Christian Ketels on smart specialization and the new phase of EU's regional policy, presented at Clusters in Europe III Conference, Visegrad, 2013

1. The EU’s Regional Policy Entering a New Phase:
What Does Smart Specialization Mean?
Prof. Christian H. M. Ketels
Institute for Strategy and Competitiveness
Harvard Business School
April, 11th 2013
Visegrad, Hungary

2. 2 Copyright 2013 © Christian Ketels
Smart Specialization – The Core Idea
• Designing regional economic strategies that are location-specific and
build on existing strengths
– Quality of the business environment
– Composition of economic activities (clusters)
• Explicit integration of the sectorial dimension (clusters) into regional
economic strategies
• Focus on the systematic shift towards activities with higher rates of
innovation/value added
– Within existing clusters
– In clusters adjacent to current areas of strengths
• Mobilization of resources available at different levels (EU, country,
region) in the context of a regional strategy

3. 3 Copyright 2013 © Christian Ketels
The Evolution of European Regional Policy
Market
liberalization
Divergence
(New Economic
Geography)
Convergence
(Neo-Classical
Growth Model)
European Regional Policy
Balancing
Agglomeration Dynamics
Strengthening
Catch-up Dynamics
What happened?
• Convergence did occur, but the current crisis puts its sustainability in question
• The impact of regional policy tools on economic performance patterns across
European regions is often seen as relatively modest

4. 4 Copyright 2013 © Christian Ketels
The New Phase of EU Regional Economic Policy
• Helping all regions to upgrade, not just
compensating laggards
• But still disproportionate allocation of funds
to regions with lower prosperity levels
• Strengthening the focus on location-
specific action plans vs. generic priorities
• But overall focus on innovation and
competitiveness, not just infrastructure
Target
Tools

5. 5 Copyright 2012 © Christian Ketels
The Role of Regions
Dimensions of Regional Heterogeneity
Performance
Business
Environment
Quality
Location
History
Size
Cluster
Composition

6. 6
Furniture
Building
Fixtures,
Equipment &
Services
Animal
Husbandry
Hospitality
& Tourism
Agricultural
Products
Transportation
& Logistics
Traded Clusters in Central Hungary, 2011
Cluster Linkages
Plastics
Oil &
Gas
Chemical
Products
Biopharma-
ceuticals
Power
Generation &
Transmission
Aerospace
Vehicles &
Defense
Lighting &
Electrical
Equipment
Financial
Services
Publishing
& Printing
Entertainment
Information
Tech.
Communi
cations
Equipment
Aerospace
Engines
Business
Services
Distribution
Services
Paper
Products
Construction
Prefabricated
Enclosures
Heavy
Machinery
Sporting
& Recreation
Goods
Automotive
Production
Technology
Motor Driven
Products
Metal
Manufacturing
Apparel
Leather &
Related
Products
Jewelry &
Precious
Metals
Textiles
Footwear
Processed
Food
Tobacco
Medical
Devices
Analytical
InstrumentsEducation &
Knowledge
Creation
LQ > 2.0
LQ > 1.5
LQ > 1.0
LQ, or Location Quotient, measures the state’s share in cluster employment relative to its overall share of European
employment. An LQ > 1 indicates an above average employment share in a cluster.
Maritime

7. 7
Furniture
Building
Fixtures,
Equipment &
Services
Animal
Husbandry
Hospitality
& Tourism
Agricultural
Products
Transportation
& Logistics
Traded Clusters in Eastern Hungary, 2011
Cluster Linkages
Plastics
Oil &
Gas
Chemical
Products
Biopharma-
ceuticals
Power
Generation &
Transmission
Aerospace
Vehicles &
Defense
Lighting &
Electrical
Equipment
Financial
Services
Publishing
& Printing
Entertainment
Information
Tech.
Communi
cations
Equipment
Aerospace
Engines
Business
Services
Distribution
Services
Paper
Products
Construction
Prefabricated
Enclosures
Heavy
Machinery
Sporting
& Recreation
Goods
Automotive
Production
Technology
Motor Driven
Products
Metal
Manufacturing
Apparel
Leather &
Related
Products
Jewelry &
Precious
Metals
Textiles
Footwear
Processed
Food
Tobacco
Medical
Devices
Analytical
InstrumentsEducation &
Knowledge
Creation
LQ > 2.0
LQ > 1.5
LQ > 1.0
LQ, or Location Quotient, measures the state’s share in cluster employment relative to its overall share of European
employment. An LQ > 1 indicates an above average employment share in a cluster.
Maritime

