Technovation 32 (2012) 624–638

Contents lists available at SciVerse ScienceDirect

Technovation
journal homepage: www.elsevier.com/locate/technovation

The impact of innovation policies on the performance of national innovation

systems: A system dynamics analysis
Elpida Samara a,n, Patroklos Georgiadis b,1, Ioannis Bakouros c,2
a
University of Western Macedonia, Department of Mechanical Engineering, Mater Lab, Kozani 50100, Greece
b
Aristotle University of Thessaloniki, Department of Mechanical Engineering, Thessaloniki, Greece
c
University of Western Macedonia, Department of Mechanical Engineering Mater Lab, Kozani 50100, Greece

a r t i c l e i n f o a b s t r a c t

Available online 17 July 2012 There has been a growing significance for the National Innovation System (NIS) and its use as a tool for
Keywords: the competitive advantage of a country to date. In this paper, an NIS model has been developed with the
National innovation system use of system dynamics (SD) methodological approach. The objective of this model is to integrate the
Innovation process systemic approach, the computer modelling and the simulation discipline into a holistic dynamic
Systems modelling consideration of the NIS. From this central structure, the paper analyzes the impact of innovation
System dynamics policies on the NIS performance. In particular the SD model is used as an ‘‘experimental tool’’ to conduct
extensive what-if analysis scenarios with regard to alternative innovation policies. The effectiveness of
policies is investigated through the dynamic behaviour of product innovation and process innovation
which are obtained by simulation results. By using data from a European Union country with
innovation performance below that of the EU27 average, the analysis of results reveals insights over
a strategic time horizon.
& 2012 Elsevier Ltd. All rights reserved.

1. Introduction The systemic approach to innovation is grounded on the

presumption that innovation processes cannot be decomposed
Innovation is a complex phenomenon involving the produc- into several isolated phases that take place in a strictly proceeding
tion, diffusion and translation of technological knowledge into sequence. The growing relevance of the interactive, collaborative
new products or new processes. The concept of innovation has and inter-disciplinary character of innovation, together with the
undergone several transformations due to the evolution of models rejection and obsolescence of linear innovation processes has
aiming at better understanding of the innovation process been described as the transition from mode 1 to mode 2 processes
(Rothwell, 1997). After the Second World War the linear model in the creation of knowledge (Gibbons et al., 1994) and from
was the generally accepted model. In this model, new technology ‘close’ to ‘open’ innovation in the field of exploration and
begins with basic research and advances through applied exploitation of innovation (Huizingh, 2011; Chesbrough, 2003).
research, invention, commercial market test, and is eventually Ultimately, this perspective of innovative processes serves as a
led to diffusion. Innovations are seen as the end result of a linear valuable starting point for the definition and empirical applica-
process that consists of different steps performed in a sequential, tion of the innovation systems approach in general (Balzat, 2006).
hierarchical, and unidirectional order. Later on, Kline and It also constitutes the foundation for the National Innovation
Rosenberg (1986) mentioned the conversion from the linearity System (NIS) approach, in particular if the distinctive national
of the innovation process to its dynamic-systemic behavior. content and dimension of innovative processes and of institu-
The innovation process involves interactive relations among tional settings are considered. In the last decade, NIS is the most
different actors, it follows a non linear path and is characterised frequently used approach to understand the complex relations
by complicated feedback mechanisms (Kline and Rosenberg, that constitute the innovation process (Carlsson et al., 2002).
1986; Edquist, 1997). An NIS can be described as the set of institutions, which jointly
and individually contribute to the development and diffusion of
new technologies and which provide the framework, within
which governments form and implement policies to influence
n
Corresponding author. Tel.: þ00302463024846. the innovation process (Metcalfe, 1995). From this perspective,
E-mail addresses: [email protected] (E. Samara),
the innovative performance of an economy depends not only on
[email protected] (P. Georgiadis), [email protected] (I. Bakouros).
1
Tel.: þ302310996046. how the individual institutions perform in isolation, but on how
2
Tel.: þ302461056660. they interact with each other as elements of a collective system of

0166-4972/$ - see front matter & 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.technovation.2012.06.002
 E. Samara et al. / Technovation 32 (2012) 624–638 625

knowledge creation and use (Rycroft and Kash, 2004; Calia et al., Rate; the higher the rate is, the higher the Research Activities
2007), which is subject to dynamic processes (Smith, 2001). become. However, high levels of actual Research Activities, limit
Understanding these dynamics is one of the central topics in the the increasing rate in producing new activities due to saturation
studies of NIS, mainly under macroeconomic concept. Yet, the phenomena (negative influence). On the other hand, the literature
concept calls for a decomposition into different elements because review proposes the expenditures on R&D activities as a basic
of manifold activities which are carried out by different type of indicator of innovative input in imprinting the research activities
actors within an NIS. The NIS approach stresses that under- of an NIS’ actors (Martı́nez-Román et al., 2011; European
standing the linkages among the actors involved in the innovation Innovation Scoreboard, 2008 and 2009). Loop 2 shows this
process is the key to improve innovative performance of a country dependency; Available Expenditures in R&D increase when New
(Lundvall, 1992; Nelson, 1993). Under this perspective, the Expenditures increase, but again saturation phenomena limit the
innovation process is the result of a complex set of relationships rate of increase of new expenditures, creating the negative Loop 2.
among actors which are producing, distributing and applying Available Expenditures in R&D then positively influence Research
various types of knowledge—tangible and intangible. Innovative Activities Formation Rate which, in its turn, shapes Research
performance, however, relies more frequently on intangible assets Activities’ Rate.
as the economy moves to specialised non-repetitious activities In early 1990s, many studies have been carried out by using
(Kramer et al., 2011). the NIS approach as an analytical frame, in order to reveal the
NIS concept has emphasised the importance of systemic co- structure of national innovation processes and the main involved
operation in innovation processes. NISs have already been ana- actors. These studies can be listed in three categories. The first
lysed for different countries resulting thus in a rich sample of category contains policy-oriented studies that combine the NIS
variety of participating institutions and organisations and their approach with the terminology of corporate benchmarking. A
networks of interrelations (Lundvall, 1992; Nelson, 1993). Addi- collection of these studies can be found in Nelson (1993). The
tionally, empirical research underlines the differences and func- early and descriptive studies have not been aimed at providing a
tional equivalents between countries in the organisational formalized methodology or a clearly delineated structure of the
configuration of an NIS and its impact on a country’s economic NIS concept. These limitations have simulated research efforts to
performance (Nelson, 1993; Lundvall, 1992; Harding, 2003) and carry out system-level comparisons as well as to formalize the
vice versa (Filippetti and Archibugi, 2011). Despite the systemic NIS concept. These efforts have led to the introduction of
nature of innovation, the non-linearity of processes has been descriptive frameworks and to the development of analytical
identified as a realistic concept of innovation as well (Kline and models. The studies of the second category focused to develop
Rosenberg, 1986). This non-linearity directs attention to the models to carry out international comparisons of innovative
interaction of the actors in an NIS, since it involves communica- strength (Liu and White, 2001; Chang and Shih, 2004; Marklund
tion and feedback. An example of these complicated feedback et al., 2004). Cluster analysis techniques and factor analysis
mechanisms is presented in Fig. 1. In particular, the causal loop methods constitute the main methodological approaches used
diagram shown in figure, presents the working mechanism for in these studies. The third category of studies is related with the
Research Activities, a variable of special interest for many empiri- mathematical modelling of NIS (Janszen and Degenaars, 1997; Lee
cal studies dealing with national innovative strength (Archibugi and Tunzelmann, 2005). Mathematical models from one hand can
and Michie, 1995). The diagram consists of two negative feedback provide significant insights about the dynamics of the innovation
mechanisms, Loop 1 and Loop 2. In Loop 1, the actual level of process and from the other hand can be tools to study the impact
Research Activities is influenced by Research Activities’ Increasing of innovative policies on the performance of an NIS. However, the
limited number of such models is remarkable and more impor-
tantly, there are still interactions that have not been studied
RESEARCH providing thus, only information for likely directions for future
ACTIVITIES
+ research. Towards to this direction, the need for holistic dynamic
-1 mathematical models which can be used as a tool to describe and
-
RESEARCH
to analyze the complex and dynamic nature of NISs is obvious.
ACTIVITIES’ RATE The contribution of our research is two-fold. First, we provide
+
a holistic modelling approach to the NIS concept, in order to
reveal the functions of its actors and the mechanisms which
RESEARCH
+ ACTIVITIES lead to the innovative performance of a country. The modelling
FORMATION’ RATE approach is based on the system dynamics (SD) theory and
constitutes a tool for the analysis of relations between the actors
AVAILABLE
EXPENDITURES IN of an NIS as well as the dynamic study of the innovative
+ R&D performance. Second, we investigate the impact of innovation
-2 policies on the NIS’s performance by studying the case of Greece.
In particular, the developed SD model is used as an ‘‘experimental
-
NEW EXPENDITURES
tool’’ to conduct dynamic what-if analyses, which aim to inves-
tigate the effectiveness of innovation policies on the performance
of innovative actions at a national level. Extensive simulation
+ results exhibit the dynamic behaviour of product innovation and
FIRMS’ EARNINGS EXPENDITURES process innovation for a time horizon of ten years. The observa-
FORMATION tions obtained by the results are organized under alternative
+
FINANCIAL scenarios with regard to innovation policies and reveal insights
SYSTEM + +
for the innovative performance of Greece. According to the
PRIVATE PUBLIC
+ European Innovation Scoreboard (European Innovation
EXPENDITURES EXPENDITURE
ON R&D ON R&D Scoreboard (EIS), 2008), the current level of innovation perfor-
mance of Greece is ranked under the group of ‘‘moderate’’
Fig. 1. Causal loop diagram of research activities. innovators. Consequently, the observations obtained for the case
626 E. Samara et al. / Technovation 32 (2012) 624–638

