Blog on regional development and policy
by Dr. Maximilian Benner
IT entrepreneurship in Sarajevo: Weak state, strong dynamism?
One of my students once wrote a thesis on the information technology cluster of Sarajevo, Bosnia and Herzegovina which, interestingly, emerged out of the former Yugoslav state-owned Energoinvest engerineering company set up in the early 1950s. I was surprised to learn that Sarajevo features a fairly dynamic entrepreneurial ecosystem in information technology, fueled by IT outsourcing from countries such as Austria, Turkey, or the United States. Under the complicated Dayton constitution that ended the cruel civil war in 1995, Bosnia and Herzegovina has to cope with a political system divided along ethnical lines and designed give each party the possibility to veto changes. Political standstill is thus a major characteristic of Bosnia and Herzegovina's social reality today.
One wonders how entrepreneurial dynamism can unfold under these circumstances. We are used to thinking that for entrepreneurship to unfold, support by policy is necessary and needs to be well-adapted to entrepreneurs' needs, well-designed and well-implemented. The merit of such a kind of policy is without question, but the case of Sarajevo demonstrates that at least some degree of entrepreneurial dynamism can emerge in the absence of an enabling policy environment. One might even hypothesize that the absence of policy support makes young entrepreneurs find innovative solutions to improve their products, access new markets, and grow their companies without external support.
This is not saying entrepreneurship policy is unnecessary. On the contrary: if under the present, disadvantageous circumstances IT entrepreneurship unfolds a remarkable degree of dynamism, how much more could it develop if supported by well-designed and well-implemented policies? In addition, outside of Sarajevo which in recent years seems to have gained in urban vibe (and become a fashionable tourist destination) economic perspectives are even more dire. It is in smaller cities in the periphery of Bosnia and Herzegovina and on the countryside that the full tragic of the country's economic crisis (witnessed by an unemployment rate of 27.9 percent in 2015, according to Eurostat) hits with full force. It is here that effective policies to upgrade entrepreneurial skills, promote innovative entrepreneurship, and enhance employability are most needed - but at the same time most difficult to design and implement.
In a way, Bosnia and Herzegovina teaches us a lesson in regional development: even under the most difficult political circumstances, comparatively strong locations feature some bright spots - although they might do much better under improved circumstances. Peripheral locations, however, need targeted and effective policies to keep up. Spatially, peripheral regions are the most vulnerable victims of political standstill.
Incubators: it's about the atmosphere!
Incubators enjoy cyclical popularity in local development. In his 1995 study, Rolf Sternberg observed a wave of incubators opening in West Germany in the 1980s, followed by a similar wave in former East Germany in the 1990s. We may presume incubators enjoyed similar popularity in other industrialized countries at some point in time. In recent years, co-working spaces which can be understood as a more flexible and temporary form of incubators for freelance, creative, and/or micro-entrepreneurs were highly fashionable. These days everybody is talking about entrepreneurship hubs which may combine different forms of incubation or even acceleration, and are often privately operated. And again, incubators enter the game. For instance, the German state of Bavaria is currently setting up "digital incubators" all across the state.
Evidence on the overall success of incubators is, however, mixed. Randomly selecting a handful of incubators in different locations will probably show that some function well and some don't. Of course, whether an incubator, co-working space or entrepreneurship hub works or not is a matter of the criteria defined: does a successful incubator have to be financially sustainable without government support? Probably not because if it was, there was no rationale for a local development intervention. Does an incubator have to be fully occupied? Probably yes. Does an incubator have to accept start-ups early in their lifetime, support their growth, and dismiss them after some years? This is precisely what the term "incubator" suggests, but note the conflict with the goal of keeping occupancy high. Does the incubator have to host technologically similar or complementary enterprises? Probably yes, to create synergies and spillovers, but again note the conflict with the goal of keeping occupancy high.
