3. Broadening and diffusing innovation
This chapter discusses the challenge of diffusing knowledge and innovation in regions in industrial transition. Innovation and innovation diffusion are drivers of industrial renewal and productivity growth, ultimately helping regions in industrial transition “catch up” to more productive regions. Transition regions, however, face a number of obstacles in making the most of this possibility. These obstacles include stimulating the development of knowledge-intensive industries and linking them to global value chains, addressing innovation gaps between thriving and lagging areas, and better capitalising on local innovation strengths. The chapter highlights a series of factors that are crucial to broadening innovation, such as building higher innovation capacity in regions in industrial transition and better linking innovation policies with other policy areas. It discusses these challenges and offers policy lessons to stimulate knowledge transfer and enhance inclusive innovation processes.
Broadening and diffusing innovation is fundamental for industrial transition
Innovation and innovation diffusion are key factors in renewing the economic fabric of regions in industrial transition and strengthening productivity levels and growth. Regions in industrial transition are often home to traditional industries and technology fields with high-value and high-skill activities, and a strong support system targeted at the respective specialisation. This renders the existing industry landscape an important asset for industrial modernisation.
For these regions, reaping the benefits from ongoing technological and organisational change requires simultaneous efforts to modernise old industries and diversify the local economy towards new and emerging industries. In some regions in industrial transition, key players of the local innovation ecosystem, such as large and incumbent firms and local universities, are driving industrial modernisation. This dynamic needs to be nurtured and maintained in order for these regions to best utilise the opportunities arising from automation and digitalisation. At the same time, it is important for policymakers in these regions to ensure that innovation does not rest with a small number of key players but that it spreads to rural areas and disadvantaged groups.
Focusing on innovation diffusion supports “catching up” to frontier regions
Regions in industrial transition are usually characterised by a long heritage of traditional industries and low levels of productivity in at least some parts of the local economy. It is, therefore, critical for these regions to strengthen innovation diffusion in order to catch up to more productive places within the same country and beyond.
Many regions across the European Union (EU) have narrowed the gap with the European productivity frontier, but others are only keeping pace or diverging. The European productivity frontier is composed of those regions in the 25 EU member states that have the highest productivity (gross domestic product [GDP] per worker) and represent 10% of total employment in the EU. The regions displayed as catching up in Figure 3.1 are those regions that grew at least 5 percentage points more than the European frontier regions in the 2000-16 period. The diverging regions grew less than 5 percentage points than the frontier regions over the same period. The figure highlights that productivity growth differs across regions. It also suggests that there might be untapped potential to increase productivity by improving the performance of regions. In order to increase productivity, regions in industrial transition may make better use of their existing potential to increase productivity in existing firms – including large-scale manufacturers – through technological and organisational upgrading of existing production facilities and management practices.
Productivity gaps are widening between frontier and other firms
Innovation is a central driver of productivity growth. Supporting the innovation potential among firms of all sizes should be a fundamental objective for regions in industrial transition. While these regions may also be home to firms at the national or global technology frontier, their firm ecosystem often has difficulty with innovation take-up and diffusion.
Across the OECD, productivity gaps are widening between frontier firms and other firms. Figure 3.2 shows the evolution of labour productivity for firms at the global productivity frontier, non-frontier firms and all firms. Frontier firms are the top 100 most productive firms globally. In the manufacturing sector, frontier firms have expanded labour productivity at an average annual rate of 3.5%, compared to an average growth in labour productivity of just 0.5% in non-frontier firms. This pattern is even more pronounced in the services sector.
Note: Frontier region is defined at the European level as the aggregation of regions with the highest productivity (GDP per worker) among 25 EU countries and representing 10% of total employment in the EU. Catching-up/diverging regions grew by at least 5 percentage points more/less than the European frontier over the 2000-16 period. Keeping-pace regions fall in between. The EU frontier is composed of 13 out of 200: Vienna (Austria), Brussels region (Belgium), Île-de-France (France), Hamburg (Germany), Southern and Eastern (Ireland), Lazio, Liguria, Lombardy (Italy), Groningen (Netherlands), Stockholm (Sweden), Greater London (United Kingdom), Luxembourg.
Source: OECD Regional Statistics [Database].
Note: Labour productivity is defined using value-added based labour productivity. Services refer to non-financial business services. All firms are computed from industry-level data using OECD STAN, which is meant to provide a benchmark for the productivity trend obtained using the sample of firms in ORBIS. Frontier firms refer to the Top 100 ORBIS firms.
Source: Andrews, D., C. Criscuolo and P. Gal (2015), “Frontier Firms, Technology Diffusion and Public Policy: Micro Evidence from OECD Countries”, https://doi.org/10.1787/5jrql2q2jj7b-en.
The figure suggests that the capacity of other firms to learn from the frontier may have diminished over time. The rising gap between “the best and the rest” raises important questions for regions in industrial transition about what might prevent non-frontier firms from adopting seemingly well-known innovations. It also suggests that seizing the benefits of transition will largely depend on reviving the diffusion machine.
The changing nature of innovation offers new ways to foster innovation diffusion
OECD countries are shifting away from innovation based predominantly on research and development (R&D) activity towards a definition that includes non-technological innovation (OECD, 2018a). Evidence of this is grounded in changes in innovation objectives, forms of innovation, actors involved and instruments used. There is also a move towards more open or user-driven innovation, which has its origins in the recognition that innovation diffusion, and not just knowledge creation, is key to productivity and employment growth (OECD, 2018f).
The 2018 edition of the OECD/Eurostat Oslo Manual acknowledges a broader role for innovation and seeks to fill gaps on how different types of innovation can be measured (OECD/Eurostat, 2018). According to the manual, two main types of innovation exist:
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1. A product innovation is a new or improved good or service that differs significantly from the firm’s previous goods or services and that was introduced on the market.
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2. A business process innovation is a new or improved business process for one or more business functions that differs significantly from the firm’s previous business processes and that was brought into use by the firm.
As these definitions reveal, innovation is much broader than just R&D or technological change. Innovation also goes beyond the business sector. Public sector innovation, the role of non-for-profit actors and a systematic approach to innovation support are all contributing elements (Box 3.1).
