44318071

Institutional Factors in Information Technology Innovation
John Leslie King CRITO

University of California. Irvine
Irvine. California 92717-4650
Vijay Gurbaxani University of California. Irvine
Irvine. California 92717
Kenneth L. Kraemer University of California. Irvine
Irvine. California 92717
F. Warren McFarlan Harvard Business School
Soldiers Field
Boston. Massachusetts 02163
K. S. Raman National University of Singapore
Singapore 0511
C. S. Yap National University of Singapore
Singapore 0511
Innovation in information technology is well established in developed na-

tions; newly industrializing and developing nations have been creating gov-
ernmental interventions to accelerate IT innovation within their borders. The
lack of coherent policy advice for creating government policy for IT innova-
tion signals a shortfall in research understanding of the role of government
institutions, and institutions more broadly, in IT innovation. This paper
makes three points. First, long-established intellectual perspectives on inno-
vation from neoclassical economics and organization theory are inadequate
to explain the dynamics of actual innovative change in the IT domain. A
broader view adopted from economic history and the new institutionalism in
sociology provides a stronger base for understanding the role of institutions in
IT innovation. Second, institutional intervention in IT innovation can be
constructed at the intersection of the influence and regulatory powers of
institutions and the ideologies of supply-push and demand-pull models of
innovation. Examples of such analysis are provided. Third, institutional pol-
icy formation regarding IT innovation is facilitated by an understanding of
the multifaceted role of institutions in the innovative process, and on the
contingencies governing any given institution/innovation mix.
Inslilutions—Information Technology—Innovation
Introduction
I nformation technologies have been among the fastest growing innovations in both
production and use during the past four decades, and the prospects for future
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Copyright © 1994, The institute of Management Sciences
Itiformation Systems Research 5 : 2 139

King • Gurbaxani • Kraemer • McFarlan • Raman • Yap
growth appear equally bright (Freeman and Perez 1988; Willinger and Luschovitch
1988; National Research Council, 1988, 1994). These technologies embody innova-
tion in materials and devices, in design and manufacturing techniques, and in the
uses to which the technologies are put. Industrialized countries are now heavy users
of IT; newly industrializing countries and developing countries are adopting IT rap-
idly in due course (King et al. 1992). A trend of government intervention in IT
innovation across countries appears to be accelerating (Kaul 1987, Rahim and Pen-
nings 1987, Bhalla and James 1988, Kraemer et al. 1992). Nevertheless, there is
considerable controversy about whether national leadership should be mobilized to
stimulate information technology innovation, and if so, how it should be mobilized
(Land 1990, Odedra et al. 1990).
The rapid diffusion of IT coupled with the uncertainty surrounding the appropri-
ateness of various national policies to accelerate that diffusion suggests a vacuum of
intellectual insight. Why are the appropriate policies for government action not clear,
given the clarity ofthe objectives articulated in IT-related programmatic statements
issued by various government agencies, commissions, and leaders? The answer, we
propose, lies in the absence of research attention to the vital institutional factors that
shape innovation generally, and IT innovation in particular. The dilemma of govern-
ment policy is seen as a microcosm ofa broader set of institutional concerns, of which
governmental institutions form an important but incomplete part. By placing empha-
sis on institutional factors in the IT innovation, we frame the specific problem of
government policy while opening for discussion the broad issue of institutional analy-
sis in technical change relevant to IT.
This paper brings together intellectual traditions from both the study of innova-
tions and institutions, and provides a synthesis of perspectives to assist research on
the institutional aspects of IT innovation. It begins with consideration of IT as an
innovation, assessing the rationale for innovation based on economic and social
principles, as well as the special role of institutions in innovation production and use.
From this analysis the distinction between "supply-push" and "demand-pull" per-
spectives on innovation is used as a foundation for institutional policy analysis. The
paper then defines the institutions that might intervene in IT innovation, and reviews
strategies of institutional intervention in IT innovation by linking supply-push and
demand-pull options with the influence and regulatory authorities of institutions to
produce a scheme of possible institutional actions that can stimulate or retard IT
diffusion. The paper concludes with an assessment of key roles that institutions, and
especially governmental institutions, can play in these processes.
Innovation and Institutions

Information technology as it has emerged in recent decades constitutes an ongoing
process of innovation (Laudon 1985). Innovation has been characterized as a process
of movement through three overlapping stages: invention, innovation and diffusion
(Enos 1962, Mansfield 1968, Dosi 1988). An invention is a new idea or product
which may or may not have economic value. Innovation is the process whereby
inventions move into usable form. Diffusion is the spread ofthe capacity to produce
and/or use an innovation, and its use in practice. Innovations may be products, such
as mechanical harvesters or fax machines, or techniques or processes, such as the
Bessemer steel refining process or structured programming practices. Innovations
can appear as consumer products (VCR), intermediate products (automobile fuel
injection system), or capital goods (industrial robot). They can also appear as social
140 Information Systems Research 5 : 2

reforms, such as the shifting of funding decisions for public schools from the local to
the state level, or the elimination of layers of management when downsizing organiza-
tions. This paper treats the term innovation as a social phenomenon encompassing
elements of both invention and diffusion (Goodman et al. 1980, Goodman and Dean
1982, Misa 1992, Perry et al. 1992).
Institutions in the Social Processes of Innovation
The conceptual status of institutions as a class of social and economic entities is
evolving, and no precise and comprehensive definition ofthe term is available. For
our purposes, an institution is any standing, social entity that exerts influence and
regulation over other social entities as a persistent feature of social life, outlasting the
social entities it influences and regulates, and surviving upheaval in the social order
(Hughes 1939). The goal in incorporating institutions is to bridge between amor-
phous social concepts such as "society" and "culture" on one hand, and more specifi-
able and tractable social entities such as organizations, firms, groups and individuals
on the other. Institutions form the vital boundary layers between these two worlds of
discourse.
A number of authors have focused on both influence and regulatory aspects of
institutions in their attempts to explain the relationships between, for example, tech-
nological change and economic development (Teubal 1979; Peck 1981; Johnson
1982; Irvine and Martin 1984; Nelson 1988, 1992; David 1988). Others have focused
specifically on information technology, using institutional perspectives (though often
not labeled as such) to better understand the causes and effects of innovations in this
field (Kraemer and King 1978, 1979; Danziger etal. 1982; Laudon 1985; Arnold and
Guy 1986; Kling and Iacono 1989; Yates 1989, 1994; Orlikowski 1992; Orlikowski
and Cash 1993). Our effort here is not to replace such work, but to put it in context by
arguing that institutional factors are ubiquitous and essential components of any
effort to understand or explain IT innovations that cross organizational and firm
boundaries.
We begin with a retrospective glance at two streams of theory about the importance
of institutions in social order and change, drawn from economic history and the
"new institutionalism" in sociology. Neither of these streams is conceptually new;
consideration of the broader "environment" surrounding any level of analysis in
considering social change has long been recognized as essential (Moore 1967). What
is important is confluence of these streams in recognizing that well-established but
narrowly constructed explanations of social order and change—rational-actor indi-
vidualism, the theory of the firm, bureaucratic theory, structural-functionalist de-
scriptions of organizations, and so forth—simply do not explain, much less predict, a
considerable amount ofthe order and change we observe. An institutional perspec-
tive links these explanations, and provides a broader and more robust scope for
analysis.
An Economic History Perspective. Economic literature contains a long standing
concern with the production of innovations and the role that innovation plays in
national economic development. Marx (1867) argued that innovation created mar-
kets, thereby spawning the essential mechanism of economic growth. Kuznets (1930)
argued that product innovation plays a major role in long run economic growth, and
that growth itself would be signaled by continuous shifts in product/industry mix.
Schumpeter (1928, 1935, 1939) saw successful innovation as special form of social
leadership, and the source of discontinuities in the equilibrium of production and
June 1994
King ' Gurbaxani » Kraemer » McFarlan • Raman • Yap
consumption that produced his legendary "gales of creative destmction," which were
the motive force of economic advancement. The enormous material progress of
Westem Europe in the eighteenth and early nineteenth centuries has been attributed
to production and use of innovations (Landes 1969). The connection between inno-
vation and economic progress is nearly axiomatic in modem economic discourse,
but strangely, mainstream economic analysis has for many years reified the social
process by which innovation occurres as a "black box" and treated it trivially (Rosen-
berg 1982).
A common model based on neo-classical economic theory uses changes in prices of
the factors of production (labor, capital) to explain the lure of innovation. Innova-
tions reduce factor prices, thus causing shifts among the various factors in production
(Hicks 1932). For example, when factor prices for labor rise relative to factor rates for
other inputs such as machinery that can substitute for labor, a "labor-saving bias"
emerges that will favor capital over labor (Salter 1960). Factor price models are
powerful general explanators within narrow boundaries, but they have proven to be
incomprehensive. They are nearly always contingent on local conditions such as
relative scarcity in factors, and in some cases innovation proceeds in defiance of
expected factor price explanations (Habakkuk 1962). The factor price model is also
problematic in that it explains only initial choices among innovation possibilities,
and not the subsequent innovation choices that are heavily determined by the initial
choices. The social legacy of prior innovations—what David (1975, 1988) calls "path
dependency"—creates a context in which changing factor prices are but one criterion
in innovation decisions. Economic advantage is arguably rooted in the accumulated
ability to make efficient choices among altemative pa/A^ of innovation as new oppor-
tunities (Ruttan and Hayami 1971). Even the causality in the factor-price model of
innovation incentive is subject to doubt in light ofthe findings that major spurts of
innovation have been shown \o follow increases in consumption ofthe commodities
and products toward which the innovations were targeted (Schmookler 1972, 1976;
Beniger 1986). Increased sales portend growing demand, stimulating an investment
of innovative effort.
In the last thirty years, more complex assessments have emerged that highlight the
importance of social and institutional factors that enable and stimulate innovation
(Sorensen and Levold 1992).' For example, when Landes (1969) attributes Westem
European economic growth primarily to innovation, he includes as well institutional
reforms such as the suppression of superstition and magic, coupled with innovative
political and legal developments that enabled the operation of private economic
enterprise and the rise of invention. Introducing such factors more fully accounts for
the historical record, but in the process the specific causality behind innovation
becomes blurred because the factors clearly influence one another over time. The
direction of change is not unidirectional.
The dilemma of incorporating institutional context can be seen in controversy
over the superficially simple the relationship between the creation of scientific and
' We do not refer this discussion to the "new institutional economics" developed by Williamson (1975,
1985), which concentrates primarily on transaction costs and their role in mediating interaction between
social entities. We mean, rather, the work ofscholars such as North (Davis and North 1971, North 1990),
and David (1988) who move beyond the transaction cost dimension into continuously evolving social
attributes such as conventions, roles, and so forth that shape the meaning and importance of transaction
costs and other economic issues.
Information Systems Research 5 : 2