The problem is that the criteria for an incubator's success are not necessarily established and critically assessed before the incubator is set up. It seems to me that sometimes policymakers are determined to use a certain tool (an incubator) on the outset and only later look for the goals to achieve with this instrument, instead of first defining goals of local development and then looking for the appropriate tool to achieve them, as would be the proper approach to evidence-based policymaking. Presumably, this is why we often find incubators, particularly in smaller and mid-sized cities, that provide nothing more than (subsidized) office space for small and medium-sized enterprises without significant further support, without a time limit, and without any technological focus. What, then, is the real value added of such an incubator if it does neither incubate nor accelerate?
Alas, local policymakers often regard incubators as pure office space. Yet, if there was a problem of scarce and/or expensive office space constraining start-up growth (an assumption that cannot be taken for granted a priori but has to be established by solid evidence), policymakers might find it worthwhile to subsidize start-ups directly without having to set up an incubator which requires high public investment. The real value added of an incubator should be the atmosphere which leads start-ups to network, to flourish creatively, and to enjoy knowledge spillovers and internalize external returns to scale. This is why co-location of technologically similar or complementary start-ups can make sense. This is what Alfred Marshall called an "industrial atmosphere" that was "in the air" already a century ago. Targeted support such as coaching, mentoring, or training can further enhance start-ups' growth but does not require an incubator because this kind of support can be provided to start-ups not located in the same building.
Often, incubators set up by local policymakers are just what they are seen to be: pure and ordinary office space. To really benefit from the theoretical advantages of an incubator, you need much more. Innovation management literature offers plenty of suggestions on how to design buildings and offices in an open, creativity-enhancing way. There are indeed impressive examples of incubators designed to deliver the added value of a creative atmosphere. Still, there is no guarantee that a well-designed incubator will work. In locations that do not feature an entrepreneurial ecosystem with a critical mass of entrepreneurial dynamism, setting up an incubator may just not be the right instrument to promote start-ups. For these cases, there are a number of alternative instruments such as mentoring schemes or business planning contests. These instruments can create considerable outreach at limited cost and may in these cases be preferable to spending considerable amounts of public money to construct a building for an incubator whose ability to incubate is likely to be weak.
When local development makes it to late night, you know something's wrong
In a piece entitled "Economic Development", John Oliver's "Last Week Tonight" recently discussed localities' efforts to attract corporate investments. It's funny to see what local policymakers in the US seem to be prepared to do to attract investment by large corporate giants like Amazon because they are hoping for jobs to be created in their locality. One county apparently even offered to found a new city and name it "Amazon". It's much less funny to recall that in these inter-regional bidding wars, fiscal incentives are involved, making it easy for companies to play localities off against each other. Localities competing with fiscal incentives for corporate investment is obviously a zero-sum game and not a wise strategy to pursue.
In a broader sense, local development focusing on large corporate investments is arguably not the best policy in the first place. Large companies can decide to open branch plants rapidly, but just as rapidly can they decide to close them. This is a story many previously strong "branch plant economies" can tell. Would you really want to develop your local economy into such a degree of dependency?
Focusing on more incremental, small-step local development is likely to lead to a more diversified and resilient local economy. Endogenous local development through entrepreneurship and SME support via training, mentoring, and networking is probably a preferable strategy. I am not claiming that exogenous development through investment attraction is wrong per se. But instead of spending considerable sums of public money on investment promotion subsidies, attracting investments by smaller but growing companies and assisting them in entering local networks in industry and academia is a much more sensible approach. Rooting attracted companies in the local socio-economic fabric through networking, coaching and mentoring creates added value to the aggregate economy. Investment attraction subsidies do not.
Comparing these divergent approaches leads us again to the issue of evaluation: It's easy to quantify the number ob jobs created by one large corporate investment, but do they justify the cost of offering large fiscal incentives? How much public spending per job created is appropriate? And, in comparison, how many jobs could be created through a more comprehensive and incremental strategy? This question is difficult to answer, but it is likely that jobs created through a comprehensive and incremental strategy are in the long term more resilient and maybe even higher-quality. What's for sure is that playing a zero-sum game is never a good idea in economic development. This is a lesson to learn in investment promotion - not exclusively in the US, but equally here in Europe.
