EFI-RPC-Background Paper

Innovation and Entrepreneurship Research in Forestry

Definitions, Key Questions and Measurement Approaches used for the EFI Regional Project Centre INNOFORCE

12.6.2000 Ewald Rametsteiner

EFI Regional Project Centre INNOFORCE

Gregor Mendel Straße 33 A – 1180 Vienna

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Table of Contents: 1. Definition of key terms .........................................................................................................3

1.1 Innovation .....................................................................................................................3 1.2 Entrepreneurship..........................................................................................................4

2 Theoretical Background ......................................................................................................5 2.1 General Theoretical Background: New Institutional Economics .................................5 2.2 Theoretical Models for Innovation Processes..............................................................6

2.2.1 The Linear Model and the Product Cycle Theory.................................................6 2.2.2 Systems approaches: Innovative Milieus and Innovation Systems .....................7

2.3 The Innovation Process in an Organisation.................................................................8 2.4 Influence Factors on Company Level Innovation ......................................................10

2.4.1 External factors determining innovation – the institutional environment............10 2.4.2 Internal factors determining innovation ..............................................................11 2.4.3 Influence Factors on Individual Level .................................................................11

2.5 Innovation and Policy .................................................................................................12 2.6 The Outcome of Innovation........................................................................................12 2.7 Critique on Innovation Research................................................................................12 2.8 Entrepreneurship, the Entrepreneurial Firm and Entrepreneurs ..............................13

2.8.1 Entrepreneurship ................................................................................................13 2.8.2 Entrepreneurs .....................................................................................................13 2.8.3 The Entrepreneurial Firm....................................................................................14

3 The Key Research Questions: ..........................................................................................16 4 Methodical Approach: ........................................................................................................17

4.1 Research Model 1: Actual Innovation and Entrepreneurship ....................................17 4.2 Research Model 2: The Potential for Innovation .......................................................19

4.2.1 Product Innovation Potential, including Services ...............................................19 4.2.2 Process Innovation Potential ..............................................................................19 4.2.3 Institutional System Innovation Potential............................................................20

4.3 The Measurement Instruments – Outline ..................................................................21 4.3.1 Work Package 1: Actual Innovation and Entrepreneurship in Forestry .............21 4.3.2 Work Package 2: Potential for Innovation ..........................................................23

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1. Definition of key terms 1.1 Innovation Innovation in general denotes successful introductions of novelties. However, as for most other rather general concepts, no commonly agreed definition exist. What is understood by the term “innovation” varies considerably between broad and narrow definitions. Schumpeter (1935) defines Innovation broadly, as a discontinuously occurring implementation of new combinations of means of production. Nelson and Winter (1977) define technological innovation as a non-trivial change in products and processes where there are no previous experiences. The literature on business economics distinguishes between output oriented and procedural definitions of innovation. In output oriented approaches, innovation can be understood as the first economic utilisation of new products or processes. New in this context can either be defined as a first introduction in the market or society as a whole („objective approach“) or new for an organisation or individual, irrespectively whether or not it has been introduced by others before („subjective approach“). In procedural approaches one can distinguish between general approaches in the definition of innovation, which includes all phases of a process, or a phase related definition. According to Schumpeter, four types of business innovation have to be distinguished: - the introduction of a new product or a new quality of a product, i.e. not known to the

customers (product innovation) - the introduction of a new production or procedural method in the industry sector

(procedural innovation) - opening up of a new market or of a new resource source - Implementation of a reorganisation Knight (1967) categorises innovation as follows: - product or service innovation - production process innovation - organisational-structure innovations - people innovations Freeman distinguishes between - incremental innovations, which are small changes or improvements on products or

processes which happen continuously - radical innovations - technological revolutions, which lead to the introduction of a greater number of new

products and processes. These types of innovations are also called basis-innovation. For the purposes of the EFI-RPC we use the broad definition of innovation by Schumpeter who defines innovation as a discontinuously occurring implementation of new combinations of means of production. Furthermore, innovation will be categorised into the following innovation types: a) product innovation - process innovation - organisational / institutional innovation b) new to the market innovation - new to the firm / forest holding innovation c) incremental innovation – radical innovation

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1.2 Entrepreneurship Entrepreneur comes from the French term entreprendre, which means "to undertake; to pursue opportunities; to fulfil needs and wants through innovation and starting businesses." (Burch 1986). However, as in many other rather young research fields, there is no agreed-upon definition of entrepreneurship (Boshoff 1995). Entrepreneurship has been characterised in many different ways by many different researchers over the years. For example, entrepreneurship has been described as merchant behaviour, as uncertainty and the risk bearing activities, as risk avoidance or minimising behaviour, as innovative, as novel combination of available means of production, and it has been associated with high levels of pro-activeness. A widely used definition of entrepreneurship is the definition proposed by Stevenson and Jarillo (1990), who define entrepreneurship as „the process by which individuals pursue opportunities without regard to resources they currently control“. This definition was empirically tested and subsequently adjusted to read “Entrepreneurship is the process by which individuals pursue opportunities without regard to alienable resources they currently control“ by Hart, Stevenson and Dial (1995). Timmons (1994) defines entrepreneurship as follows: "Entrepreneurship is creating and building something of value from practically nothing. That is, entrepreneurship is the process of creating or seizing an opportunity and pursuing it regardless of the resources currently controlled. Entrepreneurship involves the definition, creation, and distribution of value and benefits to individuals, groups, organisations, and society. Entrepreneurship is very rarely a get-rich-quick proposition; rather, it is one of building long-term value and durable cash flow streams." Intrapreneurship is a type of entrepreneurship which is found within a large corporation. The crucial dimensions of entrepreneurship are often defined as: innovativeness, risk-taking and pro-activeness. An entrepreneurial firm is then a firm „..that engages in product-market innovation, undertakes somewhat risky ventures, and is first to come up with pro-active innovations..“ (Wiklund 1998). Webster defines an entrepreneur as "one who creates a product on his own account“ or as „a person who organizes and manages a business undertaking, assuming all the risk for the sake of the profit." Entrepreneurs and entrepreneurship is generally seen as a different concept than managers and management. For Schumpeter (1934), entrepreneurs have the role of being the engines that drive economic development. They are change agents, who destroy the existing economic order to create something new. For the purposes of the EFI-RPC we use the definition of entrepreneurship by Stevenson et al who define entrepreneurship as „the process by which individuals pursue opportunities without regard to alienable resources they currently control“

