,  permanent  productivity 

gains  and  optimised  allocation  of  resources, 

management of human resources and others. 

Neither  knowledge  nor  networks  are  new 

concepts per se. The new factor is the rapidly 

evolving  technological  environment,  which 

changes  the  rules  of  many  approaches  and 
paradigms and thus poses new opportunities, 

but also many threats.

•  Technical  issues  alone  are  no  longer  the 

focus of investment decisions, but rather the 

economic  use  of  the  technology.  The  most 

important 

factor 

for  staying  competitive 

within  the  next  few  years  seems  to  be 

the  enhancement  of  customer  care,  for 

example  through  CRM  (customer  relations 

management).  Although  now  essential  to 

business  strategy,  the  Internet  and  other 

advanced  ICT  do  not  appear  to  create 

•  However,  there  is  still  significant  lack  of 

dramatic  short-term  changes  in  competitive 

knowledge  about  the  basic  benefits  of  ICT 

positions. The new technologies are providing 

and  how  to  exploit  them,  which  means 

another  outlet 

for  conducting  business, 

that  ICT  investment  is  not  generally  utilised 

which  has  its  own  distinct  advantages  and 

optimally.  For  many  European  companies, 

drawbacks.

in  particular  SMEs,  especially  when  they 

belong to the more traditional manufacturing 

sectors,  this  new  rapidly  evolving  business 

reality  and  the  need  for  these  technical  and 

relational tools are often poorly understood. 

Many  enterprises  have  not  yet  perceived 

the  importance  of  knowledge  assets  as  a 

crucial  factor  of  value  and  competitiveness. 

Many  are  still  wary  of  new  ICT  and  remain 

within the old paradigms. Managers are often 
distrustful  of  collaborative  actions  and  they 

frequently  lack  the  necessary  human  and 

technical resources and knowledge to access 

these resources or to undertake such actions. 

SMEs  in  particular  appear  to  prioritise  the 

establishment of simple solutions rather than 

none at all.

1

•  Most  eCommerce  solutions  are  not  yet 
integrated into production and administrative 

systems 

(for  example,  ERP  –  Enterprise 

Resource  Planning),  and  the  introduction 

SEAMATE found quite significant ICT impacts 

on productivity and investment:

•  Measuring  the  direct  effects  of  ICT  on 

productivity  is  difficult.  However,  there  is 

ample evidence for such effects at the micro 

or company level.

• 

Several studies at the company level showed 

that  investments  in  ICT  will  only  result  in 

an  increase  in  productivity  after  a  certain 
time delay, as it takes time to introduce and 

implement  ICT  investments  in  a  business 

environment.

•  Most  companies  argued 

that 

investment 

in  ICT  is  not  the  sole  solution  to  obtain 

efficiency  gains  or  productivity  growth,  and 

that particularly organisational change needs 

to  take  place  in  order  to  make  investments 

in ICT profitable. Such changes are typically 

needed  to  complement  the  investment  in 

ICT.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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SEAMATE also found important ICT impacts 

in the context of relevant and applicable human 

on employment:

•  Human  beings  are  simultaneously  the  most 

important  players  in  the  entire  game  and 

pose the greatest challenge.

• 

Extra  training  is  needed  in  many  cases, 

and  the  quality  of  staff  training  is  seen  as  a 

major  element  in  a  firm’s  ability  to  remain 

competitive.  However,  most  industries  do 

not  offer  formal  training  but  instead  rely  on 

self-learning.

skills, combined with appropriate conceptual and 

technical tools (Jensen-Butler, 1996). Innovation is 

also seen as the application of new knowledge to 

produce economic or public value. In the process 

of  knowledge  development,  there  are  two  main 

assets  that  can  developed  ad  infinitum  (United 

Nations, 2005):

i) 

people  (all  people  everywhere,  even  ‘the 

others’  who, 

like  poor  people,  hitherto 

have  been  treated  as  dangerous  deviants) 

as  creative  beings  and  carriers  of  tacit 

•  Digitisation 

considerably 

changes 

the 

knowledge

workflow and value chain within companies. 

Certain  activities  become  obsolete  or  are 

taken  on  by  other  actors.  These  workflow 

changes  reduce  the  need  for  employees 

with  specific  knowledge  in  some  cases,  but 

require training in new tasks and technologies 

for other employees.

Innovation in the knowledge economy

Innovation  is  notoriously  difficult  to  define 

precisely and tends to be an unhelpful term when 

not  used  with  care. At  its  simplest,  it  means  the 

creation of new knowledge, particularly which can 

be exploited to give commercial or other tangible 

benefits.  It  encompasses  an  important  aspect  of 

socio-economic change, being a vital foundation 

for  economic  growth  and  development,  and  is 

highly susceptible to the application of ICT.

Innovation  is  not  a  single  undifferentiated 

entity:  it  arises  in  many  different  ways,  in  many 

different  places,  and  it  evolves  over  time.  Many 

‘theories  of  innovation’  have  been  formulated 

to  enable  understanding  in  different  contexts. 

Particularly significant here is the work of Tuomi 

(2002) and Granovetter (1973). Naturally, theories 

differ, but there is a good deal of common ground 

that  is  well  established  and  well  evidenced.  For 

example,  innovation  is  most  generally  seen  as 

taking  place  in  environments  with  the  greatest 

number  of  combinatorial  possibilities,  i.e.  the 

greatest  number  of  available  knowledge  sources 

ii) 

information (explicit knowledge) that triggers 

people’s  creative  reflection,  and  specifically 

the role of ICT which allows the addition of 

the prefix “mass-” to the production, diffusion 

and utilization of knowledge.

From  this  well-accepted  core  of  theoretical 

work  with  its  accompanying  empirical  evidence 

(see  Ducatel  &  Millard,  1996,  Aichholzer  et 

al,  1995, VOS,  2003,  Edquist  et  al,  2001),  it  is 

possible  to  construct  a  specific  classification 

particularly  suited 

to 

the  present  phase  of 

development  of 

the  knowledge  economy. 

Two  dimensions  of  innovation  are  proposed 

with  particular  emphasis  on  the  adoption  and 

exploitation of ICT, each with three distinct types. 

Firstly,  a  life  cycle  dimension  with  three  basic 

stages,  early,  middle  and  late  stage.  Second,  an 

economic  value  added  dimension,  also  with 

three  basic  types  of  innovation  ranging  from 

low  to  high  value-added.  Note,  this  approach 

is  based  largely  on  market  competition,  but  can 

also  apply  to  the  public  sector  if  the  concept  of 

‘public value’ is substituted for ‘economic value’. 

In such a context, we should note that the public 

sector  is  subject  to  many  of  the  same  economic 

imperatives  as  is  the  private  sector,  although  (in 

principle  at  least)  outputs  should  be  in  terms 

of  ‘public  value’  rather  than  ‘economic  value’ 

(i.e.  profits).  In  addition  to  contributing  to,  or 
providing  an  enabling  framework  for,  economic 

1

growth,  jobs  and  competitiveness,  public  value 

 
 
 
 
 
 
 
 
 
 
 
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7

and  public  governance  include  many  intangible 

has  penetrated  sufficiently  deeply 

into 

public  goods,  such  as  inclusion,  quality  of  life, 

organisational  structures  and  cultures  that 

citizenship, trust, continuity and stability.

innovation  results 

in  new  organisational 

Taking the life cycle stage first:

1.  Early stage: process innovation. In the earliest 

stages  of  adoption  of  ICT  the  innovation 

focus  tends  to  be  very  much  on  process 

innovation  during  which  existing  things  are 

done  cheaper,  faster  and  better,  typically 

through  so-called  BPR  (business  process  re-

engineering), resulting in increased efficiency 

and  productivity.  Process  innovation  tends 

to 

reduce  employment 

(by 

increasing 

productivity); 

it  provides  a 

short-term 

competitive  advantage  until 

it  becomes 

the  sector  norm,  at  which  point  it  becomes 

essential  to  survival  in  the  market,  without 

conferring  any  long-term  competitive  edge. 

arrangements  and 

forms,  both 

internally 

within given organisations as well as between 

organisations and institutions. This can result 

not  just  in  new  markets  but  in  completely 

new value chains, as well as new governance 

arrangements involving networks and clusters 

of  economic  entities.  Again, 

the  public 

sector  can  experience  similar  effects  but 

normally at a slower pace than under market 

competition.

Cutting  across 

the 

life  cycle  stages  of 

innovation,  is  the  dimension  that  distinguishes 

the  degree  of  economic  value  added  by  the 

innovation process, which also has three distinct 
types:

In  most  sectors  in  mature  markets  this  type 

1.  Low  value-added:  cost-driven  innovation. 

of innovation is the current baseline position. 

This  results 

from  seeking 

improvements 

Similar  innovations  are  seen  in  the  public 

in  profitability  by 

increased 

sales  of 

sector,  although  often  lagging  behind  their 

existing  products/services,  lower  costs  per 

private  sector  counterparts,  in  which  BPR 

production/delivery per unit, cheaper labour 

tends  to  be  seen  through  so-called  back-

and  other  factor  inputs,  etc.  This  can  result, 

office  reorganisation,  workflow  automation 

for example, from keen price differentiation, 

using  new  technology  and  the  offer  of 

maximising  the  efficiency  of  supply  chain 

eServices  to  public  service  users  such  as 

delivery  and  logistics,  automation  through 

citizens  and  businesses.  (The  latter  is  also  a 

the  application  of  ICT,  etc.  Such  innovation 

form of product innovation).

2.  Middle  stage:  product  innovation.  In  the 

next  stage,  once  some  experience  of  the 

impact and usability of ICT has been gained, 

innovation starts to focus more on doing new 

things  rather  than  just  doing  existing  things 

better. Product innovation (both new tangible 

products  and  new  services)  can  typically 

lead to market leadership (rather than market 

survival)  and,  in  the  case  of  truly  radical 

product  innovations,  can  even  create  totally 

new markets. Analogous effects can arise in 

the public sector.

is  often  associated  with  highly  explicit  (or 

codified)  knowledge  activities  which  are 

locationally  quite  footloose  and  thus  more 

spatially  dispersed, 

thereby  prevalent 

in 

both  peripheral  and  core  areas  (at  whatever 

scale these are defined). Here the economic 
value added chain is likely to be embedded 

mostly  in  the  ICT  technology  and  systems 

themselves.  In  the  public  sector  context, 

the  search  for  increased  profitability  can  be 

replaced  by  improved  cost-benefit  ratios 

where  benefits  may  also  include  intangible 

public value goods.

1

3.  Late  stage:  organisational  innovation  and 

transformation.  In  the  most  mature  stage,  in 

addition to doing new things, the technology 

2.  Low 

to  high  value-added:  user-driven 
innovation. Here the primary focus is stronger 

branding typically by differentiating from main 

competitors  through  a  combination  of  new 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
products,  individualised  services,  product 

face  contact)  which  are  locationally  quite 

adaptation, and testing, marketing, customer 

‘sticky’  (i.e.  not  easily  moved  around)  and 

relationship management (CRM), etc. Strategic 

which  tend  to  concentrate  in  core  areas  (at 

knowledge  about  new  or  existing  markets 

whatever scale these are defined) with a high 

and  about  customers  drives 

innovation, 

premium  placed  on  organisational  learning, 

often  with  direct 

input 

from  customers 

but  which  may  also  function  as  a  network 

or  employees  with  their  own  particular 

of 

specialised  distributed  collaborative 

understanding of market developments. This 

units.  Such  innovation  is  typically  attained 

type of innovation is driven by constant inputs 

through  a  knowledge 

transfer  process 

of  customer 

intelligence  and  knowledge 

enabled through the use of learnt norms and 

(rather  than  R&D),  partially  derived  from 

conventions  among  people, 

researchers, 

customer  behaviour  data  in  which  case 

companies  and  government.  The  so-called 

it  can  be  codified  and  automated  within 

‘triple-helix’,  or  regional  innovation  system, 

data  warehouse  and  data  mining  systems, 

is  the  spatial  expression  of  this  approach, 

though  it  also  needs  to  be  interpreted  in 

involving  a  tripartite  collaboration  between 

the  context  of  strategic  decision-making. 

the private sector, academia and government.  

(Høgenhaven,  2003)  In  the  public  sector  as 

The ‘intangible assets’ involved in such tacit 

well, user input to service design is becoming 

knowledge generation range from know-how 

increasingly important in both service design 

(managerial,  scientific,  technical,  logistical, 

and  use  stages,  as  when  based  on  citizen-

etc.)  to  networks,  trust  and  goodwill  that 

relationship-management  (CRM)  in  which 

are  valuable  but  difficult  to  measure.  Here 

services  are  tailored  to  individual  citizens 

the  economic  value  added  chain  tends 

and/or  new  services  are  designed  on  the 

to  be  embedded  mostly  in  people  and 

basis  of  strong  user  demand  or  input.  There 

organisations,  rather  than  in  ICT  systems, 

is also a significant burgeoning of new public 

although  the  latter  are  necessary  supports 

information and knowledge systems in which 

for  the  former.  Again,  the  public  sector  can 

information derived from users (citizens and 

potentially  offer  examples  of  this  type  of 

businesses)  and  new  knowledge  creation, 

innovation  through  public  financed  R&D 

already  potentially  in  the  public  domain, 

into  public  services  such  as  eGovernment, 

can be developed into new valuable content 

eHealth  and  eLearning,  both  at  national 

which has both economic and public value.

and  at  EU  levels.  Research  driven  by  policy 

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3.  High  value-added:  R&D-driven  innovation. 

This  is  based  mainly  on  commercial  and 

societal  exploitation  of  R&D  which  takes 

places  within  firms,  research 

institutions 

objectives  to  improve  public  governance 

(so-called  innovative  governance)  is  also 

becoming  increasingly  important.  (European 

Commission, 2004b)

and  laboratories,  as  well  as  in  networks 

Crossing  the  two  dimensions,  results  in  the 

and  clusters.  It  may  arise  from  deliberate 

matrix  of  innovation  table  below.  Each  cell  can 

incubation  activities,  the  patenting  of  new 

contain  specific  examples  of  innovation,  but 

products, launching of new value chains and 

given  the  characteristics  of  the  two  dimensions, 

organisational  arrangements,  but  could  also 

there  is  a  tendency  for  economic  value  added 

involve  process  innovation  or  new  delivery 

to  increase  through  the  life  cycle  stages,  as  the 

mechanisms and services. Such innovation is 

matrix illustrates.

often associated with highly tacit knowledge 
activities  (i.e.  experiential  and  highly  social, 

often  requiring  a  large  degree  of  face-to-

These  two  dimensions  of  innovation  are 

1

proposed to capture the complexity of innovation 

 
 
 
 
 
 
 
 
 
 
 
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Matrix of innovation

n process innovation – early stage
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product innovation – middle stage

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organisational innovation – late stage

ECONOMIC vALUE ADDED DIMENSION

cost-driven innovation –
low value-added

user-driven innovation –
low to high value-added

R&D-driven innovation –
high value-added

a

a

a

a
a
a

a

a

a

in  a  knowledge  economy  context.  Whereas  the 

between  different  parts  of  Europe,  particularly 

life  cycle  dimension  is  more  inward  looking 

between  the  central  and  peripheral  regions.  As 

and  focused  on  the  organisation  as  a  unit  of 

the  economic  position  of  countries  converges, 

production,  the  value  added  dimension  focuses 

the  divergences  tend  to  be  located  increasingly 

outwards  on  the  unit’s  competitive  economic 
and  societal  milieu  within  which  innovation 

within  individual  countries  rather  than  between 
(European  Commission,  2001).  For 
them 

takes  place,  as  well  as  on  the  different  types  of 

example, there is a clearly delineated core super-

knowledge being used.

Local and regional milieux

The  distribution  of  the  benefits  of  ICT  is 

important.  Even  looking  at  the  most  simple 

distribution,  between  profits  and  wages,  the 

RISESI project (2004) found that countries where 

wages are lower have lagged in the development 

of  demand  for  ICT,  while  countries  (Sweden 

in  particular)  where  inequalities  in  distribution 

are  limited  have  had  better  performances  in 

all  ICT-related  indicators.  Taking  this  one  step 

further,  ICT  leads  to  new  dynamics  of  regional 

imbalances and economic exclusion. The nature 
of the employment and distribution mechanisms 

operating  in  ICT-related  activities  is  opening  up 

region within Europe, whether measured in terms 

of employment, GDP, research expenditure, etc., 

which  stretches  as  a  band  from  north-west  Italy 

through  the  south  and  south-west  of  Germany, 

up 

the  Rhine/Ruhr  west  German  corridor, 

into  Flanders,  Belgium,  southern  and  central 

Netherlands, to the Isle de France and south-east 

England. The  Digital  Europe  project  (2003)  calls 

this  the  ‘blue  banana’  super-region  and  their 

research concluded that, measured at the national 

scale,  ICT  adoption  has  tended  to  weaken  this 

core.  At  the  sub-national  scale,  however,  they 

found  a  clustering  effect  associated  with  the  so-

called  ‘new  economy’  and  the  adoption  of  ICT 

which  is  stronger  than  that  seen  with  traditional 

economic  activities,  although  this  is  often  better 

explained by industry characteristics, such as skill 

new  imbalances,  new  opportunities  and  new 

intensity, than purely ICT intensity.

threats  across  and  within  regions,  cities,  towns 

and rural areas.

National convergence, regional divergence?

1

According to the European Commission, there 

Other  research  also  points  in  the  same 

direction,  i.e.  that,  even  though  countries  in  the 

EU 15 may to some extent be converging in terms 

of economic indicators, at the regional level the 

picture is more mixed and divergence is still often 
likely to take place. Some of this may be due to 

are striking differences in economic performance 

ICT  adoption,  although  the  effects  of  this  must 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
be  seen  together  with  wider  economic  forces, 

not seem to be being squeezed to insignificance 

such  as  globalisation,  increasing  competition, 

between the jaws of a new local-global dichotomy 

de-regulation  of  markets,  etc.  For  example, 

as some would have it.

Martin  (2002)  found  that  between  1994  and 

1998,  although  the  standard  deviation  of  GDP 

per  capita  at  national  level  (EU15)  decreased 

from  12.7  to  11.2,  it  increased  at  regional  level 

from  23.0  to  25.0. There  were  however  marked 

differences  between  Member  States,  so  that  in 

the UK the regional standard deviation increased 

from  18.3  to  33.9,  but  decreased  marginally  in 

Germany  and  France.  Indeed,  there  is  evidence 

that regions with the lowest levels of development 

supported by Objective 1 of the Structural Funds 

have experienced a modest but real reduction in 

disparity  in  terms  of  GDP  per  capita  in  relation 

to all regions between 1988 and 1999 (Leonardi, 

2004).  This  finding  lends  support  to  the  notion 

that  Structural  Funds  support  for  the  weakest 

regions has had some success. However, no such 

convergence effect was observed for Objective 2 

or  Objective  3  regions  in  terms  of  employment 

and participation rates.

At  the  sub-national  level,  the  clustering, 

or  concentration  process,  seems  often  to  be 

driven  by  both  the  demand  and  supply  sides 

simultaneously  (Bennett  et  al,  1999).  On  the 

demand side, positive externalities for information 

flows and inter business exchanges are gained in 

larger  markets,  where  the  intensity  of  networks 

of  exchanges  also  reduces  the  effects  of  risk 

from  shocks.  Other  accounts  extend  traditional 

observations of the continuing importance of face-

to-face contact in high-order business exchanges 

(Casson, 1998). From a policy perspective, there 

is  also  an  important  supply-side  to  the  concen-

tration  process,  including  the  role  of  education 

and  labour  skills,  land  and  site  availability  and 

the  supply  of  innovation,  new  knowledge  and 

finance.  Supply-side  effects  also  result  from 

institutional  structures,  which  are  also  strongly 

influenced  by 

the  wider  state-administrative 

apparatus: competition law, regulatory structures 
and compliance frameworks. Indeed, the role of 

central government is vitally important and does 

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Some  proponents  of  the  new  knowledge 

economy  paradigm  have  argued 

that 

the 

importance of urban centres as primary business 

locations  is  being  challenged  by  the  growth 

of  company  downsizing  and  decentralisation, 

outsourcing  and  a  greater  role  for  SMEs  in 

the  economy.  These  developments  have,  it  is 

postulated, allowed a more flexible and footloose 

pattern of location for many types of business, and 

the contention is made by some that ICT actually 

leads to the ‘death of distance’ (Carincross 1997). 

Others,  however,  see  new  or  adapted  types  of 

both  spatial  centralisation  and  decentralisation 

taking place, with the former, in many important 
respects, often dominant over the latter. (Millard 

2002, 2004) This would help to explain some of 

the  increasing  divergence  in  Europe’s  regional 

map.

Thus, although there is some decentralisation 

of overall economic activity at the European level, 

this  tends  to  be  restricted  to  either  the  edge  of 

core cities and regions in the case of high value-

added R&D type activities, or to more peripheral 

regions  in  the  case  of  lower  or  medium  added 

value activities in manufacturing or more routine 

and standardised service activities (Millard, 2002, 

2004;  Digital  Europe,  2003).  Other  research 

shows that these latter more ‘footloose’ activities 

are often attracted to non-core locations by lower 

wage  costs,  pockets  of  flexible  and  more  stable 

labour,  and  the  existence  of  special  skills  and 
expertise  (Flecker  and  Kirschenhofer,  2002),  as 

typified by the cost-driven innovation paradigm.

However, it is also clear that there is strong 

spatial  clustering  in  core  regions  of  high-level 

(tacit)  knowledge  activities,  including  advanced 

business and financial services, media, R&D and 

innovation activities, universities, research centres 

and  other  specialised  educational  institutions, 
etc., and that this goes hand in hand with strong 

1

knowledge networking effects, including those on 

 
 
 
 
 
 
 
 
 
 
 
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7

a global scale. (This is typified by the R&D-driven 

and  innovation,  and,  although  this  is  directly 

innovation paradigm). It does not seem to be the 

enhanced by large scale  and global  networking, 

case  that  specific  economic  sectors  (particularly 

the importance of territorial complexes of ‘milieux 

when  these  are  classified  using  the  standard 

of innovation’ is also at the heart of the ability of 

taxonomies) are being moved around very much 

cities, and particularly of large cities, to become 

by  new  knowledge  economy  dynamics.  Rather, 

the  sources  of  wealth  in  the  Information  Age. 

a new type of spatial sorting seems to be  taking 

Although  Silicon Valley  is  the  obvious  example, 

place, which is to some extent dependent on the 

the logic applies to all societies and is often tied 

type of knowledge created and exploited and the 

up with the ‘cultural creativity’ which only cities 

role of ICT in this, regardless of economic sector. 

can offer.

Spatial divides

In  this  context,  Castells  (1996)  charts  an 

increasing separation of what he terms the space 

of  flows  from  the  space  of  places,  leading  to 

severe  spatial,  social  and  economic  dislocation. 

This  is  exemplified  when  large  metropolises, 

whilst  becoming  bound  more  tightly  together 

on  a  global  scale  through  exclusive  high  speed 

electronic  networks,  become  disconnected  from 

their  local  hinterlands  leading  to  the  splintering 

of  physical  networks  and  communities  and 

increasing  geographic  polarisation.  According 

to  Castells,  capital 

is,  at 

its  core,  global, 

whereas labour is local. Thus capital and labour 

increasingly tend to exist in different spaces and 

times:

• 

space:  capital  in  the  ‘space  of  flows’,  and 

labour in the ‘space of places’

• 

time:  capital 

in 

the 

instant 

time  of 

computerised  networks,  and  labour  in  the 

clock time of everyday life.

In  his  most  recent  work,  Castells  (2001,  p. 

226) re-emphasises the continuing predominance 

of  cities  when  he  describes  our  increasingly 

urbanised  world  of  sprawling  metropolises. 

Mobility 

is  enabling  people 

to  concentrate 

in  cities  more  and  more  in  order  to  improve 

their  life  chances,  and  to  gain  direct  access  to 

rewarding work and to high quality services and 

10

cultural enhancement. Economic production and 

management depend increasingly on knowledge 

In  this  work,  Castells  also  returns  to  his 

previous 

theme  of  disconnected 

locales  by 

pointing  to  the  global  trend  towards  building 

dedicated 

ICT  networks  which  bypass 

the 

general  public  systems  and  directly  link  major 

business centres. This he describes as ‘splintering 

networks’,  taking  the  cue  from  Graham,  and 
Marvin  (2001)  who  describe  how  networks 

(both ICT and physical) can splinter (or polarise) 

places  and  societies.  This  includes  so-called 

‘glocal nodes’ as specific areas within, normally, 

large  cities  that  link  up  around  the  planet  with 

equivalent  areas  anywhere,  whilst  being  loosely 

integrated,  or  not  integrated  at  all,  with  their 

surrounding hinterland. (See also Millard 1995).

Thus, geographies of both social inclusion and 

exclusion  can  develop,  depending  on  the  value 

attached  by  socially  dominant  interests  to  any 

given place, and partly driven by the privatisation 

and  deregulation  of 

telecommunications 

in 

the  1990s  and  the  loss  of  the  earlier  principles 

of  universal  service.  Castells  does  point  out, 

however,  that  this  is  only  a  structural  tendency 

as  people  do  react  against  their  exclusion  and 
assert  their  rights  and  their  values,  often  using 

the Internet to do so. Yet, in the absence of social 

mobilisation  and  policies  guided  by  the  public 

interest,  the  splintering  networks  threaten  to 

contribute to a new, and fundamental, economic, 

social  and  spatial  cleavage:  the  digital  divide. 

Graham and Marvin earlier developed two models 

(1996)  analysing  the  processes  of  differentiation 

both within and between regions and cities in a 

context of enhanced ICT:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
i) 

between regions and cities:

1999,  pp.  415-416).  Hence,  proximity  to  major 

•  uneven development

•  virtuous and vicious circles

ii)  within regions and cities:

•  social polarisation

•  spatial polarisation.

urban  centres  continues  to  be  significant  even 

if  location  within  them  may  be  less  important. 

New  agglomeration  economies  are  apparent, 

suggesting that there is a continual concentration 

on  existing  major  centres,  especially  for  high 

value  added  activities,  such  as  specialised  (non 

routine) business and financial services, research 

These spatial digital divides constitute some 

and development, media, etc.

of  the  most  profound  challenges  for  European 

This  importance  of  business  concentration 

regions  in  the  knowledge  economy.  As  shown 

throws  emphasis  on  policy  interventions  that 

above,  the  success  in  meeting  these  challenges 

focus  on  improving  local  factor  conditions  as  a 

has,  to  date,  been  mixed  with  most  success 

means of enhancing competitive advantage. Most 

achieved in relation to the very weakest regions, 

local factor conditions depend on local markets: 

though  with  much  variation  between  Member 

for  factor  inputs,  local  demand  and  supply, 

States,  and  still  strong  evidence  of  increasing 

industrial interdependencies and the structure of 

clustering  in  the  largest  cities  while  other  areas 

are tending to continue to slip behind in terms of 

relative income and employment levels.

Proximity  still  matters  and  accessibility 

is 

important

firm  strategy  and  competition.  Policy  initiatives 
can  play  an  important  role  in  improving  these 

conditions.  At  a  local  level,  major  efforts  can 

be  devoted  to  improving  education,  training, 

public  research  and  infrastructure,  including 

transport  infrastructure.  Exchange  of  information 

can be stimulated and common approaches can 

Thus,  despite  the  apparent  potential  for 

be  developed  to  improve  synergies  between 

economic  decentralisation  riding  on  the  back 

businesses,  and  between  public  and  private 

of 

ICT  adoption  and 

increasing  knowledge 

agents. Barriers to market entry or growth can be 

intensification 

in  Europe’s  economy,  most 

reduced, particularly for small firms, by improving 

empirical  research  is  pointing  strongly  the  other 

access to ‘business supports’, for example through 

way,  certainly  in  the  context  of  high  value-

provision  of  information,  advice  and  improved 

adding  business  activities.  Whilst  corporate 

access to venture capital.

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decentralisation, 

outsourcing 

and 

SME 

development  may  be  giving  greater  scope  for 

development outside the main centres, the extent 

of spread of many of these developments tends to 

be restricted to within 50-80 kilometres from the 
headquarters  or  from  major  centres.142  Indeed, 
Bennett  et  al  (1999)  conclude  that  in  Britain  a 

very high proportion of external sources of supply 

The significance of distance for the location 

of businesses can also be reduced by increasing 

physical  accessibility 

to  and 

from  specific 

locations.  This  can  be  done,  for  instance,  by 
transport 
focusing  on 

improvement  of 

the 

infrastructure and other accessibility conditions.

to  firms,  particularly  business  services,  is  sought 

Networks and clusters

within the nearest 10-25 kilometres.

In  the  global  arena  of  innovation  and 

Distance thus does appear to matter a great 

competitiveness,  metropolitan 

regions 

are 

deal  to  the  location  of  all  businesses,  and  to 

business  service  firms  most  of  all  (Bennet  et  al, 

developing as independent actors competing for 
resources  and  competencies,  and,  at  the  same 

11

142  This process is also been seen in Finland – personal communication from Nina Mustikkamäki, Research Unit for Urban and 

Regional Development Studies, University of Tampere, Finland

 
 
 
 
 
 
 
 
 
 
 
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12

time,  collaborating  for  visibility  and  recognition 

typified by the R&D-driven innovation paradigm, 

(Jensen-Butler  et  al,  1997).  These  metropoles 

and  is  likely  to  accelerate  in  the  future,  leading 

create  and  are  sustained  by  a  series  of  powerful 

to a European (as well as global) reallocation of 

milieux built around high-tech, high value-added 

R&D  resources  to  regions  with  high  innovative 

and  highly  innovative  associations  of  firms  and 

capability  in  specific  business  and  science/

institutions,  in  which  there  is  a  successful  and 

technology areas (such as ICT, biotech, materials, 

self-reinforcing  relationship  between  technology 

etc.).  Clusters  of  R&D  activity,  with 

their 

development  and  use,  research  and  innovation, 

accumulated  resources,  multiplicity  of  science-

highly  competitive  products  and  services,  high-

based  competencies  and  global  connectedness, 

level  decision-making,  political  and  cultural 

are 

the  very  spearheads  of 

the  networked 

institutions,  specialised  and  highly  educated 

knowledge  society 

(Castells,  2000),  with  a 

human resources, and, very often, visible regional 

profound impact on regional as well as national 

branding  and  identity  marketing.  Where  such 

growth and welfare.

associations  consist  of  geographically  proximate 

companies  and  associated  institutions,  Porter 

(1998)  coined  the  term  ‘cluster’  encompassing 

four key elements:

•  Geographic  concentration  –  even  where 

Given the above, there is a renewed research 

interest  in  the  potential  benefits  of  clusters 

(Gordon and McCann, 2000). At the same time, 

many,  possibly  exaggerated,  claims  are  made 
concerning  the  existence  and  economic  role  of 

advanced ICT can enable some dispersion of 

clusters (Martin and Sunley, 2001). Probably many 

activities,  persistent  face-to-face  and  social 

supposed  and  frequently  identified  clusters  do 

contact  between  actors  appears  to  remain 

not  exist  (Engelstoft,  Jensen-Butler  and  Winther, 

critical for highly innovative and competitive 

2002).  Furthermore, 

there 

is  considerable 

clustering,  especially  where  research  and 

confusion  and  disagreement  about  whether  or 

technology  development  and  other  high 

not  clusters  represent  the  spatial  expression 

value-added activities are concerned.

• 

Specialisation – clusters are normally groups 

of  actors  specialising  in  particular  markets, 

products, processes, technologies or R&D.

of  localisation  economies,  i.e.  formed  around 
one  type  of  dominant  industry  (Acs  et  al,  1999, 
Henderson, 1986), or whether they really should 

be  subsumed  under  urbanisation  economies, 

i.e. based upon inter-industry spill-overs in cities 

•  Associations of both firms and other institutions 

(Jacobs, 1969).

– typically firms across more than one narrow 

sector  cooperate  or  interlink  together  with 

public  and  non-profit  institutions,  including 

those  concerned  with  R&D,  education  and 

training and policy making.

•  Connectivity – intense and close interaction, 

interconnectivity  and  inter-linkage  between 

actors and processes are defining features of 

clusters,  for  example  along  the  supply  chain 

and with business and R&D support services.

In the European context, we can see clusters 

based  on  portfolios  of  science  and  technology 
‘hot 
based  competition,  marketed  as  R&D 

spots’  (Herbig,  2002),  ‘creative  cities’  (Landry, 

2000),  economic 

‘growth  poles’ 

(Morgan 

1997),  ‘innovation  spaces’  (Storper,  1993)  and 

‘technopoles’  (Castells  and  Hall,  1994).  This  is 

The  policy  implications  of  the  resolution  of 

this disagreement are potentially profound. There 

is thus need for a considerable research effort on 

the  links  between  ICT  use  and  the  dynamics  of 
clusters. Romano et al (2001) argue that ICT can 

enable  what  they  call  ‘organisational  proximity’ 

to substitute for ‘geographic proximity’. But, ICT 

is not stand-alone; it can reinforce positive aspects 

of clusters where these exist, and can have little 

or no effect where they are incorrectly presumed 

to  exist  (Castro  &  Jensen-Butler,  2002).  ICT  can 

serve  to  widen  regional  economic  disparities  in 

Europe, rather than promote convergence.

