Blog on regional development and policy,
by Dr. Maximilian Benner, M.Sc.
How do regional economies grow? The idea of related variety
In the scholarly discourse on regional development, there was a long-standing debate on the most desirable setup for regional economies. The basic question was, is it preferable for a regional (or local) economy to be higly specialized in one or a few industries, or to be diversified? This debate is known as the dichotomy between what is called Marshall/Arrow/Romer externalities which suggest advantages to regional specialization, and Jacobs externalities based on diversity. After many years, evidence on this controversy is inconclusive, making it hard for economic geographers to give clear advice to policymakers on whether to concentrate on, for example, cluster policies promoting specialization or on more horizontal policies aiming towards more diverse regional economic structures.
However, in my opinion the basic (and undecided) question in the Marshall/Arrow/Romer-Jacobs controversy is flawed. Specialization and diversity do not exclude each other but are complementary. After all, this is the idea behind the concept of "related variety" that was developed by evolutionary economic geographers such as Ron Boschma, Koen Frenken and others. Basically, the concept of related variety says that regional economies evolve in trajectories from established sectors or industries into diverse but related ones. This means that while regional economic evolution is agruably less likely in completely diverse activities, related variety is not about specialization strictly within sectors or industries, as was the case in tradition industrial or cluster policies. Rather, related variety suggests that regional economies grow along economic activities or competencies that are cross-sectoral but based on the same assets and capabilities such as skills or knowledge.
As such, the concept of related variety is highly compatible with the basic idea behind the smart specialization discourse, and thus with the current wave of thinking in regional policymaking in Europe: Regional development should not focus on narrow specializations in industries as such but instead on economic activities and underlying assets or capabilities that can drive economic growth in a diverse but fundamentally related set of industries. Such a strategy may suggest, for example, promoting the use of existing assets or capabilities to promote value chains that span agriculture, industry, and services. The Autonomous Province of Bolzano (South Tyrol) in Italy offers a good illustration. South Tyrol is well-known for growing apples. Instead of regarding the cultivation of apples as an agricultural activity only, the apple value chain spans various industries. For instance, landscapes shaped by orchards are an important asset for South Tyrol's touristic attractiveness, while the production of cosmetics based on apples is just one case of using this agricultural commodity in industry. Cases that link agriculture and tourism can often be found, particularly in niches such as culinary tourism, agri-tourism, or wine tourism. But there are other cases of cross-cutting regional assets and capabilities driving economic growth through related variety. Knowledge-intensive services and industries will often be closely related and fed by the same skills and competences shaped by regional research of educational entities. Information and communication technologies often require input from content-creating creative industries, highlighting the importance of regionalized skills in social sciences and humanities.
These cases show that specialization and diversity are not opposties but have to be combined in a way that is adapted to the peculiar context of the region in question. Doing so requires both context-sensitivity and creativity, and this is really what the so-called "entrepreneurial process of discovery" characteristic of the smart specialization approach is all about.
Universities and regional development: the link between innovation and the labor market
Today, some more thoughts on universities or HEIs' "third mission". In the discourse on the role of HEIs as drivers of regional innovation, some aspects are more widely acknowledged than others. One of the often-discussed mechanisms of technology transfer from HEIs into their regional ecosystem is collaborative research between university and industry. In practice, however, collaborative research is not as widespread as one might expect. When collaborative research occurs, it does so more often in some disciplines than in others - presumably more often in science- or engineering-related subjects than in humanities and social sciences. This makes collaborative research relevant for a part of HEIs and their faculties only. And collaborative research often faces complaints by both sides that academia and industry speak different "languages". Indeed, perspectives are very different: while academic research is generally more fundamental in nature, industry managers are caught up with day-to-day work and understandably are interested in practical, ready-to-use solutions academia cannot easily provide. It does not come as a surprise that there is a considerable gap between both perspectives, making collaborative university-industry research a highly complicated task.
"Cafeteria effects" are another mechanism often cited in the literature and in the policy discourse. When scholars began to dig into the workings of California's famed "Silicon Valley", they hypothesized about the possible role of serendipitous knowledge spillovers between researchers of managers in restaurants, cafeterias, or on golf courses as a source of the region's innovative dynamism. These cafeteria effects may be understood as a part of what Alfred Marshall even in the late 19th and early 20th century called an "industrial atmosphere" where dynamism is "in the air". Fancy as they may seem, evidence on these cafeteria effects is anecdotal at best, and apart from Silicon Valley and similarly vibrant clusters these effects may be virtually absent. There simply is not enough evidence to assess the real importance of these effects.
