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Knowledge creation and learning in the institutional governance of the Italian local production systems

by F. Belussi and L. Pilotti - Padua University

Second draft May 1999

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The theory of perfect competition is unscientific because, by assuming a world of perfect knowledge in which firms cannot interact to change their economic environments, such a theory imposes pompous preconditions on our subject matter: competitors are so constrained in behaviour in which they can engage....we are precluded from understanding economic reality or developing a testable theory. Burton H. Klein (1977, p. 71)

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Introduction

The aim of this paper is to present an overview about the various mechanisms of knowledge creation, diffusion, and assimilation, which are found within the so-called Italian local production systems. For this type of analysis we use here a wide definition of local production systems (LPS) which includes: typical industrial districts, multi-sectors district areas, local systems governed by large leading firms, and various aggregations of productive systems in territorial clusters (Belussi, 1999). This paper discusses the process of knowledge creation and learning within the governance of the Italian LPS, and the role played by tacit and codified knowledge. Using the seminal contribution of Polany and Nonaka, we can trace a clear cut distinction between the two forms of knowledge above mentioned. Codification refers to a form of objectivated knowledge (a set of justified true beliefs), thus an explicit form of knowledge that is related to the scientific results of basic research and innovative activity (a body of facts, information, principles and practical understanding of science). In turn, explicit knowledge may be classified in two ways. As disembodied, if refers to the progress of science and technology (laws, formulas, meaningful set of information articulated in clear language including numbers or diagrams, or scientific discoveries related to then state of organic or inorganic substance: new compounds, new materials, etc.). Or as embodied, if it lies within technological tools such as scientific instrumentation, new machinery, or new information and communication technology with an enlarged computational capability, and etc. Intuitively, this is opposed to tacitness1, a subjective (both individual and shared) property of knowledge, linked to the abilities that individual possesses on the basis of pieces of knowledge developed through practical experience (unarticulated mental models, intuitions, skills). The idea developed in this paper, based on many pieces of empirical research conducted by the authors over the last decade, is that the Italian LPS may be categorised on the basis of the prevalence of the pool of knowledge they have access to. In turn, this appears in relation with the presence of various forms of learning. Adopting this approach we can distinguish the Italian local production systems (LPS) into three main categories2:
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It is important to point out that tacit knowledge is not closely related to craftsmanship. Polanyi, the author who developed the concept of tacit knowledge, based his theoretical framework on the analysis of the activities performed by a group of scientists (Polanyi, 1958). See also Ryle (1949). 2 We can assume that all knowledge developed and transferred among local agents bears the characteristics of being contextual knowledge: a collective good whose generation and expansion is the result of a process that combines pieces of information and knowledge that are owned by a variety of parties and that cannot be traded as such (Antonelli, 1999b). This

a) Systems based mainly on the horizontal expansion of a given stock of knowledge, historically accumulated in particular localities, where tacit knowledge among agents is prevailing; b) Systems where the specialisation of the local manufacturing structure has gone further, and it has activated a process of absorption of external knowledge. So, a vertical and an horizontal process of knowledge expansion has occurred. Thus, the stock of knowledge possessed by local firms is formed by a balanced pool of tacit and codified knowledge. c) Systems organised around knowledge generating firms, where the knowledge creation process has enlarged the local (and the global) stock of knowledge. Here we assume the presence of systematic radical innovations. The trade balance of knowledge sees the LPS as importers of knowledge and as exporters of knowledge. Within this group of LPS, export flows of knowledge are more relevant than import flows: the clustering of innovations and the total amount of knowledge embedded in local firms allow us to define these LPS as technological districts. Here, among firms codified knowledge prevails, but tacit knowledge remains important. The evolutionary pattern of Italian local production systems may be fully understood if the institutional complexity that exists behind these historical aggregations of manufacturing firms is considered. Not only local firms are active agents in knowledge producing, but also local institutions contribute to the process of information and knowledge diffusion. So, in various ways, tacit and codified knowledge is elaborated, recombined, transferred, and socialised as a circular process between the two basic typologies. This paper, given the debate that has arisen in recent years on codified knowledge versus non-codified knowledge, examines the wide ranging international debate. Theoretical knowledge in modern times has developed at a quite spectacular pace. However, in our paper, we examine the view that the process of growth of knowledge observable in our society might be depicted simply as a radical shift towards a generalised process of codification. The main purpose of the paper is to reassess the importance of tacit knowledge in modern economic systems. We address the issue of the importance of tacit knowledge not only in its pivotal role of (new) knowledge generation in high-tech sectors, as in Senker (1995), or MacKenzie and Spinardi (1995). The idea discussed throughout this essay is that tacit knowledge always plays a significant role in firms3, in all branches of economic activity. Despite its importance it is generally ignored in the economic literature. We believe that a proper understanding of the tacit elements of knowledge is decisive in modelling industrial dynamics. The role of tacit knowledge in firms is in fact central to the absorption and the practical utilisation of external knowledge. And, because the amount of external knowledge that firms require to operate is undoubtedly greater than the knowledge that they can reasonably afford to produce in-house, tacit knowledge become a strategic element in firm organisation. More specifically, in the interpretation proposed here, economic
approach follows in part the Hayekian view, where knowledge is stated as partially private, empirical, often tacit, and not all gained through price signals (ODriscoll and Rizzo, 1985, p. 102). Then, the assumption of a world of perfect knowledge is unrealistic; what is relevant for the economic agents is the knowledge of the particular circumstances of time and place (Hayek, 1945). 3 The approach presented, with some variations, is similar to one employed by Nonaka, and by the stream of studies started off after the Nonaka contribution (Nonaka, 1993; 1995; and Nonaka, Umemoto, and Senoo, 1996).