Technology parks: beware of enthusiam, but seize opportunities
Technology or science parks appear to be highly attractive to policymakers in regional development these days. Many regions, in industrialized as well as transformation, emerging or developing countries, designate their own science and technology parks and expect them to become beacons of innovation-driven regional development.
Reality, however, is often different from policymakers' aspirations. As Daniel Hardy and Andrés Rodríguez-Pose showed in their 2014 study, science and technology parks tend to be successful if located either in vibrant urban regions of close to strong research universities or anchor investors. In other cases, science and technology parks often remain cathedrals in the desert and do not generate significant growth spillovers to their wider regional environment.
Cyprus is one of the countries currently striving to develop a science and technology park. In its 2016 National Reform Program of the European Semester, the development of a science and technology park was explicitly stipulated. In our recent study, my students and I looked at perspectives for regional development under the conditions of structural adjustment and reform in Limassol. One of the subjects we assessed was the potential of a science and technology park located in Limassol. We came up with the recommendation to position the park as a hub for applied research in cross-border "Horizon 2020" projects between EU member states and Israel. Given Cyprus's and Limassol's location in the Eastern Mediterranean and Israel's high profile in technology-intensive entrepreneurship and participation in "Horizon 2020", positioning the park in such a niche seemed promising to us.
Our ideas for Limassol are meant to serve as an example of how to seize the idiosyncratic benefits of a particular location such as Limassol in developing and positioning a science and technology park. A copy-paste approach to science and technology parks is likely to fail. In contrast, thinking about what particular advantages a given science and technology park can provide to tenants and its wider region is worthwhile. Putting science and technology parks everywhere or regarding them as a panacea for regional development is not the way to go, but using the setup of a science and technology park as a tool for seizing the specific opportunities of a given region does indeed provide an opportunity to upgrade the region's innovative potential and to upgrade its economy's competitiveness.
The end of inter-regional solidarity?
Catalonia, Lombardy, Veneto: Referenda for more regional autonomy (or in the case of Catalonia, even independence) seem to be in vogue these days. Even in countries with a long federal tradition such as Germany, regional governments at times call for more competences. What is remarkable is that the regions fueling this discussion tend to be the wealthier ones. There is ample reason to assume that the distribution of public money is at the heart of the debate. Italy is a particularly interesting case: the regions of Lombardy and Veneto whose voters just called for more regional autonomy in non-binding referenda are among the country's most prosperous ones. Italy has a long tradition of inter-regional redistribution from the wealthier and more industrialized Northern region to the less developed South. Greater (fiscal) autonomy for wealthy Northern regions might spell the end of Italy's traditional equity-based regional policy with its considerable public spending on infrastructure investments in the Mezzogiorno.
Does this apparent trend towards greater (fiscal) autonomy for prosperous regions mean the end of inter-regional solidarity? It is too soon to tell, but there is reason to assume regional policies will have to change. In the literature, scholars have witnessed a gradual shift of regional policies from the objective of improving inter-regional equity (e.g. through public investments, incentives for private investment, or cash transfers from richer to poorer regions) to the objective of enhancing regional competitiveness (e.g. through promoting clusters, technology transfer, or innovation). In contrast to the first objective which is explicitly aimed at less developed regions, the latter objective focuses on endogenous strengths of regions, be they prosperous or lagging. Often, the objective of enhancing regional competitiveness promotes prosperous regions more than poorer ones, arguably because of increasing returns to scale, and may thus widen the economic gap between regions rather than narrowing it. If more prosperous regions such as Lombardy and Veneto are accorded greater fiscal autonomy, the shift towards enhancing regional competitiveness instead of improving inter-regional equity is likely to be reinforced.
