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Local Economy
Merits, problems and 26(6–7) 544–561
! The Author(s) 2011

paradoxes of regional Reprints and permissions:

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innovation policies DOI: 10.1177/0269094211417161

lec.sagepub.com

Francesco Grillo
Vision and Value, Italy; The London School of Economics and Political Science, UK

Mikel Landabaso1
European Commission, Belgium

Abstract
Public investments in innovation and research assets have been recently perceived by policy
makers as an effective tool for the development of less developed regions. This has been parti-
cularly true in the case of the European cohesion policies and the structural funds expenditures.
However, the expectations have not always been matched by effective results. This article will
examine the problem in three main sections. In the first we will review the debate about whether
regional imbalances can be corrected by market forces and what is, eventually, the role that
regional innovation strategies can play within cohesion programmes. In the second we will discuss
the so called ‘regional innovation paradox’ and the problems of designing and implementing
strategies within less developed regions. In the third we will identify 10 criteria that programme
managers at EU, national and regional levels should consider as they try to solve those problems.

Keywords
cohesion policies, Europe, innovation, public investments in R&D, R&D, regional development,
regional innovation strategies, structural funds

Introduction of policy choices based on only a few inter-

Most economists, when confronted with the
challenge of designing regional economic
development policies, would acknowledge
the sheer difficulty of the task due to its com-
plexity and multifaceted character. Most
would focus on one particular aspect of the
economic development process, with the
result being an economic analysis and set
connected economic problems. Most of the
time we are aware of the limitations of our
efforts and we feel somehow frustrated by
our inability to understand the problem in
Corresponding author:
Francesco Grillo, Vision and Value, Via di Ponziano 15,
00152 Rome, Italy.
Email: francesco.grillo@visionandvalue.com
Grillo and Landabaso
its wholeness and provide a satisfactory
response which will offer a comprehensive
solution.
This article will examine this problem
in three main sections. In the first we will
identify the main elements of the debate
about whether regional imbalances require
a specific policy on interventions or whether
they tend to be corrected by market forces,
and what is, then, the role that regional inno-
vation policy can play within cohesion
programmes. In the second we will discuss
the problems of designing and implementing
regional innovation strategies. In the third
we will elaborate on some of the components
that programme managers at European
Union (EU), national and regional levels
should consider as they seek to solve these
problems.
Is there a market failure to
which regional development
policy respond? The role
of innovation strategies
The question which is preliminary to our
analysis is this: is calling for more labour
market flexibility, de-regulation, lower sala-
ries and tax rebates to attract foreign direct
investment, in regions with high levels of
unemployment and little or no influence
over macroeconomic policy tools, the best
we can do to create jobs and stimulate
economic growth? Or, are we in reality,
simply asking the unemployed to emigrate,
explaining, of course, that in time the market
will adjust and that development will even-
tually take place in those regions they have
left behind? This latter school of thought
argues that after some unavoidable adjust-
ments these regions will start catching
up faster, surpassing others, and eventually
being ranked, in line with their comparative
advantage (see, for example, World Bank’s
Reshaping Economic Geography, 2009).
Graphs will show curves nicely crossing
each other again in the right places. Some
545
development economists might have a hard
time accepting this act of economic faith.
They might be reminded of pioneer develop-
ment economists like Myrdal or Hirschman,
or even impatient ones like Keynes or
Krugman, who have argued pessimistically
that curves may run wild opening up ever
widening disparities among regions through
absolute disadvantage, and that time is a
concept of little help to those who cannot
afford to wait.
In Europe, we see that the limits to
workers’ mobility in a European Union
with an incomplete internal market, more
than 20 different languages and nearly 300
regions in 27 countries, is a very different
entity from the more homogeneous market,
institutional and cultural framework in the
US, where many of these orthodox economic
recipes come from.
In fact, it is interesting to see how the
perception of regional economic context and
its diversity, including economic, institu-
tional, historical and cultural features, have
largely influenced the recent debate on the
relevance of place for regional policy, between
those that think that regional policies should
be people centred as opposed to place based
(Gill, 2010) and those that think that these
policies need to be place based in order to be
people centred (Barca and McCann, 2010;
Garcilazo et al., 2010). At the centre of the
debate is of course the concept of agglomera-
tion and its role in speeding up development,
as well as the extent either to which it can be
influenced by public policy, or to which this is
desirable.
What is in question are not the benefits of
agglomeration processes themselves (econo-
mies of scale, concentration of the brains of
industry in globally connected high-tech
hubs, etc.) but its scale, pace and connected-
ness to its wider geography, including its
limits in terms of environmental (pollution),
economic (inflationary pressures), social
(security) and accessibility considerations,
not to mention ‘beyond GDP’ issues in
546
terms of human dimension and shared
community values.
In terms of policies, one could argue that
in the early stages of development (e.g. some
of the new EU members from south-eastern
Europe) public policies should accompany
the process of agglomeration while ensuring
that trickle down effects in its wider hinter-
lands do take place in order to maximize
growth country wide. In more advanced
stages, public policies should turn their
efforts to developing a balanced, multi-
polar growth structure and ensuring connec-
tivity, both amongst these poles and between
them and the global economy in order to
develop a harmonious development process
which does not leave any region behind and
exploits overall economic capacities to their
full, wherever they are to be found. Regional
development policy should not become a
social policy in the form of charitable fis-
cal transfers if it is to have a truly lasting
development impact. Regional policy is
about sharing growth efforts and helping
regions help themselves, not just about
redistribution.
In terms of agglomeration processes, no
one can deny the advantages of a more flex-
ible and therefore mobile labour market, in
particular in those advanced economies
which work with the safety nets of low
unemployment and generous social security
systems. In these economies people may be
able to choose to emigrate in search for
better job opportunities, enrich themselves
by exposure to multi-cultural experiences or
take chances with their present jobs by trying
more promising avenues. Moreover, the
economic adaptation to an ever changing
market demand, fuelled by an accelerated
process of ‘creative destruction’, will be
much facilitated by this flexibility and, in
the long run, will probably help limit and
minimize its social costs. Moreover, this
adaptation might be particularly useful in a
context of globalization and open war for
the talent of highly educated people.