of Greece can be generalized at least as likely directions for the caused by the existence of positive and negative feedback mechan-
rest of European Union countries which belong to the group of isms that link the development of technologies, products and
‘‘moderate’’ innovators (like Cyprus, Estonia, Slovenia, Portugal). markets to the development of industries and supporting institu-
The SD model is based on the basic beginnings introduced by tions (Andersen and Lundvall, 1988; Arthur, 1994). However, these
Lee and Tunzelmann (2005). This work is one of the first SD-based institutions may also delay the development of new technology-
NISs which study the interactions between its structural ele- product-market combinations because of time delays in the decision
ments. However, the absence of governmental macroeconomic making process and lock-in effects.
policy and governmental legal and financial systems are impor- The existence of numerous positive and negative feedback
tant limitations of the proposed model. In our modelling loops in combination with significant time delays in decision
approach, the boundaries of the NIS are expanded constituting making process and needed actions/activities, describes the non-
macroeconomic conditions and financial system as additional linear dynamic behaviour of the innovation systems, making
structural elements of the system. With regard to innovation extrapolation of trends hazardous and prediction of the outcome
process, our study is based on the product-process life cycle impossible. As such, innovation systems can be considered to be
theory of Utterback and Abernathy (1975). The Utterback and complex systems, which Nicolis and Prigogine (1994) describe as
Abernathy approach succeeds in encompassing the mutual rela- ‘‘y systems that share the common feature to exhibit a great variety
tionships between the stages of a product’s life cycle, the related of behaviours’’. On other hand, innovation systems are social
production process’ stages of development and competitive strat- systems because they are made by social actors namely, institu-
egy. Using this approach, Milling and Stumpfe (2000) developed a tions and organisations (Johnson, 1997). As such, they constitute
simplified SD model that portrays the relation between product sets of habits, practices and rules for participating social actors.
and process innovation but they define the R&D capacity exogen- The nature of social systems is dynamic and open to external
ously. The endogenous definition of R&D capacity is an additional interaction (Lundvall, 1992); they can grow and can be modified
innovative element of our modelling approach. by the context in which they operate in an irreversible way.
The rest of the paper is organized as follows. Section 2 presents Partnerships between organisations are influenced by endogen-
the systemic perception of the innovation process. Section 3 ous factors such as commitment, social norms, power and
provides the generic structure of NIS, while the modelling of the exogenous factors such as information asymmetry and opportu-
innovation process is given in details in Section 4. In particular nism (Eng and Wong, 2006). However, in order to keep the
Section 4 contains the causal loop diagram, the mathematical cohesion of social systems, they must have a certain degree of
formulation, the structural validity, the initial conditions and the internal coherence which must be higher than the respective
units of measurement. Based on simulation results, Section 5 degree of external environment. Given that social systems are
provides the innovative performance of Greece for a period of 10 influenced in an irreversible way by the external reality, innova-
years under what-if scenario analysis with regard to innovation tion systems are path-dependent, namely, they are the results of
policies. Finally, Section 6 provides a brief summary and potential the local socio-economic history (Johnson, 1997).
future research aspects. The complex and social nature of NISs justifies the SD meth-
odological approach as an appropriate method for modelling the
innovation process and studying the dynamic behaviour under
2. The systemic perception of innovation processes what-if analysis scenarios. SD originated in the early 1960s and
was pioneered by Forrester (1961), Forrester and Senge (1980).
There is a prevailing consensus among innovation theory The SD philosophy rests on a belief that the behaviour (or time
scholars that a systems’ approach to understand the dynamics history) of an organization is principally caused by the organiza-
of innovation is more realistic and provides a more useful policy tion’s structure. A second aspect of this philosophy is the concept
guide than the linear innovation model (Carlsson et al., 2002). The that organizations are viewed most effectively in terms of their
adoption of the linear concept of innovation could lead to the common underlying flows instead of in terms of separate func-
conclusion that high investments in R&D would have positive tions. According to Coyle (1996), ‘‘System Dynamics deals with the
consequences in productivity and growth. However, during the time-dependent behaviour of managed systems with the aim of
70s and 80s, the emergence of new and important technologies describing the system and understanding, through qualitative and
was followed by a reduction of productivity in the majority of the quantitative models, how information feedback governs its beha-
OECD countries (OECD, 1991: 77). The apparent contradiction viour, and designing robust information feedback structures and
between these facts was known as the productivity paradox. control policies through simulation and optimisation’’. SD is
The systemic approach to innovation was initiated with the grounded in the theories of linear/nonlinear dynamics and feed-
‘‘chain-linked’’ model of Kline and Rosenberg (1986) and broa- back control. The literature suggests SD as a well-documented
dened and deepened by the NIS approach. Kline and Rosenberg methodological approach for studying the dynamic behaviour of
(1986) argue that the linear model distorts the nature of the complex systems. In SD terminology, a ‘complex system’ is
innovation process in several ways, especially because it con- defined as ‘‘a high-order, multiple-loop, nonlinear feedback
siders R&D as the only source of innovation and since it ignores structure’’. The dynamic behaviour of the system arises from the
important feedback loops and interactions among the distinct interactions among the agents over time. The dynamic complexity
stages of the process. Later, Abrunhosa (2003) justifies the arises because systems are dynamic, tightly coupled, governed by
innovation as a complex process where there is interaction feedback, nonlinear, history-dependent, self-organizing, adaptive,
between firms and organisations of education/scientific/techno- counter-intuitive, policy-resistant, and characterized by trade-offs
logical system, and where innovative activities influence and are (Sterman, 2000). Through analysing the processes of information
influenced by the market. feedback in the internal environment and by computer simula-
The systemic perception of NIS results in innovations as the tion, SD methodological approach shows how structure, policies,
outcome of the involved actors’ actions and relations/interactions decisions and time delays within organizations and business
with each other (Abrunhosa, 2003). Through these interactions systems are interrelated and influence growth and stability (Lee
technologies, products (in which these technologies are embodied), and Tunzelmann, 2005). Policies affect the dynamic behaviour of
markets, industries and supporting public and private institutions systems through the actions over time. Actions are the output of
co-evolve (Levinthal and Myatt, 1994; Nelson, 1995). Co-evolution is the way in which the management responds to close the gaps
 E. Samara et al. / Technovation 32 (2012) 624–638 627