technical knowledge and the resulting production of innovations. It is nearly a matter

of religious doctrine among members ofthe research establishment in the U.S. that
science produces technological advancement, for the broad economic welfare of all.
Bemal (1939) argued the invention that flowed from scientific inquiry was essential
to national economic progress, and was one ofthe first to espouse direct social invest-
ment in scientific enterprise. This view has been echoed by a host of commentators
and there is empirical evidence to support this claim (Musson and Robinson 1960).
But there are other opinions on the matter. Gillespie (1957) argued that science owes
more to manufacture and industrialization than the other way around; in other
words, that innovation drives science. Hall (1963), Mathias (1972) and Rosenberg
(1992) found that the specific knowledge outputs of science and technology, while
important in the innovation process, are far less significant than the institutionalized
values of procedure, reliance on experiment, and the supremacy of observed fact that
are embodied in contemporary scientific enterprise. With the directions of causality
so much in dispute, it is little wonder that the economic dynamics of innovation
remains an open question.
Out of this controversy, a salient fact emerges: there is no simple, conceptually
linear characterization for innovative processes or the role they play in economic
development. Indeed, a chicken-and-egg problem emerges whenever one tries to
posit one factor (e.g., production of scientific knowledge, presence of natural endow-
ments, a capital market ready for investment in innovation) as the initiator of an
innovation cycle. Rather, innovation emerges from a complex interplay of precurs-
ing economic and institutional conditions, the perceptions and decisions of entre-
preneurs, and the ongoing refinement and improvement ofthe innovations as exper-
tise is gained in their production and application (Sorensen and Levold 1992). Each
of these factors, in tum, is shaped by prior innovative effort, making the discussion of
innovative process inherently aporetic.
Historical studies of innovations suggest that Schumpeter's "great leap" innova-
tions are only part of innovative processes; a large fraction of innovation progress is
due to slow, incremental accumulation of knowledge and skill (Pavitt 1984). Innova-
tion is a cumulative, interactive process where new actors step in at each threshold of
production or use (David 1975, Rogers 1983). Successful innovations are surrounded
by a social process of improvement wherein producers of innovative products "learn
by doing" as they build and improve the products (Arrow 1962), the users of those
products "learn by using" the critical knowledge necessary to use the products effec-
tively (von Hippel 1976, Rosenberg 1982), and both producers and users "learn by
interacting" with one another (Lundvall 1988). The importance of this slow accre-
tion of capability is important in the overall productivity of the innovation in use,
and there is abundant evidence to show that the cumulative economic effects of small
improvements can far outweigh the effects ofthe initial introduction ofthe innova-
tion overtime (Gilfillan 1935, Hunter 1949, Kendrick 1961, Enos 1962, Hollander
1965, Knight 1967, Landsberg and Schurr 1968).
Economic historians have increasingly begun to see innovation as a product of
individual efforts occurring in a "network context" in which the infrastmcture and
protocols of communication, together with changing externalities in the uses of clus-
ters of innovations, influence the historical paths taken in shaping any given regime
of innovation (David 1988). Choices among competing innovations are difficult
because most innovations require complementary inputs of other technologies and
techniques to be useful, and are substitutable in some degree for one another.
June 1994 , 143

Improvements in the state of knowledge expand the range of substitutability among

factors as well as reduce inputs necessary per unit output, but each innovation carries
with it a peculiar mix of complementarities and substitutabilities, and each innovat-
ing actor (individual, organization or industry) evaluates that mix differently. Pro-
gress toward widespread innovation takes place in a broad ecology of other comple-
mentary and substituting factors, and very few if any actors can be sufficiently knowl-
edgeable about this ecology to act in a tmly strategic manner. Rather, all innovation
decisions are constrained by limited information (Davis and North 1971, Rosenberg
1976, 1982, Tomatzky et al. 1983, Coricelli and Dosi 1988, Freeman 1992).
Innovation is unpredictable in part due to limits of available information, and in
part because it is inevitably forward-looking. Innovation choices are based on the
expectations of potential producers and users. Self-interested actors who might even-
tually use an innovation worry not only about the current performance ofthe inno-
vation, but on the future change in performance. They want to know if the advantage
gained by adoption can be sustained. Those considering innovating know that the
innovation's performance is not an absolute, but is relative to other altematives, and
dependent on factors they and other innovators cannot control, such as the rise of
competitive substitutes or the presence of essential complements. As Kierstead
(1948) noted early-on, economic progress depends not on innovations per se, but on
"constellations" of innovations that collectively enable major productivity
improvement.
Innovation is enticing, but it is inherently risky. The seeds of this central dilemma
of innovation can be found in Schumpeter's view of capitalist development as an
equilibrium cycle involving producers and suppliers in which innovation was a desta-
bilizing factor (a shift in the production function), causing changes in expectations
among both producers and suppliers that could not be easily foreseen (Schumpeter
1935, as analyzed by Rosenberg 1982). Expectations manifest themselves in Schum-
peter's vision as a two-stage cycle of demand on capital markets, first from entrepre-
neurs seeking capital to exploit the profit potential seen in the innovation, and second-
arily from the industry as a whole in anticipation of further expansion due to diffu-
sion of the innovation. This process is neither smooth or predictable, and its
uncertainty is a grave source of risk. The touted "first mover advantage" superficially
apparent from Schumpeter's model is highly risky, as he himself recognized (Rosen-
berg 1976). The understandable apprehension that follows produces what Fellner
(1951) called "anticipatory retardation," in which potential innovators take a wait-
and-see posture and let others test the profitability of an innovation, especially if
implementation requires a large investment (Mansfield 1968, 1988). Everyone, in
principle, benefits from innovation. But until individual benefits are clearly in reach,
a ubiquitous state of anticipatory retardation can preclude innovation.
What, aside from heroic action on a mass scale, breaks the logjam of anticipation
retarding diffusion? Or altematively, what explains those instances in which all the
apparent obstacles to diffusion are overcome and yet an innovation still does not
diffuse in a manner predicted by rational economic action among disaggregated
actors? This expectations dilemma is central to our story, and explains why economic
historians have begun to describe institutions as a source of powerful interventions
that encourage or discourage potential innovators by altering the incentives to inno-
vate. Institutional forces, which include in the economic historian's parlance every-
thing from govemment agencies to labor unions, emerge as vital elements in regu-
lating the context of innovation. This perspective, which has gained serious credibil-

ity in economic history during the past decade, is still in its infancy. Serious problems
of boundary definition and measurement are acknowledged. But institutions have
secured a place in the focus of contemporary economic history, particularly that
related to the economics of technical change.
A Contemporary Sociological Perspective. In contrast to the economic tradition,

