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IINNTTRROODDUUCCTTIIOONN
In this brief paper, we propose an explanation
for the long-run evolutionary trajectories of
city-regional economies. We develop the argument
that such an explanation could rest on the interre-
lationships between the concepts of path depend-
ence and local innovation systems. Within this
framework our basic argument is that the sectoral
development of city economies evolves over long
periods of time in a path dependent manner and
that ‘as a consequence’ condition the scope and
possibilities of future development. Local innova-
tion systems provide the key dynamic of change in
these structures. Over time the interrelationships
between local economic structure and innovation
determine the path dependent economic trajecto-
ries of city economies relative to one another.
Evolutionary economic theory provides a rich
set of possible explanations for understanding
change in local economies. Within this theoreti-
cal approach three main perspectives may be
identified: Generalised Darwinism which uses
ideas and metaphors from evolutionary biology;
the theory of complex adaptive systems; and path
dependence theory. These are illustrated schemat-
ically in Figure 1.
The Generalised Darwinian (biological) evo-
lutionary analogy adopts concepts such as varia-
tion, novelty, selection and continuity (retention)
to explain the evolution of such entities as popu-
lations of firms and industries. The theory also
recognises that such activity is not only purely
economic but also social and deals with the co-
evolution of both the economy and its institu-
tional arrangements. Complex adaptive systems
theory adapts ideas taken from complexity theo-
ry to understand the development of networked
forms of economic activity, and how macro-level
118833
Copyright © eContent Management Pty Ltd. Innovation: management, policy & practice (2008) 10: 183–196.
Path dependence and local
innovation systems in city-regions
RROONNMMAARRTTIINN
Professor of Economic Geography, Department of Geography, University of Cambridge, Cam-
bridge, UK
JJAAMMEESSSSIIMMMMIIEE
Professor of Innovation and Urban Competitiveness, Department of Planning, Oxford Brookes
University – Headington Campus, Oxford, UK
AABBSSTTRRAACCTT
In this paper we argue that evolutionary economic geography and particularly the concept of path
dependence provide a theoretical framework within which to understand the different historical
economic trajectories followed by different cities. Within this framework we identify four phases of
path dependent development of new technologies or industrial sectors within urban economies. The
particular characteristics of each of these phases depend on the nature and interactions of a city’s
local innovation system combined with the capacity to absorb new knowledge.
Keywords: Path dependence, innovation, absorptive capacity, city regions, history
Volume 10, Issue 2–3, October–December 2008 IINNNNOOVVAATTIIOONN::MMAANNAAGGEEMMEENNTT,, PPOOLLIICCYY&& PPRRAACCTTIICCEE
economic structures and organisation emerge
from micro-behaviours. This approach focuses
on how such systems self-organise and adapt over
time, in response to both endogenously generat-
ed developments and external shocks. Path
dependence theory seeks to explain the long-
term historical development of distinctive pat-
terns of technological and industrial forms, and
how once established particular trajectories of
technological and industrial development
become self-reinforcing via various forms of
autocatalytic processes, especially externalities
and increasing returns effects.
Within these three theoretical approaches evo-
lutionary economists have addressed issues where
mainstream economics offers little in the way of
theoretical explanation. The big themes in this
work include economic growth and decline, tech-
nological change, industry life cycle studies and
the importance of institutions in influencing eco-
nomic change (Essletzbichler & Rigby 2006).
Research in these areas includes economic growth
(Nelson & Winter 1982; Nelson 1995; Verspa-
gen 2001), technological change (Arthur 1987,
1988; David 1985; Dosi 1982; Dosi et al. 1988;
Pavitt 1984), industrial evolution (Abernathy &
Utterback 1978; Klepper & Graddy 1990; Klep-
per 2001), and the importance of institutions
and regimes (Hodgson 1988; Nelson 2001; Peuk-
ert 2001). This body of work is now substantial
enough for Hodgson (1993) to have provided a
history of evolutionary theorising, for Witt
(2003) to have pulled together a collection of
classic articles in evolutionary theory, for a new
evolutionary microeconomics to have emerged
(Potts 2000), and for the beginnings of an evolu-
tionary foundation of economics to be champi-
oned (Dopfer 2005).
