Knowledge based capital: An essential ingredient towards building strong East Africa regional integration innovation capacity

The purpose of this paper is to investigate the importance of knowledge-based economy as a strategic resource and a foundation of successful East African Regional integration’s capacity. The paper identifies human, relational, structural and social capital as the four main knowledge-based categories building the knowledge-based capital of a region. The role of each knowledge-based category in determining regional innovation capacity is analyzed. Specifically, the author discuss the relationships among the knowledge-based categories and a regional innovation capacity.This paper is based in an in-depth literature review of the knowledge management and regional innovation research discipline.

The paper clarifies the concept of knowledge-based capital and of regional innovation capacity. These are two key concepts for understanding the role and relevance of the knowledge assets bundles in the creation, development and management of innovation capabilities at regional level. Then the paper explores how knowledge-based components affect the innovation capacity of a region. This is an issue of great relevance for both theory and practice. From the theory point of view it allows the identification of the main factors characterising the links between knowledge assets and innovation capacity, while from a practical point of view it can provide implications for policy makers for the definition of policies oriented towards the development of regional knowledge asset domains to develop regional innovation capacity.

The paper provides an answer to the need to develop a holistic view of the links between a region's integration knowledge-based capital and its innovation capacity. Indeed, most of the studies in the literature have analysed the links between isolated knowledge asset categories and innovation capabilities. The paper, on the basis of a clear definition of knowledge-based capital and innovation capacity, analyses why regional knowledge foundations make differences in the innovation capacity of regional integration.

Introduction

Regional economic cooperation in East Africa dates back during pre-independence were a sizeable number of commonly operated services within these countries. For example; Post and Telecommunications, railways and harbours, airways, universities, customs, excise and income tax departments, research and technical services, which was initially known as the East African Common Services Organization (Kahnert & Thomopoulos, 1969). The East African Community (EAC) is one of the various economic communities that exist in Africa. It is a regional inter-governmental organization of Kenya, Uganda, Tanzania, Rwanda and Burundi.The revival of the EAC II was occasioned by the lessons learnt from the EAC I of 1967 to 1977. EACI established through a treaty in 1967 focused on harmonization of economic policies of memberstates, common institutions and a common market (Mohiddin, 2005). Article 2 of the treaty equallyemphasised strengthening and regulating the industrial, commercial and other relations of themember states in a way that promotes accelerated harmonious and balanced development and equitable distribution of benefits. The EAC I was to fail from among other things, the unbalanced sharing of benefits among partner states. The treatydid not call for equal sharing of benefits but emphasised that the less developed member stateswould benefit disproportionately (Mohiddin, 2005). The East African Heads of States signed the treatyfor the establishment of the East African Community in Arusha on 30th November, 1999. The EAC strategy gives emphasis to economic cooperation and development with a strong focus onsocial dimension. The co-operation and integration as identified by the EAC incorporates among other thing human resources, science and technology and innovations.

Innovation dynamics play a fundamental role in regional development. This is an issue that has been analysed in the literature from different research perspectives (Furman et al., 2002; Howells, 2005; Kuznets, 1971; Romer, 1990; Rondè and Hussler, 2005; Solow, 1957). In particular, in the last decade, the ties between research on knowledge and research on innovation have been so close that scholars have seen a blurring of the boundaries between the two research streams. It is now quite common for studies examining regional innovation to use knowledge or other related concepts as antecedents, and for studies investigating knowledge and knowledge-based capital frequently to use innovation as an outcome (Asheim and Coenen, 2005; Subramaniam and Youndt, 2005).

The two research streams have contributed to each other to develop a better understanding of the role and relevance of knowledge in sustaining and developing innovation dynamics, at both micro and macro levels. However, there is still a need for a better analysis of the links between the ownership of knowledge assets and the development of innovation, particularly at the regional level. For this reason, an investigation of how the knowledge-based capital of a region contributes and determines the construction of a region's innovation capacity appears to be of great relevance.