agents, in order to have access to the existing stock of knowledge, and to put codified knowledge in action, need a great deal of cognitive capabilities, and informal skills. New ideas, and new technical solutions, are continuously generated in the world, but the process of knowledge transfer is much more complex than one portrayed by standard theory. In order to have access to novelties, firms must be aware of them, and then they must be able to assimilate and absorb the new knowledge generated outside. The application of new knowledge requires acceptance, adoption and inter-firm diffusion. All these sub-processes are related to informal learning capability (Gilbert and Cordey-Hayes, 1990). Thus, the successful management of knowledge transfer needs firstly, a re-contextualization of external knowledge (for reconverting and decoding the innovation), and secondly, an operational encoding of this new knowledge into the internal firms capabilities and organisational routines. During these different steps tacit knowledge is retained, accumulated, and spontaneously created within organisations. But what can we say about the relation between tacit knowledge and codified knowledge? David and Foray (1995) put forward the thesis that because the scope of what can be codified seems to be continually expanding (thanks to the new advances produced by the scientific and technological progress), the codification of knowledge is central to the modern process of dissemination, transfer and retention of knowledge. Cowan and Foray (1997), linking codification with the dynamics of the firm information structures, reinvigorate this thesis. A similar point is also outlined in Arora and Gambardella (1994). But should the increasing use of general and abstract knowledge mentioned above lead us to conclude that the amount of tacit and (practice knowledge) within the economic systems is destined to decrease? The main issue addressed here focuses on the universal importance that tacit knowledge still has in explaining the different performance of LPS in comparison with the rest of the economy. The growing awareness that a fundamental part of knowledge possessed by agents has a tacit form, leads us to speculate on the different composition of these two forms of knowledge exhibited within the LPS. In our view, which is based on empirical analysis, significant levels of tacit knowledge are still at work in the territorial model of LPS. However, among them, as we have tentatively classified in Fig.2, tacit knowledge has different relative weight. But we do not deny that within the more innovative LPS, during the last phase of development, a great amount of codified knowledge has not only be absorbed but also produced. So, is therefore the codification trend a plausible hypothesis that helps us to forecast the future changes of the LPS economies? Within the LPS investigated, a growth of codified knowledge has been detachable, particularly within the stronger and more organised systems. And without fear of being contradicted, it can be said that the growing complexity of these structures has multiplied the intelligent nodes (Albertini and Pilotti, 1996), where codified knowledge is re-elaborated and transferred. For the reasons explained in details in section 5, this does not occur at the expense of the stock of the existing tacit knowledge. Tacit knowledge, as we could investigate within the LPS, not only has not declined at all, in absolute terms, but, it is relatively becoming more important in the mapping out the evolution of firms production networks. In comparison with the past, the new agile relational networks built-in within the LPS during 1980s, have externalised and diffused the old pool of existing tacit knowledge along an enlarged informational circuit (Belussi and Arcangeli, 1998).
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The analysis presented in the paper places the discussion of codification of knowledge in a wide framework. 1. First, we discuss the blurring boundaries of the dichotomy between codified versus tacit, reaffirming the fundamental role of tacit knowledge as opposed to codification. 2. Second, we emphasises the contextualization of knowledge, a process that represents an opposing trend, juxtaposed to the previous one, and antagonistic to generalisation and abstraction that put knowledge in action, and localised it in specific territorial and productive contexts. The concept of knowledge contextualization comes near to the work of Nonaka and Konno (1998). They define extensively this concept on the base of their model of knowledge creation. Ba can be thought as a shared space for emerging relationships. A space that is defined in three main dimensions, structured in a mixture of individual and/or collective knowledge: a - physical (office, dispersed business space); b - virtual (e.g. electronic equipment, teleconference, e-mail); c - mental (e.g. shared experienced, ideas, ideals). The analyses of Nonaka and Konno are a useful tool which help us to describe the dynamics of LPS. The spatial clustering of activities (and innovation processes) defines the context where we see the creation of pieces of non codified knowledge (tacit knowledge), and where the mixture of codified and tacit knowledge embedded in the territory becomes a collective good, not transferable outside. However, creativity and innovation is not simply resident in ba, but in a complex circular process between codified and non codified knowledge at individual level or within collective organisations (firms, networks and institutions). The paper is organised as follows. Section 2 reviews the debate about the various forms of knowledge. Section 3 elaborates a taxonomy of the various forms of learning, distinguished as: instructive, adaptive and generative. In the following section we discuss the importance of contextual knowledge. Here we argue that the spiral process of conversion of knowledge, implied in the Nonaka model, works in part. Not all existing codified knowledge (external knowledge) can be absorbed from outside the LPS, and, conversely, the externalisation of knowledge is never complete outside the LPS, because attrition and protective local institutional mechanisms, that make localised knowledge partially tacit and difficult to replicate and imitate. In section 5 an overview of our empirical research conducted is presented. Section 6 contains some concluding remarks.

