What Does Smart Specialization Mean?

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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


<ul><li>1.The EUs Regional Policy Entering a New Phase:What Does Smart Specialization Mean?Prof. Christian H. M. KetelsInstitute for Strategy and CompetitivenessHarvard Business SchoolApril, 11th 2013Visegrad, Hungary</li></ul> <p>2. 2 Copyright 2013 Christian KetelsSmart Specialization The Core Idea Designing regional economic strategies that are location-specific andbuild on existing strengths Quality of the business environment Composition of economic activities (clusters) Explicit integration of the sectorial dimension (clusters) into regionaleconomic strategies Focus on the systematic shift towards activities with higher rates ofinnovation/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. 3 Copyright 2013 Christian KetelsThe Evolution of European Regional PolicyMarketliberalizationDivergence(New EconomicGeography)Convergence(Neo-ClassicalGrowth Model)European Regional PolicyBalancingAgglomeration DynamicsStrengtheningCatch-up DynamicsWhat happened? Convergence did occur, but the current crisis puts its sustainability in question The impact of regional policy tools on economic performance patterns acrossEuropean regions is often seen as relatively modest 4. 4 Copyright 2013 Christian KetelsThe New Phase of EU Regional Economic Policy Helping all regions to upgrade, not justcompensating laggards But still disproportionate allocation of fundsto regions with lower prosperity levels Strengthening the focus on location-specific action plans vs. generic priorities But overall focus on innovation andcompetitiveness, not just infrastructureTargetTools 5. 5 Copyright 2012 Christian KetelsThe Role of RegionsDimensions of Regional HeterogeneityPerformanceBusinessEnvironmentQualityLocationHistorySizeClusterComposition 6. 6FurnitureBuildingFixtures,Equipment &amp;ServicesAnimalHusbandryHospitality&amp; TourismAgriculturalProductsTransportation&amp; LogisticsTraded Clusters in Central Hungary, 2011Cluster LinkagesPlasticsOil &amp;GasChemicalProductsBiopharma-ceuticalsPowerGeneration &amp;TransmissionAerospaceVehicles &amp;DefenseLighting &amp;ElectricalEquipmentFinancialServicesPublishing&amp; PrintingEntertainmentInformationTech.CommunicationsEquipmentAerospaceEnginesBusinessServicesDistributionServicesPaperProductsConstructionPrefabricatedEnclosuresHeavyMachinerySporting&amp; RecreationGoodsAutomotiveProductionTechnologyMotor DrivenProductsMetalManufacturingApparelLeather &amp;RelatedProductsJewelry &amp;PreciousMetalsTextilesFootwearProcessedFoodTobaccoMedicalDevicesAnalyticalInstrumentsEducation &amp;KnowledgeCreationLQ &gt; 2.0LQ &gt; 1.5LQ &gt; 1.0LQ, or Location Quotient, measures the states share in cluster employment relative to its overall share of Europeanemployment. An LQ &gt; 1 indicates an above average employment share in a cluster.Maritime 7. 7FurnitureBuildingFixtures,Equipment &amp;ServicesAnimalHusbandryHospitality&amp; TourismAgriculturalProductsTransportation&amp; LogisticsTraded Clusters in Eastern Hungary, 2011Cluster LinkagesPlasticsOil &amp;GasChemicalProductsBiopharma-ceuticalsPowerGeneration &amp;TransmissionAerospaceVehicles &amp;DefenseLighting &amp;ElectricalEquipmentFinancialServicesPublishing&amp; PrintingEntertainmentInformationTech.CommunicationsEquipmentAerospaceEnginesBusinessServicesDistributionServicesPaperProductsConstructionPrefabricatedEnclosuresHeavyMachinerySporting&amp; RecreationGoodsAutomotiveProductionTechnologyMotor DrivenProductsMetalManufacturingApparelLeather &amp;RelatedProductsJewelry &amp;PreciousMetalsTextilesFootwearProcessedFoodTobaccoMedicalDevicesAnalyticalInstrumentsEducation &amp;KnowledgeCreationLQ &gt; 2.0LQ &gt; 1.5LQ &gt; 1.0LQ, or Location Quotient, measures the states share in cluster employment relative to its overall share of Europeanemployment. An LQ &gt; 1 indicates an above average employment share in a cluster.Maritime 8. 