A broader understanding of innovation can help policymakers expand its impact, while also contributing to other policy concerns, such as sustainability, inclusiveness and social issues. Key elements supporting a broader understanding of innovation include:
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Innovation as a concept spanning the whole chain of knowledge production from fundamental research to market launch.
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A “systemic understanding” of innovation, in which innovation is seen as the result of the co-operation and interaction of a multitude of various actors.
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A notion of innovation policy that is not restricted to promoting innovation as an end in itself, or for purely economic motives, but that considers innovation as an important tool in overcoming major societal challenges.
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A broad understanding of innovation policy, which extends beyond traditional science and technology policy, embracing education as well as other directly relevant sectoral policies and indirectly related socio-economic policies in addressing major global challenges such as climate change, health or biodiversity.
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Exploring the links between technological and non-technological innovation in firms.
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Greater attention to public sector and social innovation.
Source: OECD (2018b), “OECD Experience on Broadening Innovation and Innovation Diffusion”, Scoping Paper for Peer Learning Workshop, Lille, 11-12 April, OECD Paris, Unpublished.
Broadening the understanding of innovation also creates new opportunities for excluded groups to become involved in the innovation process, to create new jobs and to grow incomes. For example, digitalisation and enhanced access to information technologies can open new paths for all entrepreneurs to become successful innovators. This supports the “democratisation of innovation” as the group of successful innovators is potentially enlarged to include actors that did not previously participate in innovation processes. Well managed, this process can support greater industrial and territorial inclusiveness (OECD, 2015a).
What challenges and opportunities do regions in industrial transition face in broadening and diffusing innovation?
Regions in industrial transition need to build up more knowledge-intensive industrial activities
One challenge for regions in industrial transition is to invest in and attract more strategically important R&D investments and to work equally with larger firms and small- and medium-sized enterprises (SMEs) towards using R&D for industrial modernisation. More R&D activities mean more basic research, applied research and experimental development with the purpose of increasing human knowledge and devising new applications and products based on it. As products, applications and processes become increasingly complex, R&D collaborations between the private sector and universities become more and more important to solve wicked problems. Creating and maintaining local innovation networks that include incumbent as well as emerging firms, research institutes, clusters and government actors is therefore critical for regions in industrial transition.
Increasing levels of R&D is not an easy task. Across the OECD, innovation measured by R&D is highly concentrated in a few regions (Figure 3.3). Research and development expenditures as a percentage of GDP ranged in 2015 from 6% of GDP to less than 1%. In Austria, Denmark, Germany, Korea and Sweden, expenditure on R&D was particularly high, with an average outlay of around 3% of GDP or more. In those countries, regional differences are also substantial. For instance, around 5% of GDP is spent on R&D in Styria (Austria) and Baden-Württemberg (Germany), which is approximately 5 times and 3.5 times higher than in Burgenland (Austria) or Saxony-Anhalt (Germany) respectively.
Source: OECD (2018g), OECD Regional Statistics (database), https://doi.org/10.1787/region-data-en.
An important element of increasing levels of R&D and strategically targeting R&D towards new and emerging industries is encouraging higher private sector engagement. This is important for a number of reasons. First, private R&D contributes to modernising the industrial base and enhances local competitiveness. Second, private R&D often helps to maintain a high level of skills and the ability of firms to adopt technologies developed elsewhere (Archibugi and Filippetti, 2018). Third, private R&D can help overcome societal challenges in areas such as transport, health, energy or the circular economy. Importantly, these challenges also constitute industrial opportunities and, therefore potential sources of jobs and growth in regions in industrial transition. Fourth, while public financing of R&D can complement private R&D, public budgets on their own are often insufficient to provide the scale of investment needed.
Better integration of new technology in existing businesses supports positive transition outcomes
Innovation is more than the commercialisation of science, and the importance of R&D versus non-R&D innovation varies by sector. Different types of non-R&D innovation, such as capital investment in equipment (often produced by high-tech sectors), or non-technological innovation (marketing, organisation), can be equally important sources of innovation. Traditionally, regions in industrial transition have a large company base. While these firms often possess large resources and strong capabilities in long-established industrial activities, they do not always have the required business capabilities, i.e. the resources, knowledge and management skills needed to absorb emerging and enabling technologies, such as advanced manufacturing methods, bio- and nanotechnology or artificial intelligence (AI) applications. However, for technology diffusion to lead to productivity gains, firms must integrate new technology into their business processes and make complementary investments in skills and business models.
Small firms, in particular, might find it challenging to absorb new and digital technologies. OECD research shows that the uptake and diffusion of digital technologies and activities are much lower among SMEs than among large firms (Figure 3.4). A number of factors may drive this, including less knowledge about digital technologies and how they can improve business in small firms, lower R&D levels and a lack of incentives to change traditional working methods. Strengthening business capabilities, in particular in SMEs, and finding ways to stimulate innovation is one of the challenges for policymakers in regions in industrial transition.
Sources: OECD (2019), OECD Regional Outlook 2019: Leveraging Megatrends for Cities and Rural Areas, https://doi.org/10.1787/9789264312838-en, based on OECD, ICT Access and Usage by Businesses Database, http://oe.cd/bus, January 2019.
Universities can be major drivers of industrial transition if their potential is well used
Universities are major contributors to local innovation ecosystems. Strong universities play a leading role in organising networks for the development of future-oriented regional innovation strategies. For regions in industrial transition, universities are important knowledge generators that can contribute to innovation and actively support the transition from old to new industries by bringing new knowledge and networks into the region. However, in order to successfully support industrial modernisation, universities need to be strong regional innovators themselves. Academic research institutions might, for example, be too slow to respond to current trends in technological change, which leads to foregone research opportunities in new technologies.
More and better incentive systems to link academia with businesses and adapt teaching activities to changing labour market requirements are necessary for regions in industrial transition. Better linking universities with their local innovation ecosystems in order to offer education in line with changing skills profiles – while at the same time maintaining world-class research – is a policy challenge for regions in industrial transition.
