Tacit Knowledge in Geographical Context

It has now become commonplace to refer to the current period of capitalist development as the era of the ‘knowledge-based’ (OECD 1996) or ‘learning’ (Lundvall and Johnson 1994) economy. No matter which label one prefers, the production, acquisition, absorption, reproduction, and dissemination of knowledge is seen by many as the fundamental characteristic of contemporary competitive dynamics. Long before this parlance became popular, scholars had expressed a deep interest in distinguishing between different types of knowledge. Philosophers of knowledge such as Ryle (1949) and Michael Polanyi (1958; 1966) anticipated later developments in social constructivist thought by enunciating what was for them a crucial distinction between knowledge that could be effectively expressed using symbolic forms of representation—explicit or codified—and other forms of knowledge that defied such representation—tacit knowledge (see Reber 1995; Barbiero n.d.). Within the field of innovation studies and technological change, and especially since the publication of Nonaka and Takeuchi’s The Knowledge- Creating Company (1995), the distinction between tacit and codified knowledge has been accorded great significance. However, in characteristically prescient fashion Nelson and Winter (1982) in their classic work had already made extensive use of the concept, which informed their analysis of organizational routines within an evolutionary perspective on technological change. In drawing attention to this concept, these authors helped revive widespread interest in the earlier work of Michael Polanyi, to the point where tacit knowledge has come to be recognized as a central component of the learning economy, and a key to innovation and value creation. Moreover, tacit knowledge is also acknowledged as a prime determinant of the geography of innovative activity, since its central role in the process of learning through interacting tends to reinforce the local over the global. For a growing number of scholars, this explains the perpetuation and deepening of geographical concentration in a world of expanding markets, weakening borders, and ever cheaper and more pervasive communication technologies. Recently, tacit knowledge has received considerable attention within the field of industrial economics (see for e.g. Cowan, David, and Foray 2000; Johnson, Lorenz, and Lundvall 2002), where a process of critical re-examination has begun.

Crisis in Machinery Building: The Roots of Germany’s Economic Malaise?

The health and state of the German economy has been the dominant topic in the European business press since at least 1994, when the post-unification boom came to an end, and with good reason. Home to 82 million people, it is Europe’s largest economy. But it has also been the slowest-growing economy within the European Union since 1994, averaging just 1.6 per cent annually, a period in which it has also lagged behind the United States in every year except 2001. The DAX index of Germany’s top companies has experienced a sharper and more sustained downturn than the stock markets in the United States, United Kingdom, and France, indicative of a growing malaise amongst the country’s largest industrial and financial firms (Smiley 2002: 4). Inward foreign direct investment has slowed to a trickle, and a large proportion of its biggest companies are diverting their own investments to production sites abroad. The country’s share of global exports has declined from 11.8 per cent to 9.7 per cent over the decade between 1992 and 2002 (The Economist 2002a: S8). Meanwhile, the national unemployment rate has climbed to nearly 10 per cent over the same period, according to German statistics (or 8.3 per cent using European Union statistics) (The Economist 2002b: S13). There is no shortage of diagnoses for what allegedly ails the German economy these days. For many in the same business press, the answer is seductively simple: Germany is ‘stifled by a hugely restrictive and intrusive web of regulations, and weighed down by one of the most expensive, inflexible and protected labour forces in the world’ (Smiley 2002: S4). While there is undoubtedly some truth to this assessment, it is also simple-minded in the extreme. This chapter provides an alternative interpretation of the roots of Germany’s economic problems by focusing on one of its bedrock industries: mechanical engineering (in particular, its machinery and machine tool industry). Tracing the evolution of this key industry from a point early in the 1990s when it first encountered a serious competitive setback.