2. The generation and absorption of tacit and codified knowledge

It is common knowledge that knowledge is a very complex subject to analyse. Technological knowledge involves various degrees of complexity, specificity, openness, cumulativeness, opportunity, transferability, appropriability, and tacitness.
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Moreover, the creation of new pieces of useful knowledge in firms, the innovation process, requires a great deal of endogenous expertise and exogenous sources to be included. Knowledge itself (Arrow, 1994) is an input into the production of other goods, but it also an output: it is a function of resources devoted to knowledge as well as a function of the existing knowledge. And it is not just the average level of knowledge that is relevant, but also its distribution (diffusion) among agent. Not all knowledge is of such form that can be easily transferred. Some personal knowledge or tacit knowledge related to abilities, routines, know-how, or specific practical skills, deriving from experience cannot be codified, and thus cannot be simply transferred. Knowledge in practice tends to be highly tacit in nature, while abstract knowledge scientific knowledge related to the theoretical understanding, and to the scientific principles, has the characteristic of being fully codified. This distinction may be clearer if we recall the Lundvall and Johnson (1994) metaphor. While the former type of knowledge has to do with knowing how, and includes some forms of active participation (knowing in action) of the knowledgeable agent and relational capability know-who, the latter is related to a passive and merely conceptual understanding of knowing what and knowing-why (speculative awareness on the state of the world). These two forms of knowledge do not coincide. Routinised activities, and skills may be learned and reproduced without someone is being able to go back to their scientific rationales4. Furthermore, it is also true that to use codified knowledge we need a certain amount of tacit knowledge and ability. In the history of technology we observe a path of evolution of many specific pieces of knowledge that have become over the time fully codified (this includes many crafts products that were industrialised under the constraint of technical progress5). But, generally speaking, different degrees of tacitness are embodied in knowledge, in relation to the various levels of scientific and technological activities. In pure science knowledge is typically articulated, controlled by scientific advanced instrumentation, and formalised in written theories, formulae, and testable falsification procedures. Nearly one hundred percent of this is codified. The more we move away from pure science, the more we find that the degrees of codification decline, and tacit knowledge grows in intensity. Incremental technological activities and applied research normally contain high levels of tacit knowledge. All thing considered, because activities related to applied research and direct production have a large influence on the economic structure, we can infer, at least, that activities related to tacit knowledge- are not marginal. Given the obvious difficulty in measuring how much knowledge exists, either codified or tacit, these reflections maintain a certain degree of abstraction and inaccuracy. (One deals with affirmations that have no possible practical demonstration but that have strong theoretical and practical implications in terms of technology policy). The discussion about codification versus tacitness has brought out some important contrasts. In recent years the nature of technology has come under scrutiny. In particular, a wide-ranging debate has explored the changing nature of technological change. Some convincing predictions see in the nearer future a possible intensification in the
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In regard to this, a few examples were reported by Nelson and Winter (1982). In short: the physiology of muscular movement may be unknown to an athlete without affecting his or her performance. 5 History is full of disquieting anecdotes. Expert systems have proved to be a complete disaster in running financial activities in stock markets, and during the black October 1987 they nearly provoked a catastrophe, but automatic pilots are commonly used as a support and extension of human senses. In the ceramic industry, in Sassuolo, the knowledge of skilled pluggers is still far superior of any computer-controlled program. At the end of a very automated production cycle, human abilities govern the cocking, times and the weight of specific ingredients. The use of computer programs for translations has produced very poor results, while the codification of technical designs has gone further, etc.

rate of technical change in firms, as well as an increased degree of knowledge codification. An era of transition has been forecast towards more universal technological systems, cast in frameworks and categories that relay on more generalised, more transmissible abstract pieces of knowledge. Some have claimed that, because the dominant technological paradigm is now information technology, the distribution of knowledge between tacit and codified has dramatically changed in favour of codification: after all, information technology is about processing, storing, and transmitting information and codified knowledge. This is for instance the position of Cowan and Foray (1997), and Arora and Gambardella (1995). On the contrary, more cautious remarks can be found in the contributions of Lundvall (1995 and 1996), Senker (1995), Dosi (1996), and Breschi and Malerba (1997). As stated by Lundvall (1996a),
..while the codification can go very far in the field of know-what there are important limitations for the codification in other fields of knowledge. Know-why can be fully codified only in areas where little new knowledge is currently produced or the new knowledge is purely incremental. When scientific principles are in a state of flux or when they are disputed within the scientific community they cannot easily be communicated outside a narrow group of scientists. ..The work on expert system is far from innocent There are skills of an intuitive kind which remain hidden and tacit and which cannot be incorporated when the codification takes place. Finally it is obvious that a register of names cannot integrate the social network of relationships which are included in the knowwho category. (p.7)

