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PART II

PART II: THE RATIONALE OF SMART SPECIALISATION

What: Concentrating knowledge resources for economic specialisation
The underlying rationale behind the Smart Specialisation concept is that by concentrating knowledge resources and linking them to a limited number of priority economic activities, countries and regions can become - and remain - competitive in the global economy. This type of specialisation allows regions to take advantage of scale, scope and spillovers in knowledge production and use, which are important drivers of productivity.

Furthermore, strategies that combine innovation with specific strengths of the national/regional economy offer a much greater chance of success. Imitating other regions by trying to create 'miracle growth' in headline industries such as semiconductor or biotechnology not only lessens the chances for the imitating region to succeed, but also perpetuates patterns of market dominance with leaders and followers. In short, Smart Specialisation is about generating unique assets and capabilities based on the region's distinctive industry structures and knowledge bases.

Why: Learning lessons from the past
Previous regional innovation strategies have often suffered from one or more of the following weaknesses:[1]

    •  They lack an international and trans-regional perspective, i.e. the regional innovation and economic system is often considered in isolation.
    •  They are not in tune with the industrial and economic fabric of the region; there is too much public involvement in R&D which is not sufficiently business driven.
    •  A sound analysis of the region's assets is missing.
    •  There is a ‘picking winner's syndrome’.
    •  The best performing regions are copied without consideration of the local context.

As a result, regional innovation policies have often demonstrated a lack of efficiency in identifying priorities and forms of practical cooperation between regions. This issue is even more critical in the current economic crisis where public and private financial resources are scarce.

The smart specialisation concept therefore promotes efficient, effective and synergetic use of public investments and supports countries and regions in strengthening their innovation capacity, while focusing scarce human and financial resources in a few globally competitive areas in order to boost economic growth and prosperity.

Who: Putting entrepreneurial knowledge to work
Smart specialisation addresses the difficult problem of prioritisation and resource allocation decisions by allowing entrepreneurial actors to demonstrate the most promising areas for future regional development through what has been described as an 'entrepreneurial process of discovery.'[2] This process can reveal what a country or region does best in terms of R&D and innovation because entrepreneurial actors are best placed to know or discover what they are good at producing. This typically happens through trial and error and experimentation in new activities. Regions therefore need to pro-actively involve entrepreneurial actors in strategy design and offer more incentives for risk taking.

Entrepreneurial knowledge involves much more than science and technology. Rather, it combines and relates this to knowledge of market growth potential, likely competitors and the entire set of input and services required for launching a new business activity. The synthesis and integration of this previously dispersed and fragmented knowledge should help to create a vision for opportunities in existing or new sectors. It is this type of knowledge that needs to be activated, mobilised and supported as the main ingredient in a process of smart specialisation.However, who has the entrepreneurial knowledge in the regional economy? It may be held by firms, which is often the case in 'advanced' regions rich in entrepreneurial experiments and discoveries. In this case, the process of smart specialisation is likely to be more evident. Yet in many other cases where industry structures and entrepreneurial capabilities are weak, it is crucial that knowledge is identified and activated elsewhere, such as in universities or public research institutes. Collaborative projects with local firms can help to reveal information about the future value of certain specialisations.

Entrepreneurial actors must therefore be understood in a broad sense to include inter alia firms, higher education institutions, public research institutes, independent innovators; whoever is best placed to discover the domains of R&D and innovation in which a region is likely to excel given its existing capabilities and productive assets. Given the importance of entrepreneurial experiments and discovery, there is no contradiction between a smart specialisation policy and one to encourage entrepreneurship. On the contrary, these two policies are mutually reinforcing; without strong entrepreneurship, the strategy of smart specialisation will fail because of a deficit in the entrepreneurial knowledge needed to feed and nurture this strategy.

How: Setting in motion regional change
Smart specialisation strategies will usually require some sort of structural change, which could follow from one of the following not mutually-exclusive processes:

    •  Firstly, a transition from an existing sector to a new one based on cooperative institutions and processes, i.e. the collective R&D, engineering, and manufacturing capabilities that form the knowledge base for development of the new activity. For example, entrepreneurs in Austria discovered a transition path from fine mechanical and optical engineering to medical technologies; the initial set of inventions in medical technologies emerged from the industrial capabilities and competences which were already strong in mechanical engineering.
    
    • Secondly, modernisation is the technological upgrading of an existing industry, involving the development of specific applications of a Key Enabling Technology (see Box 2 for more information) to improve efficiency and quality in an existing (perhaps traditional) sector. For example, the Finnish pulp and paper industry views nanotechnology as a promising source of valuable applications and its firms are taking steps to assess this potential. Some companies are responding to these opportunities by increasing their overall internal R&D investment, which is aimed not only at implementing available technologies but also at exploring recent advances in areas of nanotechnology and biotechnology.
 

Box 2 - Key Enabling Technologies

The deployment of Key Enabling Technologies (KETs) can be an important component of a smart specialisation strategy because of their horizontal nature and transformative potential. Many future goods and services will be driven by KETs such as semiconductors, advanced materials, photonics and nanotechnology. Moreover, these goods and services will be crucial in addressing the 'grand societal challenges' facing the EU, including energy supply, public health, ageing and climate change. Whilst Europe has very good research and development capacities in some key enabling technology areas, it has not been as successful in translating research results into commercialised manufactured goods and services.

Smart Specialisation strategies can help to address this gap between innovation and commercial application. Not all Member States and regions can be leaders in developing KETs, but they can benefit in different ways, including upstream and downstream links in value chains. An example of the successful use of KETs is the Slovenian automotive sector which has developed specialised products to supply the main European car manufacturers. This was achieved through the identification of niche areas in KET related fields and the development of strategic research agendas in priority technologies such as biosensors, hydrogen & lithium batteries, plastic materials and nuclear magnetic resonance studies.