In this theoretical analysis of the economic tra-
jectories of city-regional economies we draw on
all three perspectives but especially on path
dependence theory. We also agree with those the-
orists cited above that innovation is the key to the
introduction of new knowledge, novelty, change
and renewal in long-term pathways not just in
national and regional economies but also in spe-
cific cities where most economic activities are
actually located. The particular characteristics of
local innovation systems determine the relative
abilities of different city economies to generate
novelty by recombining endogenous knowledge
with externally sourced new knowledge to pro-
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FFIIGGUURREE11::TTHHRREEEEPPEERRSSPPEECCTTIIVVEESSOONNEECCOONNOOMMIICCEEVVOOLLUUTTIIOONN
Generalised
Darwinism
Variety
Novelty
Selection
Retention
Complex
Adaptive
Systems
Self- Organisation
Emergence
Adaptation
Path Dependence
Theory
History
Positive feedback
Lock-in
vide a local economy with its evolutionary
momentum. Some local innovation systems have
proved to be much more effective at doing this
than others. This is a key reason underlying the
differing economic performance of urban
economies and so understanding the interactions
between the structural pathways followed by
individual cities and their different abilities to
absorb new knowledge and generate new com-
mercial products and services is critical to under-
standing why some forge ahead, others may catch
up and yet other cities fall behind in overall eco-
nomic performance.
We develop these arguments as follows. First
we briefly set out our argument on the nature of
path dependent economic development in city-
regional economies. This is followed by a brief
discussion of how new pathways are created.
Next we discuss the relationships between path
dependence and local innovation systems. We
then draw the different strands of our arguments
together and illustrate their possible interrelation-
ships in a concluding section.
PPAATTHHDDEEPPEENNDDEENNTTEEVVOOLLUUTTIIOONNAARRYY
TTHHEEOORRYY
From an evolutionary perspective, a key question
is: given the operation of similar evolutionary
principles in different city economies with differ-
ent specific economic histories how does this lead
to observed divergent outcomes? The answer to
this question for many evolutionary economists is
that once a particular pattern of socio-economic
development is established, it can become cumu-
lative and characterised by a high degree of per-
sistence or ‘path dependence’ (Martin 2003: 27;
Martin & Sunley 2006; Martin & Sunley 2009).
Martin and Sunley (2006: 402) define path
dependence as ‘a probabilistic and contingent
process (in which) at each moment in historical
time the suite of possible future evolutionary tra-
jectories (paths) of a technology, institution, firm
or industry is conditioned by (is contingent on)
both the past and the current states of the system
in question. The past thus sets the possibilities
while the present conditions what possibility is to
be explored’.
Work in the social sciences on the concept of
path dependence over the past two decade or so
has been strongly influenced by the pioneering
studies of Paul David on the economic history of
technology (David 1985, 1986, 1988, 1992,
1994) and of Brian Arthur on non-linear econom-
ic processes (Arthur 1988, 1989, 1994a, b, c, d).
Both of these authors attribute path dependence
to the emergence of autocatalytic or self-reinforc-
ing processes that ‘lock in’ a particular industrial-
technological trajectory in preference to others. In
the case of David, these processes are:
• technical interrelatedness (the reinforcing
effects of complementarity and compatibility
between different components of a technology
and its use);
• economies of scale (the benefits associated
with the use of a technology as it gains in
acceptance relative to other systems);
• the quasi-irreversibility of investments (in
effect the inertia of sunk costs arising from the
difficulties of switching technology-specific
capital and human skills to alternative uses).
These features are often grouped together as
‘positive network externalities’.
Arthur identifies four types of increasing
returns effects that generate path dependence in
the economy:
• large fixed, initial set-up costs; dynamic learn-
ing effects (learning by doing, learning by
interacting and learning by using all tend to
entail positive feedbacks);
• co-ordination effects (which confer advantages
to ‘going along’ with other economic agents
taking similar actions);
• self-reinforcing expectations (where the
increased prevalence of a product, process or
practice enhances beliefs of further prevalence).
• Other carriers of history include ‘routines’
which Nelson and Winter (1982) use as one of
their core concepts explaining industrial evolu-
tion as discussed above (Martin 2003: 28).
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For firms and their industries, interactions
between the carriers of history under conditions
of uncertainty tend to reinforce past achieve-
ments and so create a dynamic favouring the con-
tinuation along existing pathways. These
mechanisms therefore tend to preserve pre-exist-
ing structures and counteract novelty. Beinhocker
(2006) suggests that the decision-making rules
and mental models that have been applied in the
past will continue to be used in uncertain envi-
ronments. As a result one of the roots of path
dependence is human decision making.
