The Challenges of a Globalized Europe: Policy Implications for SMEs and Clusters Chiara Del Bo and Massimo Florio Presented by Massimo Florio OPEN DAYS 2008 Workshop 07A03 “Growth poles for territorial cohesion” Brussels, 7 October 2008

Outline SMEs and clusters in Europe: role and challenges Existing policy measures and critical assessment New approaches to cluster financial policies: Cluster Strategic Programmes

SMEs: economic impact

Economic impact: New Member States

SMEs: challenges EU enlargement and world-wide globalization have a wide impact on the European industrial structure and composition and will be long-lasting. This will deeply affect SMEs and clusters in several traditional industries, especially in the relatively labour-intensive industries (e.g. in manufacturing).

Clusters: a tentative definition

Clusters: some evidence

Empirical studies: cluster determinants

Empirical studies: possible identification methods Employment location quotient: ratio between a sector’s regional employment share over the national counterpart. Growth share matrix: employment size of a sector in the region, the regional employment growth rate in that sector and its location quotient. Statistical procedure: compare the relative firm and employment regional distribution in a sector, controlling for triggering events, local characteristics and regional size (Brenner 2006). Cluster mapping projects.

Example of cluster mapping: the European Cluster Observatory More than 2000 regional clusters were identified across the European regions, based on three main dimensions. The criteria used are:

Example of cluster mapping: automotive Automotive clusters classified by employment Leading European automotive clusters Source:European Cluster Observatory

Example of cluster mapping: furniture Furniture clusters classified by sizeFurniture clusters classified by specialization Source:European Cluster Observatory

Clusters and performance Support to cluster formation rests on the evidence that this form of industrial structure may be beneficial in terms of:  economic performance;  employment;  innovative output. Geographical concentration and inter-firm collaboration may enhance innovative activity and ultimately promote competitiveness of the area (Baptista 2001).

Clusters and performance Benefits for firms belonging to a cluster comprise:  Economies of scale;  Higher productivity due to lower transaction costs;  Cooperation and exchange of knowledge and human capital between members.

Cluster Policies According to the OECD: “Industrial policies with cluster programmes tend to focus either on the drivers of national and regional growth or focus on the needs of SMEs. The cluster approach provides a more transparent, inclusive and potentially less trade-distorting framework for efforts to strengthen strategic sectors than the prior policies of supporting large and often state-owned firms.”

Cluster Policies The main instruments used in the OECD area to support clusters fall under one or more of the following categories:

Cluster Policies When designing and implementing a policy initiative aimed at clusters, it is important to:

Cluster Policies: critical assessment Choosing beneficiaries of policy intervention:  Clusters should build on existing specialties and technical competencies within a region. Government support should go to clusters that promote incremental innovation and build on existing specialties.  Importance of cluster identification and mapping. Defining cluster boundaries:  Cluster boundaries should reflect economic links and relations, and the existence of knowledge spillovers, and not be limited to a geographical dimension or political and administrative boundaries.

Cluster Policies: critical assessment Aims and goals of cluster policies:  Encourage development and dissemination of knowledge among the firms in the cluster.  Increase firms’ awareness to the benefits of cooperation of results, information sharing and active networking.  Encourage and facilitate spin-offs from existing clusters. Instruments:  Performing cluster studies, setting up facilities and institutions for fostering dialogue, providing direct subsidies for cooperation and establishing networking schemes for private firms.

Cluster Financial Policies Most of the existing policy measures are aimed at promoting cluster formation and functioning, and concentrate on organizational and administrative aspects. Existing policy instruments rely on two broad sets of measures: 1. Directed towards labour and capital markets. Aimed at reducing labour costs and softening financing budget constraints for SMEs and clusters. 2. Focuses explicitly on innovation, recognizing its growth-enhancing role, and points to R&D and human capital costs. These measures, while useful in cases of market imperfections, may not be enough to deal with the competitive pressure faced by European SMEs and clusters in this new globalized scenario.

Example: District Bonds

Financial Instruments The main problems with existing cluster financial instruments can be summarized as follows:  The small scale of the operation (which implied high incidence of fixed costs);  The lack of national institutions’ public support;  The general crisis of securitization.

Cluster Strategic Programmes Systemic approach, aimed at clusters of SMEs, which stresses the importance of innovation and competitiveness. Based on a mix of financial and non financial instruments well suited to help SMEs and clusters to adapt to the changes to cost structures, upstream, downstream or within the production process. Main underlying principles:  competitiveness scenario analysis;  stake-holders involvement;  concentration and selectivity;  integrated innovation packages for regional industrial systems.

Cluster Strategic Programmes Three main actors:  The public sector;  A managing body representing the stakeholders;  A financial institution. Three steps: 1. identify industry clusters that need public funds’ assistance to achieve competitiveness targets due to globalisation and enlargement challenges. 2. ask stakeholders in the selected clusters to propose a feasibility study for a Cluster Strategic Programme. 3. approval or rejection of the Programme by national or regional authorities, and finally the commitment of public funds

CSP: main ingredients A managing body, representing the stakeholders and the beneficiaries. It could be a consortium, an individual large company, or a public sector body. This body will be in charge of implementing the Strategy. A financial investor, typically an investment bank, who declares to be ready to co-finance the CSP, against a share in its future returns. A set of targets to be achieved in terms of cost reductions, increase of revenues, and profitability through specific investments (e.g. investments in opening new distribution channels, in recurring to new financial mechanisms, in creating export organizations, in international joint-ventures), and the detailed supporting cost benefit analyses.