1 Smart Specialisation as Regional Policy - How to Make it Work? Philip McCann Special Adviser to the European Commissioner for Regional Policy, Johannes Hahn University of Groningen, The Netherlands

2 Smart Specialisation: Concept ERA European Research Area and Innovation Union Flagship Programme Knowledge For Growth Expert Group – nine policy briefs Smart specialisation concept – Dominique Foray, Bart van Ark – subsequently developed by Paul David, Bronwyn Hall Transatlantic productivity gap since 1995

3 Smart Specialisation: Concept Emergence of the gap at precisely the time when we would expect the opposite Various reasons for the gap – labour markets, human capital, market segmentation, managerial practices etc 1990s - the R&D gap in ICT-producing sectors 2000s - adoption and adaptation of new technologies by IT-using sectors Market barriers and fragmentation limit opportunities for knowledge flows

4 Smart Specialisation: Concept Context matters for technological evolution – knowledge ecology – in terms of pathways for innovation Depends on existing institutional structures and innovation systems Actors and agents are entrepreneurs, universities, research institutes, multinational firms etc Governance (MLG) and policy innovation Self-discovery (Hausman and Rodrik 2004) and self-awareness are critical

5 Smart Specialisation: Concept Smart specialisation elements: Smart specialisation emphasises the issues of potential within a domain Elements - Entrepreneurial search process - Domain - Relevant size - Connectedness

6 Smart Specialisation: Concept The entrepreneurial search process leads to the identification of the distribution of potential opportunities (for GPT-ICT technological improvements) Relevant size relates to the potential magnitude of the innovation outcomes. Connectedness determines the potential for learning about the opportunities and the magnitudes.

7 Smart Specialisation: Concept Smart specialisation aims to foster innovation via entrepreneurship, technoligical adaptation and governance innovation Smart specialisation – strategic technological diversification on areas of relative strength and potential Smart specialisation is about increasing diversification – promoting new linkages, synergies, spillovers

8 Smart Specialisation: Regional Context Shift from a sectoral discourse to a regional discourse Measuring Smart Specialisation: The Concept and the Need for Indicators, David, P., Foray, D., and Hall, B., 2009 Philip McCann and Raquel Ortega-Argilés: Smart Specialisation, Regional Growth and Applications to EU Cohesion Policy ns_for_economic_change/index_en.cfm#4

9 Smart Specialisation: Regional Context Need to move from a national, sectoral or technological innovations systems logic to a regional innovations system logic Translating smart specialisation into a operational tool at the regional or national level uses three economic geography concepts –Embeddedness –Relatedness –Connectivity

10 Smart Specialisation: Regional Context Embeddedness: can be captured by regional CGE models, regional Input-Output models, location quotients, case studies, longevity, social capital etc. Relatedness (Related Variety): It is not about promoting specialisation - but specialised technological diversification Embeddedness + Relatedness = Relevant Size Domain

11 Smart Specialisation: Regional Context Connectedness translates to connectivity The sectoral approach interprets connectedness in terms of networking and access to learning – whereas economic geography sees connectivity in terms of access to markets – with the danger of centripetal forces and the Krugman shadow effect on non-core regions Connectivity: inter-regional knowledge flows and intra-regional knowledge flows

12 Smart Specialisation: Regional Context Economic Geography implies core regions offer a greater potential rewards to entrepreneurial search processes in terms of: –Distribution –Magnitude –Capacity for learning Lagging regions exhibit combinations of problematic features.

13 Smart Specialisation: Regional Context On face value a sectoral or space-neutral approach to smart specialisation implies funding in dominant locations OECD (2011) Regions and Innovation Policy approach on the links between local institutions, capabilities and economic geography In reality smart specialisation is particularly suited to non-core and weaker regions which are already relatively specialised

14 Smart Specialisation: Policy Smart specialisation is really about a policy process – how we prioritise Why is this being done? On what basis – current and future? How are we to monitor and evaluate? How are we to learn? How are we to adjust? How are we to ensure engagement and commitment?

15 Smart Specialisation: Policy Transfer the onus of responsibility to local stakeholders and policy-designers to identify bottlenecks, market failures, missing links Responsibility for monitoring the policy Results/outcomes and results/outcome indicators This is not because the outcomes are known in advance but to drive the policy process correctly (Rodrik 2004) Smart specialisation is explicitly a results and outcome oriented agenda - not an input or outputs oriented agenda

16 Smart Specialisation: Policy Smart specialisation is not about promoting specialisation – unless it is clear that this offers the greatest rewards – via first-moved advantages in emerging technologies and specialist niches It is not about championing sectoral policies It is about finding the new and emerging technologies, linkages which offer the greatest medium and long-term local entrepreneurial opportunities May or may not have a cluster logic to it

17 Smart Specialisation: Policy A smart specialisation approach to regional policy should be about promoting the generation of local ideas, and maximising both intra- and inter-regional knowledge spillovers in the relevant scale domains (embeddedness + relatedness) Embeddedness + relatedness: focuses on the choice of innovation thematic priorities, concentration, targeting – based on a regional- structural logic

18 Smart Specialisation: Policy Types of interventions Innovation vouchers Dissemination of GPT-ICTs may well be a core priority but not necessarily Supply chain system upgrading Skills-matching and redesign of local labour- training systems Institutional reform - promotion of local university-industry linkages Network or cluster development

19 Smart Specialisation: Policy How to promote smart specialisation while avoiding rent-seeking? Rent-seeking can be sectoral or scattered and local Incentive to limit openness and to restrict variation and specialised diversification Need to avoid central government capture or sectoral capture by strong institutions Multi-level governance Governance innovation

20 Smart Specialisation: Policy Picking winners? Knowledge for Growth expert group argue that modern industrial policy – nascent or fledgling industries - may be necessary at the regional level NRC spatially distributed (space neutral place based) funding scheme Fledgling industry argument is on a powerful footing

21 Smart Specialisation: Conclusions Policy process is central Smart specialisation emphasises strategic and specialised diversification It is an excellent tool for policy prioritisation – powerful lens to ensure thematic concentration Place-based regional approach or a national- sectoral-regional approach to policy Self-discovery (Hausman and Rodrik 2004) and self-awareness are critical

22 Smart Specialisation: Conclusions Highly influential in the smart growth component of Europe 2020 and in the EU Flagship Programme Innovation Union Consistent with the Barca report Implementation as a conditionality in EU Cohesion Policy reforms S 3 platform OECD Smart specialisation initiative