Institutions, Agency, and Industrial Practices

Why are firms in some regions or nations so successful at adopting particular new production technologies and work practices while those in other places are not? What role do culturally defined characteristics, traits, and attitudes play in determining the degree of success in this process? Moreover, to what extent can such successful practices be replicated or ‘manufactured’ in other less fortunate locations? These questions figure prominently in a number of important debates, both theoretical and practical, and constitute the central issues of concern for this book. Scholars interested in the theory of regional and national economic development have, at least since the mid-1980s, engaged in a lively debate over the nature of change in the contemporary economy, and the forces producing such change. Considerable attention has been focused on the set of new production and innovation practices that many see as the foundation of firms’ competitive success in a period described variously as the era of post-Fordism. after-Fordism, ‘new competition’, ‘new social economy’, ‘knowledge-based economy’, or ‘learning economy’. These practices include the use of highly flexible, advanced manufacturing technologies, the reorganization of work inside the firm to enhance innovative capacity, improve quality, and increase responsiveness to changing market demands, and the restructuring of external relations—with customers, suppliers, and competitors—as firms supplement arm’s-length, market-based transactions with closer co-operation and collaboration to improve their responsiveness and innovative capability. The international literature in economic geography, industrial economics, economic sociology, political science, and management studies is now replete with case studies of individual countries and regions where firms have developed and employed such practices to great effect, enabling them to increase sales at home and abroad, and to maintain or expand their workforces. The most celebrated cases include Germany’s Baden-Wurttemberg, the Third Italy (especially the regions of Emilia-Romagna and Tuscany), Silicon Valley, and Japan’s Tokyo-Osaka corridor. In this multidisciplinary literature, interest has converged around a common theme: the role of culture in shaping the internal and external practices of firms.

Geography, Learning, and Convergence

According to an increasingly accepted view, the sovereignty of national economies has been eroded to the point where nation-states ‘have become little more than bit actors’ (Ohmae 1995: 12). With the development of globalized financial markets, the rising power of multinational corporations (MNCs), and the emergence of a new set of supranational institutions to govern economic processes on a continental or world scale, nation-states are said to have lost the ability to manage their own domestic economic affairs, having ceded control over exchange rates, investment, and even fiscal policy to extra-national forces (Strange 1997). Moreover, with the increasing leverage and reach of MNCs further contributing to the erosion of national economic sovereignty, the once distinctive character of particular national industrial ‘models’ is said to be under imminent threat. While it may still be possible to identify at least three clearly distinctive national models—an Anglo-American model, a Rhineland (German) model, and a Japanese model—the decline of national institutions, the intensification of competitive forces on a global scale, and the cross-penetration of national markets by MNCs are said to have propelled a process of convergence between these different national models (see Martin and Sunley 1997 for a review of these arguments). In most representations of this globalization dynamic, convergence is regarded as inexorable. One of the most important processes underpinning this dynamic is learning. At the global level, large corporate actors are allegedly learning from each other, so that the most successful corporate practices are emulated and diffused cross-nationally at an increasingly rapid pace. In the late 1980s and early 1990s, considerable attention was devoted to the diffusion of methods of production and workplace organization perfected by Japanese producers of cars and consumer electronics, in which American, Canadian, and European manufacturers were shown to be learning methods such as just-in-time, kaizen/continuous improvement, and other aspects of ‘lean production’ techniques from their Japanese competitors (Womack, Jones, and Roos 1990). With the resurgence of the United States’ economy in the second half of the 1990s, American practices have apparently become the object of global firms’ affections, with large corporations in Europe and Asia adopting the core characteristics of US-style ‘shareholder capitalism’: especially flexible labour market practices, ‘re-engineering’, and the empowerment of shareholders (The Economist 1996a; 1996b).

Regional Cultures of Production

With the shifting nature of capitalist competition in recent years, many have argued that systems of innovation and production have become more social in nature. This assertion has two distinct but related components. First, production systems are coming to be characterized by a more finely articulated social division of labour, achieved through the process of vertical disintegration of large firms and the growing use of various forms of outsourcing, including subcontracting to smaller supplier firms. This externalization of the production process is said to offer the chief advantage of agility in meeting the needs of ever more rapidly changing and fragmented markets. As market demands shift qualitatively, producers are able to respond more effectively in such ‘open’ systems because they can more readily absorb the innovative ideas of supplier firms to help them devise new products and improvements, and because they can rework their sources of supply to match the particular attributes of the ‘product of the moment’, in both cases drawing upon the rich resources of a large collection of suppliers. The second component is that, as individual firms come to rely more heavily on their relations and exchanges with other firms, non-market forms of interaction become more important. Viewed in terms of the Williamsonian continuum between public markets and private hierarchies, much of the interesting action is seen to be taking place in the middle ground: relations are social, but are increasingly buttressed by trust. In particular, as Harrison (1992) pointed out in a classic essay, for these innovative production systems to function properly, firms must develop a considerable degree of interdependence on one another (including surrendering proprietary information) but will only do so when a relationship of trust has been established. Such relations are more likely to arise when firms interact with one another directly and repeatedly over time, as they will tend to do when they are located in the same region (see Crewe 1996). However, as sociologists such as Granovetter (1985) have pointed out, this interaction takes place through informal as well as formal mechanisms, and is reinforced by shared histories and cultures.