8 Copyright 2012 Christian KetelsClusters and Economic Outcomes: ProsperityThe EvidenceDeterminants of Regional JobGrowth, Wages, and Patenting Specialization in strong clusters Breadth of position within eachcluster Positions in related clusters Presence of a regions clusters inneighboring regionsAnd... Cluster mix significantly lessimportant than cluster strengthSource: Porter/Stern/Delgado (2010), Porter (2003)Quantifying the effects Regional cluster portfolio strength explains closeto 40% of variation in regional wages/GDP percapita (Porter, 2003; EU, 2008) Doubling regional cluster strength increases theregional average wage by 40% (Porter, 2003) One SD higher cluster strength raises the annualemployment growth rate at the industry level by3% (Delgado/Porter/ Stern, 2011) Entry of large plants into a cluster raises TFP inother companies by 20% over five years(Greenstone, 2008) 9. 9 Copyright 2012 Christian KetelsThe Role of Cluster-Based Policy Agglomeration largely driven by business environment conditions andautomatic cluster effects in a market processBUT 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. 10Cluster Policy: The Track Record So Far Increasingly clear evidence on the economic benefits of clusterpresence Evaluations of cluster programs generally positive A new role for regionsHOWEVER Quality of cluster initiatives is heterogeneous Economic benefits of cluster programs so far limited to activeparticipants Tendency to strengthen existing structures, much less drivingstructural change Tendency to benefit stronger regions, much less helping laggingregions to catch up 11. 11 Copyright 2013 Christian KetelsEnabling Structural Change Creatingwinners? Backing losers!OldIndustrial Policy Enabling newwinners toemergeThe ChallengeAheadFAILURE Backingwinners!CurrentCluster PolicyPARTIALSUCCESS 12. 12 Copyright 2012 Christian KetelsClusters and Structural Change:EntrepreneurshipNew Industries (+) New Business Formation (+)Survial Ratesof New Businesses (+)Job GrowthIn New Businesses (+)The stronger the cluster, the more likelynew industries within the cluster are toemergeThe stronger thecluster, the moredynamic is theprocess of newbusiness formationThe strongerthe cluster, thehigher the jobgrowth in newbusinessesThe stronger thecluster , the higherthe survial rate ofnew businessesSource: 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. 13 Copyright 2013 Christian KetelsTextilesRoller bearingsVehiclesVehicle safetyTelematics1907192419562001Source: Slvell, Lindqvist,,011Clusters and Structural Change:Transformation of Existing Clusters3D Design2010 14. 14 Copyright 2012 Christian KetelsClusters and Structural Change:Emergence of New ClustersU.S.MilitaryCommunicationsEquipmentSporting andLeather GoodsAnalytical InstrumentsPower GenerationAerospace Vehiclesand DefenseTransportationand LogisticsInformation Technology1910 1930 1950 19901970BioscienceBioscienceResearchCentersClimateandGeographyHospitality and TourismMedical DevicesBiotech / PharmaceuticalsEducation andKnowledge Creation Existing clusterportfolios have asignificant impact on theevolutionary path ofregional economies(Neffke et al, 2009;Boschma et al. 2011) Clusters provide apowerful analytical toolto understanddiversification and theemergence of neweconomic activitiesThe San Diego EconomySource: Porter, Monitor Company, Council on Competitiveness (2003) 15. 15 Copyright 2013 Christian KetelsCluster-Driven Economic PolicyRegional Policy based on Smart SpecializationThe Challenge: How to support structural change towards highervalue-added activities?The New (Smart Specialization) Answer: Identify your assets, including yourexisting cluster base Actively pursue opportunities in areasadjacent to current strengths andleading towards higher value added Longer-term development ofsustainable competitive advantagesThe Old Answer: Identify growing markets and try toenter them (bio, nano, eco, ) Failure to succeed in intenselycompetitive markets without uniqueassets 16. 