An aspect of HEIs' role within their regional ecosystem that is obvious but often overlooked is the human capital an HEI provides to its regional economy. While teaching is the first and most traditional mission of HEIs (hence the expression "higher education institutions"), the intricate relationship between a university's three missions should not be neglected. Universities do not teach, research, and drive regional development separately. These three processes are more or less interrelated. When an HEI teaches students, it provides them with the recent state of research. At least that's what good academic teachning is supposed to do. In internships and collaborative bachelor or master theses, students learn to bridge academic and practical knowlegde and to apply lessons learned in university courses in a "real-life" industrial setting. After graduation, students take the academic knowledge acquired into industry. Doctoral students in HEIs perform original research but many will leave the academic world after graduation and join industry. While it is true that not everything taught in university is directly relevant for day-to-day work in industry (and indeed academic education is supposed to go beyond day-to-day problems and give students a deeper understanding of the subject), chances are that students and graduates will bring with them innovative ideas from academia into industry. Therefore, labor mobility between HEIs and their regional ecosystem is a major force of innovation diffusion and, as a matter of fact, technology transfer. And this mechanism of "technology" transfer is not limited to natural sciences and engineering but can work in humanities and social sciences, too.
This is why I recommend that when designing regional innovation strategies, policymakers should take a closer look at the role of HEIs in the regional labor market, and to come up with ideas on how to enhance this role. Before designing complex schemes to incentivize collaborative research between HEIs and companies, encouraging student internships or collaborative theses in industry is a comparatively easy and cost-effective way to stimulate the diffusion of innovation from universities to their regional economies. For example, policymakers might find small-scale scholarship programs worth considering. At the same time, by closer aligning academic education and labor-market demand, students' employability can be enhanced through these forms of university-industry exchange. Dual-study programs jointly organized by HEIs and companies from the regional economy are another, more comprehensive way to do so. In any case, we should see the wider systemic implications of labor-market mechanisms that link HEIs and their regional ecosystems. Higher education and innovation diffusion are not separate mechanisms but are intricately related.
Universities and local communities: the "third mission" needs cooperation!
Universities, or more precisely higher education institutions (HEIs), are increasingly said to fulfill a "third mission". Next to their traditional missions of teaching and research, HEIs' contribution to their surrounding local and regional economies have attracted the interest of scholars and policymakers. Maybe the first HEI whose third mission was widely acknowledged is California's Stanford University, the knowledge hub of the famed "Silicon Valley" cluster. Still, there are many smaller and less well-known HEIs that considerably contribute to local economic development. First of all, HEIs provide new generations of skilled workers to knowledge-intensive industries. Second, HEIs often function as a nucleus for spin-offs and start-ups. Third, HEIs generate knowledge that can be commercialized in local companies through technology transfer or collaborative research (although this is difficult to achieve because academic research and commercial product development are fairly different worlds). Fourth, because of the inherent dynamism in attracting and educating a new generation of young people every few years, HEIs are typically a source of creativity that shape the place they are located in.
In any case, it is clear that in a knwoledge-based economy, HEIs have the potential to act as drivers of economic growth. Thus one might expect close collaboration between HEIs and policymakers in local economic development. Surprisingly, this kind of close collaboration is not as widespread as one might think. Particularly in smaller and mid-sized towns, collaboration between HEIs and local economic development policymakers is piecemeal at best. Instead of agreeing on a common strategy on how to leverage an HEI's contribution to local economic development, each side pursues its own policies. HEIs offer their students and graduates entrepreneurship training and try to connect them with companies for internships and employment. Municipalities set up their own incubators and sometimes tender business-planning contests. But real collaboration is rare. Consequently, each of these tools of local economic development is rather isolated and the systemic opportunities of leveraging an HEI's economic impact are not fully seized. Part of the problem may be that HEIs are usually funded by the state, not by municipalities. Local policymakers thus lack visibility of what "their" local HEI exactly does because they feel the HEI is simply some school funded by another public budget, and therefore miss the systemic importance of an HEI for local economic development.