Local Economy 26(6–7)
But in developing economies, the price
paid by most of those forced to emigrate in
terms of changing culture, leaving behind
family, loss of identity, isolation and plain
human distress is difficult to measure in eco-
nomic terms. As economists we also have to
consider the deserted underdeveloped
regions left behind and deprived of their
younger and more entrepreneurial people
or of those latent economic capacities left
unexploited. Here history and geography
matter, even if they are quite difficult to fit
as such in the neoclassical growth function.
Thus, one of the public policy dilemmas
for many governments comes down to
two main questions. On the one hand,
either they help to exploit underutilised eco-
nomic resources in backward regions by
proactively building capacities—intention-
ally creating competitive advantage—in
order to maximize overall national economic
potential to its full or they are likely to have
to face a sub-optimal and unbalanced geo-
graphical distribution of economic activity in
their territories, which misses out latent eco-
nomic opportunities. On the other hand,
either they help underdeveloped regions
and countries develop or they are doomed
to confront higher unwanted migration pres-
sures which can create all sorts of political
tensions if, as is the case today, integration
efforts do not keep pace. The dilemma is
made more complex since the European
Union cannot afford to lose members of its
working population, needed to sustain
increasingly expensive health and pension
bills of an ageing population.2
One might think that out of developmen-
tal considerations, a more geographically
balanced and connected distribution of eco-
nomic activity throughout a territory might
favour overall economic competitiveness
and, among other things, improve social
cohesion by helping people to work where
they choose to live. This way we might also
contribute to preserving communities and a
rich regional diversity that counts positively
Grillo and Landabaso
in an economy driven more and more by
innovation. Such an approach may eventu-
ally help unleash economic potential where it
is currently most under-utilized, including
reducing environmental problems and exter-
nal diseconomies in central regions and
urban centres (e.g. price of housing and
traffic congestion).
One simple and interesting argument
in favour of this consideration revolves
around the nature of the new knowledge-
based economy in the making, with intelli-
gence as the key raw material of economic
activity and regional competitiveness.
Fortunately, and in contrast with the type
of raw materials on which past industrial
revolutions depended on, intelligence is the
one economic resource that is geographically
evenly distributed. Therefore it might be safe
to assume that regional differences will
progressively rest in the future on the way
this intelligence is valorized or left idle. In
other words regional differences will
depend more and more on regions having
the infrastructures (schools, vocational train-
ing centres, universities and technology
centres and R&D laboratories), policies
and business environment to effectively
transform and exploit intelligence in the
form of innovation, and which are capable
of attracting more talent from elsewhere.
The so-called digital divide3 and similar
other new technology and education-related
divides we are increasingly hearing about are
the offsprings of this situation.
Another way of looking at this is to say
that we will all be better off if we help
develop the opportunities for people who
need it most where they are in order to
prevent unwanted social, economic and
political problems in our own (developed)
countries and regions. Simply put, the cake
can be made bigger; there will be more to
redistribute, leading to a win-win situation
for both richer and poorer regions. As
European regional policy has demonstrated,
those assist others stand on their (economic)
547
feet do get value for their money. In time,
their economies will benefit through
increased, more stable and diversified
demand for goods, know-how and a
market for higher value added products for
which they have consolidated their competi-
tive advantage (EC, 2010a).
So the key question becomes can we do
something (else) about underdevelopment in
less favoured regions or should we continue
to promote faster, more balanced and
environmentally friendly developmental
trajectories in already advanced regions
and countries? Fundamentally, is there a
real case to be made for developing public
policy interventions in the form of regional
policy? Many economic policies are based on
the assumption that public action in other
realms of economic life, away from macro-
economic policy management, health, educa-
tion and basic public infrastructures, might
not only be inefficient but even counterpro-
ductive, notably by crowding-out private
investment and other undesired macroeco-
nomic effects of budget deficits.4 In other
words doing nothing may be better than
doing something, in the form of industrial
or regional policy, since the invisible hand
of the market always produces better out-
comes than what an intelligent public
policy mind could do: possibly because eco-
nomic intelligence and the public mind could
sometimes be considered as a contradiction
in terms!
Thus, planners and politicians in particu-
lar have often been left with very few alter-
natives. They are told to pursue an orthodox
economic policy which is better left in the
hands of a small group of high level econo-
mists (do not touch it if you do not under-
stand it), often sitting in national ministries,
reputable international consultancies, or
even better, independent organizations such
as central banks (the least you touch it the
better) usually located in the capital cities
and leading financial centres of central
regions. Monetary and fiscal policies have
548
therefore concentrated most of the debate
and the role of the public sector in these
fields is widely acknowledged and well
established.
And quite rightly so because a reasonably
healthy macroeconomic framework, with
inflation under control and lower interest
rates in particular, is a necessary pre-
condition for any regional or industrial
policy to succeed, even if the later can, in
turn, contribute to achieving the former
objectives.
The real issue here is about the ‘else’ part:
what else should be done once the macroeco-
nomic picture is more or less right? Is there
anything else that can be done through
public intervention to promote economic
development? The issue is not to oppose
macroeconomic policies and mesoeconomic
policies (regional policy) as excluding alter-
natives. The problem arises when all public
economic policy is based exclusively on
the first type of policies and the second is
discarded on the grounds of orthodox
economic doctrine. By pursuing this route,
possible synergies are, at best, not maxi-
mized, and at worst, simply lost.
