Theoretical Underpinnings for Smart Specialisation Strategies

1. Theoretical Underpinnings for Smart Specialisation Strategies Mario Cervantes Senior Economist Country Studies and Outlook Division DSTI, OECD Outreach Workshop on Smart Specialisation Strategies, 3-5 April 2013, Gwangju, Korea

2. Outline • The Smart Specialisation Concept • Genesis and definitions • Underpinning elements • Conclusions

3. The Smart Specialisation Concept http://ec.europa.eu/research/era/publication_en.cfm • ‘Knowledge for Growth’ expert group (DG RTD) launched concept in the framework of ERA; • To address problem of fragmentation/imitation/duplication of public R&D investments; • Stresses role for all regions in the knowledge economy, but especially for catching up regions to identify their comparative advantages in specific R &I domains/clusters of activities (not sectors per se); Foray, D.; P. David and B. Hall (2009) “Smart Specialisation – The Concept” Knowledge Economists Policy Brief No 9, June 2009

4. Smart specialisation aims to help policy makers determine • In whichdomain or activitywould a regionbenefitfromgreaterspecialisation in R&D and innovation • Regionscannot do everything in STI sotheyneed to focus oncertain domains • Theyneed to focus by developing distinctive and original areas of specialisation (not by imitatingeachother) • These are the domainswhereinnovativeprojectswillcomplement the region’sother productive assets

5. Standard definition • «  It is not a planning doctrine thatwouldrequire a region to specialize in a particular set of industries » • « It is an approach to policythatconsiderswhetherthoseactivitiesalreadystrong or showing promise for a regioncanbenefitfrom (more) R&D and innovation » - D. Foray

6. Growing pains • More of a policy approach that can be characterised than a general theory. • Mainly about prioritising R&D and innovation investments through bottom-up process of “entrepreneurial discovery”. • Links to other areas: education, skills infrastructure, etc. • Mainly a regional policy approach but links to national policy are necessary. • Many core regions are already doing this, perhaps a strategy for lagging or less buoyant regions?

7. Genesis of smart specialisation • The concept originally emerged from the sectoral growth literature (McCain and Ortega-Argiles, 2011) • In particular the role of differences in R&D intensity in explaining productivity growth differentials between US and the EU (Foray and Ark) • Initially focused on R&D, the approach has gradually emphasized the adoption and use of general purpose technologies (GPTs). • Intends to help EU regions prioritise public investments in R&D, innovation and ICTs and aid in the design of better policy interventions

8. Key elements of smart specialisation and their theorectical underpinnings • Key elements of smart specialisation • Entry and growth • Innovation • Specialisation and diversification • General purpose technologies • Prioritization • Entrepreneurial discovery • Regions • Openness • Universities and Centres of Excellence • New Industrial Policy • Evaluation

9. Key element: growth and entry • In smart specialisation, firm entry’ isdesirable to generateagglomerationexternalities (clusters) and a diversity of innovators (large and small) • In this scenario growth is endogenous as externalities and spillover effects lead to growth • Implicit is the incentives for entrepreneurship and innovation (R&D, education).

10. Key element: Innovation • “Innovation” in the Smart Specialisation framework is viewed as a force of structural change. • In line with the Schumpeterian concept of innovation (large-scale (radical) or small (incremental) changes that have a significant impact on the structural changes in individual industries and market segments. • New production methods are not necessarily based on basic R&D, they can also result from the application of existing technologies (e.g ICTs) • Embraces open innovation as source of value creation • Emphasis the direction of innovation not just the rate of innovation

11. Key elements: Specialisation • Specialisation allows: • a more efficient use of scarce resources, raising output, • the exploitation of economies of scale and, through trade and competition, to lower prices for consumers. • In the SS context, specialisation is around activities (e.g. Business services) not sectors per se! • Specialisation leads to an crease in the variety of economic activities = related variety!– Innovation around technological pathways

12. Foray’s examples of specialisation and diversification Movingfromnails to eye-glasses Inventingmedical technologies Discovering the potential of nanotech. in pulp & paper Source: Dominque Foray, Collègedu Management de la Technologie – CDM Chaire en Economie et Management de l'Innovation – CEMI

13. Key element : Specialisation (3) • Conditions that affect factor endowments for specialisation include: • Institutions • Framework policies • Technological attributes • Demand factors • Economies of scale and product life cycles • Market dynamics • Industrial policies In almost all government can play a role!