So what perspectives are lagging regions left with? It would be misleading to equate the gradual retreat from equity-based regional policies with a deterioration in the long-term economic opportunities of lagging regions. Part of the scholarly debate on equity-based and competitiveness-based regional policies is that equity-based regional policies have been tried for decades in many industrialized economies but have not led to a clear trend of inter-regional convergence across the board. Equity-based policies thus cannot be seen as an overall success. Given the significant public resources spent on equity-based regional policies, critically evaluating their achievements is certainly justified and even neccessary. Developing viable and more efficient alternatives for promoting inclusive economic growth in lagging regions should be on the agenda of scholars and policymakers. The instruments of competitive-based regional policies typically seem to work better in prosperous regions but a comprehensive analysis of the economic structure of lagging regions may yield promising strengths and opportunities to be promoted through competitive-based tools. Giving these endogenous potentials of lagging regions, pursuing a more targeted regional policy instead of redistributing public money broadly (e.g. through road construction or investment subsidies in lagging regions) is but one possibility for readjusting regional policy in lagging regions. While policy experimentation will be necessary, building on the endogenous potentials of lagging regions is needed more than ever.
Reuniting Cyprus: a case for regional development
There are a couple of conflicts that catch the world's attention. The unresolved Cyprus question is not one of them. However, the fact that one member state of the European Union continues to suffer from de facto division after more than four decades deserves more international attention than it gets. Alas, the most recent round of negotiations for reuniting the island ended last July without an agreement. Still, the very fact that negotiations have been taking place over and over again demonstrates the political momentum that might eventually lead to a settlement.
If and when the island finally is reunited, regional policy will be a major field of action to implement reunification and to facilitate the necessary process of upgrading the northern part's economy. While reunification holds considerable economic opportunity for both parts of the island, the large disparities in economic performance between regions in the southern part and those in the northern part of the island pose a challenge for economic policy. In any case, making regional development a priority in implementing a possible settlement if and when it were to occur is highly recommended. Building on the endogenous potential of regions in the northern part of the country may be preferable to attracting investment from the southern part, though the latter is likely to play a certain role in upgrading the northern part's economy.
It is worth noting the the northern part's economy does have its strengths. Tourism is comparatively developed in Kyrenia and Northern Nicosia but structured differently from tourism in the southern part. In contrast to the mass package tourism found in the southern part of the island and particularly in Aya Napa, the northern part offers opportunities for eco-tourism, while casino tourism has gained importance in recent decades. Kyrenia and Northern Nicosia sport attractive old towns, and Northern Nicosia's Ercan Airport might eventually become the island's third major gateway for tourist arrivals besides Larnaca and Paphos airports. Prior to the 1974 crisis, Famagusta was the island's major hub for tourism and industry as well as the island's main port. The latter role has since shifted to Limassol, while mass tourism has become concentrated mostly in Aya Napa and Paphos. Still, Famagusta might regain some of its economic strength after a settlement.
After a settlement, full market access to the EU may offer significant economic opportunities for companies from the northern part, while companies from the southern part might benefit from market access to Turkey. In both cases, however, small and medium-sized enterprises (SMEs) will have to be prepared to seize these new opportunities. Regional development agencies can play a major role upgrading SME competitiveness through training and assistance programs. Unifying the national innovation system will be another challenge. Cyprus's national smart specialization strategy will have to consider the state of the northern part's economy after a settlement. Depending on the degree of political autonomy of either part of the island accorded in an eventual settlement, it might be worth considering the elaboration of two sub-national but complementary smart specialization strategies. EU cohesion policy can be an important tool for upgrading the northern part's regional economies. Applying lessons from successful regional innovation projects supported by the European Regional Development Fund (ERDF) can inform schemes for endogenous regional development in urban centers such as Northern Nicosia, Famagusta, and Kyrenia. Rural development projects following the Community-led Local Development (CLLD) method can be applied in rural regions and contribute to upgrading agricultural or agri-food value chains.
