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The EU’s Regional Policy Entering a New Phase: What Does Smart Specialization Mean? Prof. Christian H. M. Ketels Institute for Strategy and Competitiveness Harvard Business School April, 11 th 2013 Visegrad, Hungary
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What Does Smart Specialization Mean?

May 11, 2015

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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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Page 1: What Does Smart Specialization Mean?

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

Page 2: What Does Smart Specialization Mean?

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

Page 3: What Does Smart Specialization Mean?

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

Page 4: What Does Smart Specialization Mean?

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

Page 5: What Does Smart Specialization Mean?

5 Copyright 2012 © Christian Ketels

The Role of RegionsDimensions of Regional Heterogeneity

Performance

BusinessEnvironment

Quality

LocationHistory

Size

Cluster Composition

Page 6: What Does Smart Specialization Mean?

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

Page 7: What Does Smart Specialization Mean?

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

Page 8: What Does Smart Specialization Mean?

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)

Page 9: What Does Smart Specialization Mean?

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

Page 10: What Does Smart Specialization Mean?

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

Page 11: What Does Smart Specialization Mean?

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

Page 12: What Does Smart Specialization Mean?

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

Page 13: What Does Smart Specialization Mean?

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

Page 14: What Does Smart Specialization Mean?

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)

Page 15: What Does Smart Specialization Mean?

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

Page 16: What Does Smart Specialization Mean?

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

Page 17: What Does Smart Specialization Mean?

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

Page 18: What Does Smart Specialization Mean?

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

Page 19: What Does Smart Specialization Mean?

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

Page 20: What Does Smart Specialization Mean?

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

Page 21: What Does Smart Specialization Mean?

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