Arguments that oppose the codification trend are the following: 1. The introduction of the information technology paradigm has not just increased the stock knowledge we can use; it has (above all) increased, to the nth degree, the availability of data; in turn, this has also dramatically increased the circulation of unnecessary information as well. The overload of information we observe, will oblige people to make ever greater use of their tacit knowledge, to select the relevant information they can utilise. 2. There is a spiral of conversion of tacit into codified knowledge, but more tacit knowledge is needed to handle this new codified knowledge. Let us take the case of medicine. There are now more research centres, more scientific journals, more discoveries, more instrumentation, and more cures, but the specific skills of experts has not be undermined. So, the expansion of codified knowledge has been a paralleled by the expansion of tacit knowledge (also among the users of the services). 3. With the contemporary trend towards a post-Fordist society, based on skilled work, or knowledge workers, it is the entire labour market that in fact is moving towards activities, jobs, and tasks, where learning attributes and tacit knowledge are becoming more important. This implies that there is little evidence of a diminishing role of the tacit elements that form the reservoir of knowledge in society: human capital. 4. Lundvall (1996b) has recently pointed to the dawn of the Learning Economy. Today we find ourselves in an economy in which the competitiveness of individuals, firms, and entire systems of innovation reflects their ability to learn. The learning economy places emphasis on interactions (user-producer relationships), and on knowledge sharing and networking. Both these features represent some tacit competencies related to the expansion of tacit knowledge.

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The social dimension of learning is of paramount importance. The knowledge of human knowledge (Tamborini, 1997) finds active elaboration of: mental models6, feedback mechanisms of knowledge verification and testing (based on the individual or on the collective experience), where, to allow the passing of the message, common languages, meanings, metaphors, heuristics, visions 7, beliefs and conventions must shared among actors. Hence, in practice, as argued by Lundvall, a symbiotic relation is established between the two form of knowledge. Codified knowledge may be utilised only through recourse to tacit knowledge. The decisive importance of subjective, and partial knowledge, accumulated by individuals is that they learn only when tacit knowledge is embodied in actions 8. Individuals are the constructors of empirical human knowledge. Tacit knowledge is used to frame the perception of their reality (Schon, 1979), to structure their behaviours, to select and encode the relevant information they need, to filter and re-assemble knowledge (abstract and tacit), to receive signals and elaborate their content, etc. Within the economic organisations, therefore, individuals experience a continuous elaboration and exchange of codified and tacit knowledge. But economic agents do not just act, they interact. They are able not only to absorb codified knowledge, but also to create new knowledge (framed in a tacit or in an explicit setting). Generative relationships are conducive to learning procedures, to innovation activity, and to the establishment of new organisational routines (Lane, Malerba, Maxfield, and Orsenigo, 1996). The industrial networks, and the emerging knowledge-based organisations, must be regarded as the classical locus where these interactions generate a new stream of localised technical change (Antonelli, 1999a). Generative interactions use both tacit and codified knowledge, and innovation (new pieces of knowledge) takes place among multilevel loops, or chains, of tacit-plus-codified converting it into tacit-pluscodified new knowledge.

In summary, in this section we have presented two antagonistic perspectives. On one hand, we have presented the view of those who believe that codification is becoming the essence of the economic activity, on the other hand we have put forward some arguments, that suggest caution, and support the apparently contradictory thesis that the impact of the 1990s changing will not change the balance between codified and tacit knowledge very much. Following the pioneering contributions of some Italian economists such as Antonelli, Malerba, Rullani, and Vacc, we have asserted the permanent influence of the mechanisms which generate tacit knowledge within the economic system, suggesting the growing importance of localised learning and openended processes of conversion between tacit and codified knowledge.

3. Instructive, adaptive and generative learning

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As argued by Denzau and North (1994), people act in part upon the basis of myths, dogmas, ideologies, and half-backed theories. In condition of uncertainty individuals interpretation of their environment will reflect their knowledge. Individual with common cultural backgrounds and experience will share their knowledge. Shared mental models guide choices and the evolution of political-economy. Mental models, institutions and ideologies all contribute to the process by which human beings interpret and order their environment. 7 In his compelling article on the existing different theories of the firm, Fransman (1994), whose aim is to describe the influence exerted by these visions on the firm internal process of knowledge and information, presents what he calls the Ibm paradox. It is a clear case of a firm clinging to the mistaken belief in the ability of the mainframe computer to sustain profitability at least until 1991, despite the information which it possessed (and processed), contradicting this belief. 8 The classical reference here is in Argyris and Schon (1974).. For an excellent survey see Tosoukas (1996).