Financing innovation activities remains challenging
Finance, be it from public or private sources, is a cornerstone of innovation. It allows companies and organisations to conduct research and adopt new technologies as well as to commercialise innovation (Kerr and Nanda, 2015). Access to finance for innovation is often a particular challenge for seed and early stages of business development. While large firms can more easily finance their R&D activities through internal resources or by raising equity, start-ups and small firms have fewer assets at their disposal. Therefore, many governments use different types of interventions to increase the amount of finance available for innovation activities. Instruments can include direct funding, such as R&D grants, but also debt risk-sharing schemes such as credit guarantee schemes and fiscal measures. Regions in industrial transitions often face resource limitations, including tight budgets. An important policy challenge in this context is to increase the availability of equity finance for innovative firms, such as venture capital schemes.
Barriers to investment beyond financing also remain
The challenge of financing innovation is embedded in a broader range of investment barriers. Public and private investment tends to remain below pre-crisis levels across European regions, generating a persistent and troublesome investment gap (EIB, 2019). Some regions in industrial transition face administrative challenges to investment. These can include deficiencies in multi-level governance, difficulties in accessing and managing investment funds, an unfavourable business environment and a lack of skills in future-oriented activities. The scope and degree of how these multiple barriers to investment affect industrial transition likely differ among regions and the challenge for policymakers in each region is how to tackle these barriers in a holistic manner. Moreover, overcoming some of these challenges will likely require addressing them at different levels of government and ensuring a clear allocation of responsibilities among each level.
Some regions in transition face large territorial disparities in innovation
It is neither desirable nor realistic to expect a uniform distribution of innovation within and across regions and businesses. However, an increasing divergence in innovation and productivity performance can lead to widening income and wage disparities, ultimately exacerbating territorial disparities. Policy has a role to play in ensuring that innovation diffuses across firms and territories.
Regions in industrial transition often face difficulties in spreading innovation beyond cities, which are often home to universities, research organisations and companies with high R&D activities. In addition, remote regions in industrial transition face a situation in which firm headquarters may move to larger metropolitan areas outside their own region or where large companies outsource R&D capabilities to more dynamic places in other regions. Broadening and diffusing innovation can help support a broader range of places and firms and reduce spatial gaps in innovation activity.
More needs to be done to create and nurture regional innovation systems
A well-functioning regional innovation system encourages the rapid diffusion of knowledge, skills and best practice within a region. Regional actors involved are universities and non-university research organisations, firms, regional and local government or administration, intermediaries (e.g. advisory bodies) and their networks, financial institutions and more. Regional innovation systems matter for regions in industrial transition because they support new and collaborative innovations that help foster industrial modernisation.
In order for innovation and innovation diffusion to thrive in regional innovation systems, a fundamental ingredient is the existence of and access to local and global networks within and across sectors. Networks between industry, research, public services and civil society provide opportunity for new knowledge and resources, making them invaluable to regions in industrial transition. Yet, many regions struggle to establish such networks and a lack of (formal and informal) links and partnerships between universities, large and small firms and the public sector persists. This calls upon policymakers to create channels such as regular networking events, thematic project calls and dedicated websites through which firms and universities are willing to share what they know and open up to external knowledge.
Monitoring and evaluating innovation and innovation policies remains a large challenge
Because innovation and innovation policy operate in a complex, dynamic and uncertain environment, a commitment to performance measurement systems, including monitoring and evaluation, is fundamental. These systems can paint a picture of whether or not innovation policies are meeting their objectives, offer insight into what needs to be adjusted, and build evidence bases for future policy and programming design. Yet, performance measurement in innovation policy is a challenge, as regions often face financial and staff resources and skills limitations, as well as gaps in technical knowledge with regard to defining performance indicators and setting quantitative objectives.
In addition, with a broader understanding of what innovation can be and what it encompasses, there is a need to improve the indicators traditionally used. Available measurements largely reflect the industrial era and less the knowledge-based and digitalised economy, and policymakers struggle to capture the impact of networking and linkages policies, for example. Developing more relevant indicators is an exercise that is not yet complete at the regional, national or international levels, leaving regions at a loss with respect to effective measurement. For regions in industrial transition, where broadening innovation policy is fundamental for a successful transition, the lack of effective monitoring and evaluation mechanisms is particularly difficult.
How can policy (better) support broadening and diffusing of innovation?
Policy support to innovation diffusion dates back to the 1980s. In its early stages, the focus was on disseminating advanced manufacturing technologies (e.g. machine tools and robotics) to industry in order to raise productivity. However, it became evident that many of the obstacles to the successful adoption and use of technology were internal to the firm, such as a lack of resources, limited management capabilities, inadequate workforce skills or technological capabilities. In the 1990s and 2000s, greater attention was given to addressing these internal obstacles at the firm level. Policymakers began experimenting with networking initiatives and business advisory services to help firms implement complementary organisational, workforce and technical changes (OECD, 2015b). Building on this, today’s emphasis is on increasing the technological absorptive capacity of firms, building local and global links to integrate firms and places into global value chains, and creating and nurturing holistic innovation support systems that include firms, universities and the public sector.
Creating and sustaining comprehensive innovation ecosystems
Regions in industrial transition need to stimulate the use of new technology but this is not enough. Focus also needs to be placed on experimentation processes with alternative firm strategies and business models, and co-ordination between innovation-led regional development policies and other policy domains. For these regions, subsidising research and development activities – a common public policy tool to support innovation– may have limited effects in itself as only some local firms would recognise and leverage value in the adoption of radically new technologies for their business. Instead, firms in regions in industrial transition need to become more aware of current challenges, trends and opportunities for their sector and identify what type of support is needed to remain competitive and to find new market opportunities. The role of policymakers then becomes one of facilitating dialogue between firms, knowledge organisations and public sector organisations to articulate needs for innovation, as well as possible solutions to needs and pathways for local innovation (Table 3.1).
Broadening innovation
Innovation measures across the OECD have broadened to include non-technological innovation such as innovative project management in firms, supply chain innovations, improved customer experiences and new and digital business models. For regions in industrial transition, broadening the focus of innovation policy to include non-technological innovation is essential for industrial modernisation because these regions are often home to a large number of firms that have strong potential to seize opportunities from organisational progress. In East and North Finland, a partnership among the seven participating subregions is leading to broader innovation approaches, peer learning and the emergence of collaborative initiatives (Box 3.2).