Proximity, Organization, and Culture

Since the late 1980s a growing number of geographers and other social scientists have chronicled the apparent rise of post-Fordist economic systems (Scott and Storper 1987; Schoenberger 1988; Harvey 1989; Storper and Walker 1989; Boyer 1990; Storper 1997). These systems are said to employ a flexible approach to production reflected in employment relations, the organization of work within firms, and the broader social division of labour (Cooke and Morgan 1998). To some, the heart of this transformation lies in the rise of a new set offerees of production (Walker 1994). In particular, they point to a new set of flexible process technologies whose programmable properties offer producers prospects of great versatility, limited downtime, unparalleled precision, and superior quality. The same technologies are said to hold the potential to unleash the creative potential of workers, and to compel manufacturers to establish a new regime of co-operation on the shopfloor (Florida 1991). Despite the popularity of such arguments, their unqualified acceptance has not been universal. A critical literature has arisen which, among other things, questions the pervasiveness of such practices, especially in locations outside the paradigmatic flexible production regions (Gertler 1988; 1992; Sayer 1989; Pudup 1992). The evidence reviewed in Ch. 2 attests that, while rates of adoption of flexible technologies such as computerized numerical control (CNC) are reasonably high amongst manufacturers in countries such as the United States, Great Britain, and Canada, many firms in these countries have experienced considerable difficulty in trying to implement such technologies effectively (Jaikumar 1986; Beatty 1987; Meurer, Sobel, and Wolfe 1987; Kelley and Brooks 1988; Turnbull 1989; Oakey and O’Farrell 1992). Furthermore, the discussion in Ch. 2 also shows that there is an apparent regularity to the geography of technology adoption difficulty that is highly suggestive of its roots. Many of these implementation difficulties seem to arise in older, mature industrial regions, where manufacturing firms are far removed from the major production sites of the new flexible production technologies. Increasingly, the leading producers of these process technologies are to be found in such countries as Germany, Japan, and Italy, while once-dominant American machinery producers have seen their market shares drop significantly, both at home and abroad (Graham 1993).

Capital, Technology, and Economic Performance

Across economic doctrines of all stripes, one of the eternal verities is that capital plays a crucial role in determining the path and rate of growth in advanced economies. Contemporary work in geography, regional economics, and planning has reinforced this view, attesting to the key influence of investment—and investors—on the economic vitality of localities and regions. However, until comparatively recently, both our theoretical apparatus for understanding the role of capital in regional development and our collected body of empirical evidence to illuminate this process were rather limited (Gertler 1984b; 1987). Our understanding of the investment process has developed along new lines of theoretical inquiry only since the mid-1980s. At the macroeconomic scale, economists have attacked the study of growth theory with renewed vigour, in an attempt to incorporate some of the most important attributes of the capitalist system—such as technological change and scale economies—that had hitherto defied easy reconciliation with accepted theories of economic growth (Romer 1986; 1990a, b). At the microeconomic scale, the results of a set of detailed, firm-level studies in several countries have forced a reappraisal of the accepted wisdom concerning the relationship between investment, productivity, and firm performance (Meurer, Sobel, and Wolfe 1987; Gertler 1993). Within this second avenue of progress, economic geography has made an important contribution to our understanding of the process by which mobile financial capital becomes ‘fixed’ in place as productive apparatus. Furthermore, this work has suggested important implications for the objectives and shape of industrial policy intervention. In this chapter I shall consider two fundamental questions: one that is more general in nature and another that is explicitly geographical. First, why have the returns from investment in new manufacturing technologies frequently been so disappointing? In addressing this question, I shall critically review some of the more significant insights produced by the ‘new growth theory’ in economics. This literature argues that investment is the motive force for technological change, since new capital goods by definition embody new, productivity-enhancing technologies. I demonstrate the extreme limitations of this perspective, drawing on the important conceptual and empirical work of economic geographers, economic sociologists, and other social scientists in the process.