Clusters tend to be more discretely spatially 

defined  types  of  networks. The  basic  differences 

between  clusters  and  networks  have  been 

generalised as:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLUSTERS

Open membership

NETWORKS 

Limited membership

Attracts specialised services to the region

Access to specialised firms at lower cost

Social values fostering trust and reciprocity

Contracts 

Clusters generate demand for more firms with similar and 
related capabilities

Easier for firms to engage in complex business

Co-operation and competition

Collective vision

Source: Jensen-Butler (2000)

Based on co-operation

Common business goals

The  strongest  and  most  successful  networks 

As the growth processes involved are cumulative, 

are based upon human relations, with economic, 

gaps  in  regional  income  per  inhabitant  and 

social  and  cultural  components.  As  pointed  out 

regional  labour  productivity  levels  will  grow, 

by the OECD’s research into the ‘learning region’ 

rather than decline. Reaching take-off and critical 

(OECD,  2001b,  p.  77),  networking  is  a  social 

mass are thus questions of prime concern. There 

process and hence dependent upon social capital 

is a key role for regions and regional authorities 

as well as infrastructure. This means that there is 

in ensuring that:

often an element of spatial proximity in network 

creation  and  development.  Networks  grow 

faster  and  are  stronger  when  there  is  a  social 

and  cultural  component,  which  is  why  regions 

are  important  for  network  creation  and  growth. 

Thus,  ICT  networks  are  most  successfully  when 

based  upon  real  local  or  regional  communities 

characterised  by  trust,  risk  sharing,  common 

learning, imitation and social interaction.

ICT  is  a  network-based  technology.  This 

means  that  when  critical  mass  is  attained, 

revenues will grow in an exponential manner. As 

these networks have a regional component, then 

first  movers  will  have  a  substantial  and  growing 

advantage.  It  is  easier  to  be  a  first  mover  and 

attain  critical  mass  in  regions  that  have  (Castro 

and Jensen-Butler, 2002):

• 

critical mass is achieved. This is easiest to do 

in  a  regional  context.  Then,  linking  regional 

networks  will  make  European  networks  as 

large as possible, which will bring maximum 

benefits to Europe. Exclusion of regions means 

loss of revenue not only for the excluded, but 

also for Europe as a whole. The market, left 

to itself, will not maximise inclusion.

• 

the  benefits  of  the  knowledge  economy 

are  experienced  in  all  regions  of  Europe, 

reinforcing  cohesion  and  self-supporting 

growth.

Despite  globalisation,  most  firms 

(and 

particularly SMEs) develop their primary networks 

within the region, for example by:

•  membership  of  common  supply  and  value 

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• 

large  populations 

(both  people 

and 

chains

enterprises)

•  higher incomes, as willingness to pay to join 

a network is higher

• 

• 

exploiting and developing regional markets

sharing  and  discussing 

information  on 

markets, technologies, pay scales and profits

• 

large  numbers  of  ICT  proficient  enterprises 

• 

similarity in processes and techniques among 

and  households  (which  lowers  the  costs 

and  risks  of  implementation  of  ICT  and 

firms  so  that  one  can  understand  and  judge 

the other’s behaviour

eCommerce).

Regions  having  these  characteristics  will,  in 

general, reach critical mass before regions that do 

not, although other types of regions can become 

• 

• 

experience of being helped by another firm

1

long-term relationships even with intermittent 

contacts

first  movers  if  they  act  quickly  and  act  properly. 

• 

rotation of real leadership

 
 
 
 
 
 
 
 
 
 
 
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7

• 

similar financial rewards

•  firms  collectively  experience  the  economic 

advantage  of  increased  sales  and  profit 

margins

• 

an  awareness  of  a  bounded  community  of 

fate  generated  by  trade  and  professional 

associations,  municipal  service  groups  and 

unions.

Strong  regional 

ICT-based  networks  are 

themselves a prerequisite for the development of 

strong  external  links  to  national,  European  and 

global levels. According to Jensen-Butler (2000), 

there  are  three  critical  aspects  of  successful 

regional  SME  networks 

in 

the  knowledge 

economy:

• 

• 

access to and use of ICT

trusting, 

delegating 

and 

visionary 

management

developing 

public-private-partnerships 

and 

capacities  observed  to  have  ‘worked’  in  more 

successful regions, including the shift from local 

‘government’ to local ‘governance’, in which local 

authorities appear to be just one player amongst 

many,  having  become  ‘strategic  enablers’  rather 

than direct deliverers of services and policy.

Apart  from  the  democratic  deficit  problem 

in this approach, these assumptions are far from 

being  universally  tenable  across  all  European 

regions, and the political question of how regional 

development should best proceed remains open. 

“In  the  Humber  (UK)  case,  the  most  effective 

form  of  development  might  well  involve  strong 

leadership  from  the  public  sector.  It  may  not  be 

the  case  that  (sub)  regional  prosperity  could  be 

easily  achieved  if  only  the  appropriate  private 
sector  partners  could  be  found.  Institutional 

capacity  might  be  appropriately  directed  and 

shaped by those local authorities which have had 

• 

a 

learning, 

competent 

and 

flexible 

experience  in  grappling  with,  for  example,  the 

workforce.

Because 

of 

the 

substantial 

positive 

history of economic decline in the Humber sub-

region.” (Gibbs et al, 2001, p. 116).

externalities  provided  by  networks  (e.g.  the  fact 

The 

prevailing 

European 

regional 

that a large network is much more valuable to an 

development  model,  generally 

termed 

the 

individual member than a small one), and because 

‘Regional 

Innovation  Systems’  approach, 

is 

these are much easier to achieve in regions with 

largely  predicated  on  developing  specific  types 

higher  populations  and  greater  incomes,  the 

of  regional  institutional  structures  and  public-

public sector has a particularly important role in 

private-partnerships,  and  is  often  typified  by  the 

building networks in less central regions. Regional 

‘Triple  Helix’  approach,  i.e.  close  collaboration 

public authorities have a special role in network 

between 

the  public,  private  and  academic 

promotion  because  of  their  close  knowledge  of 

sectors.  The  archetypal  Triple  Helix  region  in 

the regional economy and its actors.

The need for new regional development models 

and policies

Europe  is  Tampere  in  West  Finland,  which  is 

a  high  growth  region  built  around  a  public-
private-partnership  with  Nokia’s  R&D  facilities 

and  a  joint  technical  university.  But,  to  use  this 

as  an  ideal  development  model  for  most  other 

An  underlying  assumption  of  much  of 

European  regions  seems  misleading,  especially 

this  kind  of  analysis  is  that  a  major  problem 

given  the  fact  that,  as  Tampere  officials  readily 

for  ‘less  successful’  regions  is  that  they  either 

admit, “how successful really is Tampere – what 

lack  the  type  of  institutional  capacity  present 

if Nokia decided to move out?”

in  more  ‘successful’  areas,  or,  if  they  do  exhibit 

1

some  degree  of 

institutional 

thickness, 

the 

local  institutional  milieu  is  conflict-ridden  and 

dysfunctional  (Gibbs  et  al.  2001).  This  agenda 

has  been  taken  up  in  the  European  regional 

policy model with an administrative bias towards 

A  Similar  conclusion  was  reached  by 
the  Tigers  project  (2000)  which  examined  six 

European  regions  or  small  countries  away  from 

Europe’s core. The common factors for success in 

such areas are not always based on public-private 

partnerships  nor  a  declining  role  for  the  local 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
authority,  but  upon  strong  public  policy,  a  solid 

The  second  and  more  advanced  type  is  the 

education system in the broadest sense (i.e. much 

‘complex adaptive systems’ approach, which like 

more  than  ICT  skills),  case  specific  investment 

the  ecosystem  model  also  draws  on  the  natural 

policy,  and  conducive  regulatory  frameworks. 

selection  metaphors  of  survival  of  the  fittest  and 

Furthermore,  the  development  of  these  regions 

diversity.  In  addition,  however,  it  allows  for  a 

capitalised upon regional-specific strengths, such 

public  sector  role  if  it  too  can  be  creative,  self-

as human capital skills and industrial structures.

organising  and  innovative  and  thus  provide  a 

Developing an appropriate regional strategy 

requires  a  more  nuanced,  subtle  and  bottom-up 

approach  than  that  suggested  by  the  standard 

model  of  regional  development.  Two  of  these 

are  currently  being  discussed,  not  just  in  a 

theoretical  context  but  also  based  on  empirical 

evidence. Firstly the ‘digital business ecosystems’ 

conducive  milieu  to  help  find  the  ‘sweet-spot’ 

between  too  much  chaos  and  too  much  order. 

Finding  this  balance,  the  sweet  spot,  means 

enjoying  the  advantages  of  both  a  centralised 

controlled 

approach 

and 

decentralised 

uncontrolled  approach,  while  avoiding 

the 

disadvantages of each.

model  which  sees  a  local  or  regional  economic 

For  example,  although  this  is  ultimately 

landscape  like  a  biological  ecosystem  which 

a  political  question,  minimum  standards  must 

is  self-organising,  evolutionary  and  adaptive, 
and where the survival of the system as a whole 
is  more  important  than  individual  entities.143 
This  model  builds  on  the  traditions  of  industrial 

be  guaranteed  while  avoiding  bureaucratic 
local 
homogeneity 

and  unresponsiveness; 

needs  must  be 

taken 

into  account  while 

avoiding  parochial  and  isolationist  tendencies. 

districts,  growth  nodes  and  clusters,  and  the  EU 

Standardised  centrally-agreed  structures  ensure 

is  already  supporting  active  digital  ecosystems 

overall  efficiency,  a  minimisation  of  negative 

pilots in Tampere (Finland), West Midlands (UK), 

externalities  and 

transparency,  whilst 

local 

Aragon (Spain), Piedmont (Italy) and Extremadura 

adaptation  delivers  on  the  ground  impact  and 

(Spain).

subsidiarity.

Digital Business Ecosystems and Complex Adaptive Systems

Source: adapted from presentations at the “Knowledge-Based Economy, Regional Innovation Systems, Digital Business Ecosystems 
and Complex Adaptive Systems” IANIS Conference, in Brussels, 14 September 2004(http://www.erisa.be)

143  Existing  and  new  regional  development  models  in  a  knowledge  economy  context  were  reviewed  at  the  “Knowledge-Based 
Economy,  Regional  Innovation  Systems,  Digital  Business  Ecosystems  and  Complex Adaptive  Systems”  IANIS  Conference,  in 
Brussels,  14  September  2004,  inter  alia  by  Gareth  Hughes  (Erisa),  Jeremy  Millard  (DTI)  and  Francesco  Nacchira  (European 
Commission, DG INFSO. For example, Gareth Hughes’ paper for the conference ‘Complex Adaptive Systems, the Knowledge 
Economy and Government’. See www.erisa.be and www.prelude-portal.org

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1

 
 
 
 
 
 
 
 
 
 
 
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7

Regional 

job 

creation 

and 

economic 

the norm and based on benchmarking, league 

development

The  BEEP  project  (BEEP,  2003)  examined 

a  large  number  of  case  studies  of  local  and 

regional  economic  development  using  ICT,  and 

found a number of ‘good practices’ or guidelines 

for  creating 

jobs  and  promoting  economic 

development:

• 

Local physical, institutional and human assets 

must  be  linked  directly  into  the  process  of 

competitive  knowledge  creation.  To  do  so 

effectively,  regional  policymakers  need  to 

understand  the  types  of  knowledge  and 

innovation  activities  their  locality  can  use 

to  develop  and  compete.  For  example,  cost 

driven  and  R&D  driven  innovation  rely  on 

different types of knowledge and supportive 

environments.

•  The  local  recycling  of  economic  and  social 

benefits,  rather  than  excessive  asset  leakage 

tables  and  a  focus  on  measurable  outputs), 

to  networked, 

‘joined-up’  and 

learning 

governance  (based  as  much  on  supporting 

processes, as well as output, by focusing on 

flexible  evolution  and  knowledge  creation 

and  flow).  Such  transitions  require  not  only 

process  re-engineering,  but  also  mindset 

and  cultural  re-engineering.  Much  greater 

emphasis  needs  to  be  placed  on  policy 

learning and evidence-based policy making if 

localities and regions are to design strategies 

appropriate to their own needs and potentials 

within wider national and global networks.

• 

Inward  investment  is  often  attracted  by 

quality  life  styles,  environment,  pockets  of 

skilled  labour,  the  chance  to  develop  niche 
products, and the like.

•  Particularly in more disadvantaged rural and 

peripheral regions:

out  of  the  region,  can  help  build  local 

−  There  is  a  need  for  branches  of  local/

strength.  This  requires  achieving  a  balance, 

regional  governments  to  work  together 

finding  the  ‘sweet  spot’,  dependent  upon 

(be ‘joined-up’), so that they can better 

each  specific  region,  between  endogenous 

attract 

investment  and  support 

the 

and exogenous growth and between tradable 

regional private sector.

and non-tradable goods and services.

− 

Local  pro-active  innovation  is  essential, 

•  Although institutional thickness is important, 

coupled  with  determination  and  strong 

the  new  approaches  focus  more  on  the 

leadership (often via champions) in using 

need for institutions to be dynamic, creative 

and developing local assets.

and  evolving  rather  than  having  a  particular 

structure  or  type  of  stability.  Although  they 

must focus on local needs and opportunities 

(subsidiarity)  they  must  also  be  ‘joined-up’ 

with  institutional  arrangements  in  adjacent 

regions  and  with  wider  national  and 

international  frameworks.  Again,  they  must 

find  the  ‘sweet-spot’  between  the  local  and 

the global.

−  Vigorous  marketing,  often  in-person, 

is  needed  to  sell  the  attractions  and 

skills  of  the  region,  including  regional 

branding. The fact that telework (eWork) 
or  eOutsourcing  are  being  used  is  not 

a  sales  argument.  In  a  commercial 

context, it is price, quality and delivery, 

perhaps 

coupling  qualitative 

and 

lifestyle  factors,  which  are  important. 

•  Depending  upon  the  existing  patterns  of 

eWork  and  eOutsourcing  are  purely  a 

organisation  and  support  in  the  region, 

means to an end.

1

changes  in  governance  traditions  might  be 
necessary.  There  is  a  real  challenge  of  the 

transition  of 

(regional)  governance 

from 

bureaucratic  governance  (now  being  left 

behind),  to  ‘best  practice’  governance  (now 

− 

Economic 

sustainability, 

especially 

in  rural  and  peripheral  regions,  often 

rests  upon  two  different  strategies  for 

exogenous job growth:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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i)  For  obtaining  work  through  telework 

typically  remain  vital  to  economic  growth  and 

or 

eOutsourcing, 

the 

general 

competitiveness,  especially  in  terms  of  their 

characteristics  of  the  area  are  not 

legal, institutional and socio-cultural frameworks 

important  as  long  as  the  commercial 

and milieux. What it does mean, however, is that 

requirements of the transaction are met 

these  systems  are  now  joined  by  powerful  and 

by the company concerned (normally 

truly  global  systems,  including  multi-national 

price,  quality  and  timely  delivery). 

companies  as  well  as  multi-national  institutions 

Compared with strategy ii), such work 

(like the WTO, the World Bank, the IMF, the UN, 

seems  relatively  easy  to  obtain,  but 

etc.),  which  the  territorially-bound  systems  must 

can also be quite easily lost again, and 

accommodate and interact with. It remains to be 

also has the disadvantage that it tends 

seen which set of systems becomes dominant in 

to  lead  to  a  smaller  number  of  jobs 

future, or indeed whether or not this is a sensible 

than strategy ii).

question at all.

ii) For attracting inward investment, the 

general  characteristics  of  the  area 

do tend to be important (particularly 

social,  cultural,  environmental  and 
in 
infrastructural 

characteristics) 

addition  to  the  normal  commercial 

requirements.  The  reason  for  this 

is  that  investment,  and  thus  the 

relationship  with  the  investor,  tends 

to be longer term than an outsourcing 

arrangement,  and  workers  from  the 

investing  company  may  move  to  the 

area to live. Compared with strategy 

i),  the  work  and  jobs  derived  from 

the  investment  in  strategy  ii)  seem 

relatively more difficult to obtain, but 

once they are obtained they do tend 

to  be  more  stable  and  permanent. 

Strategy ii) also has the advantage that 

it tends to lead to a larger number of 

jobs than strategy i).

ICT and economic globalisation

One  of  the  major  drivers,  offering  both 
profound  opportunities  and  threats,  to  the  21st 
Century  European  economy  is  globalisation,  i.e. 

Tradable versus non-tradable goods and services

First  of  all,  we  need  to  put  globalisation  in 

context and look at the types of economic goods 

and services which are most likely to be affected. 

(Turner,  2001,  inspired  by  Krugman,  1997)  has 

re-evaluated  the  relationship  between  so-called 

tradable  (or  more  tradable)  and  non-tradable  (or 

less tradable) goods and services.

Tradable goods and services are those likely 

to  be  subject  to  inter-regional,  large  scale  or 

globalised  competition. These  tend  to  be  goods 

and  services  which  can  be  automated  and/or 

subject  to  large  productivity  increases  by  using 

new technology, including ICT. They thus tend to 

be in manufacturing, in the more routine aspects 

of  services  using codified knowledge  (e.g. back-

office  functions  like  information  sorting  and 

mediation), and in highly creative but, at the same 

time, 

information/knowledge-rich,  digitisable 

services (like web-design, software development, 

etc.).  Because  of  massive  productivity  increases 

and  intense  competition  in  these  goods  and 

services,  prices  tend  to  fall  dramatically  and 

employment  is  often  sucked  out  (depending  on 

how  rapidly  the  sector  is  growing  in  relation  to 

the  increasing  reality  of  markets,  investments, 

productivity  increase).  So,  although  these  are 

value chains and trade being created and destroyed 

important for global trading and competitiveness, 

within the context of the global system as a whole. 

their  value  (as  measured  by  their  falling  prices) 

This  does  not,  however,  imply  a  corresponding 

and their employment levels tend to remain static 

1

decrease  in  importance  of  European,  national 

or even fall, certainly in relative terms.

or even regional systems. On the contrary, these 

 
 
 
 
 
 
 
 
 
 
 
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7

Non-tradable  goods  and  services  are  those 

sports  centres  and  the  like  whose  output  is 

not likely to be subject to globalised competition, 

consumed  in  that  location:  a  smaller  share 

but  which  tend  instead  to  be  anchored  more 

occurs  in  the  factories  which  produce  goods 

closely  within  local  or  regional  competitive 

which are then shipped to other cities, regions or 

milieu.  These  goods  and  services  tend  to  rely 

countries.” Krugman (1997, chapter 13) estimates 

on  face-to-face  contacts  which  are  difficult  to 

that Los Angeles today is a 75 per cent ‘local’ and 

automate  or  to  subject  to  significant,  sustained 

only 25 per cent ‘traded’ economy, whereas late 

productivity  increases.  They  are  thus  mainly  in 

nineteenth  century  Chicago  was  more  than  50 

the  human  services  sectors,  both  those  which 

per cent traded and less than 50 cent local. This 

are  more  routine  and  relatively  low  value,  like 

debate  also  harks  back  to  the  old  discussion  in 

hairdressing, and those which are more complex, 

urban  geography  about  the  relative  importance 

high  skilled  and  high  value,  like  counselling, 

of  basic  (cf.  tradable)  and  non-basic  (cf.  non-

teaching,  medical  services,  etc.  These  services 

tradable) activities. The lesson here is also that fast 

tend  not  to  be  traded  outside  the  locality/region 

growing sectors, in terms of unit value-added and 

and  are  often  seen,  compared  to  the  tradable 

productivity, may not be the ones which provide 

sector,  to  be  increasing  in  relative  value  (as 

the greatest turnover or the most jobs.

prices  do  not  fall)  and  in  relative  employment 

(as  the  quality  of  service  can  often  be  improved 

by  more  manpower,  not  less).  Some  aspects  of 

these  services  can  be  automated  using  ICT  (e.g. 

in health and education) where access to codified 

knowledge can improve efficiency and decision-

making. However, value and quality is essentially 

enhanced, not by ICT substituting for people, but 

by  using  ICT  to  support  human  capital  quality 

improvements.

However,  although  the  above  reflection  on 
jobs  and  income  is  important  to  consider,  it  is 

also true that more and more goods and services 

are  now  becoming  potentially  tradable,  so  the 

picture  is  increasingly  complex  and  dynamic 

with  ever  changing  configurations  of  functions 

and jobs previously thought ‘safe’ now subject to 

competition, both nationally and internationally. 

Trading  in  services  is  an  aspect  which  is  now 

subject  to  WTO  discussions,  even  though  such 

In  relation  to  employment  and  income, 

discussion may have been stalled within the EU.

conventional wisdom tends to rate tradable more 

important than non-tradable goods and services, 

particularly because of the former’s ‘competitive’ 

and  global-trading  potential.  However,  a  re-

assessment,  particularly  in  the  context  of  the 

knowledge  economy  at  national  and  regional 

level,  should  take  account  of  the  non-tradable 

sector’s importance for employment, income and 

quality of life, and the way in which many such 

non-tradable services are dependent on high and 

growing disposable incomes spent locally. These 

issues  are  especially  important  in  advanced 

economies as in Europe.

A great deal of useful research and analysis 

has  already  been  undertaken 

into  different 

dimensions  of  economic  globalisation,  or 

internationalisation, in the context of ICT activities 

(production  and  use), 

including  mapping, 

developing 

typologies  and  policy  analysis, 

despite  the  intractable  problems  of  definition 
and  the  dearth  of  reliable  and  meaningful  data. 

Much of this research has taken place within the 

context  of  the  Fifth  Framework  Programme  IST 

socio-economic  research,  by  DG  Employment 

and  Social  Affairs,  DG  Enterprise,  the  ILO  and 

the OECD. Many of these studies have, however, 

According  to  Turner  (2001,  p.  35)  “A  far 

only  focused  on  specific  dimensions,  such  as 

larger  proportion  of  what  is  produced  in  a  city 

the  de-location  of  work  and  changes  in  skills 

1

or region is now consumed in that city or region 

demands,  and  there  is  still  much  controversy 

than  was  the  case  fifty  or  a  hundred  years  ago: 

about such issues. This is exemplified in a speech 

a  bigger  share  of  economic  activity  occurs  in 

made  by  former  Commissioner  Liikanen,  who 

the  retail  outlets,  schools,  hospitals,  restaurants, 

at  an  international  conference  on  international 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
competitiveness held in Limerick Ireland in April 

standardised and digitalised which, in turn, then 

2004 stated:

“Outsourcing,  offshoring  and  de-localisation 

are complex, difficult and important political 

issues. They deserve a well informed debate 

and  conclusions.  First  we  have  to  get  our 

allows the production of many goods and services 

to  be  fragmented  into  components  that  can  be 

located  in  other  countries  to  take  advantage 

of  costs  differentials,  economies  of  scale,  etc. 

(European Commission, 2005d, p. 15.)

analyses  right,  then  it  will  be  time  to  take 

One  way 

to  envisage 

this  value-added 

political decisions.”

Spatial sorting along the value chain

Though 

there  are  many  strategies 

for 

competitiveness,  one  of  the  more  predominant 
theories  of  business  strategy,144  suggests  that 
companies  will  want  to  focus  on  those  specific 

activities  along  the  total  value  chain  that  are 

closest  to  their  core  competencies  and  add 
the  most  value  to  their  products,  since  this  will 

place  them  in  a  position  where  their  offer  will 

be  hard  to  imitate  by  potential  competitors. The 

portfolio of activities along the value chains of a 

particular product or service should therefore be 

seen  as  a  continuum  between  low  value-adding 

activities  and  high  value-adding  activities,  along 

the spectrum: cost-driven, user-driven, and R&D-

driven types of innovation.

Clearly,  most  business  activities  (including 

ICT-related  activities)  will  be  a  combination 

of  these  three  types  of  innovation.  The  relative 

importance  of  each,  however,  appears  to  have 

distinctive locational consequences. The manner 

in which different types of knowledge seem to be 

undergoing new types of spatial sorting gives rise 

to the observation that “a given activity may well 
evolve over time and we might anticipate product 

and  service  life  cycle  effects,  whereby  ‘new’ 

activities  tend  to  agglomerate  until  routinisation 

takes place and the activity, or at least elements 

of  it,  are  decentralised  and  outsourced  in  order 

to  reduce  costs”  (Gillespie  et  al.  2001). The  EU 

Economy 2005 Review also points out that “The 

use  of  ICT  allows  knowledge  to  be  codified, 

continuum  is  to  unpick  the  main  business 

process  steps  along  the  value  chain,  as  shown 
in  the  diagram  below.145  In  the  first  column  (on 
the  extreme  left),  the  different  steps  of  the  value 

chain are listed by diminishing level of economic 

value-added.  Subsequent  columns  are  examples 

of other characteristics linked to these steps.

When  we  add  a  specific  geographic 

dimension  to  these  economic  activities,  there 

is  a  wide  range  of  concepts,  terms,  and  models 

in  use. Terms  such  as  offshoring,  delocalisation, 

insourcing,  and  nearshoring,  are  often  used 

without  any  explicit  references  made  to  their 

exact meaning and function. The most elaborate 

descriptions define activities related to outsourcing 

in two-axis models related to location and control 

(McKinsey 2003, OECD 2004a). One such model 

was presented in a recent OECD paper (2004a), 

in  which  the  geographic  aspect  focuses  on  the 

location of the provider of the outsourced good or 

service, i.e. whether it is supplied from within the 

same country or outside the country (offshoring). 

The  control  element  in  the  matrix  highlights  the 

corporate control of the good or service provider, 

i.e.  whether  the  good  or  service  is  supplied 

internally from an affiliate or branch (insourced), 

or  whether  the  good  or  service  is  supplied  from 
external suppliers (outsourced).

While this seems to be a very robust model, 

used in a national perspective it does not have the 

ability  to  address  the  specific  themes  that  arise 

when the object of analysis is the European Union. 

This  is  because  the  EU  as  a  union  of  countries 

requires  another  geographical  dimension.  Seen 

in  an  EU  perspective,  the  nearsourcing  of  ICT 

144  The most prominent representatives of such theory would Michael Porter’s “five forces” (Porter, 1985).
145  This diagram draws on Millard (2002) and on the BEEP project analyses of regional development in the Information Society, 

BEEP (2003).

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1

 
 
 
 
 
 
 
 
 
 
 
 
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7

Characteristics of business process steps along the value chain
Characteristics of business process steps along the value-

1 Creativity

2 Product/service innovation

3 Product/service development

4 Marketisation

5 Production

6 Distribution

value-added
spectrum:

tacit
knowledge

embedded in
people &
organisations

locationally
sticky

retained
in house

high
clustering

3) R&D driven

2) user-driven

7

Maintenance & customer
service

1) cost-driven

codified
knowledge

embedded in
technology &
systems

locationally
footloose,
mobile

out-sourced

low
clustering

activities  within  the  EU  might  pose  challenges 

EU,  and  (offshore)  outsourcing,  which  refers  to 

for certain regions or nations, but can also foster 

the delocalisation of activities to countries outside 

regional  specialisation  and  positive  economic 

the EU. So, here we depart from the terminology 

development that will contribute to the long-term 

economic integration of the EU.

From an EU perspective, the most important 

distinction related to outsourcing therefore seems 

to  be  whether  the  activities  are  moved  outside 

used  in  the  OECD  paper  by  including  a  within 
EU  dimension  to  the  model.146  This  within  EU 
dimension can be called ‘nearshore outsourcing’, 

which is outside the country of origin, but within 

the EU, as shown in the following diagram:

Europe  or  moved  within  Europe,  although  the 

The three value-adding activities introduced 

latter  category  could  also  at  this  point  in  time 

above  (cost-driven,  user-driven,  and  R&D-driven 

be  divided  up  into  EU15  and  the  New  Member 

innovation),  are  confirmed  by  a  recent  study 

States. This  is  reflected  in  the  terminology  used 

(Danish  Technological  Institute  (2004),  which 

in  the  “Employment  in  Europe  2004”  report 

used  the  equivalent  terms  when  examining  the 

(European  Commission,  2004a),  where 

the 

drivers of outsourcing:

generic term used (parallel to the OECD term of 

‘outsourcing’)  is  delocalisation  of  activities.  In 

geographical  terms,  the  document  distinguishes 

between  relocalisation,  which  refers 

to 

the 

delocalisation of activities to countries within the 

i) 

reducing  costs  (both  through  economies  of 

scale and by flexible outsourcing of functions 

which only add low value to the business)

ii) 

seeking access to new markets (users)

Outsourcing defined by control and locational aspects

Control

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Onshore outsourcing

Nearshore outsourcing

Offshore outsourcing

Internal Domestic supply

Internal nearshoring

Internal offshoring

National

within EU

Global - outside EU

Location

10

Source: based on a model from OECD 2004a

146  To complete the picture a fourth geographical dimension could be implemented; the sub-national regional dimension. There 
are indications that most outsourcing in EU takes place within a given country from one region to another. The consequences at 
national level thus are neutral, while there may be serious consequences at regional level.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
iii)  seeking access to new high-level knowledge

is  thus  a  driver  of  regional  specialisation  and 

These  three  drivers  seem  to  be  the  most 

important drivers of outsourcing in an ICT context 

on  a  company  level  and  seem  to  stimulate 

different  kinds  of  outsourcing  activities.  The 

figure  below  sums  up  the  relationship  between 

the three drivers and the six types of outsourcing 

activities  which  are  interesting  from  a  European 

perspective (see diagram below).

In  addition,  this  study  also  identified  a 

number  of  strategic  and  policy  drivers,  such 

as 

strategic  decisions  at  company 

level, 

national  labour  market  and  education  policies, 

international trade agreements, etc.

impact  of  ICT  on 

The 
activities

internationalisation 

cluster  formation,  as  well  as  the  development 

of  distributed  value  chains,  virtual  organisations 

and knowledge networks (VSO, 2003). If you can 

produce  and  deliver  services  anywhere  you  can 

become more selective about where you actually 

do  locate  activities.  A  small  difference  can  thus 

make a big difference, and could lead to winner-

take-all situations. The interplay of dynamism and 

inertia in shaping new geographies and a tension 

between centralisation and decentralisation leads 

to  a  new  regional  mosaic  of  critical  success 

factors.  By  a  seeming  paradox,  the  ICT-induced 

‘death of distance’ thus increases the importance 

of  locality.  However  there  are  no  universal  or 

inevitable trends. Patterns are shaped by strategies 

of  players  on  both  the  supply  and  demand 

side  as  well  as  by  specific  features  of  the  local 

environment  including  cultural,  political  and 

In principle, the use of ICT can mean that any 

geographical patterns as well as economic ones.

task involving the processing and/or transmission 

of  digitised  information  can  be  carried  out 

anywhere where the right infrastructure is present 

in combination with the right workers at the right 

price. This (in theory) opens up new opportunities 

for  development  all  over  the  world.  (JANUS, 
2004)

In the 1960s and 1970s a global division of 

labour  in  manufacturing  industries  developed. 

ICT played a role in managing global production 

lines  and  some  ‘white-collar’  work  was  also 

involved (e.g. typesetting in Hong Kong, Malaysia 

and  Malta  for  UK  customers).  In  the  late1970s 

the  export  of  bulk  data  entry  started,  e.g.  from 

This 

internationalisation  of 

ICT-enabled 

the US to the Caribbean, the Philippines, China. 

economic  activities  is  accompanied  by  new 

The  1980s  saw  large  scale  ‘body-shopping’,  for 

forms of competition and collaboration between 

example from India to more developed countries 

and  within  regions,  companies  and  people.  It 

in the software sector.

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Relationship between outsourcing drivers and outsourcing activities

Drivers

Activities

Onshore
outsourcing

Nearshore
Outsourcing

Offshore
outsourcing

Cost: 
economies of scale

Cost: flexibilisation

Access to new
Markets (users)

Access to knowledge

X

X

Internal 
domestic 
supply

x

Internal 
nearshoring

Internal
Offshoring

X

x

X

X

X

X

11

x marks an area where some sourcing activities have been documented or are expected to be documented.
X marks an area where significant sourcing activities have been documented or are expected to be documented.
Source: Danish Technological Institute, 2004.

 
 
 
 
 
 
 
 
 
 
 
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12

In  the  1990s  the  internationalisation  of 

within  the  same  country,  whilst  only  5.3% 

ICT  accelerated  with  the  global  liberalisation 

outsource across their national borders.

of  telecommunications  and  the  rapid  spread  of 

ICT  including  the  Internet.  Simultaneously  there 

was  a  dramatic  growth  in  outsourcable  forms 

of  employment.  Call  centres  provide  the  most 

celebrated examples of this, but many other ICT-

mediated economic activities are also affected.