between targets and actual states resulted by external distur- combination of knowledge, dexterities, record and faculty of a
bances. Finally, SD is a problem-solving approach that involves nation’s individuals so that they face the challenges, influenced
models and simulations that examine the varying relationships from the values, the culture and their philosophy’’ (OECD, 2001).
among the components of any dynamic process (Mandinach and According to empiric studies of Galende and Suarez (1999) and
Cline, 1994). Martinez-Ros and Salas (1999), it was observed that human
capital positively influences the innovation process. According
to Porter (1990), knowledge capital is defined as the reserve of a
3. The systemic overview of NIS country in scientific, technological and general knowledge which
is found in universities, governmental research institutions,
NIS is a macroeconomic concept. However, we need to split private research centres, scientific bibliography and data bases.
the concept into different sections to describe various activities It is in general acceptable that the countries that allocate rich
taking place within an NIS. These activities are performed by knowledge capital have better records in levels of innovative
various actors, most importantly governments, enterprises, growth (Malhotra, 2003). In the present subsystem we measure
research and technological organizations and educational institu- the level of faculty and creation of scientific, technological and
tions. The properties and behavior of each actor affect all the general knowledge which influence the function itself and the
others. In this paper, seven individual sections (subsystems) are performance of an NIS. Moreover, we measure the quality of the
identified as components of an NIS. These subsystems create a educational system or the educational level of the workforce,
complex network of interactions. The aim is to describe the factors aimed at pointing towards the future inventiveness of an
central points of an NIS. The decomposition into subsystems NIS. R&D capacity is positively depended on the availability of
adopts the functional structure of an NIS proposed by Balzat suitable knowledge and human capital.
(2006) instead of the actor-specific perspective. The justification With regard to Research Activities, we focus in the roles that
of a functional approach lies in the rejection of the linear model of companies, universities, research institutes and the government
innovation processes to embrace the systemic nature of innova- of a country play for the configuration of research activities. R&D
tive activity to constitute the very core of the NIS (Balzat and expenditure constitutes basic indicators of innovative input for
Pyka, 2005). Indeed, an actor-specific structure would imply a the imprinting research activities of an NIS’s actors (CIS, Frascati
classification of an NIS into its main actors mentioned above. But Manual). In addition, strongly positive correlations between R&D
such a composition could lead to an input–output taxonomy of expenditure and output measures of innovative action have been
each actor and, as a consequence, to a structure that would be detected empirically (European Innovation Scoreboard (EIS),
grounded to the notion of a linear model. More specifically, we 2009). Research activities increase the R&D capacity.
decompose the NIS into seven subsystems, namely Knowledge and As far as Market Conditions are concerned, literature suggests
Human Resources, Research Activities, Market Conditions, Institu- that the larger the national market is (in terms of overall
tional Conditions, Financial System, Innovation Process and Techno- extension, affluence and sophistication) the greater will be the
logical Performance. Fig. 2 illustrates the generic NIS structure. A market opportunities for firms to produce and innovate (Godinho
brief discussion regarding the structural elements which consist et al., 2004). Another important element, in such a view of market
each subsystem as well as the causal links and cause effects and demand conditions, is the way that consumers are spread in
between the subsystems is provided below. the national space. A territory with low population density will be
Knowledge and Human Resources is a crucial subsystem for the much more difficult to serve than one where the population is
growth of an NIS (OECD, 1996). The human capital is substantially more densely distributed (Godinho et al., 2004). Moreover, the
a nation’s property in human resources, while is defined as ‘‘the companies innovate more in a market open to international flows

Institutional
Conditions

Technological
Research Performance
Activities

Product Innovation
Product Innovation Process
I. Rate
Product
Attractiveness

Desired Desired
R&D Capacity Product I. Process I.
Prices
Market
Share
Process
I. Rate Production
Process Capacity
Innovation
Expenditure
on R&D Sales
Revenues

Knowledge Financial
and Human System
Resources

Market
Conditions

Fig. 2. The generic structure of NIS.

628 E. Samara et al. / Technovation 32 (2012) 624–638

of goods, investments, persons and ideas (OECD, 1999). Finally, to system. The flow variables represent the flows in the system,
a large extent, general macroeconomic conditions determine the which result from the decision-making process. The behavior of a
general business climate, which, in turn, influences the innova- system is obtained by the evolution of state variables. Although
tion climate in national innovation systems (Van der Steen, 1999). delays exist in all flow variables, only the significant ones
There are several links between general macroeconomic condi- (compared with the simulation time step) are included in the
tions and innovation incentives. Three major links of such types model because they considerably affect the system’s behavior
are public deficits, inflation and interest rates. The market condi- (Sterman, 2000).
tions influence indirectly the financial system and directly the The structure of a system in SD methodology is captured by
R&D capacity. causal loop diagrams. A causal loop diagram represents the major
The interdependence of national institutional settings and feedback mechanisms. These mechanisms are either negative
innovative activities at the national level lies at the centre of feedback (balancing) or positive feedback (reinforcing) loops. A
the NIS approach (Balzat, 2006). The objective of the Institutional negative feedback loop exhibits goal-seeking behavior: after a
Conditions subsystem is to evaluate national institutional frame- disturbance, the system seeks to return to an equilibrium situa-
work conditions by means of taxation policies and regulatory tion. In a positive feedback loop an initial disturbance leads to
framework (Samara et al., 2010). Taxation policy constitutes one further change, suggesting the presence of an unstable equili-
of the basic incentives for R&D activities (Innovation Framework brium. Causal loop diagrams play two important roles in SD
Report, 2004). Moreover, a fundamental role of the governments methodology. First, during model development, they serve as
is the configuration of regulations and legislation via which a preliminary sketches of causal hypotheses and secondly, they can
nation’s innovative activity is influenced (Porter, 1990). The simplify the representation of a model. The arrows represent the
governments, in this way, create substantially the activation relations among variables. The direction of the influence lines
motives for innovative activities, influence all institutions of the displays the direction of the effect. The sign ‘‘ þ’’ or ‘‘  ’’ at the
NIS (companies, universities, research institutions etc) and the upper end of the influence lines exhibits the sign of the effect.
relations and interactions between them. In general, they shape A‘‘þ ’’ sign dictates that the variables change in the same direc-
the frame for the creation and development of research activities tion; a ‘‘ ’’ sign dictates the opposite.
(Balzat and Pyka, 2005). Fig. 3 illustrates the causal-loop diagram of the innovation
The Financial System of a country combines as many sources of process. To improve appearance and distinction among the
finance as possible. We consider that elements of Financial System variables, stock variables are written in capital letters and the
which significantly effect innovation growth are the national flow variables are written in small letters. The diagram consists
capitalized market development and soundness of banks, the from three positive feedback loops. The first loop L1 (Product
level of main public expenses for R&D indicated by the interest- Innovation, Desired Process Innovation, Process Innovation, Desired
rates and the availability of venture capital which contributes in Product Innovation, Product Innovation), shows the relation
the configuration of R&D expenditures of companies (Tylecote, between product and process innovation. It describes that more
1994). Other important elements are the financing of national process innovation leads to the increase of pressure for desired
programs or the attendance in international programs. The product innovation and the increase in product innovation
evaluation of the above mentioned elements can characterize increases the need for desired process innovation.
the level of economic system’s maturity which can support The second loop L2 (R&D Capacity, Product Innovation Rate,
innovation at a national level. Product Innovation, Product Attractiveness, Market Share, Sales,
With regard to Technological Performance subsystem, European Revenues, Expenditure on R&D, R&D Capacity), shows that an
Innovation Scoreboard (European Innovation Scoreboard (EIS), increase in R&D capacity leads to high rates of product innovation
2008) suggests that innovation outputs include two dimensions: that leads to higher innovator performance (product and process
(i) applications, which measure the performance, expressed in innovation). Higher product innovation results in an increase in
terms of labour and business activities, and their value added in product attractiveness which increases the market share and
innovative sectors; (ii) intellectual property, which measures the sales leading to increased profits. Increased profits lead to high
achieved results in terms of successful know-how. investments in R&D that improve the capacity for R&D.
Finally the subsystem Innovation Process constitutes the sub- In the same way, the third loop L3 (R&D Capacity, Process
system under study of this research and it is presented in details Innovation Rate, Process Innovation, Production Capacity, Price,
in the following section. Product Attractiveness, Market Share, Sales, Revenues, Expendi-
ture on R&D, R&D Capacity), shows the positive influence on R&D
Capacity via process innovation.
4. The innovation process modelling
4.2. Mathematical formulation
Innovations are differentiated in various types; social, organi-
zational, administrative or technical, incremental or fundamental, The next step of SD methodology includes the development of
product or process (Jost et al., 2005). In this paper we examine the the mathematical model, usually presented as a stock-flow dia-
last two types, namely product and process innovations of gram that captures the model structure and the interrelationships
companies. Scientific literature in many cases focuses either on among the variables. The stock-flow diagram is easily translated
product innovation or on process innovation, without explicitly to a system of differential equations, which is then solved via
considering the existing interactions between them. As men- simulation. Nowadays, high-level graphical simulation programs
tioned, in our modelling approach the product/process innovation (such as i-thinks, Powersims, Vensims, and Stellas) support such
is based on the Utterback and Abernathy (1975) and Milling and an analysis (Galanakis, 2005).
Stumpfe (2000) models considering endogenous R&D capacity. The stock-flow diagram of innovation process subsystem,
which has been developed using the Powersims 2.5c software, is
4.1. Causal loop diagram exhibited in Fig. 4. The diagram is constructed using building
blocks (variables) categorized as stocks, flows, delays, converters
The structure of a SD model contains stock (state) and flow and constants. Stock variables (symbolized by rectangles) are the
(rate) variables. Stock variables are the accumulations within the state variables, flow variables (symbolized by valves) are the rates
 E. Samara et al. / Technovation 32 (2012) 624–638 629

+ + PRODUCT_
Product_ Innovation_Rate
INNOVATION

- +
+ -
Capacity_for_ + g1 Difference_1 + Product_Attractiveness
Product_R&D + +1
+ + + +
K1
Delay Desired_Product - Market_Share_Rate
_Innovation
Division_ -
R&D_Capacity Factor K2 Prices - +
+
-
Delay + Desired_Process MARKET_SHARE
+ + _Innovation +
Capacity_for_ + + Production_
Process_R&D Ca pacit y Sales _ Formation
+ g2 Difference_2
+ - - + +2 +
+ Process_ + PROCESS_ Sales_Rate
Innovation_Rate INNOVATION

- -
+ +
Expenditure_on_ +3 SALES
R&D
+ Revenues_Formation +
+
REVENUES Revenues_Rate
+ Physical flows
- -
Information flows

Fig. 3. Causal loop diagram of the innovation process subsystem.