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2 Theoretical Background 2.1 General Theoretical Background: New Institutional Economics A new branch of economists has developed neo-classical economic thinking further by looking into the modes of exchange and by focusing on the role of institutions. In general, institutions direct, channel or guide behaviour of individuals. This field of theories, mainly developed around and after the 1950´s is loosely defined as „New Institutional Economics“. It tries to explain the emergence, working mechanisms and decline of institutions in terms of individual behaviour by using the basics of economic theory. A lead scholar of this school, Douglas North, defines institutions as “ the humanly devised constraints that structure political, economic and social interaction (North 1991). He goes on to define organisations, which „consist of groups of individuals bound together by some common objectives. Firms, trade unions, co-operatives are examples of economic organisations; political parties, the Senate, regulatory agencies illustrate political organisations; religious bodies, clubs are examples of social organisations“. They consist of both informal constraints (sanctions, taboos, customs, traditions and codes of conduct) and formal rules (constitutions, laws, property rights) and their enforcement characteristics. Those constraints define, together with the standard constraints of economics, the opportunity set in the economy. a) Property Rights Theory The centre of the Property Rights Theory builds the idea that the design of property rights is of central importance for the allocation and use of resources. Property rights are defined as legally or institutionally sanctioned possibilities to act and to relate to other subjects in the form of contracts. Property rights are specified and enforced by polities. The property rights literature (e.g. Alchian and Demsetz, 1973) analyses the implications of institutions and organisations for performance, but in most of it the formation and evolution of institutions and organisations remain exogenous to the analysis.

Rules governing elections, property rights, and the right of contract are examples of the type of ground rules that make up the economic environment. An exchange of goods on markets is seen as an exchange of a bundle of rights. An institutional arrangement is an arrangement between economic units that governs the ways in which these units can co-operate and/or compete. An ownership arrangement is an institutional arrangement which governs the property rights of an individual, a group of individuals, or government.

b) Contract Theory and Institutional Choice The contract is a central concept in new institutional economics, as it is contracts that define institutions, lay down property rights and exchanges of these rights. Contracts are seen as an essential tool for inter-individual co-ordination. Theory distinguishes between complete (ideal) and incomplete contracts. Incomplete contracts are a result of bounded rationality of actors and the incomplete verifiability of relevant variables concerning the contract realisation (Grossman and Hart 1986). In most contract situations ex-ante institutional settings and rules as well as the information distribution drive contracting and determine the outcome of contracts. An important school within NIE, named “constitutional economics” and led by Buchanan (Buchanan and Tullock 1965, analyses the genesis and dynamics of such rules as well as, on the basis of economic principles, the decisions and consequences of choices of institutional design.

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c) Theory of the Firm / Organisation Since Coase´s seminal paper on “The nature of the firm” (1937) the firm is often conceptualised as an entity that is primarily kept together by transaction cost minimisation, a widely shared paradigma of the new institutional economics school. The initial question that were addressed by transaction cost theorists in the 1930s (Coase 1937) was simply, why do firms use internally those exchanges that could otherwise be conducted by using markets? Transaction cost theorists posit that organisations exist because they are able to economise on the costs of exchanging goods and services in the market. This approach also allows to address questions that are in the centre of organisation theory, in particular questions about the design of organisational structures under various circumstances. New approaches extend the view of the firm as an entity whose primary role is to acquire, combine utilise and upgrade knowledge. d) Economics of Information “Economics of information” is a branch of new neo-classical microeconomic theory. The theory of economics of information overcomes the assumption of complete and symmetric information in neo-classical theory by assuming uncertainty and incomplete information of market actors. It is concerned with the analysis of markets with uncertainties and with asymmetrical information distributions between exchange partners. Its main assumptions are that both the provision and the acquisition of information is creating costs and that information is asymmetrically distributed. The theory of economics of information states that a person will continue to acquire and process information as long as the cost of additional acquisition and processing does not outweigh the additional benefits. The marginal costs of the provision with information must be lower or equal to the marginal utility which a person gets from the use of the information. 2.2 Theoretical Models for Innovation Processes 2.2.1 The Linear Model and the Product Cycle Theory In the innovation literature on linear innovation the innovation process is conceptualised as a linear process that occurs in the following phases: - basic research - applied research - elaboration of prototypes - manufacturing of the product - introduction in the market (Innovation defined as the successful introduction in a market) - diffusion of the innovation - adoption of the innovation Diffusion of an innovation is defined as the process by which an innovation is communicated through certain channels over time among the members of a social system (Rogers, 1995). The product cycle theory is based on the assumption that products on markets are subject to an „ageing process“. Products are introduced on the market, go through a phase of rapid growth in terms of sales, mature and gradually decline into obsolescene. According to this model of market development a typical pattern of innovation can be observed that follows the centre-periphery approach to regional planning. Product innovation occurs in agglomeration areas, product modification and procedural innovation and little innovation activities occur in rural areas and old industrial regions.

