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Christian Ketels on smart specialization and the new phase of EU's regional policy, presented at Clusters in Europe III Conference, Visegrad, 2013
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The EU’s Regional Policy Entering a New Phase:What Does Smart Specialization Mean?
Prof. Christian H. M. KetelsInstitute for Strategy and Competitiveness
Harvard Business School
April, 11th 2013Visegrad, Hungary
2 Copyright 2013 © Christian Ketels
Smart Specialization – The Core Idea
• Designing regional economic strategies that are location-specific and build on existing strengths
– Quality of the business environment– Composition of economic activities (clusters)
• Explicit integration of the sectorial dimension (clusters) into regional economic strategies
• Focus on the systematic shift towards activities with higher rates of innovation/value added
– Within existing clusters– In clusters adjacent to current areas of strengths
• Mobilization of resources available at different levels (EU, country, region) in the context of a regional strategy
3 Copyright 2013 © Christian Ketels
The Evolution of European Regional Policy
Market liberalization
Divergence(New Economic
Geography)
Convergence(Neo-ClassicalGrowth Model)
European Regional Policy
BalancingAgglomeration Dynamics
Strengthening Catch-up Dynamics
What happened?• Convergence did occur, but the current crisis puts its sustainability in question • The impact of regional policy tools on economic performance patterns across
European regions is often seen as relatively modest
4 Copyright 2013 © Christian Ketels
The New Phase of EU Regional Economic Policy
• Helping all regions to upgrade, not just compensating laggards
• But still disproportionate allocation of funds to regions with lower prosperity levels
• Strengthening the focus on location-specific action plans vs. generic priorities
• But overall focus on innovation and competitiveness, not just infrastructure
Target
Tools
5 Copyright 2012 © Christian Ketels
The Role of RegionsDimensions of Regional Heterogeneity
Performance
BusinessEnvironment
Quality
LocationHistory
Size
Cluster Composition
6
FurnitureBuildingFixtures,
Equipment &Services
Animal Husbandry
Hospitality & Tourism
Agricultural Products
Transportation & Logistics
Traded Clusters in Central Hungary, 2011Cluster Linkages
Plastics
Oil & Gas
Chemical Products
Biopharma-ceuticals
Power Generation &
Transmission
Aerospace Vehicles &
Defense
Lighting & Electrical
Equipment
Financial Services
Publishing & Printing
Entertainment
Information Tech.
Communications
Equipment
Aerospace Engines
Business Services
DistributionServices
PaperProducts
Construction
Prefabricated Enclosures
Heavy Machinery
Sporting & Recreation
Goods
Automotive
Production Technology
Motor Driven Products
MetalManufacturing
Apparel
Leather & Related Products
Jewelry & Precious Metals
Textiles
Footwear
Processed Food
Tobacco
Medical Devices
Analytical InstrumentsEducation &
Knowledge Creation
LQ > 2.0
LQ > 1.5
LQ > 1.0
LQ, or Location Quotient, measures the state’s share in cluster employment relative to its overall share of European employment. An LQ > 1 indicates an above average employment share in a cluster.
Maritime
7
FurnitureBuildingFixtures,
Equipment &Services
Animal Husbandry
Hospitality & Tourism
Agricultural Products
Transportation & Logistics
Traded Clusters in Eastern Hungary, 2011Cluster Linkages
Plastics
Oil & Gas
Chemical Products
Biopharma-ceuticals
Power Generation &
Transmission
Aerospace Vehicles &
Defense
Lighting & Electrical
Equipment
Financial Services
Publishing & Printing
Entertainment
Information Tech.
Communications
Equipment
Aerospace Engines
Business Services
DistributionServices
PaperProducts
Construction
Prefabricated Enclosures
Heavy Machinery
Sporting & Recreation
Goods
Automotive
Production Technology
Motor Driven Products
MetalManufacturing
Apparel
Leather & Related Products
Jewelry & Precious Metals
Textiles
Footwear
Processed Food
Tobacco
Medical Devices
Analytical InstrumentsEducation &
Knowledge Creation
LQ > 2.0
LQ > 1.5
LQ > 1.0
LQ, or Location Quotient, measures the state’s share in cluster employment relative to its overall share of European employment. An LQ > 1 indicates an above average employment share in a cluster.