Moreover, our problem increases when
our political masters look for proven stan-
dard economic development recipes (non-
contested economically or politically) that
are easy and fast (within their political
cycle) to implement. An inward investment
policy, based on subsidies or tax rebates, to
attract foreign multinational companies
which can create a significant number of
clearly identifiable new jobs the day after
tomorrow and bring new technology with
them is a good example of what it is meant
by the latter. Unfortunately the increasing
scarcity of this type of foreign direct invest-
ment opportunities for Europe’s less
favoured regions is making policy makers
look for more complex policy options.
Finally, the really big problem starts
when economists simply proclaim that
there are no easy recipes and that proposed
Local Economy 26(6–7)
solutions are long, never easy and require
deep pockets. Politicians may get very
nervous if we tell them that trying to create
a new Silicon Valley is not only not possible,
but might well be a waste of time and
resources. All this usually tends to confirm
the politicians’ suspicion that the only really
serious economic policy options are the ones
that work at the macro level and talk about
interest/exchange rates, money printing or
taxes with a clear-cut advice on a x%
increase/decrease of such and such monetary
or fiscal variable. In this context, from the
point of view of regional policy, economics
can certainly seem like a dismal science.
The need is therefore for a policy specifi-
cally addressed to correct regional imbalances
that can legitimately call for taxpayers’
money to be spent on initiatives directed at
achieving goals such as the European cohe-
sion objectives. Such a policy does, however,
need to be clearly defined: as Romer (1994: 2)
puts it ‘the most important job for economic
policy is to create an institutional environ-
ment that supports technological change’.
In the next section we will first identify the
problems associated with traditional regio-
nal development policies. We will then dis-
cuss the merits of strategies of development
that are based on innovation and we will
finally discuss the problems that these strat-
egies create.
The paradox of regional
innovation strategies
We would still like to think that we can do
something more through having effective
regional policies. In a nutshell, the argument
goes as follows: in all regions, but in those of
more developed countries in particular, we
need a new regional development policy
driven mainly by the promotion of innova-
tion which is based on strong public-private
partnerships with inclusive planning and
implementation processes, including a
shared vision for the region: a regional
Grillo and Landabaso
development policy driven by innovation
and based on smart specialization strategies
(Barca, 2009; Foray et al., 2009).
In order to be able to argue for a new
regional innovation policy, we must first
identify how such a policy, with new objec-
tives, instruments and forms of implementa-
tion, differs from traditional industrial
policies. It might be helpful, therefore, to
summarize why traditional regional policies
often do not address adequately the develop-
mental needs of less favoured regions in
particular.
The old industrial and regional policies
have been subject to heavy criticism for
their lack of cost-effectiveness, having often
been based on several of the following (the
list is not exhaustive) (Landabaso and
Mouton, 2005):
. Selecting and positively discriminating in
favour of a few winners (businesses, sec-
tors or technologies) by means of public
grants from the national/regional public
authorities. These are awarded on the
basis of administrative decisions made
by officials and/or politicians without ade-
quate entrepreneurial or technological
know-how. There may be a lack of a
long-term strategic approach and insuffi-
cient consultation with other key eco-
nomic actors in the region.
. Excessive reliance on direct individual
subsidies rather than the establishment
of market-based financial instruments
and the provision of collective services to
groups of firms (e.g. technology centres
and clusters). Moreover, entrepreneur-
ship promotion has often been neglected
in favour of achieving more short-term
economic success in old established busi-
nesses. In this sense, big industry in tradi-
tional sectors has often received more
attention than homegrown SMEs, includ-
ing those in promising new sectors.
. Protecting domestic industry from inter-
national competition with artificial
549
barriers, often non-tariff barriers that
provided a breathing space that was
only occasionally used to lay the founda-
tions for sustained growth in the sector
concerned, by actively identifying and
reinforcing new factors for regional
competitiveness.
. Concentrating efforts on attracting direct
foreign investment from big multina-
tional companies, using tax policy in
competition with other regions, rather
than attracting talent and promoting
bottom-up endogenous growth in
SMEs. Almost all regional development
agencies in Europe have placed great
emphasis and money on attracting for-
eign investments, which have been
found to be highly volatile, sometimes
bringing more problems when they are
withdrawn than benefits when they
arrive. This is particularly the case if
they are branch plants with little or no
R&D and technological internal capacity
based on exploiting low labour costs and
there are no active accompanying mea-
sures to root the investments in the
region, something which requires more
than just offering low wages and taxes.
. Horizontal, automatic and non-discrimi-
natory public aid schemes intended to
reduce business costs temporarily without
substantially changing firms’ strategic
behaviour. In addition, they have in cer-
tain cases created business networks that
tend to become self-perpetuating, and
generate a market of specialized consul-
tancy which is all dependent on continu-
ing public aid.
. On the business side, the excessively
bureaucratic and complex nature of the
application procedures and the time
taken to evaluate applications and grant
aid have made firms regard aid more as
rebates on the cost of investments which
they would have made anyway, rather
than as real incentives to make high-risk
investments they would not have made
550
without aid. Thus, the principle of addi-
tionality of public aid has often not
been applied because of administrative
complexities.
. Sometimes, industrial policies have in fact
been just reconversion policies with an
exclusively redistributive accent, designed
more to compensate ex-post negatively
affected social groups with lobbying
powers in the short term than to promote
economic development of territories in
the long term.
More generally, these policies have been
criticized because of their short-term
nature, short-sightedness in terms of the
wider economic context and their sometimes
limited anti-cyclical impact. Thus, new regio-
nal development policies based on innova-
tion must be considered neither as a lesser
evil nor as a miracle cure but rather as
stable, inclusive and incremental policies,
taking into account interrelated historical,
economic, cultural and sociological aspects,
including business culture and existing public
institutions in a given region or country. In
some cases, these policies depend and are
built on territorial capital. Moreover, by
their very nature the effects of these policies
may take time to emerge and need deep pock-
ets to sustain them, thus making them hard to
sell politically.