the sociological tradition provides a rich base of evolving thought about the social
role of institutions, but relatively little concern with innovation. There are, of course,
exceptions. Theorists such as Marx and Schumpeter, who were as much sociologists
as they were economists, dealt with both; the institution of class stmcture was central
to Marx' social theory, and Schumpeter saw capital markets in a light that contempo-
rary analysts would call institutional. Also, there have been sociological accounts of
innovation such as GilfiUan's (1934, 1935) sociological history of invention. Never-
theless, until recently, most sociological discussions of innovation were black-boxed
along with the broader term "technology" as one of several interesting, background
variables in the quest for understanding of society.
Sociology has given institutions considerable attention. The sociological accounts
of political group conflict and organizational behavior by Selznick (1949, 1957), and
the subsequent ethnomethodological (Garfinkel 1967) and phenomenological
(Berger and Luckmann 1967) approaches pushed the critical question of meaning as
a vital force in the evolving tradition of action explanations (DiMaggio and Powell
1983). The central concern of this "early" institutionalism in sociology was how and
why individuals adopted and adhered to the mles, conventions, principles, beliefs
and other social context criteria that shaped action. This quest can be seen as a
reaction to Durkheim's persistent effort to drive from sociological explanation all
aspects of psychologism, and an extension of Parsons' narrow dependence on norms
and sanctions as the only cognitive sources of contextual guidelines for social action
(Star and King 1993).
Contemporary institutionalism in sociology, as characterized by its proponents
(March and Olsen 1989, DiMaggio and Powell 1991), emerged in the mid-1970's
through the work of Meyer (1977), Meyer and Rowan (1977), Giddens (1979, 1984),
Bourdieu (1977), Zucker (1977), and others who, in sum, argued that social action
was powerfully shaped by social context, and in tum shaped that context. The social
"reality" in which individuals, groups, and organizations function was viewed as a
highly plastic constmct that simultaneously enforced behaviors on many dimensions
while being altered to accept previously disallowed behaviors on many others. This
perspective built upon, or was at least contemporary to, two other traditions outside
sociology. One was the "open systems" view that organizations had to be modeled
not as self-contained systems, but rather as entities in constant interaction with their
environment (Buckley 1967; Kast and Rosenzweig 1963, 1969; Lawrence and
Lorsch 1967). The other was a loosely coupled series of challenges to narrowly-con-
stmcted individualist accounts of organizational action by March and Simon (1958),
Cyert and March (1963), and Williamson (1975), who focused on the importance in
organizational life of the uncertainty-mediating infiuence of adopted routines, and
the inescapable costs associated with maintaining social order wherein routine action
was possible. A synthesis of new institutional thought began in the 1980s with
the work of DiMaggio and Powell (1983), and has continued since. This emerging
vision has taken environmental context seriously, not as a residual left over after the
June 1994 145

King « Gurbaxani • Kraemer » McFarlan • Raman • Yap
important issues are taken care of, but as an essential component any explanation of
social action (Scott 1991).
Three characteristics ofthe new institutional approach are important to this analy-
sis, in part because they clarify and strengthen our claim of importance for institu-
tional factors in innovation, and in part because they dovetail with the emerging
institutional concems of economic historians. First is the abandonment ofa tradition
of dividing organizations into "technical" and "institutional" categories of environ-
mental infiuence (Scott and Meyer 1983). The technical/institutional divide classi-
fied as "technical" for-profit organizations operating in a marketplace where produc-
tion efficiency was the key goal, and as "institutional" nonprofit and public organiza-
tions operating in a context of law and procedure, where legitimacy of process is as
important as the goal. The new institutional approach holds that efficiencies in pro-
duction and legitimacy of means are significant factors in a//contemporary organiza-
tions. Second is the shift in definition of institutional boundary away from organiza-
tions as sharing geographic proximity and legal authority, to organizations as sharing
similarity of services, products or functions, and including as well those organizations
that critically influence the performance ofthe focal organizations. Third is the aban-
donment ofthe view of institutions as monolithic, stable, and inflexible, and toward
institutions as fluid entities operating through various mechanisms in the form of
"interorganizational networks" of activity (Warren 1967, Benson 1975, March and
Olsen 1989, Scott 1991). Although institutions are powerful factors in social change,
they are themselves constantly undergoing change.
The legacy ofthe new institutionalism is to refocus theories of social change from
reified notions of action-in-principle to concrete notions of "practical action" that
explicitly bring individual cognition as well as individual and group routine to the
foreground. The new institutionalists incorporate but go well beyond rational and
calculative behavior, embracing the affective and the taken-for-granted aspects of
routine behavior as well. Social stmcture is continually reproduced by knowledgeable
agents in everyday life, who act in part to change the existing stmcture and in part in
conformance with that stmcture (Giddens 1979). All social action is surrounded by
socially constmcted, continually evolving "logics" that give meaning to the action
(Friedland and Alford 1991). The effect of these logics confounds simple explana-
tions of behavior based on rational actor individualism, including (although this is
not often a subject of discussion found in the sociological literature) action related to
the adoption of innovation.
Converging Views of Institutions. As noted above, we do not attempt to synthesize

the various streams of theory engaging institutions as a key sector of social change.
However, we do note several points of convergence that suggest the importance ofthe
institutional shift for understanding the evolution ofinformation technology in pro-
duction and in use. The first is the willful embrace ofthe "broader" context within
which any given level of social change is discussed, while recognizing the inherent
risks in such a move. It is naturally easier to gain control over explanations when the
plethora of possible influences to be accounted for is reducible to just those that are
important. The problem comes in determining what is important, and when. At any
given moment, institutional factors, because they are not changing as quickly as those
they influence, can be held constant: "black boxed." But any eflbrt to explain change
over time requires opening up the black box of context, and this complicates explana-

tion considerably. The focus on institutions is a kind of compromise, opening the

context enough to let in observably powerful and important forces in social change,
but nonetheless drawing boundaries around them and forcing some kind of order
onto them so they can be handled systematically in analysis.
A second important point of convergence is the notion that institutional activity,
particularly as regards technical innovation, is best described in terms of networks.
David (1988) describes innovation as an explicitly network phenomenon, and in fact
distinguishes further between innovations that are and are not "network technolo-
gies." Scott (1991) and March and Olsen (1989) note that institutions in many cases
operate through, or as, interorganizational networks. While in each of these instances
the definition of network is touched on obliquely, there is more than passing signifi-
cance in this choice of descriptor from broadly different intellectual traditions. In a
sense, the notion of networks itself could begin to serve as an integrating mbric for
bringing together highly complementary but heretofore disconnected streams of
theory development.
Finally, both streams of work converge on the view that institutions have been
historically important in the shaping of organizational and economic life, and that
institutions are becoming more important as time goes on (Pavitt 1992, Friedland
and Alford 1991). We hold with this view, as well, and argue that the powerful
innovations in thefieldofinformation technology are inextricably wrapped up in the
institutional complex as both recipients of institutional legacy and shapers of emerg-
ing institutional reality. The purpose of the foregoing discussion has been to place
institutions as key factors in innovation squarely on the stage of research on informa-
tion technologies, and to argue that the incorporation of an institutional component
in research related to IT development and use is both inevitable and valuable. More-
over, it is in keeping with streams of contemporary research on social and economic
change that are, themselves, highly innovative and exciting. As much as anything, we
argue for the adoption of an institutional point of view in information systems re-
search.
Innovation proceeds because individuals acting in institutional circumstances
make the decisions about whether to innovate. In Freeman's (1988a, p. 2) words, the
institutional framework " . . . always influences and may sometimes facilitate and
retard processes of technical and stmctural change, coordination, and dynamic ad-
justment." The diffusion ofinformation technologies into the economy is a dynamic,
contingent, path-dependent process in which the expectations among and interac-
tions between producers and users are highly dynamic. The dynamics are not easy to
decipher at any given point in time, yet any eflbrt to build an institutional framework
for intervention in the innovation process must engage this dynamic complexity.
From a policy perspective, we ask whether and how institutions can deliberately
affect innovation production and use. We argue that they do so through the interac-
tion of influence and regulation along the dimensions of supply-push and demand-
puU forces for innovation. In the sections to foUow we elaborate our institutional
point of view, producing one model for incorporating the institutional perspective in
analysis if IT innovation. The model that follows is not exhaustive, nor exclusive. It is
illustrative, designed to point at the kinds of issues that should be engaged, and one
way of organizing the conceptual task of bringing in the broad issues of institutions
without drowning in the sea of possible explanations that accompanies the opening of
the institutional black box.
June 1994 147

Government authorities. National govemment agencies, provinces.

prefectures, states, municipalities, etc. Also governmental authorities acting
to influence the policies of another sovereign state. Govemment authorities
carry the powerfiil and unique strength of legal authority and set the context
within which all other institutions may and shall operate.
Intemational agencies. Mission agencies of intemational organizations such as
the United Nations, the World Bank and the Intemational Monetary Fund,
plus intemational "outreach" agencies of developed countries (e.g., US-
AID).
Professional and trade and industrv associations. Scientific and technical
societies, organizations of professionals such as physicians and lawyers,
and trade and industry associations.
Research-oriented higher education institutions. Influential organizations that
typically have strong intemational, institutional ties.
Trend-setting corporations. Powerful domestic companies performing
important functions that influence on innovation.
Multi-national corporations. Cross-national companies that influence the
movement of technology where they operate.
Financial institutions. Banks, non-bank lending institutions, equity markets.
venture capital funds and informal financing arrangements (e.g. kin- or
ethnic-based ties).
Labor organizations. Unions that influence the use of technologies in particular
industries.
Religious institutions. Religious authorities that raise moral or ethical questions
regarding use of technology.
FIGURE 1. Institutions Influencing IT Innovation.
Institutional Intervention In Information Technology Innovation

We began our discussion of institutions with a general definition: an institution is
any standing social entity that exerts influence and regulation over other social enti-
ties. We will build on the influence and regulation roles of institutions below, but
before doing so, we should illustrate the kinds of institutions that might be involved
in IT innovation. Figure 1 lists the institutions referred to in this paper.
The list of institutions in Figure 1 is not exhaustive; the list might well include
other entries, such as the media or the black market. These can have powerfully
institutional character, and can exert great influence regarding IT innovation. The
media in the U.S., for example, have recently begun widespread coverage of the
"boom" in networks, personal digital assistants, and information resources, with
likely effect on the market formation for such products and services (cf. Lazzareschi
1993). Similarly, the black market has in some countries been more important than
the official market for distribution of IT products and services. The former Soviet
Union, for example, constituted a bizarre market for computers due to the
NATO-imposed COCOM restrictions on sale of strategic technologies, as well as the
USSR's own internal institutional restrictions on the diffusion ofinformation tech-
nologies that enhanced unregulated communication among citizens (Chereshkin
1991). We do not include all possible entries, however, simply in order to make the
points that follow tractable.