In any case, whenever an agreement for reuniting the island is reached, creating common macro-economic framework conditions for the whole island will not be sufficient to achieve economic convergence. Attention should be paid to the meso level of the economy through endogenous regional development, in particular in regions of the island's northern part. Even today, while a settlement is not yet in sight, developing viable approaches towards endogenous regional development in the northern part is important to prepare for the time being.
Evaluating local and regional development strategies: how to account for contingency and multiplicity?
In recent years policymakers have increasingly come to accept the necessity to evaluate local and regional development strategies. This is a welcome development: since local and regional development uses public money, its effectiveness should be assessed and justified. However, evaluating complex evolutionary processes in local or regional economies and the often indirect and systemic effects of policies and strategies on them is a highly complex task.
While it is easy to measure outputs, what really counts is impact. Take, for instance, a business planning competition. Measuring the numbers of business plans submitted is straightforward, but not an end in itself. Evaluating the impact of such a measure requires establishing ultimate policy objectives and eventually assessing the contribution of the competition to the achievement of these objectives. Ultimate policy objectives of a business planning competition within the framework of a local or regional development strategy can include the creation of jobs, the generation of value-added and income, enhanced innovation, higher export competitiveness, and many more. Each of these impacts can be measured on the aggregate level, but assessing the direct contribution of the measure at hand – in this example, a business planning competition – is fraught with uncertainty. Of course, it is possible to look at the enterprises established according to the business plans developed and to measure employment or revenue generated by implementing them. Yet, it cannot be established with certainty to which degree the business planning competition has actually contributed to these impacts. First, there is the problem of additionality: is it safe to assume that the enterprises would not have been set up or would not have developed equally successfully without the competition? Answering this question requires establishing a counter-factual scenario which is per definition uncertain. Second, apart from the direct impact there may have been indirect impacts much less easy to spot. For instance, teams of entrepreneurs whose participation in the business planning competition has not led to the successful setup of an enterprise might have benefited from the competition in other ways. For example, they might have acquired entrepreneurial skills or established professional networks that benefit their professional careers as employees. We might then assume positive effects on intrapreneurship but these effects are so indirect that they cannot systematically and reliably traced.
The latter point implies a major feature of systemic local or regional development policies in today's complex and interregionally and internationally interrelated economy. Local or regional development is not an exercise in engineering where clear-cut and regular relationships between actions and outcomes exist. Outcomes are uncertain and subject to multiplicity. A policy action might not achieve its original objectives but – indirectly and rather in the long term – lead to other outcomes, some of which may be beneficial to local or regional development and some not. This insight leads to the aspects of contextuality, path dependency and contingency of local and regional development that Harald Bathelt and Johannes Glückler have pointed out. Planning or predicting these multiple and contingent outcomes a priori with any degree of certainty is impossible, but that does not mean they should not be evaluated a posteriori. Measuring the direct and indirect, multiple and contingent impacts of local or regional development strategies then becomes a highly complicated matter, but it is not impossible. Relying less on quantitative output data and more on qualitative, explorative methods to gain an understanding of the multiple and contingent impacts of policy interventions, and doing so regularly and in the long run is probably the way to go. Such an approach to evaluation is far more sophisticated than simply counting the number of participants to network events or the number of submissions to business planning competitions, but it is far more likely to provide a meaningful assessment of policy effectiveness and, most importantly, offer useful lessons for iterative policy learning.
Haifa: from industrial city to cultural hub
Haifa has a long tradition as an industrial city. With its port, shipping and logistics sectors, and chemical and oil refining industries, Haifa for a long time was known as a blue-collar city and has suffered from a reputation of air pollution.
Things are changing, however. Urban renewal has set in during recent years with the restoration of the historical German Colony quarter where boutique hotels and restaurants have popped up. The port area is currently experiencing a revival. The city's economic landscape has been transformed by high-tech companies such as Microsoft, Intel, Google, Apple, or IBM which have located research and development facilities in the city. Haifa's MATAM technopark played a major role in this development.