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The strength of the linear model is the inclusion of business innovation into a broader concept of market structure and market development, competition and production strategies in a dynamic way (Tödtling 1990). The weaknesses of the linear model of innovation are that it disregards the fact that many innovations do not originate from science and research but from customers, suppliers or co-operation partners and workers. Empirical research has also shown that in practice feedback loops play a considerable role in innovation activity. All of these aspects have major political implications, as they touch upon questions of efficient resource allocation for research and development activities and innovation diffusion. Concerning the product life cycle theory it has been criticised that only in a few sectors of the economy product cycles can actually be determined, that the individual stages of the product life cycle can often not be determined, it is unclear how to deal with product modifications. The underlying centre-periphery approach is criticised to be over-simplistic (Storper and Walker 1989). 2.2.2 Systems approaches: Innovative Milieus and Innovation Systems While the product cycle theory looks at the innovation process from a individual business enterprise perspective, the innovative milieu approach looks at innovative regions. The business enterprise is then seen rather as a consequence of a local milieu (Aydalot and Keeble 1988). Contrary to the linear model, the innovative milieu approach is characterised by conceptualising innovation as a collective effort with division of labour between a multitude of actors. These actors form networks which are key sources of information and knowledge. The local characteristics of the actor network can be highly relevant, especially for tacit forms of knowledge. However, as Maillat (1991) points out, a “milieu” “...cannot be defined merely as a geographical area, it must be envisaged as an organisation, a complex system made up of economic and technological interdependencies. It groups together into a coherent whole a production system, a culture, and protagonists.” A milieu is therefore rather a socio-cultural approach. The innovative milieu approach is furthermore characterised by putting a high importance to synergies between different factors. The strength of the innovative milieu approach lies in the recognition of the role of the business environment for innovation and in the recognition of more qualitative aspects like informal, social and cultural factors, or historical structures. One of its main weaknesses lies in the difficulty to exactly define and measure what is meant by the term “milieu” (Maier and Tödtling 1995). A system of innovation has, usually in the context of national innovation system research, been defined by the leading researchers in the field as follows: “ .. the network of institutions1 in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies.” (Freeman, 1982) “ .. the elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge ... and are either located within or rooted inside the borders of a nation state.” (Lundvall, 1992) “... a set of institutions whose interactions determine the innovative performance ... of national firms.” (Nelson, 1993) “ .. the national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change generating activities) in a country.” (Patel and Pavitt, 1994) “.. that set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is

1 Institutions are often commonly defined as “the humanly devised constraints that structure political, economic and social interactions“. Douglas North (1991)

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a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies.” (Metcalfe and DeLiso, 1996) Edquist (1997) defines nine common characteristics of the systems of innovation approaches: 1. innovations and learning at the centre 2. holistic and interdisciplinary 3. a historic perspective is natural 4. differences between systems and non-optimality 5. emphasis on interdependence and non-linearity 6. encompasses product technologies and organisation al innovations 7. institutions are centre 8. conceptually diffuse 9. conceptual framework rather than formal theories Specific analyses in national innovation system research are directed to deepening the understanding of certain types of flows or structures and processes in innovation systems, especially: 1. human resource flows; 2. institutional linkages; 3. industrial clusters; 4. innovative firm behaviour. In practice, there are many different approaches to analysing innovation systems. Firm-level innovation surveys question enterprises on their sources of knowledge most relevant to innovation and allow a ranking of different linkages by industrial sector and country. Cluster analysis focuses on the interactions between particular types of firms and sectors, which can be grouped according to their technological and networking characteristics. The EFI RPC uses the innovation system approach and bases the work on Nelson´s definition of an innovation system, which reads: “... a set of institutions whose interactions determine the innovative performance ... of national firms.”, or of Metcalfe: “.. that set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies.” 2.3 The Innovation Process in an Organisation The process of innovation in an organisation can be categorised in the following model of stages in the innovation decision process (Rogers 1995): 1. Prior conditions

- Previous practice - Felt needs / problems - Innovativeness - Norms of the social system

2. Knowledge – the characteristics of the decision making unit are - Socio-economic characteristics (education, social status, economic orientation,...) - Personality variables (attitude towards education, fatalism, achievement motivation, ) - Communication behaviour (interconnectedness, active information seeking, change

agent contact) 3. Persuasion – related to the perceived characteristics of the innovation

- Relative advantage - Compatibility

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- Complexity - Trialability - Observability

4. Decision (adoption or rejection) 5. Implementation 6. Confirmation Individual agents or companies can be classified according to their adoption behaviour related to innovations. One common scheme is to classify them according to the degree to which an organisation or individual is relatively earlier in adopting new ideas than other members of a social system. This aspect will further be elaborated in 2.4.3. The EFI-RPC focuses on prior conditions, knowledge and the implementation phase of innovation, while leaving out the other stages of an innovation process.