The nature of institutional intervention in IT innovation depends on whether the
desired changes are in IT production or use. Production concerns who makes innova-
tive products, and has become a matter of considerable political consequence. East
Asian countries have gained access to product innovations developed in the U.S. and
Europe and applied innovative manufacturing processes and management tech-
niques that enabled their producers to challenge U.S. and European products in their
traditional markets. There is growing concem that advantage in invention and initial
innovation is passing to East Asian countries as well. The fact that Japanese and
Korean industries have benefited from highly effective institutional policies of strate-
gic industrialization has prompted institutional intervention by the U.S. govemment
in key industries (Johnson 1982, Amsden 1989, Mansfield 1988, Freeman 1988b).^
Use concerns the ways in which innovations are put to work. Productivity accrues
only if an innovation is used in the appropriate places. Most innovations must be
altered to fit the special needs of different users, and constantly improved to retain
the loyalty of their users especially in the capital goods sector, which includes com-
puters and telecommunication equipment as capital goods of service industries (Ro-
senberg 1963). Such innovations are institutionally important irrespective of produc-
tion, because even if a country does not have the means to produce IT innovations, it
can still profit from the effective application of those innovations in other sectors.
Influence and Regulation
The influence of an institution is the exerting of persuasive control over the prac-
tices, rules and belief systems of those under the institution's sway (Kimberly 1979).
Influence is exerted via education and socialization processes of individuals, the
systematic articulation of particular points of view (e.g., propaganda), and provision
of differentially more resources to those social activities deemed "appropriate" and
withholding of resources from those deemed "inappropriate." Regulation by institu-
tions is the direct or indirect intervention in behavior of those under the institution's
influence, with the specific objective of modifying that behavior through sanction or
other affirmative means. Regulation is implemented by any modality with the follow-
ing properties: the means of making conflicting, decentralized decisions compatible
without the need for individuals to bear in mind the logic ofthe overall system; the
ability to control the prevailing mode of resource accumulation; and the means to
reproduce existing social relationships through a system of historically determined
institutional forms (Boyer 1988a, b).
Supply-push and Demand-pull
Influence and regulation can play different roles depending on the "supply-push"
or "demand-puU" forces driving the innovation (Pavitt 1971, Rosenberg 1972,
Teubal 1979, Roessner 1979, Utterback 1974). Supply-push force for innovation
comes from the production of the innovative product or process itself. "Demand-
puU" force arises from the willingness of potential users to use the innovation. The
choice is not either/or; both are required for innovation, broadly considered. There
can be no innovation without a new idea or artifact to adopt and apply, but in-
novators usually respond to established needs. Whether the "supply-push" or
^ In computer-related industries, interventions have begun in the form of relaxed constraints on collabo-
ration among competitors (e.g., the Microelectronics and Computer Consortium, SEMITEC, U.S. Memo-
ries) as well as direct investment in so-called "key technologies" (e.g., the High Performance Computing
and Communication program).
June 1994 149

King * Gurbaxani • Kraemer • McFarlan • Raman • Yap
"demand-puU" forces dominate in the innovation process shapes institutional ac-
tions regarding innovations. Under supply-push, intervention must concentrate on
stimulating the production and application of factors that go into innovating: a grow-
ing supply of scientific and technical knowledge, provision of capital for experimen-
tation and development of prototypes, support for getting innovative products and
processes ready for the marketplace, and so on. Under demand-pull, intervention
must define and articulate demand to potential sources of supply to innovative ac-
tion, while mobilizing acquisition ofthe innovations by users.
Research through the mid-1970s culminated in the view that demand-pull forces
were dominant in the innovation process (Utterback 1974, Gilpin 1975), with ex-
pected institutional implications. However, Mowery and Rosenberg (1979) criticized
this claim, arguing that observable demand usually relies on market indicators, a
poor surrogate of human needs due of market failures and the moderating influences
of market mechanisms. More significantly, a number of industries exhibiting rapid
rates of growth such as computers and consumer electronics appear to have created
their own demand. Both supply and demand forces are operating at all times in the
innovation process, and the dynamics of the interaction between the forces them-
selves change depending on circumstances such as the relative state of technical
knowledge, the availability of complementary and substitutive factors, the character
ofthe needs of society at any one time, and the eifectiveness ofthe market at translat-
ing needs into clear demands (David 1975, Rosenberg 1982, Nelson 1988, Freeman
1988a). These factors are seen in long-view assessments of technological change
within global regions (Landes 1969, Pavitt 1971), between countries (Habakkuk
1962), across domains of knowledge and invention (Carter and Williams 1957), and
across industries (Beniger 1986, Schmookler 1976, von Hippel 1976).
Forms of Institutional Action
The model that follows is constructed on two dimensions of potential institutional
action: influence and regulation that institutions might exert, and the "supply-push"
and "demand-puU" forces that provide a context for those actions. In the cells are
examples of kinds of specific actions in which institutions might engage. The out-
come of this array is shown in Figure 2. Each of these actions can be classified as one
of six general kinds: knowledge building, knowledge deployment, subsidy, mobiliza-
tion, standard setting, and innovation directive. We elaborate each kind of action
below, highlighting the arguments for and against the action, and noting the kinds of
institutions that might be involved. For each item listed, its position in Figure 2 is
noted by presence in one ofthe cells, from I to IV. The discussion of each is followed
by a summary conjecture about the role ofthe action in IT innovation.
Knowledge Building. Knowledge building is undertaken to provide the base of
scientific and technical knowledge required to produce and exploit innovations. An
obvious form of knowledge building is sponsored research that helps build the base of
knowledge necessary for innovative activity (Cell I, Figure 2). This kind of activity is
often supported by governments, but governments are by no means the universal or
direct institutional sponsors of such research, and the modes of support vary from
country to country. In the U.S., the govemment role in research support is very large
but is supplemented by support from other institutions such as private foundations
and companies. In most large Western European countries the national governments
support most basic research. An example in information technology is the Alvey
project in the UK, which focused on four areas of enabling technologies and
associated research: software engineering, man-machine interface, intelligent

SUPPLY PUSH DEMAND PULL
KNOWLEDGE BUILDING KNOWLEDGE DEPLOYMENT

Funding of research projects Training programs for individuals and organ-
izations to provide base of skilled talent for use
KNOWLEDGE DEPLOYMENT
Provision of education services SUBSIDY
Procurement of innovative products and services
SUBSIDY Direct or indirect provision of complementarities
Funding development of prototypes required for use
Encouragement of capital markets to support Direct or indirect suppression of substitute
R&D activity products or services
Provision of tax benefits for Investment in R&D
MOBILIZATION
(e.g., investment tax credits, rapid depreciation)
Programs for awareness and promotion
INNOVATION DIRECnVE
Direct institutional operation of production
facilities for innovation ^ n
ra rv
KNOWLEDGE DEPLOYMENT SUBSIDY
Require education and training of all citizens Procurement support for products and
processes that facilitate adoption and use
SUBSIDY
Reduction in general liabilities for organizations STANDARDS
I engaging in innovative activity
Modification of legal, administrative, or compet-
Require particular products or processes to be
used in any work for the institution
itive barriers to innovation and trade Require eonformance with other standards that
essentially mandate use of particular products
STANDARDS or processes
Establishment of standards under which innovative
activity might be encouraged INNOVATION DIRECnVE
Require that specific innovative products or
INNOVATION DIRECTIVE processes be used at all times
Establishment of requirements for investment in
R&D by organizations
FIGURE 2. Dimensions of Institutional Intervention.
knowledge-based systems, and very large scale integration (British Department of

Industry, 1982).
In expensive and difficult research areas a solid tradition of international coopera-
tion has emerged. The ESPRIT project ofthe European Economic Community is an
instance of such multinational cooperation in knowledge building actives is in ad-
vanced microelectronics, software technology, advanced information processing,
and documentation standards (EC Commission 1983). In Japan the government
supports comparatively little ofthe nation's research activity, but government plays
an important role in mobilizing the very large corporate investment in research
around particular topics of identified national importance (Freeman 1988b). The
Fifth Generation Project, for example, included eight large companies and two na-
tional laboratories coordinated by the government (Feigenbaum and McCorduck
1984). In Korea the government has announced a plan for the development of scien-
tific technology, especially VLSI capability, by year 2000 (Jae 1990). In Mexico the
government and IBM have collaborated to establish a semiconductor technology
center to support local business with R&D facilities. Singapore has created several
institutes for the purpose of facilitating R&D of value to local industry (Gurbaxani et
al. 1991).
Knowledge building can take place through the support of basic research with
June 1994 151