The most remarkable transformation Haifa has gone through is its rise as a cultural hub for the North of Israel. The city's social climate of coexistence between Jewish Israelis and members of Arabic-speaking minorities has arguably facilitated the emergence of an art scene around entities such as the Beit HaGefen Arab Jewish Cultural Center. The old Arab-style Wadi Nisnas neighborhood has turned into an open-air gallery for street art. The city hosts the Haifa International Film Festival and the inter-faith "Holiday of Holidays" festival. The city's two universities, the renowned Technion and Haifa University with its significant share of students from Arabic-speaking minorities, provide the backdrop to the city's newfound cultural vibrancy.
The city's cultural turn has attracted the attention of the New York Times which in a 2016 article described the city's "liberal Arab culture". The article brought forward the idea that for members of the country's Arabic-speaking minorities, Haifa offers opportunities for cultural expression and experimentation in much the same way Tel Aviv does for the country's secular Jewish population. Following this idea, both cities are attracting what Richard Florida has dubbed the "creative class", although both in their own way and from different groups of society. Both are "bubbles" that allow for cultural diversity and creativity.
Haifa thus provides an important lesson for local development in cities. A social climate of coexistence between diverse cultural groups, or what is commonly called "multi-culturalism", can act as a driver for local development and complement efforts to renew a city's economic fabric.
Tourism development: from quantitative to qualitative growth
Quite a few tourist destinations in the Mediterranean seem to reach their limits to quantitative tourism development. Dubrovnik is a prominent example for a destination overwhelmed with growing demand, and demonstrations against "too much" tourism in Spanish or Italian destinations such as Barcelona or Venice show how congestion and rising price levels make local populations call for limits to tourism development.
This debate seems to me comparable to the debate on limits to growth of the industrial economy in the 1970s after the Club of Rome's seminal 1972 report. The report's basic argument that industrial economies have to reorient from quantitative growth to qualitative growth, or what could simply be rephrased as passing from "more production/consumption" to "better production/consumption" has become the mainstream of thinking in industrial development in the era of the knowledge-based economy. Yet, in tourism - one of the major growth industries of our time - a similar debate seems to set in only now.
Traditionally, tourism development strategies have tended to target higher numbers of tourism arrivals. There may well be a case for continued quantitative tourism development in destinations that can accommodate more tourists. For smaller, ecologically sensitive destinations, however, reorienting the focus of tourism policy from quantitative towards qualitative tourism development will become a necessity.
Take for example small Greek islands in the Aegean such as Santorini. The growth of cruise tourism in recent years has made the island host several thousand cruise tourists during each day of the season, but local value-added from cruise tourists is low because they sleep and eat on board and only spend several hours on the island. For such a small and ecologically sensitive destination, permanently inceasing the number of tourist arrivals is not a sustainable strategy in the long term. A sustainable strategy focused on qualitative tourism development might include, for example, attracting tourists interested in local culture and cuisine and staying in small, family-owned boutique hotels. Santorini, the case at hand, features a great number of such small hotels as well as assets in high value-added niches such as wine tourism, and is thus well positioned to pursue such a strategy. Other destinations might focus on different higher value-added niches to pursue the goal of qualitative tourism development: Increasing tourism value-added instead of increasing tourist arrivals, and doing so in a sustainable and ecologically friendly way.
The flip side of the coin for these small and sensitive destinations is to limit their capacities for large-scale cruise tourism and low-cost carriers. In a global perspective, the challenge for tourism policy will be to redirect these forms of tourism or transport towards less sensitive destinations that can accomodate further quantitative growth. Doing so will call for some degree of international coordination of tourism policy or even some form of an international planning framework for tourism development.
Welcome to my new blog!
Welcome to my new blog on regional development and policy! Here I will regularly share some thoughts on how to develop regions and localities with a particular focus on Mediterranean countries, and introduce some ideas from interesting cases I come across in my research. I hope you will enjoy my blog!
Maximilian Benner, e-Mail: post(a)maximilian-benner.de