Instead of each side pursuing its piecemeal approaches to local economic development, why should a municipality and a local HEI not develop a joint, systemic local innovation strategy? Developing such a strategy should start by thinking about which knowledge assets exist in the local economy and particularly within the HEI - in a perspective similar to smart specialization on the local level. The next step would be to identify the most appropriate interventions to address bottlenecks and to support promising trajectories. Finally, the municipality and the HEI should set out to distribute tasks, responsibilities and funding accordingly. Instead of HEIs limiting themselves to assisting their own faculty and students and municipalities limiting themselved to assisting local companies, more interrelated and systemic support efforts developed under such a joint strategy could provide real added value to local economies. For instance, given the (maybe increasing) importance of corporate social responsibility and private endowments to public causes, local policymakers could set up a municipal science foundation that attracts endowments from citizens and companies and that supports HEI infrastructure in applied research such as endowed chairs or venture capital funds for HEI spin-offs, thus enabling initiatives that could not be funded from the HEI's core budget. Similarly, a municipality could invest in R&D infrastructure at its local hospital that is complementary to the research interests of the local HEI in fields such as life sciences or health economies, including fields of technological convergence such as digitalization of health services. Further, local development policymakers and practitioners could make the inner dynamics of an HEI more visible in the local community by hosting regular science slams where reseachers and students can present their research in an entertaining way. And why not think about how to bring together fields of the local economy with the peculiar strengths of local HEIs? For instance, my students and I recently published a study on regional development in the Autonomous Province of Bolzano-South Tyrol which took a look at the city of Bressanone (Brixen). In terms of its local economic structure, the city is marked by tourism driven by its impressive architecture and historical significance as a diocesan town. At the same time, the city hosts a philosophical-theological academy. So we thought, why not use these assets to develop a niche in tourism which we dubbed "philosophy tourism", i.e. particular offers of seminars or educational tours for tourists interested in philosophy, theology, or meditation. This idea leads me to a point I emphasized several times before: don't forget the humanities and social sciences!
In any case, seizing the opportunities of an HEI's third mission is a task not just for an HEI itself but equally for the local community. When it comes to developing a local economy in a knowledge-based society, it may well be that a mayor's closest counterpart is the president of the local university.
The debate about rural areas: No place for innovation and creativity?
The urban-rural debate is once more on the political agenda. Fueled by the demographic implications of an ageing society, European countries find some of their rural areas are losing inhabitants. Typically, young people leave rural areas for urban ones which offer them specialized schools, universities, and employment. Often, policy resorts to would-be simple solutions such as relocating government agencies from urban centers to rural areas. Local policymakers often are delighted by such a step. Jobs are created in their region, hence young people do not have to leave any more, so the common wisdom goes.
Yet, this thinking seems far too simplistic to me. Take, for instance, a hypothetical teenager from a small town or village who is set on pursuing an education as astrophysicist. What difference does it make for this hypothetical teenager that 200 jobs in public administration are being "created" in (or more correctly: shifted to) his or her home region? He or she will still have to move to an urban center that offers the specific educational and professional opportunity he or she is looking for. In a knowledge-based society based on a deep social division of labor, urban centers offer a diversity of educational and professional opportunities rural areas simply are unable to provide. This is why creating "any" jobs will not necessarily improve the attractiveness of a small town or village towards young people.
Why not instead focus on creating the right jobs? By "right jobs" I mean those that are in sync with the specific small town or village's endogenous assets. On closer examination, many small towns or villages feature some endogenous assets in their economic structure, maybe in some agricultural value chains, in crafts, or in tourism, just to name a few. Seizing growth opportunities based on these endogenous assets (or in fields of convergence among them) will often require some form of competitive upgrading through branding, quality improvements, use of cross-cutting technologies such as information and communication technologies, new marketing methods, steps into higher value-added stages of the value chain and so on. In short: what is needed is a policy that promotes innovation and creativity on how to make the most of the assets a specific rural area holds. These assets do exist and there is demand for high value-added products and services "from the country". Social trends such as regional food production or agritourism as well as the abundance of rural-life journals available at almost every urban newsstand underscore the demand for rural produce and brands. Catering to this demand offers a considerable potential for innovations and for creative new business models. Indeed, some small towns and villages are doing better than others because they have somehow managed to become the setting for innovation. Other small towns or villages might need support on facilitating innovation and creativity. What is needed, then, is a rural innovation policy.