King • Gurbaxani • Kraemer « McFarlan • Raman « Yap
limited immediate application potential, or through support of applied research to
yield particular payoffs. The huge U.S. biomedical research estabhshment embodies
both kinds of research in large measure, ranging from the most basic investigations
into the nature of living organisms to the most practical assessments of treatments for
diseases. Also, institutions can have multiple objectives for supporting knowledge
building activities. The U.S. programs for development of nuclear science and tech-
nology were guided by expectations about payoffs to both military application and
power generation, and the vast majority of research funds in this field were from the
government (Nelson 1988). Much of U.S. government funding for the development
of computer technologies, however, was aimed at military objectives, while research
aimed at commercial application was left largely to the private sector (Flamm 1985,
1987). Finally, institutions can change their funding modalities over time. For exani-
ple, the U.S. commercial aircraft industry was literally built on government spon-
sored R&D from 1945 to 1965, but when the needs of military aviation and commer-
cial aviation diverged in the late 1960s, the R&D burden shifted dramatically onto
the civilian aircraft companies (Mowery and Rosenberg 1981).
Substantial scientific and technical knowledge-building activity is necessary for
production of innovations, but it is not clearly required for innovative practice. In
fact, several studies of Japan's remarkable economic growth, which was highly de-
pendent on adoption and institutionalization of innovative industrial practices, sug-
gest that much of this progress was made possible through "learning by using" that
did not require substantial in-place bodies of scientific and technical know-how (Ro-
senberg 1982, Johnson 1982).^ Based on this analysis, we postulate:
CONJECTURE 1. Institutional intervention to promote knowledge building is es-
sential to sustained production of innovation in the field ofIT, but it is not absolutely
required for successful diffusion in use.
Knowledge Deployment. The objective in knowledge deployment is to stimulate
the dissemination of new knowledge, either in the form of knowledgeable individuals
and organizations, or in the form of repositories of knowledge in the form of archives
and libraries of scientific and technical facts. The most obvious form of knowledge
deployment is the general provision of education to the population (Cell I, Figure 2).
The creation of a literate and educated population has been shown to be essential to
any broad innovative tradition (Mathias 1972, Easterlin 1965). The provision of
education is usually carried out by government entities in most countries, but in
some there is a substantial component of educational service provided by private
nonprofit or profit institutions (e.g., religious organizations, private schools). Beyond
provision of educational opportunity, there is the corollary act of mandating educa-
tion to a particular level; for example, requiring children to attend school through age
16, or through grade 10 (III). Such broad mandates might include, along the way,
components of IT-related education. For example, in Taiwan every vocational
school student must take at least four courses in computer application and basic
information technology (Cheng 1990). Mandates regarding education are usually the
' It is worth noting that while the Japanese attained their remarkable economic strength without a strong
basic research infrastructure, they now are actively building up that infrastructure through offshore re-
search laboratories in countries like the U.S., through cooperative scientific research programs with other
countries, and through establishment of new research institutes in Japan, and through efforts to improve
basic research in Japanese universities.

sole province of the government, although actual provision of educational services

can be handled by other institutions such as religious schools, companies, and private
schools.
Another form of knowledge deployment is the encouragement of already knowl-
edgeable individuals and organizations to come into the country or region and estab-
lish operations (I). This is a major objective of immigration laws that give preference
to individuals with special skills, and of industrial and commercial development
activities that favor certain kinds of businesses and industries. Such actions are
usually carried out by governments, although private corporations, local develop-
ment organizations and trade/professional associations might play a significant role
in establishing such practices. The multinational firms appear to play a major role in
such knowledge deployment processes (Chesnais 1988, Cantwell 1989, Encarnation
1989, Rosenberg 1992, Pavitt 1992). For example, the government of Singapore has
established training institutions in several areas of infonnation technology in collabo-
ration with major corporations, including the Institute of Systems Science with IBM,
a data communications education center with AT&T, and a software development
center with assistance from Japanese corporations (Gurbaxani et al. 1991).
Still another form of knowledge deployment is aimed at stimulating the use of
innovations by training a cadre of potential users (II). This kind of activity might be
performed by government agencies, but it is also frequently performed by trade and
professional associations, unions, and companies with an interest in providing the
necessary human talent to exploit an innovation. Such programs have played impor-
tant roles in major innovation efforts in the past (Rosenberg 1982). In Taiwan, a
national-level examination, jointly administered by the Ministries of Education and
of Economic Affairs, was put into force in 1984. Three levels of examinations are
held: systems analyst, senior programmer, and programmer. Each year between
2,000 and 4,000 people register to take these examinations, and about 10-15% pass
them. A high percentage of those who do pass are not graduates of IT-related instruc-
tion programs. (Cheng 1990). Testing is not the only mechanism available for the
purpose of building special skills. The government of Singapore provides a program
called ITPOWER that contains 56 hours of instruction aimed to equip office workers
with basic skills to use personal computers for common office applications
(Raman 1990).
Knowledge deployment activities are usually the foundation of institutional inter-
ventions to stimulate innovation. Without the ability on the part of a significant
number of individuals in the population to apprehend innovation potential, or to
recognize the prospects for exploiting an innovation, it is essentially certain that
innovation cannot take place. Without innovative people there can be no innova-
tion. Innovative people might arise from otherwise poorly educated populations, but
they are easily discouraged by lack of support or recognition for their talents.
CONJECTURE 2. Significant production or use of IT innovation requires serious
and sustained institutional interventions for knowledge deployment.
Subsidy. A subsidy is provided whenever an institution uses its resources or author-
ity to defray the otherwise unavoidable costs or risks to innovators and users in the
process of innovation and diffusion in use. Subsidies take a variety of forms. In a
sense, both knowledge building through institutional grants and the provision of
general education are subsidies for innovation. But the intent of knowledge build-
ing and education is much broader than to facilitate innovation, while subsidy is
June 1994 153

generally a targeted activity to achieve a specific end, such as an increase in the

indigenous production and/or use of computer systems. Thus, we use subsidy to
describe institutional activities designed to produce specific innovative outcomes.
A good example of subsidy for innovation is the funding of prototype development
and demonstration projects that help to prove concepts and reveal possible improve-
ments (I). Such subsidy is often provided by government, through one means or
another, but this is not always the case. Funding can be provided, as noted under
knowledge building above, by other institutional sources. The European Economic
Community, for example, allocated ECU 23 million for pilot projects that demon-
strate innovative new applications of information technology (CACM, 1990). Less
direct but perhaps as potent as subsidies is the encouragement of capital markets to
make funds available for innovative activity (I) and acquisition of innovative prod-
ucts or processes (II). These mechanisms are generally tools of government agencies,
effected through preferential treatment on loan guarantees, provision of tax breaks,
and so on, which are usually instrumentalities of governments (I). For example, the
Singapore government's Small Enterprise Computerization Programme encourages
small enterprises in Singapore to implement computer systems by subsidizing the
cost of external expertise, and providing low-interest loans for hardware and software
purchase (II) (Raman 1990). In Taiwan, the Ministry of Economic Affairs similarly
provided assistance to computerize small and medium sized firms (Cheng 1990).
Another powerful form of subsidy is institutional procurement of innovations and
of locally produced goods and services containing those innovations. This is a particu-
larly dramatic form of intervention when the institution is a large buyer, as in the case
of military procurements by governments or procurements of communications
equipment by national telephone companies. By specifying particular requirements,
innovative developments and production can thus be stimulated. The power of this
instrument is dramatically shown in the case of U.S. government procurements in
the areas of aircraft, spacecraft, electronics and computers (Nelson 1988). The effec-
tiveness of this instrument goes beyond its direct application as a form of influence on
demand (II). It can also be a mandate that innovative products or processes be used as
a condition of aid for support from the institution for any reason. An example would
be the required use of particular accounting innovations for administration of institu-
tionally funded programs (IV). In this instance, the subsidy is for something else, but
the innovation is required nonetheless.
A subtle but often essential kind of subsidy is support for provision of necessary
complements to be used with innovative products or processes (II). Perhaps the most
obvious two complements related to IT are establishment and maintenance of reli-
able and continuous electrical power and telecommunications services (Flamm
1985). The establishment of roads, harbors, and other physical improvements are
other examples. A different kind of subsidy can be provided by proscribing or pro-
hibiting the use of substitutes for the innovation in question (II). Examples are giving
preference to domestic products or services, limiting the foreign content of products,
or taxing imported products and services. Rules of Origin are used to determine
application of customs tariffs. For integrated circuits, the EC Commission in 1989
reinterpreted the governing principle as "The operation of diffusion. . ." which will
require diffusion of integrated circuits to be built in the EC countries. This is poten-
tially significant for countries that export most ofthe integrated circuits assembled in
their countries (II) (Chiarado and Mussehl 1990). The protective tariffs and import
restrictions of Brazil, India, and Japan on certain information technology products

