Future of the European Union – Smart specialization

“Europe is facing a moment of transformation. The crises has wiped out years of economic and social progress and exposed structural weaknesses in Europe´s economy. In the meantime, the world is moving fast and long-term challenges such as globalisation, pressure on resources, population ageing, are intensifying.”
– Quote from Europe 2020 Strategy

Introduction

This blog post is about the new strategy for regional innovation system development in the European Union, RIS3 (Regional research and innovation strategies for smart specialisation) which is a clear-cut break with previous EU strategies for funding. The information and experience we document in this blog post is important to know for anyone in Europe who is working with regional development.

RIS3 will become will become an ex-ante conditionality in the EU Structural Funds 2014-20. This means that in order for a region to to run projects that are co-funded by the European Union, there need to be a smart specialization strategy in place.

To run a project to develop and anchor such a smart specialization strategy is a process that will take even smaller regions at least six months, so it is urgent to get started.

Every single region in the European Union is expected to produce a RIS3. One significant aspect that makes a regional research and innovation strategy SMART, is the process itself: Smart specialisation is specialised diversification, structural change towards knowledge, innovation and creativity-driven growth.

If a regions smart specialization strategy is in place by mid 2013, this allows for only six months to prepare and develop project proposals for new regional development projects to run from January 2014. This means that to get ready on time, European regions are in a hurry.

Bearing have already run two smart specialization projects for clients during 2012 and we are developing key competencies in the field of RIS3 together with Innopro, a Barcelona based consulting firm specialized in smart specialization and urban development projects, R&D, innovation and technology transfer projects for research centers and universities.

The contents of this blog post is developed collaboratively by Miquel Barceló, Jörgen Eriksson and Lars-Göran Larsson and based upon a one day seminar we give on this topic.

Europe 2020 Strategy

The EU has set out its vision for Europe´s economy in the Europe 2020 Strategy, which aims at confronting structural weaknesses through progress in three mutually reinforcing priorities:

Smart Growth, based on knowledge and innovation
Sustainable Growth, promoting a more resource efficient, greener and competitive economy
Inclusive Growth, fostering a high employment economy delivering economic, social and territorial cohesion

Investing more in research, innovation and entrepreneurship is at the heart of Europe 2020 and a crucial part of Europe´s response to the economic crises. So is having a strategic and integrated approach to innovation that maximizes European, national and regional research and innovation potential. Therefore the new priority in the EU is about enhancing Europe´s capacity to deliver smart, sustainable and inclusive growth, through the concept of smart specialization.

Smart specialization is closely interlinked with business clusters. A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally.

The Harvard Business School professor Michael Porter claims that clusters have the potential to affect competition in three ways: by increasing the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field.

According to Porter, in the modern global economy, comparative advantage, how certain locations have special endowments (i.e., harbor, cheap labor) to overcome heavy input costs, is less relevant. Now, competitive advantage, how companies make productive use of inputs, requiring continual innovation, is more important.

Below is a map from Bearings research of some currently existing clusters in Europe.

The new cohesion policy

On 6 October 2011, the European Commission adopted a draft legislative package that will frame EU cohesion policy for the period 2014-2020.

The Commission proposed changes to the way cohesion policy is designed and implemented:

Deliver the Europe 2020 Strategy’s priorities of smart, sustainable and inclusive growth;
Maximize the impact of EU funding, "do more with less";
Focus on results , not spending;
Simplification
Territorial cohesion;
Integrated programming;

The funding instruments for the new cohesion policy, that regions can apply to for funding of projects, are:

Some common rules are applicable to all these funds:

To give more specific information about the three most important funds:

The European Regional Development Fund

The fund aims to strengthen economic, social and territorial cohesion in the European Union by correcting imbalances between regions

Detailed priorities to increase focus on

research and development, and innovation;
Information and communication technologies;
climate change and moves towards a low-carbon economy;
business support to SME’s;
services of general economic interest;
telecommunication, energy, and transport infrastructures;
enhancing institutional capacity and effective public administration;
health, education, and social infrastructures; and
Sustainable urban development.

Priorities

Less developed regions: at least 50% of ERDF resources to energy efficiency and renewables, innovation and SME support.
A minimum of 5% of ERDF resources for sustainable urban development.

The European Social Fund

The fund is the main financial instrument for investing in people
It increases the employment opportunities of European citizens, promotes better education, and improves the situation of the most vulnerable people at risk of poverty.

The regulation proposes to target the ESF on four thematic objectives throughout the Union:

promoting employment and supporting labour mobility;
promoting social inclusion and combating poverty;
Investing in education, skills and lifelong learning; and
Enhancing institutional capacity and an efficient public administration.

The Cohesion Fund

The Cohesion Fund helps Member States with a GNI (Gross National Income) per inhabitant of less than 90% of the EU-27 average to invest in TEN-T transport networks and the environment.

Priorities

will support investment in climate change adaptation and risk prevention as well as investment in the water and waste sectors, and the urban environment.
In line with the Commission’s proposals on the Multi-Annual Financial Framework, investment in energy would also be eligible for support, provided it has positive environmental benefits.
In the field of transport, in addition to the TEN-T network, the Cohesion Fund will contribute to investments in low-carbon transport systems and urban transport.

