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Merits, problems and paradoxes of regional innovation policies

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

Local Economy 26(67) 544561 ! The Author(s) 2011 Reprints and permissions: sagepub.co.uk/journalsPermissions.nav DOI: 10.1177/0269094211417161 lec.sagepub.com

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 particularly 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

Most economists, when confronted with the challenge of designing regional economic development policies, would acknowledge the sheer diculty of the task due to its complexity and multifaceted character. Most would focus on one particular aspect of the economic development process, with the result being an economic analysis and set

of policy choices based on only a few interconnected economic problems. Most of the time we are aware of the limitations of our eorts 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 oer a comprehensive solution. This article will examine this problem in three main sections. In the rst we will identify the main elements of the debate about whether regional imbalances require a specic policy on interventions or whether they tend to be corrected by market forces, and what is, then, the role that regional innovation 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.

545 development economists might have a hard time accepting this act of economic faith. They might be reminded of pioneer development 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 aord to wait. In Europe, we see that the limits to workers mobility in a European Union with an incomplete internal market, more than 20 dierent languages and nearly 300 regions in 27 countries, is a very dierent 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, institutional, historical and cultural features, have largely inuenced 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 agglomeration and its role in speeding up development, as well as the extent either to which it can be inuenced by public policy, or to which this is desirable. What is in question are not the benets of agglomeration processes themselves (economies of scale, concentration of the brains of industry in globally connected high-tech hubs, etc.) but its scale, pace and connectedness to its wider geography, including its limits in terms of environmental (pollution), economic (inationary pressures), social (security) and accessibility considerations, not to mention beyond GDP issues in

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 exibility, de-regulation, lower salaries and tax rebates to attract foreign direct investment, in regions with high levels of unemployment and little or no inuence 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 eventually take place in those regions they have left behind? This latter school of thought argues that after some unavoidable adjustments these regions will start catching up faster, surpassing others, and eventually being ranked, in line with their comparative advantage (see, for example, World Banks Reshaping Economic Geography, 2009). Graphs will show curves nicely crossing each other again in the right places. Some

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 eects in its wider hinterlands do take place in order to maximize growth country wide. In more advanced stages, public policies should turn their eorts to developing a balanced, multipolar growth structure and ensuring connectivity, 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 scal transfers if it is to have a truly lasting development impact. Regional policy is about sharing growth eorts and helping regions help themselves, not just about redistribution. In terms of agglomeration processes, no one can deny the advantages of a more exible 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 exibility 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(67) 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 dicult to measure in economic 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 dicult to t 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 economic resources in backward regions by proactively building capacitiesintentionally creating competitive advantagein order to maximize overall national economic potential to its full or they are likely to have to face a sub-optimal and unbalanced geographical distribution of economic activity in their territories, which misses out latent economic opportunities. On the other hand, either they help underdeveloped regions and countries develop or they are doomed to confront higher unwanted migration pressures which can create all sorts of political tensions if, as is the case today, integration eorts do not keep pace. The dilemma is made more complex since the European Union cannot aord 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 developmental considerations, a more geographically balanced and connected distribution of economic 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 eventually help unleash economic potential where it is currently most under-utilized, including reducing environmental problems and external diseconomies in central regions and urban centres (e.g. price of housing and trac congestion). One simple and interesting argument in favour of this consideration revolves around the nature of the new knowledgebased economy in the making, with intelligence 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 dierences will progressively rest in the future on the way this intelligence is valorized or left idle. In other words regional dierences will depend more and more on regions having the infrastructures (schools, vocational training centres, universities and technology centres and R&D laboratories), policies and business environment to eectively 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 osprings of this situation. Another way of looking at this is to say that we will all be better o 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 benet through increased, more stable and diversied demand for goods, know-how and a market for higher value added products for which they have consolidated their competitive 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 macroeconomic policy management, health, education and basic public infrastructures, might not only be inecient but even counterproductive, notably by crowding-out private investment and other undesired macroeconomic eects of budget decits.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 outcomes than what an intelligent public policy mind could do: possibly because economic intelligence and the public mind could sometimes be considered as a contradiction in terms! Thus, planners and politicians in particular have often been left with very few alternatives. They are told to pursue an orthodox economic policy which is better left in the hands of a small group of high level economists (do not touch it if you do not understand 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 nancial centres of central regions. Monetary and scal policies have