and services are also well known. In these cases, the institution provides a relative
advantage, and thereby an effective subsidy, by making the use of altematives more
costly or impossible. This can be an especially important instrument for forcing out
older ways of doing things by specifying that they cannot be used in work for the
institution.
Finally, there are important but indirect subsidies in the form of reducing barriers
to production of innovation by individuals and organizations (III). One kind of
subsidy restricts the risks associated with innovation, as with the U.S. government's
legal restriction of maximum liability for any single nuclear power accident. This
effectively eliminates the catastrophic loss potential from such accidents, and makes
private investors more willing to use nuclear power generating innovations (Wood
1982). A second kind of subsidy modifies the barriers to competition in the use of an
innovation, such as restricting commercial returns from use of an innovation to
particular parties. This is precisely the objective of patent and copyright laws, which
restrict the right to a return from the use of an innovation by requiring payment of
license and royalty fees established by the patent or copyright holder. As an example
of the modification of legal and administrative barriers, the EC Commission has
taken the initiative to eliminate legal and administrative obstacles in the areas of
intellectual property including software, the authentication of electronic transac-
tions, suppression of electronic fraud, and improved means for dealing with the
liabilities of information services (CACM 1990).
CONJECTURE 3. Subsidies are often crucial but not always essential instruments
of institutional intervention in both the production and use of IT innovation.
Mobilization. Mobilization basically means the encouragement of decentralized
actors and organizations to think in a particular way with respect to an innovation.
By encouraging a positive or negative view of an innovation, diffusion of IT will be
affected (Kling and Iacono 1988). Mobilization is a subtle force, and can be found in
all ofthe above. For example, there is no doubt that the pro-science curricula of most
public schools in the United States are intended, whatever their actual resuhs, to
encourage students to accept scientific viewpoints and, if possible, pursue scientific
careers. The intent ofthe term as used here is more precise, however, and addresses
institutional action taken specifically to encourage the use of particular kinds of
innovations. The main institutional instruments for this kind of mobilization are
promotional and awareness campaigns (II). These include advertising to support use
ofthe innovation (e.g., "Buckle Up For Safety"), staging of major events (e.g.. Con-
sumer Electronics Show), and establishment of social traditions (e.g.. National Infor-
mation Technology Week). Highly successful examples of social traditions are the
annual Information Technology Week in Singapore and the annual Information
Month in Taiwan. Each event is built around trade expositions, seminars, publica-
tions, and opportunities to provide the interested public with hands-on experience
using new information technologies. In Taiwan, Information Month events are held
in all major cities, and gross attendance is often more than 15% ofthe country's
population (Cheng 1990). The Philippines celebrates a National IT Month in June of
each year, and announced its National IT Plan at this event in 1991.
There is a special mobilization role played by higher education and professional
associations that has not been well addressed by past research. This is the role of
mobilizing the self-interest and organizational interests of significant actors within
organizations to see innovation as necessary to organizational welfare. Although
June 1994 155

difficult to measure directly, we believe this has been a particularly important compo-
nent in the spread of use of IT in both private firms and public agencies alike. The
emphasis on the strategic importance of IT for competitive positioning is one exam-
ple (Harvard Business School 1991, Allen and Scott-Morton 1994). This advice is
targeted to highly placed executives within large firms with multinational operations,
and such mobilization probably is an important force in the global spread of innova-
tive capability (Chesnais 1988, Henderson 1989, Pavitt 1992). Also, scientific and
scholarly societies often play important mobilizing roles with respect to innovation,
as in the case ofthe U.S. National Research Council's Computer Science and Tele-
communications Board's publications arguing for greater investment in information
technology research (National Research Council 1988) and against evidence that IT
investments do not yield financial payoffs in service industry firms (National Re-
search Council 1994).
Whether such mobilization efforts have a dramatic effect on actual innovative
practices is difficult to measure. In principle, mobilization's effects might be similar
to the effects that advertising has on consumer behavior, which is also difficult to
measure. Simple mobilization efforts are likely to have little effect on actual innova-
tion without the other interventions of knowledge building, knowledge deployment,
and subsidy. Nevertheless, mobihzation efforts can have a marked catalytic effect in
the presence of these factors.
CONJECTURE 4. Mobilization efforts are important but not essential in stimulat-
ing production and use of IT innovation, and are useful mainly in conjunction with
other institutional interventions.
Standard Setting. Standard setting is a form of regulation aimed at constraining
options of decentralized actors and organizations in line with larger social or institu-
tional objectives. Standards are socially constructed; they are agreements or
"treaties" among interested parties to describe one way of doing things as "prefera-
ble." They can be completely voluntary, as many standards promulgated by profes-
sional and trade associations are, or they can have the force of law. Standards appear
as components of knowledge building, knowledge deployment, and subsidy instru-
ments. They both derive from and help direct the course of knowledge building
activities, and they significantly influence the codification of knowledge as it is de-
ployed in the society. Standards are an important mechanism for imposing meaning
and order on a corpus of knowledge that otherwise provides too many potential
options to be socially applicable (King, Ferguson and Shi 1992).
There are some notable examples of standard setting in the IT arena. For example,
the EC Commission has acted to support standardization in the area of data base
access with respect to harmonizing procedures for computer networking, formats for
data transfer, and criteria for description of data bases (IV) (CACM 1990). The ISO
Open System Interconnect (OSI) standard has been promulgated to set standards of
linking heterogeneous computer systems (IV) (International Standards Organization
1984). And broadly speaking, the varied efforts to establish the Unix operating sys-
tem as a standard falls within this category (Economist 1990). The effort to establish
the National Information Infrastructure in the United States is closely coupled to a
search for new standards for the communications industry (U.S. House of Represen-
tatives 1994).
Standards appear as instruments for institutional intervention in innovation in
several ways. They can be established to stimulate or speed up investment in innova-

Institntional Factors in Information Technology Innovation
tion production (III). For example, efforts to build data communication controllers
can be stalled while different, decentralized actors try tofigureout the structure ofthe
connectors that go between the machines. Setting a standard for such connectors
removes an obstacle to progress on the more complex and important problems in
developing the controllers. An example of this from the microcomputer industry is
the establishment of the IEEE RS432C serial interface standard, which facilitated
connections of peripheral devices to personal computers. Standards are also estab-
lished to promote the use of innovations after they have been developed (IV). Poten-
tial adopters are often concerned about future technical changes, and in particular
about the residual value of their investments and the upgrade path for future procure-
ments. They are reluctant to buy innovations that are "non-standard" because these
will be hard to sell subsequently, and because any additional apparatus or protocols
built around the innovation will be rendered useless in time. The technological domi-
nance represented by de-facto standards, such as IBM's 360 hardware/software archi-
tectural dynasty and Microsoft's MS-DOS operating system for Intel 80X86 proces-
sors, exhibit this point clearly.
An indirect but important kind of standard is that which establishes some mini-
mum level of performance on a particular criterion that, to be reached, requires use
of a particular innovation. For example, health regulations surrounding the sale of
certain food products mandate pathogen or impurity counts below particular thresh-
olds that can only be reached by use of innovations such as pasteurization in dairy
products or batch retort autoclaving in canned goods. The standard itself does not
mandate innovation, but provides an incentive to use innovations that meet the
standard, and to produce new innovations that meet the standard more efficiently.
Standards are often called upon to help stabilize technological domains that con-
fuse consumers in the belief that a certain world is preferable to a worrisome, uncer-
tain world (David and Greenstein 1990). However, premature settling on a standard
can have the effect of stifling innovation in the future by locking innovation produc-
tion onto a path that subsequently proves suboptimal. Standards can therefore serve
to constrain as well as enhance innovation.
CONJECTURE 5. Standards are important tool of institutional intervention in pro-
duction and use ofIT innovation, but standard-setting is risky and can produce coun-
terproductive consequences.
Innovation Directive. The last category of actions is the innovation directive: a
command to produce innovations, to use them, or to engage in some activity that will
specifically facilitate production and/or use. One form of directive is for the institu-
tion to produce its own innovations and/or use them (I). This is best seen in the
instance of a government agency or industry that is required to develop or use particu-
lar technologies. Another form of directive is the requirement that organizations
invest given amounts of their resources in R&D activity presumed to lead to innova-
tion (III). A third form of directive is a requirement that organizations use particular
products or processes wherever they can be applied (IV). A fourth, and more subtle
but nonetheless powerful form of directive is to require organizations to alter their
structures or operations in ways that affect innovation and diffusion as an indirect
consequence.
In general, directive interventions have a mixed record in encouraging innovation
production or diffusion in use. Specific orders to innovate often fail, simply because
people cannot be forced to be creative. Invention occurs when a complex and fuzzy
June 1994 157

set of capabilities, attitudes and incentives come together in an individual or, less
often, a group. It is difficult to "engineer" innovative processes, although it is possible
to create conditions that help or hinder innovation. Orders to innovate also fail
because the directives must be targeted toward achieving specific innovative break-
throughs. This effectively places higher-level individuals who know relatively little
about the intimate details of the problem in the position of directing lower-level
individuals who do know the details (Von Hayek 1945). Innovation tends not to
occur in "top-down" fashion. Generally, therefore, institutions do not achieve signifi-
cant levels of innovation or diffusion by ordering people to innovate or use
innovations.
Nevertheless, directives can play important roles in innovation and diffusion. In
some circumstances, as in a state of war, many aspects ofthe social order are altered.
Individuals may be willing to sacrifice personal discretion to follow the directives of
the national leadership, while private incentive can give way to need for accomplish-
ing shared objectives. The technical progress made during the second world war in
many areas (radar, rocketry, jet aviation, nuclear power) demonstrate that some
directives for innovation can produce dramatic effects. The other instance where
directives can make a difference is in the setting of parameters for organizational
behavior that, in time, yield innovation. Japan's MITI has engaged for years in provi-
sion of "administrative guidance" to companies in an effort to help rationalize pro-
duction capacity given the character of international markets (Johnson 1982). In the
computer industry, for example, MITI played a crucial role in guiding groups of
companies to focus on specific classes of technologies where MITI perceived a possi-
ble market for Japan's producers (Ohashi 1990, Mansfield 1988, Freeman 1988b).
CONJECTURE 6. Top-down directivesfor stimulating innovation and diffusion can
be powerful interventions in special circumstances such as crises, but are of limited
long-term utility for sustaining production and use of IT innovation.
Research Implications
The discussion above has outlined the ways in which institutions can affect IT
innovation. These conjectures are not precise enough to provide explicit research
directions. They outline the broad influences possible at the institution/innovation
nexus, not all the elaborations possible. To push the analysis further for research
purposes, the role of institutions should be considered both multi-faceted and contin-
gent. In this section we briefly outline these features of institutional factors in IT
innovation.
The Multi-faceted Role of Institutions
The discussion above, and Figure 2 on which it is based, can be criticized for what
Rogers (1983) has called a "pro-innovation bias." It is ofiten assumed by students of
innovation phenomena that innovations are socially positive, and that individuals,
organizations, and institutions desire the promotion of innovation. This is not neces-
sarily the case, as the history of technical innovation suggests. While institutions can
take actions along the lines noted above to encourage innovation, they also can take
actions that discourage innovation. Many examples can be provided to show that
innovation is inherently poHtical, and the desirability of particular innovations varies
greatly when the question of who wins and who loses is raised. Here are just a few:
• Organized labor institutions can demand contracts that limit the introduction of
labor-saving innovations or define j ob descriptions in ways that alter the complemen-