These  data  tend  to  gainsay  the  growing 

apprehension 

that 

the  European  economy 

is  moving 

towards 

the 

‘death  of  distance’ 

(Cairncross,  1997)  in  which  whole  industries 

in  specific  countries  or  regions  could  be  wiped 

out. On the contrary, this seems to happen rarely, 

For  example, 

the  EMERGENCE 

study 

at  least  in  the  fundamentalist  way  envisaged  by 

(EMERGENCE,  2003),  which  examined  telework 

the idea that you can locate anything anywhere. 

or eWork, showed that the incidence of individual 

As  shown  above,  much  depends  on  the  types 

forms  of  eWork,  such  as  individuals  working  at 

of  knowledge  involved  in  a  particular  activity 

home  rather  than  commuting  to  the  office  each 

as  well  as  the  specific  characteristics  of  each 

day,  is  significantly  lower  than  the  incidence  of 

location. Previously, locational assets like relative 

collective forms of eWork, i.e. where the work of 

proximity, raw materials and nearness to markets 

organisational units each containing two or more 

were  determining  factors  in  regional  prosperity. 

employees is relocated due to ICT use, regardless 
of whether or not the same individuals carry out the 

In  the  knowledge  economy,  on  the  other  hand, 
knowledge, creative talent and innovation, based 

work. According to the eWork definition adopted 

upon the local development of human resources 

by EMERGENCE, nearly half of all establishments 

and  institutional  structures,  are  more  important. 

in  Europe  (49%)  were  already  practising  some 
form of eWork in 2000.147 However, of this total, 
only  just  over  2%  of  establishments  employed 

Thus,  location  is  still  vital,  but  now  depends 

much  more  on  how  local  assets  (both  existing 

and  latent)  are  perceived  and  developed.  It 

people  to  work  exclusively  from  home  on  an 

depends on government and enterprises thinking 

individual  basis  using  ICT,  compared  to  the  two 

and acting both locally and globally at the same 

types  of  organisational  eWork  examined  by 

time. Locally because vital assets like people and 

EMERGENCE:

i) 

In-house  eWork,  taking  place  within  the 

same organisation but at different sites within 

that organisation, undertaken by 11.8% of all 

EU15 establishments (i.e. insourcing)

ii)  Outsourced  eWork,  taking  place  on  the 

premises of another independent organisation 

and thus involving a contractual relationship 

between 

the  organisation  out-sourcing 

the  work  and  the  organisation  receiving 

the  work,  undertaken  by  43%  of  all  EU15 

establishments. 

In 

geographical 

terms, 

however,  much  of  this  outsourced  eWork 

is  carried  out  within  the  region  where  the 

outsourcer  is  based  (34.5%)  but  substantial 

numbers (18.3%) outsource to other regions 

institutions  largely  remain  local,  and  globally 

because  competition, 

trade  and 

investment 

now  take  place  on  an  increasingly  global  scale. 

(See also Castells,  1996) It  is, in  fact,  new types 

of  interplay  between  the  local  and  the  global, 

including the role of ICT in this, which make up 

the  ingredients  of  the  new  regional  agenda  and 

the new international division of labour.

There  remain,  however,  concerns  about  the 

effects of the delocalisation of ICT related services, 

mainly  in  relation  to  unemployment  as  a  short 

term  effect,  and  on  the  re-distribution  of  wealth 

as  a  longer  term  effect.  (Danish  Technological 

Institute,  2004)  The  primary  concern  is  loss  of 

jobs (mostly jobs per se or low-skilled jobs). This 

concern  tends  to  focus  on  the  short  term  effects 

147  Note  these  EMERGENCE  data  are  only  for  establishments  with  at  least  50  employees,  although  samples  from  several  EU 

countries of all establishments show similar overall incidences of eWork.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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of  cost-driven  outsourcing  (both  nearshore  and 

Preliminary  results  from  the  analysis  of  the 

offshore).  A  medium  term  effect  of  cost-driven 

OECD’s  (2004a)  occupational  employment  data 

outsourcing,  recognised  by  the  trade  unions,  is 

suggests  that  some  20%  of  total  employment  is 

the  downward  pressure  on  working  conditions 

likely to be affected by the international sourcing 

following  from  exposure  to  global  competition. 

of  ICT-intensive  service  activities.  Most  of  these 

This  effect  is  felt  regardless  of  whether  there 

are clustered in service sectors such as financial 

have  been  lay  offs  or  not. There  is  also  concern 

and 

insurance  services  and  computer  and 

about  the  risk  of  loss  of  the  skill  base  due  to 

information  services.  The  offshoring  of  service 

outsourcing  of  knowledge  intensive  activities.  It 

activities has also generated considerable debate, 

is remarkable that the positive aspects, i.e. access 

especially since it now also involves some high-

to  new  knowledge  through  outsourcing  and  the 

quality service jobs, even though relative numbers 

greater  efficiency  of  companies  resulting  from 

remain very small.

outsourcing,  are  not  generally  recognised  as  a 

potential gain in the national context.

Anecdotal  evidence  also 

suggests 

the 

following breakdown (OECD, 2004a):

•  of  all  outsourcing:  2/3  national,  1/3 

Current patterns and adjustment challenges

international

The  international  sourcing  of  ICT  activities 

•  of all offshoring (international) activities: 2/3 

is  growing  rapidly.  It  seems  to  be  reasonably 

insourcing, 1/3 outsourcing.

distributed  across  countries  even  though  some 

major  suppliers,  such  as  India,  have  emerged. 

Exports  of  other  business  services  and  computer 

and  information  services,  which  are  used  to 

approximate  international  service  sourcing,  are 

growing  rapidly  in  many  countries,  with  the 

fastest  growth  occurring  mainly  in  non-OECD 

countries.

However, in the absence of official statistics, 

little of detail is known about the impact and extent 

of  the  globalisation  phenomenon  overall.  It  is 

clear that the international sourcing phenomenon 

is  not  new  in  ICT  or  in  other  industries.  It  has 

existed in manufacturing for many years. What is 

new  is  that  it  is  increasingly  taking  place  in  the 

service and R&D activities of both ICT and other 

industries, and is now starting to affect those white 

collar  jobs  previously  considered  ‘untouchable’. 

There  are  no  official  numbers  of  jobs  that  have 

moved  abroad,  only  anecdotal  evidence  and 

projections.  Published  numbers  vary  widely, 

but  even  the  largest  projections  of  ‘jobs  lost  to 

offshoring’  are  relatively  small  in  comparison 

to  normal  job  churning  in  advanced  (including 

EU)  economies,  as  the  above  EMERGENCE  data 

indicate.

Most  current  data  and  evidence  show  that 

internationalisation occurs in response to:

• 

increased  competition,  resulting  from  trade 

liberalisation and reinforced pressures to cut 

costs,  combined  with  rapid  technological 

change,  making 

services  as  well  as 

manufacturing increasingly tradable

• 

skills  shortages  and  skills  mis-matches  – 

ensuring a skills base is in place increasingly 

becomes  a 

locational  determinant  of 

economic activity.

The overall expected impact of international 

sourcing  is  likely  to  involve  initial  job  losses  in 

the country from which the offshoring originates, 

and  job  creation  in  the  host  country.  Despite 

this,  both  will  probably  experience  efficiency 

gains and cost savings induced and enhanced by 

greater competitiveness and productivity growth, 

and  this  should  create  new  employment  and 

growth opportunities in both locations.

However,  the  adjustment  process  in  home 

countries  may  be  costly,  especially  for  those 

who have lost their jobs. Education and training 

1

programmes  will  need  to  be  adapted  to  enable 

 
 
 
 
 
 
 
 
 
 
 
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.

7

people  to  take  advantage  of  new  employment 

causal  relationship  between  ICT  and  economic 

opportunities  and  life-long  learning  and  skill-

performance,  whether  the  latter  is  measured  in 

upgrading  will  become  the  norm.  A  change 

terms of growth, productivity or competitiveness. 

in  mentality  will  be  needed  as  people  are 

The  OECD  Growth  Project  (2001a)  re-drew 

increasingly likely to have multiple jobs and even 

attention to the ‘productivity paradox’, originally 

multiple  careers.  (See  also  section  4.3).  Thus, 

suggested  by  Robert  Solow.  (Solow,  1987)  This 

a  measured  response  to  international  sourcing 

OECD  survey  evidence  relates  to  countries, 

would  be  to  take  advantage  of  the  benefits 

however,  the  ‘paradox’  message  applied  equally 

while  managing  the  adjustment  process  and 

to a region or to a firm. Of course, this ‘paradox’ 

maintaining  good  labour  conditions  and  social 

simply expresses the fact that a clear relationship 

welfare  provisions  everywhere.  EU  countries 

has  been  difficult  to  establish  between  ICT  and 

should remain committed to liberalising trade in 

productivity  improvements  or  economic  growth, 

services and avoid a protectionist response.

but  this  is  true  for  many  so-called  inputs  to,  or 

Thus,  policy  recommendations  are  likely  to 

include those proposed by the OECD (2004a):

•  Avoid 

a 

protectionist 

response 

and 

remain  committed  to  liberalising  trade  in 

manufacturing and services (including through 

GATS Mode 4: movement of persons).

drivers  of,  economic  growth  and  social  change. 

In  the  case  of  ICT  and  productivity,  this  may  be 

due to the likelihood that the effects take a long 

time to reveal themselves (as historically was the 

case  with  the  introduction  of  steam  power  and 

electricity), and because it is simply very difficult 

to isolate the effects and interactions of so many 

•  Manage 

the  adjustment  process  and 

variables. This is a debate which is on-going.

compensate 

for  adjustment  costs  where 

necessary.

•  Adjust  education  and 

lifelong 

learning 

systems to train and retrain workers, not just 

in  specific  skills  but  also  in  order  to  obtain 

broader and transferable skills so as to enable 

them to take advantage of new employment 

opportunities.

• 

Ensure  good  labour  standards  and  welfare 

provisions in home and host countries.

However,  some  substantial  evidence  started 

to  emerge  about  5-6  years  ago.  For  example, 

when comparing two cohorts of companies, one 

implementing ICT, upgrading skills and changing 

the management structure, and one doing none of 

these things, over a period of 6-8 years, the former 

cohort  achieved  a  significantly  higher  long-

term productivity growth compared to the latter. 

Interestingly,  this  was  after  a  short  initial  period 

of lower productivity growth due to the need for 

individuals  to  learn  how  to  use  the  technology 

•  Reassessment 

of 

the 

inter-connection 

(data from Eurostat show that acquiring ICT skills 

between national, EU and supra-national ICT 

R&D policies, including the balance between 

can  be  a  costly  and  time-consuming  process) 

as  well  as  to  change  the  management  structure 

basic  and  applied  research,  and  the  role  of 

(European Social Fund, 1999).

interdisciplinary  research  to  further  product 

and process innovation.

Measuring the role of ICT in the 
economy

1

Further,  “Paul  David,  an  economist  at  the 

Oxford University, suggests that a technology will 

start  having  a  significant  effect  on  productivity 

only  if  it  has  reached  a  50%  penetration  rate. 

American  computer  use  has  reached  the  50% 

mark  only  recently,  and  other  rich  economies 

still lag behind. That puts ICT at roughly the same 

The  productivity  paradox  and  the  problem  of 

stage now as electricity reached in 1920. Almost 

services

Until very recently, economists have found it 

signally hard to establish – let alone quantify – a 

exactly  on  cue,  growth  in  labour  productivity 

in  America’s  business  sector  has  increased  to 

an annual average of 2.9% since 1996, from an 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
average  of  1.4%  in  1975-95.  In  the  year  to  the 

This  general  trend  also  extends  to  the  public 

second  quarter  of  this  year,  productivity  surged 

sector. But approaches different from those used 

by  5.2%”  (Economist  2000,  p.  13).  Since  this 
Economist  review,  of  course,  we  have  had  the 
dot.com  crash  and  a  lowering  of  productivity 

increase again, but this probably has more to do 

with  business  cycles  and  business  confidence 

than with ICT as such.

In the same article the Economist argued: “A 
breakdown  of  productivity  growth  by  industry 

in  manufacturing  are  required  for  performance 

improvements in the area of services.

While  productivity  gains  in  manufacturing 

were mainly realised by employing an engineering 

model, i.e. largely based on standardised products 

and the application of technology, this model is of 

limited use in services. Herzenberg et al. (1999) 

argued that the case- and situation-specific nature 

shows  that  in  many  of  the  sectors  that  use 

of most services demand an orientation along an 

computers  most  intensely,  notably  banking  and 

interpretative  model  instead,  and  that  this  goes 

education,  productivity  actually  declined  in  the 

hand  in  hand  with  policies  towards  a  learning 

1990s. So is IT a waste of money? Not necessarily: 

economy  and  a  learning  region.    They  identify 

more  likely,  the  figures  are  flawed.  The  service 

two  complementary  pathways  to  productivity 

sector  has  always  been  hardest  to  measure,  and 

improvements  which  they  call  economies  of 

IT and the Internet have exacerbated the problem 
because much of their benefit comes in the shape 

depth  and  economies  of  coordination. Although 
standardised  production  processes  are  also 

not  of  cost  savings,  but  of  increased  product 

possible in service industries to some extent, “the 

quality, convenience and customer service. Such 

basic assumption of a well-defined product with 

gains rarely show up in GDP figures.”

attributes independent of the production process 

Further,  the  data  presented  in  this  context 
the  Economist, 
a  productivity  decline 

in  banking,  health 

to  showing 

in  addition 

in 

applies only partially, poorly, or not at all to other 

service processes.”

This parallels the contention that whilst goods 

and  education  for  the  period  1987-97,  also 

are  produced  and  then  delivered  to  customers, 

showed  a  productivity  increase  in  all  other 

services  in  a  real  sense  are  first  produced  only 

sectors  represented,  including  manufacturing, 

when  they  are  delivered  to  customers.  Thus,  in 

wholesaling, public utilities, insurance, transport, 

most services, the ‘product’ differs depending on 

communications, retail trade, etc. So the evidence 

the customer: a nurse’s patient, a teacher’s student, 

is  mixed,  apart  from  the  fact  that  the  data  are 

a waitress’s meal. For each provider a slightly or 

probably  inadequate.  In  an  analysis  of  600  big 

largely  different  process  –  a  different  model  of 

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American  firms  between  1987  and  1994,  the 
Economist  reportedly  “found  that  investment  in 
computers appeared to boost annual Total Factor 
Productivity by 0.25-0.5%. The productivity gains 

got bigger over longer periods, confirming that it 

takes  time  for  firms  to  reorganise  their  business 

before  they  reap  the  full  benefits  of  IT.  Their 

research also showed that firms that coupled ICT 

investment  with  changes  in  their  organisational 

structure,  such  as  decentralisation,  enjoyed  the 

biggest  productivity  gains  from  IT”  (Economist 

2000, pp. 17-18).

production  –  applies  from  one  customer  to  the 

next. Each process is interpretative, depending on 

a customer’s desires and the needs of the situation 
(Herzenberg et al. 1999, p. 57).

In  services  also  ICT  plays  an  important 

supporting  role  to  achieve  economies  of  depth 

(improving skills of case-specific interpretation and 

situational  response  in  services)  and  economies 

of  coordination  (improving  adjustment  of  efforts 

in  collaborative  service  processes).  Examples  of 

such benefits of ICT include their contribution to 
facilitate communication through mobile devices 

1

With the expansion of the service economy 

or  to  faster  and  more  comprehensive  access  to 

the  search  for  strategies  to  strengthen  service 

information.

productivity  becomes  even  more 

important. 

 
 
 
 
 
 
 
 
 
 
 
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.

7

Further  basic  strategies  which  are  utilised 

for example, it seems only to kick in after a certain 

to  achieve  productivity  improvements  in  more 

threshold is reached, and only after an adjustment 

and  more  service  areas  are  introducing  elements 

period. In addition, there are many other factors 

of  self  service  with  the  support  of  ICT  (such  as 

which  are  important  and  which  help  to  explain 

with  electronic 

telling  machines,  eBanking, 

the  marked  differences  between  countries,  as 

eGovernment, call centre support, etc.). With such 

summarised earlier.

forms  of  technological  incorporation,  often  as  a 

combination of hard-, soft-, and ‘humanware’, ICT 

seems also now to be opening up new opportunities 

for  performance  gains  in  service  production 

(Häußermann  et  al.  1995,  p.  49.  See  also  Miles, 

1993).  In  addition,  as  mentioned  previously, 

automation  is  making  increasing  inroads  into 

services,  as  there  appears  to  be  evidence  that 

we are on the edge of a major move towards the 

commoditisation of business processes.

The paradox resolved?

While  evidence  for  a  link  between  ICT 

developments  and  economic  growth  was  thin 

up  to  a  few  years  ago  (the  so-called  Solow 

paradox),  data  is  now  becoming  available  to 

Both  the  OECD  (2004b)  and  the  Economist 

Intelligence Unit (2004) point to three major ways 

in  which  ICT  positively  impacts  the  economy: 

through ICT investment, through ICT production, 

and through ICT use.

ICT  investment  boosts  capital  deepening, 

which  in  turn  leads  to  increases  in  labour 

productivity. Research has shown that ICT capital 

investment has made a significant contribution to 

GDP growth over the past decade, accounting for 

between 0.3% and 0.8% of GDP per head growth 

in  the  OECD  in  the  1995-2001  period.  (OECD, 

2003) In many OECD countries the share of ICT 

investment  in  total  investment  has  increased, 

especially  in  the  US,  Australia,  Canada  and  the 

Nordic countries.

support  the  hypothesis  that  ICT  adoption  has  a 

Other European countries are also investing 

positive  effect  on  levels  of  productivity  within 

large  amounts  of  capital  in  ICT  goods  and 

an  economy.  (OECD,  2003)  In  particular,  the 

services,  but  still  tend  to  lag  behind  overall, 

OECD’s  major  study  (OECD,  2004b)  concluded 

accounting  for  2.6%  of  GDP  compared  with 

that  the  empirical  evidence  of  the  economic 

4.2%  in  the  US.  (Colecchia  &  Schreyer,  2001, 

impacts  of  ICT  is  significantly  improved  from 

and Bartelsman and Hinloopen, 2002) As seen in 

what  it  was  only  a  few  years  ago.  Furthermore, 

the diagram on page 177, ICT gross fixed capital 

in terms of empirical evidence and measurement, 

formation in the EU totalled nearly €1.9 trillion in 

many OECD countries now provide estimates of 

1995-2001,  and  expanded  at  an  average  rate  of 

ICT investment that enable calculations of capital 

19.5% over the period.

services, whilst data on the ICT sector and on the 

services  sector  are  available  for  many  countries, 

although  important  gaps  in  our  knowledge  do 

remain.  In  addition,  many  countries  now  have 

regular  business  surveys  of  ICT  use  that  provide 

an overview of diffusion patterns.

to 

According 

the  Economist 

Intelligence 
Unit  (2004),  there  is  now  no  doubt  that  the  link 
between  ICT  and  economic  growth  is  strong  in 

In  terms  of  ICT  production,  both  hardware 

and  software,  this  itself  can  make  a  large 

contribution  to  GDP  growth,  although  only  a 

minority  of  European  countries  have  been  able 

to  enter  and  remain  competitive  in  this  market. 

For EU Member States competition on the world 

market takes two forms, namely competition with 

non-EU  economies  and  competition  with  fellow 

Member  States.  (Horlings  et  al,  2002)  Roughly 

1

developed  economies.  However,  it  is  also  the 

case  that  this  relationship  is  not  straightforward, 

60  percent  of  EU  trade  takes  place  within  the 
Union.148  The  figure  on  page  178  shows  the 

148  OECD data show that in 2000 56% of the value of imports and 60% of the value of exports came from and went to other EU 

countries. (OECD, 2003)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ICT investment in the EU (1995-2001). Gross fixed capital formation in 14 EU countries (in contrast 
1995 prices), billions of Euro.

450

400

350

300

250

200

150

100

50

0

1995

1996

1997

1998

1999

2000

2001

IT equipment

Communication equipment

Software

Source: Timmer et al, 2003, reproduced in the Economist Intelligence Unit, 2004. p. 12.

Revealed  Comparative  Advantage  (RCA)  of  14 

productivity benefits of ICT throughout the rest of 

EU Member States and their main competitors in 

the economy. (OECD, 2003)

the  international  market  for  ICT  and  consumer 
electronics.149 Countries with an RCA of more than 
1 have a comparative advantage, while those with 

a value below 1 have a comparative disadvantage, 

although  this  can  also  be  interpreted  simply  as 

degree  of  specialisation.  Although  the  EU  has 

approximately the same score as the USA, only 5 

Member States have a comparative advantage in 

IT and consumer electronics. The other economies 

have a considerable comparative disadvantage.

The  largest  economic  effects  of  ICT  are, 

however,  through  its  use  across  the  whole 

economy,  and  particularly  in  sectors  where 

such  use  can  most  readily  be  translated  into 

increases  in  productivity.  In  the  service  sectors, 

these  tend  to  be  in  such  areas  as  financial  and 

insurance services and computer and information 

services.  However,  achieving  such  benefits 

requires  a  variable  set  of  other  factors  to  be  in 

place,  dependent  on  sector  and  circumstances. 

One  important  measure  of  ICT’s  impact 

Moreover, this is still to some extent contentious 

on  productivity  (total  factor  productivity,  TFP) 

ground,  as  although 

the  US  and  probably 

growth,  has  as  a  result  accelerated  in  those 

Australia  almost  certainly  demonstrate 

these 

countries  with  a  comparative  advantage.  (Ark, 

effects,  Europe  as  a  whole  has  yet  to  convince, 

et  al,  2002)  However,  the  strong  competition 

as  illustrated  in  the  diagram  on  page  179.  It  is 

for  ICT  production  means  only  a  few  highly 

important  to  make  a  distinction  here,  however, 

specialised  countries  can  succeed,  but  this  is 

both  between  individual  European  countries 

not  thought  to  be  a  hindrance  to  reaping  the 

and between levels of analysis. At the micro firm 

149  The RCA value is equal to the share of a commodity in a country’s exports divided by the share of this commodity in world 

exports.

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1

 
 
 
 
 
 
 
 
 
 
 
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7

Revealed Comparative Advantage (RCA) in IT and consumer electronics, 1997-2001

IRELAND

SOUTH KOREA

FINLAND

NETHERLANDS

UK

JAPAN

SWEDEN

USA

EU

FRANCE

DENMARK

GERMANY

BELGIUM

PORTUGAL

CANADA

AUSTRIA

SPAIN

GREECE

ITALY

AUSTRALIA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Source: ITC (2003), Note: the value for the EU is an unweighted average of the 14 Member States in the figure.

level,  the  evidence  does  suggest  that  ICT  use  is 

In  aggregate  terms,  countries  with  a  strong  and 

beneficial, whilst it is at the aggregate or national 

dynamic  presence  in  ICT  have  shown  better 

level,  that  the  evidence  is  much  less  conclusive 

overall  performances.  However,  they  also  point 

about  the  benefits  of  ICT  use.  (OECD,  2004b, 

out  that  no  regular  positive  relationship  can  be 

Economist Intelligence Unit, 2004)

found between innovation, growth of production 

There is also strong evidence to support the 

above  findings  from  research  conducted  under 

the  auspices  of  the  European  Commissions’ 

Research  and  Technology  Programmes.  For 

example,  empirical  results 

from 

the  RISESI 

project  (RISESI,  2004)  clearly  demonstrate  that 

expenditure  on  ICT  has  overall  positive  effects 

on  the  growth  of  employment  in  ICT  producer 

and  new  jobs  across  different  countries  or 

sectors.  The  differences  between  product  and 

process innovations may explain this diversity of 

outcomes, but also the differential performances 
of  major  national  firms  play  a  role,  as  well  as 

the  uncertainty  and  volatility  dominating  many 

of  these  industries.  Thus  domestic  and  sector 

differences are very important.

and  ICT  using  sectors.  Regression  analysis  was 

In  terms  of  more  and  better  jobs  arising 

used  to  show  that,  when  controlling  for  growth 

from  ICT,  recent  work  undertaken  in  support  of 

in  demand  and  in  labour  costs,  the  job  creating 

the  European  Commission  concluded  that  ICT 

1

effects  of  new  technologies  was  greater  than 
job  replacing  effects.  RISESI  concludes 
the 

investment  has  direct  employment  effects  in 
the  ICT  industry,  in  ICT  and  RTD  departments 

that  although  ICT  activities  are  a  relatively 

of  companies  and  in  RTD  institutions.  (RAND, 

small  part  of  the  economy  as  a  whole,  they 

2005,  p.  49)  On  the  other  hand  ICT  may 

nevertheless  have  strong  and  pervasive  effects. 

reduce 

the  demand 

for 

labour 

in  existing 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contribution of ICT-using services to aggregate labour productivity growth. Contributions to value 
added per employed person, in percentage points

1,50

1,25

1,00

0,75

0,50

0,25

0,00

-0,25

-0,50

-0,75

Source: OECD (2004b), estimates, reproduced in the Economist Intelligence Unit, 2004. p. 13.

1990-95

1996-2002

companies.  Therefore  the  total  contribution  of 

Europe  has  not  delivered  the  same  impressive 

ICT to employment varies over time. The positive 

economic and productivity growth experienced 

effects  have  a  time  lag,  whereby  the  increase 

in  the  US.  Although  there  has  been  some 

in  competitiveness  and  the  creation  of  new 

businesses  should  lead  to  new  employment  in 

the longer term. What ‘better jobs’ are is difficult 

questioning  of  whether  Europe  and  the  US 
calculate  growth  in  the  same  way,150  there  is 
sufficient  evidence  that  the  difference  is  real 

to determine, but the concept implies a reduction 

and  significant. 

(OECD,  2004b,  Economist 

of  manual  labour,  increasing  efficiency  and 

Intelligence Unit,2004, Department of Trade and 

allowing the same person to fulfil more functions 

Industry, UK, 2005) Thus, in order to adequately 

and  to  execute  them  better,  thus  increasing  job 

rectify  the  European  shortcomings,  we  need 

satisfaction and value added per employee. Also 

to  thoroughly  understand  the  reasons  that  lie 

there  may  be  new  opportunities  for  ‘better’  jobs 

behind the differences.

via  distant  working,  increased  mobility  and  the 

emergence of independent workers, supported by 

ICT.

Europe’s ICT challenge and productivity slump

There is general and widespread consensus 

that  the  relatively  heavy  investment  in  ICT  in 

Since  1945  the  overall  level  of  total  factor 

productivity in EU-15 has converged towards that 

of the United States. However, this convergence 

was broken in the mid 1990s, and since then the 

relative productivity performance of the European 

Union  has  slowly  declined.  (Groningen  Growth 

&  Development  Centre,  2005)  Total 

factor 

productivity growth has slowed down in the EU, 

150  For example, at the “Preliminary analysis of the contributions of the EU Information Society policies and programmes to the 
Lisbon  and  Sustainable  Development  Strategies” Workshop,  Brussels,  15  December  2004,  Jacques  Pelkmans  suggested  that 
comparisons could be suspect because the US includes service quality and the EU does not, and that if the same approach was 
used European ‘growth’ would be much closer to that of the US.

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1

 
 
 
 
 
 
 
 
 
 
 
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.

7

GDP per hour worked in the EU as a percentage of the USA, 1950-2002

100

95

90

85

80

75

70

65

60

55

50

45

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Source: Ark et.al (2003)

whilst it accelerated in the US, and there is as yet 

kept  pace  with  US  productivity  growth,  as  well 

no  evidence  of  a  new  phase  of  catching  up,  as 

as  in  terms  of  ICT’s  contribution.  These  are 

shown in the figure above.

The  same 

trend 

is  seen  when 

labour 

productivity  growth  and  ICT  are  examined. 

The  data  in  the  table  on  page  181  show  how 

the  US  was  near  the  bottom  of  the  15  country 

OECD sample in the period 1990-1995 as far as 

labour  productivity  growth  was  concerned,  and 

about  half  way  in  terms  of  the  contribution  of 

ICT  to  this  growth.  The  period  1996-2002  saw, 

however,  a  dramatic  turnaround  with  the  US 

rising  to  fourth  position  for  labour  productivity 

growth  and  to  the  top  (jointly  with  Ireland)  in 

terms  of  ICT’s  contribution.  Ireland’s  economic 

miracle is almost unique and is partly based on a 

mainly  the  small  countries,  especially  Ireland 

and Austria,  but  also  the  Nordic  countries,  with 

their own specific socio-economic model which 

has  managed  to  achieve  a  high  level  balance 

between  economic  flexibility  and  labour  market 

security. An examination of the diagram on page 

179,  which  shows  the  contribution  of  ICT-using 

services to labour productivity growth (as opposed 

to the data in this section which looks at total ICT 

contribution, i.e. also in terms of ICT investment 

and ICT production) shows that the UK is Europe’s 
leader. Although the UK is still some way behind 

the US and Australia, it shares some of their open 

and flexible market approaches.

determined strategic policy to attract FDI-fuelled 

This  UK  and  Irish  experience,  which  also 

ICT  production  to  a  very  small  country  in  order 

follows  a 

typical 

‘Anglo-Saxon’  economic 

to  compensate for  otherwise relatively  moderate 

model,  together  with  that  of  the  US,  Australia 

levels of ICT use.

10

However, the table also shows big differences 

across Europe. These data, in fact, nicely illustrate 

that  there  are  countries  in  the  EU  which  have 

and  a  number  of  other  non-European  countries, 
lies  at  the  base  of  the  call  for  a  significant  shift 

to  so-called  economic  flexibility  and  creative 

destruction. 

(OECD,  2003,  OECD,  2004b, 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Labour productivity growth and ICT

1990-1995

1996-2002

Labour productivity 
growth

ICT contribution

Labour productivity 
growth

ICT contrib-ution

Norway

Sweden

Italy

Finland

Ireland

Austria

United Kingdom

Germany

Denmark

Belgium 

Spain

France

United States

Netherlands

Switzerland

3.11

2.95

2.83

2.65

2.39

2.32

2.20

2.11

1.99

1.90

1.22

1.13

1.12

0.63

0.85

0.96

1.09

0.43

0.68

0.76

0.74

0.52

0.72

0.92

0.06

0.23

0.71

0.29

-0.03

-0.42

Ireland 

Sweden 

Finland 

United States 

Austria 

Norway 

Denmark 

Germany 

Switzerland 

United Kingdom 

France 

Belgium 

Netherlands 

Italy 

Spain 

3.76

2.67

2.02

1.74

1.73

1.71

1.45

1.38

1.10

1.08

1.00

0.78

0.77

0.56

0.28

Source: OECD (2004b), reproduced in the Economist Intelligence Unit, 2004. p. 9.

1.90

1.33

1.40

1.90

0.75

0.68

0.59

0.67

0.43

1.21

0.18

0.35

0.48

0.36

0.14

Economist  Intelligence  Unit,  2004,  Department 

pace than in the US, and that the slow-down in 

of Trade  and  Industry,  UK,  2005)  Somehow  the 

productivity  is  both  due  to  this  delay  as  well  to 

Nordic experience seems to have been forgotten 

the ways in which ICT have been used. The data 

in this debate.

Despite these important variations, however, 

the overall diffusion of ICT in Europe appears to 

proceed  at  a  slower  pace  than  in  the  USA. This 

is  even  more  apparent  now  that  the  EU  has  ten 

new  Member  States  which  generally  lag  even 

in  the  table  below  have  been  decomposed  to 

show the growth rate of GDP per hour in terms of 

the  contributions  from  ICT  and  non-ICT  capital, 

from  total  factor  productivity  (TFP)  growth,  and 

from labour quality, comparing the US with four 

EU countries.

further behind compared to EU-15. On the other 

The  most  marked  changes  are  the  major 

hand, it does appear that ICT diffusion in the EU 

reductions 

in 

the  non-IT  capital  growth 

follows  the  same  pattern  as  in  the  USA,  albeit 

contribution  and  the  labour  quality  (human 

with a time lag. (Ark et al, 2002) There is a strong 

capital) contribution in Europe, which lead to the 

dispute about whether ICT diffusion has overshot 

slowdown  in  labour  productivity  growth  in  EU4 

in the US in which case slower EU diffusion is a 

in the second half of the 1990s.

good thing. Also, some technologies diffuse faster 

in  the  EU.  Barring  a  major  economic  crisis,  the 

impact of ICT could appear in the EU on a similar 

scale  as  in  the  United  States  somewhere  in  the 

next five to ten years.

Daveri 

(2002,  2004)  generally  supports 

Looking  at  evidence  on  the  US  side,  there 

are  substantial  productivity  gains  particularly  in 

ICT-using  industries,  including  wholesale  and 

retail trade, finance and business services (Stiroh, 

2002,  Nordhaus,  2002).  There  is  also  evidence 
of  productivity  gains  spreading  from  innovating 

11

these conclusions, pointing out that ICT has been 

industries  (i.e.  computers,  semiconductors)  into 

rolled out and used in Europe, albeit at a slower 

industries  able  to  effectively  use  ICT.  It  has  also 

 
 
 
 
 
 
 
 
 
 
 
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7

been shown that most of the US-EU growth gap 

telecom market, and in industries with relatively 

stems  from  a  handful  of  ICT-using  industries, 

low  ICT-intensity  (e.g.  chemicals,  food,  social 

including  wholesale  and  retail  trade  as  well  as 

services).

the brokers industry. (Ark et al, 2003). In addition, 

it  has  been  demonstrated  that  in  Europe  there 

was  a  decrease  in  the  contribution  from  non-

ICT  capital  in  all  industries,  and  a  decrease  in 

the contribution from TFP growth in non-durable 

manufacturing,  to  labour  productivity  growth. 

