The Role of Interfirm Networks in Technological Innovation and Education

Abstract

This article examines the sociopolitical conditions for preventing market failure in public goods investment. Based on International Social Survey Program data for 17 advanced industrialized countries, the author compares economies with strong and weak institutions of interfirm coordination in how they encourage investment in skills and technological innovation and highlight the inefficiency of alternative investment strategies that bypass cooperation. With weak coordination, firms underinvest in skills and the labor market relies on academic education as an alternative, resulting in underutilization of human capital. Innovation intensifies skill demands and can reduce overeducation. However, without cooperation, firms also underinvest in research and development, and the economy relies on innovation from outside the firm, which reduces its effectiveness in alleviating overeducation. In countries with weak interfirm coordination, the economy suffers simultaneously from deficient skills, underused academic qualifications, and technological innovations with limited human capital benefits for the labor force.