It is probably true that not every remote village will be saved from demise but for others, and even more so for small towns, promoting competitive upgrading and innovation based on their specific endogenous assets can indeed be a way to unlock growth potentials. While our hypothetical teenager will still have to leave for a larger city to pursue his or her astrophysics career, other young people in fields closer to the given rural area's endogenous assets might eventually become interested to locate there. Trying to stop dynamic trends will not save rural areas, but facilitating beneficial dynamics could.
It's not always about SMEs...
Regional development policymakers and practitioners often focus on SMEs, as does economic policy on the national level. On the surface, the rationale behind this focus seems clear: in many economies, SMEs account for up to 90 percent of registered enterprises and for some 70 or 80 percent of employment. Yet, drawing the conclusion that regional policy absolutely has to focus exclusively or primarily on these SMEs misses a more fundamental point about regional economic development: given limited resources, policy should facilitate economic and employment growth where and how it can make the greatest impact. And the greatest impact of regional policy is not necessarily to be achieved by targeting SMEs, mainly for two reasons.
Firstly, small size does not necessarily stand for opportunity. Not every enterprise has a realistic percpective for growth just because it is small. Many SMEs operate businesses that are designed to be small, and of course this is a fully legitimate business strategy. Focusing regional policy on these small businesses, however, is very unlikely to generate or facilitate significant growth in value-added or employment in the regional economy. This is why scholars are interested in "gazelles", that is, the sub-population of SMEs that are growing rapidly or have the potential to do so. Identifying these "gazelles" is a challenge both for science and for policy, but doing so is important for increasing the effectiveness of regional policies. "Gazelles" do not always need to be technology companies, and it is important not to forget or neglect services industries. Once in a while, fast-growing business models emerge from services industries without necessarily being highly technology-intensive. Identifying "gazelles" is not about targeting sectors or industries but facilitating the growth of those SMEs across diverse fields that share some attributes that give them a higher propensity to sustained growth.
There is a second reason why focusing on SMEs generally and exclusively is not wise. Assisting SMEs in upgrading their competitiveness and innovativeness is a worthwhile goal of regional policy, but maybe even more than other companies, SMEs do not innovate in isolation. Because of their small size, SMEs typically do not systematically pursue R&D activities and thus need interaction with their (regional) innovative ecosystem more than larger companies. Interacting with other agents in the value chain and particularly with (larger) innovative lead companies can provide an important innovative stimulus for SMEs and integrate them in regional, national, or even international innovation circuits. This may be the reason why in their 2014 international comparative study on technology and industrial parks, Andrés Rodríguez-Pose and Dan Hardy stress the role of international anchor tenants in science and technology parks. Hosting SMEs in a technology park (or incubator) and encouraging them to network amongst each other may simply not be enough to stimulate innovation. An anchor agent capable of injecting innovative impulses from the outside such as a larger, international company (or a research university) can create a pull effect for the innovativeness of tenant SMEs. The challenge is for regional development to attract innovative anchor companies to their region, to increase SMEs' absorptive capacity, and to faciliate networking between newly attracted or home-grown innovation leaders and SMEs. It is here where SMEs need support. SMEs might be hesitant to cooperate with larger companies because of mistrust or fear, particularly when in direct competition. Regional policy can train SMEs in how to get the belance between competition and cooperation (which Michael Porter defined as a major characteristic of a cluster) right, and how to protect their own knowledge while learning by interacting (which Bengt-Ĺke Lundvall so brilliantly observed) with larger companies. Providing such a kind of assistance to SME upgrading requires a change of perspective: as long as regional policy focuses primarily on SMEs as such, it misses opportunities associated with integrating SMEs in their innovation ecosystem and in trans-regional value chains.
Regional innovation: it's not always about engineering!
Regional innovation policies often focus on technical subjects such as engineering, physics or chemistry. Technology transfer from higher education institutions (HEIs) to industry as well as entrepreneurship support programs are often oriented towards students, graduates or researchers from these and related fields. In education policy, policymakers often emphasize the importance of mathematics, engineering, natural and technical sciences because these subjects are assumed to have a higher potential for generating inventions and commercializing innovations than other subjects.