8. 8 Copyright 2012 © Christian Ketels
Clusters and Economic Outcomes: Prosperity
The Evidence
Determinants of Regional Job
Growth, Wages, and Patenting
• Specialization in strong clusters
• Breadth of position within each
cluster
• Positions in related clusters
• Presence of a region‘s clusters in
neighboring regions
And...
• Cluster mix significantly less
important than cluster strength
Source: Porter/Stern/Delgado (2010), Porter (2003)
Quantifying the effects
• Regional cluster portfolio strength explains close
to 40% of variation in regional wages/GDP per
capita (Porter, 2003; EU, 2008)
• Doubling regional cluster strength increases the
regional average wage by 40% (Porter, 2003)
• One SD higher cluster strength raises the annual
employment growth rate at the industry level by
3% (Delgado/Porter/ Stern, 2011)
• Entry of large plants into a cluster raises TFP in
other companies by 20% over five years
(Greenstone, 2008)

9. 9 Copyright 2012 © Christian Ketels
The Role of Cluster-Based Policy
• Agglomeration largely driven by business environment conditions and
‘automatic’ cluster effects in a market process
BUT
• Exploitation of localized spill-overs not automatic
• Exploration of opportunities for joint action not automatic
• Cluster efforts enhance the benefits of existing strengths
• Cluster efforts are about upgrading competitiveness
• They are not about creating clusters

10. 10
Cluster Policy: The Track Record So Far
• Increasingly clear evidence on the economic benefits of cluster
presence
• Evaluations of cluster programs generally positive
• A new role for regions
HOWEVER
• Quality of cluster initiatives is heterogeneous
• Economic benefits of cluster programs so far limited to active
participants
• Tendency to strengthen existing structures, much less driving
structural change
• Tendency to benefit stronger regions, much less helping lagging
regions to catch up

11. 11 Copyright 2013 © Christian Ketels
Enabling Structural Change
• Creating
winners?
• Backing losers!
Old
Industrial Policy
• Enabling new
winners to
emerge
The Challenge
Ahead
FAILURE
• Backing
winners!
Current
Cluster Policy
PARTIAL
SUCCESS

12. 12 Copyright 2012 © Christian Ketels
Clusters and Structural Change:
Entrepreneurship
New Industries (+) New Business Formation (+)
Survial Rates
of New Businesses (+)
Job Growth
In New Businesses (+)
The stronger the cluster, the more likely
new industries within the cluster are to
emerge
The stronger the
cluster, the more
dynamic is the
process of new
business formation
The stronger
the cluster, the
higher the job
growth in new
businesses
The stronger the
cluster , the higher
the survial rate of
new businesses
Source: Porter, The Economic Performance of Regions, Regional Studies, 2003; Delgado/Porter/Stern, Clusters and Entrepreneurship, Journal of Economic Geography, 2010;
Delgado/bPorter/Stern, Clusters, Convergence, and Economic Performance, mimeo., 2010.
CLUSTER

13. 13 Copyright 2013 © Christian Ketels
Textiles
Roller bearings
Vehicles
Vehicle safety
Telematics
1907
1924
1956
2001
Source: Sölvell, Lindqvist,,011
Clusters and Structural Change:
Transformation of Existing Clusters
3D Design
2010

14. 14 Copyright 2012 © Christian Ketels
Clusters and Structural Change:
Emergence of New Clusters
U.S.
Military
Communications
Equipment
Sporting and
Leather Goods
Analytical Instruments
Power Generation
Aerospace Vehicles
and Defense
Transportation
and Logistics
Information Technology
1910 1930 1950 19901970
BioscienceBioscience
Research
Centers
Climate
and
Geography
Hospitality and Tourism
Medical Devices
Biotech / Pharmaceuticals
Education and
Knowledge Creation
• Existing cluster
portfolios have a
significant impact on the
evolutionary path of
regional economies
(Neffke et al, 2009;
Boschma et al. 2011)
• Clusters provide a
powerful analytical tool
to understand
diversification and the
emergence of new
economic activities
The San Diego Economy
Source: Porter, Monitor Company, Council on Competitiveness (2003)

15. 15 Copyright 2013 © Christian Ketels
Cluster-Driven Economic Policy
Regional Policy based on “Smart Specialization”
The Challenge:
• How to support structural change towards higher
value-added activities?
The New (Smart Specialization) Answer:
• Identify your assets, including your
existing cluster base
• Actively pursue opportunities in areas
adjacent to current strengths and
leading towards higher value added
• Longer-term development of
sustainable competitive advantages
The Old Answer:
• Identify growing markets and try to
enter them (bio, nano, eco, …)
• Failure to succeed in intensely
competitive markets without unique
assets