Maritime
8 Copyright 2012 © Christian Ketels
Clusters and Economic Outcomes: ProsperityThe Evidence
Determinants of Regional JobGrowth, Wages, and Patenting
• Specialization in strong clusters
• Breadth of position within each cluster
• Positions in related clusters
• Presence of a region‘s clusters in neighboring regions
And...• Cluster mix significantly less
important than cluster strength
Source: Porter/Stern/Delgado (2010), Porter (2003)
Quantifying the effects
• Regional cluster portfolio strength explains close to 40% of variation in regional wages/GDP per capita (Porter, 2003; EU, 2008)
• Doubling regional cluster strength increases the regional average wage by 40% (Porter, 2003)
• One SD higher cluster strength raises the annual employment growth rate at the industry level by 3% (Delgado/Porter/ Stern, 2011)
• Entry of large plants into a cluster raises TFP in other companies by 20% over five years (Greenstone, 2008)
9 Copyright 2012 © Christian Ketels
The Role of Cluster-Based Policy
• Agglomeration largely driven by business environment conditions and ‘automatic’ cluster effects in a market process
BUT
• Exploitation of localized spill-overs not automatic • Exploration of opportunities for joint action not automatic
• Cluster efforts enhance the benefits of existing strengths• Cluster efforts are about upgrading competitiveness• They are not about creating clusters
10
Cluster Policy: The Track Record So Far
• Increasingly clear evidence on the economic benefits of cluster presence
• Evaluations of cluster programs generally positive
• A new role for regions
HOWEVER
• Quality of cluster initiatives is heterogeneous
• Economic benefits of cluster programs so far limited to active participants
• Tendency to strengthen existing structures, much less driving structural change
• Tendency to benefit stronger regions, much less helping lagging regions to catch up
11 Copyright 2013 © Christian Ketels
Enabling Structural Change
• Creating winners?
• Backing losers!
Old Industrial Policy
• Enabling new winners to emerge
The Challenge Ahead
FAILURE
• Backing winners!
Current Cluster Policy
PARTIAL SUCCESS
12 Copyright 2012 © Christian Ketels
Clusters and Structural Change:Entrepreneurship
New Industries (+) New Business Formation (+)
Survial Ratesof New Businesses (+)
Job GrowthIn New Businesses (+)
The stronger the cluster, the more likely new industries within the cluster are to
emerge
The stronger the cluster, the more dynamic is the process of new business formation
The stronger the cluster, the higher the job growth in new
businesses
The stronger the cluster , the higher
the survial rate of new businesses
Source: Porter, The Economic Performance of Regions, Regional Studies, 2003; Delgado/Porter/Stern, Clusters and Entrepreneurship, Journal of Economic Geography, 2010; Delgado/bPorter/Stern, Clusters, Convergence, and Economic Performance, mimeo., 2010.
CLUSTER
13 Copyright 2013 © Christian Ketels
Textiles
Roller bearings
Vehicles
Vehicle safety
Telematics
1907
1924
1956
2001
Source: Sölvell, Lindqvist,,011
Clusters and Structural Change:Transformation of Existing Clusters
3D Design
2010
14 Copyright 2012 © Christian Ketels
Clusters and Structural Change:Emergence of New Clusters
U.S. Military
CommunicationsEquipment
Sporting andLeather Goods
Analytical Instruments
Power GenerationAerospace Vehicles
and Defense
Transportationand Logistics
Information Technology
1910 1930 1950 19901970
Bioscience Bioscience Research Centers
Climate and
Geography
Hospitality and Tourism
Medical Devices
Biotech / Pharmaceuticals
Education andKnowledge Creation
• Existing cluster portfolios have a significant impact on the evolutionary path of regional economies (Neffke et al, 2009; Boschma et al. 2011)
• Clusters provide a powerful analytical tool to understand diversification and the emergence of new economic activities
The San Diego Economy
Source: Porter, Monitor Company, Council on Competitiveness (2003)
15 Copyright 2013 © Christian Ketels
Cluster-Driven Economic PolicyRegional Policy based on “Smart Specialization”
The Challenge:• How to support structural change towards higher
value-added activities?