Circular economy in the Central Ostrobothnia region
The Kokkola Industrial Park (KIP) is the biggest inorganic chemistry cluster in Nordic countries. KIP is home to 80 companies, which generated EUR 1.5 billion of exports in 2017 and employ 2 200 staff. KIP is private-public partnership and is an example of industrial symbiosis where one firm’s waste is another firm’s input (heat, steam, gases, metals, etc.). The Biovalley Consortium has 24 partners, joint campus facilities, a project portfolio worth EUR 40 million and 150 R&D personnel. Biovalley is an expertise hub that combines the expertise of several industries found in the area: chemical industry, the bioeconomy and the mineral economy.
Aligning non-governmental organisation (NGOs) with regional development in North Karelia
North Karelia counts 3 700 registered NGOs. Whilst the majority are sports-, cultural- and hobby-related associations, a significant number serve unemployed people, immigrants and the elderly, and play significant roles in social inclusion. Social and health associations have important role in ongoing structural change and the delivery of services. Civil society supports the services of public and private social and health services and voluntary work is considered a significant instrument in empowerment, inclusion and well-being for the whole society. According to statistics, each Finnish person belongs, on average, to three civil society organisations. NGOs feed into the regional development ecosystem through an overarching initiative. The insights given by this co-operation have been valuable in ensuring the quality and effectiveness of the development actions.
Local business support organisations and innovation agencies can help firms implement effective production and management practices, thereby lending innovation support. Innovation support should be aligned with strategic investment promotion activities in the region in order to build innovation and technology capabilities in areas of strategic interest. Local industry associations can connect firms with each other and facilitate exchange and learning. Public authorities can support private sector-led efforts as long as they do not result in collusion. The region of Limburg in the Netherlands has successfully broadened its innovation policy support and has taken a holistic approach to innovation (Box 3.3).
The closure of 13 Limburg coal mines in the early 1970s triggered a process of regional innovation system thinking which has become the guiding paradigm for regional development policy in the Province. Limburg was one of the first of four Regional Technology Plan (RTP) pilot regions in Europe. It completed its plan in 1996 and followed it up with a Regional Innovation and Technology Transfer Strategies and Infrastructures Plan (RITTS), a Regional Innovation Strategy (RIS) and a smart specialisation strategy (S3) as of 2014. Limburg is classified as an innovation leader in Europe based on a sustained approach to internal and external collaboration, partnerships and implementation. Limburg is focused on developing its innovation system to include more integrated themes, better address sustainability issues, implement improved governance processes and create evidence-based information (e.g. R&D/patent information) for strategy building.
A particular innovation emerging from Limburg’s experience is the use of innovation vouchers – a concept pioneered by Limburg in 1997. This first pilot explicitly aimed at encouraging knowledge transfer and building collaboration between SMEs and research institutions. The goal was to encourage, advice and support SMEs in Limburg as they undertook measures to maintain or improve their competitiveness in the domestic and international markets. The project’s target group was SMEs located in Limburg with 15-250 employees and DSM Research, a private research and development campus where vouchers could be utilised.
Source: OECD (2018f), “OECD Experience on Broadening Innovation and Innovation Diffusion”, Presentation for Peer Learning Workshop, 14-15 June, OECD Paris, Unpublished.
Supporting innovation-oriented public procurement
Public procurement can be a lever of innovation diffusion in regions with large purchasing power and can pull demand for innovation. Innovation-oriented public procurement can be justified on a number of grounds. Making public procurement more innovation-friendly through the incorporation of innovation-related criteria can stimulate the supply of innovation and new technologies. The request of a specific or new technology by public administration can also be a strategic asset for regions that want to prioritise their activities in a certain industry or enable a technology. Finally, innovation-friendly public procurement can also promote technological advances that require R&D before any market solution is in sight. In some cases, pre-commercial procurement is used to offset biases against innovation driven by new and small companies (OECD, 2011).
Using public procurement as an innovation-generating policy instrument can be challenging too. The traditional focus on value for money, as well as the problem of fragmentation of public demand (often among different levels of government) can limit the potential effect of innovative procurement. Furthermore, the agencies or local governments with responsibilities for public procurement can operate separately from line ministries or government agencies with a mandate to support innovation.
Supporting innovation financing and overcoming barriers to investment
Innovation financing is important for the creation, survival and growth of innovative businesses. A lack of finance may prevent firms from investing in innovative projects and improving their productivity (see also Chapter 4). For regions in industrial transition, suitable finance is critical to reorient old industrial pathways towards modern industries. This implies a need to innovate and broaden financing mechanisms beyond traditional finance offers.
Beyond financing innovation, territorial obstacles to investment are often related to multi-level governance and public administration challenges, including co-ordination with other levels of government and sectors. Regions in industrial transition often lack the appropriate tools and governance arrangements to make the best use of investment funds. The OECD has highlighted that the challenges are often much broader than just financing investment and that the impact of public investment depends to a significant extent on how governments manage it. Co-ordination, capacity and framework conditions are three systematic challenges hindering the achievement of the best possible outcomes. For this reason, the OECD Council adopted a Recommendation on Effective Public Investment across Levels of Government (OECD, 2014), organised around three pillars (Box 3.4).
Across the OECD, subnational governments are responsible for about two-thirds of direct public investment – with notable variation among countries. Well-managed public investment can be growth enhancing and contribute to higher levels of productivity growth. Poor investment choices, on the contrary, may not only waste public resources but also hamper future growth.
In 2014, the OECD Council adopted a Recommendation on Effective Public Investment across Levels of Government. The principles set out in the recommendation are meant to help governments assess the strengths and weaknesses of their public investment capacity and set priorities for improvement. The 12 recommendations are grouped into 3 pillars representing multi-level governance challenges to public investment:
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1. Co-ordinate public investment across levels of government and policies. This pillar focuses on the importance of seeking and creating complementarities in policies and programmes across policy sectors, vertically across levels of government and horizontally among subnational governments to increase the effectiveness of public investment.