This section focuses on the diffusion of knowledge and the growth of human capital. The growth and diffusion of knowledge, both tacit and codified, take places in firms and organisation through learning activities. Economic literature has tended to separate the growth in the stock of knowledge from its diffusion (Davies, 1979; Mansfield, 1961; Mahajan and Wind, 1986; Rogers, 1962). This distinction, going back to Schumpeter, has proved to be useful when a new piece of knowledge can be identified, such as a particular invention. However, most advances in knowledge are not achieved at once, and then slowly adopted by potential users (Stoneman, 1983). Rather, new technical change is the outcome of many building blocks, and it embodies many ideas. In the assembly of innovations many agents and sources are involved. Tacit and codified knowledge is necessary to disentangle the main research objectives, and to implement the discovery process. If this is so, the growth of knowledge may be portrayed essentially as an interactive process of learning and invention. This new way of addressing the issue of the growth and diffusion of knowledge has provoked two significant consequences at intellectual level. Firstly, diffusion and growth may be seen as joint products: growth is often inseparable from diffusion. The innovation process may takes place in different steps and involving many actors. Secondly, learning activities in firms are both devolved to absorb the existing external knowledge (from the historically created pool of knowledge) and to create new knowledge9. The Arrows (1962) formulation of learning by doing shed lights on this analytical dilemma and captures the linkage of growth and diffusion. In Arrows view, learning (improvements in firm knowledge) is related to the accumulated experience of firms, measured by the proxies of a) the cumulative output and, b) the growing number of adopters. However, if we follow the Arrows tradition, we focus our attention only to the individual firm and its search procedures. What is missing is that we do not deal explicitly with differences among agents. It is the combination of different ideas that produces new knowledge. And different ideas gives rise to better ideas because knowledge (both tacit and explicit) is unevenly distributed among agents. If each agent knew exactly the same thing, the exchange of information would no produce any increase on the amount of knowledge in each firm. So, learning activities may be also portrayed as a decentralised process of diffusion of knowledge. Spillovers of knowledge depend in part on how hard firms are trying to capture new knowledge (this may be measured by the length, extension, and numerosity of informative channels, and by frequency with which information passes through them). But also by the knowledge gap: the existing differences in what firms know (some agents are rich of accumulated knowledge, and they may play the role of activators of knowledge/competencies, within the system of relationships which they govern). Spillovers and learning efforts may be analysed from a territorial perspective. By elaborating our research we have sketched three forms of learning, which take place among the firms of the LPS analysed: instructive, adaptive and generative learning (Fig. 1).
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This point was first treated in a satisfactory manner by Choen and Levinthal (1989).

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Fig.1

Models of learning Instructive Codified Adaptive Generative/creative

Type of knowledge Tacit

Instructive

This form of learning is mainly related to the transmission of simple instructions from skilled workers to apprenticeship through (intra-firm) transfer of tacit knowledge or it refers to the technical specification provided to subcontractors (inter-district firms). Knowledge is transfer among the production networks, where firms co-operate in relationships more or less arm length. The modality that we have called instructive learning refers mainly to the transfer of tacit knowledge. This, in any case, requires the exchange of a lot of information and knowledge. Recourse to instructive learning avoids within the various LPS avoids the degradation of the existing stock of knowledge. This stock of knowledge, referring mainly to traditional manufacturing activities grows slowly. Instructive learning is bounded10 by the absence of relevant innovations (once the ability of perform a certain task is settled only minor modification may be introduced). Craft skills form the main component of the existing stock of knowledge that is embedded in particular LPS. These skills still seem to be crucial in some sectors such as clothing, footwear, furniture, etc. Here firms base their competitiveness on traditional craft labour force skills. Given the fact that, in the nineteenth century, many skills have been lost because of technological progress due to the introduction of mass production, large scale industrialisation, and the standardisation of labour tasks, the formation of the Italian LPS, and the diffusion of instructive learning have allowed the maintenance of these tacit skills. So, while world wide a loss of skills and an un-learning process (a forgetting of knowledge) have occurred, in the cases studied, abilities, skills, and tacit competencies have been kept alive thanks to this mechanism of knowledge sharing and imitating through side to side job training of individuals and by exchange of experience which occurs along the subcontracting chains.

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On this issue see also Young (1993).

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Adaptive

Adaptive learning characterised the type of learning that has occurred in the Italian industrial districts during 1970s. Is stems mainly on the reduction of transaction costs, and it is based on the imperative of making the firm organisational design flexible. It did not involve only labour force skills but also focused on improving product and processes. Typically it involved learning by doing, by using, and by interacting (client-supplier relationship). The stock of knowledge grows incrementally, with the ongoing industrial activities. The model of flexible specialisation set the boundaries of learning activities that were initiated. Firms learned to react and adjust to market signal, to co-operate in dense but territorially dispersed networks, to slightly modify product and processes. When a small new piece of knowledge is incorporated in a firm of the LPS, very soon this new knowledge spread because imitative procedures. So, firms tend to balance their knowledge. Adaptive learning is not just limited to the growth and diffusion of tacit knowledge, it can involve also pieces of codified knowledge. Among firms one finds an acceleration in the mechanisms for absorbing external tacit and codified knowledge. The absorption of external knowledge may also be performed by local LPS institutions like training centres, or ad-hoc laboratories. R&D activities are carried out by some firms of the district.