A_4
Product_Innovation A_2 A_3
Product_Innovation_Rate A_1

Capacity_for_Product_RD
g1a Product_Attractiveness
Desired_Product_Innovation
Difference1 a1
g1 K1
a2
g1b a3 a4
R
Division_Factor Market_Share_Rate
RD_Capacity g1c K2

pc1 pr1
g1d Production_Capacity Prices Market_Share

Process_Innovation pr3
pc3
Process_Innovation_Rate
Capacity_for_Process_RD pr2
pr4
pc2
Difference2 Sales_Formation
g2a

Desired_Process_Innovation pc4
g2 g2b Sales
Sales_Rate

g2c Revenues_Formation

g2d Revenues

Expenditure_on_RD Revenues_Rate

Fig. 4. Stock and flow diagram of innovation process.

630 E. Samara et al. / Technovation 32 (2012) 624–638

of change in stock variables and they represent those activities, The values of annual rate of increase in Market Share are
which fill in or drain the stock variables. Delays (represented by estimated as the mean values of Market Share in Greece over a
circles with a rectangular) introduce time delay in material or period from 1999 to 2008 (GSRT, 2009; Hellenic General Secre-
information channels. Converters (represented by circles) are tariat of Research and Technology), ‘‘The Greek Innovation Sys-
intermediate variables used for auxiliary calculations. Constants tem’’, 2009.).
(represented by rhombuses) are the model parameters. Finally,
Market Share Rate ¼ IF½4 oProduct Attractivenesso
the connectors, represented by simple arrows, are the information
¼ 7,0:07nMarket Share,
links representing the cause and effects within the model struc-
ture, while the double line arrows represent physical flows. 0:035nMarket Share ð8Þ
Double lines across the arrows indicate a delayed information. In the same way, by Eqs. (9) and (10) we define the flow equations
The stock-flow diagram is a graphical representation of the for Sales Rate and Revenues Rate appeared in Eqs. (4) and (5),
mathematical model. The embedded mathematical equations are respectively.
divided into two main categories: the stock equations, defining
the accumulations within the system through the time integrals Sales Rate ¼ IF½4o Sales Formation r7,0:082nSales,0:041nSales
of the net flow rates, and the rate equations, defining the flows ð9Þ
among the stocks as functions of time.
The equations of our model have been regulated by using data Revenues Rate ¼ IF½4 oRevenues Formation
from the Greek innovation system. Product Innovation and Process r 7,0:08nRevenues,0:04nRevenues ð10Þ
Innovation, measure the national innovative performance as the The Product Attractiveness in a market depends on the achieved level
percentage of enterprises performing innovative activities. of Product Innovation. This dependency is defined in the modelling
Further details are given in Section 4.3 Below we present selected approach under scenario analysis with regard to market behaviour.
formulations related to important model assumptions. More More specifically, we incorporate four alternative forms of market
specifically, the stock equations of the innovation process sub- behaviour as shown in Fig. 5. In A1 the behaviour is assumed as
system can be derived from the stock and flow diagram of Fig. 4 proportional. In A2, consumers present innovative demand and
as follows: therefore product attractiveness reacts fast for low levels of product
dðProduct InnovationðtÞÞ ¼ ½Product Innovation RateðtÞndt ð1Þ innovation, while in A3 the response is slow and becomes more acute
for high levels of product attractiveness. Finally A4 combines A2 and
dðProcess InnovationðtÞÞ ¼ ½Process Innovation RateðtÞndt ð2Þ A3. The relation has the form of an S-curve (sensitive market for very
poor or very good product innovation).
dðMarket ShareðtÞÞ ¼ ½Market Share RateðtÞndt ð3Þ In the same way, we define the influence of Process Innovation on
Production Capacity (Fig. 6), of Production Capacity on the configura-
dðSalesðtÞÞ ¼ ½Sales RateðtÞndt ð4Þ tion of innovative product Prices (Fig. 7), of Difference1 on the
percentage g1 (annual rate of change for Product Innovation Rate)
dðRevenuesðtÞÞ ¼ ½Revenues RateðtÞndt ð5Þ
(Fig. 8) and of Difference2 on the percentage g2 (annual rate of
The Product Innovation Rate appeared in Eq. (1) is defined by Eq. change for Process Innovation Rate) (Fig. 9). Production Capacity and
(6) given in Powersim format, as a material delay. In particular Prices are measured on a 1-to-7 scale.
Product Innovation Rate is a third-order exponential smoothing of
Capacity for Product RD with a mean value of delay equal to two 4.3. Initial conditions and units of measurement
years, implying a smoothing coefficient of 1/2. The initial value of
Product Innovation Rate is set equal to zero. Difference1 is the As mentioned above, the modelling of innovation process
discrepancy between the desired and the actual values of Product subsystem contains in total five state variables. These state
Innovation, g1 is the annual rate of change for Product Innovation variables are frequently mentioned as indicators in innovation
Rate and parameter K2 regulates the acceleration of the system issues related review reports and statistical analyses. Two state
concerning the Process Innovation and the Product Innovation. variables (Product Innovation and Process Innovation), measure the
Increase in the process innovation leads to higher pressure for
desired product innovation (Kim et al., 1992, p. 56). 7
Product Attractiveness (scaled units, see table 3)

Product Innovation Rate ðtÞ ¼ DelayMTRðCapacity f or Product RD, 2, 3, 0Þ

nDif f erence1ng1nK2 ð6Þ 6

The equation for Process Innovation Rate may be deduced in the
same way as a material delay of Capacity for Process RD, where 5
Difference2 is the discrepancy between the desired and the actual
values of Process Innovation, g2 is the annual rate of change for
Process Innovation Rate and K1 regulates the acceleration of the 4
system concerning the product innovation and the process
innovation. A1
3
Process Innovation RateðtÞ ¼ DelayMTRðCapacity f or Process RD,2,3,0Þ
A2
A3
nDif f erence 2ng2nK1 ð7Þ A4
2
The flow equation for the Market Share Rate appeared in Eq. (3)
describes the annual rate of increase in Market Share. It is defined
1
by Eq. (8), as a proportional increase of the current value of
20 30 40 50 60 70 80
Market Share and is affected by Product Attractiveness. The values
Product Innovation (% SMEs introducing product innovations)
of Product Attractiveness are normalized on a 1 (worse)-to-7 (best)
scale. Further details on normalization are given in Section 4.3. Fig. 5. Influence of product innovation on product attractiveness.
 E. Samara et al. / Technovation 32 (2012) 624–638 631

7 0.05
Production Capacity (scaled units, see table 3)

g1 (% annual rate of change for Product Innovation Rate)

6
0.04
g1a
5
g1b
g1c
4 0.03
pc1 g1d
pc2
3 pc3
pc4 0.02

1 0.01
46,9 51,5 56,7 62,4 68,6 75,5 83,0 89,0 90,0
Process Innovation (% SMEs introducing process innovations)

Fig. 6. Influence of process innovation on production capacity.

0
0 7 14 21 28 35 42 49 56
Difference 1 (% SMEs introducing product innovations)
7
Fig. 8. Influence of Difference1 on annual rate of change g1.

6 0.07
pr1
Prices (scaled units, see table 3)

pr2
g2 (% annual rate of change for Process

5 0.06 g2a
pr3 g2b
pr4 0.05 g2c
4
Innovation Rate)

g2d
0.04
3
0.03
2
0.02

1
3 3.5 4 4.5 5 5.5 6 6.5 7 0.01
Production Capacity (scaled unites, see table 3)

Fig. 7. Influence of production capacity on prices. 0

0 7 13 20 26 33 39 46 52 59 65 72 78 85
Difference 2 (% SMEs introducing process innovations)
national innovative performance. Because of their central role in
Fig. 9. Influence of Difference2 on annual rate of change g2.
evaluating the effectiveness of innovation policies, the dynamic
behaviour of these variables is of interest to the study presented
in this paper. 2008). In particular for each variable-indicator, we found the
The initial values of state variables are given in Table 1 and countries with the best and the worst record. The country with
refer to the year 2008. The table also provides a short definition of the best record was fixed in level 7, while the one with the worst
state variables, their units of measurement and the sources in level 1. All the remainders were smoothed out in intermediary
of data. categories. The qualitative scale is shown in Table 3. The same
In Table 1, Product Innovation and Process Innovation represent 1-to-7 scale is used for the measurement of the independent
the share of enterprises with activities in product and process variables of our SD model. These independent variables practi-
innovation, respectively. Because of Greek SMEs perform the cally represent the system’s parameters. All system parameters
majority of innovative activities, Product Innovation and Process are given in a following section while studying the effect of
Innovation are measured as percentage of total number of Greek innovation policies on the performance of NIS (Section 5.2).
SMEs; scale from 0 to 100% as shown in Table 2 (GSRT). According
to the Background Report for the Review of Greece’s Innovation 4.4. Model validation
Policy by the OECD (2009), the total number of Greek SMEs is
approximately 30,000 (GSRT). Recall from previous section that SD practitioners have developed a wide variety of tests to
Product Attractiveness, Production Capacity and Prices are normal- improve models (Sterman, 2000). We firstly tested the structural
ized on a 1-to-7 scale. The normalization procedure is based on validity of the model; specifically, its dimensional consistency.
the Report of World Competitiveness (World Economic Forum, In particular each equation was checked to confirm that the
632 E. Samara et al. / Technovation 32 (2012) 624–638

Table 1
Initial values, units of measure and sources of data.