(Daveri  2002  and  2004,  European  Commission, 

2993,  OECD  2003)  From  these  observations,  it 

can be concluded that the slump in productivity 

in Europe is at least partially due, not to ICT itself, 

but to the way it is being used.

Possible  explanations  for  the  slowdown  in 

European  productivity  growth  and  the  slower 

diffusion  of  ICT  have  clear  implications  for 
policy.  For  example,  in  many  European  sectors 

opportunities to invest in ICT seem to be limited 

by  regulations  and  structural  impediments  in 

product and labour markets (such as limited shop 

opening  hours,  transport  regulations,  barriers  to 

entry, restrictions on the free flow of capital, etc.). 

(Ark et al, 2003) It is also that case that many EU 

countries  are  slow  to  address  the  main  critical 

success factors as summarised in the conclusion.

A sectoral decomposition shows that the USA 

has  a  marked  advantage  in  the  ICT-producing 

manufacturing 

industries 

(e.g. 

computers, 

semiconductors) and ICT-using service industries 

(e.g. securities trade, retail and wholesale trade). 

The EU is relatively stronger in the ICT-producing 

services, especially due to the rapid growth of the 

Overall,  there  are  two  versions  of  the 

‘convergence  hypothesis’,  both  within  the  EU 

and between the EU and the US:

i) 

the absolute convergence hypothesis, i.e. that 

less  developed  countries  grow  faster  than 

countries  at  the  frontier,  which  is  generally 

not found corroborated by the data

ii) 

the conditional hypothesis, i.e. conditional on 

initial capital stocks or human capital, which 

does seem to be confirmed by the data, also 

in the EU countries.

Convergence depends of course critically on 

trade, and many of the investments necessary for 
endogenous  growth  (especially  when  structural 

change  is  involved)  show  up  as  divergence. The 

very  different  operational  time  scales  of  ICT 

related policies will also have an important effect 

but these are difficult to track or predict.

The  growth  and  dynamism  data  seem  to 

support a form of divergence within the EU, even 

though  the  single  market  policies  should  have 

reversed  this,  but  demographic  differences  and 

the opposed tensions in different countries created 

by the Euro account for much of the failure. The 

data should also be put in the context of world-

wide  changes  in  economic  growth.  The  period 

1995-2002 covers several very different episodes, 

and  comparisons  are  frustrated  by  the  different 

timing  of  economic  cycles  in  different  regions. 

Decomposing aggregate labour productivity growth

Business sector

US

1979-95

Labour productivity growth

1.21

Contributions to labour productivity growth from:

12

 IT capital

 Non-IT capital

 TFP growth

 Labour quality

Source: Daveri (2004)

0.46

0.35

0.26

0.13

1995-00

2.46

0.86

0.43

1.05

0.13

EU-4 (UK, F, D, NL)

1979-95

2.30

1995-00

2.02

0.33

0.70

0.94

0.33

0.53

0.25

1.07

0.18

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Again,  a  sectoral  view  gives  a  different  picture. 

profoundly  on  the  working  environment. 

For  example,  removing  agriculture,  looking  at 

Organisational  change  often 

requires  a 

services,  or  looking  at  high-tech  could  help  get 

short-term  diversion  of  resources  into  re-

behind  the  aggregates  which  mask  structural 

organisation  and  training.  (Ark  et  al,  2002 

shifts  and  thus  give  a  better  view  of  whether  or 

and 2004) This means that there is a time-lag 

not  Europe  is  optimising  its  investment  in  ICT. 

between investment and any manifestation of 

Finally, there is a pricing paradox, as competition 

productivity growth. The success or otherwise 

becomes  healthier,  prices  (and  thus  measured 

of  appropriate  organisational  change  is  also 

GDP)  fall,  despite  the  underlying  increases  in 

related  to  the  availability  of  know-how  and 

efficiency and even (real) growth.

qualified personnel, as well as the capability 

Conclusions

Factors 

important 

for  achieving  economic 

benefits of ICT

Various  sources  and  the  research  for  this 

paper  point  to  a  series  of  factors  which,  to  a 

greater or lesser extent, are important in achieving 

beneficial  economic  impacts  through  the  use 

of  ICT.  (OECD  2004b,  Economist  Intelligence 

Unit  2004,  Department  of  Trade  and  Industry 

UK  2005,  Ecotec  2004,  RISESI  2004,  SEAMATE 

2003,  Millard  2004,  Sapir  2003)  These  factors 

are  summarised  below,  some  of  which  are 
characterised  by  the  Economist  Intelligence  Unit 
(2004,  p.  4)  as  the  critical  success  factors  that 

policymakers  and  managers  must  address  to 

improve the rewards of ICT.

1.  A certain threshold of investment and use of 

ICT is required, so that benefits are only seen 

after a time lag.

2.  Sufficient  investment  is  required  in  ICT.  It 

has  been  demonstrated  (Ark  et  al,  2002 

and  2004)  that  between  1980  and  2000 

comparatively 

lower 

investment  partly 

explains why the contribution of ICT capital 

investments to growth in labour productivity 

in the EU lagged well behind the US.

3.  Considerable  organisational 

change 

is 

needed  to  accompany  the  introduction  of 

ICT  to  realise  the  full  benefits.  (Basu  et  al, 

2003)  eBusiness  applications,  for  example, 

require  not  only  investment  in  technology, 

but  also  organisational  changes  that  impact 

to innovate.

4.  Skills 

(especially 

ICT-related  managerial 

skills,  generic  skills,  ICT  technology  skills, 

skills  to  reorganise,  and  skills  to  innovate) 

help  determine  the  effectiveness  of  ICT 

use.  Difficulties  in  making  the  necessary 

organisational  and  process  changes  in  the 
workplace  because  of  a  lack  of  appropriate 

skills  are  a  major  impediment  to  growth  in 

Europe. Weaknesses in managerial skills and 

technology  awareness,  and  the  lack  of  an 

innovation culture, often hamstring European 

enterprises  in  their  attempts  to  put  ICT  to 

productive use. Management and leadership 

skills are also vital, and need to be entrenched 

widely through the workforce.

5. 

Innovation and R&D capacity and capability. 

Successful ICT use by firms is often linked to 

the  ability  of  its  workforce  to  innovate,  i.e. 

to  make  the  ICT  investments  more  valuable 

through experimentation and some measured 

risk-taking,  such  as  the  innovation  of  new 

processes,  products  and  organisational 

arrangements.  Thus,  an  entrepreneurial 
culture  needs  to  be  developed,  which  is 

market-driven  and  embedded  in  the  firm’s 

organisational  and  skill  portfolio.  This  can 

be assisted at the macro level by appropriate 

security,  standards  and  intellectual  property 

rights frameworks, the availability of venture 

capital, setting up centres of excellence, and 

ensuring  that  public  and  private  R&D  funds 

pull  together  (for  example,  as  successfully 

1

done in Sweden and Ireland). Some empirical 

evidence  shows  that  ICT  expenditures  are 

positively  correlated  with  R&D  effort,  as 

 
 
 
 
 
 
 
 
 
 
 
well  as  with  some  proxies  for  the  level  of 

economies.” 

(Department  of  Trade  and 

education,  a  proxy  for  the  sophistication  of 

Industry, UK, 2005, p. 16)

financial markets (the share of venture capital 

on  GDP),  and  the  extent  of  cooperative 

relations  within  the  labour  market.  On  the 

other  hand  no  correlation  has  been  found 

between ICT expenditures and the power of 

the trade unions. (RISESI, 2004)

7.  A flexible approach is also needed in relation 

to  sectoral  and  national  differences  in  terms 

of 

their  different  needs,  characteristics 

and  circumstances.  For  example,  Europe’s 

weaknesses are most acute among small and 

medium-sized  enterprises  (SMEs).  SMEs  fare 

6.  The competition and regulatory environment 

poorly  compared  with  large  firms  in  access 

experienced  by  economic  units  or  sectors, 

to  capital,  the  fruits  of  R&D,  high  quality 

especially  in  relation  to  competitors.  Many 

networks, and management skills training, as 

of  the  sources  suggest  that  excessive  and/or 

well  as  ICT  systems.  SMEs  account  for  over 

inappropriate regulation may make it difficult 

95%  of  firms  in  most  European  countries, 

for firms to seize the opportunities offered by 

However,  Europe’s  big  firms  also  have 

ICT.  (OECD,  2004b,  Economist  Intelligence 

problems,  especially  in  being  slow  to  adapt 

Unit,  2004,  Department  of  Trade  and 
Industry, UK, 2004) This leads the Economist 
Intelligence  Unit  (2004)  to  call  for  open 
markets  and  unfettered  competition  and 

processes  and  changing  the  way  people 

work.  Sectoral  differences  are  also  very 
significant,  for  example  whether  related  to 

the  manufacturing  industry  or  the  service 

a  redoubling  of  the  assault  on  the  barriers 

sector,  such  as  in  financial  and  insurance 

to  competition.  For  example,  structural 

services  and  computer  and 

information 

differences in the regulatory environment help 

services, which present evidence shows have 

explain the comparatively poor performance 

achieved  the  greatest  benefits  of  ICT  use 

of EU Member States. (Basu et al, 2003). The 

so  far.  The  role  of  the  public  sector  is  also 

argument put forward is that it is labour and 

important,  and  one  of  the  best  things  that 

product  market  regulations  in  the  EU  that 

governments  can  do  is  promote  effective 

inhibit  the  re-organisation  required.  (Ark  et 

ICT  use, 

including  stimulating  demand 

al, 2002 and 2004)

Regulation should also positively promote so-
called  ‘creative  destruction’.151  “This  implies 
economic  flexibility,  including  flexibility  in 

and  providing  eGovernment  services;  in 

other  words  to  “practice  what  you  preach.” 

(Economist Intelligence Unit, 2004, p. 25)

8.  The use of ICT to lever greater effectiveness 

relation to the entry and exit of firms and the 

out  of  other 

technologies.  Firms  which 

hiring  and  firing  of  labour.  The  potential  for 

combine 

ICT  use  with  other  advanced 

ICT to change the economy and society has 
therefore  placed  a  premium  on  economic 

technologies  tend  to  do  better  than  those 
that  use  only  one  technology.  For  example, 

flexibility that may have been largely absent 

adoption  of  advanced  process  control 

prior  to  1995  –  when  Europe  performed 

technology,  by  itself,  has  little  effect  on  the 

relatively  well.  Labour  market  flexibility, 

productivity  growth  of  a  firm,  but  when 

and/or  active  labour  market  policies,  are 

combined with ICT and advanced packaging 

also  essential 

to 

resolve 

the  structural 

technologies, the effect is significant. (OECD, 

unemployment  problem  in  some  European 

2004b)

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151  A term first coined by economist Joseph Schumpeter; see OECD (2003), OECD (2004b), Economist Intelligence Unit (2004), 

Department of Trade and Industry, UK (2005).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wanted: a great balance

This  paper  has  shown  the  significant  and 

indisputable  impacts  of  ICT  on  firms,  business 

organisation  and  performance,  work  and 

skills,  as  well  as  on  economic  growth  and 

competitiveness.  However,  it  has  also  shown 

that  such  impacts  are  not  necessarily  beneficial 

for all stakeholders all of the time and that many 

non-technology conditions must also be in place, 

thus  highlighting  the  importance  of  appropriate 

decisions and policies at all levels. Although the 

purpose of this article is not to focus on European 

cannot be large in all countries, but the innovations 

that drive ICT use are available to everyone. The 

main cause of the relative European productivity 

slowdown  post-1995  therefore  has  little  to  do 

with  the  international  competitiveness  of  ICT 

as  a  traded  sector.  Differences  in  the  adoption 

and use of ICT are mainly due to domestic non-

technology  circumstances.  There  is  no  inherent 

reason  why  all  countries  in  Europe  should  not 

benefit  fully  from  the  use  of  ICT,  provided  the 

policy environment is right. (Department of Trade 

and Industry, UK, 2005, p. 6)

policy  responses,  nor  on  a  synthesis  of  possible 

This begs the question, of course, of what is 

future  strategies,  several  main  issues  do  spring 

the right policy environment? Clearly, the critical 

directly from the analysis provided above.

success  factors  described  in  earlier  play  a  key 

The recent input by the UK Presidency to the 

i2010  initiative  came  solidly  to  the  conclusion 

that,  as  regards  productivity  growth,  and  the 

improved  competitiveness,  job  situation  and 

innovation  which  goes  hand  in  hand  with  this, 

then  ICT  matters  most  and  is  key  to  closing 
Europe’s  productivity  gap.152  ICT  does  not  just 
represent  a  manufacturing  sector,  but  its  use  is 

diffusing  throughout  the  economy.  The  analysis 
above  shows  that  very  significant  economic 

role.  But  missing  from  these  are  a  host  of  issues 

not  directly  related  to  economic  performance  or 
to ICT as such, but which it can be argued are just 

as important, also because they provide the wider 

frameworks  for  the  successful  operation  of  the 

economy as a whole, as well as for the use of ICT.

Policy  overall  needs 

to  concentrate  on 

the  establishment  of  a  climate  for  business  (in 

particular  in  the  private  sector)  that  enables 

(even promotes, but certainly does not constrain) 

returns  can  be  expected 

from 

ICT  where 

business  growth. This  generally  means  measures 

the  policy  environment  enables  successful 

associated  with 

the  environment 

in  which 

complementary 

investments 

in  organisational 

businesses  operate, 

including 

the  regulatory 

change and innovation. This is not surprising as it 

environment,  and  eliminating  or  reducing  other 

is the same pattern as seen historically with other 

constraints  on  business  change  and  growth 

so- called general purpose technologies, such as 

(European eSkills Forum, 2004b):

steam, rail and electricity. These showed, as does 

ICT now, wide ranging impacts on the economy 

and  society,  even  though  the  sectors  themselves 

did not form a large part of the economy.

Earlier,  we 

summarised 

the  evidence 

presented in this article that improved productivity 

comes  from  more  effective  use  of  ICT  and  not 

ICT  production  per  se.  According  to  the  UK 

Presidency,  ICT  production  is  subject  to  intense 

global competition as traded goods and services. 

Global  economies  of  scale  mean  that  the  sector 

•  Measures to stimulate innovation, drawing on 

diversity

•  Measures 

to  encourage  a 

risk-taking 

environment

•  Assistance to SMEs

• 

Investment  in  education,  training  and  skills 

(especially eSkills) development

• 

Investment in transport and communications 

infrastructure

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152  The UK held the EU Presidency between July and December 2005; see Department of Trade and Industry, UK (2005), p. 5.

 
 
 
 
 
 
 
 
 
 
 
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1

• 

Improvements  to  competitiveness,  quality, 

simply  economic  beings.  All  surveys  show  that 

flexibility, and responsiveness, aided by ICT.

purely  economic  factors  come  some  way  down 

This  points 

to 

the  need 

for  a  more 

comprehensive  demand-oriented  approach  to 

technological change rather than a narrow supply 

approach,  which  has  often  been  the  case  in  the 

past.  Regional  and  socio-economic  distribution 

issues,  labour  market  factors,  the  search  for 

quality  in  the  labour  supply  and  in  goods  and 

their list of priorities. They also have needs related 

to their psychological well being, the quality and 

non-pecuniary  rewards  of  their  work,  and  the 

quality  of  their  wider  lives.  Human  and  social 

capital  thus  lie  at  the  heart  of  economic  growth 

and  competitiveness  at  both  micro-  and  macro-

levels.

services  are  the  other  relevant  factors.  Networks 

There  is  a  sense  in  which  the  road  towards 

that  bridge  what  consumers  really  want  to  what 

creative destruction, as described by most of the 

innovators  supply  show  how  supply  itself  is 

main  sources  drawn  upon  in  this  analysis,  will 

dependent on the social organisation of demand.

lead us into a desert and will become ultimately 

Overall,  the  main  recent  sources  are  all  in 

agreement 

that  economic  flexibility,  defined 

as  the  capacity  for  creative  destruction,  based 

on  the  ability  to  rapidly  switch  resources  due 

to  instantaneous  transactions  and  insignificant 

transaction costs, is the key enabling factor for the 

effective  use  of  ICT.  (OECD,  2004b,  Economist 

Intelligence  Unit,  2004,  Department  of  Trade 

and  Industry,  UK,  2005,  European  Commission, 

2005c, Crafts, 2003) The UK Presidency proposes 

that  this  should  provide  a  unifying  theme  for 

future EU policy.

Creative destruction and economic flexibility 

are of course essential. The fact of the globalised 

economy  and  the  evidence  presented  in  this 

article about  the  impact  of ICT on  the  economy 

point  overwhelmingly  to  the  need  for  economic 

actors, at whatever scale and of whatever type, to 

be agile, flexible and easy to transform. Crucial is 

also the ability to optimise the use of embedded 

ICT  in  particular,  but  also  other  appropriate 

technologies and tools.

However, 

these  economic  actors  are 

organisations composed of people as individuals 

and  as  groups,  and  people  are  undisputedly 

the  most  important  resource  of  all  as  both 

implementers  and  innovators,  especially  in  the 

advanced  economies  of  Europe.  People  are  not 

self  defeating  if  followed  blindly.  After  all,  the 

US may be the model as far as the main indices 

of  economic  performance  are  concerned,  but  if 

issues  to  do  with  social  cohesion  and  inclusion 
are  brought  into  the  equation,  the  leadership 

of  the  US  vanishes.  The  economy  is,  it  can  be 

argued,  just  a  means  to  the  end  of  well-being 
and  happiness.153  If  this  relationship  is  seriously 
reversed, so that economic performance becomes 

its  own  ends  or  the  ultimate  goal  of  human 

existence, the consequences could be grave and 

have not been analysed in this paper.

A  middle,  or  third,  way  is  required:  a  great 

balance  between  flexibility  and  well-being. 

Government  is  one  of  the  key  players  in  this, 

not  just  as  an  economic  actor  in  its  own  right, 

or as policy maker, but also as the framer of the 

systems of stability and continuity which people 

need to lead meaningful lives. However, it is not 

only people, but also the flexible economy itself 

which  requires  such  systems  of  relative  stability 
and  continuity  if  economic  actors  are  to  have 

some  trust  that  investment  and  other  decisions 

are  made  on  a  level  playing  field  stretching  at 

least into the medium term.

The concept of trust thus needs to be brought 

into the equation. (See, for example, Fukuyama, 

1995) In the analysis of Europe’s highly variegated 

153  Wilkinson (2005), Social Capital Project (2005), and World Database of Happiness. Also, Glenn Firebaugh, from Pennsylvania 
State University, and Laura Tach, from Harvard, have shown that people’s reported level of happiness depends on how their 
income compares with others in the same age and peer group, rather than absolute income or wealth, quoted in the Guardian 
Weekly, 26 August 2005 to 1 September 2005.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
response  to  ICT,  the  Nordic  countries  stand  out 

The challenge for European policy makers in 

as  highly  successful  users  and  producers  of  ICT 

the economic sphere is thus to achieve this great 

in  economic  terms.  The  Nordic  countries  have 

European balance in the economy as a whole, as 

developed  their  own  specific  socio-economic 

well  as  in  relation  to  the  economy’s  use  of  ICT. 

model  which  has  managed  to  achieve  a  high 

level  balance  between  economic  flexibility  and 

labour  market  security. This  stands  between,  on 

The  European  socio-economic  model  needs  re-
casting,154 perhaps by looking more closely at the 
Nordic  variant. The  sharp  new  focus  on  growth, 

the one hand, the Anglo-Saxon model epitomised 

competitiveness and jobs, ushered in by the Kok 

by  the  US  and  Australia  (with  the  UK  and 

Report  and  the  relaunched  Lisbon  strategy  is,  of 

Ireland  coming  closest  in  Europe  to  this  model, 

course, wholly necessary. However, the rest of the 

although  they  also  retain  distinctive  European 

analysis,  the  socio-economic  framework  within 

characteristics)  and  which  largely  informs  the 

which  economic  performance  must  sit,  and  to 

main sources examined in this analysis, and the 

which it must ultimately be subservient, seems to 

Franco-German  central  European  model,  on  the 

have been forgotten in current analyses, although 

other. The  Nordic  countries  have,  by  and  large, 

it is of course subject to intense political debate. 

achieved the great balance. But the extant recent 

If  it  remains  absent  from  the  main  analyses,  the 

analyses have generally not managed to examine 

economic  and 

technological 

imperative  will 

why or how.

surely fail.

The  purpose  of  this  present  paper  is  not  to 

How ICT is used in human and social contexts 

fill  this  gap.  However,  one  clear  answer  to  the 

is  thus  crucial.  A  central  theme  is  whether  ICT 

‘how’  question  is  the  extremely  high  levels  of 

can  be  empowering  or  isolating,  both  socially 

trust  endemic  in  the  Nordic  countries,  which 

and  economically,  and  whether  it  can  be  used 

strongly  impact  their  economic  performance, 

to  ‘bridge’  between  heterogeneous  communities 

use  of  ICT  and  social  lives. Trust  seems  to  be  a, 

and groups or is best at ‘bonding’ within existing 

perhaps  the,  common  factor.  In  a  recent  global 

homogeneous  groups.  (IPTS,  2004)  This  applies 

survey  of  trust,  Denmark  comes  out  top  with 

just as much to economic clusters and networks 

the  other  Scandinavian  countries  close  behind. 

as  it  does  to  social  communities.  Clearly,  ICT 

(Social Capital Project, 2005) High levels of trust 

can  be  used  for  both  bridging  and  bonding 

positively  impact  economic  and  social  relations 

depending on circumstances and purpose, which 

of all sorts, and reduce inequality which is itself 

means  that  appropriate  decision-making  and 

a  barrier  to  economic  performance  (Wilkinson, 

policy  frameworks  are  crucial  for  successful  ICT 

2005, and Social Capital Project, 2005), as well 

application.

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as  minimise  suspicion  of  new  technology  and 

change  generally.  Trust  also  improves  dealings 

with  government  and  civil  society.  Reciprocal 

trust  is  critical  in  enabling  economic  actors  to 

deploy their organisational and human resources 

in  a  way  which  makes  them  flexible  and  thus 

productive. Creative destruction is very necessary, 

but it can only work if it is economic actors and 

organisational  forms  which  are  destroyed  and 

created  rather  than  people’s  working  and  social 

lives.

In  order  to  prioritise  economic  and  social 

empowerment, a way forward seems to be to give 
support  to  knowledge  generation  and  exchange 

in  learning  communities  and  organisations,  for 

example  through  ‘communities  of  practice’  as 

social  networks  of  practitioners  (IPTS,  2004). 

Such  approaches  rest  heavily  on  the  existence 

of  trust  between  members,  which  often  requires 

frequent face-to-face contact and the exchange of 

tacit or ‘sticky’ knowledge, whilst more codifiable 

or  ‘leaky’  knowledge  can  be  mediated  by  ICT. 

1

154  Sapir (2003, p. 97) refers to this as the need for a new social contract.

 
 
 
 
 
 
 
 
 
 
 
Policies,  therefore,  should  not  focus  primarily 

The  uncertainty  is,  of  course,  that  the 

on  ICT,  information  and  knowledge  per  se,  but 

boundary  between  what  can  be  codified  and 

on  social  practice,  and  the  communities  and 

captured  by  ICT  and  what  cannot  is  constantly 

networks which form around it. This applies just 

moving. What  we  think  of  as  ‘routine’  is  part  of 

as  much  to  the  economic  sphere  as  it  does  to 

a dynamic cycle in which new work, knowledge 

the purely social, given the prime role of human 

and  processes  are  created  and  older  types  are 

resources in economic competitiveness.

‘routinised’.  Thus,  the  boundary  between  what 

Much  of  the  evidence  presented  in  this 

paper points strongly to the conclusion that ICT, 

if  used  in  appropriate  social,  organisational  and 

regulatory  contexts,  has  profound  impacts  on 

the  way  firms  operate,  on  how  individuals  work 

and the jobs they do, and on how organisations 

organise  their  operations  both  internally  and 

externally.  Extrapolation  into  the  future  leads 

machines  do  best  and  what  people  do  best 

is  constantly  shifting,  as  both  change,  also  in 

response  to  each  other.  If  we  are  to  retain  our 

humanity as ultimately sociable beings in which 

work and the economy are just means to an end, 

we  must  be  aware  of,  and  manipulate,  these 

shifting boundaries, and this also requires policy 

intervention.

to  the  prediction  that  most  if  not  all  activities 

This  long  term  evolution  in  the  relationship 

which  become 
‘routine’,  which  manipulate, 
match and mine data, and which require access 

between people and machines fits quite well with 
the ageing of societies. As machines increasingly 

to  information  and  systematised  intelligence, 

take over the routine and systematised aspects of 

will  become  codified  and  automated  by  ICT, 

work, previously performed by low- and unskilled 

resulting  in  the  squeezing  out  of  human  jobs. 

workers, the work that is left requires high skills 

Human  jobs  in  the  future,  on  the  other  hand, 

and  high  creativity.  The  boundary  shifts  so  that 

will focus even more than at present on activities 

automated  work  increases  in  scope  and  scale, 

which  humans  are  innately  better  equipped  to 

but work requiring human performance increases 

do  than  machines.  Fortunately,  this  still  appears 

in richness and quality, with its scale and scope 

to  encompass  a  large  potential  area  of  growth 

only  dependent  on  our  creativity  and  ability 

in  the  numbers  and  quality  of  work,  revolving 

to  innovate.  This  shift  however,  is  not  perfectly 

around the use and creation of implicit and tacit 

synchronous with the actual development of our 

knowledge.  These  areas  include  care,  teaching, 

economies,  so  in  Europe  especially  we  will  still 

consulting,  counselling,  advising,  controlling 

require  at  least  a  temporary  influx  of  relatively 

and  coordinating,  decision-  and  policy-making, 

young  and  unskilled  workers  in  order  to  bridge 

creating, brainstorming, empathising, socialising, 

the gap, before machines take over such work. In 

etc. In each case, of course, such human-centred 

the longer term, however, as the quality of work 

work  will  increasingly  be  strongly  supported  by 

and  living  increases  for  all,  we  should  aim  to 

powerful ICT systems.

avoid similar gaps.

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1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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1

 
 
 
 
 
 
 
 
 
 
 
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“Understanding 

Knowledge  Societies:  In  twenty  questions  and 

inequality:  how 

to  make 

sick 

societies 

healthier”, Routledge, 2005.

answers with the Index of Knowledge Societies”, 

-  Williamson,  O.  (1986a)  “Vertical  integration 

Department  of  Economic  and  Social  Affairs 

and  related  variations  in  a  transaction-cost 

(DESA), Division for Public Administration and 

economics  themes”,  in  J.  Stiglitz  and  G. 

Development  Management,  United  Nations, 

Mathewson  (eds),  “New  developments  in  the 

New York, 2005.

analysis  of  market structure”, Cambridge, MA, 

-  Varian, Hal R. (2001) “Economics of Information 

MIT Press.

Technology” 

(University 

of 

California, 

-  Williamson,  O.  (1986b)  “Hierarchical  control 

Berkeley)

-  VSO,  Virtual  Smart  Organisation 

(2003) 

analysis  undertaken  by  RAND  Europe  and  the 
Danish Technological Institute for DG INFSOC, 

and  optimum  firm  size”, 

in  “Economic 

Organisation”,  Brighton,  Wheatsheaf,  Chapter 

3, pp.32-53.

-  World  Database  of  Happiness  (2005),  quoted 

European Commission.

in the Social Capital Project (2005).

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1

 
 
 
 
 
 
 
 
 
 
 
1

8. The New Meaning Processing Paradigm 
      by Ilkka Tuomi

During 

the 

last  decades,  research  and 

integrated with and embedded in social, cultural 

development 

of 

information 

technologies 

and cognitive processes. These processes consist 

has  been  guided  by  what  can  be  described 
information-processing  paradigm.  The 
information-processing  paradigm  has  influenced 

the 

as 

of  the  ways  people  consume  and  produce 

goods  and  services,  and  the  way  they  interact 

with  other  people. 

Information 

technologies 

theories  of  computer  hardware  and  database 

are  now  becoming  a  media 

for  socially, 

design, organization theory, research on artificial 

culturally  and  historically  embedded  meaning 

intelligence  and  knowledge 

representation, 

processing. Thus,  whereas  research  and  product 

theories  of  human  learning  and  cognition,  as 

development  within  the  traditional  information-

well  as  economics.  This  chapter  argues  that 

processing paradigm required mainly knowledge 

the  limitations  of  the  information-processing 

about  microelectronics,  mathematics, 

logic, 

paradigm are now rapidly becoming visible. The 

and  engineering,  the  new  paradigm  can  only 

development  of  important  new  applications  of 
information society technologies, such as instant 

fully  be  described  using  cultural,  social,  and 
epistemic knowledge. When new applications of 

messaging,  blogging,  tagging,  social  filtering 

information and communication technologies are 

and  networking,  distributed  annotation,  and 

taken  into  use,  they  acquire  their  functionality 

knowledge  management  systems, 

implement 

and  meaning  in  a  historical  context  of  existing 

ideas  that  cannot  easily  be  described  using  the 

technologies  and  social  practices.  Technologies 

traditional information processing concepts.

do  not  come  into  world  ready-made;  instead, 

The  old  paradigm  does  not  work  well 

anymore  because  it  is  built  on  a  conceptual 

foundation  that  is  not  well  suited  to  the  present 

reality. Yet, at the present, we lack well-articulated 

models and concepts that would effectively move 

they are interpreted and shaped by active actors 

who  appropriate  technological  opportunities  in 

serendipitious, unexpected and innovative ways. 

The  emerging  paradigm,  therefore,  is  inherently 

dynamic, social, and evolutionary.

beyond  the  old  paradigm,  and  guide  policy, 

In 

the 

traditional 

information-processing 

research, and design. This chapter, therefore, tries 

paradigm, semantics was a major challenge and 

to outline the characteristics of an emerging new 

the  problem  of  meaning  was  explicitly  pushed 

paradigm—the meaning-processing paradigm.

beyond  the  limits  of  the  paradigm.  Information 

The  chapter  combines  a  brief  conceptual 

introduction  to  the  new  paradigm  with  some 

practical examples of developments that highlight 

the  relevance  of  this  paradigm.  It  also  discusses 

some policy approaches that emerge in the new 

paradigm.

In  the  new  meaning-processing  paradigm, 

information  and  communication  technologies 

are  understood  as  technical  systems  that  are 

systems were designed based on a strict separation 

of  syntax  and  semantics.  This  was  a  central 
design  requirement  for  traditional  computing 

architectures.  The  reason  is  simple:  algorithmic 

computer programs can process data only when 

the  meaning  of  data  is  fully  represented  in  data 

structures and programs do not have to interpret 
it.155  In  the  emerging  paradigm,  information  and 
communication systems do not aim at algorithmic 

processing  of  data,  except  in  some  well-defined 

155  The design rationale and limitations of traditional computer architectures in processing knowledge and meaning are discussed 
in Tuomi (2000), which also showed that the conventional concepts of data and information emerge as a side effect of computer 
system architectures and the epistemological models that they implement.

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1

 
 
 
 
 
 
 
 
 
 
 
 
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.
8

special cases. On one hand, information systems 

positivism,  and  often  assumed  it  to  be  trivially 

are now increasingly used to implement abstract 

true.  Epistemic  models  have  therefore  often 

communication and knowledge processes where 

remained  invisible  and  implicit  in  technical, 

information-processing  concepts  become  trivial 

economic,  and  policy  discussions  related  to 

and  irrelevant.  Bits  are  now  becoming  a  similar 

information  society  technologies.  In  the  present 

commodity as electrons, and we do not have to 

chapter,  we  make  epistemic  discussion  explicit. 

talk about bits any more than we need to talk about 

The aim is to provide concepts and language that 

Maxwell  equations  when  we  talk  about  future 

help in articulating challenges and opportunities 

information  society  technologies.  On  the  other 

in  the  knowledge  society,  where  knowledge, 

hand, real advances in the micro- and nano-level 

indeed,  is  not  trivial  anymore,  and  where  the 

information  processing  technologies  will  require 

proper  and  theoretically  robust  characterization 

that  we  reconsider  the  conceptual  foundations 

of knowledge has become an important practical 

of 

the 

information-processing  paradigm. 

In 

problem.

other words, there is an increasing need to bring 

meaning back to computing, communication and 

knowledge society technologies.

