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Innovation patterns and technological specialization vary considerably between market economies with different institutions because they coordinate economic activities in different ways with different kinds of firms developing contrasting innovation strategies. Six major forms of economic organization, or business systems, with different kinds of firms can be distinguished: fragmented, coordinated industrial district, compartmentalized, collaborative, highly coordinated and state organized. These kinds of business system develop and are reproduced in particular institutional contexts. They are associated with five kinds of innovation strategies: dependent, craft-based responsive, generic, complex and risky, and transformative. These strategies can be distinguished in terms of the following characteristics of innovations: technical and user uncertainty, user differentiation and product quality specialization, organizational competence destruction, use of codified knowledge, and the complexity of the knowledge base. Firms with different kinds of governance structures and organizational capabilities pursue these innovation strategies to varying degrees in different institutional environments. As a result, institutional differences between market economies lead to variations in innovation strategies and patterns of innovative performance.

The identification of distinctive and effective forms of economic organization in East Asia has emphasized the close connections between dominant social institutions and ways of co-ordinating economic activities as well as the interrelations between firm and market characteristics in separate business systems. Differences in major institutions thus generate significant variations in how firms and markets are structured and operate. These variations suggest that an important element in the analysis of market economies is the comparison of firm-market relations across institutional contexts. This requires their key characteristics to be identified. These can be summarized under three main headings which constitute the components of business systems: the nature of firms as economic actors, the nature of inter-firm relations in markets and the nature of authoritative coordination and control systems within firms. Thirteen major characteristics form the basic dimensions of business systems, which vary as the result of differences in state structures, financial systems, cultural conventions and other key institutional features. Interdependences between these characteristics restrict the variety of business systems that become established in market economies and suggest that five major kinds can be identified on the basis of institutionalized patterns of risk-sharing and firm self-sufficiency: centrifugal, partitioned, collaborative, coordinated and state-dependent. These types of business system highlight the different patterns of economic organization, and some of their institutional connections, which have developed in Europe and other industrialized societies.

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