* Robin Cowan and Nicolas Jonard 3.1 INTRODUCTION This chapter presents a very stylized model of innovation to examine one feature of the information technology revolution. Innovation can be seen as the production of knowledge. It has many diﬀerent types of inputs, but for our purposes we focus on one of the most important inputs, namely existing knowledge. When a ﬁrm innovates, it uses both private knowledge and public knowledge. One of the important features of the IT revolution, particularly as represented by the growth of the worldwide web, is that the fund of public knowledge is bigger, and more easily accessible. It is this feature that we explore here. Since as early as Schumpeter, economists have acknowledged that innovation consists largely of the recombination of existing knowledge. Recently, however, changes in the knowledge environment of ﬁrms have made this recombination more diﬃcult for individual ﬁrms: we refer to ‘the expanding knowledge base’ of ﬁrms and industries.1 The general idea is that in most industries today the technologies both being used and being produced involve technological expertise that covers a much broader range of ‘disciplines’ than has hitherto been the case (see Weitzman, 1998; Olsson, 2000; Smith, 2000). What this implies is that types of knowledge necessary to innovate and compete successfully can lie outside a ﬁrm’s main area of expertize. A common way now of coping with this problem is to form an alliance with a ﬁrm that has the missing expertize. Inter-ﬁrm cooperation can be extremely...
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