State variables- Definition Units of measurement Initial conditions (2008) Sources of data
indicators

Product innovation SMEs introducing product innovations Percentage of total number of SMEs 32.4 GSRTa (CIS4b)
Process innovation SMEs introducing process innovations Percentage of total number of SMEs 41.8 GSRT (CIS4)
Market share SMEs market share with innovative activities % 37.9 GSRT
Sales Sum of total turnover of new or significantly improved Percentage of turnover 25.64 EUROSTAT
products for all enterprises
Revenues Total annual revenues from innovative products’ sales Million euros 3 GSRT

a
GSRT: Hellenic general secretariat of research and technology.
b
CIS4: Community innovation survey 4.

Table 2 Table 4
Scale for product innovation and process Historical data and simulation results for product innovation and process
innovation. innovation.

Scale (%) Characterization Year Historical data Simulation results

90–100 Perfect Product Process Product Process

75–90 Very good innovation innovation innovation innovation
65–75 Good
50–65 Adequate 2000 15.6 14.7 15.8 16
30–50 ‘‘Poor’’ 2002 20.3 23.2 19.27 23
o 30 ‘‘Very poor’’ 2004 25.1 31.8 23.9 31.88
2006 28.9 37.3 29.17 37.23
2008 32.4 42.6 33.1 41
MAPE: 0.00503 MAPE: 0.0037
BIAS:  0.022 BIAS:  0.06125
Table 3
Qualitative scale for normalized variables/
parameters.

Scale Characterization 35 y = -0,2083x3 + 1,9864x2 - 1,1352x + 15,178

R2 = 0,9998
Product Innovation (% SMEs introducing product innovations)

6–7 Perfect
33
4–6 Very good
3–4 Good
2–3 Adequate 31
o2 ‘‘Poor’’

29

dimensions of the left part are the same with the right part. Then
27
we conducted extreme-condition tests checking whether the
model behaves realistically no matter how extreme the policies
imposed may be. For example we checked that if R&D Capacity 25
equals to zero then Product Innovation and Process Innovation
remained stable and equal to their initial value, since Product 23
Innovation Rate and Process Innovation Rate are mainly affected by
R&D Capacity. Integration error tests were subsequently con- 21
ducted (Sterman, 2000). In our model we used the Euler numeric
method since the integration method Runge–Kutta should be
Historical Data
19
avoided in models with random disturbances. The simulation Simulation Results
horizon is set equal to ten years; a strategic horizon to be able to Polynomial
study the improvement of an NIS performance and also to 17
(Simulation Results)
facilitate the tuning of model parameters. Moreover, since the
model’s shortest time constant is set to one year and standard 15
practice in SD suggests that the integrating time step (DT) should 2000 2002 2004 2006 2008
be maximum 1/4 of the shortest time constant in the model, we Time - t (years)
set the DT initially at 1/4 year and ran the model. Then we cut the
Fig. 10. Historical data, tendency and simulation results for the case of Product
DT in half and ran the model again. The results did not signifi- Innovation.
cantly change, so we chose DT¼1/4 year.
The ability of a mathematical model to reproduce the beha-
viour that is observed in the real-world, constitutes another test
of validation. The behaviour of the Greek innovation system and 11 show the tendency for the cases of Product Innovation and
during 2000–2008, is given in Table 4 and Figs. 10 and 11. Process Innovation, respectively. The mean absolute percent error
Table 4 shows the historical data and simulation results for the (MAPE) between the real values of Product Innovation and Process
cases of Product Innovation and Process Innovation, while Figs. 10 Innovation (A) and the equivalents obtained by simulation results
 E. Samara et al. / Technovation 32 (2012) 624–638 633

45 y = -0,2883x3 + 1,8814x2 + 3,8998x + 10,402  Innovation followers (Austria, Ireland, Luxembourg, Belgium,
2
France and the Netherlands), with innovation performance
R = 0,9982 below that of innovation leaders but above that of the EU27
40 average.
(% SMEs introducing process innovations)

 Moderate innovators (Cyprus, Estonia, Slovenia, Czech Repub-

lic, Spain, Portugal, Greece and Italy) with innovation perfor-
35 mance below that of the EU27 average.
 Catching-up countries (Malta, Hungary, Slovakia, Poland,
Process Innovation

Lithuania, Romania, Latvia and Bulgaria). Although their inno-

30 vation performance is below the EU average, this performance
is increasing towards the EU average over time.

25 The comparative study of European Innovation Scoreboard

(EIS) 2007 and European Innovation Scoreboard (EIS), 2008
indices reveals that all countries remain in the same group except
20 Greece and Portugal which have moved from the catching-up
Historical Data countries to the group of moderate innovators. This transition can
Simulation Results be explained from their strong growth in innovation performance
15 and from the revised set of indicators used in calculating average
Polynomial
innovation performance (European Innovation Scoreboard (EIS),
(Simulation Results) 2008).
10 The Greek innovation system, in particular, is shaped and it is
2000 2002 2004 2006 2008 progressively strengthened, mainly with the intervention of the
Time t - (years) government. The government indeed followed the EU lines, facing
Fig. 11. Historical data, tendency and simulation results for the case of Process with a systematic way the creation of an environment favourable
Innovation. for innovation. According to European Innovation Scoreboard
(EIS) (2008) records, Greece had one of the higher growth rates
between the 15 fundamental EU members. Precisely, from the
Table 5 decade of ‘90 the annual growth rate of GDP was continuously
Thiel statistics for Product innovation and Process innovation (2000–2008). higher than the average rate of the EU-15 countries (3% on 1991–
2004 compared with the 2% of EU-15). In 2006, according to the
Parameter Theil’s inequality statistics
Hellenic National Statistical Service, the GDP was increased at
MAPE Bias R2 N 4.3% despite the high oil prices. However, its classification to the
competitiveness indicators between 80 countries according to the
Product innovation 0.00503 0.0222 0.9998 8 WEF (World Economic Forum) in Global Competitiveness Report
Process innovation 0.0037 0.06125 0.999 8
2008–2009 shows clearly that its innovative activity is low.
Furthermore, it shows that Greece is an imitative economy, which
constitutes importer of innovations, while the technologies are
(F) is given by: only adopted by its institutions, when they are checked and
n   applied in advanced countries or simply are incorporated in
1X 
AtFt 
MAPE ¼ equipment and products (Komninos and Tsamis, 2008).
n t ¼ 1 At 

As mentioned, the majority of Greek firms are SME’s, being
Table 5 summarizes the statistical results. The values of MAPE thus unable to play a leading role for the NIS. The relations and
( o0.6%) and the small divergences (bias), indicate the absence of the interactions between the NIS’s actors can be considered as
systematic errors. Consequently, the model can effectively repeat satisfactory. However, the dependency of the firms to a great
effectively the system’s behaviour (Thiel, 1966). degree from the government owned financing constitutes a
From the above we conclude that our model can express the barrier for increased innovative efforts.
innovative performance of an NIS.
5.2. Sensitivity analysis

5. The effect of innovation policies on the performance of The present NIS performance model is able to contribute as an
NIS—The Greek innovation system ‘‘experimental tool’’ to conduct extensive what-if analysis scenar-
ios, aiming to investigate the effectiveness of alternative innova-
5.1. Overview of existing situation tion policies on the performance of innovation actions at a
national level. In this section we provide the analysis of the effect
According to the European Innovation Scoreboard (European of innovation policies under three alternative scenarios. In the
Innovation Scoreboard (EIS), 2008), the Summary Innovation first scenario (basic scenario), the definition of Product Attractive-
Index (SII) gives an ‘‘at a glance’’ overview of aggregate national ness, Production Capacity, Prices, g1 and g2 follows the propor-
innovation performance and is calculated as a composite of the 29 tional scenario shown in Figs. 4–8 (A1, pc1, pr1, g1a and g2a,
EIS indicators. Based on a statistical cluster analysis of SII scores respectively). The second scenario examines the performance of
over a five-year period, the countries can be categorized into the Greek NIS under the Lisbon treaty scenario. We study in parti-
following groups: cular, the effect of the hypothesis ‘‘the accomplishment of targets
that have been set by the Lisbon Treaty for Greece’’ on the
 Innovation leaders (Sweden, Finland, Germany, Denmark and innovative performance (Product Innovation, Process Innovation).
the UK), with innovation performance above that of the EU27 Finally in the third scenario, we study the behaviour of Greek NIS
average and all other countries. under different system parameters settings.
634 E. Samara et al. / Technovation 32 (2012) 624–638