Generative learning

Generative learning is the most creative form of learning we can find in LPS. Generative learning is activated by creative agents interactions and it focuses primarily on the creation of new knowledge. It describes the behaviour of some LPS during 1990s, reflecting their more complete form of learning. In these LPS the presence of firms with built-in generative learning models increase greatly the stock of existing knowledge. The new knowledge produced here has the characteristic of being semi-private (it is shared only within the final firms production systems). New knowledge tends to be codified in a local rather than universal code. Generative learning increases both tacit knowledge and codified knowledge. In the most dynamic LPS high levels of knowledge creation occur in parallel with an institutional complexity of the industrial structure (emerging leading firms and dominant networks). A cognitive division of labour is emerging among firms. The division of innovative labour crosses the entire local industrial structure. Final firms or hub firms concentrate their activity on the strategic core of new product design, engineering, marketing and post-sale services. Manufacturing activity (routinised activity) is often delegated to small local producers.

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Fig. 2 describes the historical trend of the evolutionary pattern of knowledge diffusion trajectories. At the beginning, LPS are characterised by the presence of tacit knowledge. The contextualization of tacit knowledge prevails, as well its externalisation (among individuals or firms) through the traditional form of learning-by-doing and instructive learning. A permanent sharing between tacit and explicit knowledge characterises the second step. Here a process of re-contextualization of external (codified knowledge) takes place. Adaptive learning prevails in systems where there is a balance between tacit knowledge and codified knowledge. There is then a migration of dynamic districts towards a third level of transformation, where we find a type of contextual knowledge that incorporates radically new pieces of knowledge. This type of knowledge is prevalently codified and it can be transmitted outside, through a process of de-contextualization. Generative learning is here activated. The innovation governance of LPS is modelled by a double string: A - contextualization- re-contextualization and de-contextualization of knowledge; B - decodified-codified-redecodified of knowledge. This double string of transformation knowledge is directed to reinforce the local innovation process of LPS. In the figure we see three different types of structural evolution, depending upon the pool of knowledge they have access to. Where the focus is on instructive systems, the single agent or small firms are dominant. Where the focus is on adaptive systems, the grouping of firms prevails. Finally, the focus on generative systems is inducing a more complex structure (networks of networks), mediated by the presence of local or multi-localised institutions, playing the role of transferring, and re-retransferring knowledge. This last level of evolution of contextual knowledge produces a virtuous integration between codified and non codified knowledge. The Italian LPS have experimented, firstly, a transition from a classical Smithians division of labour (instructive learning) to a more technically based Marshallians division of labour with agents sharing atmospheres, signalling, and externalities, secondly, a more recent transition towards a postFordist organisational model, characterised by a cognitive inter-firms division of labour (with the sharing of tacit knowledge within the organisational nets). Leading firms, network-of-networks, and institutions populate these districts.

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Fig. 2 The mechanisms of knowledge creation in the Italian LPS

FLOWS OF EXPORTS OF KNOWLWDGE PREVALENCE OF EXPLICIT KNOLEDGE

LOCAL KNOWLEDGE DIFFUSION TRAJECTORIES DECONTEXTUALIZATION NEW KNOWLEDGE IS CREATED AND THEN CHANNELED OUTSIDE THE LPS CREATION OF SOME EXPLICIT KNOWLEDGE

RECONTEXTUALIZATION KNOWLEDGE ABSORPTION ABSORPTION

CONTEXTUALIZATION
TACIT KNOWLEDGE SOCIALISATION

DIFFUSION OF TACIT KNOWLEDGE

INSTITUTIONS AND NETWORKS HIGH LEVELS OF KNOWLEDGE CREATION BALANCE BETWEEN CODIFIED KNOWLEDGE AND TACIT

LEADERS AND GROUPING FIRMS TACIT KNOWLEDGE

AGENTS AND LEARNING TRAJECTORIES

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2. From contextual to global knowledge: an incomplete mechanism of conversion

It is useful at this point to introduce the concept of localised technical change (Antonelli, 1999a). Antonelli s perspective sets the theoretical basis for understanding the role of tacit elements in the contextualization of knowledge.
Technological change is inherently localised in that it consists of changes in the technical capability of structures that are limited to a well defined set of characteristicsLocalised technological change builds upon structured information ..that, as a public good, is available to everybody with low, though not negligible costs, of imitation and acquisition. Tacit knowledge instead is the result of lengthy learning processes; it is idiosyncratic and specific to the organisation and business environment of the firm. .. Technological change is more or less localised according to the mix of internal and external, codified and tacit knowledge on which it depends, but neither form may be dispensed with It consists of specific pieces of technological know-how obtained by means of learning by using and doing. It incorporates the experience and skills of labour as well as the opportunities of improving products and production processes generated by highly circumstantial factors and events Since localised knowledge is mainly tacit, because it is implicit and embedded in the memory of organisations and in the economic, regional and industrial environment of each firm, it is difficult to learn, imitate, transfer, adopt and use. It is more proprietary and it use is more excludable than in the Arrowian tradition. (p.5-6).