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2.4 Influence Factors on Company Level Innovation A key for understanding innovation / innovation diffusion is to identify why many companies are not innovating, and the impediments faced by those who wish to innovate, or to increase their level of innovative activity. Related to markets as a whole, a significant body of research has investigated the relationship of industry structure to industry entrance by and success of new firms, relying heavily on Porter’s five forces model (Porter 1985). Barriers to entry are in his view the creations of industry competitors. Related to new products or product modification, significant less theory-based research has been conducted. Most surveys on innovation use a list of possible external and internal factors, which might include, e.g. laws/statutory requirements, lack of know how or personnel, ease of imitation, high costs or risk, lack of capital, market risk. 2.4.1 External factors determining innovation – the institutional environment The type and degree of innovation on company level are the result of internal and external factors. The external factors concern characteristics of the market and the sector specific environment, such as the level and type of competition or given technological conditions. They concern regional conditions or the local milieu, such as the knowledge and information level and the availability of qualified workers, research and education institutions, the quality of transport and communication infrastructure. A further external factor constitutes the relevant legal and political system and its policies. For inducing product innovation, the following external or regional factors have been found to play, in general, a major role (Davelaar 1987): - highly qualified workforce - technical and economic universities and research institutions (knowledge centres) - company level services (economic and technical consultancy, market research, legal

services) - sufficiently many potential suppliers and subcontractors - sufficiently big markets and good market access - transport infrastructure, especially to enable personal communication - access to capital, especially risk capital For the adoption of process innovation, the following factors have been found, in general, to be important (Maier and Tödtling, 1996): - density of companies of the same or similar branches - sales and service nets of new technologies that enable the process innovation - access to public consulting and transfer service - availability of specifically educated workforce Studying the diffusion of innovation Rogers (1995) also highlighted the specific role of change agents. A change agent is an individual who influences clients´ innovation-decision in a direction deemed desirable by a change agency (ibd.). A change agent usually seeks to secure the adoption of new ideas, but he or she may also attempt to slow the diffusion process and prevent the adoption of certain innovations with undesirable effects. Change agents fulfil seven roles in the process of introducing an innovation (ibd.): - to develop a need for change - to establish an information-exchange relationship - to diagnose problems - to create an intent in the client to change - to translate an intent to action - to stabilise adoption and prevent discontinuance - to achieve a terminal relationship by developing a self-renewing behaviour

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2.4.2 Internal factors determining innovation The internal factors concern organisational aspects, such as organisational characteristics of the company and its size, quality of workforce, and the goals and innovation strategy of the company. Freeman (1982) distinguishes between offensive, defensive innovation strategies, imitation strategy, traditional and niche strategies and dependent satellites. The latter type does not innovate but simply produces according to specifications of the customer Rogers (1995) defines the following variables as being key to explain organisational innovativeness (+ or – shows direction of correlation): - individual (leader) characteristics (see 2.4.3) - internal characteristics of organisational structure

- centralisation (-) - complexity (+) - formalisation (-) - interconnectedness (+) - organisational slack (+) - size (+)

- external characteristics of the organisation - system openness (+)

Co-operation can be defined as the voluntary collaborative work of firms with the aim to achieve progress in technical or economic fields, while maintaining decision freedom. In terms of co-operation the following categories can be distinguished: - in relation to sectoral orientation: horizontal co-operation and vertical co-operation - geographical: local, regional, national and international co-operation - number of co-operating firms - function of co-operation (research and development, supply, production, distribution,

sales, etc.) 2.4.3 Influence Factors on Individual Level Individual agents can be classified according to their adoption behaviour related to innovations. One common scheme is to classify them into (Rogers 1995): - Innovators – the venturesomes - early adopters – the respected local opinion leaders - early majority – the deliberate followers - late majority – the sceptical - laggards – the traditional Rogers (1995) summarizes the results of existing literature on the characteristics of adopter behaviour into the following categories (sub-categories denote some aspects where a majority of studies found support for differences in adopter behaviour categories): - socio-economic characteristics

- attitude towards credit, education, commercial orientation - personality values

- favourable attitude towards education and science, change, ability to cope with uncertainty, rationality, non-fatalism, higher aspirations, intelligence

- communication behaviour - interconnectedness with the social system, more active information seeking, change

agent contact, cosmopoliteness, opinion leadership, exposure to interpersonal communication channels, knowledge of innovations

The EFI-RPC studies the relationship between innovation behaviour and the external and internal factors determining innovation behaviour of a forest holding, as well as some personal variables of the main decision maker.

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2.5 Innovation and Policy Edquist et al (1998) provide a taxonomy of innovation policy: - policies to strengthen the knowledge infrastructure - policies to create specific organisations to support innovation activities - policies to develop some basic institutions which affect interactive learning - policies to improve conditions for financing innovation OECD (1998) lists possible innovation system related policy responses to a range of possible systemic imperfections, such as: - inefficient functioning of the market - informational failures - limited interaction between actors in innovation systems - institutional mismatches between (public) knowledge infrastructure and market needs - missing demanding customer - government failure 2.6 The Outcome of Innovation The consequences of innovation can be studied on different levels, e.g. the economy wide level, regional level, company level, individual level. The outcome of innovation can be functional and dysfunctional, intended or unintended. Functional consequences often are increased production effectiveness, higher income, dysfunctional are greater expenses. 2.7 Critique on Innovation Research The critique most often brought forward related to innovation and innovation diffusion research is the pro-innovation bias. Its implication is that an innovation should be adopted by more, more rapidly, and that an innovation should neither be re-innovated nor rejected. Another critique is the individual blame bias (Rogers 1995), whereby the research is conducted from the position of a change agent, interested in promoting change and blaming individuals for not doing so rather than the system. Further critiques focus on the recall problem in surveys.