The  underlying  claim  in  this  chapter  is  that 

we are approaching a discontinuity that requires 

reframing  many  ICT  engineering,  design  and 

At  present, 
the 
processing  paradigm 

traditional 
is  being  extended 

information-
to 

policy  problems.  The  new  paradigm  does  not 
emerge  ex  nihilo,  and  the  chapter  tries  to  build 

include  semantics. A  large  number  of  initiatives 

bridges to research traditions that have existed for 

aim  at  developing  knowledge  and  meta-data 

many decades. New paradigms exist in laboratory 

representation  schemes 

that  would  enable 

scale  before  their  society-wide  impact  is  felt. 

automated  processing  of  meaning.  These 

The elements of the new paradigm are not new; 

initiatives often revisit—and sometimes reinvent—

instead, the novelty is in the overall restructuring 

the ideas of knowledge representation that were 

of  existing  knowledge.  Paradigms  change  when 

popular  in  artificial  intelligence  research  in  the 

we  reinterpret  and  reconfigure  existing  pieces 

1970s  and  1980s.  These  initiatives,  therefore, 

of  a  puzzle  so  that  the  present  reality  forms  a 

often rely on epistemological approaches that are 

coherent  picture.  In  the  first  phase,  we  have  to 

known  to  have  difficulties  in  handling  meaning. 

recognize  that  there  is  an  anomaly  and  that  the 

Although  brute-force  computing  can  sometimes 

world  does  not  fit  well  with  our  models  of  it. 

solve  practical  problems  related  to  meaning,  a 

This is often difficult, as the old models typically 

paradigm  that  lacks  conceptual  rigor  or  relevant 

work extremely well in many practical situations 

dimensions in describing the problem of meaning 

by  construction.  As  Kuhn  noted,  social  forces 

can only with great effort be scaled-up to practical 

drive  and  constrain  paradigm  change,  and  new 

meaning processing tasks. This chapter, therefore, 

paradigms often emerge only after old professors 

also  makes  the  perhaps  controversial  claim  that 

die. Today, millions of people have invested heavily 

initiatives  such  as  the  Semantic  Web  promoted 

in skills and theoretical concepts that are directly 

by the W3C will have only limited success in the 

related  to  the  information-processing  paradigm. 

future.  A  truly  semantic  Web  already  exists.  To 

When  a  new  paradigm  replaces  the  dominant 

understand its character and evolution, we need, 

paradigm,  new  skills  and  new  disciplines  of 

however, a new epistemological approach and a 

knowledge  become  relevant  and  old  ones  lose 

new research paradigm.

Throughout 

this  chapter,  we  emphasize 

1

the  importance  of  epistemological  concepts. 

One  problem  with  the  traditional  information-

processing  paradigm  was  that  it  mainly  relied 

on  one  specific  epistemic  model,  empirical 

some of their relevance. This happens, however, 

only  when  the  anomalies  of  the  old  paradigm 

become clearly visible and practically important. 
Then  we  have  to  give  up  some  fundamental 

assumptions and reconceptualize the world. This 

is a natural part and a sign of learning. Creation 

 
 
 
 
 
 
of  new  knowledge  requires  that  obsolete  truths 

The two paradigms: an overview

become  obsolete  and  that  we  unlearn  what  we 

learned earlier.

This section summarizes the main differences 

between 

the 

information-processing  and 

the 

Competitive  advantage 

in  research  and 

meaning-processing  paradigms.  Due 

to 

the 

business  is  gained  by  locating  discontinuities 

multidisciplinary nature of the new paradigm, we 

early  and  by  linking  weak  signals  that  on  the 

first provide a very high-level overview, and then, 

surface appear to be disconnected. This chapter, 

in a subsequent section, introduce more detailed 

therefore,  invites  researchers  to  join  the  work 

discussion and references to existing research.

of  discovering  the  potential  new  sources  of 

leadership  in  information  society  technologies. 

Instead  of  elaborating  the  meaning-processing 

Epistemology

paradigm  in  any  great  detail,  the  chapter  aims 

at  giving  a  quick  glance  over  the  emerging 

landscape.  In  particular,  I  try  both  to  provide 

references to relevant earlier streams of research 

and introduce some concrete examples that could 

provide starting points for further discussions.

Structure of the Chapter

This  chapter  starts  by  contrasting 

the 

two  paradigms  of  information  processing  and 

meaning  processing.  The  aim  is  to  first  give 

the  reader  a  general  idea  of  where  the  focus  of 

each  paradigm  lies.  We  do  this  by  discussing 

differences between the paradigms in three areas: 

epistemology,  the  organizational  model,  and 

the  socio-economic  model. We  then  summarize 

some main differences in Table 1.

An 

important  difference  between 

the 

information-processing  and  meaning-processing 

paradigms can be found in their epistemological 

starting  points.  The 

information-processing 

paradigm  is  based  on  empiristic  and  positivist 

concepts  of  information  and  knowledge.  The 

meaning-processing  paradigm,  in  contrast,  is 

based on a constructivist approach.

The  empiristic  and  positivist  epistemologies 

typically  assume 

that 

the  world  consists 

of  perceiver-independent  objects  and 

that 

knowledge  is  accurate  representation  of  these 

objects  and 

their  relations.  Empirism  states 

that  only  observations  of  the  external  world 

can  lead  to  knowledge.  Positivists,  in  turn, 

argued that reality consists of things that can be 

asserted  by  empirically  confirmed  facts. Various 

interpretations  on  both  empirism  and  positivism 

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Then we move to a more detailed discussion 

exist.  The  common  view  that  the  world  is  “out 

that  points  to  related  research  traditions  and 

there”  and  that  knowledge  is  about  empirically 

provides references that are useful for formulating 

verified  facts  and  laws  of  nature  is  called  naïve 

the new paradigm. This exploration of conceptual 

realism.  Since  the  1950s,  epistemologists  have 

foundations is intended to provide a concentrated 
introduction  to  some  key  ideas  underlying  the 

generally  agreed  that  this  naïve  realism  has  to 
be modified, for example, because facts depend 

new paradigm, as well as links to relevant research 

on  theoretical  models  within  which  they  make 

disciplines. After this theoretical and conceptual 

sense.  The  main  characteristic  of  positivist  and 

discussion,  the  chapter  describes  some  example 

empiristic  epistemologies  is  the  strict  separation 

Internet  applications 

that  highlight  different 

of subjects and objects of knowing, as well as the 

elements  of  the  new  paradigm.  Instead  of  a 

assumption that knowledge has to be independent 

detailed discussion of these examples, we simply 

of  the  social  and  personal  context  of  knowing. 

show  how 
these  representative  applications 
look  and  point  out  some  of  their  most  relevant 

Epistemologists  in  this  tradition  often  argue  that 
if knowledge becomes subjective, all knowledge 

1

characteristics. The  report  finishes  by  discussing 

claims become equally valid, cumulative science 

out  some  policy  implications  and  areas  for 

becomes impossible, and anything goes.

information society policy development.

 
 
 
 
 
 
 
 
 
 
 
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The  information-processing  paradigm  has 

and value systems, and social practices. Scientific 

often relied on an epistemic position that closely 

knowledge,  for  example,  is  deeply  rooted  to 

resembles  naïve  realism. 

tried 

to  represent 

socially shared stocks of accumulated knowledge, 

knowledge  about  existing  objects.  This  led  to 

specific  scientific  practices  and  instruments  of 

questions  such  as  how  to  avoid  logical  and 

observing the world, and conceptual systems that 

empirical  errors  in  knowing  the  reality.  An 

make facts, theories and observations meaningful 

influential  early  example  was  the  mathematical 

and  relevant  for  the  scientific  community  in 

theory  of  information,  developed  by  Shannon 

question.  Knowledge  is  constructed  in  a  social 

and Weaver. The fundamental goal of the theory 

and  historical  process,  not  as  isolated  universal 

was  to  find  efficient  coding  schemes  that  would 

facts  or  bits  of  information,  but  as  coherent 

maximize  the  probability  of  correctly  receiving 

systems 

that 

integrate  human  knowing  and 

a  message  selected  from  a  predetermined  set 

action.  Knowing,  therefore,  is  understood  in 

of  messages.  This  same  epistemic  starting  point 

the  meaning-processing  paradigm  as  an  active 

was  often  adopted  by  researchers  on  artificial 

process and verb, not a static representation of an 

intelligence  and  human  information  processing, 

observer-independent reality.

who  tried  to  represent  and  process  knowledge 

about  existing  objects,  and  model  knowledge 

structures stored in the human brain.

The traditional information theory implicitly 

assumed  a  closed  world.  The  constructivist 

approach  that  underlies  the  meaning-processing 

paradigm takes as its starting point an open world. 

This  world  is  not  simply  “out  there.”  Instead,  its 

objects  and  characteristics  are  generated  and 

organized  by  intelligent  actors,  who  use  their 

cognitive capabilities to structure the reality and 

make  sense  of  it.  In  this  view,  humans  create 

information and knowledge by active processing. 

Many alternative interpretations of the reality are 

possible, constrained by cultural, social and even 

biological factors.

The  cultural  and  social  foundations  that 

provide the basis for interpretation of meaning also 

imply  that  the  processes  that  produce  meaning 
are  not  purely  individualistic.  Instead,  they  are 

grounded  on  historically  accumulated  stocks  of 

meaning  and  shaped  by  social  interaction.  The 

accumulated stocks of meaning are not arbitrary 

or  detached  from  the  rest  of  social  life.  The 

meaning of things and events depends on social 

differentiation,  institutions,  existing  conceptual 

Organisation model

In  organisation 

theory, 

the 

information-

processing  paradigm  has  had  a  major  influence 

during  the  last  decades.  Leading  authors  in 

organization  studies  argued  that  organizations 

and  their  structures  should  be  understood  as 

information  processors.  Often  the  underlying 

model  was  a  hierarchy  that  was  assumed  to 

make  decisions  based  on  information  received 

from 

the  environment.156 

In  organisational 

information  systems  research,  the  information-

processing  paradigm  led  to  extensive  studies 

on 

decision-support 

systems, 

executive 

support  systems  and,  for  example,  attempts  to 

implement comprehensive enterprise information 

architectures.

The 

meaning-processing 

paradigm, 

in  contrast,  has  been  visible  in  studies  on 

organisational  knowledge-creation  and  strategic 

sensemaking.  Research 

on 

organisational 

learning,  organisational  narratives,  knowledge-

based  organisation  and  innovation  management 

also  often  understood  organisations  as  loci  of 
meaning processing.157

200

156  Influential examples include Tushman & Nadler, 1978; Knight & McDaniel, 1979; Egelhoff, 1988; March & Simon, 1958.
157  For an extended review of organizational information processing research, see Tuomi, 1999.

 
 
 
 
 
 
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Organisational information systems research 

neoclassical 

theory,  prices  have  often  been 

has  been  conducted  within  both  paradigms. 

understood  to  contain  information  about  the 

Research 

that  has  highlighted  elements  of 

marginal  utilities  of  consumers  and  the  costs 

the  meaning-processing  paradigm  has  often 

of  producers.  Market,  in  itself,  has  commonly 

focused  on  computer-mediated  communication, 

been perceived as a computational machine that 

augmentation systems and collaboration systems 

processes  price  signals.  Leading  neoclassical 

that support knowledge creation and innovation. 

economists  have  explicitly  argued 

that 

the 

Also  studies  on  Internet  communities  and  self-

distributed information processing mechanism of 

organisation  have  often  focused  on  the  social 

markets  outperforms  any  rational  planning  and 

aspects  of  communication  and  interpretation, 

design.  Institutional  economists  working  within 

thus  moving  beyond  the  information-processing 

the  neoclassical  framework  have  also  explained 

paradigm.  Studies  on  user-centric  design, 

the  emergence  of  organisations  and  institutions 

emotional design, domestication of technologies, 

using  information  processing  costs.  In  general, 

and,  for  example,  ethnographies  of  technology 

during  the  last  decades  information-processing 

use have also highlighted meaning-related factors 

models  of  economy  have  been  influential  and 

in information and communication systems.

visible. Economic actors have been perceived as 

Research  on  organisational  knowledge-
management  systems  has  been  divided  along 

the  lines  of  the  two  paradigms.  In  particular, 

economic  decision-makers  who  maximize  their 

utilities  and  self-interest,  perhaps  with  bounded 

rationality or with other imperfect computations.

around 

the  mid-1990s 

some  knowledge-

Studies  on  neoclassical  economics  have 

management  scholars  adopted  an  epistemic 

typically  adopted  an  empiristic  and  positivistic 

position  that  closely  resembled  naïve  realism. 

epistemology. 

In 

this 

epistemology, 

the 

Researchers  rooted  in  computer  engineering 

epistemic  challenge  is  to  accurately  represent 

and  programming,  and  information  systems  and 

and  extract  information  about  the  world  and  its 

knowledge-based  technologies  often  understood 

objects.  Economic  actors,  in  turn,  are  typically 

organizational  knowledge  management  systems 

perceived as calculators who compute economic 

to be about representing, storing and processing 

options  and  outcomes,  and  then  realize  options 

data. In contract, researchers influenced by studies 

according  to  the  calculated  outcomes.  In  this 

on  business  strategy,  innovation,  organizational 

theoretical tradition, it rarely makes sense to ask 

sensemaking,  collaboration  technologies,  social 

why  utilities  or  preferences  are  what  they  are. 

learning, change management, and social studies 

Questions about values and meaning of products 

on  technology,  often  adopted  a  view  in  which 

and  consumption,  therefore,  typically  remain  in 

knowledge  management  systems  are  facilitating 

an opaque black box, and outside the economics 

tools in an essentially social process of knowledge 

proper.  Whereas  traditional  computer  system 

generation,  diffusion  and  action.  In  general, 

research  pushed  meaning  beyond  its  domain  by 

the  first  approach  lead  to  attempts  to  automate 

representing it in data structures that provided the 

knowledge processing using computers, whereas 

static  constraints  for  automated  data  processing, 

the latter tried to make people and organizations 

economics  pushes  meaning  out  of  its  equations 

more intelligent by supporting human knowledge 

by  reducing  it  into  a  one  dimensional  number 

processes.

Socio-economic model

The  information-processing  paradigm  has 

close  affiliation  with  the  mainstream  schools 

of  economic  thinking.  For  example,  in  the 

that  has  no  internal  structure. This  approach,  in 

itself,  reflects  the  epistemic  idea  that  the  laws 

and  facts  of  nature  have  to  be  universal  and 

independent  of  subjective  valuations.  Modern 
economic  theory  typically  assumes  that  values 

201

are  fully  subjective  and  personal,  and  therefore 

cannot and should not be modeled in economic 

 
 
 
 
 
 
 
 
 
 
 
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theory.  Somewhat  paradoxically,  this  leads  to 

More  recent  research  on  social  meaning 

concepts of value, utility and preference that are 

processing has pointed out that consumers are not 

fully universal and agnostic concerning personal 

passive sinks of goods and services. Instead, they 

values and meaning.

Neoclassical  models, 

therefore, 

are 

also  independent  of  history  and  culture.  By 

construction,  the  market  is  understood  as  a 

universal  mechanism,  which  in  its  theoretically 

optimal form operates independent of time, place 

or  social  structures.  In  its  pure  abstract  form, 

neoclassical economics understands economy as 

a social system that consists of individual rational 

consume products and services in contexts where 

their consumption makes sense. Instead of being 

active  only  at  the  moment  of  decision-making 

and  maximization  of  self-interest,  consumers 

use  material  and  symbolic  goods  to  produce 

meaning.  Producers  form  symbiotic  relations 

with the users of their products, and products, in 

turn, are used to allow consumers to participate 

in social meaning processing.

decision-makers,  who  reveal  their  preferences, 

Sociologists  have  further  pointed  out  that 

expectations  and  knowledge  in  their  economic 

meaning  processing  is  in  many  ways  structured. 

transactions. 

In 

this  approach,  economic 

Modern  societies  are  functionally  and  culturally 

transactions,  in  turn,  fully  represent  all  relevant 

diversified. The  social  infrastructure  of  economy 

information  about  values,  thus  consolidating 
histories  and  expectations  into  points  in  time 

consists  of  communities  of  specialized  practice 
and interpretation, multiple linguistic genres and 

where values are cleared. Neoclassical economic 

a  rich  variety  of  conceptual  and  value  systems. 

theory, therefore, typically rejects from its models 

Practical  social  and  economic  activity  often 

information  that  relates  to  culture,  contingent 

requires crossing of the associated interpretation 

historical  events,  and  social  and  ethical  value 

and cultural boundaries.

systems.  Historically  accumulated,  contingent, 

structural,  and  qualitative  factors,  such  as  social 

and  organizational  networks  pose  an  important 

challenge to this theoretical approach. Similarly, 

the  epistemic  foundations  of  the  neoclassical 

theory  lead  to  difficulties  in  handling  meaning-

related phenomena, such as knowledge, learning, 

novelty, and innovation.

In  this  “non-neoclassical”  view,  economic 

transactions  are  accompanied  by  knowledge 

that  extends  beyond  the  time  and  place  of 

economic  transactions.  In  practice,  economic 

transactions  exist  only  within  a  context  of 

historically  accumulated  stocks  of  knowledge 

and  other  resources,  including  social  capital, 

trust,  structures  of  social  practice,  technical 

In  contrast,  economic  sociologists,  since 

designs,  as  well  as  social  institutions,  including 

Marx,  Durkheim,  Weber  and  Schumpeter,  have 

laws, bureaucracies, sanctions, and political and 

emphasized  the  importance  of  the  historical 

organizational power. The interpretation of these 

and  cultural  context.  For  example,  Durkheim 
highlighted  the  role  of  symbolic  systems  that 

elements  relies  on  communication  and  requires 
active  processing  by  participants. The  economic 

create and embed “social facts,” as well as rituals 

transaction, in this view, is therefore only a tip of 

and  religion-like  systems  of  belief  that  underlie 

an iceberg, which is complemented and combined 

social  and  economic  behavior.  Weber,  in  turn, 

with  various  other  symbolic  and  material 

argued  that  social  sciences  are  different  from 

exchanges  that  facilitate  production  of  meaning 

natural  sciences  because  in  the  former  both 

and  participation  in  social  processes.  Often  the 

the  researchers  and  the  objects  of  study  attach 

economic  transaction  can  also  be  bypassed  in 

meaning to events. Therefore, according to Weber, 

production activities, as, for example, students of 

202

researchers  cannot  understand  social  behavior 

open source software development have pointed 

without  taking  into  account  the  meanings  that 

out.  Most 

important,  new 

information  and 

mediate social action.

communication  technologies  enable  new  ways 

 
 
 
 
 
 
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in  which  information  and  knowledge  contexts 

paradigm,  economy 

is 

fundamentally  about 

can be built. This can reorganize both economic 

creating  new  areas  for  economic  exchange,  not 

transactions and markets, for example, by making 

about optimally dividing existing scarcity, as the 

history,  reputation,  social  capital,  value  systems, 

classical economists thought.

and trustworthiness explicitly visible.

The  production  of  new  meaning  potentially 

leads to reinterpretation of meaning. The economy 

of  meaning  production  is,  therefore,  inherently 

unstable.  This  recursive  nature  of  meaning 

production  implies  that  the  underlying  utilities 

and values are constantly being reinvented. New 

“needs,”  “values”  and  “demand”  can  therefore 

also  intentionally  be  created  in  the  economic 

system. The economy of meaning production is a 

Summary: Main characteristics of the 
two paradigms

Table  1  below  summarizes 

the  main 

differences between the two paradigms.

Conceptual starting points

This  section  describes  in  a  concentrated 

continuously  expanding  one,  and  not  structured 

form  key  theoretical  contributions  that  underlie 

by  the  problem  of  acquiring  and  distributing 

the  meaning-processing  paradigm.  This  section 

scarce  resources. 

In 

the  meaning-processing 

is  deeply  multidisciplinary.  The  goal  is  to  give 

Table 1. Main characteristics of the Information and Meaning Processing Paradigms.

Paradigm:

Information Processing

Meaning Processing

Epistemological model

Positivist, empirist, objectivist

Constructivist

Knowing subject

Individual cognitive processors of 
mental knowledge representations

Cultural and historical actors who participate 
in social processes of knowing, sensemaking 
and intelligent action

Concept of 
information

Structured facts about observer-
independent reality

Socially and culturally interpreted and 
articulated signals and communications

Organizational model

Organizations as information 
processing structures

Organizations as intelligent actor systems and 
knowledge-creators

Strategy

Hierarchical decision-making; 
strategic long-term planning

Information systems

Decision-support systems (DSS), 
Executive Support and Information 
Systems (EIS/ESS),
Data Mining Systems, Enterprise 
Information Architectures (EIA)

Distributed organizational learning, 
competence development and utilization, 
directed and led by shared vision, narrative, 
and interpretation culture; strategic 
management of cross-boundary knowledge, 
innovation and communication networks

Computer-Mediated Communication Systems 
(CMC), Collaboration Systems (CSCW),
Cognitive Augmentation and Knowledge 
Construction Systems, Business Intelligence 
Systems (BIS), Organizational Memory 
Systems (OMS)

Socio-economic model

Neoclassical economy with scarce 
resources

Institutional and sociological system of expanding 
space of meaning and economic interactions

Consumer

Sphere of 
production

Individuals expressing their self-
interest, needs, and preferences

Consumption as production of socially 
meaningful interactions and progress

Profit-maximizing individual and 
organizational actors

Symbiotic and co-evolving user-producer 
ecologies

20

Sphere of economic 
interactions

Universal market

Diversified value and knowledge communities 
that act as carriers of social practice

 
 
 
 
 
 
 
 
 
 
 
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8

the  reader  a  set  of  pointers  to  key  literature  and 

Humberto Maturana and Francisco Varela (1980; 

research  traditions  that  provide  material  for  the 

1988),  as  a  non-Darwinistic  theory  of  evolution 

new  paradigm.  Due  to  space  limitations,  we 

of  living  systems,  perception,  cognition  and 

will  not  explore  the  different  research  traditions 

communication. The underlying lines of research 

in any detail; instead, the aim is to paint a broad 

combine  and  synthesize  epistemological  work 

overview of the area.

New theoretical paradigms reorganize and 

combine existing knowledge in new ways. They 

also provide novel interpretative frameworks, in 

which familiar concepts may gain new meaning. 

Much  of 

the  meaning-processing 

related 

research  has 

itself  been  multidisciplinary. 

In  practice,  this  means  that  there  is  no  trivial 

access to some key ideas of the new paradigm, 

and  that  the  following  snapshot  of  theoretical 

research 

lines  necessarily  remains  cursory. 

A  more  detailed  elaboration  would  require  a 
more  in-depth  review  of  these  research  lines, 

as  well  as  an  explicitly  articulated  synthetic 

of philosophers such as Henri Bergson, Edmund 

Husserl, and Maurice Merleau-Ponty; the abstract 

study of Laws of Form by George Spencer Brown; 

theories  of  meaningful  social  action  by  Émile 

Durkheim,  C. Wright  Mills,  G.  H.  Mead, Talcott 

Parsons  and  Kenneth  Burke;  and  second-order 

cybernetics of self-referential and self-organizing 

systems  (cf.  Mingers,  1995). These  literatures  do 

not belong to basic courses on information system 

design,  computer  engineering,  or  information 

society policy, for example. In fact, relatively few 

researchers  have  used  these  theoretical  starting 

points to develop information systems or models 
of information society.158

summary that would show how the mentioned 

With the understanding that a full elaboration 

research  traditions  complement  each  other. 

of the various research traditions and explication of 

Due to practical constraints, the present chapter 

their linkages is both impossible and unnecessary 

remains only a first step on this longer path.

in this chapter, the following theoretical sections 

A  brief  example  may,  however,  help  in 

understanding  and  overcoming  this  challenge. 

Concepts 

that 

look  relatively  straightforward 

sometimes  need  to  be  interpreted  using  specific 

theoretical  frameworks,  also  in  the  subsequent 

sections of this chapter.

In  sociological 

theory,  Niklas  Luhmann 

(1995;  1990;  1992;  2000)  has  in  great  detail 

developed  a  model  of  societies  as  meaning 

processing  systems.  In  his  systematical  studies 

simply  provide  brief 

introductions 

to  some 

main  related  lines  of  research.  Furthermore,  the 

discussion below does not try to cover all relevant 

research  traditions. The  aim,  instead,  is  to  make 

the reader aware of the types of relevant research 

that can usefully be brought together to build the 

foundations  for  the  new  paradigm. We  focus  on 

three  areas:  epistemology,  society,  and  political 

economy.

Luhmann  elaborated  a  rather  sophisticated  and 

Epistemology

idiosyncratic  theory,  which  argued  that  societies 

are  meaning  processing  systems  that  exist  as 

systems  of  communication.  Luhmann  built  his 

theoretical  sociology  on  general  systems  theory, 

phenomenological  sociology,  and  in  particular 

the  theory  of  autopoietic  systems.  The  last  one 

was  developed  in  the  1970s  by  the  biologists 

The  ways  in  which  we  conceptualize  and 

understand knowledge and information implicitly 

define  the  ways  in  which  information  and 

communication  systems  are  analyzed,  studied, 

and designed. Scientists and engineers, therefore, 

use  epistemological  models  extensively  in  their 

everyday  work.  These  models  are  sometimes 

20

158  An  important  and  well-known  exception  is  the  now  classic  computer-mediated  collaboration  system,  the  Coordinator, 
developed  by Terry Winograd  and  Fernando  Flores.  In  their  Understanding  Computers  and  Cognition, Winograd  and  Flores 
(1986)  integrated  some  of  these  theoretical  traditions  with  speech  act  theory. Their  work  had  major  impact  also  because 
Winograd—one  of  the  leading  pioneers  in  artificial  intelligence  research—essentially  argued  that  AI  researchers  should 
reconsider their traditional approaches.

 
 
 
 
 
 
implicit, but they have practical implications. We 

which, perhaps, for the time being remains only 

can  therefore  ask  which  models  provide  a  good 

partially known.

basis for the design of technologies, theories, and 

policies. In the knowledge society, epistemology, 

therefore,  is  not  just  a  peripheral  issue;  instead, 

it is one of the core issues, and requires explicit 

analysis.

Researchers  working  with 

questions 

related 

to  meaning  processing  have, 

in 

contrast,  adopted  philosophical  positions  that 

are  close  to  phenomenological,  hermeneutic, 

constructivist, and pragmatic traditions. Whereas 

As was noted above, positivist and empiristic 

empiricism  started  from  the  assumption  that 

epistemologies  have  strongly 

influenced 

the 

the  reality  exists  “out  there,”  and  that  the  main 

information-processing 

paradigm.  When 

epistemological  problem  was  to  represent  it 

researchers  working  within 

the 

information-

accurately,  phenomenological, 

constructivist 

processing  paradigm  quote  philosophers,  they 

and  pragmatic  philosophers  have  asked,  how 

often  refer  to  philosophers  such  as  Bertrand 

the  “reality”  becomes  what  it  is,  already  before 

Russell and Karl Popper. The priority of empirical 

we  start  to  explicitly  “represent”  it.  In  these 

observation  is  well  present  in  the  quote  that 

philosophical  traditions,  questions  concerning 

starts  Popper’s  (1981)  classic  work,  Objective 

the nature of objects that constitute the world, in 

Knowledge.  The  quote  is  from  Russell,  and  it 
reflects  the  basic  positivist  worry  that  truth  and 

other words ontology, provide the foundation for 
epistemological considerations.

knowledge  can  be  destroyed  by  making  them 

relative and less than universal:

This  primacy  of  ontology  has  been  one  of 

the  key  characteristics  of  the  phenomenological 

“The  growth  of  unreason  throughout  the 

philosophies  of  Edmund  Husserl  (1982),  Martin 

nineteenth  century  and  what  has  passed  of 

Heidegger  (1968;  1977)  and  Maurice  Merleau-

the  twentieth  is  a  natural  sequel  to  Hume’s 
destruction of empiricism.”159

Empiricism  underlies 

the 

information-

processing  paradigm  by  providing  a  model  of 

knowledge  where  knowledge  is  accumulated 

by  observing  facts  about  the  reality.  This  view 

Ponty (1962). Their work, in turn, has influenced 

hermeneutic  philosophies.  Hermeneutics,  the 

theory  of  the  interpretation  of  meaning,  has 

been  developed  by  authors  such  as  Hans-Georg 

Gadamer, Paul Ricoeur and Jürgen Habermas (cf. 

Bleicher, 1980).

assumes that true knowledge is independent of any 

Henri  Bergson 

(1988;  1983)  developed 

particular knowing subject and that it represents 

around the turn of the last century a radical and 

a  universal  reality.  Facts,  therefore,  cannot  be 

original  epistemological  position  that  was  based 

contradictory;  knowledge  cannot  depend  on 

on  a  fundamental  critique  of  the  empiristic 

knower’s history or context; world follows a logic 

epistemology.  Bergson  started  by  analyzing  the 

of  simple  truth-values;  and  knowledge  cannot 

emergence of cognition and perception in living 

exist  without  a  unique  reality.  In  this  model, 

beings.  Bergson,  for  example,  asked  how  the 

knowledge  is  accurate  representation  of  reality, 

possibilities for perception emerge and change in 

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159  Popper does not give the source of the quote but it comes from Russell’s History of Western Philosophy, 1945, p. 672. Russell 
believed that giving up empiricism would mean that: “The lunatic who believes that he is a poached egg is to be condemned 
solely  on  the  ground  that  he  is  in  a  minority,  or  rather—since  we  must  not  assume  democracy—on  the  ground  that  the 
government  does  not  agree  with  him.”  Russell  perhaps  wrote  this  while  eating  English  breakfast.  In  some  cultures,  normal 
people, however, categorize themselves, for example, as green parrots. This has puzzled anthropologists, who have tried to 
figure out whether people actually think they are green parrots, or whether they only symbolically associate themselves with 
green parrots. Russell, of course, faces the same problem when someone asks whether he thinks he really is a philosopher, or 
whether he is a philosopher only because other people really think so. From the pragmatic point of view, however, claiming 
that one is a poached egg is lunatic, for example, if with the claim one risks ending up on Russell’s breakfast plate. In general, 
the lunacy of claiming to be a green parrot, a poached egg, or a philosopher depends on what the speaker and her audience 
mean by green parrots, poached eggs, and philosophers.

20

 
 
 
 
 
 
 
 
 
 
 
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8

the course of evolution, and how the physiological 

American  pragmatists  William  James,  John 

possibilities  of  action  shape  the  ways  in  which 

Dewey  and  George  Herbert  Mead  also  often 

reality is perceived and constructed. In particular, 

appear in studies related to meaning processing. 

Bergson  described  how 

reality  necessarily 

The  pragmatic  method,  according 

to 

James 

becomes  structured  into  objects  and  located  in 

(1977:425-43), 

is  based  on 

interpreting 

the 

space and time for intelligent observers. In other 

practical consequences of epistemic claims. Truth 

words,  Bergson  also  explained  why  the  realist 

and facts, in other words, are not abstract; instead, 

and  empiristic  views  of  the  world  are  natural 

they  depend  on  whether  we  interpret  them  in 

for  living  and  acting  beings.  At  the  same  time, 

a  way  that  makes  sense,  given  the  practical 

Bergson  showed  how  the  very  functioning  of 

implications  of  our  claims.  Pragmatists  thus 

intelligence necessarily hides parts of reality and 

brought  the  questions  about  knowledge  back  to 

how  the  natural  attitude  of  intelligence  makes 

practical  and  concrete  environments,  where  the 

some  important  phenomena,  such  as  the  key 

knower  tries  to  do  something  with  knowledge. 

processes  of  life  and  knowing,  unintelligible  for 

Mead  (1967)  linked  this  pragmatic  view  with 

the  human  system  of  cognition.  To  understand 

theory  of  symbolic  and 

linguistic  systems, 

human  cognition  and  knowing,  we  have  to  first 

arguing  that  the  human  mind  is  fundamentally 

understand  the  natural  limits  of  cognition  that 

social and produced by communication. Mead’s 

lead us to the common-sense naïve realism, and 

views have also been characterized as “objective 

then  adopt  a  broader  interpretative  framework 

relativism,”  as  according  to  him  knowledge 

that moves us beyond these limits.

emerges  as  a  relation  between  the  knowing 

Bergson  further  argued  that  the  possibilities 

for human action underlie the human capabilities 

of  making  distinctions 

in 

the  world.  The 

capabilities  of  cognition  are,  therefore,  deeply 

connected  with  the  possibilities  of  action.  In 

contrast  to  disembodied  minds,  epistemologists, 

therefore,  should 

focus  on  embodied  and 

acting  living  beings  if  they  want  to  understand 

perception, cognition, and knowledge. According 

to  Bergson,  reality,  as  such,  can  never  be 

known,  as  the  human  system  of  perception  and 

intelligence  necessarily  constructs  the  world 

in  a  way  upon  which  it  can  act.  As  biological 

subject  and  the  known  world.  His  view  was 

“relativistic,”  as  knowledge  was  dependent  on 

the  particular  position  and  capabilities  of  the 

knower,  yet  “objective,”  as  it  conceptualized 

knowledge as generalized invariants about reality 

which different knowers experienced in a similar 

fashion.  Knowledge  can  become  “objective” 

when  it  expresses  events  that  are  perceived  as 

similar  by  “generalized  others”  internalized  in 

the  human  thought.  Both  knowledge  and  the 

knowing mind, therefore, are social, and knowing 

can  only  be  understood  in  the  context  of  social 

psychology.

living beings, humans, however, may expand the 

In  parallel  to  American  pragmatists,  Soviet 

boundaries  of  their  intelligence  and  knowledge 

developmental psychologists, led by Lev Vygotsky, 

using  an  alternative  form  of  cognition  which 

created a sophisticated theoretical framework for 

Bergson  called  intuition.  By  intuition,  he  meant 

understanding  the  linkages  between  social  and 

those  cognitive  processes  that  access  the  reality 
at a pre-conceptual level.160

cognitive  development. This Vygotskian  research 

tradition—also  known  as  cultural-historical  or 

20

160  Bergson  had  a  major  influence  on  social,  cultural  and  scientific  movements  in  the  beginning  of  the  20th  century,  and  his 
thoughts created major political, philosophical and religious controversies (cf. Antliff, 1993). Since then, his contributions have 
to a large extent been deleted from mainstream works of history of philosophy, especially in the Anglo-American philosophical 
literature. This is partly because his analysis made the key starting points of the mainstream analytical and empiristic traditions 
questionable. Russell (1979:765), for example, stated that those “to whom action, if it is to be of any value, must be inspired by 
some vision, by some imaginative foreshadowing of a world less painful, less unjust…will not find in this philosophy nothing 
of what they seek, and will not regret that there is no reason to think it true.” (cf. Tuomi, 1999: 87-95). I have argued before that 
many failures in artificial intelligence research resulted from the fact that researchers followed Russell instead of Bergson in 
their epistemological assumptions (Heinämaa & Tuomi, 1989).