548 therefore concentrated most of the debate and the role of the public sector in these elds is widely acknowledged and well established. And quite rightly so because a reasonably healthy macroeconomic framework, with ination under control and lower interest rates in particular, is a necessary precondition 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 macroeconomic 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 alternatives. The problem arises when all public economic policy is based exclusively on the rst 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 maximized, and at worst, simply lost. Moreover, our problem increases when our political masters look for proven standard economic development recipes (noncontested 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 signicant number of clearly identiable 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 investment opportunities for Europes 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(67) 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 conrm 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 scal 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 specically 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 cohesion objectives. Such a policy does, however, need to be clearly dened: as Romer (1994: 2) puts it the most important job for economic policy is to create an institutional environment that supports technological change. In the next section we will rst identify the problems associated with traditional regional development policies. We will then discuss the merits of strategies of development that are based on innovation and we will nally discuss the problems that these strategies create.

The paradox of regional innovation strategies

We would still like to think that we can do something more through having eective 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 innovation 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 rst identify how such a policy, with new objectives, instruments and forms of implementation, diers from traditional industrial policies. It might be helpful, therefore, to summarize why traditional regional policies often do not address adequately the developmental needs of less favoured regions in particular. The old industrial and regional policies have been subject to heavy criticism for their lack of cost-eectiveness, 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, sectors or technologies) by means of public grants from the national/regional public authorities. These are awarded on the basis of administrative decisions made by ocials and/or politicians without adequate entrepreneurial or technological know-how. There may be a lack of a long-term strategic approach and insucient consultation with other key economic actors in the region. . Excessive reliance on direct individual subsidies rather than the establishment of market-based nancial instruments and the provision of collective services to groups of rms (e.g. technology centres and clusters). Moreover, entrepreneurship promotion has often been neglected in favour of achieving more short-term economic success in old established businesses. In this sense, big industry in traditional sectors has often received more attention than homegrown SMEs, including those in promising new sectors. . Protecting domestic industry from international competition with articial

549 barriers, often non-tari barriers that provided a breathing space that was only occasionally used to lay the foundations for sustained growth in the sector concerned, by actively identifying and reinforcing new factors for regional competitiveness. . Concentrating eorts on attracting direct foreign investment from big multinational 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 foreign investments, which have been found to be highly volatile, sometimes bringing more problems when they are withdrawn than benets 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 measures to root the investments in the region, something which requires more than just oering low wages and taxes. . Horizontal, automatic and non-discriminatory public aid schemes intended to reduce business costs temporarily without substantially changing rms strategic behaviour. In addition, they have in certain cases created business networks that tend to become self-perpetuating, and generate a market of specialized consultancy which is all dependent on continuing 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 rms 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 additionality 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 aected 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 regional development policies based on innovation 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 eects of these policies may take time to emerge and need deep pockets 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 themselves. 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 eld at the start than equalizing the outcomes at the end. Regional innovation policies for less developed regions are faced with a special diculty: the so-called regional innovation paradox (Oughton et al., 2001). The regional

Local Economy 26(67) 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 eectively, 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 economy, the more dicult it is to invest there eectively and to absorb public funds to promote innovation. One might expect that once the need (the innovation gap) is acknowledged/identied 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 diculties in absorbing the public money available for innovation and, often, new available funds are captured instead by already well-established lobbies (e.g. science academies) which may divert their use away from innovation into basic, sometimes second-rate, R&D eorts. The main reason for this apparent paradox is not that public funds are not available 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 professional 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 developed regions) suer two problems when it comes to managing innovation strategies. The rst is that they lack some of the skills. An analysis of regional innovation strategies in dierent countries (Grillo, 2010) shows a