5.2.1. Basic scenario dependent on governmental funding, leading to reduced

The initial conditions are given in Section 4.3 (Table 1). The efforts in innovative actions. To capture this effect in our
values of Product Innovation (32.4%) and Process Innovation model, we test the participation rate of private expenditure on
(41.8%) in 2008 exhibit a ‘‘poor’’ performance, according to the R&D. In particular, according to the evidence so far, R&D
scale given in Table 2. expenditure in Greece came at a rate of 75% from the public
Based on simulation results for a time horizon 2008–2018, we sector and only 25% from companies. Therefore, according to
observed that the performance for the Product Innovation still Lisbon Strategy this should reverse to 60% and 40% between
remains into the ‘‘poor’’ scale while for the Process Innovation public and private expenditure. The variable that captures this
reaches the ‘‘adequate’’ scale (Fig. 12). In terms of real world percentage rate belongs to the innovation process subsystem;
effect, taking into consideration that there are approximately Expenditure on R&D in Figs. 3 and 4, is influenced by the
30.000 SMEs operating in Greece there will be an increase of Participation rate of private expenditure on R&D given in
about 9.000 new enterprises with activities in product innovation Table 6.
and about 12.500 with activities in process innovation. The higher 3. Shortages and quality issues in education and training: During
percentage of increase for the case of Process Innovation is in line the last decades Greece has a high Tertiary Education Partici-
with the Hellenic GSRT expectations, since the share of firms with pation Indicator. This creates expectations of raising the level
activities in process innovation is already higher than the share in of innovation in Greece, since tertiary education graduates are
product innovation. an important driving force for innovation. This does not refer
necessarily to science and technological intensive innovation
5.2.2. The Lisbon Treaty scenario but, to innovation resulting from relations and networking in
In the frames of the Lisbon Treaty, the EU countries owed to the market, adaptation to customers’ needs and business
converge with certain objectives that have been placed, in order model innovation. This positive factor is mitigated however
to converge in the same levels with regard to innovation. The by the low Educational System and Research Organizations’
main challenges faced by the Greek National Innovation System Quality indicators. Consequently, in order to be in line with the
are: Lisbon Strategy targets, the initial values of education quality
indicators should be raised compared to those of the basic
1. Limited impact of innovation policies on economy and employ- scenario. These indicators are connected with the knowledge
ment: In Greece there is a general tendency to exhibit better and human resources subsystem and are the following: Total
performance in indicators measuring the input of innovative Public Education Expenditure and Quality of Scientific Research
process (like Business R&D expenditures, Public R&D expendi- Institutions (Table 6).
tures, etc.) and worse performance in innovation output
indicators. Output indicators are connected with the techno- Overall, under the Lisbon Strategy targets the Greek NIS model
logical performance subsystem and are the following: Patents, setting is summarised in Table 6.
Trademarks, Sales New to the Market, Sales New to the Firm, Fig. 13 exhibits the simulation results for the time horizon
Service Sector Employment and Manufacturing Employment. In 2008–2018. We observe that the effect of implementing the
order to converge, the initial values of innovation output Lisbon Treaty scenario is not significant on the overall innovation
indicators of the model (year 2008) are raised compared to performance at a country level. More precisely, the simulation
those of the basic scenario (see Table 6). results of the basic scenario and Lisbon Treaty scenario are
2. Lack of emphasis on knowledge creation and innovation as a compared in Table 7. In case of Product Innovation, the position
component of business strategies: As mentioned in Section 5.1, at the end of 2018 has improved by 4.7% in comparison to that of
this is due to the fact that Greek companies are largely the basic scenario, remaining though at the ‘‘poor’’ scale. In case of
Process Innovation, the position has improved by 5.3%, remaining,
100,00% however, at the high level of the ‘‘adequate’’ scale.
The slow improvement of the innovative performance was
90,00% expected given the fact that for most of the indicators, the
simulation of the Greek NIS starts in 2008 from a very low
80,00% Product Innovation position comparing to that of the E.U average. In addition, the
% SMEs introducing innovations

changes in the values of Table 6 are related to the structures and

70,00% Process Innovation values of the society and therefore the improvement at a national
level is difficult. However for the same settings given in Table 6
60,00% but by extending the simulation horizon from 10 to 20 years, we
observe a significant improvement in the performance; perfor-
50,00% mance rises at a level that qualifies as ‘‘good’’ for Product
Innovation and ‘‘very good to excellent’’ for Process Innovation
40,00% (Fig. 14). Due to the very long time horizon of 20 years, these
results could not be considered as accurate forecasts. However
30,00% they demonstrate that the improvement in innovation perfor-
mance is a long term target that requires a persistent and
20,00% systematic effort.

10,00%
5.2.2. Third set of investigation
0,00% Our model consists of 39 independent variables shown in
08 09 10 1 12 3 14 5 6 17 8 Table 8. Practically, these variables are the system parameters
20 20 20 201 20 201 20 201 201 20 201
which are normalized on a 1-to-7 scale given in Table 3. To clarify
Time t (years)
‘‘NIS performance’’, a comprehensive study of the effects of these
Fig. 12. Performance of product and process innovation for the basic scenario. variables on system behavior is required. A prerequisite for a
 E. Samara et al. / Technovation 32 (2012) 624–638 635

Table 6
Different settings for independent variables in order to improve the Innovative Performance of Greek NIS (Lisbon Treaty scenario).

Model’s subsystem Independent variables Initial values in the basic Initial values for the Lisbon
scenario (2008) (units of measure treaty scenario
as in Table 3) (2008) (units of measure
as in Table 3)

Technological performance Patents 1 3

Trademarks 1 3
Sales new to the market 5 7
Sales new to the firm 5 7
Service sector employment 3 6
Manufacturing employment 2 4
Innovation process Participation rate of private expenditure 2 4
on R&D
Knowledge & human Total public education expenditure 2.8 4
resources Quality of scientific research institutions 3.6 6

100,00% 100,00%
90,00%

% SMEs introducing innovations

90,00%
Product Innovation 80,00%
80,00% Process Innovation 70,00%
% SMEs introducing innovations

60,00%
70,00%
50,00%
60,00% 40,00%
30,00%
50,00%
20,00%
40,00% 10,00%
Product Innovation Process Innovation
30,00% 0,00%
20 8
20 9
20 0
20 1
20 2
20 3
14
20 5
20 6
20 7
20 8
20 9
20 0
21
20 2
20 3
20 4
20 5
20 6
20 7
28
0
0
1
1
1
1

1
1
1
1
1
2

2
2
2
2
2
2
20

20

20
20,00% Time t (years)

Fig. 14. Performance of product and process innovation for a 20 year simulation
10,00%
horizon.

0,00%
separate the independent variables into groups displaying similar
09

12

14

15

16
08

10

11

13

17

18
20

20

20

20

20
20

20

20

20

20

20

properties and then to study the impact of each group on the

Time (years)
system’s performance. In our model, these groups of independent
Fig. 13. Performance of product and process innovation for the Lisbon Treaty variables are defined as the six subsystems that make up the NIS
scenario. (the innovation process subsystem does not contain independent
variables).
The six groups of independent variables are given in Table 8 (A
Table 7
Simulation results of the basic scenario and the Lisbon Treaty scenario.
to F). The basic scenario provides the original values of all
independent variables for the year 2008. We carried out six
Scenario Simulation results (2008–2018) simulation experiments. In each experiment, we changed the
values of one group of independent variables while keeping all
Product innovation (%) Process innovation (%)
the others equal to those of basic scenario (original values). In
Basic scenario 43 60.5 particular, by using the 1-to-7 scale, the original value of each
Lisbon treaty scenario 45 63.7 independent variable is increased and set at the maximum of the
Rate of change 4.7 5.3 next higher scale. The experimental design is shown in Table 8
(Case A to Case F). In every simulation run we studied the impact
of changes on the performance of NIS through the dynamic
full-factorial experimental design of the model’s behavior is the behaviour of Product Innovation and Process Innovation in a time
systematic study of all cases, occurring when all independent horizon 2008–2018.
variables of the system are at different value levels, i.e., the The results are summarized in Table 9. We observe that the
planning of a statistical test with all the independent variables institutional conditions have the greatest impact on innovation
in at least two levels. Such a detailed test, because of the large performance, though a small one. In particular, innovation per-
number of independent variables, is prohibitive as it would formance increases by 2.1% (Product Innovation) and 2.5% (Process
require conducting at least 239 simulation runs. Therefore, we Innovation). The regulatory framework is a key driver of competi-
should plan tests with a ‘‘reasonable’’ number of independent tiveness, the effectiveness of market processes and other similar
variables. However, in case that the investigation of the interac- conditions related to innovation. In Greece, despite efforts to
tion of innovative performance with governmental policies calls enhance competition in various sectors, there is a gap, as various
to take into account all 39 variables, the only solution is to administrative barriers exist in many economic activity areas.
636 E. Samara et al. / Technovation 32 (2012) 624–638

Table 8
Model’s independent variables (reference year 2008) and alternative case settings.