Budget

The total budget for the cohesion policy 2014-2020 is EUR 376 billion, distributed on the different regions according to the pie chart below.

As the reader can see, most of the budget will be available for the less developed regions, in red in the map below. The transition regions are shown in brown and the more developed regions are shown in orange.

What is Smart Specialization?

Smart specialization is about developing the right specialization for a region, based on its current unique characteristics, actors and assets, highlighting the regions competitive advantages and rallying regional stakeholders and resources around an excellence-driven vision of their future.

It also means strengthening regional innovation systems, maximizing knowledge flows and spreading the benefits of innovation through the entire regional economy.

Implementation must start by establishing a multi-level-governance structure, securing the seamless coordination from the national, regional and local levels.

Always start by understanding the dominating trends in the place main target markets. For some places with a strong demand for talents, residents are most important. For other places with unemployment and economic stagnation, investors and companies are the top priority, and available talents and labor are an attraction factor. For other places, historical or cultural attractions are the assets and tourists are the prime target market.

What is RIS3?

RIS3 is an integrated agenda for regional economic transformation, strengthening RTD, innovation and increasing access to ICT and its use

Based on SWOT analysis (including ICT)
Concentrate resources on a limited set of priorities
Encourages private investment in innovation
Monitoring and review system
If thematic objective 2: Chapter on digital growth: balance of support to the demand and supply of ICT technologies; objectives "e-“

+ derived from the NRPs: national level multi-annual plan for budgeting and prioritisation of investments linked to EU priorities.

The RIS3 policy rationale

To make innovation a priority for all regions

‘Europe 2020’ requires policy makers to consider how the different aspects of smart, sustainable and inclusive growth are interrelated. Integrated smart specialisation strategies respond to complex development challenges by adapting the policy to the regional context. RIS3 supports the creation of knowledge-based jobs and growth not only in leading research and innovation (R&I) hubs but also in less developed and rural regions. RIS3 is a key part of the proposed EU Cohesion Policy reform supporting thematic concentration and reinforcing strategic programming and performance orientation.

To focus investment and create synergies

RIS3 focuses economic development efforts and investments on each region’s relative strengths, exploiting its economic opportunities and emerging trends, and taking action to boost its economic growth. RIS3 enhances the added value, impact and visibility of EU funding. It ensures value for money in times of tighter budgets and scarce(r) public resources. RIS3 ensures synergies between European policies and funding, complementing national and regional schemes and private investment.

To improve the innovation process

RIS3 requires smart, strategic choices and evidence-based policy making. Priorities are set on the basis of strategic intelligence about a region’s assets, its challenges, competitive advantages and potential for excellence. RIS3 involves making sure that the policy mix, i.e. the combination of policy instruments available in a given regional environment – grants, loans and other support – is effective in reaching the overall policy goals, helps businesses, and leverages private investment. RIS3 entails developing result indicators and using them to drive, steer and adjust policies and programmes. They thus promote continuous policy evaluation and learning, sharing experience and good practices between regions.

To improve governance and to get stakeholders more closely involved

RIS3 encourages all stakeholders to unite under a shared vision. It links small, medium sized and large firms, encourages multi-level governance and helps to build creative and social capital within the community. The RIS3 process must be interactive, regionally-driven and consensus-based. While the precise mix of organisations involved will depend on the regional context, it is important that all partners be fully involved in developing, implementing and monitoring smart specialisation strategies.

The RIS3 economic rationale

To develop and implement strategies for economic transformation

RIS3 requires an integrated and place-based approach to policy design and delivery. Policies must be tailored to the local context, acknowledging that there are different pathways for regional innovation and development. These include:

rejuvenating traditional sectors through higher value-added activities and new market niches;
modernising by adopting and disseminating new technologies;
diversifying technologically from existing specialisations into related fields;
developing new economic activities through radical technological change and breakthrough innovations; and
exploiting new forms of innovation such as open and user-led innovation, social innovation and service innovation.

To respond to economic and societal challenges

Europe faces relentless global competition for talent, ideas and capital. At the same time, fiscal austerity requires governments to focus oftentimes scarce resources on a few areas and measures that have genuine potential to create sustainable jobs and growth. Most regions can only acquire a real competitive edge by finding niches or by mainstreaming new technology into traditional industries and exploiting their ‘smart’ regional potential. Smart specialisation strategies can also be a powerful instrument to tackle social, environmental, climate and energy challenges, such as demographic change, resource efficiency, energy security and climate resilience.

To make regions more visible to international investors

By focusing on what gives a region its greatest competitive potential, smart specialisation helps position the region in specific global markets/niches and international value chains.
To attract private investment and to get the attention of international investors it is important to brand a region’s expertise in a specific knowledge sector or niche market and to provide solid, integrated support to help strengthen this specialisation.