 
 
 
 
 
 
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socio-cultural  activity  theory—  has  since  the 

as  competent  adults  and,  for  example,  learn 

1920’s  had  a  profound  influence  in  particular 

scientific models of the world. Vygotsky’s answer 

in  the  domain  of  education  and  developmental 

was  that  this  development  occurs  in  a  close 

psychology  (cf.  Kozulin,  1990;  Wertsch,  1985; 

interaction between adult members of the culture 

van  der Veer  & Valsiner,  1994).  Due  to  the  fact 

and  the  child.  In  particular,  the  child  develops 

that  the  seminal  writings  of  this  school  became 

advanced  mental  capabilities  in  a  “zone  of 

widely available in English translations only after 

proximal  development,”  where  he  or  she  can 

the  1970s,  the  full  impact  of  the  socio-cultural 

perform  advanced  mental  functions  with  the 

activity theory has become visible only relatively 

help  of  an  adult.  After  the  child  learns  how  to 

recently,  however.  Important  early  proponents 

accomplish such feats, the cognitive and practical 

of  the Vygotskian  ideas  in  the  English  speaking 

“scaffolding” becomes unnecessary, and the child 

countries  include  Jerome  Bruner  (1986;  1990), 

starts  to  be  able  to  perform  advanced  mental 

Sylvia Scribner (1997) and Michael Cole (1986).

functions on his or her own. In this process, the 

In  his  “Thought  and  Language”,  originally 

published  in  1934,  Vygotsky  argued  that  the 

mind of the child becomes infused with cultural 

resources and capabilities.

development  of  the  mental  capabilities  of  the 

According  to  Vygotsky,  the  most  advanced 

adult  human  mind  can  only  be  understood  as 
a  process  that  relies  on  accumulated  social  and 

forms  of  thought  rest  on  a  linguistic  foundation. 
He  distinguished  the  concepts  of  meaning  and 

cultural  resources.  Historically,  three  different 

sense,  arguing  that  “meaning”  has  to  do  with 

and parallel developmental processes enable this 

words  and  their  conceptual  relations,  whereas 

development of human thought processes (Luria & 

“sense”  depends  on  the  context  of  speech. The 

Vygotsky, 1992). The first is the slow and gradual 

sense  of  communication  could,  therefore,  never 

“ontogenic”  evolutionary  process  that  creates 

be  inferred  from  the  meaning  of  the  words  that 

the  biological  capabilities  of  perception  and 

constitute  a  sentence.  In  the  same  ways  as  it  is 

functioning. The  second  is  the  historical  process 

impossible  to  infer  the  meaning  of  a  word  by 

of  cultural  evolution  that  accumulates  cultural, 

studying  the  letters  that  form  the  word,  it  is 

symbolic  and  technical  resources  and  artifacts, 

impossible  to  infer  the  sense  of  a  sentence  by 

which  humans  can  then  use  in  their  cognitive 

adding  up  meanings  of  words.  Word  meanings 

action.  Vygotsky,  for  example,  described  how 

and communicative sense simply live in different 

material  artifacts  such  as  knotted  ropes  become 

phenomenological universes.

cognitive  tools  that  are  used  to  augment  human 

memory  and  cognitive  capabilities.  Humans, 

therefore,  can  “outsource”  some  of  their  mental 

functioning  to  technical  devices  and  conceptual 

symbol systems. This idea has become influential 

in studies on distributed cognition (e.g. Hutchins, 

1995; Salomon, 1993; Rogoff, 1990). According 

to  Vygotsky,  the  theoretic  systems  of  science 

represent 

the  most  advanced 

form  of 

this 

evolutionary process.

Based  on  Vygotsky’s 

ideas  and 

their 

refinement,  his  colleague  and  student  A.  N. 

Leont’ev  (1978)  further  developed  a  general 

theory  of  symbol-mediated  action.  Leont’ev’s 
activity  theory  distinguished  three  conceptually 

independent  levels  in  human  behavior:  activity, 

action and operation. The level of “activity” was 

socially  and  culturally  constituted  performance 

that aimed at fulfillment of a motive. For example, 

people  can  engage  in  activity  of  constructing 

The third developmental process, which was 

a  building  or  hunting  for  game.  Activity  is 

the  main  focus  of  Vygotsky  and  his  followers, 

accomplished 

through  a  sequence  of  goal-

was 

the  mental  development  of 

the  child. 

oriented “actions,” such as erecting the walls, or 

20

Vygotsky  asked,  in  particular,  how  individuals 

making  noise  that  frightens  the  game  so  that  it 

gain  their  mental  capabilities  and  become  able 

becomes visible and can be killed.

to  participate  in  social  and  cultural  processes 

 
 
 
 
 
 
 
 
 
 
 
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Human action, in turn, is performed through 

their  cognitive  capabilities  with  material  and 

“operations,”  that  implement  actions  in  specific 

symbolic  artifacts. This  last  idea,  of  course,  has 

concrete  contexts.  Most  importantly,  available 

also  influenced  the  development  of  the  Internet 

operations  depend  on  available  technical  tools. 

and  modern  user  interfaces  (cf.  Licklider,  1960; 

For example, the action of “killing the game,” can 

Engelbart,  1963;  Licklider  &  Taylor,  1968; 

be implemented in various ways, for instance, by 

Johnson, Roberts, et al., 1989).

throwing stones or spears, or by using a sling or 

a gun. The appropriate operations depend on the 

context where the action is performed, as well as 

accumulated technologies and skills. For example, 

it may be easier to hunt fish using spears than with 

stones,  and  it  may  be  easier  to  hunt  flying  birds 

with a shotgun than with a spear. The possibilities 

to  implement  actions  as  operations  therefore 

depend  on  the  concrete  situation  at  hand,  but 

also  on  culturally  accumulated  resources.  In  a 

culture that does not have shotguns, you cannot 

use shotguns.

The  work  of  socio-cultural  activity  theorists 

has  highlighted  several  important  points  that 

have been relatively invisible in the information-

processing  paradigm.  First,  advanced  mental 

activities  are  deeply  rooted  in  culturally  and 

historically  accumulated  stocks  of  meaning. 

Knowledge  production 

and 

interpretation, 

therefore,  depend  on  context,  social  learning 

processes,  and  memory.  When,  for  example, 

a  scientist  observes  an  electron  in  a  laboratory 

he  or  she  always  sees  it  through  a  complex 

system of socially shared and learned theoretical 

concepts  and  technical  artifacts  that  implement 

these  concepts  and  enable  and  constrain  their 

meaningful  interpretations.  Second,  the  stocks 

of meaning are socially diversified, continuously 

evolving, and related to social practices carried by 

communities formed by social division of labour. 

Vygotskian  ideas,  therefore,  have  also  become 

important in making the “community of practice” 

one  of  the  key  concepts  in  recent  discussions 

on  knowledge  creation  and  learning  (Lave  & 

Wenger, 1991; Wenger, 1998; Brown & Duguid, 

1991;  Brown  &  Duguid,  2000).  Third,  humans 

20

rapidly  integrate  new  technical  and  symbolic 
resources  into  their  meaning-making  processes, 

and  use 

technological  artifacts  as  cognitive 

tools,  effectively  extending  and  augmenting 

In psychological theory, key authors of these 

constructivist  ideas—in  addition  to  Vygotsky—

include Jean Piaget. Piaget’s ideas have also been 

widely  used  within  the  information-processing 

paradigm.  In  his  later  writings,  Piaget,  however, 

comes close to Vygotsky, emphasizing the social 

and  cultural  foundations  of  knowing.  Piaget, 

for  example,  noted  that  scientific  knowledge 

and  systems  of  thought  evolve  in  a  continuous 

process.  “More  specifically,”  he  noted,  science 

“is  a  process  of  continual  construction  and 
reorganization.” (Piaget, 1970:2)

The construction of meaning and knowledge 

was  a  major  theme  also  for  Michael  Polanyi 

(1998;  1967).  Polanyi  specifically  pointed  out 

that  knowing  always  requires  a  context  that 

necessarily  has  to  remain  unarticulated  and 

subsidiary for the knower. Human perception can 

only operate by focusing on something particular 

in  a  field  of  factors  of  which  it  has  to  remain 

unaware.  Such  “from-to”  knowledge  Polanyi 

called tacit knowledge, and described how tacit 

knowledge  also  provides  the  foundation  for 

scientific  knowledge.  Polanyi,  therefore,  argued, 

for example, that the positivist dream of knowing 

the future by computing the trajectories of all the 

atoms in the universe was futile. To get to the level 

of meaning of things and events, tacit knowledge 
is  needed  as  much  as  explicit  knowledge.  All 

the relevant knowledge cannot be made explicit 

at  the  same  time,  however.  As  Polanyi  (1975: 

36)  put  it:  “you  cannot  use  your  spectacles  to 

scrutinize your spectacles.” Even if the Laplacian 

dream  of  knowing  the  future  by  calculating  the 

positions  of  all  particles  in  the  universe  would 

one day be fulfilled, the results of the computation 

would  be  unable  to  tell  us  anything  of  interest, 

as  the  meaning  would  have  been  left  out  of  the 

computation from the beginning.

 
 
 
 
 
 
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The meaning of human acts also needs to be 

thinking:  the  idea  that  philosophy  and  knowing 

interpreted as acts that are reflexively performed 

rests  on  the  fundamental  separation  of  the 

for  others  who  try  to  make  sense  of  them. 

subject and object. In contrast to this apparently 

The  context  of  meaning  is  a  narrative  context, 

obvious  starting  point,  the  founder  of  Kyoto 

which tells where things come from, where they 

School,  Kitaro  Nishida,  argued  that  we  need  to 

are,  and  where  they  are  heading.  As  Bruner 

understand cognition as a process where objects 

pointed  out,  human  action  become  meaningful 

and  subjects  mutually  construct  themselves  in 

through  communication  that  integrates  acts  into 

the  act  of  cognition.  The  separation  of  subjects 

meaningful stories:

“Indeed, the meaning placed on most acts by 

the  participants  in  any  everyday  encounter 

depends upon what they say to one another 

in  advance,  concurrently,  or  after  they  have 

acted.” (Bruner, 1990:18)

Whereas 

phenomenological 

and 

constructivist  epistemologies  are  now  quite 

frequently  referenced 

in 

information  system 

research,  a  relatively 

little-know  source  of 

epistemological  ideas  is  the  Kyoto  School  of 

phenomenological 

existentialism 

(Nishida, 

1987; Nishitani, 1991; Carter, 1997). This school 

has  since  the  beginning  of  the  last  century 

combined in a unique way European continental 

phenomenology,  American  pragmatism,  and 

Buddhist  philosophical  thinking.  Recently,  it 

has  had  an  important  impact  on  theoretical 

models  on  knowledge-creation  and  innovation. 

Contributions  of  this  school  have  remained 

somewhat  underutilized,  however.  Partly  this  is 

because the Asian approach to philosophy tends 

to discuss philosophical questions in the context 

of  religion,  which  is  an  unfamiliar  context  for 

most Western epistemologists. When ontological 

questions  are  understood  to  be  the  basis  for 
epistemology,  the  linkages  between  Buddhist 

thinking and Western philosophy become clearer, 
however.161

The Kyoto School is interesting for a number 

of  reasons.  Its  early  starting  point  was  a  critique 

on the basic tenet of most Western philosophical 

and  objects  is  therefore  a  wrong  starting  point 

for  epistemology.  The  rejection  of  this  starting 

point,  however,  also  implies  that  we  need  to 

develop  “a  logic  of  paradoxes,”  where  we  can 

describe  phenomena  that  are  at  the  same  time 

inside  and  outside  of  the  active  perceiver.  The 

reality, according to Nishida, “is” and “is not” at 

the same time, and we need a logic that matches 

with the reality if we want to describe it well.

As  the  Kyoto  School  starts  from  a  well-

informed critique on the fundamental assumptions 

of 

the  conventional  Western  philosophy, 

it 

has  the  potential  to  introduce  new  elements 

to  sophisticated  epistemological 

thinking. 

In 

practice,  it  has  influenced  Japanese  technology 

policy makers and provided starting points to one 

of  the  most  influential  models  of  organizational 

knowledge management (Nonaka, 1994; Nonaka 

& Konno, 1998). It has also been used to derive an 

architecture for a “semantic” computer (Shimizu 

&  Yamaguchi,  1987).  Although  the  semantic 

computer  project  was  abandoned  for  various 

reasons, it still represents an interesting example 

of  how  a  computer  system  can  be  built  on  an 

epistemology which is different from the one used 

to design conventional algorithmic computers. In 

particular, it seems to be the only existing attempt 

to  design  a  self-organizing  system  that  could 
automatically process meaning.162

The  above-discussed  theoretical  traditions 

share 

the 

idea 

that  “reality” 

is  actively 

“constructed”  by  humans. The  experienced  and 

161  The Kyoto School, in fact, has been called the only philosophical school in Japan. This is because, even when the members of 
the Kyoto school were discussing traditional conceptual issues that in Japan have normally been categorized as religious issues, 
the  thinkers  in  the  Kyoto  School  explicitly  related  their  work  to Western  philosophical  traditions,  including  Bergson,  James, 
Husserl, and, for example, Heidegger.

162  The associative memories and self-organizing maps of Kohonen (1980; 1984) could perhaps also be described as “meaning 

processing systems.” To my knowledge, Kohonen has not made this link.

20

 
 
 
 
 
 
 
 
 
 
 
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known  “world”  is  not  simply  “out  there”  to  be 

learning. For example, starting from Fleck’s ideas, 

more  or  less  correctly  perceived,  as  empiricists 

Mary  Douglas  (1987;  1996)  described  the  ways 

thought. 

Instead, 

it 

is 

the  result  of  active 

in which human thinking, individual preferences 

cognitive work of the perceiver. This basic insight 

and  collective  memories  depend  on  social 

was  the  core  of  the  Kantian  revolution,  but 

institutions.  The  role  of  social  and  institutional 

it  was  put  into  a  dynamic  context  when  it  was 

power  structures  in  shaping  categorization  was 

combined  with  evolutionary  considerations  and 

a  central  theme  to  Michel  Foucault  (1970)  and 

individual cognitive development. The categories 

his  followers.  George  Lakoff  (1987),  in  turn, 

through  which  humans  perceive  and  know  the 

emphasized  the  cultural  and  linguistic  aspects 

world,  became  then  the  present  end-points  of 

in  the  way  realities  are  constructed,  whereas 

evolutionary  and  developmental  processes, 

Karin  Knorr  Cetina  (1999)  focused  on  practical 

and  deeply 

integrated  with 

technologies  at 

epistemic  settings  in  scientific  laboratories.  The 

hand.  Furthermore,  technologies,  themselves, 

earlier  theoretical  work  of  Mikhail  Bakhtin  (cf. 

become  part  of  the  human  process  of  knowing. 

Morson  &  Emerson,  1990)  on  linguistic  genres 

Information  is  not  innocent  or  objective;  it  does 

and  the  communal  foundations  of  meaning  has 

not wait us behind the veil of reality and it cannot 

also  become  increasingly  visible  in  information 

be extracted from the world. Instead, information 

sciences in the recent years. These lines of thought 

is  produced  in  the  act  of  bringing  together  the 

appear  in  several  recent  studies  on  information 

constraints  and  possibilities  of  the  human  mind, 

systems,  including  Nardi  (1997),  and  Bowker 

technologies  of  observation  and  action,  and  the 

and  Star’s  (1999)  study  on  the  consequences  of 

world  where  the  “outside”  and  the  “inside”  are 

classification  for  the  society  and  for  information 

inseparably connected.

Social meaning processing

infrastructures. All these authors have essentially 

argued  that  knowledge  is  a  communicative 

process 

that  occurs  within  communities  or 

cultures, where social forces shape the structures 

Polanyi  emphasized 

the 

importance  of 

of knowledge.

personal  history  and  experience  in  the  process 

of  generating  scientific  knowledge.  Others  have 

focused  on  the  social  infrastructure  of  knowing 

and  knowledge.  An  early  pioneer  in  this  area 

was Ludwik Fleck (1979), who used the history of 

medical sciences to show that systems of scientific 

knowledge  are  produced  and  maintained  by 

specialized  communities.  Fleck  called 

these 

“thought  communities.”  According 

to  Fleck, 

the  meaning  of  scientific  observations  and  data 

was  rooted  in  specific  diagnostic  practices  and 

technologies, and propagated in the society when 

young  researchers  adopted  existing  views  of  the 

world. Fleck, though, remained little known until 

Thomas Kuhn popularized the idea that scientific 

knowledge  exists  in  the  context  of  scientific 

210

“paradigms,” which are maintained and guarded 
by scientific communities. The ideas of Fleck and 

Kuhn have become particularly productive when 

they  have  been  combined  with  empirical  and 

historical  studies  on  human  categorization  and 

Bowker  and  Star  were  also  influenced  by 

actor-network theory (cf. Law & Hassard, 1999). 

The  highlights  of 

the  actor-network 

theory 

include the idea that human activity is performed 

in material contexts where material objects gain 

meaning  and  become  integrated  in  networks  of 

communication  and  knowledge.  Actor-network 

theory, thus, moves beyond traditional semiotics 

that  focuses  on  linguistic  meanings,  and  links 

to  studies  on  technical  and  cultural  artifacts. 

In  particular,  actor-network  theory  dilutes  the 

boundaries  between  human  and  nonhuman 

actors.  Human  relations  and  power  structures, 

for  example,  can  potentially  be  translated  into 

material  structures  and  technical  functioning. 

In  Bruno  Latour’s  (1993;  1999)  terminology,  a 

speed-bump,  for  example,  can  be  described 
as  a  “sleeping  policeman.”  This  is  because  the 

nonhuman  actor  —speed-bump—  plays  roughly 

the  same  social  role  as  the  human  actor,  a 

 
 
 
 
 
 
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policeman  in  controlling  the  speed  of  cars.  In  a 

studies  on  technology  was  the  observation  that 

similar  fashion,  complex  social  resources  and 

technological  artifacts  are  open  to  sociological 

institutions, such as “the British government” can 

analysis, not just in the usage but also with respect 

become  represented  through  public  servants, 

to their design and technical functionality (Bijker, 

paper forms, or computer systems (cf. Law, 1992; 

Hughes,  &  Pinch,  1987). Technical  systems—for 

Tuomi,  2001).  Latour  also  proposed  a  tactic  for 

example,  a  computer  program  for  managing 

discovering the complementary meaning of social 

financial  accounts—can  only  be  understood 

structures and material structures:

in  a  context  where  historical  processes  and 

“This explicit principle is: look for nonhumans 

when  the  emergence  of  a  social  feature 

is  inexplicable;  look  to  the  state  of  social 

relations  when  a  new  and  inexplicable  type 

of  object  enters  the  collective.”  (Latour, 

1999:209)

In  the  last  two  decades,  Peter  Berger’s  and 

Thomas  Luckmann’s  The  Social  Construction 

of  Reality  has  also  been  a  seminal  contribution 

to  social  theory.  Berger  and  Luckmann  argued 

that  the  traditional  focus  on  “history  of  ideas” 

in  the  sociology  of  knowledge  was  misplaced. 

Systematic 

knowledge, 

be 

it 

scientific, 

philosophical or even mythological, forms only a 

part  of  the  human  stocks  of  knowledge  used  in 

the everyday life. Social theory, therefore, should 

take  also  pre-theoretic  and  practical  knowledge 

into  account  when  it  describes  how  societies 

become  possible.  Common-sense  knowledge, 

according  to  Berger  and  Luckmann  (1966:27) 

“constitutes the fabric of meanings without which 

no society could exist.”

The 

idea 

that  societies  are  collectively 

constructed  through  communication  and  made 

real  by  fixing  and  representing  socially  shared 

meanings  through  social  institutions,  symbols 

and  material  artifacts  has  become  extremely 

popular  in  social  and  cultural  studies  in  the  last 

two decades. Researchers have studied the social 

construction  of  a  broad  set  of  things  and  ideas, 

such  as  gender,  facts,  identity,  the  child  viewer 

of  television,  quarks,  and  statistics  (Hacking, 

power  struggles  have  led  to  specific  practices 

and  rules  of  representing  human  and  economic 

activity in numbers and signs. Such “subjective” 

and  “imagined”  social  orders  become 

then 

embedded and materialized in technical systems, 

making them “objective,” “path dependent” and 

sometimes difficult to change.

Social  studies  on  how  technological  worlds 

are  constructed  have  also  lead  to  a  renewed 
interest  in  the  role  physical  artifacts  and  space 

has in meaning processing. Both material artifacts 

and the structures of physical space constrain and 

enable human activity, and embed and sediment 

social  meaning.  For  example,  Lefebre  (1991) 

has  explored  the  linkages  between  physical 

and  mental  spaces.  Castoriadis  (1998)  tried  to 

elucidate how the society and its institutions are 

created  by  its  members  and  the  society  itself  in 

a  socio-historical  process.  Pacey  (1999),  in  turn, 

has  studied  the  individual,  social  and  political 

meanings of technology.

Societies  are  structured  at  many  different 

levels.  Cultural-historical  activity  theory  allows 

us to describe societies as systems of specialized 

activity.  Fleck’s  thought  communities,  in  turn, 

emerge around specialized groups of practitioners. 
Actor-network  theorists,  in  contrast  describe  the 

world  as  heterogeneous  systems  of  humans  and 

technologies. On a more abstract level, Luhmann 

and  Castoriadis  introduce  the  level  of  cultures. 

In the modern world, all these different levels of 

diversity and analysis are real and important.

1999). The idea that social stocks of meaning also 

The 

information-processing 

paradigm, 

provide the foundation for the emergence of new 
knowledge  and  innovations  has  also  become 

however,  has  only  limited  capacity  to  describe 
such  historically  and  socially  grounded  and 

211

important  in  social  studies  of  technology.  One 

structural  phenomena.  As  Bruner  noted  fifteen 

point  of  departure  in  the  social  constructivist 

years ago:

 
 
 
 
 
 
 
 
 
 
 
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“Insofar as information in this dispensation can 

purely  economic  and  monetary  transactions.  In 

deal with meaning it is in the dictionary sense 

particular,  some  of  the  fastest  growing  Internet 

only:  accessing  stored  lexical  information 

applications can be found in the area of identity 

according to coded address. There are other 

production,  as  the  following  sections  illustrate. 

‘meaning-like’  operations  such  as  permuting 

One may ask, for example, how we appropriate 

a set of entries in order to test the resultants 

resources,  things,  symbols  and  communications 

against a criterion, as in anagrams or Scribble. 

in  our  environment  to  produce  a  meaningful 

But 

information  processing  cannot  deal 

life.  Research  on  anthropology  of  fashion,  for 

with  anything  beyond  well-defined  and 

instance,  has  shown  that  people  use  clothes  to 

arbitrary  entries  that  can  enter  into  specific 

make social distinctions and signal memberships 

relationships  that  are  strictly  governed  by 

in particular social groups. Fashion, in this sense, 

a  program  of  elementary  operations.  Such 

is  a  communication  and  meaning  processing 

a  system  cannot  cope  with  vagueness,  with 

technology. 

People 

also 

customize 

and 

polysemy,  with  metaphoric  or  connotative 

personalize  products  they  buy.  The  economic 

connections…Information  processing  needs 

importance  of  this  phenomenon  has  led,  for 

advance  planning  and  precise  rules. 

It 

example, 

to  flexible  manufacturing  systems 

precludes such ill-formed questions as ‘How 

that  support  customized  mass-production  and 

is the world organized in the mind of a Muslim 

product varieties. Manufacturers have also started 

fundamentalist?’  or  ‘How  does  the  concept 

to design products that allow personalization and 

of  Self  differ  in  Homeric  Greece  and  in  the 

user-created  modifications  and,  as  the  examples 

postindustrial world?’” (Bruner, 1990:5)

in the next section show, much of the production 

One  can,  of  course,  argue  that  information 

processing, electrons, and bits are the foundation 

on the Internet now occurs outside conventional 

systems of production.

for  all  modern  communication  and  meaning 

In  this  section,  I  briefly  discuss  research  on 

processing systems. At the same time, one needs 

the  production  and  exchange  of  meaning,  and 

to  remember  that  the  information-processing 

provide  links  to  research  that  could  be  used  to 

paradigm  brings  with  it  not  only  bits  but  also 

describe  distributional  issues  in  the  economy 

a  broad  set  of  theoretical  assumptions.  These 

of  meaning.  I  start  with  meaning  embedded  in 

include the assumptions that the world is a closed 

material objects, consumption, and fashion, and 

world,  that  different  interpretations  of  the  world 

quickly  highlight  some  important  contributions 

do  not  matter  in  practice,  and  that  precise  rules 

between ethical theory, communication, narrative 

can  be  described  to  operate  technical  systems. 

studies,  socially-grounded  value  systems,  and 

One might then ask, however, whether the world 

political  theory.  This  section  then  finishes  with 

really is closed, whether different interpretations 

a  short  discussion  on  Amarya  Sen’s  capability-

do actually matter, and whether, indeed, we need 

based  theory  of  economic  development.  Due 

bits for meaning processing. Perhaps bits, after all, 

to  space  limitations,  I  will,  again,  leave  many 

were  only  artifacts  created  by  the  mathematical 

unconnected  threads,  and  provide  only  a  rapid 

theory of signal compression and the era of either-

glimpse on the relevant research lines.

or semiconductor switches?

212

The political economy of meaning production

One  way  of  understanding  meaning  in 

information  systems  is  to  study  information 

society technologies in the context of production, 

consumption, and exchange. Such an economic 

context,  however,  need  to  be  extended  beyond 

Csikszentmihalyi 

and  Rochberg-Halton 

(1981) were among the first to empirically study 

how  people  use  material  objects  in  defining 

who  they  are,  who  they  have  been,  and  who 

they  wish  to  become.  They  argued  that  people 

use  man-made  things  to  organize  their  attention 

and cultivate personal and social goals. Material 

objects,  thus,  become  invested  with  psychical 

energy.  This  psychical  energy  is  critical  for  the 

 
 
 
 
 
 
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survival  of  social  systems,  as  without  structured 

If specific ways of perceiving the world depend 

awareness  social  order  would  not  be  possible. 

on  historically  accumulated  stocks  of  meaning 

Csikszentmihalyi  and  Rochberg-Halton, 

in 

and on diversified systems of social practice and 

particular,  studied  how  people  invest  household 

activity, it is natural to assume that different views 

objects with meaning.

McCracken 

(1988), 

in 

turn,  described 

the  ways  in  which  meaning  is  manufactured 

in  modern  economic  systems.  He  argued  that 

the  cultural  systems  of  categorization  provide 

the  basis  for  constructing  the  self,  and  that  the 

modern  consumption  economy  to  an  important 

extent  exists  as  a  system  that  transfers  cultural 

meaning from the world of communication to the 

world of things, and vice versa. Consumer goods, 

according  to  McCracken,  are  key  locations  of 

meaning:

“Clothing, 

transportation, 

food,  housing 

exteriors  and  interiors,  adornment,  all  serve 

as  media  for  the  expression  of  the  cultural 

meaning  according  to  which  our  world  has 

been constituted.” (McCracken, 1988:83)

of the world also imply different systems of value. 

When  we  analyze  “value  systems”  as  systems 

that  provide  the  basic  distinctions  that  make 

meaning and value judgments possible, different 

communities  can  be  expected  to  have  different 

and  perhaps 

incompatible  ways  of  valuing 

things. Values,  therefore,  are  not  just  individual 

preferences.  Instead,  they  are  culturally  learned, 

as  complex  interdependent  systems  of  meaning. 

More  fundamentally,  the  systems  that  enable 

basic distinctions also guide the ways in which the 

reality is perceived and interpreted. This creates a 

model  of  a  society  in  which  a  plurality  of  value 

systems  co-exists  and  where  communities  with 

different  value  systems  negotiate  their  interests. 

As  a  result,  questions  about  political  decision-

making, social distribution, and theory of justice 

become  linked  with  questions  about  knowledge 

Simmel’s  (1990;  1971)  classic  studies  on 

and social meaning processing.

economic  exchange,  value  and  fashion  also 

linked  material  goods  and  their  social  meaning. 

Social  circulation  of  goods  as  a  source  of 

meaning,  trade  and  taste  has  also  been  studied 

by  social  and  cultural  anthropologists  (e.g., 

Appadurai,  1986).  In  the  context  of  business 

strategy  and  product  marketing,  several  authors 

have  recently  emphasized  the  importance  of 

meaning  as  a  driver  of  consumption  and  source 

of  value  (e.g.,  Friedman,  1986;  Fournier,  1991; 

Richins,  1994;  Helfenstein,  2005).  Pine  and 

Gilmore (1999) presented an influential variation 

of  this  theme  by  arguing  that  we  should  forget 

the  idea  that  information  is  the  foundation  of 

the  New  Economy.  Instead  we  should  focus  on 

informationalized services and experiences. They 

further argued that mass customization transforms 

goods into services and services into experiences. 

The  future  growth  area  in  the  economy  was, 

according  to  Pine  and  Gilmore,  in  creating 
meaningful experiences. Thus, they recommended 

that  business  strategists  consider  themselves  as 

“dramaturges” who stage narratives and transform 

commodities into valuable experiences.

Hannah  Arendt  put  the  implications  of  this 

pluralistic model into the context of the historical 

development  of  the  modern  economy.  Arendt 

also  highlighted  the  point  that  humans  become 

“real”  through  action.  As  biological  beings  they 

can  stay  silent  and  disengaged  from  action,  but 

they  reveal  their  identity  and  who  they  are  only 

when they engage in action. As the consequences 

of  action  are  fundamentally  unpredictable  in  a 

social world where the effects of action propagate 

in  the  web  of  social  interactions,  all  action  is 

risky for the actor. Thus every free human action 

becomes  a  statement  and  a  claim  for  the  need 

for  intervention.  Human  acts,  therefore,  also 

create  an  ongoing  narrative  of  “who”  the  actor 

is.  Although  pure  instrumental  action  is  also 

possible, the specifically human way of being is 

to participate in the web of social interaction:

“The  disclosure  of  the  ‘who’  through  speech, 

and  the  setting  of  a  new  beginning  through 

action, always fall into an already existing web 

where  their  immediate  consequences  can  be 

felt.  Together  they  start  a  new  process  which 

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eventually emerges as the unique life story of 

systems  and  ways  of  interpreting  the  world,  this 

the newcomer, affecting uniquely the life stories 

does  not  imply  that  we  should  give  up  the  idea 

of all those with whom he comes into contact. 

that  we  can  make  rational  choices  in  ethical 

It  is  because  of  this  already  existing  web  of 

problems. In given practical contexts, values can 

human  relationships,  with  its  innumerable, 

be  compared,  even  when  there  are  no  absolute 

conflicting  wills  and  intentions,  that  action 

and universal values.

almost never achieves its purpose; but it is also 

because of this medium, in which action alone 

is real, that it ‘produces’ stories with or without 

intention  as  naturally  as  fabrication  produces 

tangible  things.  These  stories  may  then  be 

recorded in documents and monuments, they 

may be visible in use objects or art works, they 

may  be  told  and  retold  and  worked  into  all 

kinds of material.” (Arendt, 1998:184)

In  his  communicative  “discourse  ethics,” 

Jürgen  Habermas  (1993)  attempted  to  define 

the  universal  principles  according  to  which 

incompatible  worldviews  can  be  “reasonably” 

negotiated.  John  Rawls  (1999)  has  further  tried 

to  outline  a  theoretical  system  of  justice  that 

would  be  perceived  as  a  legitimate  basis  for 

regulating 

relations  between 

societies  and 

states  where  people  do  not  share  the  same 

This  importance  of  interwoven  narratives  as 

moral,  philosophical, 

religious  assumptions. 

the  basis  for  making  sense  of  the  world  and  in 

making  distinctions  in  it  was  a  key  theme  also 

Rawls’  earlier  theory  of  justice  has  had  a  broad 
influence  in  the  discussion  on  political  theory 

in  Alasdair  MacIntyre’s  (1981)  analysis  of  the 

and democracy. In this more recent “The Law of 

development of ethical theories and the concept 

Peoples,” he, in effect, sketches a philosophically 

of  modern  identity.  MacIntyre  noted  that  value 

grounded  constitution  for  a  multicultural  global 

systems are rooted in communities of practice. He 

world.

argued that man is, “in his actions and practice, 

as well as in his fictions, essentially a story-telling 

animal.”