Independent variables Basic Case Case Case Case Case Case Holistic
scenario A B C D E F Case

A. Knowledge & human 1. Population with tertiary education per 100 population aged 3 4 4
resources 25–64
2. S&E and SSH doctorate graduates per 1000 population aged 2.8 4 3.8
25–34
3. Participation in life-long learning per 100 population aged 1.7 3 2.7
25–64
4. Education expenditure 4 6 5
5. Quality of scientific research institutions 3.6 6 4.6
B. Research Activities 6. Business R&D expenditures (% GDP) 2 4 3
7. Public R&D expenditures (% GDP) 3.1 6 4.1
8. Gross domestic expenditure on R&D (GERD) (% GDP) 2 4 3
C. Market conditions 9. Government debt (% GDP) 2 4 3
10. Government budget balance (% GDP) 2 4 3
11. Inflation 6 7 7
12. GDP (current prices) per capita 5 7 6
13. National income per capita 3 6 4
14. Population density 3 6 4
15. Brain drain 3 6 4
16. International co-publications 4 6 5
17. Foreign direct investment/GDP 4.3 7 5.3
18. Imports/ GDP 2 4 3
19. Exports/GDP 2 4 3
20. Medium and high-tech manufacturing exports (% of total 3 6 4
exports)
D. Institutional conditions 21. Extent and effect of taxation 3.3 6 4.3
22. B indicatora 1 3 2
23. Total tax rate 3 6 4
24. Burden of government regulation 2.4 4 3.4
25. Number of procedures required to start a business 3 6 4
E. Financial system 26. Soundness of banks 5.9 7 6.9
27. Venture capital at early stage (% of GDP) 1 3 2
28. Venture capital expansion (% of GDP) 1 3 2
29. Venture capital availability 3 6 4
30. Financial market sophistication 4.6 7 5.6
31. Interest rate spread 1 3 2
32. Direct investment by government 3 6 4
33. National Projects 6 7 7
F. Technological 34. New-to-firm sales (% of turnover) 5 7 6
performance 35. New-to-market sales (% of turnover) 5 7 6
36. Employment in knowledge intensive services (% of 3 6 4
workforce)
37. Employment in medium & high-tech manufacturing (% of 2 4 3
workforce)
38. European Patent Office patents per million population 1 3 2
39. Community trademarks per million actpopulation 1 3 2

a
The B index specifies the pre-tax income of a firm that is required to break even one US-dollar of R&D expenditure, given the level of corporate tax income,
existing tax allowances for R&D spending and the depreciation rate of those capital assets that are directly involved in the carrying through of R&D activities (see OECD,
2003).

Governmental regulations, in a market based economy, often are

Table 9 considered as a negative impact on innovation. For this reason
Simulation results of the third set of investigation.
Greece should improve the indicators of Burden of Government
Scenario Simulation results Regulation and Number of Procedures Required to Start a Business, in
order to get closer in achieving higher innovative performance.
Simulation horizon Product Process Overall, however, it is noted that bureaucracy, regulations and
(2008–2018) innovation innovation taxation, since they are connected to structures and values of
(%) (%)
society, are difficult and slow to improve (a fact which is also
Basic scenario 43 60.5 considered by a delay that we introduced in our model in the
Case A 43.2 60.9 subsystem of institutional environment).
Case B 43.3 60.9 In addition, we studied a holistic case where we changed all
Case C 43.8 61.6
independent variables simultaneously but in a moderate degree (þ1
Case D 43.9 62.0
Case E 43.3 61.0 from their original value in 2008). The case is also shown in Table 8.
Case F 43.8 61.7% The basic observation from the simulation of the holistic case is that
Holistic Case 46.98 67.92 moderate changes result in almost four and five times higher rate of
Rate of change for Case D 2.1 2.5 change in product and process innovation, compared to the results
Rate of change for the holistic 9.25 12.3
case
obtained by the case of basic scenario. Therefore, we observe that a
strategy directed to upgrade just few indicators, and even in high
 E. Samara et al. / Technovation 32 (2012) 624–638 637