Another important characteristic of evolution-
ary and path dependent development of history is
that it is irreversible. Thus, according to David,
economies are irreversible historical processes in
which future outcomes depend on past events
and outcomes: at any point in time the state of
an economy depends on the historical adjustment
path taken to it (see Martin & Sunley 2006:
400). Irreversibility is a key characteristic of evo-
lutionary processes in general.
The basic David–Arthur type of path depend-
ence model suggests a four-phase model of the
evolution of an industrial sector in an urban or
regional economy. These are:
• a pre-formation stage;
• a path creation phase,
• a path lock-in phase, and
• a path dissolution phase (Martin & Sunley
2009; see Figure 2).
New paths do not emerge in a vacuum, but
always in the context of existing structures and
paths of technology, industry and institutional
arrangements. These existing structures and paths
– that together constitute the ‘pre-formation
phase’ – provide the stimulus for, and shape the
scope of, new opportunities, of technologies,
products, whole industries, and institutions. Dur-
ing this early phase many cities may have the
potential to develop the new industries. Windows
of locational opportunity open up. Several differ-
ent alternative new technologies or industries
may co-exist at this stage. Experimentation takes
place and no single technology predominates.
Which particular technology or product or
industry out of the alternatives emerges – or is
‘selected’ – may simply be a chance or contingent
event, as, for example, where conditions happen
to favour one alternative rather than another, or
where one alternative has a slight ‘first-mover’
advantage over others; but could also be the result
of deliberate and purposive (and competitive)
behaviour by economic agents or institutions
(such as a local university research laboratory).
Once a given technology achieves dominance
over its rivals then the places where that technol-
ogy has been developed will begin to have both
first mover and entry cost advantages over other
localities. As a result windows of locational
advantage begin to close for the latter.
This opportunity or development then begins to
attract other actors, or acquires market influence,
and a critical mass around this activity begins to
build up and a development path is formed. Once
this critical mass achieves a certain size or momen-
tum, the path gets ‘locked-in’, and a third phase of
cumulative and self-reinforcing (catalytic) develop-
ment along this path ensues. Loss of momentum
and development can result for several reasons. It
can arise because of the emergence of external com-
petition or radical innovation/technology else-
where. It can also arise because of the onset of
internal ‘rigidification’ – a slow down in the innova-
tive dynamism of the sector concerned. Or loss of
momentum can be the direct result of the move-
ment out of the locality of some of the key firms
and actors to other locations. As a consequence the
path will break down and dissolve. These processes
are illustrated schematically in Figure 2.
We also argue that the path decay phase may
be avoided if firms adapt and adjust to such
processes by engaging in a renewed phase of
intensive innovation and development then the
path may not dissolve but be given a further
phase of growth. So while many industrial tech-
nological paths do follow a ‘rise, lock-in, and
decline ‘life cycle, others seem able to ‘reinvent’
themselves successfully.
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Evolutionary economists are also increasingly
arguing that aggregate path dependence of whole
economic systems such as those of cities involves
the co-evolution of different arenas such as the
economic, technological, institutional and socio-
cultural.
At the social level there are some contrasting
arguments concerning, for example, the signifi-
cance of social networks. On the one hand, there
is the suggestion that if they are too strong and
inward looking the interactions and learning
between partners can become constraints for pos-
sible future paths of development and hence the
process becomes path-dependent (Lambooy
2004: 648). There is also some evidence that
strong local networks can induce a ‘lemming
effect’ among participants, as in the Ruhr (Grab-
her 1993) and Swiss mechanical watch making
(Maillat 1996; Glasmeier 2000). But ‘as we argue’
below some of the most innovative local
economies are marked by the complementary
existence of open local, national and international
networking.