The concept of innovation capacity has recently emerged in the academic and policy debate as a meta-concept to denote the real and potential capabilities of a system to convert knowledge into innovation that is able to drive long-term economic growth and wealth creation (Freeman, 1995; Furman et al., 2002; Lundvall and Johnson, 1994; Nelson, 1993). It has been introduced and adopted by different scholars interested in investigating and understanding the factors and determinants at the root of innovation dynamics and the capabilities grounding regional and local development (Furman et al.,2002; Howells, 2005; Tura and Harmaakorpi, 2005). Furman et al. (2002) specifically referred to innovation capacity as “the ability of a geographical area to produce and commercialize a flow of innovative technology over the long term” and underlined that it depends on the strength of the common innovation infrastructure, on the environment for innovation, and on the strength of the linkages between the two.

The role of knowledge in the development and application of innovation has been particularly highlighted by the cognitive approach to innovation, which has stressed that knowledge dynamics are at the core of innovation capabilities. Coherently with this perspective, innovation at the regional or local level can be considered as the result of the capabilities to activate, develop, sustain, and manage knowledge dynamics and processes (Albino et al., 2007; Albino and Schiuma, 2003; Schiuma, 2000).

Although the relevance of knowledge as a resource and source of innovation at regional and local level (Carrillo, 2006) is recognized, there is still a lack of understanding of the knowledge-based dimensions building regional innovation capacity. Indeed, most studies have focused attention on isolated knowledge components, rather than on a holistic view of the knowledge-based capital building a region's innovation capacity (Bounfour and Edvinsson, 2005).

This paper aims to explore the knowledge-based dimensions of the innovation capacity of a region. In particular, four main knowledge-based assets categories are identified:

i.human capital;

ii.relational capital;

iii.structural capital; and

iv.social capital.

As bundles of resources they build the knowledge-based capital of a region and represent fundamental factors affecting the creation and the development of a regional innovation capacity. The role of each knowledge-based dimension in the construction of a regional innovation capacity is analysed. This allows us to define an interpretative conceptual framework delineating the knowledge-based foundations of the innovation capacity of regions and local systems.

1.2 Knowledge and regions

In the new socio-economic scenarios, great attention has been paid by different research streams to the role played by knowledge as a critical resource to enhance companies' and territories' innovation dynamics, and in turn competitiveness. Studies in the management, organizational and economic research streams have highlighted the relevance and traits of the so-called “knowledge-based economy” (Bell, 1973; Handy, 1989; Hitt et al., 1998; Mandel, 2000; Toffler, 1971, 1981). This concept has emerged to delineate that knowledge represents a key strategic source of growth and wealth creation in today's complex business scenario. Hence, the definition and explanation of regional competitive advantage need to reach well beyond concern with “hard” productivity to consider several other “softer” dimensions of the regional socio-economy, and in particular non-economic factors, such as cognitive, social, cultural and institutional factors (Pinch et al., 2003; Morgan, 2004). As result, most studies draw on the common rationale that the best sources for an innovation-based globalising economy lie in localised learning processes and “sticky” knowledge characterising regional and local contexts. In particular, scholars have highlighted the following as fundamental dimensions of a region's competitiveness:

  • the relevance of the labour force's quality and skills;
  • The extent, depth and orientation of social networks and institutional forms;
  • the range and quality of cultural facilities and assets;
  • the presence of an innovative and creative class; and
  • the scale and quality of public infrastructure (Asheim, 1999; Maskell et al., 1998; Polenske, 2004; Storper, 1995).

Although it is largely recognised that knowledge resources play an important role in creating regional innovation capabilities, it is still far from clear what this role is exactly, and what the links are between knowledge-based capital and innovation capacity. Moreover, even the basic definition of knowledge-based capital at the regional level is still not completely shared.

The following sections aim to outline some fundamental conceptual propositions for delineating an interpretative framework explaining how regional knowledge-based capital builds and influences a region's innovation capacity. Together with an analysis of the concept of knowledge-based capital, a knowledge-based perspective of the regional innovation capacity is proposed, delineating the components of a regional knowledge-based capital affecting and determining innovation capacity at regional level.