The dynamics of localised technical change provides the basis of the formation of contextual knowledge. Contextual knowledge is embedded in the territory and it is formed by elements of codified knowledge (absorbed also from the outside), and tacit knowledge (developed slowly within the production process in practical experience, and internally to the networks of relationships that surround that place). Contextual knowledge may be described as the social output of an historical process of accumulation of technological capabilities and skills. This occurs only if in a specific territory the mechanism of development is activated (for this reason contextual knowledge is linked with territorial industry specialisation). When external economic conditions are favourable, the territory becomes a system: the model of LPS takes-off. Knowledge creation and propagation occur as a consequence of the development of firms. But the creation of contextual knowledge is at the same time a cause and effect of growth. In other words, a circular loop between growth and knowledge is at work. LPS are accelerators of new technologies in the presence of network externalities11 (Belussi, 1998). The evolutionary path of growth that originates within the LPS model starts with the grow of a restricted number of firms: the LPS founders. In these firms knowledge and technical skills become consolidated, and contextual knowledge is promoted. Knowledge propagation is achieved via the entrepreurialisation of technical and professional people. Their level of professionalism allows them to leave the firms and become small independent entrepreneurs. The industrial structure of LPS expands through a process of firms gemmation. During the first phases, instructive and
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Technological externalities related to the rapid adoption of innovation (the bandwagon effect); externalities deriving from the co-ordination of investments among the firms which participate to the same production networks; externalities of transaction costs reductions based on the social climate of trust linked to the visibility of actors, and to the social bounds of friendships and relationships; externalities stemming from the abundance and sharing of information; externalities related to the presence of specific centres of research or training that offer tailored specialised services and information; and externalities deriving from the presence of specialised suppliers in the intermediate parts utilised from the final firms.

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adaptive learning behaviours diffuse. The exchange of information and knowledge occur via the transfer of personal experience and know-how. Subsequently, new waves of spin-offs may occur, populating the district with small innovative producers: the frequency of contacts, and the numerosity of exploratory searching lead, due to the law of large numbers, in the end to improved products or processes: thus, often, generative learning is activated 12. Contextual knowledge is developed in practice by local economic agents, and new knowledge is generated through the interactions agents (suppliers, clients, subcontractors, and local institutions). Looking back to the extraordinary commercial success of the Italian model, which in our paper we have defined as the LPS, it should be saied that too much attention (and speculation) has been made on terms like flexibility, small firms, and etc. In the view shared by the authors of this paper, in the establishment of this type of industrial structure the process was sustained, above all, by the existence of high levels of contextual local knowledge. Practical and contextual knowledge was transmitted through apprenticeship and personal contacts. Practical and contextual knowledge, from this perspective, may be viewed as an existing strategic (but immaterial) resource, that is essentially territorial-specific. This cognitive form of social capital, historically accumulated in the LPS model, can be viewed as a sunk investment. Only agents operating in the local district have access to it, and they may further enlarge and exploit its profitability through strategies of entrepreneurial growth. This process, thus, is highly path-dependent, and built up upon a nucleus of original local skills and competencies. The development of these idiosyncratic LPS is territorial-specific. This bears an important consequence: the nature of contextual knowledge, therefore, is bound to the spatial boundaries of the systems: contextual knowledge can not be completely globalised. Spatial proximity and social mechanisms of sharing knowledge facilitate its local transmission. Over long-distance (which is relational as well spatial), frictions dominate13. It is obviously true that some innovations introduced by the firms of LPS can be clearly codified, and imitated elsewhere. So, the codified elements of contextual knowledge are more at risk. But, differently from what Nonaka claimed, the conversion of tacit knowledge, into external knowledge, is far more difficult. It follows, that on the whole, the contextual knowledge of the various LPS can never go over the LPS walls, thus it can not be completely externalised. The verification of this interpretation regarding the factors of competitiveness of LPS clearly can only be indirect. However, the imitation by other countries has proved difficult. And the areas of specialisation on which LPS compete internationally have not varied very much over the last two decades. During this time, LPS have proved to be quite stable structures, and not foot loose organisations. They have deepened their roots in their territory, which is also a community of people, sharing local traditions, habits, language, and entrepreneurial visions. The process of globalisation have passed over them. LPS were already global in their market outlets. In nearly all LPS export

12

R&D-dependent radical innovations are not typically produced within the LPS, where firms are often small sized. Radical innovation would require the specialisation of dedication of resources to invention and innovation. But a great deal of innovative activity is generated trough learning by interaction. 13 A similar perspective is also developed in the Breschi and Malerba (1997)

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flows are quite high14 (typically 40-50%) of total firms sales, with some remarkable peaks.15