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2. Strengthen capacities for public investment and promote policy learning at all levels of government. This pillar highlights different capacities that should be present at all levels of government to bolster conditions for effective investment and to promote continuous improvement from the strategic selection of investment to its execution and monitoring.
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3. Ensure proper framework conditions for public investment at all levels of government. This pillar emphasises the importance of good practices on fiscal decentralisation, public financial management, public procurement and regulatory quality at all levels of government.
Source: OECD (n.d.), Effective Public Investment Toolkit, http://www.oecd.org/effective-public-investment-toolkit/.
Innovation monitoring and evaluation
Innovation and innovation-diffusion policy is crosscutting with results based on multiple policy agendas that extend beyond R&D investments. In order to best support innovation and innovation diffusion, regions in industrial transition need to improve monitoring and evaluation capacities of innovation policies. This includes more consultation with stakeholders to develop goals and design programmes, more stringent collection of programme data, better monitoring of progress, adjusting programmes towards industrial modernisation and overcoming societal and disruptive challenges related to transition (OECD, 2019).
Adjusting policy interventions over time involves testing and experimenting, and learning and adapting. The idea of experimentation takes into account the need for a flexible approach. For regions in industrial transition, this means that interventions may need to be piloted, or combined, or adaptable within a given initiative. For example, there could be variations in the criteria for innovation partnerships or various options for cost-sharing in R&D funding. Once a project has rolled out, flexibility and openness to changing plans in order to adapt to shifting conditions arising from transition is fundamental. Spain’s Basque region has successfully implemented a monitoring and evaluation system for its regional innovation system (Box 3.5).
Spain’s Basque Country has been gradually implementing its monitoring and evaluation system. In 2012, it began monitoring and evaluating results by trying to unite different inputs and assess a programme’s contribution in terms of input, output and impact indicators. Resources and results are monitored, and companies are regularly surveyed to determine whether input indicators are clear and on expected output. Only after three years did the Basque regional authorities begin to ask for results and with this information, they then were able to begin measuring impact. While it is difficult to change the time dimension, it is possible to streamline the measurement approach. For example, the Basque system focuses on indicators to measure two specific objectives linked to their industrial and innovation policy: increasing employment and supporting internationalisation.
Source: Adapted from Oyón, C. (2018), “PCTI EUSKADI 2020: A smart specialisation strategy oriented to boost Economic and Sustainable Development”, PowerPoint Presentation for the Peer Learning in Regions in industrial transition Workshop: Broadening Innovation and Innovation Diffusion, Presented by Mario Cervantes, 11-12 April, 2018, Lille, France.
Strengthening knowledge transfer and innovation capabilities
Regions in industrial transition are currently revising their innovation-policy packages to better support innovation and technology diffusion. A key challenge for these regions is to strengthen business capabilities for innovation and to avoid political lock-in in well-established and traditional industries. Relevant policy instruments include strengthening workforce and management skills for innovation, accelerating the digital transformation to scale business innovation networks and fostering effective industry-university relationships (Table 3.2).
For regions in industrial transition, the uptake of digital technologies is a key lever to support industrial modernisation and embrace the digitalisation of production and processes. As digitalisation is radically changing certain industries, including manufacturing, new and digital business models, firms in regions in industrial transition can make use of this development to increase their digital presence, create new contact channels to customers, and ultimately improve efficiency and productivity. Making the digital transformation work for industrial modernisation requires coherent and well-coordinated policies that proactively consider those who benefit from digitalisation and those who risk being left behind. Fully benefitting from the opportunities linked to digitalisation will require that individuals, businesses and regional governments in transition regions have reliable and affordable access to Internet and digital services. However, good access to digital networks alone does not ensure effective use. Policy also needs to help equip workers and citizens with appropriate skills to make effective use of digital technology.
Accelerating the digital transition
Policymakers in regions in industrial transition can support digital take-up by people, firms and local governments in different ways. They can provide financial support and technical assistance on topics such as online marketing, digital business process or information technology (IT) security. Policy instruments can range from targeted loans and regional vouchers to non-repayable aid to small firms to support digitalisation. Training support can include a mix of support activities, events, webinars, analysis tools and training programmes to foster digital competencies. Often these programmes have a specific focus on SMEs, as they often lag behind in the adoption of digital technologies. The German Mittelstand initiative on digitalisation shows one way to structure digital training for SMEs (Box 3.6). In addition to the targeted instruments described above, information campaigns, as well as cluster-wide approaches and solutions, can be important instruments to accelerate technology diffusion in regions in industrial transition.
Germany has 2.5 million SMEs. Many of these are skilled craft workshops confronted with the challenge of remaining competitive in the digital revolution. To enhance their productivity growth the German Federal Ministry of Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, BMWi) launched Mittelstand-Digital, an initiative consisting of 18 regional competency centres nationwide to support SMEs in digitising, networking and introducing Industry 4.0 applications.
Support is offered in a number of areas, such as work organisation and digitisation strategies, intelligent production and IT security, and legal issues and standardisation affairs. The competency centres include learning and demonstration factories, so that SMEs can learn how digital technologies might transform a business, and they provide information sessions and practical use cases.
Key lessons stemming from the initiative include:
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Care is needed to ensure that the Mittelstand-Digital programme is presented in a format and language that is appropriate for connecting with SMEs and skilled craft workshops.
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The challenges of digitalisation vary across regions (for example, learning cultures vary across regions), such that the format of events (e.g. webinars, entrepreneurs’ breakfasts, weekend meetings) and publications need to be tailored to the recipient SMEs.
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Trust is an important aspect for SMEs: they are often more willing to accept the official and unbiased information provided by the German federal government as opposed to that of private consultants, which has implications for the choice of an appropriate IT consultant.
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The benefits of the programme appear to improve if SMEs can take advantage of peer learning, whereby SME participants learn from each other.
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SMEs may harbour the belief that “what costs nothing is worth nothing”, which may make them less receptive to the value of the advice offered in the context of the programme.
Sources: OECD (2016), Job Creation and Local Economic Development 2016, https://doi.org/10.1787/9789264261976-en; Bundesministeriums für Wirtschaft und Energie (n.d.), Mittelstand Digital, https://www.mittelstand-digital.de.