Grillo and Landabaso lack of the specic expertise normally required in the innovation management process. 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 advantage. At the micro level, it may be a weak capability to identify, along the value chain of the industries we want to promote at regional level, the specic areas that need investment. The second is that public ocials may also lack the ability to manage risk in choosing amongst the demands of dierent innovation options (Porter, 1990). More specically, according to the Barca report (2009) regional innovation strategies display in the experience of EU cohesion policies three specic problems: . rst, they have been used by some regions and countries as a redistributive mechanism with an even distribution amongst dierent 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 knowhow and, therefore, they may fail to encourage the emergence of new competitors/ideas that may disrupt current competitiveness 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 accumulation 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 business world. The latter is particularly true in the case of less developed regions, with relatively 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 concentrate most of the excellence of R&TDI (Research and Technology Development Innovation) infrastructures and leading universities and they are naturally where hightech industries and knowledge intensive services are overwhelmingly located, thus producing the highest number of patents. Within this framework, intra-regional knowledge spillovers are considered to arise when actors involved in the innovation process such as universities, the business sector and the government sector tie close links leading to fertilizations and feedback relations (Greunz, 2004: 2). In short, knowledge spillovers are generated and further developed within ecient 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 cooperation, business networks, university-enterprise connections and clusters can be of outmost importance in generating these spillovers and therefore in increasing the knowledge generation, diusion and absorption 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 developing successful regional innovation strategies.

Local Economy 26(67) 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 regional economic development. Neither can Richard Floridas famous 3Ts (technology, talent and tolerance) (Florida, 2002) which very elegantly and intelligently captures important parts of the complexity of knowledge-driven economic development. Indeed, it is dicult 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 sustainable, embedded innovation. This would be focused social capital that requires the presence of companies, research centres, governments 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 policies to promote economic development: regional policy is neither national policy at smaller scale nor public policy applied to a territory which has been articially identied as a region. Territorial capital cannot t 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,

The success factors for a new generation of regional innovation strategies

From a policy perspective, what we said also means that action-oriented, open, consensusbased and participative strategic planning processes led by regional authorities with a sucient 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 innovation-friendly business environment underpinned 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 eectively 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 considered by economists as key to economic development eorts. Thus, the most important long-term keys to economic development are not the availability of strategic raw materials, proximity to central markets, transport/ logistics axis or providential foreign investment. No one really knows how the virtuous circle of higher productivity and better quality jobs is sparked and maintained.

Grillo and Landabaso . . . with rms which are already more innovative being less likely to cut back on innovation expenditure (Kanerva and Hollanders, 2009: 23). Preparing the ground involves the strengthening of planning capacities, the identication of policy intermediaries for the implementation of the policy (public or semi-public innovation or development agencies) and establishing appropriate cooperation with the private sector and the knowledge base simultaneously. In other words, the design of smart specialization strategies should be a pre-condition for any public investment in this eld. Regions should develop integrated and tailor-made strategies pursuing smart specialisation by dening a few research and innovation priorities based on the European objectives and on their needs and potentials, identied in partnership with stakeholders, and concentrate earmarked EU resources on these identied priorities (WIRE, 2010: 1). In this sense, place-based regional innovation strategies and action plans integrating multi-level governance (internationalnational-regional) and horizontal (interministerial) cooperation are a necessary rst 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 rst 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 eld from the experiences 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 supporting R&D policy, simply because R&D on its own is not innovation.

553 Promoting innovation-led regional development is not rst and foremost about increasing R&D excellence and R&TD infrastructures (supply push) but is also about new partnerships where ecient innovation systems (demand pull) mobilize the intellectual and entrepreneurial capacities to create an innovation friendly business environment, 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 elds which t each regions competitive assets, both in terms of sectors and R&I (Research and Innovation) capacities. On the contrary, the only R&D eorts which are worth supporting through regional policy should be based on excellence, which by their own nature are international in perspective. Regional is not parochial. Regional innovation policy cannot and should not be considered as supporting second-rate R&D eorts of those not able to reach the top rankings. Instead, complementary eorts 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 rms and the great majority of SMEs, reecting the dierent ways in which they innovate. The dierent needs can be characterized 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

innovation in the ordinary SME. Both must be encouraged.