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2.8 Entrepreneurship, the Entrepreneurial Firm and Entrepreneurs 2.8.1 Entrepreneurship In an attempt to structure the very fractured field of entrepreneurship research, Bechard (1997) conducted a literature analysis on the most often quoted references in five academic journals that are mainly related to entrepreneurship research in the US and Europe. He distinguished four main areas of research - the economic forces regulating or supporting demand and supply of goods and services - psychological forces determining personality traits and encouraging innovative behaviour - socio-cultural forces modulating cultural traits and allowing to perceive and act on

opportunities - organisational forces provoking adaptation to pressure from competition and/or

supporting the creation of new ventures Over the last decade, research and theory development in the field of entrepreneurship has moved from the study of individual differences/personal characteristics toward integrated models of entrepreneurship as a process (Hills et al 1997). Although no universal definition exists, entrepreneurship is today widely defined as a process. Olson (1986) separates this process into four main stages: - Identification – becoming aware of a market opportunity - Design – evaluating the market opportunity - Selection – making a choice concerning the course of action - Implementation – converting the potential innovation onto a relity Ellsworth (1985) considers action to be the difference between creative people and entrepreneurs. As a result he dichotomizes the entrepreneurship process into two distinct dimensions: - creativity

- vision of the opportunity - strategy to exploit the opportunity

- initiative / action - commitment to the action - marshalling necessary resources - managing implementation

Research on entrepreneurship seems to have increasingly focused on opportunity as the heart of the entrepreneurial phenomenon. Kirzner (1973) argued that the discovery of opportunities is the core issue of entrepreneurship. According to Kirzner, entrepreneurs find and exploit opportunities by taking advantage of economic disequilibria by knowing or recognizing things that others do not (ibd.). Christensen, Madsen, and Peterson (1989) defined opportunity recognition as, “either a) perceiving a possibility to create new businesses or b) significantly improving the position of an existing business, in both cases resulting in new profit potential.” 2.8.2 Entrepreneurs Approaches to determine the characteristics of entrepreneurs fall largely into three areas: - attitudinal research - personality traits - demographic characteristics A wealth of different constructs and related research has been undertaken to better determine the key personality traits of entrepreneurs. Shaver and Scott (1991) developed an entrepreneurship model of personality traits which is based on four constructs: achievement

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motivation, locus of control, risk perception, and creativity. Achievement motivation has been singled out as the most prevalent construct to explain entrepreneurship (Johnson 1990), mainly based on the works of McClelland (1961). Other researchers summarise attributes of entrepreneurs into entrepreneurial attitude and behaviour. An entrepreneurial attitude or orientation refers to the "willingness of an individual or organisation to embrace new opportunities and take responsibility for effecting creative change" and entrepreneurial behaviour is doing whatever it takes to move an idea through to implementation. (Morris 1998). A description of entrepreneurs by the identification of clusters of attitudes that are different from non-entrepreneurs has been described by Robinson et al (1991). Results indicate that entrepreneurs are higher than owners or managers on the following attitudinal dimensions - Innovation - Achievement - Personal control - Self confidence Timmons (1994) in considering the search for understanding of the entrepreneurial mind in thought and action, found that a consensus emerged around six dominant themes of desirable and acquirable attitudes and behaviours. These are: commitment and determination, leadership, opportunity obsession, tolerance of risk, ambiguity and uncertainty, creativity, self-reliance and an ability to adapt, and the motivation to excel. He describes entrepreneurial activity as a "human creative activity". It involves "building a team of people with complementary skills and talents; of sensing an opportunity where others see chaos, contradiction and confusion, and of finding, marshalling and controlling resources to pursue the opportunity." 2.8.3 The Entrepreneurial Firm Although much behavioural research has focused at the individual level of analysis, more recently many researchers have focused on a firm-level combination of risk taking, innovativeness and pro-activeness, called entrepreneurial orientation (Brown 1998). An entrepreneurial orientation of a firm refers to the "willingness of an organisation to embrace new opportunities and take responsibility for effecting creative change". (Morris 1998). One of the most often used conceptualisations of entrepreneurship or entrepreneurial management is Stevenson’s (1983), which views entrepreneurship as a management approach of pursuing opportunity without regards to alienable resources currently controlled. In summary, Stevenson’s view of entrepreneurship is based on opportunity-based behaviour. Stevenson maintains that firms can be classified in a matrix according to their degree of administrative/resource or entrepreneurial/opportunity orientation. At the entrepreneurial/opportunity end of the spectrum are the promoter firms, while at the administrative/resource end are the trustee firms. Implicit in this view is whether the firm has an outward focus on perceiving opportunities in the environment (entrepreneurial/ opportunity focus) as promoters; or an inward focus on resources currently controlled (administrative/ resource focus) as trustees. Stevenson describes these two types of firms by categorising management behaviour into six key dimensions; - strategic orientation - commitment to opportunity - resource commitment, - control over resources, - organisational systems and - compensation policy.