tarity and substitutability characteristics ofthe innovation (e.g., preventing or man-

dating shifts of workers to new functions created by use ofthe innovation).
• Religious restrictions on the use of new technologies (e.g., the Catholic Church
prohibition of artificial birth control.)
• Repressive government policies toward the exchange of ideas for internal politi-
cal or security reasons. Examples include state censorship, state ownership of the
press, and limitations on activities of academics and journalists.
• International restrictions on the free flow of knowledge and technology. Exam-
ples include the COCOM restrictions on trade in high-technology products with the
former Soviet bloc, and the International Atomic Energy Agency attempts to restrict
nuclear proliferation.
• Tariffs, quotas and other barriers to trade of technology-based goods and ser-
vices. These inhibit the use, although in some cases they might increase domestic
innovation. In fact, this outcome is often the goal of such restrictions. Overall effects
depend on whether the government requires domestic firms to develop exports or
simply allows them to enjoy monopoly rents in the domestic market.
• Foreign investment restrictions that keep multinational firms and their ad-
vanced technologies out of a country. Even here, however, policies can have compli-
cated consequences. The Japanese proved through their creative negotiations with
IBM that MNCs can be persuaded to provide valuable transfers of technology in
return for access to the domestic market, thereby boosting domestic production capa-
bility.
• Patent of copyright policies balanced too heavily toward allowing innovators to
enjoy monopoly rights to their innovations at the cost of dissemination of new knowl-
edge. This naturally is a balancing act, since some protection from competition can
act as an incentive to innovation when other barriers to entry are high.
• Delay ofthe introduction of innovations developed by corporations that would
make their existing products obsolete.
The multifaceted character of innovation requires incorporation into the "institu-

tional point of view" the recognition that institutions, like individuals and organiza-
tions, are politically and ideologically biased. They are ofiten explicitly in the business
of reinforcing particular ideologies or political perspectives. Institutions can take
conflicting positions with one another regarding particular innovative activity, as the
so-called "Hundred Years War" between Japan's Ministry of Post and Telecommuni-
cation and Ministry of International Trade and Industry over national infonnation
infrastructure development suggests. MPT and MITI both want to see Japan's IT
infrastructure expand, but each wants to lead the effort. As a result they are engaged
in a titanic struggle to determine supremacy (Ohashi 1990).
Institutions also can change their positions rather dramatically with respect to their
appropriate role in innovation. A good case in point, though at a rather high level of
abstraction, is seen in the U.S. Department of Defense Advanced Research Projects
Agency's changes of name between 1978 and 1993. Originally known just as ARPA,
the agency long supported development of various advanced technologies to, in the
words of its charter, "protect the U.S. from technological surprise." The agency
changed it's name to DARPA (D for Defense) in 1978 to reflect its defense purpose.
After the end of the cold war, however, and as the mood of the establishment in
power drifted back to consideration of industrial policy, the D was dropped, and the
agency became known again simply as ARPA. It now actively embraces a role as a
June 1994 159

King • Gurbaxani • Kraemer • McFarlan « Raman « Yap
changie agent for technology transfer, and is leading major components of the so-
called "defense conversion" effort to build the civihan industrial and commercial
sector.
Again, we note that institutions must themselves be seen as fluid entities, as net-
works of organizations in action, that are being shaped by individuals, groups, organi-
zations, and interest groups just as surely as they shape those entities. The axiom for
the researcher studying IT innovation in an institutional context is to treat institu-
tions as powerful sources of influence and regulation that are somewhat more stable
than the entities they influence, but that over time, evolve in response to changing
conditions and thus change their focus and methods of influence and regulation.
Contingencies in Institutional Intervention

The nature of institutional intervention in IT innovation is no less complex and
contingent than the general process of innovation itself. The discussion above does
not provide specific commentary on which interventions might be used for particular
purposes in specific cases. Not every possible institutional action is appropriate for
every objective; much depends on what the institutions involved desire to accom-
phsh, and the range of motivations can be broad. Nor is each possible action appro-
priate for every innovation. Some innovations are discrete; snowmobiles, for exam-
ple, have a specific application niche that, although complicated in its own right, is
nonetheless circumscribed (Pelto 1973). On the other hand, IT innovations are nota-
bly "network" innovations (David 1991). They are embedded in complex webs of
technological infrastructure, and as noted earlier, they play roles ranging from capital
goods to consumer products.
The "network" component of IT innovations can be divided into two broad
classes: physical networks and social networks. All IT innovations are tied to social
networks of technical knowledge, support, and culture, but not all are necessarily tied
to physical networks. Those IT innovations tied to physical networks, such as data
communications technologies linking transaction processing or electronic mail sys-
tems, depend on a backbone of robust and reliable physical systems that are hkely to
require heavy intervention in both subsidy and standards. Not surprisingly, actual
diffusion of IT across the array of developing, newly industrializing, and developed
countries corresponds directly to the level of existing communication infrastructure,
and by extension, subsidy and standards to support that infrastructure (Gurbaxani et
al. 1991). Thus, we suggest that diffusion of stand-alone IT innovations such as
personal computers will require institutional interventions for knowledge deploy-
ment, at minimum, and modest subsidy and standard setting for supply of basic
infrastructure such as electric power. But more complex and sophisticated IT innova-
tions, such as credit data reporting systems, require much more elaborate and sus-
tained interventions in the form of knowledge building, subsidy, and standards.
Beyond these broad speculations, however, little empirical evidence is available to
associate specific interventions with specific IT innovations. This clearly is an area for
future work.
We also note that not all institutions are equally adept at facilitating IT innovation,
and the mix of adept institutions will vary from place to place. Generally speaking,
some level of government institutional intervention is required to mobilize, standard-
ize, and subsidize creation of massive infrastructure such as communication net-
works. However, as shown by the experience in the U.S. and Canada, investor-owned
companies operating under government regulation (e.g., AT&T) proved to be a via-

ble aitemative institutional form for developing and deploying the actual systems.
Moreover, institutional modalities can change in response to circumstances; a fact
underscored by the "privatization" of national telecommunications institutions in
the UK and Japan. It is also clear that government is not the most appropriate
institution for actual production of most IT innovation; not a single innovative
computer company in the world can be described as government-owned or even
parastatal. At the mainframe level, the only contending institutions are large multina-
tional firms (Cantwell 1989). While these firms typically have close relations with
government institutions, they are definitely institutions in their own right. Finally,
institutional intervention in IT innovation sometimes shows up in odd ways. For
example, the rapid spread of electronic mail systems embodied in the Internet was
due in large measure to the subsidy, knowledge building, knowledge deployment, and
standard setting roles played by institutions of higher education in the U.S., Europe,
and Japan (Mechling and King 1992). We conclude this section with two useful
examples ofthe complex contingencies involved in institutional interventions in IT
innovation: the European ESPRIT program, and the more recent National Informa-
tion Highways effort in the United States.
Mytelka's (1992) analysis provides an unusually trenchant glimpse ofthe institu-
tional forces at work in the failures ofthe ESPRIT program in Europe. The ESPRIT
program was launched by the European Community in 1984 as a defensive measure
to counter the loss of European IT industry competitiveness to the U.S. and Japan.
Predictably, the elite planners of the EC called upon the elite institutional forces of
the European IT industry—the twelve largest firms in the business—to plan a strat-
egy whereby over 500 projects in over 800 enterprises would recapture a lead for the
Europeans in the IT industry. ESPRIT succeeded in building a network of companies
and universities that could work together on IT innovation, but by pursuing a defen-
sive and oligopolistic strategy that excluded not only U.S. and Japanese firms, but
small and innovative European firms as well, the program locked this new oligopoly
into a long-term "strategic drift" that killed ability to operate at the frontier of IT
innovation. In the meantime, the small European firms that had in many cases been
working at the forefront of IT innovation were brought up by U.S. and Japanese IT
firms. When the innovative superiority of U.S. and Japanese technology began to
prove too powerful in the late 1980s, many members of ESPRIT's oligopoly began
selling out to the same U.S. and Japanese firms, either directly or by licensing most of
the advanced IT innovations from such firms. By late 1992, ofthe 12 original IT
firms in the ESPRIT program, only one remained a viable, stand-alone innovator in
the European IT arena.
The emerging social history ofthe National Infonnation Highways initiative pro-
vides a useful opportunity to assess the institutional role in shaping contingencies,
and thus to construct in theory explanations that can be investigated empirically.
Prior to the 1992 U.S. presidential election, then-Senator Albert Gore authored legis-
lation to support research that would aid U.S. leadership in ITfields.This legislation
passed Congress and was one ofthe few bills for government support of an industrial
sector signed during the Reagan-Bush administrations. After the election. President
Clinton and Vice President Gore made clear their intentions to push further for the
development of a "national information highway," similar in concept and purpose to
the federally-funded National Defense Interstate Highway System that Vice Presi-
dent Gore's father, a U.S. Senator in the 1950s, had sponsored. Funds to launch the
information highway initiative were contained in two pieces of funding legislation.
June 1994 161