New regional development policies based
on innovation are now much more about
empowerment: helping regions to help them-
selves. They are also about helping regions
reach their full potential whatever their level,
rather than establishing a standard goal for
all, or creating rankings within a single
narrow developmental path. These policies
are much more about levelling the playing
field at the start than equalizing the out-
comes at the end.
Regional innovation policies for less
developed regions are faced with a special
difficulty: the so-called regional innovation
paradox (Oughton et al., 2001). The regional
Local Economy 26(6–7)
innovation paradox refers to the apparent
contradiction between the comparatively
greater need for investment in innovation in
the less developed regions to enable them to
compete more effectively, globally, despite
their relatively smaller capacity compared
with more developed regions, and to absorb
public funds earmarked for the promotion of
innovation. That is to say that often, the
more a region needs innovation to maintain
and improve the competitive position of its
businesses in an increasingly globalized econ-
omy, the more difficult it is to invest there
effectively and to absorb public funds to pro-
mote innovation. One might expect that once
the need (the innovation gap) is acknowl-
edged/identified and the possibility exists,
through public means, to respond to it,
such regions would have a greater capacity
to absorb these resources, since they are
starting at a very low level, with everything
still to be done. However, experience shows
that these regions have serious difficulties in
absorbing the public money available for
innovation and, often, new available funds
are captured instead by already well-estab-
lished lobbies (e.g. science academies) which
may divert their use away from innovation
into basic, sometimes second-rate, R&D
efforts. The main reason for this apparent
paradox is not that public funds are not avail-
able for innovation in the less favoured
regions. The explanation lies instead in the
nature of the regional innovation system
and the institutional capacity in these
regions, including the availability of profes-
sional intermediaries (Grillo, 2010) such as
regional development/innovation agencies,
technology centres with private participation
or technology transfer organizations.
More broadly public administrations (not
only, but especially those in the less devel-
oped regions) suffer two problems when it
comes to managing innovation strategies.
The first is that they lack some of the skills.
An analysis of regional innovation strategies
in different countries (Grillo, 2010) shows a
Grillo and Landabaso
lack of the specific expertise normally
required in the innovation management pro-
cess. At the macro level this may be a lack of
knowledge of global markets for innovation
which is necessary to identify the niches
where a certain region can develop its advan-
tage. At the micro level, it may be a weak
capability to identify, along the value chain
of the industries we want to promote at regio-
nal level, the specific areas that need invest-
ment. The second is that public officials may
also lack the ability to manage risk in choos-
ing amongst the demands of different inno-
vation options (Porter, 1990).
More specifically, according to the Barca
report (2009) regional innovation strategies
display in the experience of EU cohesion
policies three specific problems:
. first, they have been used by some regions
and countries as a redistributive mecha-
nism with an even distribution amongst
different geographic areas, industries and
research domains whereas such a strategy
should be about making evidence-based
decisions when it comes to allocating
resources;
. second, these strategies can be captured by
actors that have higher bargaining power
because of an advantage in terms of know-
how and, therefore, they may fail to
encourage the emergence of new compet-
itors/ideas that may disrupt current com-
petitiveness equilibria;
. third, many regions may tend to imitate
other regional contexts and this may
again undermine the very purpose of
expenditures on innovation that are
meant to increase the distinctiveness of a
certain region as opposed to others.
One way of understanding this problem
might be the following: within new growth
theory, the main explanation for increasing
returns to production factors, which is key to
explain cumulative processes of economic
growth, is knowledge spillovers. The latter
551
have been progressively recognized as being
spatially bounded, not least because of the
tacit and sticky nature of certain types of
knowledge and the territorial nature of
much of the process of knowledge accumu-
lation and learning. This is so once the
circular and systemic model of innovation,
rather than the linear model, is used for
regional policy planning as a more realistic
guide to what goes on in reality in the busi-
ness world. The latter is particularly true in
the case of less developed regions, with rela-
tively lower rates of formal R&D investment
and personnel, and where innovation is more
incremental, often based on the adoption and
adaptation of generic technologies, and less
radical and science-based, as may be the case
in more advanced regions. The latter con-
centrate most of the excellence of R&TDI
(Research and Technology Development
Innovation) infrastructures and leading uni-
versities and they are naturally where high-
tech industries and knowledge intensive
services are overwhelmingly located, thus pro-
ducing the highest number of patents.
Within this framework, ‘intra-regional
knowledge spillovers are considered to arise
when actors involved in the innovation pro-
cess such as universities, the business sector
and the government sector tie close links lead-
ing to fertilizations and feedback relations’
(Greunz, 2004: 2). In short, knowledge spill-
overs are generated and further developed
within efficient regional innovation systems,
which facilitate links and cross-fertilization
among the key innovation players, not least
by connecting SMEs to a responsive R&TDI
knowledge base. Thus, public-private cooper-
ation, business networks, university-enter-
prise connections and clusters can be of
outmost importance in generating these
spillovers and therefore in increasing the
knowledge generation, diffusion and absorp-
tion capacities in a region. This is precisely
what is most lacking in less favoured regions
and therefore largely explains the regional
innovation paradox outlined earlier.
552
These considerations lead us to identify
some insights that can be useful in develop-
ing successful regional innovation strategies.
The success factors for a new
generation of regional
innovation strategies
From a policy perspective, what we said also
means that action-oriented, open, consensus-
based and participative strategic planning
processes led by regional authorities with a
sufficient degree of autonomy/power, and
acting within a ‘development coalition’
(Asheim, 2001) with the private sector
and the knowledge base, can become key
ingredients of the process of generating
knowledge spillovers. This includes an inno-
vation-friendly business environment under-
pinned by sound regional governance
structures, including the collective capacity
of key socio-economic players in the region
(e.g. companies, local or regional authorities,
research centres, business support agencies,
universities, etc.). The key is to form and
effectively use networks or other forms of
cooperation on the basis of shared interest,
trust and reciprocity in order to enable and
accelerate the process of regional learning
and knowledge-based development.
