Ž . Research Policy 29 2000 955–972 www.elsevier.nlrlocatereconbase Innovation in project-based, service-enhanced firms: the construction of complex products and systems David M. Gann ) , Ammon J. Salter SPRU-Science and Technology Policy Research, UniÕersity of Sussex, Mantell Building, Brighton BN1 9RF, UK Abstract This paper explores the management of innovation within firms producing complex products and systems. It is based on a study of how design, engineering and construction firms develop and produce buildings and structures. We contend that these project-based, service-enhanced forms of enterprise are not adequately addressed in the innovation literature. Project-based firms rely upon combining technical expertise from other organisations in order to deliver their own technical capabilities, usually in one-off processes. The paper argues that these firms are only able to effectively harness and reproduce their technological capabilities by integrating project and business processes within the firm. Our results show the need for a better conceptual understanding and new management practices to link project and business processes. The paper offers a framework for achieving this, explaining the dynamics of project-based firms and how they can improve performance across portfolios of projects. q 2000 Elsevier Science B.V. All rights reserved. Keywords: Construction firms; Design and engineering firms; Complex product systems; Management of technology; Project-based firms; Innovation; Systems integration 1. Introduction Constructing complex products and systems re- quires the mobilisation and management of a wide range of capabilities. Rarely are these to be found within the sphere of control or ownership of a single enterprise. This paper explores innovation processes in firms operating in design, engineering and con- struction, who produce and service buildings, struc- tures and infrastructures. It focuses on the nature of activities that link core technical capabilities and ) Corresponding author. Tel.: q 44-1273-678167; fax: q 44- 1273-685865. Ž . E-mail addresses: d.gann@sussex.ac.uk D.M. Gann , Ž . a.j.salter@sussex.ac.uk A.J. Salter . business processes within the sphere of control of what we call project-based, service-enhanced firms. Business processes are the intra-organisational activi- ties, forming the ‘glue’, which binds the different parts of a project-based firm. The issue here is not immediately about project performance, rather, it is about the performance of firms whose business is to engage with others in delivering projects. Capabilities are explored in terms of delivery and feedback mechanisms linking one firm’s technical capabilities with those of other enterprises, with whom the firm collaborates, in order to produce one-off projects. A resource-based approach to the firm is taken, following Penrose’s earlier work Ž . Penrose, 1995 . The management of innovation is analysed in the context of the organisation of firms’ technical capabilities associated with their business 0048-7333r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved. Ž . PII: S0048-7333 00 00114-1