These  contributions  highlight  the  point  that 

human  action  is  fundamentally  communicative 

and  social.  Information  society  technologies, 

“Deprive  children  of  stories  and  you  leave 

therefore, enter the core processes of social life. 

them  unscripted,  anxious  stutterers  in  their 

As  different  communities  perceive  their  worlds 

actions  as  in  their  words.  Hence  there  is 

using  different  stocks  of  accumulated  narratives 

no  way  to  give  us  an  understanding  of  any 

and  meanings  that  emerge  from  their  specific 

society,  including  our  own,  except  through 

social practices, the modern world is a pluralistic 

the stock of stories which constitute its initial 

world  of  communications.  People  do  not  live 

dramatic resources.” (MacIntyre, 1981:216)

in  a  global  village,  where  shared  values  would 

To understand the meaning of a thing or an 

action,  we  have  to  know  where  it  came  from, 
and where it is going. Meaning, thus, cannot be 

represented in a dictionary definition. It emerges 

only as a part of a story.

The  pluralistic  model  of  society  underlies 

also  Charles Taylor’s  (e.g.,  1989)  studies  on  the 

historical  roots  of  modern  ideas  about  identity, 

ethics  and  the  self.  Taylor,  in  particular,  has 

emphasized  the  point  that  although  different 

communities  in  the  society  have  different  value 

21

provide  the  foundation  for  making  distinctions 

and  producing  well-aligned  interpretations  of 
the reality. Instead, the global world is a loosely 

coupled  federation  of  overlaid,  overlapping  and 

also incompatible interpretative communities.

Russell’s  dream  of  finding  a  unique  and 

objective 

reality 

that  would  make  politics 

redundant was, therefore, at its core a totalitarian 

dream. Contrary to what Russell expected it would 

not lead to “a world less painful, less unjust, less 
full of strife.”163 Instead, as Arendt argued, humans 

163  See footnote 160.

 
 
 
 
 
 
become humans when they face the dilemma of 

information  society 

technologies  are  deeply 

being individual actors in a community, without 

political themselves. The society exists as ongoing 

which  they  or  “free  acts”  could  not  exist.  This 

communication 

and  meaning 

processing, 

makes  humanity,  society  and  culture  essentially 

and  politics,  in  the  Arendtian  sense,  is  about 

“political”  phenomena. 

Individuals 

create 

rules  of  participation  in  this  public  sphere. 

meaningful  lives  and  identities  by  living  in  a 

Information  society  technologies  are  not  just 

fundamental  tension  between  being  creative, 

used  to  implement  politics;  instead,  information 

innovative  and  original  actors  and  at  the  same 

society  technologies  are  the  infrastructure  of 

time being members of society. In the Arendtian 

politics. Decisions about technical architectures, 

terms,  people  become  humans  when 

they 

therefore, are fundamentally political, and require 

organize  themselves  in  the  polis.  In  the  modern 

sophisticate  understanding  about  the  political 

world, the agora, of course, is implemented using 

models 

that  different 

technical  architectures 

information  and  communication  technologies. 

make  possible  and  impossible.  Although  this 

In  this  sense,  information  society  technologies 

political  dimension  remained  relatively  invisible 

are  more  than  just  tools  for  making  democracy 

in the early phases of the computer revolution, it 

possible or effective; instead, they are the platform 

is becoming now clearly visible as computers are 

which makes politics possible in the first place.

networked  and  people  start  to  use  them  in  their 

Information 

and 

communication 

everyday life.

technologies  radically  change 

the  visibilities 

An  economic  model  of  development  that 

of  communities  in  the  society  at  large,  and 

fits  this  pluralistic  world  has  been  elaborated 

also  increase  their  interdependencies  in  the 

by  Amartya  Sen  (1992;  2000).  Sen  argued 

global  space  of  communications.  The  political 

that  the  expansion  of  human  capabilities  and 

challenge,  therefore,  is  not  only  to  negotiate 

freedoms  should  be  understood  as  the  basis  of 

interests; instead, it is also to translate the various 

development.  The  relevant  freedoms,  however, 

discourses  in  the  society  so  that  interests  can 

depend  on  cultural  and  individual  factors.  Sen 

be  processed  by  the  society.  Furthermore,  if  the 

therefore  positioned  the  theory  of  economic 

social  order  is  to  be  perceived  legitimate  by  the 

development  into  a  context  of  theory  of  justice 

members  of  the  society  it  has  to  be  legitimized 

and democracy. Sen’s capability-based model has 

in ways that are independent of specific cultural 

had broad influence and it underlies, for example, 

practices.  Thus,  the  theoretical  questions  about 

the Human Development Index published by the 

meaning processing inherently link with questions 

UNDP. The capability-based model can be linked 

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of political models and ethics.

This political and ethical dimension remains 

outside  the  traditional  information-processing 
paradigm,  as  the  epistemological  starting  point 

of  this  paradigm  was  that  information  can  be 

processed  without  knowing 

the  cultural  or 

historical context, or the factors that create specific 

ways  of  understanding  the  world  and  making 

distinctions  in  it.  From  the  point  of  information 

society foresight, the implication is that “politics” 

in  the  future  does  not  only  mean  lobbying 

existing  interests  as  they  relate  to  technical 

architectures and standards, for example. Instead, 

in  a  relatively  straightforward  way  to  questions 

about  the  capabilities  of  new  technologies  to 

expand  human  possibilities 

for  meaningful 

action.  The  capability-based  model,  therefore, 

could  also  provide  the  missing  link  between 

economic theory, political theory, ethics and the 

theory  of  social  diversification.  It  could  also  be 

used as a basis for evaluating new technologies. 

In  other  words,  using 

the  capability-based 

model,  we  could  better  answer  the  core  policy 

question why and when some technical advances 

can  be  associated  with  social  and  economic 
development.

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21

Meaning processing in the Internet: 
Some example applications

Laplace’s  problem  essentially  leaves  meaning 

out of the picture, it would have great difficulties 

in  determining  whether  a  specific  location  in 

the  universe  consists  of  a  chicken  or  a  bowl  of 

Semantic Web

chicken soup.

A well-known attempt to add semantics to the 

web is the W3C activity on Semantic Web (http://

www.w3.org/2001/sw/). The W3C Semantic Web 

represents “the meaning” of concepts by links to 

metadata and associated thesaurus definitions. The 

basic  motivation  for  the  semantic  web  is  to  add 

descriptive metadata to web content so that it can 

be  automatically  processed.  The  W3C  initiative 

tries  to  move  from  “words”  to  “concepts,”  with 

the  assumption  that  the  metadata  descriptions 

add the level of semantics to the net.

There 

is  considerable  effort  underlying 

this  “next-generation  web”  project.  With  some 

exceptions,  the  various  initiatives  still  implicitly 

rely  on  the  traditional  information-processing 

paradigm. For example, in the Scientific American 

article  that  popularized  the W3C  Semantic Web 

activity, Berners-Lee, Hendler and Lassila explain 

the goal of the activity in the following terms:

“The  Semantic  Web  is  an  extension  of 

the  current  web 

in  which 

information 

is  given  well-defined  meaning,  better 

enabling  computers  and  people  to  work 

in  cooperation.”  (Berners-Lee,  Hendler,  & 

Lassila, 2001)

This description, of course, is problematic in 

constructivist epistemologies, which start from the 

observation that meaning cannot be well-defined. 

From a constructivist point of view, the idea that 

well-defined  meanings  would  enable  computers 

and  people  to  work  together  looks  similar  to 

Laplace’s claim that by knowing the positions of 

all the particles in the universe we can determine 

all its futures. As was pointed out above, even if 

that would be the case, the futures so discovered 

would  be  of  little  interest  of  humans.  To  put  it 

simply,  as  the  original  conceptualization  of  the 

Similarly, 

from 

the  meaning-processing 

perspective,  the  description  of  the  goals  of  the 

Semantic  Web  simply  leaves  out  those  aspects 

of  the  problem  that  relate  to  meaning.  The 

description 

is  particularly  confusing,  as 

the 

concept  of  “meaning”  is  used  instead  of  the 

technical term “semantics,” and because even the 

latter term would only make sense in the context 

of computer science. This specific technical sense 

of  the  word  “semantics”  actually  has  very  little 

to do with semantics, as it is understood outside 

computer  science.  Also  the  idea  that  people 
would  somehow  require  well-defined  meanings 

before they can cooperate, or course, represents 

a  simplified  picture  of  social  and  cooperative 
behavior.164  One  could  therefore  argue  that  the 
Semantic  Web  activity  promises  to  solve  the 

problem of meaning by first getting rid of it.

More  accurately,  the  W3C  Semantic  Web 

activity  can  be  described  as  a  set  of  projects 

that aim at making web content more accessible 

using  machine-readable  meta-data.  Specifically, 

it  defines  standards  for  representing  particular 

application  domains  using 

the  Resource 

Definition  Framework  (RDF)  and  the  ontology 

definition  language  OWL.  The  challenges  for 

adding  “semantics”  to  the  Web  have  generated 

a  large  number  of  proposals  how,  actually,  this 

should  and  could  be  done.  For  example,  some 
authors  (e.g.  Bouquet,  Giunchiglia,  et  al.,  2004) 

have  argued  that  domain-specific  ontologies 

need to be combined with user-specific contexts. 

Epistemologically, 

this  approach 

implements 

Mead’s  “objective  relativism,”  discussed  above. 

Other  approaches  are  closer  to  the  meaning-

processing  paradigm.  For  example,  the  bottom-

up  computer  supported  peer-to-peer  negotiation 

of  user-specific  ontologies  proposed  by  Aberer, 

164  In fact, ambiguity and equivocal concepts have been argued to be highly important for innovation, learning, and social change 

(e.g., Schon, 1963; Weick, 1995; Bougon, 1992; Tuomi, 2002).

 
 
 
 
 
 
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Cudré-Mauroux and Hauswirth (2004), generates 

World-Wide Web basically provided a repository 

translations  between  different  user  ontologies 

for human language, images and sound, without 

by a mechanism that resembles the spreading of 

any  assumptions  about  how  meaning  should  be 

rumors.

The  problems  associated  with  using 

knowledge  and  ontology  representation  systems 

have  been  widely  discussed  during  the  last  two 

decades  in  the  artificial  intelligence  literature 

(e.g.,  Pylyshyn,  1987).  One  major  problem 

is  the  fact  that  context  and  history  makes  a 

represented.  The  web,  thus,  remained  perfectly 

agnostic  about  the  meaning  of  the  content  and 

activities  it  was  used  for,  enabling  an  efficient 

distribution  of  labour  between  human  cognitive 

capabilities and technology. This is one of the main 

factors explaining the extremely fast propagation 

and proliferation of web applications.

difference in getting the meaning right (Suchman, 

In 

the  next 

sections, 

some  example 

1987).  Indeed,  the  discussion  above  on  the 

applications  are  briefly  described,  where  the 

epistemological  basis  of  meaning  processing 

social  and  cultural  aspects  of  meaning  are 

actually  implies  that  the  basic  assumptions  of 

explicit. From an engineering point of view, they 

the W3C semantic web project has fundamental 

may look trivial. From a socio-economic point of 

weaknesses.  The  project 

is  mentioned  here 

view, they represent some of the fastest growing 

because  the  visibility  of  the  W3C  may  give  the 
impression that the problem of semantics actually 

has been addressed by the consortium.

The  Semantic  Web  project  will  perhaps 

succeed  in  adding  some  semantic  processing  in 

controlled micro-worlds, in a similar way as the 

traditional artificial intelligence applications did. 

The  epistemological  problems  of  the  semantic 

web project will, however, become visible when 

micro-worlds  need  to  be  combined,  when  the 

conceptual  system  evolves,  or  when  the  same 

content  is  used  in  alternative  interpretative  and 

practical  contexts.  The  W3C  goal  of  creating 

ontologies  that,  for  example,  enable  automated 

processing  of  purchase  data  and  supply-chain 

management,  of  course,  is  a  relatively  simple 
problem  of  micro-world  semantics.165 
therefore,  important  to  note  that,  although  the 
W3C  initiative  talks  about  “semantics”  as  the 

is, 

It 

major missing element of the present World-Wide 

Web, its approach is still deeply grounded in the 

uses of the net.

MMOGs and virtual worlds

Massively  multiplayer 

online 

games 

(MMOGs)  are  interesting  examples  of  the  way 

people now use the Internet to construct identities, 

communities, and stories. Whereas they are often 

perceived  simply  as  “entertainment,”  modern 

multiplayer  games  are  large  and  continuous 

expanding universes, where also users participate 

in the construction of the game.

Currently,  NCsoft,  headquartered  in  Seoul, 

South  Korea,  is  the  world’s  largest  independent 

online  game  company.  Established  in  1997  as 

a  systems  integration  company,  NCsoft  became 

the  leading  online  game  software  company 

with  its  Lineage  game  (http://www.lineage.com), 
introduced in 1998. Lineage was one of the key 

drivers of broadband diffusion in Korea. Currently 

there are more than four million active subscribers 

information processing-paradigm of computing.

worldwide playing Lineage.

Yet, 

the  World-Wide  Web  has  been 

extremely  successful. To  a  large  extent  this  was 

because  it  allowed  computers  to  be  used  for 

meaning  processing.  This  was  possible  as  the 

A  somewhat  different  approach  is  adopted 

in  the  EVE  Online  (http://www.eve-online.com). 

It is set in an unknown part of the universe, and 

includes  several  thousands  of  solar  systems, 

21

165  Indeed there exist many successful initiatives in creating semantic structures for business transactions and information exchange 
in controlled micro-worlds. The World-Wide Web itself was based on the SGML standard, a main early application of which 
was in the U.S. Department of Defense’s Computer-aided Acquisition and Logistic Support ( CALS) initiative.

 
 
 
 
 
 
 
 
 
 
 
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21

many  of  which  are  settled  by  the  players.  The 

virtual  spaces  for  themselves  and  structure  their 

players  can  inhabit  worlds,  create  organizations 

interactions around the virtual architecture of the 

and  alliances,  accumulate  wealth  and  build 

five-star Habbo Hotel.

economies,  much  as  they  would  operate  in  a 

simulated  real  world.  The  system  provides  a 

persistent  and  continuously  evolving  world  that 

runs  on  servers  in  London.  In  August  21,  the 

system  recorded  13.993  simultaneous  players. 

In  August,  a  team  of  players  also  successfully 

constructed  the  first  user-created  outpost  in  the 

system, including a strip club, where they offered 

cold  drinks  and  hamburgers  to  celebrate  the 

event.

Neopets  (http://www.neopets.com),  in  turn, 

is  a  community  of  over  70  million  virtual  pet 

owners across the world who feed and play with 

their  pets  and  adventure  around  Neopia  with 

them.  The  system  has  a  free  membership  and 

it  includes  over  160  games,  trading,  auctions, 

greetings, and messaging.

Habbo  Hotel 

(http://www.sulake.com) 

is 

a  virtual  “hang-out”  where  people  can  walk, 

dance,  eat,  drink  and  chat  in  cafes,  restaurants, 

swimming pools and games rooms. The users can 

also  decorate  rooms,  chat  with  other  users,  host 

parties, etc. In July 2005, the system had over 4 

million users. The participants can use credit cards 

and SMS to buy “habbo coins” that they can then 
use  to  buy  decorations  for  their  rooms,  gifts  to 

their friends, and to play games. The participants, 

represented  as  user-tailored  “habbo  characters” 

(avatars), 

therefore, 

construct  personalized 

Flickr

Flickr (http://www.flickr.com) has been called 

“massively  multiplayer  online  photo  sharing” 

and a media for “visual conversations.” It allows 

people  to  post  their  photographs  on  the  web 

using Internet-connected PCs and mobile devices. 

The photographs can be tagged and commented 

by  the  people  to  whom  the  poster  gives  access 

rights.  Often  access  rights  are  given  to  anyone 

using  the  Internet.  People  can  also  embed  pop-

up comments directly on the images, highlighting 

specific  details,  providing  information  on  the 

image  content  and,  for  example,  telling  their 

personal stories associated with the picture.

Flickr,  therefore,  creates  an  image-sharing 

platform where members of a social network can 
access  images,  collaborate  in  organizing  and 

categorizing  them,  and  tell  stories  about  them. 

It also allows photographs to be made visible to 

everyone  connected  to  the  net,  thus  providing 

visibility  to  people  who  publish  their  images. 

The  images  stored  in  Flickr  can  also  be  used  in 

personal  blogs.  They  are  also  used  in  location-

based  applications 

that 

link  pictures  with 

addresses  and  GPS  points.  In  the  beginning  of 

year 2005, about 80 percent of the over 5 million 

images  stored  in  the  system  were  accessible  to 

 
 
 
 
 
 
all  web  users.  Professional  photographers  who 

music-related  groups,  ranging  from  High  School 

use  the  open  Creative  Commons  licensing  also 

Goths and electric bass players to Linkin Park, the 

distribute  photographs  using  the  system.  Flickr 

last  one  with  some  40.000  members.  Users  can 

has now over 1 million members, and over 4000 

also  sign  up  as  artists  and  post  up  to  four  MP3 

images are uploaded to the service each second. 

songs  of  their  music  free. At  present,  artists  can 

Flickr, which is still in beta, was recently acquired 

also  upload  videos  for  editorial  review. The  best 

by Yahoo!

videos are featured in the system.

Social software and journals

Today,  several  free  blog  services  combine 

digital  representation  of  their  users  with  social 

networking  and  aggregation  of  diary  and 

discussion  entries.  For  example,  LiveJournal 

(http://www.livejournal.com),  an  early  blogging 

system,  based  on  open  source  software  and 

Yahoo  360°  (http://360.yahoo.com),  now  in 

beta, has similar functionality. It also allows you 

to  publish  a  “radio  station,”  which  your  friends 

can listen to. Yahoo 360° also links to the user’s 

mailbox and Flickr, allowing the users to manage 

large  annotated  picture  collections  and  slide 

shows.

launched in 1999, allows registered users to keep 

Del.icio.us

diaries,  post  photographs  and  join  public  and 

restricted groups. Users can also read aggregated 

journals of their friends and the people belonging 

to specific groups. LiveJournal has now some 2.5 

million  active  users,  and  about  250.000  users 

updating  their  pages  during  the  last  24  hours. 

The number of blogs registered in the Technorati 

service  doubles  now  every  5.5  months  and  the 

system  registered  about  one  new  blog  every 
second.166  In  mid-November  2005,  the  total 
number  of  blogs  was  estimated  to  be  over  100 

million,  and  Technorati  tracked  21.3  million 

blogs.

Some  newer 

social 

software 

systems 

are  rapidly  gaining  popularity.  For  example, 

MySpace  (http://www.myspace.com)  has  now 

some  27  million  members.  The  system  allows 

the members to maintain profiles and links to the 

profiles of friends, join forums and participate in 

groups,  rate  and  listen  music,  keep  blogs,  and 

contact  people  with  email  or  instant  messaging. 

The  users  can  also  send  text  messages  through 

the system, as well as “bulletins” to all friends to 

inform them about what is happening in your life 

or, for example, invite them to a party. The system 

is free to use, and uses banner advertisement for 

funding. There are now, for example, about 9.600 

166  http://www.technorati.com/weblog/2005/08/34.html

del.icio.us 

(http://del.icio.us) 

is  a  social 

bookmarks manager. It is a free service that allows 

the  users  to  add  web  pages  to  their  personal 

collection  of  links,  to  categorize  those  sites 

with  keywords,  and  to  share  collections  among 

browsers, machines, and with other users.

The users add a simple bookmarklet to their 

browsers. When they find an interesting web page 

they  simply  select  the  del.icio.us  bookmarklet, 

and the application asks for information about the 

page. The user can add descriptive terms to group 

similar  links  together  and  add  notes. The  list  of 

links can be accessed from any web browser. The 

users can view their links by date, or by specific 

keywords,  which  are  dynamically  defined,  as 

needed.  Del.icio.us  has  become  widely  popular 

as  it  also  allows  the  other  users  to  see  the  links 
that others have collected, as well as show who 

else  has  bookmarked  a  specific  site.  People 

can  also  view  the  links  collected  by  others,  and 

subscribe to the links of people whose lists they 

find  interesting.  Del.icio.us  shows  how  many 

people have bookmarked a specific page on the 

web,  and  allows  people  to  search  and  browse 

bookmarks  based  on  categories  that  the  users 
themselves have defined. The system shows also 

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a dynamic list of most popular tags and, when the 

physical  locations.  Similarly,  the  users  can  add 

user browses a specific tag, related tags, a list of 

physical location to their instant messages. Users 

which  is  automatically  generated  by  analyzing 

can also track their friends in physical space. The 

the  associations  between  tags.  In  practice,  by 

service is free and in beta.

using  del.icio.us,  the  dynamic  tags  and  their 

relationships  self-organize  and  categorize  the 

content  on  the  web.  The  system,  for  example, 

gives  a  good  indication  of  emerging  new  hot 

topics on the web.

Plazes

Plazes (http://www.plazes.com) is a grassroot 

approach  to  location-aware  interaction.  It  aims 

at global collaborative effort to annotate physical 

locations,  so  that  they  can  be  linked  to  web 

content and used to link the “virtual” world with 

the physical world. The system creates a location 

At  present, 

the  system  has  over  8000 

registered  plazes  in  91  countries. These  include 

universities, private and public WiFi access points, 

hotels, airports, homes of people, market squares, 

museums, etc. The places can also be combined 

with satellite images and maps that are accessed 

through  the  open  Google  Maps  interface.  Users 

can  smoothly  zoom  in  from  a  global  satellite 

image  to  a  close  up  of  the  location,  show  it  on 

a  map,  and  see  information  about  people  and 

comments  associated  with  the  place,  as  well  as 

look for other nearby places.

“fingerprint”  using  the  signature  of  the  router 

Annotation  of  objects  and 

the  Crafter’s 

that  is  linked  to  a  specific  local  Internet  access 

Manifesto

point. The  user  can  then  register  this  fingerprint 

as  a  specific  “plaze.”  The  users  can  then  add 

notes to the plaze. A plaze contains information 

about the actual location like pictures from Flickr, 

comments  and  mapping  information,  as  well  as 

the people currently online at that plaze. Plazes 

also  allows  you  to  share  your  location  with  the 

people  you  know  and  to  discover  people  and 

220

services  around  you.  For  example,  the  user  can 
link  herself  and  her  blog  entries  with  specific 

New  services, 

for  example  Microsoft’s 
Aura,167  enable  people  to  annotate  physical 
objects  with  information  on  the  web.  Objects 

such  as  clothes,  accessories, 

furniture,  and 

computers  can  be  linked  to  specific  Internet-

addresses  that  are  associated  with  the  object. 

For  example,  hobbyprincess.com  has  used  RFID 
tags  to  annotate  objects  and  places.168  The  tags 
can be read and written by RFID-enabled mobile 

167  http://aura.research.microsoft.com/
168  http://ullamaaria.typepad.com/hobbyprincess

 
 
 
 
 
 
does  not  interpret  the  processed  meaning  in 

any  way.  As  the  speakers  typically  generate  all 

the  content  in  real-time,  the  Internet  can  simply 

provide  a  “pipe”  for  moving  bits.  Economically, 

VoIP  is  also  interesting  as  the  users  create  the 

content.  This  “free  content”  has  also  been  the 

basis  for  the  development  of  the  traditional 

telephony  networks.  Skype,  the  leading  VoIP 

provider,  has  accumulated  some  51  million 

registered  users  since  its  launch  and  on  average 

about 3 million users log on it at any given time. 

PC-to-PC telephony is typically available free, and 

connections  to  and  from  traditional  telephony 

networks  at  low  cost.  OECD  now  estimates  that 

phones,  which  then  link  the  user  to  the  desired 

the  revenues  from VoIP  double  in  the  next  two 

address on the web. Using this approach, objects 

years, to 6.5 billion euros. An important reason for 

such  as  hand-made  fashion  items  can  “tell  their 

this rapid growth is the fact that most of content 

story”  and  become  “extended  objects.”  In  this 

does not generate revenues or require agreements 

way, they can also become part of the emerging 

on  intellectual  property  rights.  Spoken  language 

recommendation-based online markets.

on  traditional  telephony  networks  has  been  one 

Ulla-Maaria  Mutanen, 

the  author  of 

hobbyprincess.com, argues that there is currently 

a  very  large  latent  market  of  locally  produced, 
non-mass manufactured products.169 This includes 
most of art, design, and craft. Also, an increasing 

number  of  people  are  interested  in  creating 

fashion,  music,  movies,  and 

text  products, 

modifying the products they buy, and sharing or 

trading their creations online, for example, using 
eBay  or  etsy.170 The  realization  of  the  economic 
potential of this activity, however, will require the 

development of information systems that can use 

unique  identification  and  metadata  of  products 

(e.g. musicbrainz.com).

of the socially and economically most important 

applications of information technology, and it will 

most probably remain so also in the foreseeable 

future.  VoIP,  however,  will  also  highlight  major 

social  and  cultural  issues,  such  as  questions 

related to the ownership and reuse of traditionally 

non-persistent speech.

Policy implications

A new paradigm implies a different view of 

the world. It requires reframing the problems we 

are  tackling,  new  priorities,  and  new  strategies 

and  tactics  for  problem  solving.  It  also  leads 

to  new  technical  architectures  that  implement 

solutions  to  the  perceived  new  challenges  and 

Voice over IP

opportunities.

One  obvious,  theoretically  interesting  and 

It  is  impossible  to  fully  draw  out  the 

yet rarely noticed meaning-processing application 

implications of the emerging new paradigm in the 

on the Internet is voice telephony. The underlying 

present report. In some areas the practical impact 

technology application simply moves bits so that 

may  be  low.  It  does  not  really  matter  whether 

people  can  talk  to  each  other.  The  application 

the  sun  rotates  the  earth  or  the  earth  rotates  the 

169  www.makezine.com/04/manifesto/
170  www.etsy.com/. Etsy is an online marketplace for buying and selling all things handmade. It supports searches by color, place, 

time and material.

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sun  when  we  enjoy  the  sunset.  It  does  matter, 

traditional  question  of  technical  interoperability 

however, when we study greenhouse warming or 

need to be perceived as a special case of a much 

launch  satellites.  The  conventional  information-

broader  question 

related 

to  socio-technical 

processing  paradigm  already  has  adapted  itself 

interoperability.  Standardization,  for  example,  is 

to  some  practical  demands  that  fundamentally 

not a technical question, or a question of lobbying 

have  their  origins  in  the  challenge  of  deploying 

economic  interests.  It  is  a  deeply  cultural  issue 

computer  systems  in  meaningful  cultural  and 

that requires explicit models of social change and 

social  settings.  For  example,  telephony  services 

distribution of power and risk.

are already implemented using current computer 

and  Internet  architectures.  To  understand  how 

such  applications  will  evolve  and  could  be 

improved, we, however, need new concepts.

Robust 

implementations  of 

information 

society  technologies  in  such  diversified  socio-

cultural  environments  also  need  to  be  socially 

and  culturally  acceptable.  This  means  that  the 

For  research  policy, 

the  new  paradigm 

underlying  political  models  need  to  be  made 

points  to  the  importance  of  linking  cultural  and 

explicit. Current technical architectures hardwire 

social  dimensions  to  information  technology 

social  processes  and  beliefs  in  ways  that  are 

development. 

Information 

technologies  often 

sometimes culturally simplistic. Overly simplistic 

implement social,  cultural and cognitive  models 
theories. 
that  are  based  on  common-sense 

architectures  make 
innovation  and  change 
difficult, and limit the potential of global diffusion 

These  theories  are  not  universal  and  in  the 

of new technologies and applications.

global information society they need to be made 

explicit.

The  social,  cultural  and  historical  emphasis 

of  the  meaning-processing  paradigm  also  points 

For  example,  social  stocks  of  knowledge 

to  the  fact  that  the  present  conceptualization 

are  typically  organized  around  social  practices 

of 

intellectual  property 

is  not  well-aligned 

and communities that reproduce those practices. 

with  the  new  paradigm.  Meaning  processing 

Different  communities  use  different  models 

is 

inherently  a  social  and  communicative 

to  perceive  the  world,  they  make  different 

process,  where 

individuals  participate  by 

distinctions, and they prioritize and value things 

incremental  contributions. The  locus  and  origin 

differently.  They  have  value  systems  that  are 

of  innovation  cannot  easily  be  located  in  such 

tightly linked with the demands of the practice in 

socially  distributed  processes.  The  ownership 

question, as well as to historically routinized and 

rights  to  user-constructed  spaces,  such  as  those 

socially  institutionalized  interactions  between 

found  in  MySpace  and  Habbo  Hotel,  will  also 

the community and its social environment. In the 

be  a  theoretically  demanding  area  of  research. 

modern  world,  people  belong  to  many  different 

Fundamentally,  the  current  intellectual  property 

communities and these communities often extend 
beyond  organizational  and  national  boundaries. 

right regimes assume a world of scarce resources, 
whereas the economy of meaning is continuously 

This diversified social structure underlies meaning-

expanding.  To  support  economic  growth  and 

making  processes  in  the  society,  and  it  provides 

socio-economic 

development, 

intellectual 

the foundation for economic exchanges, political 

property rights need to be redesigned.

interaction  and,  for  example,  the  construction 

of  identities.  Technological  architectures  that 

can  support  communication  and 

interaction 

within  and  across  such  social  structures  will  be 

important  in  the  extremely  diversified  global 

world. 

“Technologies  of 

translation” 

that 

specifically  address  interoperability  at  a  cultural 

and  social  level  are  becoming  important.  The 

222

In  very  concrete  terms,  one  implication  of 

the new paradigm is that a criterion in evaluating 

technical  research  proposals  could  be  that  the 

proposal  shows  awareness  of  the  cultural  and 
social  dimensions  of  technology  development. 

If  these  dimensions  are  becoming  increasingly 

important,  policy-makers  could  require 

that 

attention is paid to them and they could sponsor 

 
 
 
 
 
 
research  that  puts  Europe  at  the  leading  edge 

Europe  exists  on  a  unique 

foundation 

of  the  new  paradigm.  When  project  proposals 

of  social  diversity,  where  a  rich  mosaic  of 

explicitly have to address the social and cultural 

languages,  thought  styles  and  historically  rooted 

dimension of technical designs and development 

cultures  provide  a  model  of 

the  emerging 

roadmaps,  the  projects  can  more  easily  realize 

globally  connected  world.  This  social  diversity 

the  opportunities  of 

implementing  project 

reflects  a  historical  process  that  has  generated 

results in a global world and in the socially and 

diversified  systems  of  meaning. 

Information 

culturally diversified Europe. Such a competence 

and  communication 

technologies  are  now 

of  integrating  social  and  cultural  dimensions 

reorganizing  these  systems  of  meaning,  and 

to  technology  development  could  eventually 

making  theoretical  and  practical  understanding 

become  a  core  competence  in  the  European 

of meaning processing increasingly important for 

Research Area.

At  a  more  fundamental  level,  the  emerging 

paradigm  requires  that  we  reconsider  some 

current  justifications  for  developing  information 

society technologies. For example, at the present 

there  are  no  conceptually  robust  approaches 
in  measuring  the  socio-economic  impact  of 

information  technology  applications.  Although 

it  is  clear  that  ICTs  have  a  fundamental  impact 

on society and economy, for example, the current 

national  statistics  or  measures  of  economic 

productivity do not capture these impacts well. As 

a  part  of  the  new  meaning-processing  paradigm 

we,  therefore,  also  need  a  new  productivity 

paradigm (cf. Tuomi, 2004).

policymakers, product developers, and researchers 

in the European Research Area. Europe can build 

its  future  by  turning  this  historical  inheritance 

into  a  competitive  advantage.  It  can  do  this  by 

explicitly integrating social, cultural and cognitive 

dimensions into information and communication 

technology  development  and  research,  at  the 

same  time  moving  these  technologies  into  their 

next  evolutionary  generation.  Through  such 

integration, it can also better develop technologies 

that  lead  to  true  socio-economic  development. 

This, however, requires that we reconsider some 

of the very basic epistemological and conceptual 

starting  points  of 

the 

information-processing 

paradigm, and enrich the research on information 

society 

technologies  with  new  sources  of 

theoretical ideas and knowledge.

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22

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22

9. Conclusions

The role ICT plays in the economy is part of 

One of the underlying objectives of this part 

a wider debate on future “knowledge” economy 

of  the  FISTERA  project  was  to  understand  those 

options.  In  this  transition  phase  towards  the 

policies  that  might  drive  the  change  from  the 

knowledge economy, analytical models to explore 

information  society  to  the  knowledge  society. 

these options are scarce and not widely accepted, 

To  conclude,  issues  that  came  across  in  all 

and  many  important  concepts  are  still  under 

contributions are discussed in the following:

discussion. For instance, there is a heated debate 

in  the  scientific  literature  on  productivity.  Most 

economists  agree  that  traditional  measures  of 

economic growth do not capture adequately the 

reality of the knowledge economy. Unfortunately, 

no  such  agreement  exists  on  an  appropriate  set 

of  indicators  for  the  measurement  of  knowledge 
economy dynamics.