Martin and Sunley (2006) have identified five
different sources of path dependence, namely:
dependence on initial chance events, technologi-
cal lock-in, increasing returns effects, institutional
inertia, and social embeddedness. They are not
mutually exclusive. As a result, the economic
development pathways followed by a given city
may depend on chances such as its natural
resource endowments; technological lock-in such
as the manufacture of QWERTY keyboards,
increasing returns exemplified by the spread of
Microsoft operating systems, institutional inertia
such as restrictive union practices or social
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FFIIGGUURREE22::PPAATTHHDDEEPPEENNDDEENNCCEEAANNDDTTHHEEDDEEVVEELLOOPPMMEENNTTOOFFAANNEEWWTTEECCHHNNOOLLOOGGIICCAALL//IINNDDUUSSTTRRIIAALL
SSEECCTTOORRIINNTTHHEEUURRBBAANNEECCOONNOOMMYY
Pre-Formation
Phase
Pre-existing
structure and
paths of
technologies,
industries and
institutions
determine variety
of local
opportunities and
scope for novelty
and
experimentation
Path
Creation
Phase
Selection of path
from alternatives
via contingent
circumstances
or direct
purposive action;
development of
momentum and
critical mass
Path
Dependence
Phase
Development,
‘positive lock-in’
to and evolution
of selected
technological,
industrial, or
institutional path
by local
cumulative and
self-reinforcing
(autocatalytic)
processes
Em erg ence of
Path
Path
Development
Time
Path
Decay
Phase
Loss of
momentum and
development
resulting from rise
of external
competition;
decline of
dynamism due to
internal
‘rigidification’
(‘negative lock-
in’), or purposive
abandonment of
path
Onset of
Path-breaking
Path
Dissolution
embeddedness exemplified by strong inward
looking local social networks.
Despite this variety of possible sources of path
dependent outcomes of evolutionary processes, it
is as well to bear in mind at this point the basics
of what would constitute an evolutionary analy-
sis of them. Witt (2003) argues that three condi-
tions must be satisfied for an economic system to
be evolutionary: it must be a dynamic system,
the processes generated must be ‘irreversible’ in
the sense that the economy has no steady state
equilibrium, and novelty and innovation must be
the source of endogenously generated change
(see Martin 2003: 31). From this perspective, an
evolutionary analysis of path dependence should
concentrate on the endogenous development of
localisation economies, including localised learn-
ing and inter-relatedness, local institutions, and
social and cultural embeddedness.
NNEEWWPPAATTHHCCRREEAATTIIOONN
All the economic development pathways found
in cities were new at some point in the past. It is
also critical for the long-term economic perform-
ance of urban economies that either these exist-
ing pathways are continually renewed or that
new pathways are created. Thus we need both a
theory of path dependence and one of path cre-
ation.
In much of the path dependency literature, the
emergence of novelty and new pathways is said to
be serendipitous. Although it is true that in some
respects new developments such as the discovery
of penicillin were chance events, as a general rule
reliance on random chance is not a good enough
explanation for the creation of new pathways. It
offers little in the way of explanation as after the
initial chance the rest is merely descriptive history.
As argued above (Vromen 1995; Witt 2003;
Martin & Sunley 2006), to be truly evolutionary
path-dependent systems need mechanisms that
generate novelty and hence new pathways of
development. We know from the empirical work
of Kondratieff (1926, 1935), Mensch (1979)
(Freeman and Clark 1982), Freeman (1984,
1985), and Rothwell and Zegveld (1981) that
capitalist economies have been marked by period-
ic Schumpeterian ‘gales of creative destruction’ in
which especially rapid change is associated with
the rise of new technologies, industries and meth-
ods of production, and with corresponding shifts
in social regulation, class divisions and institu-
tional arrangements (Martin 2003: 28). It is
highly unlikely that all these major upheavals
associated with the development of new econom-
ic pathways were created purely by chance.
Martin and Sunley (2006: 20) suggest five
possible sources of the start of new pathways in
particular (urban and regional) economies. These
are:
• Indigenous creation
• Heterogeneity and diversity
• Diversification into technologically related
industries
• Upgrading of existing industries
• Transplantation from elsewhere
Most work, particularly by economic geogra-
phers, has focused on the first of these path cre-
ation mechanisms – indigenous creation. Here
the organisation of the production and transfer of
new knowledge is the key element in the estab-
lishment of new pathways. Patel and Pavitt
(1997) argue that the main innovation actors,
firms, develop most of their new technologies in
house by modifying processes alongside contribu-
tions from other firms and the science base. Most
of the time existing firms build and improve
upon their current technological base.
Branching out of existing industries into new
but technologically related activities can also cre-
ate new pathways. Some firms, for example 3M,
are well known for pursuing such a strategy. Over
the years it has developed its basic adhesive tech-
nology from producing sand paper through post-
its to plasma screens. The British motor sport
industry has also developed in proximity to areas
with generic skills in the mass production car
industries of Birmingham, Coventry and Oxford
(Pinch & Henry 1999). Many of the world’s
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longer lived companies have renewed their prod-
uct life-cycles in this way. As a consequence they
have also contributed to the renewal of the eco-
nomic pathways followed by the cities in which
they are located. This is a two way process in
which elements of the local innovation system
external to firms, such as their local labour mar-
kets, universities and electronic communications
infrastructures, contribute to the renewal capaci-
ties of local firms.
