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The Economics of the Digital Society

Edited by Luc Soete and Bas ter Weel

This important book presents a unique body of research into the economics of the digital society. It questions how modern economies have been transformed as a result of digital goods and markets, and explores the policy implications and challenges of this revolution.
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Chapter 3: Network formation, innovation and IT use

Robin Cowan and Nicolas Jonard


* 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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