 

    • Thirdly, diversification: In such cases the discovery concerns potential synergies (economies of scope and spillovers) which are likely to materialise between an existing activity and a new one. Such synergies make the move towards the new activity attractive and profitable. For example, the region of Toulouse exhibits smart specialisation in aeronautics (Airbus valley). This has led to an extension of entrepreneurial activities and higher education and research infrastructure to new areas such as satellites and GPS technologies.
    

    • Finally, radical foundation of a new domain: The discovery here is that R&D and innovation in a certain field can make previously low growth activities suddenly become attractive. Such radical foundation involves the co-emergence of R&D / innovation and related entrepreneurial activity. For example, the development of IT applications for the management and maintenance of the archaeological and historical heritage in Italy (Florence) is a good example of the co-emergence of an R&D / innovation area and a niche market.

Smart specialisation is not about creating technology monoculture and uniformity; on the contrary, it is likely to promote greater diversity. Indeed, regions can sustain multiple lines of smart specialisations (priorities). Most of the above structural changes generated by smart specialisation strategies actually involve the creation of variety, such as the transition to new activities or the diversification of existing sectors.

In particular, strategies aimed at fostering cross-sectoral or cross-border cooperation have proven to be successful in generating ideas for new innovative applications and integrated solutions. Cross-sectoral links can provide a region with the degree of originality and specialisation to differentiate itself and provide a competitive advantage vis-à-vis other regions.

Where: A role for every region
The smart specialisation concept can be used in all regions, even though some are more advanced in terms of knowledge production. However, the application of the concept in a regional context has to be approached with care because the economic and institutional context varies considerably between and within European regions.

This means that a Smart Specialisation strategy needs to take into account several geographically specific characteristics to help generate growth in regions. In this respect the following points need to be considered when applying smart specialisation to the regional context,[3] as explained also in Part III and Annex I of this document:

    • The entrepreneurial process of discovery will work differently in every region: In some places the process will be quite evident due to the high density of innovators and entrepreneurs (usually core-cities). However, the process will be much harder in other regions characterised by low population, a small number of sectors and large dominant firms but with few external links. In this case, links between local universities and strong public-private partnerships are the types of strategies that may be essential for smart specialisation to work.
    
    • Identifying sectors that can achieve critical mass should take into account the 'principles of regional embeddedness and relatedness'. The first principle of 'embeddedness' refers to the existence of industries that are in tune with the relevant socio-economic conditions and can rely on a trained local labour force and a history of cooperative relations with other regional actors. Evidence shows that without displaying these characteristics, industries are much more likely to be unsuccessful in the medium term. However, by concentrating only on embeddedness, a regional development strategy may risk increasing vulnerability to changing economic conditions. Therefore, it is crucial that the second principle of 'relatedness' is also taken into consideration. This principle describes the diversification of firms into related areas based on new innovative techniques or processes. In other words, it is a strategy of diversifying within a specialisation. This allows firms to build on the skills, assets and capabilities within a region while adapting and improving on them through innovation.
     
    • Connectivity: Smart Specialisation should link emerging knowledge based industries to other actors within and outside the region, but it does not always lead to good outcomes so needs to be assessed. Firstly, we know that face to face interaction in particular places can be crucial in nurturing innovation and there are many examples of regions that have used what can be described as social capital to create knowledge based growth. Nevertheless, local interaction can also be negative when it creates protectionism and rent seeking. Interaction is most beneficial between different groups and across classes and power structures. Secondly, connections to outside the region are only beneficial when ideas are internalised to the benefit of local firms. Being connected to the outside, both digitally (with ICTs) and physically (with transport infrastructure) may lead to a flow of human capital out of the region (in a process labelled 'brain-drain').
     
    • Integration of policies at regional level: Sector-based policies alone do not address the need for links between different interventions. For example, increasing human capital through a programme to enhance skills should match the needs of emerging industries. Similarly, a strategy to increase the attractiveness of a place for investors has to take into account social, cultural and legal issues in addition to purely economic considerations. A successful strategy would therefore integrate policies that are formulated with demand side considerations, through approaches such as public-private partnerships.  

Smart Specialisation as a tool for regional policy has to be carefully considered and must follow the 'place based approach' to economic development that has been promoted by both the European Commission and the OECD. The strategies on their own will not bring about change if they are not translated into delivery instruments considered in the Operational Programmes of Cohesion Policy.

In summary
The concept of Smart Specialisation is 'smart' for two main reasons:

    • Firstly, it links research and innovation with economic development in novel ways such as the entrepreneurial process of discovery and the setting of priorities by policy makers in close cooperation with local actors.
    • Secondly, this process is carried out with an eye on the outside world, forcing regions to be ambitious but realistic about what can be achieved while linking local assets and capabilities to external sources of knowledge and value chains.  

However, while each regional or national strategy will share common features, the place based approach shows us that understanding the local context is crucial in their successful design.

The process of shaping and implementing a strategy is now considered in Part III and Annex I of this guide.

[1] For more information about previous innovation activities funded by the EU, please see the Commission Working Document 'Innovative Strategies and Actions: Results from 15 Years of Regional Experimentation' which can be found here.

[2] This idea was introduced and is elaborated by Foray et al (2009) in 'Smart Specialisation – The Concept', a Policy Brief of the Knowledge for Growth Expert Group advising the then Commissioner for Research, Janez Potočnik.

[3] These points are based on a working paper by Phillip McCann and Raquel Ortega-Argilés (2001), 'Smart Specialisation, Regional Growth and Applications to EU Cohesion Policy', Groningen University.

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