Saviotti defines technologies as “the set of activities by means of which human beings modify their external environment” (2005, p. 12). These ―activities‖ mostly refer to technical artefacts and do not include ideas. In a
Co-evolution in network industries
practical ways in industry”. It is linked to the use of tools and crafts. The boundaries of the technologies are
physically given.
Within this research small hydropower represents the technology (see Chapter 4), whereby in a larger perspective the technology is the whole electricity sector (generation, transport, distribution; see Section 2.2). This larger view matters for example in regards to the continuous and instant adjusting of electricity demand and supply.
Institutions have been defined in various ways (Williamson, 2000). Many scholars in the literature have different understanding of institutions, primarily based on their background in economics and social sciences (Nelson and Sampat, 2001). The most common view of institutions is to see them as the rules of the game. Douglas North is one of the most famous supporters of this viewpoint.
North (1990: 3) defines institutions as “the rules of the game in a society or, more formally, the humanly devised
constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change.” He distinguishes between informal (sanctions, taboos, customs,
traditions, and codes of conduct) and formal (constitutions, laws, property rights) institutions and their enforcement aspect.
North argues that there is a distinction between institutions (i.e., the rules of the game) and their actors (i.e., the game players, also called stakeholders within this research). He defines these actors as organisations, i.e.
“groups of individuals bound by a common purpose to achieve objectives” (North, 1990). Actors may interpret the
same institution with different meanings. Such differences can give rise to debate or conflict and lead to the incremental modification of those institutions over time (Jackson, 2010).
North‘s definition is assumed for this research. Other scholars take a similar perspective, such as Ménard und Shirley (2005: 1) who define institutions as ―the written and unwritten norms, rules and constraints that humans
devise to reduce uncertainty and control the environment. These imply:
i. written rules and arrangements that govern contractual relations and corporate governance, ii. constitutions, laws and rules that govern politics, government, finance and society
iii. and unwritten codes of conduct, norms of behaviour and beliefs.”
Groenewegen et al. (2010: 25) further distinguish between the formal and informal institutions: formal institutions are defined ―as public rules of behaviour that are designed by a public authority with legislative power (parliament
or senate) and enforced by (i) a public authority with executive power (the administration or government, making use of police, regulatory agencies and other enforcement agencies); and (ii) a judiciary power (judges) that has the right and the power to penalize an individual or organisation for breaking the rule.” Informal institutions are
defined “as private rules of behaviour that have been developed gradually and spontaneously and do not need
any legal enforcement because the rules are sanctioned by the private parties themselves or because it is in the self-interest of the actors to follow the rules of their own accord.”
Historically, institutions were first seen as having evolved in a way that assured they were always efficient; however, it became the view that societies that possess relatively efficient institutions are very lucky (Nelson and Sampat, 2001: 36).
In light of Sections 3.2 and 3.3, institutions are seen as a set of rules shaping the interaction between actors involved in the functioning of a technological systems (Koppenjan and Groenewegen, 2005), such as network industries.
3. Co-evolution and coherence between institutions and technologies in network industries
The chosen definition of institutions comes from scholars involved in New Institutional Economics (NIE) such as North. NIE is an interdisciplinary compilation of economics, law, organisational theory, political science, sociology, and anthropology to understand the institutions of social, political and commercial life (Klein, 2000). Its primary language is economics and its origins are in Original Institutional Economics (OIE). OIE departed from neoclassical economics in its recognition of the importance of institutions in structuring human behaviour and economic exchange (Ménard and Shirley, 2005). NIE aspires to explain why and how institutions emerge, function and evolve (Williamson, 2008). It is interested in social, economic and political institutions that govern daily life (Klein, 2000). It not only incorporates institutions in economic analysis, but considers policy making as well.