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Strategic orientation describes what factors drive the creation of strategy, whether it is opportunity oriented and not by the resources that may be required to exploit that opportunity. The commitment to opportunity is related to strategic action, whether the promoter is action-oriented and able to commit to this action rapidly. For Stevenson, commitment to resources means exploiting opportunities while minimising the resources required. The second component of Stevenson’s opportunistic view on the control of resources maintains that entrepreneurial firms are less concerned with owning resources than it is with its ability to use, exploit and/or extract value from them. Stevenson’s final two dimensions focus on the firm’s structure and reward systems. The management structure of the promoter organisation is flat and made of multiple informal networks. The promoter’s organisation is designed to co-ordinate key non-controlled resources, to be flexible and to create an environment where employees are free to create and seek opportunity. The compensation policy of entrepreneurially managed firms tend to base compensation on how individuals contribute to value creation. The organisation’s structure assists in this evaluation because it is designed for independent action and accountability. Firms managed administratively tend to relate compensation with the amount of resources under the individual’s controlled (i.e., assets and/or people) and with seniority. Brown (1998) identifies two additional underlying key dimensions that are important to Stevensons´s conceptualisation of entrepreneurship. These are growth (Stevenson & Jarillo, 1986) and an opportunistic idea culture (called an “entrepreneurial culture “ by Stevenson & Jarillo, 1990). The EFI-RPC research focuses on the entrepreneurial firm and uses the six key dimensions described by Stevenson (1983) to classify the entrepreneurial behaviour of forest holdings. We also include variables on individual level entrepreneurial orientation to research into the role of personal factors.

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3 The Key Research Questions: The key research questions should form the guiding line to specify and define the specific research interest. Based on the key research questions, hypotheses can be elaborated and tested in the field. Question 1: How much innovation is taking place on forest holdings and what type of

innovations are occurring? Question 2: What is the distribution of innovation adopter categories, and what are the

characteristics of these adopters?

The answer to this question should allow to categorise different individuals according to their personal innovation/entrepreneurship orientation and behaviour, to be able to specifically adapt communication strategies of extension services on concepts and instruments.

Question 3: What are the main external (institutional) and internal factors determining

innovation on forest holding level? Which are driving and which are hampering factors? How are these factors interrelated? The specific interest here might be put on the forest institutions that are related to the market environment, i.e. forestry extension services, forest policy and legislation, forest research institutions.

Question 4: What is the degree of entrepreneurial (management) orientation of forest

holdings and what are the characteristic differences between an entrepreneurial oriented and an administrative-resource oriented forest holding?

The answer to this question should allow to categorise different organisations/ individuals according to the innovation/entrepreneurship orientation of the firm, as observable in the structure of the firm, to be able to specifically adapt communication strategies of extension services on concepts and instruments regarding the structure of a firm/organisation.

Question 5: What are the main product and process innovations on the market today, and

possibly tomorrow? What happens on the forefront of implementing such innovation? What are the experiences of these benchmark setting innovators? The answer to this question should allow to identify and direct attention to these developments that will shape the future of forest enterprises, and to highlight that practical examples exist (leader role)

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4 Methodical Approach: In the following, the expressions firm, organisation, company, business, entreprise will all be used as a synonym. Administrational entities of public forests are regarded as organisations or firms. The question of defining adequate borders of such entities, on the basis of sovereignty in decision and financial matters have to be solved for each of the situations. 4.1 Research Model 1: Actual Innovation and Entrepreneurship The basic research approach taken to set up the research model (see Fig. 1) is as follows: - focus on the firm as main unit of analysis - use the innovation system approach as the theoretical basis - adapt the innovation system model

- include socio-cultural factors, as specified by the innovation milieu approach - include aspects of the linear model to better capture the innovation behaviour

relevant factors and processes within a company - integrate the entrepreneurial dimension in the innovation framework - adapt the general model to sector specific conditions

In general, a broad variety of factors can be named that might have a significant influence on the innovation behaviour of firms or organisations. From this list of potential factors, a more concise list of the most important factors has to be derived.

Innovation Behaviour of

the Organisation a) Product innovation

• New to the market • New to the firm

b) Process innovation • New to the market • New to the firm

External Factors: a) market environment characteristics

• size of market • competition, suppliers, .. • technical characteristics

b) regional institutional characteristics • knowledge centres (research) • workforce education • service infrastructure • culture / milieu factors (?)

c) policy institutions • administrative and legal framework • innovation related forest policies

Internal Factors a) Organisational

• Size of company, resources • Quality of workforce • Goals • Strategy • Organisational structure

b) Personal • Entrepreneurial orientation • Information behaviour • Communication behaviour • Values, incl. cultural/social (?)

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Figure 1: Research Model: Dependent and independent variables (in italics: aspects related to entrepreneurship)

The concept of entrepreneurship is integrated into the Research model as outlined in Fig. 1 above in two areas addressing the internal factors: - organisational: entrepreneurship or opportunity orientation in goals, strategies,

organisational structure - personal: entrepreneurial attitudes or orientation Draft main hypotheses related to innovation behaviour of the firm and its determinants

Hypotheses will have to be derived from the detailed and commonly agreed aims of the project.

a) Innovation behaviour

Hypothesis 1: A minority of firms actively has introduced product or process innovations in the last two years.

Hypothesis 2: The majority of innovations introduced are new to the firm, not new to the

market, introduced innovations are incremental, not discontinuous, and process- , not product innovations.

b) Determinants - External / institutional factors

Hypothesis 3: The degree of innovative behaviour depends on the institutional setting

of property rights of forests. Hypothesis 4: The obstacles to entrepreneurial and innovative behaviour are mainly

attributed to factors outside of the personal influence sphere to external factors, mainly in non existent market incentives (low demand) and institutional disincentives (lack of change agent support, regulatory burdens, non existing research support).