Scaling up business innovation networks
Well-developed clusters can yield a range of benefits for regions in industrial transition. First, by physically locating firms close to one another, agglomeration effects and economies of scale can be created. This is particularly important for those regions in industrial transition whose territories are characterised by low firm and/or population density. Second, clusters can also contribute to learning and knowledge sharing at the regional level. Firms today need to be able to interact with researchers, inventors and entrepreneurs, as well as with other firms, in order to define new products and identify new markets. While the isolated inventor in a garage remains the stereotype of an innovator, research shows that 47% of new product and process innovations occur through external partnerships (Carlino and Kerr, 2014). Clusters offer important platforms for nurturing such partnerships and can support industrial transition by helping an industry to upgrade or new industries to develop. At the same time, regions in industrial transition face the danger of pursuing cluster policies that predominantly support old and mature industries if there are no attempts of industry modernisation or upgrading through these clusters. In this case, insufficient diversification and over-reliance on local champion firms can slow down entrepreneurial dynamism.
OECD countries and regions see the emergence of a network-based development model, in which clusters across different industrial sectors are pushed to establish cross-cluster linkages domestically and internationally. Such an approach often strengthens the cluster research component, builds stronger industry-science ties and fosters cross-sectoral links (OECD, 2017b). Norway is an example of a country that has successfully developed a network-based cluster model (Box 3.7). Support for cross-cluster linkages is vital if regions in industrial transition are to transform their local economies around new and knowledge-based activities. Going beyond individual cluster support, cross-cluster collaboration can strengthen innovation diffusion by exploiting emerging links between economic activities that can cut across traditional cluster boundaries.
Norwegian Innovation Clusters is a government-supported cluster programme organised by Innovation Norway in a joint effort with Norway’s Industrial Development Co-operation and the Norwegian Research Council. The programme’s objectives are to increase the innovation capability and value creation in different clusters and to support cross-fertilisation between clusters.
Through annual open calls, clusters compete to be part of the programme. Criteria for participation include cluster resources, potential for growth and position in the industry, and that the wish to build a financially supported cluster is based on the commitment and leadership of the companies forming the cluster.
Clusters are supported on three levels:
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1. Early clusters: Clusters that are in an early phase of organised cluster collaboration. The support period is 3-5 years with EUR 200 000 to EUR 300 000 per cluster
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2. Norwegian Centres of Expertise: Mature clusters with a national position. The support period is 5-10 years with EUR 500 000 to EUR 600 000 per cluster.
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3. Global Centres of Expertise: Mature clusters in global positions. The support period is up to 10 years with EUR 1 million per cluster.
Financial support takes the form of co-funding (50%) of basic cluster activities through a cluster facilitator and targeted support schemes on cluster sustainability, entrepreneurship, innovation and the support of “change agents”. Networking and advisory services are also part of the package.
Source: Norwegian Innovation Clusters (n.d.), Homepage, http://www.innovationclusters.no/english.
Linking Global Value Chains to cluster policies
Regional cluster policies help regions in industrial transition generate necessary knowledge and innovation spillovers by creating a space for diverse regional and external actors to interact and exchange ideas. Without the formalised mechanism of a cluster, regions in industrial transition may find it harder than frontier regions to keep the necessary innovation actors in the region and attract external actors to participate. It can also increase the possibility of participation in global value chains (GVCs), which adds an important international dimension. Linking regional businesses with multinational companies can facilitate knowledge spillovers from the frontier to regions in industrial transition.
Knowledge diffusion from global to local businesses can be sporadic and unstructured when it is based strictly on regular contacts among employees. More structured learning takes place in GVCs through hierarchical or captive relations between firms, when dominant firms provide targeted knowledge to subordinate forms to help them acquire the skills they need. However, knowledge diffusion along the supply chain does not always occur. Competitive relationships between firms and the inability of “tacit” knowledge to travel along supply chains can undermine the creation of spill-overs.
Policymakers in regions in industrial transition can encourage knowledge sharing along GVCs in two main ways. First, they can motivate regional firms to diversify across different value chains, thereby (ideally) diversifying across markets and increasing productivity. Second, they can seek partnerships with locally dominant firms in GVCs to encourage these to share more knowledge across the value chain (Pietrobelli and Rabellotti, 2011).
Supporting open innovation and the use of open data
All firms, even the most innovative, increasingly need to deal with complex knowledge, which can be difficult when relying only on internal resources. In the open innovation model, a company does not strive to generate the best ideas entirely by itself. Rather, it seeks to utilise internal and external ideas in an optimal manner, to be more effective at managing cost and risk and to accelerate technology development. Sources of knowledge typically include suppliers, research centres, universities, customers, competitors, and companies with complementary offerings (Chesbrough, 2003).
The provision of open government data by public sector and governmental bodies may also lead to new and innovative business models through applying open innovation instruments. For example, open data business models support entrepreneurs in reusing and combining available open data sources to provide services. The EU estimates the total direct and indirect economic gains from open data re-use would be in the order of EUR 194 billion by 2030 (European Commission, 2018).
Open innovation systems in regions in industrial transition can complement or extend existing in-house innovation. They allow SMEs and start-ups to contribute to and engage with large businesses in the region and to develop partnerships and networks. This can stimulate entrepreneurial activity and facilitate more integrated and embedded networks between large and small firms. An example is the Centre-Val de Loire region in France, which has successfully built an innovation and economic development network (Box 3.8).
Centre-Val de Loire (CVL) is a French region with EUR 1.3 billion in R&D activities, and which has built a regional innovation and economic development network over the last decade. The network has 350 members that interact with firms across the region. Its aim is to strengthen the regional ecosystem in order to improve the effectiveness of the regional innovation/smart specialisation strategy (RIS3). The network benefits from executive-level support from participating businesses and is working to further professionalise membership through the “Economic Developer University” in order to improve the quality of business services, particularly for SMEs. The network benefits from the input of stakeholders involved in the regional innovation ecosystem and from political support at the regional level to improve the effectiveness of the innovation system. It, however, takes a neutral stance, as there are competitors even at the board level.