2.1 Knowledge-based capital

The review of the economic and management literature shows that the notion of knowledge-based capital is generally adopted as an umbrella concept to denote those regional resources which are intangible in nature and that contribute to create value at regional level (Bontis, 2004; Bounfour and Edvinsson, 2005; Edvinsson, 2002; Malhotra, 2001; Schiuma et al., 2005; Tallman et al., 2004).

Bradley (1997) defines knowledge-based capital as a region's ability to transform knowledge and intangible resources into wealth. Bontis (2004) includes in the concept those hidden values related to individuals, firms, communities or institutions that are sources of real or potential wealth. Malhotra (2001) suggests that a regional knowledge-based capital encompasses those hidden assets on which a region's growth is based, and stresses that it represents the added value generated by the stakeholders operating in the region.

We interpret regional knowledge-based capital as the group of knowledge assets that are attributed to a region and most significantly drive innovation dynamics and regional value creation mechanisms (Marr and Schiuma, 2001; Schiuma et al., 2008). Knowledge assets correspond to any regional resource made of or incorporating knowledge which provides an ability to carry out a process or an activity aimed at creating and/or delivering value. Knowledge assets are the building blocks of the competencies and innovation capabilities of a region. Indeed, any region is characterised by specific knowledge domains which are grounded on bundles of knowledge assets. These knowledge assets bundles build a region's knowledge-based capital and affect the innovation capacity and value creation dynamics of a region.

Four main knowledge assets categories building a regional knowledge-based capital can be identified:

  1. human capital;
  2. relational capital;
  3. structural capital; and
  4. social capital (Lerro, 2007; Lerro and Carlucci, 2007; Schiuma et al., 2005, 2008).

Human capital essentially comprises the know-how characterising the different actors operating within a region. It includes those factors that are built upon or are reflective of know-how, both tacit and explicit, which individuals and more generally regional stakeholders possess and exercise. In some cases, the know-how may reside in the individuals; in other cases, the know-how may be collectively owned by region's stakeholders.

Relational capital denotes the group of the knowledge resources linked to the relationships characterizing a regional system. This includes the overall relationships, both internal and external to a region, established and maintained by regional stakeholders which affect regional value creation dynamics and particularly innovation capabilities.

Structural capital includes all those assets that are tangible in nature but play a fundamental role in the development, acquisition, management and diffusion of knowledge at regional level. In this category are included those infrastructural assets which, even if tangible in nature, incorporate codified knowledge which is essential to define the knowledge domains at the basis of regional economic and production activities. It also involves the intellectual property assets owned by regional stakeholders.

Finally, social capital comprises the knowledge assets related to the soft infrastructure of a region. They are mainly the result of the dynamic interdependencies linking regional actors (Brooking, 1996; Boulton et al., 2000; Fernandez et al., 2000). The social dimensions represent fundamental factors affecting the value creation capabilities of a region. They are related to the stakeholders' social dynamics taking place within a local system and include many components, such as, among others, values, culture, routines, behaviours, networking, identity, atmosphere, and so on.

Analysing some of the main features of regional capital, Kogut et al. (1994) suggest that firms and their suppliers within a region share tradable resources, but they also share knowledge that is part of the social community – a public good for all members which is untreatable. The literature on communities of practice (Brown and Duguid, 2001) enriches this perspective, highlighting that inter-dependent individuals working in a local context develop a social milieu and shared identity. Knowledge moves freely within a community and creates a shared understanding about how the system works. Other authors stress that within a region practical know-how is developed, both tacit and explicit in nature, which is context-specific (Brown and Duguid, 2001).