Hypothesis 5: Forest owners or managers view market related determinants to be more

important determinants for innovation than other aspects of the institutional system.

Hypothesis 6: Forest owners or managers are of the opinion that the forestry specific

institutional system surrounding forest owners and managers is weak in terms of their services to support or induce specific innovation and entrepreneurship (low quality change agents).

c) Determinants - Internal factors

Hypothesis 7: The economic objectives of the majority of forestry enterprises are targeting the maintenance of the status quo.

Hypothesis 8: A minority of forest holdings shows a entrepreneurial orientation in its

organisational strategy and structure.

Hypothesis 9: A minority of forest owners or general managers shows an

entrepreneurial and innovative orientation.

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Hypothesis 10: The degree of entrepreneurial orientation of forest owners and/or managers is correlated with cultural, social and personal values of the individual.

e) Correlation hypotheses

Hypothesis 11: the degree of innovative orientation of forest owners, managers is

correlated with the values of the individual, and his attitudes towards learning and change, his information behaviour and his attitude towards networking and co-operation.

4.2 Research Model 2: The Potential for Innovation As outlined in chapter 2, innovation is understood as a process. In order to determine the potential for innovation, it has to be determined, what should be included in the project specific definition of innovation potential: - Results of applied research - Existing prototypes, or market tests - Introduction in the market / institutional system

– new to the sector specific market / institutional system – new to the market in the economy / institutional system as a whole

4.2.1 Product Innovation Potential, including Services product and service innovations seem to be quite easily determinable, after defining what is meant by the term innovation potential. Process and institutional system innovation potential, however, is more difficult to determine. 4.2.2 Process Innovation Potential

Figure 2: Porters Value Chain (Porter 1985)

The idea of the value chain is based on the process view of organisations, the idea of seeing a manufacturing or service organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Activities of converting inputs to outputs can

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be classified generally as either primary or support activities that all businesses must undertake in some form. According to Porter (1985), the primary activities are: - Inbound Logistics - involve relationships with suppliers and include all the activities

required to receive, store, and disseminate inputs. - Operations - are all the activities required to transform inputs into outputs (products and

services). - Outbound Logistics - include all the activities required to collect, store, and distribute the

output. - Marketing and Sales – activities to inform buyers about products and services, induce

buyers to purchase them, and facilitate their purchase. - Service - includes all the activities required to keep the product or service working

effectively for the buyer after it is sold and delivered. Secondary activities are: - Procurement - is the acquisition of inputs, or resources, for the firm. - Human Resource Management - consists of all activities involved in recruiting, hiring,

training, developing, compensating and (if necessary) dismissing or laying off personnel. - Technological Development - pertains to the equipment, hardware, software, procedures

and technical knowledge brought to bear in the firm's transformation of inputs into outputs.

- Infrastructure - serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.

Process innovation between companies will either be included into the value chain model´s external links or be dealt with in the institutional system. 4.2.3 Institutional System Innovation Potential Institutional system innovation potential concerns both the system elements, its structure and system element interactions, mainly in terms of knowledge or information flows relevant to innovation. The system structure concern the main organisations that are relevant for innovation, including firms, incubator or change agents, research institutes, extension and other services, public authorities, and others and the rules or opportunities set by these organisations. The means or instruments for information flow concern the range of general communication means. Knowledge or information flows relevant to innovation are e.g. 1) interactions among firms 2) interactions among firms and research institutes 3) diffusion of knowledge and technology to enterprises, through extension services, public

authorities 4) personnel mobility (human resource flows) Related to institutional system innovation potential it is proposed to focus on forestry specific organisations and structures, especially the sector specific: - administrational structure - research - education - extension services Innovation potential could be determined according to the system elements, structures and interactions or according to key dimensions used by Stevenson 1983 (see chapter 2.8.3). The focus of investigation could be to find institutional set ups that are intended to efficiently and effectively enhance production and diffusion of sector specific knowledge.

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4.3 The Measurement Instruments – Outline 4.3.1 Work Package 1: Actual Innovation and Entrepreneurship in Forestry a) Survey design

The basis population of the survey are forest holdings (used interchangeably with business, firm, enterprise, or “autonomous” administrative units of public forests) in a specific country or region. It has been expressed at the first preparatory meeting in Igls /Tyrol in April 2000 that the survey population will be different in the different participating countries. This will also influence the actual sample size and the percentage share of the population from which data is collected, and the actual sampling procedure. There are two general options for sampling: - random sample from the population - quota sample of known innovative and entrepreneurial firms and random sample

The proposed basic unit of analysis is the forest enterprise. The targeted information source would be the person responsible for determining forest management goals, management strategy and major new product or process launch decisions of the firm or holding.

b) Data collection

The data collection methods planned to determine the innovation behaviour of firms (forest owners, managers, forest administration unit) and its determinants comprise personal interviews (telephone interviews, personal interviews) or postal interviews based on a structured questionnaire. The type of interview used by the individual countries will probably vary according to sample sizes, resource and administrational factors.

c) Questionnaire

It is proposed to elaborate a master questionnaire design, if possible in a modular form. The partners should then be able to choose common modules or questions and, if necessary, modify the questions and add questions for individual research interests. The basic type of questions would in such an approach be closed and open questions. The individual questionnaires will then run through pre-testing and refinement. However, depending on the sampling and the general data collection design, it might be useful to combine more quantitative approaches with more qualitative approaches of in depth open interviews of a quota sample of known innovative and entrepreneurial firms. The latter could also act as cases in work package 2 (innovation potential: actual cases of firms who introduced new to the market products / services).

d) Fieldwork e) Data analysis

The data collected will be analysed in the individual countries, and / or the EFI service office, using standard uni- and multivariate data analysis methods.