Within  this  ongoing  scientific  discussion,  a 

choice was made to highlight and explore those 

issues,  considered  decisive  for  the  design  of  the 
knowledge society in Europe, that have received 

less  attention  from  decision  makers  up  until 

now. The first is the importance of knowledge for 

our future economy as it will shape the way we 

design economic and other policies – such as, for 

example,  the  thorny  problem  of  how  to  achieve 

sustainable  financing  for  existing  national  social 

security  systems.  Second,  a  number  of  existing 

policies  will  need  to  be  adapted  to  boost  the 

economy  in  general  and  the  digital  economy 

in  particular.  The  foresight  community,  brought 

together  and  animated  by  FISTERA,  could 

contribute  to  achieving  these  objectives.  Finally, 
Europe’s  population  is  ageing  and  this  poses  a 

number  of  formidable  challenges,  where  ICTs 

can  contribute  to  the  solutions. This  requires  an 

integrated approach for better use of technologies 

leading to true socio-economic development for 

Europe.

The  need  to  rethink  the  Intellectual  Property 

Rights regime

Although 

intangible,  knowledge 

shares 

the  properties  of  other  capital  goods:  it  can  be 

generated,  accumulated  and  transferred.  What 

is important from a strategic point of view is that 

knowledge  will  increasingly  gain  importance 

with  respect  to  other  capital  goods.  This  has 

implications for economic, R&D and innovation 

policies, as well as IST strategies.

The  role  and  the  importance  of  knowledge 

for  the  new  economy  explain  why  innovation 

patterns  have  changed.  For  instance,  many  ICT-

based  innovations  are  the  result  of  a  social  and 
communicative  process,171  whereby  individuals 
often  make  only  incremental  contributions  to 

the  process.  In  these  circumstances,  traditional 

concepts  of 

intellectual  property 

(IPR)  of 

innovation  become  difficult 

to  apply.  For 

instance,  in  such  socially-distributed  innovation 

processes  based  on  many  decisive,  but 

incremental  contributions,  the  traditional  figure 
of  an  “inventor”  is  inappropriate,  and  the  place 

of  innovation  –  as  requested  in  patent  filings 

–  cannot  be  easily  defined.  Intellectual  property 

rights therefore need to be redesigned to fit new 

social  and  cultural  patterns,  if  economic  growth 

and socio-economic development are to be fully 

supported.

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171  Examples include applications arising from social computing, open source software or shareware.

 
 
 
 
 
 
 
 
 
 
 
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.
9

“Knowledge workers” demand a different social 

future,  and  even  today  in  the  Nordic  countries, 

security and social stability contract

“security” will mean “tomorrow will be as good 

Knowledge  as  capital  is  tightly  related  to 

human  talent  as  capital  (“human  capital”).  The 

more  jobs  are  knowledge-based,  the  more  this 

will  change  the  nature  of  work.  “Knowledge 

workers”  –as  opposed  to  those  dealing  with 

physical  labour-  will  be  predominant  and  drive 

the  economy.  Such  occupations  will  provide 

a  higher 

level  of  personal  satisfaction  and 

will  largely  depend  on  the  creativity  of  the 

worker.  More  people  will  be  able  to  balance 

as today”, whether similar or completely different. 

Indeed,  flexibility  is  the  key  to  a  successful 

information  society,  since  physical  investment  is 

less important; even established structures will be 

prone  to  change. This  view  introduces  the  need 

for  a  degree  of  flexibility  in  the  design  of  any 

upcoming social security system and also ensures 

that  technical  and  societal  innovation  should 

become  an  intrinsic  part  of  the  European  value 

system and policies.

their  remunerated  activities  with  leisure  to  suit 

Is  this  possible  in  a  traditional  Europe?  In 

themselves.  However,  this  attractive  perspective 

fact  it  is,  as  there  is  no  unique  social  model  in 

will  not  be  realised  automatically.  Options  have 

Europe,  but  rather  a  range  of  different  models 

frequently been discussed, but necessary changes 

in  the  Members  States,  the  most  prominent  of 

are  not  yet  in  place  to  enable  the  emergence 

of  new  types  of  jobs.  This  will  require  policies 

which  are  the  Scandinavian,  Anglo-Saxon  and 
German  models.  Europe  offers  a  test-bed  for 

which create flexible working environments and 

different approaches and the opportunity to learn 

realistic life-long learning schemes.

from  a  variety  of  valuable  experiences,  in  order 

Changes in type of work, blurring of borders 

between  work  and  leisure,  the  ageing  society 

and  the  increasing  range  of  jobs  (from  hard 

physical  labour  to  intellectual  activities)  should 
be  taken  into  account  when  redesigning  the 

foundations  of  national  social  security  systems. 

Current social security systems are largely based 

on  a  traditional  industrial  economy  model  and 

need  to  be  adapted  to  the  knowledge  economy. 

For  instance,  the  current  retirement  age  and 

pension  conditions  originate  from  the  times 

when  the  majority  of  workers  were  involved  in 

physical  labour.  Now  this  is  no  longer  the  case, 

new  social  security  systems  should  be  adapted 

to knowledge-based workers. To do this properly, 

the notion of social “security” must be separated 

from  social  “stability”. 

In  many  European 

countries  the  meaning  of  security  is  understood 

as “tomorrow will be the same as today”. In the 

to  derive  the  best  balance  of  deregulation  and 

liberalization.  This  should  promote  productivity 

and  efficiency,  allowing  European  systems  to 

eventually converge into one that is sustainable. 

It  appears  that  reforming,  rather  than  scrapping, 

will  be  the  best  way  to  prepare  for  and  support 

the knowledge economy.

Policies needed to to boost the digital economy

Recognizing  the  fact  that  ICT  accounts  for 

40% of Europe’s productivity growth and for 25% 
of EU GDP growth,172 the European Commission 
set up specific measures focusing on this industrial 

sector.  It  has  also  responded  to  the  recognition 

of  the  pivotal  role  of  knowledge  and  innovation 
in  ICT  in  the  renewed  Lisbon  Agenda.173  In 
June  2005,  the  Commission  adopted  a  five-year 

strategy, called ‘i2010’, to foster growth and jobs 

20

172  Communication by the European Commission, “i2010 - A Euopean Information Society for Growth and Employment”, COM 

(2005) 229, Bruxelles 1.6.2006. p. 3

173  In the revision of the Lisbon Strategy, the report from the High Level Group chaired by W. Kok makes a strong recommendation 
for Europe to reap the full benefits of ICT: “In order to ensure future economic growth, the EU needs a comprehensive and 
holistic  strategy  to  spur  on  the  growth  of  the  ICT  sector  and  the  diffusion  of  ICT  in  all  parts  of  the  economy”  see  “Facing 
the  Challenge  - The  Lisbon  strategy  for  growth  and  employment”  Report  from  the  High  Level  Group  chaired  by Wim  Kok, 
November 2004, p. 22.

 
 
in the ICT and media industries. It comprises a set 

to  have  a  positive  effect  on  our  socio-economic 

of activities that modernise and deploy EU policy 

environment in the future. Further candidates for 

instruments to encourage the development of the 

ICT-enabled disruptive applications are currently 

digital economy, including regulatory instruments, 

being identified. Although the timing and nature 

research and partnerships with industry. The i2010 

of  disruptions  are  difficult  to  forecast,  a  number 

Initiative  has  three  aims;  to  create  an  open  and 

of basic conditions can be highlighted.

competitive single market for information society 

and  media  services  within  the  EU,  to  increase 

EU  investment  in  ICT  research,  and  to  promote 

an  inclusive  European  information  society.  This 

last  will  culminate  in  a  European  initiative  on 

e-Inclusion,  which  includes  actions  favouring 

citizen-centred  services,  increasing  quality  of 

life (e.g. technologies for an ageing society), and 

overcoming  the  geographic  and  social  “digital 

divide”.

There  are  at  least  three  conditions  for 

disruptive innovation, namely performance push, 

customer pull and organizational competencies. In 

other words, for a technology to cause disruption, 

its performance must be superior to that of other 

technologies  or  processes,  customers  must  care 

about  different  measures  of  performance,  and, 

with  regard  to  organizational  competencies,  the 

incumbents  must  take  a  proactive  and  dynamic 

view  of  innovation. To  detect  which  disruptions 

As  part  of  the  second  priority  of  the  i2010 
Initiative,  the  European  Commission  launched 

are  about  to  explode,  a  deep  understanding  of 
the  potential  market  trends,  the  evolution  of 

the  “Vienna  Process”.  This  has  two  objectives: 

technologies  and  business  models  is  required. 

to  identify  where  Europe  should  focus  and 

Both  the  supply  and  demand  sectors  need  to 

coordinate  its  research  efforts  by  coordinating 

be  monitored  and  scenarios  which  deal  with 

the  policies  and  visions  of  ICT  research  across 

emerging IS technology impacts and opportunities 

Europe, and to coordinate national and European 

have to be developed. The starting point for such 

ICT  research  programmes  across  Europe.  The 

an  investigation  is  to  observe  IST  trends  and 

foresight  community  can  contribute  to  the  first 

business evolutions carefully and explore specific 

objective by forging a European Vision for ICT.

implications for policies, in particular R&D policy 

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Capturing the next innovation wave

FISTERA’s  foresight  experience  and  results 

can  contribute  to  the  visions  of  Europe’s  key 

players and help to define their strategies. FISTERA 

compared  national 

ICT 

foresight  exercises 

and  designed  new  visions  for  the  EU  in  several 

scenario  building  exercises.  The  scenarios  were 

built  on  findings  from  “technology  trajectories”, 

which  depict  the  possible  evolution  of  clusters 

of 

ICT 

technologies  and 

their  applications. 

Interestingly,  it  was  found  that  some  ICTs  will 

have  a  far  more  predominant  role  than  others. 

These  ICTs  will  attract  other  technologies  and 

act  as  catalysts  on  their  progress.  Similarly, 

some applications will have an enormous socio-

economic impact and a “disruptive” effect on the 

way we do business (e.g. Internet and the mobile 

telephone). Other disruptive applications are likely 

in IST.

Many 

of 

the 

innovations 

currently 

revolutionising the Internet – amongst them Web 

2.0-  are  having  impact  because  they  respond 

to  the  consumers’  desire  to  be  more  active.  As 

Web 2.0 will provide them with content, goods, 

storage,  server  capacity  and  even  connectivity, 

they  will  be  more  than  simple  consumers. 
that  users  voluntarily  offer 
The  baseline 

is 

valuable  content,  where  the  value  may  reside 

not  so  much  in  the  individual’s  contribution 

itself  as  in  the  social  process.  As  a  result,  the 

emphasis  of  the  knowledge  economy  is  shifting 

from  a  model  of  “consumer  paying  producer” 

to  one  based  on  a  communicative  process, 

where  individuals  participate  as  producers  and 

consumers  simultaneously,  often  by  incremental 

21

contributions.  Foresight  practitioners  and  ICT 

experts  have  to  analyse  both  the  technological 

trends  and  the  real  socio-economic  impact,  in 

 
 
 
 
 
 
 
 
 
 
 
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22

order  to  feed  decision  makers  with  valuable 

among  policy  makers  and  the  R&D  community, 

information and to avoid a situation where Web 

that  Europe  may  lose  its  position  in  leading-

2.0 could become the “Bubble 2.0”.

edge  technologies  such  as  ICT.  Therefore,  there 

Adressing  the  fragmentation  of  R&D  research 

and internationalization of ICT

The  second  priority  of  the  Vienna  process 

refers 

to 

the  coordination  of  national  and 

European ICT research programmes. This priority 

responds  to  the  need  to  reduce  the  existing 

fragmentation of R&D research and to make best 

use  of  public  budgets.  Both  public  and  private 

funding  support  existing  centres  of  excellence 

is a need to make use of existing R&D capacity-

building processes in ICT sectors, and understand 

their  competitive  advantages  for  the  location  of 

these  capacities  at  the  regional,  national  and 

European level. There is an R&D investment gap 
in  ICT174  which  can  –to  a  significant  extent-  be 
explained by the lower degree of specialisation of 

the EU with respect to Japan and the USA.

Take up the challenge of an ageing Europe

in  ICT  research  across  Europe.  New  centres  of 

Europe  is  ageing  rapidly.  When  today’s 

ICT  research  are  being  created  in  Europe  and 

baby-boom  generation  reach  retirement  age, 

around the world, particularly in Asia, which are 

the  dependency  ratio  will  increase  drastically 

competing against each other. The prime criterion 

and current social security systems are in danger 

for  successful  research  is  scientific  excellence 

of  becoming  unaffordable. 

Immigration  may 

and this has a high cost. The cost of cutting-edge 

mitigate this trend but it cannot stop it. To ensure 

ICT research is spiraling upwards as technologies 

future  economic  development  and  well-being, 

become  increasingly  complex  and  research-

Europe will need to increase its productivity levels 

intensive. It appears that not even the bigger EU 

substantially. Therefore, it would be advisable to 

countries can, in the long run, afford to maintain 

put  adequate  economic  policies  in  place  before 

state-of-the-art  infrastructure  and  train  highly 

the  baby-boomer  generation  reaches  retirement 

qualified personnel in all ICT domains. Therefore, 

age. ICTs can make a contribution to maintaining 

a sharing of costs and risk seems a suitable option. 

social welfare in an ageing society by increasing 

In Europe, almost 90% of all public ICT research 

productivity  and  keeping  older  citizens  socially 

funding  is  spent  through  national  and  regional 

and  economically  active.  However,  ICTs  can 

research  programmes.  Consequently,  the  EU’s 

perform  this  role  only  if  the  overall  institutional 

Framework  Programmes  for  research  represent 

framework of European societies is changed from 

only  a  small  fraction  of  all  research  funding  – 

one fit for industrial manufacturing to one suitable 

public and private– across Europe. In spite of this 

for the knowledge society. For this to happen, ICT 

modest funding, the European Commission plays 

adoption  needs  to  be  grounded  in  fertile  soil: 

a pivotal role in Europe’s efforts to coordinate its 

structural reforms are needed in Europe in order 

ICT research and become a global leader.

to  make  innovation  (both  product  and  process 

Better coordination of research capacity may 

also  contribute  to  putting  Europe  in  the  driving 

seat  again,  at  least  as  regards  a  set  of  critical 

technologies.  ICT-related  R&D  and  production 

can  enable,  or  even  drive,  the  current  wave  of 

internationalisation.  There  is  growing  concern 

innovation) and the use of innovative technologies 

more  profitable.  Because  Europe  needs  to  adapt 

quickly to a period of rapid technological change 

(e.g. deployment phase), markets also need to be 

more  flexible,  in  order  to  boost  investment  and 

ICT  adoption.  Business  creation  and  innovation 

174  IPTS is currently studying private investment in R&D in ICT in the 25 EU Member States and in Europe as a whole. Preliminary 
results  indicate  that  European  ICT  business  spending  in  R&D  has  grown  by  6%  from  2002  to  2004.  In  absolute  terms,  this 
amounts to 35 billion € which is less than that of Japan and about half the US amount.

 
 
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need to be freed from rigidities in factor markets, 

The  need  for  an  integrated  European  policy 

favouring labour mobility and skill upgrading and 

approach

access to capital, especially risk-capital. All in all, 

“creative destruction” must be facilitated in order 

to  favour  the  emergence  of  innovative  forms  of 

economic activities embodied in new businesses, 

new  product  and  services,  new  production 

organization  processes,  new  markets,  etc.  In 

addition,  by  favouring  greater  competition  and 

greater  integration  of  EU  markets,  the  EU  may 

favour faster adoption of new technologies. This is 

particularly true in the service sector, where ICT-

related  productivity  gains  have  been  especially 

low  in  the  EU,  as  compared,  for  instance,  with 

the  US.  Europe  is  still  lagging  behind  in  this 

domain  and  there  are  great  potentialities  in 

relation  to  ICT  adoption  which  can  be  fostered 

through greater integration of EU service markets. 

ICT-led technological changes thus call for deep 

structural  changes,  including  changes  in  the 

organization of businesses, management practices 

and human capital investment. As regards human 

capital,  Europe  must  place  skills  and  education 

at  the  heart  of  its  growth  and  employment 

strategy. These  changes  are  at  least  as  important 

as  investment  in  ICT  and  strongly  determine  the 

effectiveness of these investments.

Policy makers therefore need to make every 

effort  to  put  the  right  framework  conditions  in 

place.  However,  the  urgency  of  the  situation 

has  not  yet  been  sufficiently  acknowledged. The 

PhD  students  of  2020  are  entering  school  now. 

Therefore,  if  Europe  wants  to  have  a  world-

class  ICT  industry  in  2030  despite  a  shrinking 

workforce,  it  must  adapt  its  policies  much  more 

rapidly than it has up until now. And not just in 

education and research. If product markets are not 

pushed into innovation by competitive pressures, 

young  professionals  will  orient 

their  career 

plans  elsewhere.  Risk  taking  must  be  rewarded. 

Reforms  are  much  more  urgently  needed  and 

will be much more far-reaching than most policy 

makers think.

Europe  has  a  unique  foundation  of  social 

diversity,  where  a  rich  mosaic  of  languages, 

thought  styles  and  historically-rooted  cultures 

provide  a  model  of  the  emerging  globally-

connected  world.  This  social  diversity  reflects 

a  historical  process  that  has  generated  varied 

systems  of  meaning.  How  can  Europe  turn 

this  historical  inheritance  into  a  competitive 

advantage? The way forward could be to explicitly 

integrate social, cultural and cognitive dimensions 

into information and communication technology 

development  and  research,  and,  at  the  same 

time  move  these  technologies  into  their  next 

evolutionary  generation.  This  integration  would 

also  contribute  to  the  better  use  of  technologies 

that lead to true socio-economic development.

Europe has recognised the importance of the 

emergence of the ICT paradigm for the economy 

and  society.  It  has  focused  its  policy  actions  on 
research  and  innovation.  However,  it  still  lacks 
an integrated policy approach that would employ 
all  economic  and  social  levers  for  stimulating 
innovation  and  maximising  the  benefits  of  the 

IS. These  benefits  will  not  come  by  themselves. 

First, ICTs imply profound changes in processes, 

organizations  and  the  ways  in  which  all  actors 

operate in our society, whether private businesses 

or public institutions. More specifically, the advent 

of  ICT  is  accompanied  by  a  rise  of  networking 

activities  which  questions  pyramidal  structures 

and  hierarchy.  Secondly,  policy  makers  are 

under  pressure  for  time,  due  to  the  fact  that  the 

growing  importance  of  ICTs  has  coincided  with 

globalisation.  Both  are,  in  fact,  interdependent 

and require a clear and coherent strategy at both 

national and EU levels.

Up  until  now,  much  of  the  public  debate 

has been about the implications of globalisation 

and 

technological  change 

in 

terms  of 

the 

location  of  economic  activities  and  a  potential 
loss  of  employment  arising  from  the  re-location 

2

 
 
 
 
 
 
 
 
 
 
 
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of  economic  activities  to  low  wage  countries. 

specialised segments, which are then candidates 

In  this  respect,  it  is  worth  emphasising  that  ICT-

for  relocation  to  places  that  offer  the  most 

led  globalisation  does  not  necessarily  imply  re-

advantages. These new trends cannot be ignored 

location  of  complete  economic  activities.  In 

and they cannot be faced with old policy recipes. 

particular,  recent  trends  show  an  increasingly 

Policy-makers  and  the  public  sector  in  general 

finer  dis-aggregation  of  the  value  chains  into 

have a crucial role to play in helping to make the 

necessary changes as smooth as possible.

2

 
 
About the authors

Emilio FONTELA

University Antonio Nebrija Madrid, Spain

Dean  of  the  Faculty  of  Law,  Economics 

and  Business  Administration  of  the  Universidad 

Antonio de Nebrija of Madrid, honorary professor 

of applied economics of the University of Geneva, 

Switzerland  and  of  the  Universidad  Autonoma 

de  Madrid,  Professor  Fontela  has  also  taught  in 

the  USA,  Japan  and  several  European  countries. 

Besides  his  scientific  contributions  in  economic 

areas  such  as  the  econometrics  of  productivity 

and  demand  analysis,  Prof.  Fontela  has  been 
active  in  the  development  of  futures  research 

methodologies 

(mainly  cross-impact  analysis, 

interpretive  structural  modelling,  input-output 

exploratory  modelling  and  scenario  writing) 

and  has  acted  as  consultant  to  several  projects 

of  international  organizations  (UN,  OCDE,  EC) 

dealing  with  world  economic  issues. A  member 

of  the  Editorial  Boards  of  Futuribles,  Foresight 

and Economic Systems Research, Prof. Fontela is 

President  of  the AEA  (The Applied  Econometrics 

Association, Paris)

efontela@nebrija.es

Jeremy MILLARD

Danish Technological Institute, Denmark

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employed  by  the  Danish Technological  Institute 

as a Senior Consultant. As geographer and social 

scientist, Jeremy has focused heavily on regional 

development  and  governance  issues,  especially 

in relation to new forms of eWork, eCommerce, 

eServices  and  eGovernment,  and  new  business 

and organisational change projects in the context 

of  the  knowledge  and  networked  society.  He 

has  worked  extensively  with  local  and  national 

government  and  regional  development  agencies 

in all types of areas across Europe, as well as in 

other  parts  of  the  world,  particularly  in  Africa 

and  Asia.  He  has  been  involved  in  developing, 

evaluating  and  analysing  the  impacts  of  change 

at  the  local  and  regional  scale,  both  from  a 

theoretical  perspective  and  in  terms  of  practical 

implementation, for example by advising regional 

development agencies on policy formulation and 

practice.

Some  of  Jeremy’s  recent  work  includes  a 

survey  of  European  eGovernment  research  in  a 

global  context,  an  analysis  of  the  impact  of  the 

European  Union’s  Structure  Funds  Programme 

on  its  Lisbon  2010  Strategy,  and  supporting  the 

European  Commission  with  ex-ante 

impact 

assessments  of  major  new  policy  proposals  for 

Information Society development.

Jeremy.Millard@teknologisk.dk

Jeremy  Millard  has  34  years  experience 

working  with  new  technology,  education  and 

Carlota PÉREZ

training  and 

in  consultancy 

for 

technology 

suppliers, public authorities, governments, users, 

the  European  Commission,  the  World  Bank, 

and  a  number  of  aid  agencies.  He  has  worked 

on  all  aspects  of  the  Information  Society  as 

practitioner,  researcher  and  policy  maker,  often 

taking the leading and management role. He was 

employed  by  the  UK  Open  University  and  by 

local  government  from  1971  to  1984,  and  then 

moved  to  Denmark  to  work  with Tele  Danmark 

Consult until March 1999. From April 1999 he is 

Cambridge and Sussex Universities, UK

Venezuelan,  researcher,  and  international 

lecturer  and  consultant,  specialized 
the 
socio-economic  implications  of  major  waves 

in 

of  technical  change.  Presently,  she  is  Visiting 

Senior  Research  Fellow  at  CERF,  Cambridge 
University, UK, and Honorary Research Fellow at 

2

SPRU (Science and Technology Policy Research), 

University  of  Sussex,  UK.  Her  articles,  from  the 

early  1980s,  have  contributed  to  the  present 

 
 
 
 
 
 
 
 
 
 
 
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understanding  of  the  relationship  between  basic 

Stay  Poor 

(London,  Constable  &  Robinson) 

innovations,  technical  and  institutional  change 

will  be  published  in  2006,  his  edited  books 

and  economic  development.  She  is  consultant 

include  Globalization,  Economic  Development 

to  governments  in  several  countries,  to  private 

and 

Inequality:  An  Alternative  Perspective 

sector  associations,  to  major  corporations  and 

(Cheltenham,  Elgar  2004)  and  (with  Jomo  K.S.) 

various  international  organizations.  She  is  often 

The  Origins  of  Economic  Development,  How 

invited as lecturer and keynote speaker to major 

Schools  of  Economic  Thought  have  Addressed 

business and government conferences in Europe 
and  Latin  America.  Her  book  Technological 
Revolutions  and  Financial  Capital:  the  Dynamics 
of  Bubbles  and  Golden  Ages  (Elgar  2002)  has 
become increasingly influential in the academic, 

business and policy communities.

Development (London, Zed 2005).

ESR@info.no

Tobias Schulze-CLEVEN

Berkeley  Roundtable  on 

the 

International 

carperezperez@yahoo.com

Economy

Erik S. REINERT

Tallinn  University  of  Technology,  Estonia  and 

Norwegian  Institute  of  Strategic  Studies,  Oslo, 

Norway

Tobias  Schulze-Cleven 

is  a  Research 

Associate  of  the  Berkeley  Roundtable  on  the 

International Economy (BRIE) and a PhD student 

in Political Science at the University of California, 

Berkeley. During the academic year 2005/06, he is 

a guest scholar at the Max Planck Institute for the 

Erik  S.  Reinert  is  Professor  of  Technology 

Study  of  Societies  in  Cologne,  Germany. With  a 

Governance and Development Strategies at Tallinn 

general research focuses on Comparative Political 

University of Technology. His research area is the 

Economy  and  European  Politics,  he  is  writing 

theory of uneven growth, i.e. the factors which – 

his  dissertation  on  the  comparative  politics  of 

contrary to the predictions of standard economic 

theory  –  cause  world  economic  development  to 

increasing labor market flexibility in Great Britain, 
Denmark  and  Germany.  He  has  contributed 

be  such  an  uneven  process. The  outlines  of  the 

to  the  forthcoming  ‘How  Revolutionary  was 

particular  framework  of  evolutionary  economic 

the  Revolution?  National  Responses,  Market 

theory  to  which  Reinert  subscribes  can  be 

Transitions and Global Technology in the Digital 

found  at  www.othercanon.org.  Reinert  holds  a 

Era’ (Zysman and Newman, eds.).

BA  from  Hochschule  St.  Gallen,  Switzerland, 

an  MBA  from  Harvard  University,  and  a  Ph.D. 

in  economics  from  Cornell  University  with  the 

thesis  ‘International  Trade  and  the  Economic 
Mechanisms  of  Underdevelopment’.  He  has 

worked  as  managing  director  of  a  multinational 

tobysc@berkeley.edu

Luc SOETE

Universiteit Maastricht and UNU-MERIT

manufacturing firm with production plants in four 

The Maatsricht Economic and social Research and 

European countries. The last fifteen years Reinert 

training  centre  on  Innovation  and  Technology  of 

has dedicated to teaching and researching in the 

the United Nations University

2

theory and history of uneven development, with 

particular  attention  to  the  History  of  Economic 

Policy  as  an  under-researched  area,  i.e.  what 
kind  of  economic  policy  nations  have  actually 

carried  out  historically  as  opposed  to  what 

reigning theories told them to do. His book How 

Rich  Nations  got  Rich  and  why  Poor  Countries 

Luc Soete (1950) is Professor of International 

Economics  at  the  Faculty  of  Economics  and 

Business  Administration,  Universiteit  Maastricht 
and  director  of  UNU-MERIT,  the  Maatsricht 

Economic  and  social  Research  and  training 

centre  on  Innovation  and  Technology  of  the 

United Nations University. He is also a member 

 
 
 
 
of the AWT, the Advisory Council for Science and 

Mr.  Tuomi  has  been  involved  in  several 

Technology Policy in The Netherlands.

European  and  international  research  projects 

He completed his first degrees in economics 

and development economics at the University of 

Ghent,  Belgium,  before  obtaining  his  DPhil  in 

economics  at  the  University  of  Sussex,  England. 

Before  coming  to  Maastricht  in  1986,  Luc 

Soete  worked  at  the  Department  of  Economics 

of  the  University  of  Antwerp,  the  Institute  of 

Development  Studies  and  the  Science  Policy 

Research Unit at the University of Sussex, and the 

Department of Economics at Stanford University. 

In 1988 he set up MERIT, of which he has since 

been  the  director  and  which  became  integrated 

since the 1980s. Most recently, he led the socio-

economic  work  package  of  the  interdisciplinary 

Sixth Framework “Broadband for All” coordination 

action  BREAD.  He  has  written  five  books, 

chapters  in  21  books,  over  40  scientific  articles, 

numerous  scientific  reports,  and  he  is  author  of 

two  international  patents.  His  texts  have  been 

used as background material for the development 

of  national,  regional,  and  European  research 

strategies,  the  World  Summit  on  Information 

Society,  Commission  communications,  and  the 

revision of the eEurope strategy.

with the UNU on January 1st, 2006.

He  is  currently  member  of  editorial  boards 

His research interests include the theoretical 

and empirical study of technological change and 

innovation,  with  a  particular  emphasis  on  new 

information  and  communication  technologies, 

on  growth,  employment  and  international  trade 

and investment, as well as the related policy and 

measurement issues.

soete@intech.unu.edu

of  Tiedepolitiikka 

(Science  Policy),  Lifelong 

Learning  in  Europe,  and  First  Monday,  a  peer-
reviewed online journal focusing on the Internet; 

and member of the advisory board for the Centre 

for  Activity  Theory  and  Developmental  Work 

Research at the Helsinki University.

ilkka.tuomi@meaningprocessing.com

John ZYSMAN

Ilkka TUOMI

Berkeley  Roundtable  on 

the 

International 

Oy Meaning Processing Finland

Economy

Mr  Tuomi  is  currently  Chief  Scientist  at 

Meaning  Processing  Ltd.  Before  his  current 

assignment,  he  was  with 

the  European 

Commission’s Joint Research Centre, Institute for 

Prospective Technological Studies, Seville, Spain. 

Before joining IPTS in 2002 as Visiting Scientist, 

he  developed  research  strategy  for  the  Finnish 

Technology  Agency  and  the  Finland  Berkeley 

Information  Technology  and  Society  Program. 

During 1999-2001, Mr Tuomi was visiting scholar 

at  the  University  of  California,  Berkeley,  where 

he  conducted  research  on  the  new  dynamics 

of  innovation  networks,  working  with  Professor 

Manuel Castells. From 1987 to 2001 he worked 

at Nokia Research Center, Finland, most recently 

as  Principal  Scientist,  Information  Society  and 

Knowledge Management.

John  is  professor  of  political  science  at  the 

University of California, Berkeley, and codirector 

of  the  Berkeley  Roundtable  on  the  International 

Economy.  He  has  written  extensively  on  the 

politics  Territories,  Globalization,  European 

corporate  strategy,  Japanese  corporate  strategy, 

European 
comparative 
politics,  political  economy  and  policy  of 

politics,  Western 

European  and  Japanese  business  and  economic 

development.  His  most  recent  works  include 

“How Revolutionary was the Digital Revolution? 

National  Responses,  Market  Transitions,  and 

Global  Technology”,  a  BRIE-ETLA-Helsinki 

Project (Eds.) (Stanford: Stanford University Press, 

2006), „The Politics of Greed: Privitization, Neo-

Liberalism, and Plutocratic Capitalism in Central 

and  Eastern  Europe” 

(Rowman  &  Littlefield 

Publishers, INC., forthcoming), “The State in The 

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2

 
 
 
 
 
 
 
 
 
 
 
Digital  Economy,”  with  Abraham  Newman. The 

“Creating Value in a Digital Era: How do Wealthy 

State  after  Statism:  New  State  Activites  among 

Nations  Stay  Wealthy?”  BRIE  Working  Paper  # 

the  Affluent  Democracies,  Jonah  D.  Levy  (ed.), 

165  (Berkeley:  BRIE,  2005).  John  has  served  as 

(Harvard  University  Press,  forthcoming  2006), 

a consultant to a number of governments, firms, 

“Transforming  Politics  in  a  Digital  Era”.  BRIE 

and international organizations.

Working  Paper  #  166  (Berkeley:  BRIE,  2005), 

zysman@berkeley.edu

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European Commission

EUR 22353 EN – DG Joint Research Centre, Institute for Prospective Technological Studies

Luxembourg: Office for Official Publications of the European Communities

2006 – 238 pp.

Scientific and Technical Research series

ISBN: 92-79-02984-3

ISSN: 1018-5593
Catalogue Number: LF-NA-22353-EN-C

Abstract

IPTS hosted a thematic workshop on the “Socio-Economic Aspects of the Knowledge-based Europe: The 

role  of  Information  Society Technologies  (ISTs)”,  which  set  out  to  diagnose  major  problems  for  Europe 

in  achieving  the  Lisbon  2010  objectives.  It  also  aimed  to  elaborate  on  possible  new  initiatives  which 

would  go  beyond  conventional  wisdom  and  which  would  contribute  to  defining  Europe’s  future  role 

in  a  globalised  society,  taking  into  account  the  socio-economic  drivers  for  better  quality  of  life.  After 

2

the  Workshop,  a  number  of  well  known  economists  were  commissioned  by  FISTERA  to  write  papers 

suggesting possible lines of analysis that were not included in the core FISTERA design, but which can be 

seen as crucial elements for a holistic view of the future of ISTs. This report summarizes and analyses the 

workshop findings and the views of the economists.

 
 
 
 
The mission of the JRC is to provide customer-driven scientific and technical support for the conception, development,
implementation and monitoring of EU policies. As a service of the European Commission, the JRC functions as a
reference centre of science and technology for the Union. Close to the policy-making process, it serves the common
interest of the Member States, while being independent of special interests, whether private or national.

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Publications Office

ISBN 92-79-02984-3

9 789279 029844