The above four knowledge-based capital dimensions are different and require specific kinds of investment (Youndt et al., 2004). Human capital requires the development and training of human resources as well as the attraction and retention of talent. Regarding the last aspect, brain drain and attraction in today's knowledge economy represent a fundamental trait to nurture the development of regional capabilities. This is one of the main obstacles for the development of the regions of, for example, South Italy, which experience a continual brain drain. Structural capital requires investment in tangible infrastructures which can spur, support, facilitate, and manage the development, acquisition and transfer of key knowledge domains for local growth and wealth creation. Relational and social capital requires the development of a local atmosphere that affects and drives constructive attitudes and behaviours which drive the definition and development of networking activities based on trust and mutuality.

The four categories of knowledge-based capital play a different role in the definition and construction of a region's innovation capacity, contributing both individually and holistically.

3.1 Regional innovation capacity

It is widely recognised nowadays that innovation is a central driving force of competitiveness and value creation.Cooke and Memedovic (2003) highlight that “there is a growing awareness among regional authorities that the economic growth and competitiveness of their regions depend largely on the capacity of indigenous firms to innovate. Offering the appropriate support to indigenous firms to become more competitive through innovation is a rising star on the regional policy agenda”. Archibugi and Michie (1995, state that “the production and use of knowledge is at the core of value-added activities, and innovation is at the core of firms' and nations' strategies for growth”.

Tura and Harmaakorpi (2005), reviewing a number of theoretical frameworks and notions about regional innovation, have highlighted the importance of building and enhancing regional innovativeness by developing an environment characterised by networked systems, such as regional innovation systems (Cooke et al., 1997; Doloreux, 2002), innovative milieu (Camagni, 1991; Crevoisier and Maillat, 1991), industrial districts (Marshall, 1916; Piore and Sabel, 1984; Becattini, 1990), new industrial spaces (Storper and Scott, 1992; Storper, 1995), and learning regions (Florida, 1995; Asheim, 1996). From a policy perspective, the European Commission (2005) has underlined the relevance of the regional context to develop innovation capabilities. In particular, it has been argued that innovation requires long-term cooperation between investors, entrepreneurs, researchers, firms, public authorities and consumers. Such relations flourish more easily at regional level, enjoying benefits from short distances that facilitate both formal and informal contacts. Regional-based cooperation networks are ideal knowledge sources and entry points to exchange information and to set up new ideas (Council on Competitiveness, 2005).

Furman et al. (2002) underline that innovation capacity is related to, but distinct from, scientific and technical advances per se, and it is also distinct from current national industrial competitive advantages or productivity. It mainly reflects variation in both economic geography and innovation policy.

A wide literature has analysed the different elements positively or negatively influencing regional innovation capacity. The analysis developed by Tura and Harmaakorpi (2005) allows the identifcation of two fundamental aspects affecting the development of a regional innovation capacity:

  1. the innovation processes; and
  2. the innovative capabilities.

Strictly related to the innovation processes, the following dimensions influencing regional innovation capacity can be outlined:

  • The gradual, social and cumulative character of innovation processes, which are based on continuous learning processes carried out by regional stakeholders engaged directly or indirectly in regional innovation networks (Edqvist, 2004).
  • The integration of different and numerous technological and organizational knowledge inputs, derived from other sectors and regions, which allows know-how to be renewed and new problems to be solved (Albino et al., 2007; Katz and Kahn, 1996).
  • The interactive character of the learning processes, which involves networking among firms as well as dynamism in local social networks. This requires the development of linkages, networks and cooperation between different stakeholders, outside the channels of existing institutional structures (Lundvall, 1992).
  • The characteristics of the boundaries of the innovation dynamics at regional level (Cooke et al., 2004; Edqvist, 1997; Malerba, 2002; Malerba and Orsenigo, 1995).

Rondè and Hussler (2005) have highlighted that a regional innovation capacity also requires a deep understanding of the nature of the competences and abilities that have to be mastered in order to be innovative. This also involves the identification of the competencies and the definition of strategies for their exploitation. In accordance with Teece and Pisano (1998), an “innovative capability” is defined as an actor's ability to sense the changes in the environment and to be able to exploit existing resources and competencies in order to create competitive advantage through innovation activities.