The management of the network by a dedicated organisation (a regional innovation agency) is considered a critical factor of its success, particularly in creating projects and supporting private sector research, development and innovation (RDI) investments. The European Regional Development Fund Thematic Objective 1 results indicator set an increase in the number of innovative companies from 1 000 to 1 500 to be attained in the 2014-20 programming period. By the end of 2017, 1 620 were listed in the database.
Source: OECD (2018b), “OECD Experience on Broadening Innovation and Innovation Diffusion”, Scoping Paper for Peer Learning Workshop, Lille, 11-12 April, OECD Paris, Unpublished.
Creating effective university-industry collaboration
Universities are major players in regional open innovation systems and numerous benefits derive from university-industry relationships, including innovative products and technologies, skills and knowledge provision to students, spin-off creations and higher rates of patenting. Given these benefits, many regions in industrial transition have adopted strategies and programmes to promote university-industry partnerships. However, some of these are considered fragmented, uncoordinated and limited in scope by a number of policymakers in regions in industrial transition (see Annex A).
There is a range of policy tools available to regions in industrial transition to support university-industry partnerships in a more coherent and structured manner (Table 3.3). These include collaborative research tools such as grants and innovation vouchers, and contract opportunities to develop, in partnership, innovative products or organisational practices that can increase productivity, fundamental for these regions. Universities can also receive funding from the public sector to support spin-offs and academic entrepreneurship, one good way to spur entrepreneurial dynamism in the region (see also Chapter 4). Open research laboratories or student hiring are additional instruments to support exchange between industry and university.
Clear framework conditions need to be in place for industry-university collaboration to be successful. They include adequate and sustainable funding, clear rules on property rights and confidentiality issues, career incentives for professors to be involved in industry collaboration and sufficient trust among actors (Etzkowitz and Zhou, 2017). University activities such as co-ordinating innovation labs, filing patent applications and developing innovative products for industry partners or spin-offs are suitable mechanisms to encourage such partnerships.
Research and technology organisations (RTOs) have developed in many European countries and regions to support local industry, often around specific industrial technologies or sectors (Charles and Stankova, 2014). They play an important role for regions in industrial transition through their ability to identify industry needs and technological opportunities. They can also facilitate access to global knowledge for regional firms through their networks and research collaborations and facilitate cluster interactions among firms. RTOs are often non-profit organisations funded by industry. Examples are the AIMEN Technology Centre in Spain, the EURAC research centre in Italy, and the VTT Technical Research Centre in Finland.
Ensuring innovation diffusion reaches left-behind places and firms in regions in industrial transition
Innovation has implications for inclusiveness since the distribution of innovation capacities across the local economy, among firms, regions, universities and public research institutes, is not evenly spread among industries and/or across a territory. As economies become increasingly knowledge-based, regions in industrial transition might be confronted with a situation in which successful innovation can easily be captured by leading firms. This can lead to a stronger concentration of innovation capacities in those areas, which have the most established innovation systems.
If well managed, digitalisation has the potential to support the “democratisation of innovation” by opening up new opportunities for small and lagging firms. Industrial and territorial inclusiveness depend on conditions generating a favourable environment for innovation and the diffusion of innovation. Regions in industrial transition can support places and firms behind the frontier in their regions by leveraging the potential of cities and tradable sectors, capitalising on the innovation strengths of the region and supporting skills development and utilisation in lagging places (see also Chapter 2) (Table 3.4).
Leveraging the potential of cities and tradable sectors
It is well-established that agglomeration areas with a high density of people and economic activity offer several productivity advantages for new and established businesses (Feldman, 2000; Duranton and Puga, 2004). Educated and skilled workers tend to flow to large cities because of labour market prospects as well as the local availability of diverse amenities. Likewise, knowledge-intensive and high-tech firms, R&D and headquarter services tend to locate in large cities, in part because of access to skills and connectivity.
Regions undergoing an industrial transition are often home to dynamic cities but also to more rural and left-behind places. Cities can serve as hubs for businesses in rural areas if links between the metropolitan and other areas are effective. In order to realise the potential of cities for rural areas, co-ordination of policies across administrative boundaries and across policy fields is required. Importantly, connections should be understood in a broader sense, including physical connectivity (i.e. facilitating physical connections such as with transport infrastructure) but also non-physical connections. For example, businesses in rural areas should be connected to other firms and universities that create innovation and to financial support organisations (OECD, 2018a). Startup Sweden is an example of how rural digital businesses receive support to benefit from the entrepreneurship ecosystem in Stockholm (Box 3.9).
Startup Sweden, launched in 2016, is a boot camp for digital start-ups from rural areas in Sweden. The boot camp takes place 4 times a year, with each bootcamp providing 10 companies with the opportunity to go to Stockholm and expand their networks via contacts with other companies, financiers, potential customers and partners. The main idea of the programme is to develop and leverage networks and connect firms to a broader entrepreneurial ecosystem.
Participating companies also get practical advice and knowledge in business development – from other start-ups as well as from experts in various fields. They can also practice their sales pitch for an audience of companies, coaches, sales pitch experts and investors. The selected companies are further given the opportunity to meet with private and public investors at Sweden’s biggest demo day for digital enterprises – Sweden Demo Day – as well as the possibility to get priority access to selected actions and international networks, such as the Mobile World Congress (MWC), Innovate46 and Slush.
Some of the success factors are:
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The policy initiative connects start-ups from rural areas across Sweden with the entrepreneurial ecosystem in Stockholm. Internal documentation suggests that 12 out of 80 participating firms have acquired SEK 75 million in external financing, and 75% of these firms are located outside Stockholm.
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Continued collaboration with participating firms takes place after the boot camp. The agency works with a digital platform to create an online community in which the agency and the firms can remain in contact and help each other in matters such as financing, marketing, public relations (PR) and contacts.
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Participants can grow globally by establishing contacts with entrepreneurial ecosystems in other countries.
A challenge has been to reach firms outside of Stockholm and to attract good quality applications. The agency has undertaken a number of measures to better market the policy initiative. One strategy has been to use alumni firms to disseminate information about the boot camp and to collaborate with local actors to reach out to local firms outside Stockholm.
Source: Swedish Agency for Economic and Regional Growth (n.d.), Homepage, https://tillvaxtverket.se/english.