Thus, institutions and the way in which
regional key players learn to interact among
themselves matter (Bellini and Landabaso,
2007). This explains why some regions shoot
ahead through innovation while others are
left behind in the developmental race, even
in the presence of similar endowments of
those factors that have been traditionally con-
sidered by economists as key to economic
development efforts. Thus, the most impor-
tant long-term keys to economic development
are not the availability of strategic raw mate-
rials, proximity to central markets, transport/
logistics axis or providential foreign invest-
ment. No one really knows how the virtuous
circle of higher productivity and better qual-
ity jobs is sparked and maintained.
Local Economy 26(6–7)
However, increasing investment capacities
and open markets, better educated human
capital, enhanced attractiveness for foreign
direct investment, new technology-based
companies and an entrepreneurial business
culture cannot by themselves explain regio-
nal economic development. Neither can
Richard Florida’s famous 3Ts (technology,
talent and tolerance) (Florida, 2002) which
very elegantly and intelligently captures
important parts of the complexity of knowl-
edge-driven economic development. Indeed,
it is difficult to distinguish which of the
above are inputs or outputs of process of
economic development. Possibly a fourth
T, in the form of territorial capital, would
give us better insight.
By territorial capital we mean a form of
‘social capital’ (as in Putnam et al., 1993)
that is explicitly oriented to create sustain-
able, embedded innovation. This would be
focused social capital that requires the pres-
ence of companies, research centres, govern-
ments and civil society that work together
through partnership to the solution of
problems that involve leading edge change,
and hence, innovation (Grillo, 2010; but also
Wilson, 2004).
This explains why the word ‘region’ is
important when we talk about public poli-
cies to promote economic development:
regional policy is neither national policy at
smaller scale nor public policy applied to a
territory which has been artificially identified
as a region. Territorial capital cannot fit into
administratively determined boundaries.
In order to tackle the regional innovation
paradox: big demands, big money and
limited capacity in less favoured regions, it
is of utmost importance to prepare the
ground before any public money is invested.
Moreover, this is even more important with
the current economic crisis, which has led to
increases in the innovation gaps between
developed and less developed regions, or
‘to a reversal of the convergence between
EU countries in innovation performance,
Grillo and Landabaso
. . . with firms which are already more inno-
vative being less likely to cut back on inno-
vation expenditure’ (Kanerva and
Hollanders, 2009: 2–3).
Preparing the ground involves the
strengthening of planning capacities, the
identification of policy intermediaries for
the implementation of the policy (public
or semi-public innovation or development
agencies) and establishing appropriate coop-
eration with the private sector and the knowl-
edge base simultaneously. In other words,
the design of smart specialization strategies
should be a pre-condition for any public
investment in this field. ‘Regions should
develop integrated and tailor-made strate-
gies pursuing ‘‘smart specialisation’’ by
defining a few research and innovation prior-
ities based on the European objectives and on
their needs and potentials, identified in part-
nership with stakeholders, and concentrate
earmarked EU resources on these identified
priorities’ (WIRE, 2010: 1).
In this sense, place-based regional innova-
tion strategies and action plans integrating
multi-level governance (international-
national-regional) and horizontal (inter-
ministerial) cooperation are a necessary first
step. Grassroots ownership of the strategy is
of paramount importance. This means that
consultants and international expertise are
useful but they should not be in the driving
seat of the design of smart specialization
strategies, as the evaluation of the first wave
of regional innovation strategies launched by
the European Commission (EC) during the
1990s clearly shows (Charles et al., 2000).
In this next section, we examine what
these new policies should look like, based
on lessons learnt in the field from the expe-
riences of European regional policy over the
last 20 years. This can be summed up in 10
general conclusions:
(1) Innovation policy is not only about sup-
porting R&D policy, simply because
R&D on its own is not innovation.
553
Promoting innovation-led regional
development is not first and foremost
about increasing R&D excellence and
R&TD infrastructures (supply push)
but is also about new partnerships
where efficient innovation systems
(demand pull) mobilize the intellectual
and entrepreneurial capacities to create
an innovation friendly business environ-
ment, for SMEs in particular, in all
regions and covering all sectors (not
just high-tech). This is not to say that
R&D excellence is not important or
that regional innovation policies
should not concentrate scarce public
resources in a few promising fields
which fit each region’s competitive
assets, both in terms of sectors and
R&I (Research and Innovation) capac-
ities. On the contrary, the only R&D
efforts which are worth supporting
through regional policy should be
based on excellence, which by their
own nature are international in perspec-
tive. Regional is not parochial. Regional
innovation policy cannot and should
not be considered as supporting
second-rate R&D efforts of those not
able to reach the top rankings.
Instead, complementary efforts in
R&D and innovation are needed, with
a particular emphasis on the latter in less
favoured regions, as the OECD (2010:
16) has put it:
Policies need to distinguish clearly
between a few highly innovative and
high growth potential firms and the
great majority of SMEs, reflecting
the different ways in which they inno-
vate. The different needs can be char-
acterized by a distinction between
Science, Technology and Innovation
mode of innovation on the one hand,
focused on R&D and breakthrough
innovation and Doing, Using and
Interacting mode of innovation on
the other, focused on incremental
554
innovation in the ‘ordinary’ SME.
Both must be encouraged.
This actually coincides with how busi-
ness associations (UEAPME,5 2010: 2)
see the process of innovation in SMEs:
Innovation processes in crafts and
SMEs in Europe are characterized
more by on-going permanent pro-
cesses and less by linear technical-
driven inventions. In most SMEs
the innovation process is based on
available technologies, which are
used in a new and sophisticated
way; based on the experiences and
the knowledge of persons in and
around the company; supported by
highly qualified employees and the
entrepreneurial spirit of the business
owner; based on highly flexible, but
long lasting, customer and supplier
relations and supported by existing
networks and clusters.