5. A topology of Italian local production systems: towards evolutionary governance

In Fig. 3 , using our tacit knowledge, we have sketched an evaluative map of the topological characteristics of LPS, based on their degree of formalisation of knowledge. The institutional complexity is placed on horizontal axis, and on the vertical axis the balance between tacit and codified knowledge is reported. This diagram presents three emerging models: a) with high tacit knowledge and few firmshorizontal linkages, and no specific role of institutions; b) with an equal balance between tacit and codified knowledge, and with many leading firms (presence of hierarchical linkages), with the addition that here many institutions provide training and services which are related to a process of spreading tacit and codified knowledge; c) with high levels of codified knowledge and many leading agents including global (multinational) firms as well, and the clear presence of knowledge-intensive institutions. Below a topology referring to specific LPS governance is presented. 1. The first cluster represents systems where tacit knowledge among agents predominates. Tacit knowledge is mainly embodied in the labour force skills, and in the craft production, innovations introduced by firms are incremental. These LPS are mainly specialised in traditional sectors, defined here as skill-intensive industry, like clothing and knitting, in Carpi, Vicenza and Reggio Emilia, or glass making in Murano, an island near Venice, and so on. 2 . The second cluster includes those LPS where there is a balance between tacit and codified knowledge. These are concentrated on mechanical engineering sectors: biomedical instruments in Mirandola, near Modena, water taps fittings in Varese, frames for eyeglasses in Cadore, near Belluno, leather upholstery producers in the district of Matera -Altamura-Santeramo. etc. In these LPS codified knowledge is well developed, the sources of innovation are more formalised and located in engineering and design departments, and product innovation is frequent; here many actors contribute to the socialisation of knowledge and to the reinforcement of codified knowledge, like training schools, universities or special services (supplied by the local authorities) for small firms (servizi reali alle imprese).
14

Considering the 50 product groups made in Italy localised in LPS (Montedison, 1998), we observe that these groups are responsible for a huge positive balance of trade (in 1995: 148.015 billions of lire, which surpassed the total net balance of 67.550 billion of lire; 1996: about 125.000 on a total of 39.000). Export flows were in 1995 154.294 billions of lire and in 1996 (first nine months) 104.318. For 21 products typically manufactured in LPS, the Italian firms are first placed and Italy has the best international trade balance, and for other 8, Italy ranks as the second or third country exporter.
15

See, for instance, the packaging machinery district in Bologna (Belussi, 1999), where about 95 % of total output is exported, or the Montebelluna district specialised on ski boots (Pilotti, 1999), that supplies 75% of the international markets.

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3. In the third cluster the dominant feature is the prevalence of codified knowledge (however, tacit knowledge is still important). Some examples are ski boots production

Fig. 3 A topology of the Italian LP: the formation of contextual knowledge and the implementation of learning strategies

New knowledge creation

MOTEBELLUNA (Skiboots) BOLOGNA (packaging machinery) SASSUOLO (ceramic tiles) Codified and tacit knowledge MIRANDOLA (medical machinery) SANTERAMO (upholstered furniture) CADORE (frame -glasses) CARPI (knitting and clothing) VICENZA (jewellery) REGGIO EMILIA (agriculture machinery) MANZANO (chairs) MURANO (glasses) MANIAGO (knife manufactures) Instructive learning Atomistic agents/firms

Radical innovations

Elaboration of formalised knowledge (original innovations in processes and products) Introduction of relevant innovations

Tacit contextual knowledge

Up-grading of processes and products

Adaptive learning Few leaders/ Horizontal grouping

Generative learning Open networks/institutions Networks-of-networks

*** **

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in Montebelluna, the auto-components makers in the Modena-Bologna area, or the packaging machinery industry in Bologna. Codified knowledge in these systems seems quite developed. Here many firms have R&D departments (but often only in the engineering department where new product are launched). Many local institutions play the role of meta-organiser such as the Museo dello Scarpone in Montebelluna, or the Demo center for the quick prototyping of mechanical auto-components. In the most advanced systems the division of labour of innovative activity is quite clear-cut: only large final firms and local institutions devote specific resources to technical change. In the rest of the system generative learning occurs unintentionally as a by-product of the daily manufacturing activity.

6. Conclusions: some lessons from the Italian experience

Despite the increasing attention given to the role played by knowledge in the economy, the current debate among economists and technologists demonstrates a quite contradictory nature. On one side, as discussed by Cowan and Foray (1997), or Arora and Gambardella (1994), among others, the process by which knowledge and information evolve in the economy is described as a tendency towards a continuous process of knowledge codification. This is seen as the natural trajectory of scientific progress, and as direct consequence of the development of the ICT technological paradigm. The emphasis on tacit knowledge is found in another field of research. The importance of tacit knowledge is underlined by those who place the characteristics of learning, the notion of localised technical change, and the evolution of competencies and routines in firms (the evolutionary school) at center of their interests. In this work we have developed a methodology of analysis of this topic based on the verification of the codified vs tacit debate within the case of the Italian LPS. The importance of contextual knowledge has been highlighted, along with the symbiotic relationship between tacit and codified knowledge. In our analysis of LPS two key dimensions have been examined: the combined levels of tacit and codified knowledge and the institutional governance. Our result confirm, by an large, within the analysed systems the undiminished role of tacit knowledge within the systems analysed .

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