More generally, policymakers in regions in industrial transition need to think beyond regional boundaries even if their focus is on developing their own region’s economy. Often, productivity in one place can be raised through spill-overs and connections established within another region or country. To identify and use these opportunities, regions need to co-operate with each other and exchange information.
In addition to supporting urban agglomerations, OECD research has highlighted the importance of the tradable sector for regions to “catch up” with the European productivity frontier (Figure 3.1). Regions and countries with a higher share of economic activity in tradable sectors innovate more, are more productive, have higher wages and narrow the “productivity gap” faster (OECD, 2018a). Tradable sectors are those sectors whose output in terms of goods and services are traded internationally, such as manufacturing. The non-tradable sector usually consists of services, including, for example, health, retail and construction. Firms in tradable sectors tend to be more innovative because of global competition; thus, moving into tradable sectors can be one channel for these regions to increase the innovation levels of local firms. Regional policymakers can strengthen tradable sectors in various ways. For example, well-designed cluster policies can facilitate investment in related activities and support knowledge spill-overs and diversification based on regional strengths.
Capitalising on unique innovation strengths for future-oriented activities
Regions in industrial transition can have a highly developed and specialised knowledge-generation and diffusion system. However, there is a danger that these regions overspecialise in mature and declining industries. A key challenge for regional development is helping these industries break out of locked-in paths by pursuing innovation and exploring new technological pathways.
Following the argument of regional branching, new industry formation arises from the recombination of different but related knowledge, skills and competencies found in existing industries in the region (Asheim et al., 2011). Successful regional innovation strategies are founded on identifying unique characteristics of the region and focusing on how businesses can use existing strengths to grow. Typical regional strengths can be location (e.g. proximity to the sea might lead to specialisation in port technologies), natural resources, or specialisation in a certain type of activity or industry (e.g. aviation, automotive, etc.). A strong focus on these endogenous growth factors should be at the heart of local strategies. Concentrating on regional strengths is a better competitiveness strategy than a race to the bottom by which regions try to outperform each other by lowering environmental standards or tax rates for example.
Finally, territorial branding can be a useful tool for regions in industrial transition. Territorial branding highlights the uniqueness of a region and local specialisations and communicates regional excellence. In order to be successful, territorial branding should be based on local actions that realise the potential of the brand, such as promoting the brand through regional chambers of commerce and industry (Donner, 2016). Investments in productive activities related to the brand (e.g. in agri-business, tourism or industry clusters) should underpin it. Examples of successful territorial/regional branding are the brand Produit en Bretagne (Made in Brittany) in France and the Cherry Festival in Fundão, Portugal.
Key considerations and conclusions
Strengthening innovation and innovation diffusion is critical for successful industrial transition. Managing innovation opportunities in regions undergoing an industrial transition demands policies that are sensitive to people and place. This can mean re-thinking how innovation is best stimulated to trigger productivity growth and job creation, given a region’s particular industrial profile and capacity. This section offers a number of key considerations and conclusions in policy design and implementation that are of particular relevance to regions in industrial transition.
Innovation policy needs to address dynamic and left-behind places simultaneously
It is important for regions in industrial transition to recognise that policies for innovation are part of a broader regional development agenda. Regions in industrial transition need to ensure that the gains of innovation are widespread and are not concentrated in urban or metropolitan areas. Accomplishing this may mean ensuring that innovation policies do not focus on incumbent firms over new entries and pursuing territorial inclusiveness by addressing all entrepreneurs beyond those residing and operating in cities.
Be aware of risks – Innovation creates winners and losers
Innovation inherently creates winners and losers in the process of creative destruction, with some firms and individuals benefitting through substantial returns to their invested labour and capital. In regions in industrial transition, technological change has tended to be skill-biased, favouring those with the highest skills, sometimes to the detriment of those with lower or medium-level skills. If there is no upskilling and retraining of those with lower skill sets, growing income inequality will likely be the result. Governments in regions in industrial transition must have a range of policies in place to seize the opportunities arising from innovation but also to manage some of its associated risks.
Policy alignment and multi-level governance of innovation policies are important
The precise application of innovation policies will differ according to the context in each transition region. These policies may also be affected by the sector or technology concerned, and by the specific objectives of innovation. Ensuring alignment among the wide variety of policies that intersect with innovation policy – including policies in skills, education, labour market, science and technology, SME, etc. – is a key component to overcoming the fragmentation that can accompany innovation policy and its implementation. This should be addressed at the national as well as subnational level. The development and implementation of innovation policies also require a capacitated public sector, trust in government and multi-stakeholder support.
Do not create paper tigers – Test and adjust regional innovation strategies
Establishing a regional strategy for innovation and economic development is one thing; its implementation is often another matter. Innovation policies operate in a complex, dynamic and uncertain environment, where government action will not always get it right. A commitment to policy monitoring and evaluation, to experimentation and pilots, and to learning from experience in order to adjust policies over time, can help ensure that government action is efficient and reaches its objectives.
Innovation diffusion is often embodied in “tacit” knowledge
The process of diffusion is more than the one-way flow of technology embodied in equipment. It is the process whereby an innovation, including the “tacit” knowledge of how it should be applied, spreads from the original innovator to other users. It involves a range of private and public institutions and individuals, including large firms, clusters of firms, suppliers, customers and public research institutions. For regions in industrial transition, stimulating knowledge transfer and scaling local, national, and global innovation linkages and networks is crucial because too few firms are integrated into local and global innovation networks, which would allow them to benefit from knowledge and innovation spill-overs.
Organisational changes require different skills profiles for innovation
The concepts of innovation and diffusion have broadened to cover all the actions firms and universities take to exploit the benefits of innovation. Among these, organisational change is widely seen as a prerequisite for firms and researchers to be able to absorb and exploit innovation. The new production technologies, such as the Internet of Things (IoT), 3D printing, etc., increasingly depend on data processing capabilities and modularisation of tasks through software. These production processes require intensive organisational changes and new skill requirements that will determine the absorptive capacity of firms or their abilities to exploit new technology. Re-orienting training and upskilling towards these developments are critical in regions in industrial transitions in order to fully reap the benefits of automation and digitalisation.
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