Thus, R&D excellence and regional
innovation are complementary and
both are required: exploiting agglomer-
ation and economies of scale is impor-
tant (centripetal forces) within the
European Research Area to ensure a
competitive edge vis-à-vis our trade
competitors. However, the diffusion
and absorption mechanisms based on
regional innovation potential (centrifu-
gal forces) is also necessary in order to
disseminate R&D efforts throughout
the entire territory as well as the oppor-
tunities to link into R&I international
partnerships.
Thus, from a policy perspective it is
important to emphasize that the linear
model (from R&D to the market) is
much less relevant for policy design
than the systemic or interactive model:
not just patents but economic exploita-
tion of talent and new ideas—not just
manufacturing industry and big firms
with R&D but also innovation in
Local Economy 26(6–7)
services and open innovation. This is
because regional innovation capacities
are much more about personal commit-
ments, institutions, networks, coopera-
tion,6 including social capital, than it is
about narrowly focused science
and technology efforts. In short, reinfor-
cing through the policy triple helix –
knowledge triangle, clusters and univer-
sity-enterprise is key for regional
innovation.
Innovation for most regions in the
EU is more about knowledge absorp-
tion (education and training, advanced
business services) and diffusion (tech-
nology transfer, ICT, entrepreneurship)
than about knowledge generation (sci-
ence efforts). Moreover, since innova-
tion has a strong territorial dimension
(OECD, 2009) largely based on tacit
knowledge exchanged through a net-
worked economy there is no one size
fits all innovation policy: regional diver-
sity is an asset that calls for different
routes to growth through innovation.
In this sense, ‘regional diversity calls
for different policies, in order to maxi-
mize the potential of the variety of regio-
nal knowledge economies in Europe
(Wintjes and Hollanders, 2010: 46).
(2) Targeting of public sector investment
in research is necessary and so we
expect that certain industry or aca-
demic sectors and geographical areas
will be over-represented in the portfo-
lio of projects that are being financed.
The expectation of the new eco-
nomic geography is thus confirmed:
to achieve a competitive advantage
in the global market of innovation, a
minimum quantity of R&D assets is
necessary. The consequence is that pro-
gramme managers should avoid using
R&D as a redistributive tool so that
investments get distributed to all stake-
holders and areas internal to a region
in proportional amounts. Preferences
Grillo and Landabaso
should go to the sectors where compet-
itive advantages can be achieved more
quickly; at the same time, mechanisms
that ensure that the rest of the econ-
omy interacts with the cluster of inno-
vation that has been created should be
developed.
(3) In order to define these choices, as well
as to implement them, a mix of local
knowledge and international perspectives
is necessary. Obtaining information on
which are the niches where the region
can manage to be state-of-the-art, will
require the involvement of the potential
local innovators, even if they may be
small or not yet successful because the
system lacks other conditions for them
to flourish, not adequately represented
by mainstream entrepreneur associa-
tions and sometimes not even fully
aware of their potential. This will, how-
ever, have to be complemented with a
vision of the characteristics of markets,
competitors and possible partners in the
international arena. Examples of these
capabilities—dialogue between public
administration and innovators and,
more importantly, amongst innovators
themselves—are what the technology
parks have been providing for a
decade in a number of regions, such as
Castilla Y Leon and Catalunya in
Spain.
(4) Diversity amongst regional innovation
strategies and amongst different mech-
anisms of implementing them should
be encouraged. An excess of consis-
tency between European, national
and regional guidelines may have the
side effect (especially in regions with
less experience and lower institutional
capabilities) of creating imitation.
Differences in choices are an obvious
consequence of our previous comments
about specialization to maximize the
opportunities for innovation in many
regions. Differences in implementation
555
mechanisms, such as procurement pro-
cedures, are necessary to introduce
novel ways to help inexperienced
public administrations, especially in
less developed regions to find and
develop effective innovation strategies.
(5) Partnerships are key to success but
they must be carefully set up so that
they are focused on problem solving
and sharing information, and repre-
sent a real coalition of innovators.
Programme managers should leverage
on existing partnerships as much as
possible. The experiences of a number
of regions demonstrate that construct-
ing new partnerships for the purpose of
implementing a specific, time-limited
programme are very difficult to set up
and to sustain for the medium term
(see for instance Grillo 2010 and also
Technopolis, 2006—taking examples
from programmes involving structural
funds). Coalitions must also be con-
structed on the basis of available
skills and must have the specific objec-
tive of producing certain innovation in
business, society or academia. The for-
malistic application of the partnership
principle imposed by EU structural
funds may have had the effect of pro-
moting coalitions where all stake-
holders are represented and this may
not be necessarily positive in achieving
a good outcome. Innovation is about
change and, thus, may create a chal-
lenge for incumbents: trying to involve
everybody may increase the risk of the
implementation process being captured
or influenced by those who may
have interests that conflict with the
objective.
(6) Indicators for detecting early success
or failure of the innovation strategies
appear difficult to establish because
the outcomes of the R&D investments
may require years to be realized.
However, the likelihood of R&D
556
investments working out is effectively
signalled by the amount of private
money being attracted into or alongside
public investments (Grillo, 2010). This
indicator may well become the most
important to which accountability of
managers in R&D programmes could
be attached.
(7) Public administrations working alone
rarely have the skills to successfully
develop and implement innovation
strategies—they need to work with
appropriately experienced develop-
ment agencies or commercial partners
after setting the strategic priorities.
Because successful innovation strat-
egies depend on the understanding of
how a region is positioned commer-
cially, in a global context, public offi-
cials may not have the skills or
experience to do this alone. This is
work which requires an ability to
select the right sectors, the firms to be
targeted within these sectors, and an
appreciation of the global market
processes which drive the innovation.
Political choices and leadership are
required, but the full portfolio of com-
mercial skills does not often occur
within the competences, or profes-
sional development, of public officials.