NIE builds on the assumption of scarcity and competition (Williamson, 2000). It differs from standards neoclassical: there is no perfect information, the rationality of actors is bounded and transactions are neither costless nor instantaneous. Actors have a bounded rationality because they lack complete knowledge for their decision making due to their cognitive limitations, time and information constraints (Williamson, 2000). Therefore, actors adopt an opportunistic behaviour based on their knowledge and due to the information asymmetries. Finally, NIE focuses on transactions costs and not production costs like classical economics. Transaction costs economics is one of the three pillars of NIE with the property rights theory and the agency theory51 (Groenewegen, 2005: 7).
In Transaction Cost Economics (TCE), the transaction is the unit of analysis (Williamson, 2009). Transaction costs refer to the costs incurred when making an economic exchange. They consist of several aspects (Groenewegen, Spithoven et al., 2010: 22): 1. Search and information costs; 2. costs to draft, to negotiate and to conclude contracts; and 3. monitoring costs and enforcement costs. The costs under 1. and 2. are ex-ante costs, whereas under 3. they are ex-post costs. These costs cannot be ignored and have to be optimised as much as production costs. Today‘s complex world requires more contracts and thus TCE increased in significance (Groenewegen, Spithoven et al., 2010). Section 6.1 considers TCE.
Williamson developed a model for the economics of institutions (Williamson, 1998). It distinguishes four levels of analysis of institutions and is based on two main criteria: first, the level of analysis and second, the frequencies and purpose of change of institutions. Both of these criteria are qualitative and aim to highlight only some general differences.
51 Agency theory concerns the relationship between a principal and an agent. An actor delegates to another some authority to act on his behalf. The reason behind is that an agent has a better information or expertise in a given field. This advantage causes the so called information asymmetry. Therefore, the key questions in agency problems are (i) how can a principal be sure that the agent acts according the task and authority delegated, and (ii) is it possible to define incentives in contract which ensure the principal that the agent will take the same actions as the principal would take. A large literature base has explored the influence of asymmetric information in regards to policy making (e.g. regulation) for natural monopolies such as the
Source: (Williamson, 1998: 26)
Figure 3-2: The four levels model of Williamson
Informal institutions are located at level 1. The formal ones at level 2. This level is mainly affected by property rights theory. By taking the rules (property) of the game introduced at level 2, level 3 addresses the play (contracts) of the game. The latter level concerns transaction costs economics. Finally, level 4 relates to agency theory which stresses at ex ante incentive alignment rather than ex post governance.
To enable comparative means, a similar model as the one of Williamson for institutions has been introduced for technologies by Künneke (see Table 3-1). Technological paradigms are long-term waves of technological practices (e.g. currently ICT and biotechnology). Technological trajectories are defined as the pattern of normal problem solving activity on the ground of a technological paradigm52 (Dosi, 1982). According to Dosi, “continuous
changes are often related to progress along a technological trajectory defined by a technological paradigm, while discontinuities are associated with the emergence of a new paradigm‖ (1982: 147). Trajectories lead towards more mechanisation and economies of scale (Nelson and Winter, 1982). According to Nelson and Sampat the notion of ―routine‖ refers to ―a collection of procedures which, taken together, result in a predictable and
52
Dosi defines a "technological paradigm" as a definition of the "'relevant" problems and of the specific knowledge related to their solution (1982).
3. Co-evolution and coherence between institutions and technologies in network industries
specifiable outcome‖ (2001, p. 42). The ―routines‖ deal with the optimisation of scale and scope of a given
technology. The last level of the model refers to the day-to-day management of systems components.
Table 3-1: The four levels model of Künneke Level Economics of technological
paradigm
Frequency of change (years)
Purpose
1 Technological paradigm > 100 Often non-calculative and spontaneous 2 Technological trajectory 10-100 First-order economising: development
of coherent and efficient technological systems
3 Routines 1-10 Second-order economising:
optimisation of individual technical components
4 Operation and management Continuous Actual operational management
Source: (Künneke, 2008: 244)
This research dealt mainly with levels 2 and 3 of both models. It relates therefore to property rights and transaction costs, as well as technological trajectories and routines.