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f) The measurement of innovation behaviour: variables used Quite many surveys on innovation behaviour of firms measure innovation behaviour in the following categories: Introduction of products / processes (within a defined period) that were - new to the market - new to the firm One crucial aspect of measuring innovation behaviour is the characterisation of what is an innovation and what is just a modification. This aspect is significantly more relevant for process innovations than for product innovation. In would in general be more practical to use the subjective definition approach, which would mean, that it is up to the interviewee to decide whether a change made should be characterised as a modification or an innovation, while giving as a general guideline, a very wide definition of innovation – in the line of „a major modification of processes or products“. While this approach has the disadvantage of fuzziness, it avoids the technically induced headaches of comparing each modification against a very rigid objective definition. g) Measurement of Determinants for Innovation behaviour: approaches, constructs, and variables used The measurement of determinants for innovation will have the view of the interviewee as the starting point. He/she will either name factors unprompted or rate different factors on a list according to his/her view how much the aspect in question is a determining factor for innovation in his /her organisation and whether this factor is driving or hampering innovation. A final list of external and internal factors will have to be generated after a more thorough literature study and more feedback from the partners in the project. The factor categories of the research model shown in Fig. 1 can be seen as a possible starting point. Relevant external factors are related to market environment, regional characteristics, policy institutions. These and possible other relevant external factors determining or perceived to determine the innovation behaviour could again either be asked in a self-reporting format on the positive and the impeding external aspects related to innovative behaviour or Relevant internal factors related to organisational aspects determining or perceived to determine the innovation behaviour could again either be asked in a self-reporting format on the strengths and weaknesses of the organisational factors related to innovative behaviour or a scheme could be devised for some aspects to characterise and determine innovation or entrepreneurial companies from non-innovative or entrepreneur oriented companies. A commonly used approach has been elaborated by Stephenson (1983). Stevenson maintains that firms can be classified according to their degree of administrative/ resource or entrepreneurial/ opportunity orientation (see chapter 2.6.3). Relevant personal factors, such as the entrepreneurial orientation, attitudes towards change, learning, co-operation, information and communication behaviour, or values can also be asked using scales with a range of items. For each of the above mentioned constructs, a great variety of scales exist. One of the most influential concepts on entrepreneurial orientation is the measurement construct elaborated by Miller/Covin & Slevin. Another more often used scale is the measurement instrument EAO (Entrepreneurial Attitude Orientation) (Robinson 1991). Schiebel (1997) uses three constructs to distinguish successful entrepreneurial individuals: general locus of control belief, ability to solve problems, social initiative. None of these scales has up to date been obtained. A detailed decision on the type of construct to use and which measurement instrument will again best be determined after a more thorough literature search on research results, especially the explanatory power, for each of these constructs, and after consultation with and input from the partners.

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The most well known innovation surveys are the Community Innovation Surveys (CIS) conducted by EUROSTAT. The third innovation survey of this type will be carried out in 2001. A typical sample of variables collected in surveys by EUROSTAT on innovation are: enterprises with innovation activity, turnover due to innovative products, innovation expenditures, objectives of innovation, sources of information for innovation, co-operation in innovation activity, number of innovating enterprises with progress problems, hampering factors for innovating enterprises with seriously delayed projects, hampering factors for innovating enterprises with abolished projects, hampering factors for innovating enterprises with not even started projects. The second mayor survey on innovation in Europe was the PACE survey, conducted in 1994. The PACE survey focused on R&D managers of the largest firms in the EU. The information collected in this survey includes the following variables: types and goals of innovation, external sources of technical knowledge, public research, methods to protect innovation, government support to innovation, obstacles to profiting from innovation. In order to be able to collect data on determinants of innovation, the existing broad variety of possible determining factors has to be condensed to a more concise list of the most important factors on which data can be collected, given the resource restraints. 4.3.2 Work Package 2: Potential for Innovation The potential for innovation in the three areas - product / service innovation - process innovation - institutional innovation will be tackled using the approach outlined in chapter 4.2. The most difficult areas to analyse are process innovation and institutional system innovation. In both areas, focusing on major innovation areas and finding practical borders for the analysis seems crucial, given the limited resources available. According to the discussion paper to the proposal presented at the first preparatory meeting in April in Igls/Tyrol, it is intended to use two methodical approaches to determine innovation potential: - a qualitative approach by setting up expert panels with a limited number of experts

named by the participating institutes, and based on ground work organised by the project centre office. Expert panels could be installed separately for product/service innovations and for organisational / process innovations and for institutional innovation. The single partner organisations and possibly further experts mentioned by them take part in these expert panels, which should take place approx. one to two times per annum.

- a quantitative approach by setting up a delphi-type survey of experts, especially from business, but also form other research institutes, governmental organisations and other.

As some questioned the value of such a broader survey on the state of innovation potential and (e.g. short and mid term) expectations on the future role of identified markets, technologies or others, this aspect should be further discussed. Several possible further alternatives exist. One could conduct a pure business survey, or enlarge the experts groups by inviting business representatives, etc. A written or telephonic Delphi like survey of a larger number of respective experts could help to deepen, validate and better quantitatively underpin the results of the expert panels regarding the innovation potential, and to get the view of business representatives.

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