This focus on technical subjects seems one-sided to me. Too often, the innovative potential of humanities and social sciences is ignored. This neglect of humanities and social sciences by innovation policies is paradoxical because it contradicts obvious realities in the innovation landscape. In today's knowledge-based economy, it is not necessarily technical innovations but often creative ones that account for considerable contributions to economic growth. Take, for example, smartphone apps: while apps are built on technical knowledge, what makes them attractive to consumers is their function whose nature is usually creative or social. What makes apps (or other immaterial products) attractive to consumers is not necessarily their high technical sophistication but their utility to and acceptance by consumers - a non-technical question very much in the focus of humanities and social sciences. This insight explains why some technically highly innovative products fail on the market because they do not adequately address customers' needs or because they are not socially accepted. And this insight might explain why successful entrepreneurial teams are often those whose members combine multi-disciplary competencies such as engineering, business, and creative content.
What I am calling for is a multi-dimensional innovation policy on all levels, including on the regional level. Cultural and creative industries have become the focus of policymakers in recent years, but these policies are usually separate from more traditional, technically-oriented innovation policies. Why not include support for cultural and creative industries in comprehensive regional innovation policies? Doing so might suggest, for example, truly muti-disciplinary entrepreneurship support or training programs in HEIs that facilitate networking between students, graduates and researchers from different backgrounds and faculties. Why not consider setting up "technology" transfer programs (or, as one might rather call them, creativity transfer programs) in humanities or social sciences faculties of HEIs? In some cases, establishing specific incubators linked to these faculties might be a thought worth contemplating. Isn't it strange that almost every engineering faculty in major HEIs has some kind of technology transfer and entrepreneurship support program but (to my knowledge) virtually no language or literature faculty does? After all, written creative content such as books is at least as large a market as some engineered products are.
Tourism: the digital revolution
Tourism is an interesting industry for regional development because it is labor-intensive and can be promoted in peripheral regions. One disadvantage of the tourism industry, however, is its limited potential for productivity gains. At first sight, promoting so-called "high-tech" industries such as information and communication technology (ICT) may seem more promising for policymakers when supporting the emergence of regional economies with longer-term growth potential through productivity gains.
Yet, it seems to me that the tourism industry is currently on the brink of a major productivity increase. Digital technologies have in recent decades come to permeate our daily lives, but stange enough, the tourism industry is only now discovering the large impact digital technologies can have. Admittedly, online booking portals have revolutionized the way we book flights and hotel rooms some time ago. But when it comes to tourism content, digitalization is arriving only now and only slowly. So far only a handful of large international hotel chains have introduced digital concepts to enhance guests' experience such as controling room functions (e.g. lighting, movies, room service) through mobile apps. Large tour operators have started to introduce integrated app-based tour booking and management solutions only a few years ago. Tourist attractions enhancing the visitor experience through virtual reality such as Rome's "Domus Aurea" are still few and far between.
These few examples suggest the enormous potential of digital technologies in tourism for local and regional development. Policymakers have a role to play and should consider how to enable the tourism sector in their region to benefit from digitalization. For instance, how to help tourism SMEs such as smaller and independent hotels introduce new technologies and, at the same time, avoid dependence on powerful international online booking platforms? How to enhance the guest experience in publicly-funded tourist attractions such as museums or art galeries through digital technologies? How to increase the attractiveness of localities through technologies such as virtual reality by helping visitors imagine, for instance, how the place looked like in the Middle Ages? How to employ digital technologies in public conference centers? And importantly: how to do all of this without replacing human labor, but by complementing it in ways that create a value-added experience for visitors? Futher, when applying digital technologies, a region's tourism sector can create a new market by targeting people physically unfit for travel through virtual travel solutions. Doing so will require public investment in digitalizing attractions.
From these few points mentioned, it becomes clear that the digital revolution in tourism currently under way provides regions with significant opportunities to promote their tourism sector and to facilitate productivity gains. Policy assistance is needed and will presuppose overcoming the narrow focus on "high-tech" industries like ICT as such, and understanding the diffusion of ICT to other sectors traditionally seen as "low-tech" as an equally important driver of economic growth. As an example, this is what Spain's Balearic Islands have done by defining the introduction of innovative new technologies to the tourism sector as one of their smart specialization strategy's priorities.
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.eu