There is also an issue of what we can
broadly call culture: to conceive and to
realize innovation strategies requires
an attitude to risk-taking which is for-
eign to the ethos of many public
administrators. Research (for instance,
Leydesdorff, 2000; Lundvall 1992) sug-
gests that intermediary organizations
(development agencies and similar) can
be an effective solution if they are held
accountable for their results (mea-
sured, for instance, on the volume of
private investment being mobilized).
A further development for the
future might be to involve specialized,
internationally experienced financial
Local Economy 26(6–7)
institutions (venture capitalists, mer-
chant banks) who may be willing to
select the projects to be financed, and
to share the risk and the funding to be
provided to the firms and universities to
be supported. Return on the invest-
ments should, then, be split between
the financial operator and the public
investor with the aim of compensating
the private investor for the higher risk
of investing into a less developed
region.
Within this framework the region/
policy maker should be responsible
for: the main choices in terms of indus-
try and academic sector to be targeted;
the definition of criteria (e.g. size of the
firms, share of start-ups) in the project
selection that may increase the linkage
of the investment to local economy and
research base; the identification and
selection of the banks and the establish-
ment of the compensation system; and
the creation of the public infrastructure
(e.g. telecommunication and transpor-
tation, red tape cutting) for research
projects to happen. The development
agency or the private operator should
then operate within this framework of
choices imposed through obligations
or incentives.
(8) Integration of various development
strategies appears to be essential. In
order to for this to happen, however,
integration needs three conditions: an
institutional setting, a focus on the
project level and demand from the
local economy.
Normally, the design of innovation
strategies is led either by an agency or
by a political body that is responsible for
the entire innovation policy. However,
it is at the project level where the collab-
oration between universities, firms and
government appears to be particularly
important. As already stated, this is
most likely to happen through the
Grillo and Landabaso
maintenance of partnerships already
engaged in initiatives that pre-existed
the launch of the publicly funded
programmes.
(9) Leadership also appears necessary for
innovation strategies to succeed (as the
literature—for instance Wilson, 2004,
but also Porter, 1990—on innova-
tion demonstrates, and not only in
Europe). The solution to a lack of an
already established champion of inno-
vation is either to search within indus-
try, government, research or civil
society for leaders that are not yet vis-
ible or to attract from elsewhere, even
from abroad, people from leading edge
organizations that may provide skills,
technologies or advice to the region.
(10) Systems to generate knowledge from
programmes should be developed and
this is likely to be the area where inter-
national organizations, like the EC can
provide added value (as per the defini-
tion of European added value that we
find in, for instance, Mairate, 2006).
Public investment in research, just like
private investment, faces an unavoid-
able uncertainty due to the nature of
the projects to be financed. By defini-
tion, there are many unknowns both
in terms of the implementation of the
innovation strategy and its governing
mechanisms upon which this work
has contributed useful findings. This
means that it is necessary that continu-
ity of research is ensured and that
policy makers and public administra-
tions develop systematic mechanisms
to learn from experience. This is an
opportunity especially for cohesion
policies and for the EC: the volume
of the investments, the number of proj-
ects, the difference in governing mech-
anisms is such that comparisons
amongst different member states and
regions may be the added value of a
policy governed by the EC as opposed
557
to one managed by single member
states. This, however, would mean
that: (a) the EC develops a proper
knowledge management system through
which projects become possible solu-
tions to well-identified research or
industry problems and their effective-
ness is measured so that knowledge pro-
duced gets maximized; that (b) projects
(or part of them) are, also, seen as exper-
iments and that therefore failures—and
the reasons for them—are recognized
and diversity is maximized. This will
also require (as the Barca report, 2009,
reminds us) a modification of the pro-
curement procedures and the mecha-
nisms through which programme
managers can engage with innovators.
In general, the key questions about regio-
nal innovation policies are no longer about
what to do or why, but chiefly about how
and who (EC, 2010b) should do it and
through which mechanisms. These policies
need experimentation and institutionalized
learning processes in the form of (ongoing)
evaluations, including appropriate input as
well as output indicators. Such indicators
should go well beyond R&D expenditure
and patents. Admittedly, the necessary
indicators for properly characterizing regio-
nal innovation potential or measure policy
impact are still lacking with much work
remaining to be done in this area.
In terms of experimentation, these poli-
cies should favour a culture of public
policy risk taking and allow for tests through
pilots and failure. This could be seen as a
sort of public venture capital which invests
in latent innovation capacities to make them
happen and support them in their early
stages. Innovation policies require risk
taking, trial and error and sound evaluation
as well as funding and long lead times, with
political consensus as a plus.
Since ‘innovation cannot be dictated
but . . . can be cultivated’ (Sallet et al.,
558
2009: 1), policy makers need businesses as
well as professional intermediaries such as
regional development agencies, technology
centres, technology parks and incubator
managers, technology transfer offices,
working as soldiers on the front line. In
this sense, it is important that the public
sector understands its role in providing
shared leadership and vision, rather than
control, and in catalysing economic devel-
opment by promoting new ideas and part-
nerships with the private sector. In other
words, ‘regional governments and their
development related agencies play a key
role in animating regional innovation sys-
tems to stimulate the learning processes’
(Runiewicz-Wardyn, 2009: 6).
It is important to underline that innova-
tion policies cannot be ‘for them but without
them’. This is also why innovation support
schemes must be stable, understandable and
readily accessible by SMEs. Administrative
simplification and short awarding times are
not simply an option in this field but an
absolute requirement for policy efficiency
and business recognition.
Policy makers should aim at matching
business demand, as the starting point,
with R&TD supply and not the other way
round. Innovation is a market phenomenon
which transforms creativity, ideas and
knowledge into development opportunities.
R&D policy takes the same path in the
opposite direction: innovation earns money
by transforming new or existing knowledge
into business; R&D spends money to gener-
ate new knowledge.