14. Key element: Prioritization • For governments, priority setting presents risks, hence traditional focus on minimizing risks (spreading investments across the board) but leading to fragmentation • SS emphasizes the bottom-up process of entrepreneurial discovery to solve the problem of identification, selection & prioritization • Fine-tuning priority setting through better diagnostic tools and indicators can help policy makers gather information on market and technology developments (inside and outside borders.)

15. Focusing knowledge investments: which ones? SUM OF BERD funded by government and R&D tax incentives, as % of GDP(provisional data)

16. Key elements: Entrepreneurial discovery • Under smart specialisation, the outcome of entrepreneurial discoveries is not a simple innovation. It is about structural change. • But entrepreneurial discovery is more than the sole Schumpeterian entrepreneur or the firm and concerns : • Intrapreneursinside firms • Universities and centre of excellence (revealing ideas and commercialisation activities) • Public sector innovation (e.g. via public procurement) This has important policy implications: incentives for entrepreneurs to disclose inventions/ideas

17. Key element: General Purpose Technologies • The contribution of general purpose technologies (GPTs). • Allows incremental innovations • Fosters structural change as technology diffuses • May requires combining tech and non-tech innovations (organisation, marketing, supply-chain). • Not only about implementing available GPTs, but also about exploring recent advances in areas of nanotechnology and biotechnology and at their interface(convergence)!

18. Key element: Regions • Regions matters • Many knowledge spillovers are localised • Regions as a relevant level of innovation policies – prioritisation is more intensive. • Regions vary not only in terms of their technological and industrial competences, but also in terms of their potential evolutionary trajectories • Smart specialisation at regional level can promote greater diversity at system’s level • Implementation requires effective local governance and institutions

19. Innovation hotspots Innovation hotspots in ICT, biotechnologies and nanotechnologies, 2006-08 Source: OECD STI Scoreboard 2011 based on OECD, REGPAT Database.

20. Key element: universities and centres of excellence • Prioritising process • Co-ordination and stakeholder engagement • SS Diagnostic – The idea discovery process; getting researcher and student to disclose inventions! • Showing the way : by doing open science and open innovation • Getting the word out: Marketing/communication of university success, attracting students and firms.

21. Key element: Openness • Under smart specialisation, buildingextra-regional connections is key • Importance of cross-border flows of knowledge and spill-overs • Involvement of multinationals and local SMEs (think global, act local phenomenon) • Internationalisation of clusters, innovation networks

22. Key element : ‘new’ industrial policy • A dirty word in the 1980s and 1990s: • Avoid “picking winners” • Today, focus on supporting framework conditions (competition, regulation, financing) and horizontal policies • Growing role of indirect support, especially via the tax base (tax credits for R&D, tax allowances for foreign investors, etc)

23. Key element : ‘new’ industrial policy (2) • New discourse on industrial policy: • Market /systems failures are key rationale but government can also act to create opportunities (demand-side innovation) and to address global challenges (eco-innovation) • New information sources are available and in real-time

24. Key element: Evaluation • Danger of local rent seeking and capture by economic agents • Need for transparency • Monitoring and evaluation are one way to reduce risk of capture • Helps to terminate projects early on. • Can help drive a review of regulations and barriers that may impede initiative, knowledge flows and the process of entrepreneurial discovery.

25. Key element: Strategy • Smart specialisation brings ‘strategic’ thinking to regional policy making: • Vision and leadership • Aligning goals and means to implement strategy (beware of short-term political promises!). • Developing policies with clear measurable goals, esp. for lagging /peripheral regions • Coherence between national and regional innovation strategies to “translate” regional choices into terms used in the national strategy. • Skills and training in regional governments.

26. Conclusions • Smart specialisation is novel concept but its underlying elements (i.e. Specialisation, bottom-up entrepreneurial focus) have been around in various incarnations. • Government as a co-ordinator but also as a player in enabling the process of entrepreneurial discovery. • Public-private partnerships can help identify growth barriers • As a regionally-based strategy it emphasis more market-based vertical policies and carries some risks (capture by clients) so it is important to stress evaluation and monitoring • Regions are at different starting points , the choice of investment and impacts will vary over time. • Smart specialisation as a learning tool for policy

27. End Thank you! Mario.cervantes@oecd.org