Innovation and institutional change: the transition to a sustainable ...

24 Chapter 2
exchange of knowledge between the supply side and demand side (Smits and
Kuhlmann, 2004 : 16).
Path dependence
What all the previously analysed theoretical streams have in common is
elements of so-called path dependence play a role in innovation processes.
Evolutionary economists tend to stress the role of increasing returns to
adoption through which apparently inferior designs can become locked-in
through a path-dependent process in which timing, strategy and historic
circumstances, as much as optimality, determine the winner (David, 1985;
Arthur, 1988). The classic example is of the QWERTY keyboard, which was
designed to prevent keys from cluttering, but remained dominant after this
technological problem was solved. Due through accumulation of
competencies (peoples’ ability to type based on the QWERTY keyboards),
accumulated investments, standards, various improvements of the keyboard
faced rejection by the market (David, 1985). Arthur (1988) later developed
economic principles that underly lock-in to particular technological designs.
Increasing returns to adoption are seen to create positive feedback loops that
strengthens the position of a technology relative to competitors. Examples
are learning effects, with accumulation of experience as the technology
becomes more adopted and used, thus leading to further development of
skills and competences and enabling clearer paths for improvement; network
externalities, with the availability, variety, and service regarding the
particular technology increasing as more users adopt it; scale effects, with
economies of scale reducing production costs for the technology; and
technological interrelatedness, with more and more technological
components becoming part of the infrastructure for the adopted technology
(Arthur, 1988: 591). All these path-dependent features are of relevance for
the electricity system and form part of the explanation for the difficulty of
developing and expanding alternatives. Moreover, at the level of
technological systems the emergence of a dominant design that incorporates
both technical and social elements (for example monopolistic organisation in
the case of the electricity sector) facilitates system expansion in its early
phase but also can hamper renewal as suboptimal technologies may be
chosen because of a better fit with the existing dominant design and superior
technological variants do not necessarily win (Unruh, 2000). Especially the
way certain institutional arrangements become intertwined with
technological configurations is an issue we will touch upon repeatedly in the
remainder of this book.