Local Economy 26(67) services and open innovation. This is because regional innovation capacities are much more about personal commitments, institutions, networks, cooperation,6 including social capital, than it is about narrowly focused science and technology eorts. In short, reinforcing through the policy triple helix knowledge triangle, clusters and university-enterprise is key for regional innovation. Innovation for most regions in the EU is more about knowledge absorption (education and training, advanced business services) and diusion (technology transfer, ICT, entrepreneurship) than about knowledge generation (science eorts). Moreover, since innovation has a strong territorial dimension (OECD, 2009) largely based on tacit knowledge exchanged through a networked economy there is no one size ts all innovation policy: regional diversity is an asset that calls for dierent routes to growth through innovation. In this sense, regional diversity calls for dierent policies, in order to maximize the potential of the variety of regional 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 academic sectors and geographical areas will be over-represented in the portfolio of projects that are being nanced. The expectation of the new economic geography is thus conrmed: to achieve a competitive advantage in the global market of innovation, a minimum quantity of R&D assets is necessary. The consequence is that programme managers should avoid using R&D as a redistributive tool so that investments get distributed to all stakeholders and areas internal to a region in proportional amounts. Preferences

This actually coincides with how business 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 processes and less by linear technicaldriven 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 qualied employees and the entrepreneurial spirit of the business owner; based on highly exible, 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 agglomeration and economies of scale is important (centripetal forces) within the European Research Area to ensure a ` competitive edge vis-a-vis our trade competitors. However, the diusion and absorption mechanisms based on regional innovation potential (centrifugal forces) is also necessary in order to disseminate R&D eorts throughout the entire territory as well as the opportunities 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 exploitation of talent and new ideasnot just manufacturing industry and big rms with R&D but also innovation in

Grillo and Landabaso should go to the sectors where competitive advantages can be achieved more quickly; at the same time, mechanisms that ensure that the rest of the economy interacts with the cluster of innovation that has been created should be developed. (3) In order to dene 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 ourish, not adequately represented by mainstream entrepreneur associations and sometimes not even fully aware of their potential. This will, however, have to be complemented with a vision of the characteristics of markets, competitors and possible partners in the international arena. Examples of these capabilitiesdialogue between public administration and innovators and, more importantly, amongst innovators themselvesare 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 dierent mechanisms of implementing them should be encouraged. An excess of consistency between European, national and regional guidelines may have the side eect (especially in regions with less experience and lower institutional capabilities) of creating imitation. Dierences in choices are an obvious consequence of our previous comments about specialization to maximize the opportunities for innovation in many regions. Dierences in implementation

555 mechanisms, such as procurement procedures, are necessary to introduce novel ways to help inexperienced public administrations, especially in less developed regions to nd and develop eective 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 represent 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 constructing new partnerships for the purpose of implementing a specic, time-limited programme are very dicult to set up and to sustain for the medium term (see for instance Grillo 2010 and also Technopolis, 2006taking examples from programmes involving structural funds). Coalitions must also be constructed on the basis of available skills and must have the specic objective of producing certain innovation in business, society or academia. The formalistic application of the partnership principle imposed by EU structural funds may have had the eect of promoting coalitions where all stakeholders are represented and this may not be necessarily positive in achieving a good outcome. Innovation is about change and, thus, may create a challenge for incumbents: trying to involve everybody may increase the risk of the implementation process being captured or inuenced by those who may have interests that conict with the objective. (6) Indicators for detecting early success or failure of the innovation strategies appear dicult 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 eectively 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 strategiesthey need to work with appropriately experienced development agencies or commercial partners after setting the strategic priorities. Because successful innovation strategies depend on the understanding of how a region is positioned commercially, in a global context, public ocials may not have the skills or experience to do this alone. This is work which requires an ability to select the right sectors, the rms 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 commercial skills does not often occur within the competences, or professional development, of public ocials. 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 foreign to the ethos of many public administrators. Research (for instance, Leydesdor, 2000; Lundvall 1992) suggests that intermediary organizations (development agencies and similar) can be an eective solution if they are held accountable for their results (measured, for instance, on the volume of private investment being mobilized). A further development for the future might be to involve specialized, internationally experienced nancial