New pathways can also be created by upgrad-
ing existing industries by the infusion of new
technologies or the introduction of new products
and services. Evolution in this way is not an easy
task and has often not taken place in the UK’s
traditional heavy and manufacturing industries.
Generally the things that a firm can do well at
any time are quite limited. But while firms can
learn and do new things these learning capabili-
ties are also quite limited (Nelson 1995: 79).
PPAATTHHDDEEPPEENNDDEENNCCEE,, LLOOCCAALL
IINNNNOOVVAATTIIOONNSSYYSSTTEEMMSSAANNDDAABBSSOORRPPTTIIVVEE
CCAAPPAACCIITTYY
At the level of city-regional economies we argue
that the key dynamic underlying the evolutionary
path dependent development as outlined above is
the ability of the firms, organisations and institu-
tions located in a particular city to acquire,
understand and generate economically valuable
new knowledge. This is significantly dependent
on the characteristics of their local innovation
systems and their absorptive capacities.
LLooccaall iinnnnoovvaattiioonn ssyysstteemmss
The Oslo Manual defines innovation as ‘the
implementation of a new or significantly
improved product (good or service), or process, a
new marketing method, or a new organisational
method in business practices, workplace organisa-
tion or external relations’ (OECD 2005: 46).
The nature of local, territorial innovation sys-
tems has been laid out by, among others, Braczyk
et al. (1998) with respect to regions and Simmie
(2001) with respect to some of the most innova-
tive cities in Europe. They form a crucial part of
the open architecture of city economies. The rele-
vant and possible characteristics of a local innova-
tion system (LIS) include:
• Sectorally and institutionally diverse knowl-
edge generating businesses and institutions
which can draw innovative ideas from many
potential sources
• High levels of firm specialisation to supply the
best in national and international markets
• Commercial and marketing know-how, based
on knowledge of international market and
technological conditions
• A wider social culture that is also tolerant of
diversity, and new ideas and ways of doing
things
• Firms able to exploit knowledge and support
knowledge applications by others
• High levels of technical sophistication among
both producers and users of technology
• Economies of scale
• International knowledge spillovers from sophis-
ticated customers, including locally-represented
multinational companies, providing the local
innovation system with information on leading
edge knowledge, products and services.
While all these characteristics are objectively
possible elements of an LIS, individual localities
will have different combinations and strengths in
each of them. In many cities one or more of these
phenomena will be missing altogether
The main function of local innovation systems
is to generate new (practical) knowledge and to
commercialise it. The generation of novelty by
recombining the varieties of endogenous knowl-
edge with externally sourced new knowledge pro-
vides a local economy with its evolutionary
momentum. The interaction between this momen-
tum and the external environment determines the
extent to which the economy is subject to posi-
tive or negative lock-in and the rate of new path
creation. Thus the degree to which the actors in a
local economy can access, understand and con-
vert leading edge knowledge to new products and
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services determines their relative capacities to
generate new pathways or renew older ones. Con-
versely the further behind the new knowledge
frontiers they are the greater is the likelihood of
their becoming locked into ageing technologies
and declining economic activities.
It is increasingly accepted that the creation,
adoption, and commercialisation of new eco-
nomically valuable knowledge within urban
economies is based on complex relationships
between the nature and types of economic variety
present in those economies and the capacity of
the local innovation systems to combine this
endogenous knowledge with that drawn from
other sources and locations across the interna-
tional economy.
Variety represents an important indicator of
the changing stock of knowledge present in an
urban economy over time. The pathways and sec-
toral change that emerge over time in city-region-
al economies determine the level and extent of
economic variety present in those economies at
any given moment in time. This variety deter-
mines the knowledges available for new combina-
tions into innovations at subsequent times. In
this way the sectorally specific knowledge present
in a city economy at a given point in time pro-
vides the bases for understanding new knowledge
in those fields. The more specialisations in a par-
ticular economy the greater are the chance of
developing one or more of them or those closely
related to them in the future. The less the variety
of specialisations the fewer are the potential
opportunities for the future.
With respect to city economies as a whole, we
are primarily concerned with aggregate variety as
expressed in agglomeration economies that are
external to individual firms in any individual
local innovation system. The varieties of knowl-
edge in a city regional economy combined with
the aggregate ability to acquire, transform and
exploit that knowledge form the contemporary
endogenous basis of its local innovation system.