degrees, will rather result in a lack of innovative behaviour for References

Greece. Given that the overall innovative behavior is formulated
from many independent variables, the achievement of a substantial Abrunhosa, A., 2003. The National Innovation Systems Approach and the Innova-
growth in innovation performance calls the government to focus on tion Matrix. DRUID Summer Conference.
Andersen, E.S., Lundvall, B.A., 1988. Small National Systems Of Innovation, facing
the concurrent strengthening of a set of them, even in a moderate
technological revolutions: an analytical framework. In: Freeman, C., Lundvall,
rate. This calls for more holistic types of strategy for the public B.A. (Eds.), Small Countries Facing the Technological Revolution. Pinter,
government. For example, admit that developing a reliable knowl- London, pp. 9–31.
edge production and exploitation structure is an impossible task so Archibugi, D., Michie, J., 1995. The Globalization of technology: a new taxonomy.
Cambridge Journal of Economics 19 (1), 121–140.
they need to reinforce the knowledge transfer and dissemination Arthur, W.B., 1994. Increasing returns and path dependency in the economy.
mechanisms, together with encouraging organizational changes. The University of Michigan Press, Ann Arbor. European Commission, 1996.
Certainly it must be considered that many of these policies that Groenboek over innovatie. Supplement 5/95 van het Bulletin van de Europese
Unie. European Commission Luxembourg.
affect the system interrelate with all economic, institutional and
Balzat, M., 2006. Economic Analysis of Innovation Extending the Concept of
social environment. For this reason, their parallel improvement is National Innovation Systems. Printer: MPG Books Ltd, Bodmin, Cornwall.
difficult and time-consuming, requiring simultaneously radical Balzat, M., Pyka, A., 2005. Mapping National Innovation Systems in the OECD Area.
changes in the mind-sets of the relevant actors. Beitrag Nr. 279.
Calia, R.C., Guerrini, F.M., Moura, G.L., 2007. Innovation networks: from technological
development to business models reconfiguration. Technovation 27 (8), 426–432.
Carlsson, B., Jacobsson, S., Holmen, M., Rickne, A., 2002. Innovation systems:
6. Conclusions and future research aspects analytical and methodological issues. Research Policy 31 (2), 233–245.
Chang, P.L., Shih, H.-Y., 2004. The innovation system of Taiwan and China:
a comparative analysis. Technovation 24 (7), 529–539.
In this paper, we have developed a SD-based model that provides Chesbrough, H.W., 2003. The era of open innovation. MIT Sloan Management
the dynamic analysis of the impact of innovation policies on the Review 44 (3), 35–41.
performance of an NIS. Formulating innovation performance as the Coyle, R.G., 1996. System Dynamics Modelling: A Practical Approach. Chapman &
Hall, New York.
output of many independent variables, the model supports policy Edquist, C. (Ed.), Pinter Publishers, London, Washington.
makers to reveal structures for generating change and also develop Eng, T.Y., Wong, V., 2006. Governance mechanisms and relationship productivity in
and test strategies for the government. Simulation results under vertical coordination for new product development. Technovation 26 (7), 761–769.
European Innovation Scoreboard, 2008. INNO-METRICS. Pro-Inno, Europe.
alternative policies and scenario settings show that a combination of European Innovation Scoreboard, 2009. INNO-METRICS. Pro-Inno, Europe.
sustained efforts is needed to strengthen innovative behaviours. Filippetti, A., Archibugi, D., 2011. Innovation in times of crisis: National Systems of
Based on these results policy makers are suggested to formulate a Innovation, structure and demand. Research Policy 40 (2), 179–192.
Forrester, J.W., 1961. Industrial Dynamics. MIT Press, Cambridge, Massachusetts.
strategy characterized by symmetry in its objectives, aiming at
Forrester, J.W., Senge, P.M., 1980. Tests for building confidence in system dynamics
improving a set of performance indicators even in a moderate rate models. In: Legasto, A.A., Forrester, J.W., Lyneis, J.M. (Eds.), System Dynamics,
compared to targets set by isolated aggressive upgrading policies. Studies in the Management Sciences. North Holland Publishing Company,
Simulation results also reveal that improvement of innovation pp. 209–228.
Galanakis, K., 2005. Innovation process. Make sense using systems thinking.
performance is a long-term target that requires continuous and Technovation 26 (11), 1222–1232.
systematic efforts, since many policies that affect the system Galende, J., Suarez, I., 1999. A resource-based analysis of the factors determining a
interrelate with the national, economic, institutional and social firm’s R&D activities. Research Policy 28, 891–905.
Gibbons, M., Limoges, C., Nowotny, H., 1994. The New Production of Knowledge:
environment. Hence, governments and regulators should not expect
The Dynamics of Science and Research in Contemporary Societies. Sage,
the improvement to appear over short-term cycles. London.
The presented model establishes SD as an appropriate method Global Competitiveness Report, 2008–2009. World Economic Forum.
for the development of dynamic models to deal with the Godinho, M.M., S., Mendonc- a and Pereira, T.S., 2004. Towards a Taxonomy of
Innovation Systems, paper presented at the Second Globelics Conference:
structural and functional complexity of the innovation processes Innovation Systems and Development: Emerging Opportunities and Chal-
at a national level. This study integrates the simulation discipline lenges. Beijing. 16–20 October 2004.
and the theory of nonlinear dynamics and feedback control into a GSRT (Hellenic General Secretariat of Research and Technology), 2009. The Greek
Innovation System: Review of Greece s Innovation Policy by the OECD
dynamic consideration of the NIS. The approach provides an
Background Report.
‘‘experimental’’ tool to reproduce historic results, test the effi- Harding, R., 2003. New challenges for innovation systems: a cross country
ciency of alternative innovation-policy scenarios both individu- comparison. International Journal of Technology Management 26 (2/3/4),
ally and in combination, and reveal effective policy suggestions. 226–246.
Huizingh, E.K.R.E., 2011. Open innovation: state of the art and future perspectives.
The paper also presents an application of this experimentation for Technovation 31 (1), 2–9.
the case of Greece. The key finding is that the institutional Innovation Framework Report, 2004. Measuring Innovation for National Prosper-
conditions have shown the greatest impact on innovation perfor- ity. Version 3.0.
Janszen, F.H.A., Degenaars, G.H., 1997. A dynamic analysis of the relations between
mance; however, aggressive upgrading policies still result in
the structure and the process of national systems of innovation using
partial innovative behaviors. computer simulation; the case of the Dutch biotechnological sector. Research
The conclusions of this paper may be inappropriate for other Policy 27, 37–54.
European countries, since they are based on the Greek case. Johnson, B., 1997. Systems of innovation: overview and basic concepts–
introduction. In: Edquist, C. (Ed.), Systems of Innovation: Technologies,
However, for countries like Czech Republic, Cyprus, Estonia, Italy, Institutions and Organisations. Pinter Publishers, London, pp. 36–40.
Portugal, Slovenia and Spain, which according to EIS categoriza- Jost, A., Lorenz, T. and Mischke, G., 2005. Modelling the Innovation-Pipeline.
tion belong to a group of countries exhibiting the same SII score System Dynamics Society Conference, Massachusetts Institute of Technology,
Sloan School of Management, Cambridge, Massachusetts USA.
as Greece, the results of such analyses might be similar. Hence, an
Kim, J.S., Ritzman, L.P., Benton, W.C., Snyder, D.L., 1992. Linking product planning
interesting direction for future research is to conduct comparative and process design decisions. Decision Sciences 23, 44–60.
studies between E.U. countries that belong to groups with Kline, S., Rosenberg, N., 1986. An overview of innovation. In: Landau, R., Rosenberg,
significantly different SII scores. Furthermore, the results do not N. (Eds.), National Systems of Innovation. Oxford University Press.
Komninos, N., Tsamis, A., 2008. The system of innovation in Greece: structural
exhaust the possibilities of investigating all the effects of innova- asymmetries and policy failure. International Journal of Innovation and
tion policies on the performance of an NIS. The versatility of the Regional Development 1 (1).
model, allows for suitable modifications to investigate other Kramer, J.P., Marinelli, E., Iammarino, S., Diez, J.R., 2011. Intagible assets as drivers
of innovation: empirical evidence on multinational enterprises in German and
effects. For instance, it would be useful to study the effect due
UK regional systems of innovation. Technovation 31 (9), 447–458.
to the existence and operation of clusters that function in sectoral Lee, T.L., Tunzelmann, N., 2005. A dynamic analytic approach to national innova-
and regional levels. tion systems: the IC industry in Taiwan. Research Policy 34, 425–440.
638 E. Samara et al. / Technovation 32 (2012) 624–638

Levinthal, D., Myatt, J., 1994. Co-evolution of capabilities and industry: the Nicolis, G., Prigogine, I., 1994. The fourth European Framework Program and
evolution of mutual fund processing. Journal of Strategic Management 15, Research on Complex Systems, Paper on: The University. Facing up its
45–62. European responsibilities. Pisa. 23–26 November.
Liu, X., White, S., 2001. Comparing innovation systems: a framework and OECD, 1991. Technology in a Changing World. OECD, Paris.
application to China’s transitional context. Research Policy 30 (7), 1091–1114. OECD, 1996. Measuring what People Know: Human Capital Accounting for the
Lundvall, B.A. (Ed.), 1992. National Systems of Innovation - Towards a Theory of Knowledge Economy. OECD, Paris.
Innovation and Interactive Learning. London: Pinter. OECD, 1999. Managing National Innovation Systems. OECD, Paris.
Malhotra, Y., 2003. Measuring the Knowledge Assets of a Nation, Knowledge OECD, 2001. Innovative Networks: Co-operation in National Innovation Systems.
Systems for development, Ad Hoc Group of Experts Meeting, Knowledge OECD, Paris.
systems for Development. United Nations Headquarters, New York City. OECD, 2003. Main Science and Technology Indicators, vol. 2003/1–2 (CD-ROM
Mandinach, E.B., Cline, H.F., 1994. Classroom Dynamics: Implementing a Technol- edition). OECD, Paris.
ogy-based Learning Environment. Lawrence Erlbaum Associates, Hillsdale, NJ. OECD, 2009. Annual report. OECD, Paris.
Marklund, G., Nilsson, R., Sandgren, P., Granat Thorslund, J., Ullström, J., 2004. The Porter, M.E., 1990. The Competitive Advantage of Nations. Macmillan.
Rothwell, R., 1997. Towards the fifth-generation Innovation Process. International
Swedish National Innovation System 1970–2003: A quantitative International
Marketing Review 11 (1), 7–31.
Benchmarking Analysis. VINNOVA Analysis VA, Stockholm 2004:01.
Rycroft, R.W., Kash, D.E., 2004. Self-organizing innovation networks: implications
Martı́nez-Román, J.A., Gamero, J., Tamayo, J.A., 2011. Analysis of innovation in
for globalization. Technovation 24, 187–197.
SMEs using an innovative capability-based non-linear model: a study in the
Samara, E., Bakouros, ., Galanakis, K., Platias, S, 2010. The Spin-off Chain. Journal of
province of Seville (Spain). Technovation 31 (9), 459–475.
Technology Management and Innovation 5 (3), 51–68.
Martinez-Ros, E., Salas, F., 1999. Do workers share innovation returns?: a study of
Smith, K., 2001. Cross-country comparisons: comparing economic performance in
the Spanish manufacturing sector. Management Research 2 (2), 147–160. the presence of diversity. Science and Public Policy 28 (4), 267–276.
Metcalfe, S., 1995. The economic foundations of technology policy: equilibrium and Sterman, J.D., 2000. Business Dynamics: Systems Thinking and Modelling for a
evolutionary perspectives. In: Stoneman, P. (Ed.), Handbook of the Economics of Complex World. McGraw-Hill, New York.
Innovation and Technological Change. Blackwell, London, pp. 409–512. Thiel, H., 1966. Applied Economic Forecasting, North-Holland, New York.
Milling, P., Stumpfe, J., 2000. Product and Process Innovation, A System Dynamics- Tylecote, A., 1994. Financial Systems and Innovation. In: Dodgson, Mark, Rothwell
Based Analysis of the Interdependencies. The 18th International Conference of Roy (Eds.), The Handbook of Industrial Innovation. Edward Elgar, Cheltenham
The System Dynamics Society, Bergen, Norway. UK, Brookfield US.
Nelson, R.R. (Ed.), 1993. National Innovation Systems: a comparative analysis, Utterback, J.M., Abernathy, W.J., 1975. A dynamic model of process and product
Oxford University Press, Oxford, pp. 505–523. innovation, omega. The International Journal of Management Science 3 (6),
Nelson, R.R., 1995. Co-evolution of industry structure, technology and supporting 639–656.
institutions, and the making of comparative advantage. International Journal Van der Steen, M., 1999. Evolutionary Systems of Innovations. Van Gorcum Press,
of Business Economics 2, 171–184. Assen. The Netherlands.