Local Economy 26(67) institutions (venture capitalists, merchant banks) who may be willing to select the projects to be nanced, and to share the risk and the funding to be provided to the rms and universities to be supported. Return on the investments should, then, be split between the nancial 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 industry and academic sector to be targeted; the denition of criteria (e.g. size of the rms, share of start-ups) in the project selection that may increase the linkage of the investment to local economy and research base; the identication and selection of the banks and the establishment of the compensation system; and the creation of the public infrastructure (e.g. telecommunication and transportation, 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 collaboration between universities, rms 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 literaturefor instance Wilson, 2004, but also Porter, 1990on innovation demonstrates, and not only in Europe). The solution to a lack of an already established champion of innovation is either to search within industry, government, research or civil society for leaders that are not yet visible 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 international organizations, like the EC can provide added value (as per the denition of European added value that we nd in, for instance, Mairate, 2006). Public investment in research, just like private investment, faces an unavoidable uncertainty due to the nature of the projects to be nanced. By denition, 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 ndings. This means that it is necessary that continuity of research is ensured and that policy makers and public administrations 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 projects, the dierence in governing mechanisms is such that comparisons amongst dierent 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 solutions to well-identied research or industry problems and their eectiveness is measured so that knowledge produced gets maximized; that (b) projects (or part of them) are, also, seen as experiments and that therefore failuresand the reasons for themare recognized and diversity is maximized. This will also require (as the Barca report, 2009, reminds us) a modication of the procurement procedures and the mechanisms through which programme managers can engage with innovators. In general, the key questions about regional innovation policies are no longer about what to do or why, but chiey 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 regional innovation potential or measure policy impact are still lacking with much work remaining to be done in this area. In terms of experimentation, these policies 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 oces, 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 development by promoting new ideas and partnerships with the private sector. In other words, regional governments and their development related agencies play a key role in animating regional innovation systems to stimulate the learning processes (Runiewicz-Wardyn, 2009: 6). It is important to underline that innovation 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 simplication and short awarding times are not simply an option in this eld but an absolute requirement for policy eciency 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 generate 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 nancial discipline on the side of rms. Venture capital, business angels, soft loans, guarantees, equity participation and other forms of nancial engineering are better than grants and tax incentives although in most cases there is need for combination of these approaches (EC, 2010c).

Local Economy 26(67) 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 intangibles is also needed. These three characteristics are not particularly attractive to traditional nancial institutions, which on top of this often lack the expertise to properly assess the innovation projects submitted to them. This market failure, with serious developmental 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 eecting behavioural 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 eect), which is key to cultivating, retaining and attracting the talent which fuels innovation.

While public policy can make a dierence in the pace and direction of regional development, current policy practice needs a fundamental 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 disparities, into supporting latent growth capabilities 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 competitiveness problems cannot be eciently tackled by overdoses of macroeconomic or sector-

Grillo and Landabaso based policies but by integrated, place-based regional policies which focus on the promotion of innovation. Place-based regional policies should not mean parochial or inward looking. Place-based means understanding institutions, history and business culture, which are precisely the key features that dene a region. Regions are neither articial administrative constructs nor independent institutional frameworks but links in a governance chain where public policy can sometimes be more eectively 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 competitive players in their own terms. In terms of instruments, public policy eectiveness 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 experiment. The capacity of key regional players to interact, share a vision and jointly commit eorts 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 current development level, natural endowments or inherited comparative advantage. More specically for regional innovation strategies, success will require: the adoption of a broader denition of what innovation (meant as a unique feature of a region able to give it competitive advantage) is; a concentration of resources in areas where the potential is highest; making an eective relationship between local knowledge and the requirements of international markets;

559 encouraging diversity amongst regional strategies; the encouragement and care aorded 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 nanced according to the priorities of the strategy; the development of knowledge systems which will enable the continuing improvement of strategies over time. Public policy to promote regional development 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 administrative boundaries and power structures. Budgetary, audit and accounting considerations should only be at the service of strategic planning capabilities and not the other way round: ideas and cooperation rst, public money after. In terms of policy delivery systems, regional policy cannot continue to be treated as simply a funding strand but must be seen as a public investment framework with specic requirements. It requires much stronger conditionality and a healthy degree of competition 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.

This research received no specic grant from any funding agency in the public, commercial or not-for-prot sectors. Notes
1. The responsibility for the accuracy of the analysis and for the judgements expressed lies with the authors alone; this document

does not constitute a policy position of the European Commission. 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%. 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 computers, compared to 16 percent of households earning from $10.000 to $15.000. 47 percent of white households have computers, compared to 23 percent of African-American and 26 percent of Hispanic households (Gore and Lieberman, 2000: 69). 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. Association of European crafts, trades and SMEs at EU level with 12 million company members accounting for 55 million jobs. 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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