Perhaps the most striking fact in economics pertains to the large cross-country differences in economic growth and, of special relevance to this book, in innovation performance (Casper and van Waarden 2005). We propose and argue throughout this book that it is critical to seriously consider the role of institutions as an explanatory variable. This is what institutional economics is about: it analyses how institutions affect the behaviour of economic (corporate and individual) actors. In short: ‘institutions matter’. A further striking fact is that these cross-country differences remain quite stable over time, despite globalization and the development of new technologies. Thus, differences are not of a temporary nature. Of relevance here is evolutionary economics, inspired by economists like Joseph A. Schumpeter or Friedrich A. von Hayek, which stresses the role of knowledge, the role of actors (differentiating them from the neoclassical rational choice agent), and, most importantly, the role of historical conditionality and the systemic characteristics of institutions (see for an introduction into evolutionary economics Herrmann-Pillath and Lehmann-Waffenschmidt 2001; Koch 1996; Nelson and Winter 1982). In short: ‘history matters’. At its inception, institutional economics started from somewhat different

assumptions than evolutionary economics. While institutional economics focused its analysis on single institutions and their respective impact on an economic outcome, evolutionary economics focused on dynamic processes, with different assumptions related to the role and characteristics of knowledge and actors. Today, both schools – institutional and evolutionary economics – have absorbed elements of each other. In institutional economics, however, it became common to acknowledge a more refined picture of actors (in this it is also influenced by behavioural economics), and to consider the role of time, by resorting to the concept of path dependence (especially influenced by the 1993 Nobel Prize laureate Douglass North). In evolutionary economics on the other hand, Nelson (2008), one of this field’s originators, has suggested framing institutions as social, and organizations as physical technologies. Although there are still current differences in the particular details of these approaches, we find merit in combining them under an extended institutional approach.