Proximity. One of the supposed advantages of
all forms of agglomeration economies is the
(often alleged) link between geographical proxim-
ity and knowledge spillovers. Geographical prox-
imity facilitates intense local knowledge transfers.
At the same time the concentration of knowledge
within cities also makes them nodes in the wider
national and international distribution of knowl-
edge (Simmie 2003). Their internal and external
connectivities also contribute to the relative
intensity of knowledge transfers.
Networking is crucial to creation and adoption
of new forms of knowledge. Potts (2000) argues
that the structure of knowledge is a structure of
connections, and the various instances of knowl-
edge – such as technology, routines, habits, com-
petences and the like – are instances of specific
connections, i.e. of networks. From this perspec-
tive, innovation-based economic evolution is
about the emergence and evolution of multiple
connections, most significantly in the form of
knowledge networks. Much work in this area has
not distinguished between different kinds of net-
works. Too often they have been treated simply
as a generic activity. In this vein they have been
said to consist of:
• Nodes – firms or their modules, departments,
individuals, locations – with activities and
functions.
• Connections – communication channels,
roads, the web etc.
• The intensity of the transfers of goods, indi-
viduals or ideas (Lambooy 2004: 648).
It is important to note here that there are at
least two kinds of networks fulfilling significantly
different functions. On the one hand, business
type networks facilitate the co-ordination of deci-
sions made by separate entities (or nodes) such as
persons, departments, firms or cities. On the
other hand, there are knowledge networks that
enable the transmission of data, information, and
knowledge by using or making connections with
various degrees of intensity (Lambooy 2004:
643). Giuliana (2006) defines these knowledge
networks as ‘the network that links firms through
the transfer of knowledge for the solution of
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complex technical problems’ (Giuliana 2006: 5).
They have been argued to be especially significant
for the transfer, exchange and diffusion of tacit,
uncodified knowledge because of their ability to
build up over time social relationships of trust
and understanding. These are referred to as ‘rela-
tional capital’.
Local innovation systems can be dynamic,
interactive and iterative generators of new variety,
novelty and innovation within their respective
city-regional economies. While most of the key
elements of a system may be present in a given
locality their interaction ‘and therefore function-
ing’ is highly dependent on the dynamics of rela-
tional capital. As argued above, open (as opposed
to closed) knowledge networks provide crucial
links for the sharing of knowledge and the learn-
ing that arises from doing so.
Taken together such knowledge transferring
and sharing systems form the basis of competitive
national and international exports. These, in
turn, bring benefits to the local innovation sys-
tem. These include:
• Economies of scale
• International knowledge spillovers from sophis-
ticated customers, including locally-represented
multinational companies, providing the local
innovation system with information on leading
edge knowledge, products and services.
Thus, a key function of local innovation sys-
tems is to provide windows on the external world
of knowledge so that, as far as possible, firms can
see the frontiers of knowledge and firms, organi-
sations and institutions in the local system have
the capacity to absorb and combine both internal
and external knowledge into new practical and
commercial forms of novelty.
AAbbssoorrppttiivvee ccaappaacciittyy
The ability of local actors to create new knowl-
edge in the form of innovation is correlated with
the capacity to recognise, understand and use rel-
evant knowledge. These attributes of firms,
organisations and institutions have come to be
known collectively as absorptive capacity. This
concept was introduced by Cohen and Levinthal
(1989). They define it as the ability to utilize
externally held knowledge through three sequen-
tial processes: recognizing and understanding
potentially valuable new knowledge outside the
firm through exploratory learning, assimilating
valuable new knowledge through transformative
learning, and using and assimilating knowledge
to create new knowledge and commercial outputs
through exploitative learning.
An outcome of absorptive capacity is innova-
tion. According to Lane et al. (2006), absorptive
capacity builds on prior investments in absorptive
capacities, tends to develop cumulatively and is
therefore itself path dependent, and depends on
the organization’s ability to share knowledge and
communicate internally.
Firms that develop strong in-house knowledge
bases, particularly in terms of the quality of their
labour forces, have higher absorptive capacities
and more incentives to search for external knowl-
edge as they know that they will be able to make
profitable use of it. Such firms are also likely to
be sought out by similar firms whose cognitive
distance is not so great as to inhibit communica-
tion. These may be located locally, nationally or
in other national economies.. As a result firms
with strong in-house knowledge bases are likely
to exchange knowledge more intensively than
those with weaker bases. Other things being
equal, this means that such firms are probably
better at finding new leading edge knowledge and
of collectively using it to develop existing or to
create new pathways of economic development.