King • Gurbaxani • Kraemer » McFarlan « Raman » Yap
both of which were debated extensively and eventually defeated in Congress in 1993.
But the dream ofthe information highway did not die; it had, in fact, been furthered
significantly by the mobilizing force ofthe legislative efforts ofthe President and Vice
President, even though the funds were not appropriated.
The basic notion of building a national information highway was not new in 1990.
The large institutional interests ofthe Regional Bell Operating Companies (RBOCs),
the huge long-distance carriers (AT&T, MIC, GTE), the Cable Television industry,
various information service providers, and publishers had been exploring the poten-
tial in large-scale national networking for a decade. Key pieces of that infrastructure
and the concept behind it had been proven. The large television and broadcasting
broadcasting networks—institutions in their own right—had clearly estabhshed the
political and social power of national information dissemination. The institutionally-
supported network projects such as ARPA-Net, BITNET, Internet and so on had
proved the viability of packet-switched networks. Equally important, the compli-
cated legal apparatus governing who could do what in the communication and infor-
mation sectors, erected as a consequence ofthe monumental AT&T antitrust suit in
the mid-1980s, had been working toward judgments over which industries and firms
could participate in the activities at the heart of something ambitious like the na-
tional information highway.
The companies who hoped to build the basic infrastructure of conduits—the
RBOCs, the long-distance carriers, and the cable television companies—had been
stalled in a state of anticipatory retardation prior to the 1992 election, with each party
afraid to make a potentially disastrous first move. However, when the new adminis-
tration forged ahead with a plan to build the national information highway, the
dynamic of anticipation shifted suddenly and several consortia of companies an-
nounced plans to build huge new networks of high-capacity carriers. They moved in
anticipation of a stampede for position following the administration's lead. By the
time the legislation to fund the administration's program failed in 1993, this inertia
could not be called back. The national information highway, or somethingjust like it,
had been launched and was widely regarded as inevitable. The stage on which the
drama ofthe information highway could be played was itself constructed at the nexus
of technological advancement and institutional interests. The critical catalyst of the
new administration's mobilizing efforts pushed a number of key pieces ofthe evolv-
ing story into alignment and enabled a major next step in the evolution ofthe infor-
mation highway vision.
Conclusion
From our review we conclude that the role of institutions must be considered an
essential component in any theory of innovation. The institutional power to influ-
ence and regulate can be linked to ideologies governing supply-push and demand-
pull approaches to innovation in an effort to account for possible institutional inter-
ventions. We conclude with some observations on the role of government as the
paradigmatic institution in the IT innovation process.
Government entities are clearly among the most powerful institutional forces af-
fecting innovation (Nelson and Soete 1988). Their effects come in several forms.
Most obviously, deliberate interventions such as the U.S. government's military activ-
ities related to nuclear power, the Japanese government's stimulation ofthe electron-
ics industry, and India's decision to dislodge multinational firms can all be seen as
having direct and important consequences for innovation. Direct interventions have

become the subject of much heated inquiry as countries with extraordinary economic
growth performance (notably Japan and South Korea) have surged onto the interna-
tional economic scene. Both countries' governments have intervened forcefully in
economic development, especially in areas of innovation and technology, and the
effects of these interventions have challenged received economic vwsdom about the
inherent efficiency of markets and the evils of government intervention (Johnson
1982, Amsden 1989, Perez and Soete 1988, Nelson 1992). The desire of NICs to
expand their production and use of high-technology, and of DCs to break into the
game at any level, is ample testimony to the belief that govemment intervention can
make a major difference in innovation success. At the same time, however, the
experience ofthe EC and the ESPRIT project shows that intervention can sometimes
produce exactly the opposite of what is hoped for.
Deliberate government decisions to refrain from intervening in innovative pro-
cesses are themselves a form of policy. For most ofthe past fifteen years the avowed
policies of government in both the U.S. and the UK have been away from direct
govemmental support of innovation in spheres that, arguably, can be supported by
commercial enterprise." As noted above, the Clinton-Gore administration in the U.S.
recently intervened actively to push ahead the information highway vision. Land's
(1990) account of debates in the House of Commons Select Committee on Trade and
Industry regarding the UK govemment role in relation to innovation in information
technology underscores positions that are not yet settled in that country. Such de-
bates are central to the interests of researchers seeking to understand the direction of
IT innovation, and more particularly, the means by which IT innovation occurs. In a
pluralistic political order, they bring together the disparate institutional interests
likely to be central to influencing and regulating whatever new technological regimes
emerge.
There is little doubt that information technology innovation will continue and
probably accelerate throughout the world in the next decade. The rapidly developing
nations ofthe world are building their plans for economic growth at least in part on
these technologies. More broadly, the vision of the networked organization with
global reach is predicated on such innovation. The appropriate role of institutions,
and particularly govemment and quasigovemmental institutions, in facilitating
successful IT innovation has yet to be detemiined. Additional study is required to
determining the desirable kinds and mixes of institutional interventions, not only in
terms of theoretical constmcts, but in terms of demonstrated experience.*
Acknowledgements. This paper is part ofthe Globalization oflnformation Technol-

ogy project, which is supported by the National Science Foundation, the University
* Mowery and Rosenberg (1981) describe the U.S. govemment's support of R&D in the commercial
aircraft sector was strong in the 1940s through mid-1960s, but fell off sharply during the late 1960s. Later
generations of commercial aircraft were developed largely with nongovernment sources. In contrast, dur-
ing this f)eriod the European Airbus Industrie consortium gathered momentum and launched itsfirstfleet
of commercially successful passenger jets, with very substantial amounts of govemment subsidy. The
Reagan and Thatcher administrations in the U.S. and UK respectively took stands quite strongly against
govemment support in any case where private investment might be sufficient, though in some areas this
ideological position was not maintained. For example, in the U.S. during the 1980s, defense R&D
spending grew much more rapidly than civilian R&D spending, and the overall share of govemment
spending devoted to development as opposed to basic research increased substantially.
* Richard O. Mason, Associate Editor. This paper was with the authors for 2 revisions.
June 1994 163

of California, the National University of Singapore, and corporate sponsors. The

authors appreciate the assistance of Burt Swanson, who served as Acting Editor,
Associate Editor Dick Mason, Ignace Snellen, and six anonymous reviewers during
the time of the paper's evolution. An earlier version of this paper appeared in the
Proceedings ofthe Eleventh International Conference on Information Systems, Co-
penhagen, Denmark, December 14-16, 1990.
* Richard O. Mason, Associate Editor. This paper was with the authors for 2 revisions.
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Institutional Factors in Information Technology Innovation

John Leslie King CRITO

Innovation in information technology is well established in developed na-

Itiformation Systems Research 5 : 2 139

Innovation and Institutions

140 Information Systems Research 5 : 2

Information Systems Research 5 : 2

technical knowledge and the resulting production of innovations. It is nearly a matter

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Improvements in the state of knowledge expand the range of substitutability among

144 Information Systems Research 5 : 2

A Contemporary Sociological Perspective. In contrast to the economic tradition,

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Converging Views of Institutions. As noted above, we do not attempt to synthesize

146 Information Systems Research 5 : 2

tion considerably. The focus on institutions is a kind of compromise, opening the

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Government authorities. National govemment agencies, provinces.

FIGURE 1. Institutions Influencing IT Innovation.

Institutional Intervention In Information Technology Innovation

148 Information Systems Research 5 : 2

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150 Information Systems Research 5 : 2

KNOWLEDGE BUILDING KNOWLEDGE DEPLOYMENT

FIGURE 2. Dimensions of Institutional Intervention.

knowledge-based systems, and very large scale integration (British Department of

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152 Information Systems Research 5 : 2

sole province of the government, although actual provision of educational services

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generally a targeted activity to achieve a specific end, such as an increase in the

154 Information Systems Research 5 : 2

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156 Information Systems Research 5 : 2

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158 Information Systems Research 5 : 2

tarity and substitutability characteristics ofthe innovation (e.g., preventing or man-

The multifaceted character of innovation requires incorporation into the "institu-

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Contingencies in Institutional Intervention

160 Information Systems Research 5 : 2

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162 Information Systems Research 5 : 2

Acknowledgements. This paper is part ofthe Globalization oflnformation Technol-

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of California, the National University of Singapore, and corporate sponsors. The

164 Infonnation Systems Research 5 : 2

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166 Information Systems Research 5 : 2

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and D. C. Cash, "Technological Frames: Making Sense ofinformation Technology in Organiza-

168 Information Systems Research 5 : 2

_, Leadership in Administration. Row and Peterson, Evanston, IL, 1957.

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