16. 16 Copyright 2012 © Christian Ketels
Clusters and Smart Specialization Strategies (S3)
• Clusters provide a conceptual framework that is fully compatible with
the underpinnings of the S3 approach
• Clusters and cluster initiatives are important tools in the S3 process of
regional diagnosis and stakeholder engagement
• Cluster policies allow the effective organization of sector-specific
priority setting and integration of policies
• Appropriate cluster policies differ by the stage of cluster
development
• Appropriate cluster policies differ by the overall level of regional
competitiveness

17. 17 Copyright 2013 © Christian Ketels
Supporting Emerging Clusters:
Identification
Context for
Firm
Strategy
and Rivalry
Related and
Supporting
Industries
Factor
(Input)
Conditions
Demand
Conditions
• Sophisticated and demanding
local customers and needs
– e.g., Strict quality, safety, and
environmental standards
– Consumer protection laws
• Local rules and incentives that
encourage investment and
productivity
– e.g. incentives for capital investments, IP
protection, corporate governance
standards
• Open and vigorous local
competition
− Openness to foreign competition
− Strict competition laws
• Access to high quality business
inputs
– Human resources
– Capital availability
– Physical infrastructure
– Administrative
infrastructure (e.g., business
registration, permitting,
transparency)
– Scientific and technological
infrastructure
• Availability and depth of suppliers and
supporting industries
• Presence of Institutions for
Collaboration (IFCs) that support
productive coordination and
collaboration among actors
Plastic
s
Oil and
Gas
Chemi
cal
Produc
tsPharm
a-
ceutica
ls
Power
Generation
Aerospace
Vehicles &
Defense
Lightning &
Electrical
Equipment
Financial
Services
Publishing
and Printing
Entertainment
Hospitality
and Tourism
Transportation
and Logistics
Information
Technology
Communi-
cations
Equipment
Medica
l
Device
s
Analytical
Instruments
Education
and
Knowledge
Creation
Appare
l
Leather
and
Sportin
g
Goods
Agricultural
Products
Proces
sed
Food
Furnitur
e
Buildin
g
Fixture
s,
Equipm
ent and
Service
s
Sporting,
Recreation
and Children’s
Goods
Busine
ss
Service
s
Distribution
Services
Fishing
&
Fishing
Produc
ts
Footwe
ar
Forest
Produc
ts
Heavy
Construction
Services
Jewelr
y &
Precio
us
Metals
Construction
Materials
Prefabricated
Enclosures
Textile
s
Tobacc
o
Heavy
Machinery
Aerospace
Engines
Automotive
Production
Technology
Motor Driven
Products
Metal
Manufacturing
Business Environment Strengths Existing Cluster Portfolio
• External intelligence (technology, market needs) is critical
• Choice under uncertainty
Assessment criteria
• Existing bridgeheads, market opportunity, leadership

18. 18 Copyright 2013 © Christian Ketels
Supporting Emerging Clusters:
Tools for Enabling Entrepreneurial Discovery
Emerging Cluster Top Cluster Maturing Cluster
Framework
Capital
Knowledge
High
Low
Medium
Low
Medium
High
Medium
Low
High
• Accept and manage risk
• Clear exit mechanisms
• Project, not institution
• Technical support, less money
• Exploration of market opportunities,
less competitiveness upgrading
• Flexible on geographic and industry
boundaries

19. 19 Copyright 2013 © Christian Ketels
Supporting Lagging Regions:
Strategies that Acknowledge Existing Context
Competitiveness
• Weaker business environment
conditions
• Weaker cluster portfolio
Capacity
• Administration less able to design
and implement policies
• Government more vulnerable to
the pressure of interest groups
• Lower willingness and capability for
collective action
CHALLENGES
Policy objectives
• Strengthen social capital and
institutional capacity
• Upgrade overall business
environment quality
• Improve context for cluster
emergence
Policy characteristics
• Focus of cluster efforts on
technical support
• Integration of cluster and cross-
cutting efforts
IMPLICATIONS

20. 20 Copyright 2013 © Christian Ketels
The Role of Regions in Policy
Different, not Just Smaller
National and EU
programs and
funding sources
Regional programs
and funding sources
Regional Competitiveness
Set Regional Economic Strategies
Mobilize Regional Public-Private Platforms

21. 21 Copyright 2013 © Christian Ketels
From Individual Policies to Strategy
Business
Environment
Cluster
Portfolio
Positioning
• Identifies, communicates, and strengthens
the specific value proposition of the location
• Accelerates growth in
existing clusters
• Enables the emergence
of new clusters
• Strengthen unique
qualities of the location
• Eliminate weaknesses
in other areas