The New (Smart Specialization) Answer:• Identify your assets, including your
existing cluster base• Actively pursue opportunities in areas
adjacent to current strengths and leading towards higher value added
• Longer-term development of sustainable competitive advantages
The Old Answer:• Identify growing markets and try to
enter them (bio, nano, eco, …)
• Failure to succeed in intensely competitive markets without unique assets
16 Copyright 2012 © Christian Ketels
Clusters and Smart Specialization Strategies (S3)
• Clusters provide a conceptual framework that is fully compatible with the underpinnings of the S3 approach
• Clusters and cluster initiatives are important tools in the S3 process of regional diagnosis and stakeholder engagement
• Cluster policies allow the effective organization of sector-specific priority setting and integration of policies
• Appropriate cluster policies differ by the stage of cluster development
• Appropriate cluster policies differ by the overall level of regional competitiveness
17 Copyright 2013 © Christian Ketels
Supporting Emerging Clusters: Identification
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Factor(Input)
ConditionsDemand
Conditions
• Sophisticated and demandinglocal customers and needs– e.g., Strict quality, safety, and
environmental standards– Consumer protection laws
• Local rules and incentives that encourage investment and productivity
– e.g. incentives for capital investments, IP protection, corporate governance standards
• Open and vigorous local competition− Openness to foreign competition− Strict competition laws
• Access to high quality business inputs– Human resources– Capital availability– Physical infrastructure– Administrative
infrastructure (e.g., business registration, permitting, transparency)
– Scientific and technological infrastructure
• Availability and depth of suppliers and supporting industries
• Presence of Institutions for Collaboration (IFCs) that support productive coordination and collaboration among actors
Plastics
Oil and Gas
Chemical
ProductsPharm
a-ceutica
ls
Power Generation
Aerospace Vehicles &
Defense
Lightning & Electrical Equipment
Financial Services
Publishing and Printing
Entertainment
Hospitality and Tourism
Transportation and Logistics
Information Technology
Communi-cations
Equipment
Medical
Devices
Analytical Instruments
Education and
Knowledge Creation
Apparel
Leather and
Sporting
Goods
Agricultural Products
Processed
Food
Furniture
Building
Fixtures,
Equipment and Service
s
Sporting,Recreation
and Children’s Goods
Business
Services
DistributionServices
Fishing &
Fishing Produc
ts
Footwear
Forest Produc
ts
Heavy Construction
Services
Jewelry &
Precious
Metals
ConstructionMaterials
Prefabricated Enclosures
Textiles
Tobacco
Heavy Machinery
Aerospace Engines
Automotive
Production Technology
Motor Driven Products
Metal Manufacturing
Business Environment Strengths Existing Cluster Portfolio
• External intelligence (technology, market needs) is critical• Choice under uncertainty
Assessment criteria• Existing bridgeheads, market opportunity, leadership
18 Copyright 2013 © Christian Ketels
Supporting Emerging Clusters: Tools for Enabling Entrepreneurial Discovery
Emerging Cluster Top Cluster Maturing Cluster
Framework
Capital
Knowledge
High
Low
Medium
Low
Medium
High
Medium
Low
High
• Accept and manage risk
• Clear exit mechanisms
• Project, not institution
• Technical support, less money
• Exploration of market opportunities, less competitiveness upgrading
• Flexible on geographic and industry boundaries
19 Copyright 2013 © Christian Ketels
Supporting Lagging Regions: Strategies that Acknowledge Existing Context
Competitiveness• Weaker business environment
conditions• Weaker cluster portfolio
Capacity• Administration less able to design
and implement policies• Government more vulnerable to
the pressure of interest groups• Lower willingness and capability for
collective action
CHALLENGES
Policy objectives• Strengthen social capital and
institutional capacity• Upgrade overall business
environment quality• Improve context for cluster
emergence
Policy characteristics• Focus of cluster efforts on
technical support• Integration of cluster and cross-
cutting efforts
IMPLICATIONS
20 Copyright 2013 © Christian Ketels
The Role of Regions in PolicyDifferent, not Just Smaller
National and EU programs and
funding sources
Regional programs and funding sources
Regional Competitiveness
Set Regional Economic Strategies
Mobilize Regional Public-Private Platforms
21 Copyright 2013 © Christian Ketels
From Individual Policies to Strategy
BusinessEnvironment
ClusterPortfolio
Positioning
• Identifies, communicates, and strengthens the specific value proposition of the location
• Accelerates growth in existing clusters
• Enables the emergence of new clusters
• Strengthen unique qualities of the location
• Eliminate weaknesses in other areas
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