Firms with these characteristics are crucial to the
continual redevelopment of the urban economies
in which they are located
CCOONNCCLLUUSSIIOONNSS
The purpose of this short paper has been to sug-
gest a possible conceptual framework for explor-
ing and explaining the long-run economic
trajectories followed by city-regional economies.
Our approach has been to adopt an analysis
119911
Path dependence and local innovation systems in city-regions
Volume 10, Issue 2–3, October–December 2008 IINNNNOOVVAATTIIOONN:: MMAANNAAGGEEMMEENNTT,, PPOOLLIICCYY&& PPRRAACCTTIICCEE
based on the theoretical concepts of evolutionary
path dependence. We argue that this is appropri-
ate because it focuses on the dynamics underly-
ing the long-run structural changes taking place
in spatial economies. In particular it seeks to
explain the reasons for the positive or negative
lock-in to those structures and the creation of
new pathways of economic development, and
hence to show why some cities seem much more
able than others to ‘reinvent’ themselves over
time (see Glaeser 2005).
In our ‘model’ of evolutionary path dependent
development of a city regional economy the cre-
ation of new pathways and their development is
an emergent, adaptive and systemic process in
which the structural development of a local econ-
omy rests on continual interactions between local
economic history and the absorptive and innova-
tive capacities of local firms, organisations and
institutions.
For cities that are forging ahead, like Cam-
bridge in the UK, these relationships are largely
positive. Figure 3 illustrates how development in
Cambridge, for example, started with a relatively
clean sheet immediately after the second world
war. There were no major industries or
entrenched business and union cultures. This
provided a wide scope ‘combined with an intel-
lectual openness’ to take advantage of new win-
dows of locational opportunity to create new
119922
Ron Martin and James Simmie
IINNNNOOVVAATTIIOONN:: MMAANNAAGGEEMMEENNTT,, PPOOLLIICCYY&& PPRRAACCTTIICCEEVolume 10, Issue 2–3, October–December 2008
FFIIGGUURREE33::SSTTYYLLIISSEEDDPPRROOCCEESSSSOOFFPPOOSSIITTIIVVEEPPAATTHHDDEEPPEENNDDEENNTTIINNNNOOVVAATTIIVVEEDDEEVVEELLOOPPMMEENNTT
Pre-Formation
Phase
No major
industries, or
entrenched
business
cultures.
Estab lished
scientific
reputation of
University.
‘Greenfield’
environment
New Path
Creation Phase
Considerable
scope for, and
activated
openness to,
new industrial
and
technological
development
Pathway
Development
Emergence and
self-reinforcing
growth of new
sectors
Absorptive
Capacity
Build up of
high- skilled,
scientific
labour force,
enterprise
culture
and
supporting
institutions
Innovation
Capacity
Build up
indigenous
innovative
capability and
linkages to
external
knowledge
environment
Reinforces
growth of
existing
pathways
Stimulates
further creation
of new paths of
industrial and
technological
development
pathways of development. These new technologi-
cal pathways sprang largely from locally based
high levels of knowledge in advanced mathemat-
ics and computing. As the University and local
authorities began to embrace the notion of
knowledge-based technological development new
sectors began to emerge. These provided employ-
ment for a highly skilled scientific labour force
which in turn increased the aggregate absorptive
capacity of the local economy. Supporting insti-
tutions also began to co-evolve alongside these
economic changes.
The combination of growing knowledge-based
entrepreneurial capacity and supporting institu-
tions, such as local science parks and venture cap-
ital, strengthened the development of the local
innovation system. This then generated positive
feedbacks and support both for existing paths of
development and the creation of new ones. The
net result of these positive feedbacks has been the
generation of a local economy that is forging
ahead as a result of continual renewal and rein-
vention.
In contrast to cities that are forging ahead,
others in the British urban system are lagging
behind. Swansea is one example of such a city.
Figure 4 illustrates the largely negative attrib-
utes of path development in cities like Swansea.