16 Copyright 2012 Christian KetelsClusters and Smart Specialization Strategies (S3) Clusters provide a conceptual framework that is fully compatible withthe underpinnings of the S3 approach Clusters and cluster initiatives are important tools in the S3 process ofregional diagnosis and stakeholder engagement Cluster policies allow the effective organization of sector-specificpriority setting and integration of policies Appropriate cluster policies differ by the stage of clusterdevelopment Appropriate cluster policies differ by the overall level of regionalcompetitiveness 17. 17 Copyright 2013 Christian KetelsSupporting Emerging Clusters:IdentificationContext forFirmStrategyand RivalryRelated andSupportingIndustriesFactor(Input)ConditionsDemandConditions Sophisticated and demandinglocal customers and needs e.g., Strict quality, safety, andenvironmental standards Consumer protection laws Local rules and incentives thatencourage investment andproductivity e.g. incentives for capital investments, IPprotection, corporate governancestandards Open and vigorous localcompetition Openness to foreign competition Strict competition laws Access to high quality businessinputs Human resources Capital availability Physical infrastructure Administrativeinfrastructure (e.g., businessregistration, permitting,transparency) Scientific and technologicalinfrastructure Availability and depth of suppliers andsupporting industries Presence of Institutions forCollaboration (IFCs) that supportproductive coordination andcollaboration among actorsPlasticsOil andGasChemicalProductsPharma-ceuticalsPowerGenerationAerospaceVehicles &amp;DefenseLightning &amp;ElectricalEquipmentFinancialServicesPublishingand PrintingEntertainmentHospitalityand TourismTransportationand LogisticsInformationTechnologyCommuni-cationsEquipmentMedicalDevicesAnalyticalInstrumentsEducationandKnowledgeCreationApparelLeatherandSportingGoodsAgriculturalProductsProcessedFoodFurnitureBuildingFixtures,Equipment andServicesSporting,Recreationand ChildrensGoodsBusinessServicesDistributionServicesFishing&amp;FishingProductsFootwearForestProductsHeavyConstructionServicesJewelry &amp;PreciousMetalsConstructionMaterialsPrefabricatedEnclosuresTextilesTobaccoHeavyMachineryAerospaceEnginesAutomotiveProductionTechnologyMotor DrivenProductsMetalManufacturingBusiness Environment Strengths Existing Cluster Portfolio External intelligence (technology, market needs) is critical Choice under uncertaintyAssessment criteria Existing bridgeheads, market opportunity, leadership 18. 18 Copyright 2013 Christian KetelsSupporting Emerging Clusters:Tools for Enabling Entrepreneurial DiscoveryEmerging Cluster Top Cluster Maturing ClusterFrameworkCapitalKnowledgeHighLowMediumLowMediumHighMediumLowHigh 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 industryboundaries 19. 19 Copyright 2013 Christian KetelsSupporting Lagging Regions:Strategies that Acknowledge Existing ContextCompetitiveness Weaker business environmentconditions Weaker cluster portfolioCapacity Administration less able to designand implement policies Government more vulnerable tothe pressure of interest groups Lower willingness and capability forcollective actionCHALLENGESPolicy objectives Strengthen social capital andinstitutional capacity Upgrade overall businessenvironment quality Improve context for clusteremergencePolicy characteristics Focus of cluster efforts ontechnical support Integration of cluster and cross-cutting effortsIMPLICATIONS 20. 20 Copyright 2013 Christian KetelsThe Role of Regions in PolicyDifferent, not Just SmallerNational and EUprograms andfunding sourcesRegional programsand funding sourcesRegional CompetitivenessSet Regional Economic StrategiesMobilize Regional Public-Private Platforms 21. 21 Copyright 2013 Christian KetelsFrom Individual Policies to StrategyBusinessEnvironmentClusterPortfolioPositioning Identifies, communicates, and strengthensthe specific value proposition of the location Accelerates growth inexisting clusters Enables the emergenceof new clusters Strengthen uniquequalities of the location Eliminate weaknessesin other areas </p>


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