To improve a region’s internal and external connections

Improving internal connections has long been a trademark of innovation policy (e.g. triple or quadruple helix networks, knowledge triangles, university-business cooperation, clusters, etc.). However, regions also need to be outward looking, to position themselves in European and global value chains, and to improve their connections and cooperation with other regions, clusters and innovation players. This is important for the internationalisation of their companies, to achieve a critical potential of cluster activities and to generate inflows of knowledge relevant to the region’s existing knowledge base.

To avoid overlaps and replication in development strategies

In the past, regions facing development challenges have often tried to replicate the same or similar priorities as other, leading, regions, even when they had few assets and little chance of becoming world leaders in their chosen fields. RIS3 encourages regions to adopt policies realistically tailored to their capabilities, opportunities and needs. International differentiation and technology diversification are key to (re-)positioning a region in a global, highly dynamic and changing context, and to making its strategy stand out from that of other regions.

To accumulate a ‘critical mass’ of resources

RIS3 can ensure that research and innovation resources reach critical mass, i.e. sufficient
momentum to become self-sustaining, or critical potential, supporting them through targeted action to boost human resources and knowledge infrastructure. It clearly pays to focus on areas of real potential and strength rather than spreading investments thinly over unrelated areas. Critical mass/potential can be accumulated either internally within the region or via insourcing and cooperation with other regions.

To promote knowledge spillover and technological diversification

The most promising way for a region to promote its knowledge-based growth is to diversify into technologies, products and services that are closely related to existing dominant technologies and the regional skills base. Knowledge spillover is most successful if it is within related industries (as opposed to a diversity of unrelated sectors). New industries will grow out of the most successful existing clusters, but only if sectoral boundaries are abandoned. What matters is not diversification per se but rather specialised technological diversification in emerging economic activities. This starts from existing regional knowledge and economic capabilities and aims for related but higher value-added activities. Regions should thus prioritise complementarity between related economic activities, and find better ways to combine their strengths so as to create new industrial capability in areas with high growth potential (e.g. cross-clustering).

RIS3 is based on 4C´s

Competitive advantage: match R&I potential with business needs and capacities & develop cross-cutting links between sectors ; adoption of technologies (cutting-edge / tested) to for specialised diversification of sectors
Choices (tough ones): select few priorities on basis of specialisation & integration in international value chains.
Critical mass of resources & talent: cooperation between regions by avoiding duplication and fragmentation
Collaborative Leadership: involve key stakeholders from academia, businesses, public administrations and civil society ("quadruple helix") for efficient innovation systems & synergies between funding instruments (EU, national, regional)

The steps to develop smart specialization

A national / regional strategy for smart specialization (RIS3) can be designed following a number of practical steps:

The analysis of the national / regional context and potential for innovation.
The set-up of a sound and inclusive governance structure.
The production of a shared vision about the future of the country / region.
The selection of a limited number of priorities for national / regional development.
The establishment of suitable policy mixes.
The integration of monitoring and evaluation mechanisms.

Check-boxes to ensure successful funding proposals

Appropriate stakeholder involvement? How does it support the entrepreneurial discovery process of testing possible new areas?
Evidence-based? How have areas of strength and future activity been identified?
Innovation and knowledge-based development priorities? How have potential areas of future activity been identified? How does it support the upgrading of existing activities?
Appropriate actions identified? How good is the policy mix?
Is strategy outward looking? How does it promote critical mass/ potential?
Synergies between different policies and funding sources? How does it align/leverage EU/national/regional policies to support upgrading in the identified areas of current and potential future strength?
Achievable goals set to measure progress? How does it support a process of policy learning and adaptation?
Conform to CP ex-ante conditionality? Which advice can be given to improve the strategy?

Important remarks about the new rules

Smart specialization is not new. It is based on 15 years of experience in supporting innovation strategies in the regions, and on frontline economic thinking by major international institutions such as the World Bank, the OECD and the IMF. What is new is that the Commission proposes to make such strategies a pre-condition for ERDF funding.
Only SMEs … Large companies only in relation to Research, Development and Innovation -Art.3 (ERDF Reg.): "The ERDF shall support productive investment, which contributes to creating and safeguarding sustainable jobs, through direct aid to investment in SMEs"
No investment in physical infrastructures in developed regions -Art. 3 (ERDF Reg.): "In more developed regions, the ERDF shall not support investments in infrastructure providing basic services to citizens in the areas of environment, transport, and ICT"
Synergies with Horizon 2020 -Art. 55.8 (CPR Reg.): "An operation may receive support from one or more CSF Funds and from other Union instruments, provided that the expenditure item included in a request for payment for reimbursement by one of the CSF Funds does not receive support from another Fund or Union instrument,…"
Internationalization -60.2 (b) (CPR Reg.): "The total amount allocated under the programme to operations located outside the programme area does not exceed 10% of the support from the ERDF…"
Interregional and transnational cooperation -Art. 87.2 (c) v (CPR Reg.): "An Operational Programme shall set out the contribution to the integrated approach for territorial development set out in the Partnership Contract (Agreement), including the arrangements for interregional and transnational actions with beneficiaries located in at least one other Member State"