Typically they start with a legacy of old indus-
trial structures sometimes inherited from as
119933
Path dependence and local innovation systems in city-regions
Volume 10, Issue 2–3, October–December 2008 IINNNNOOVVAATTIIOONN:: MMAANNAAGGEEMMEENNTT,, PPOOLLIICCYY&& PPRRAACCTTIICCEE
FFIIGGUURREE44::SSTTYYLLIISSEEDDPPRROOCCEESSSSOOFFNNEEGGAATTIIVVEEPPAATTHHDDEEPPEENNDDEENNTTIINNNNOOVVAATTIIVVEEDDEEVVEELLOOPPMMEENNTT
Pre-Formation
Phase
Legacy of old
industrial
structures,
restrictive
business
cultures and
limited skill
base
New Path
Creation Phase
Restric ted scope
and
opportunities
for emergence
of new
technological
pathways
Pathway
Development
Lack of
momentum in
development of
new paths of
industrial and
technological
paths. Lack of
any critical
mass
Absorptive
Capacity
Failure to
attract or build
high-skilled,
scientific labour
force.
Enterprise
culture
and supporting
institutions fa il
to emerge
Innovation
Capacity
Limited
indigenous
innovative
capability and
linkages to
external
knowledge
environment
very slow to
develop
Restr icts the
scope for and
scal e of
growth-
enhancing
effects
Limits potential
for creation of
new paths of
industrial and
technological
development
long ago as the industrial revolution. These old
structures limit the available skill bases. They
also tend to be marked by restrictive business
and union cultures. These combine to limit the
scope for the emergence of new technological
pathways. As a result it has often proved easier
to commercialise new knowledge in new rather
than old places.
The persistence of traditional business prac-
tices and working cultures results in a lack of
momentum in new path development. It has
often proved very difficult for local economies
to break out of this downward spiral. This is
partly because existing industrial structures
determine the employment profiles of such cities
and they tend to lack the types of skilled and
highly educated scientific workforces that are a
necessary basis for improving the aggregate
absorptive capacity of the local economy. The
lack of knowledge workers and supporting insti-
tutions also feeds back into limitation in the
local innovation system. This then limits the
scope for enhancing existing pathways and the
potential for creating new ones. The net result
of these negative feedbacks is that such cities
tend to lag behind their national pathways of
economic growth.
In summary, we argue that local innovation
systems are the key driving mechanism underly-
ing change in spatial economies because they are
the primary source of new commercially valuable
knowledge. Indeed, their main functions are the
creation, adoption and commercialisation of such
knowledge. Innovation also become, along with
land, capital and labour, a key factor of modern
economic production.
The ability to innovate also relies on the col-
lective absorptive capacity of the firms, institu-
tions and organisations located in a particular
city. This provides the underlying and on-going
basis for the identification, assimilation and
exploitation of new knowledge. This capacity is
itself path dependent as a result of the distinctive
structures and pathways that emerge in specific
urban economies.
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IInnnnoovvaattiioonn iinn CChhiinnaa::
HHaarrmmoonniioouuss TTrraannssffoorrmmaattiioonn??
Edited by Shulin Gu and
Mark Dodgson
Innovation: Management,
Policy & Practice
– Volume 8/1-2
ISBN: 978-0-9757422-4-2
Foreword by Shulin Gu and
Bengt-Åke Lundvall
Includes articles in the
following key areas:
• Learning and innovation
The key to long-term
successful development
• Development and learning
in high-tech industries
• Development and learning
in traditional industries
• Regional innovation
systems
IInnnnoovvaattiioonn aanndd EEccoonnoommiicc
DDeevveellooppmmeenntt::
LLeessssoonnss ffrroomm LLaattiinn AAmmeerriiccaa
Edited by Gabriela Dutrénit
and Mark Dodgson
Innovation: Management,
Policy & Practice
– Volume 7/2-3
ISBN: 978-0-9750436-5-3
Foreword by Gabriela
Dutrénit and Jorge Katz
Includes articles in the
following key areas:
• Technology Performance:
Setting the scene
• Learning and Knowledge
Flows in Innovation
Systems: Domestic
Conditions
• International Dimension
• New policy approaches for
development
CCoorrppoorraattee SSuussttaaiinnaabbiilliittyy::
GGoovveerrnnaannccee,, IInnnnoovvaattiioonn
SSttrraatteeggyy,, DDeevveellooppmmeenntt aanndd
MMeetthhooddss
Guest Edited by Andrew
Griffiths, UQ Business
School, University of
Queensland
Innovation: Management,
Policy & Practice
– Volume 6/2
ISBN: 978-0-9750436-2-2
Foreword by Mark Starik
Includes articles in the
following key areas:
• Sustainability, Democracy
& Governance
• Sustainability &
Technology Strategy
• Sustainable Industry
Development
• Emerging Sustainability
Methods