In terms of policy tools, innovation policy
requires new and better forms of support over
and above direct individual subsidies to
ensure stronger financial discipline on the
side of firms. Venture capital, business
angels, soft loans, guarantees, equity partici-
pation and other forms of financial engineer-
ing are better than grants and tax incentives
although in most cases there is need for com-
bination of these approaches (EC, 2010c).
Local Economy 26(6–7)
Furthermore, a broad menu adapted to the
characteristics of a particular innovation
investment which is generally characterized
by being risky, long term and based on intan-
gibles is also needed. These three charac-
teristics are not particularly attractive to
traditional financial institutions, which on
top of this often lack the expertise to properly
assess the innovation projects submitted to
them. This market failure, with serious devel-
opmental consequences, can justify timely
public action to support these types of
investments.
Additionally, public procurement, which
is green and innovation driven, is also an
important tool to consider, given the sheer
scale of the resources at stake (16 percent of
GDP in Europe) which ‘is potentially one of
the most powerful levers for effecting beha-
vioural change amongst private sector
suppliers’ (Morgan, 2010: 90). Finally, it is
also worth considering amongst new policy
tools building up territorial capital through
regional branding and image (e.g. the
Guggenheim effect), which is key to culti-
vating, retaining and attracting the talent
which fuels innovation.
Conclusions
While public policy can make a difference in
the pace and direction of regional develop-
ment, current policy practice needs a funda-
mental rethink in terms of objectives,
instruments and policy delivery systems.
In terms of objectives, regional policy has
to move on from a narrow interpretation of
cohesion in terms of redistribution and dis-
parities, into supporting latent growth capa-
bilities wherever these are to be found. In
this sense, it is essential for decision makers
to understand the role played by innovation
and technological development in regional
development trajectories.
Micro- and mesoeconomic competitive-
ness problems cannot be efficiently tackled
by overdoses of macroeconomic or sector-
Grillo and Landabaso
based policies but by integrated, place-based
regional policies which focus on the promo-
tion of innovation. Place-based regional pol-
icies should not mean parochial or inward
looking. Place-based means understanding
institutions, history and business culture,
which are precisely the key features that
define a region. Regions are neither artificial
administrative constructs nor independent
institutional frameworks but links in a gover-
nance chain where public policy can some-
times be more effectively developed because
of its closeness in understanding economic
needs and ability to mobilize capabilities.
The objectives of these policies, with their
feet solidly rooted in their territories should
be to have regional heads above the clouds or
nearby valleys and into the global economy,
where they should aspire to become competi-
tive players in their own terms.
In terms of instruments, public policy
effectiveness is about having the right policy
mix adapted to each regional context: there
are no set recipes, and good practice only
exists for those willing to learn and experi-
ment. The capacity of key regional players
to interact, share a vision and jointly
commit efforts and resources is an integral
part of any public policy trying to promote
regional development. Regions which are
able to develop the institutions and policies
which promote these interactions through
public-private partnerships and across the
governance ladder are likely to be successful
in developing a process of sustained and
sustainable growth, no matter what their cur-
rent development level, natural endowments
or inherited comparative advantage.
More specifically for regional innovation
strategies, success will require: the adoption
of a broader definition of what innovation
(meant as a unique feature of a region able
to give it competitive advantage) is; a con-
centration of resources in areas where the
potential is highest; making an effective
relationship between local knowledge and
the requirements of international markets;
559
encouraging diversity amongst regional strat-
egies; the encouragement and care afforded to
the leaders who are sponsoring the strategy
and the partnership of innovators who are
focused on delivering it; the development of
a system of performance indicators to give
early indications of success or failure; the
involvement of development agencies and
banks in the selection of investments to be
financed according to the priorities of the
strategy; the development of knowledge sys-
tems which will enable the continuing
improvement of strategies over time.
Public policy to promote regional devel-
opment cannot be left solely in the hands of
the national or regional ministries of the
economy. It requires horizontal and vertical
governance structures cutting across admin-
istrative boundaries and power structures.
Budgetary, audit and accounting consider-
ations should only be at the service of
strategic planning capabilities and not the
other way round: ideas and cooperation
first, public money after.
In terms of policy delivery systems, regio-
nal policy cannot continue to be treated as
simply a funding strand but must be seen as
a public investment framework with specific
requirements. It requires much stronger
conditionality and a healthy degree of com-
petition to access scarce public funds.
In conclusion, the best thing one could
probably say about public policy for regional
development is that it can make economic
development a non-zero-sum game where all
stand to gain.
Funding
This research received no specific grant
from any funding agency in the public, com-
mercial or not-for-profit sectors.
Notes
1. The responsibility for the accuracy of the
analysis and for the judgements expressed
lies with the authors alone; this document
560
does not constitute a policy position of the
European Commission.
2. BEPA (Liddle, 2006: 26) ‘By 2030 age-related
public expenditure on pensions, health and
long term care is forecast to rise from 18%
of GDP at present to over 20%’.
3. ‘Digital divide’ refers to the differences in
access, skills and connectivity to information
technology and the Internet among different
income groups (e.g. according to 2000 data,
in the US 80 percent of households with
an income of $75.000 or above have com-
puters, compared to 16 percent of households
earning from $10.000 to $15.000. 47 percent
of white households have computers, com-
pared to 23 percent of African-American and
26 percent of Hispanic households (Gore and
Lieberman, 2000: 69).
4. Interestingly enough some of the most radical
‘orthodox’ would not even agree to this list,
last items in particular, and still see it as quite
natural to support huge (very public) defence
expenditures which are mostly channelled
through very restrictive national markets.
5. Association of European crafts, trades and
SMEs at EU level with 12 million company
members accounting for 55 million jobs.
6. ‘In EU 27, 52 percent of enterprises reported
innovation activity between 2006 and 2008.
Among them 34 percent cooperated with
other enterprises, universities and public
R&D institutions’ (Eurostat, 2010: 1).
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