Regions and small countries need a Smart Specialisation strategy

13 Jun 2012 | Viewpoint
Beyond measures to improve the framework conditions for innovation there is a need to concentrate resources in priority areas. Governments must let entrepreneurs show the way to these Smart Specialisations, says Dominique Foray

Smart specialisation is a policy concept that has enjoyed a short but very exciting life. Since being elaborated by a group of innovation scholars in 2009, it has very quickly had a significant impact on the policy audience, particularly in Europe. The concept is now a key element of the EU 2020 innovation plan, with the Commission deciding to build a platform of services to support regions in devising and implementing a smart specialisation strategy.

In addition, smart specialisation is also seen as an important underpinning of the Research & Innovation target and the Information and Communications Technology target, of the future Cohesion Policy.

In these times of financial crisis and budget prioritisation, smart specialisation helps regions and small states to bring a fresh perspective to the problem of resource allocation.

Deciding on priorities

The central insight of smart specialisation is that beyond the programmes that are essential to improve framework conditions - good universities, R&D tax credits, effective intellectual property rights, competition and openness, ICT infrastructure – it is crucial to prioritise, concentrating resources in specially-selected domains to get economies of scale and build critical mass.

The novelty of this policy approach comes in the answer to the question, “What are my priorities”? Priorities will neither be sectors as a whole, nor individual firms: they will be new and emerging activities that show promise and potential.

Priorities emerge where and when opportunities are discovered by firms and entrepreneurs. Indeed, the entrepreneurial discovery process is a critical element of this policy approach because it is essential to avoid any top-down priority setting by omniscient planners. Instead, the objective is to foster an interactive process, in which the private sector is discovering and producing information about new activities, and the government assesses potential and then empowers those actors most capable of realising this potential.

Applying enabling technologies

So for example, in 2008 in research by a number of pulp & paper companies in Finland uncovered the potential of nanotechnology to improve the efficiency of the industry. This is an entrepreneurial discovery (not one simple innovation) which is about the complementarity between a Key Enabling Technology and a traditional sector, and which generates information on the value of using nanotechnology to increase operational efficiency.

The government should support initiatives like this to help the activity to grow, through measures such as solving coordination problems, securing key supplies, attracting service providers and other firms. In doing so, what the government is supporting is neither the whole sector nor one single firm, but the growth of a new activity.

This achieves two things: it improves the overall performance of the pulp & paper sector, whilst at the same time building capabilities in the practical application of nanotechnology.

This is smart specialisation: and it is expected that two or three years later other discoveries will be made in other sectors, and the subsequent activities will be supported as well. Smart specialisation entails strategic and specialised diversification.

Complementing existing assets

In general, but not always, emerging activities are characterised by innovative projects which complement existing productive assets of a regional economy. The pulp & paper/nanotechnology example exemplifies this process of modernisation of a traditional industry. Another example of innovative projects complementing existing assets is when there is diversification, or a transition, from an existing set of capabilities, to a new business.

Many issues still need to be addressed. For a start, the process require capabilities that are unusual in policy makers - of being able to pinpoint entrepreneurial discoveries and assess their potential. Clear benchmarks and criteria for success or failure are needed, because, of its nature, this policy is experimental. However, such experienced policy makers are likely to be thin on the ground at a regional level.

In addition, some regional systems are too weak to generate the needed entrepreneurial discoveries. What to do in such case?

A smart specialisation policy needs intelligent design, involving incentives to reward those who discover new domains and activities, incentives to attract other agents and firms and facilitate new entrants, so that agglomeration and scale effects materialise at the next stage. The two series of incentives are not perfectly aligned.

These issues are at the heart of the new industrial policy agenda, which is the main reference and source of inspiration for the smart specialisation concept.

Dominique Foray is the Director of the Chaire en Economie et Management de l'Innovation at Ecole Polytechnique Fédérale de Lausanne. He was vice-chairman of Knowledge for Growth, a group of prominent economists that from 2005 – 2009  advised the then R&D Commissioner Janez Potočnik.

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