CAN SMART
SPECIALISATION HELP
OVERCOME THE REGIONAL
INNOVATION PARADOX ?
UCL-SSEES, London, 26/06/2013
Paper co-authored by:
Alessandro Muscio
Università degli Studi di Foggia (Italy)
Email: al.muscio@unifg.it
Lorena Rivera León & Alasdair Reid
Technopolis Group, Brussels (Belgium)
Email: lorena.rivera.leon@technopolis-group.com
Email: alasdair.reid@technopolis-group.com
A decade ago…

"The regional innovation paradox refers to the
apparent contradiction between the comparatively
greater need to spend on innovation in lagging
regions and their relatively lower capacity to absorb
public funds earmarked for the promotion of
innovation and to invest in innovation related
activities, compared to more advanced
regions.” (Oughton et al., 2002)
What has happened since ?

Geopolitical situation: 12 new Member States – mainly
‘transition economies’
  Shift


Economic power – shift of trade and market demand
towards BRICs, economic crisis after ‘growth bubble’.
Innovation systems have ‘opened’ and ‘internationalised’


of EU funds towards Eastern Europe (EE)
increased challenge to create/attract/retain innovation
resources in regional (and national) systems.
Global challenges – environmental sustainability from
inconvenient truth to desperately seeking solution.
And diversity persists in governance
performance

“the quality of governance (QoG) is highly correlated with
regional indicators of socio-economic development and
levels of social trust…there thus seems to be ‘four Europes’
with respect to QoG” (Charron et al, 2012):
The top performers: Nordic, Germanic & Anglo-Saxon countries.
  The second tiers consists of Mediterranean countries plus the two
best performers in Central-Eastern Europe (Estonia and Slovenia).
  The third consists of post-communist EU Member States and,
significantly, two southern European countries, Italy and Greece.
  The fourth group is the most recent Member States: Bulgaria and
Romania

Is the Regional Innovation Paradox a
persistent phenomenon ?

Our (draft) paper :
  Reviews
the literature and evidence on innovation systems,
regional policy and the regional innovation paradox
  We examine the specific case of the central and Eastern
European (post-)transition ‘innovation systems’ and what the
new ‘smart specialisation’ mantra could mean – linking it to
the NSE arguments on initial endowments, institutions and
comparative advantage.
  We then test empirically whether the regional innovation
paradox is still a factor impinging on the effective use of EU
Cohesion Policy to foster structural change through
innovation intensive investment.
Regional innovation paradox:
open questions

1) We investigate the determinants of regional
economic performance to check if EU funds promote
an increase in performance?
  Less
favoured regions need investment in innovation, receive
money but…do they grow?


Value Added=f(EC funding, control factors)
2) Less favoured regions need investment but cannot
absorb it because of their lower governance capacity
Does past absorption of EC funding allow regions to
leverage ‘more’ EC funding in future rounds ?
Is an effective use made of EC funding already absorbed



3 indicators (EC funding, HRST, EC funding per HRST)
EU funding and Innovation performance – Evidence from
the Regional Innovation Scoreboard 2012
Empirical analysis
Empirical work is based on an econometric analysis
of regional data analysed at the NUTS2 level for
the period 2000-09.
  We distinguished between type of region by
Structural Fund Objective ‘Convergence’ and
Regional Competitiveness and Employment’
  We tested specifically for a ‘location’ effect of
being an Eastern European (EE) region = Poland,
Hungary, Czech Republic, Slovakia, Slovenia, Latvia,
Lithuania and Estonia.

Data used
Eurostat data was used for for indicators of value
added, public and business R&D, population and
human resources employed in science and
technology (HRST).
  DG REGIO data on Structural Funds expenditures
for the period 2000-06 and Structural Funds
allocations for 2007-13.
  Data on regional participation in the research
Framework Programmes 6 and 7 was sourced from
E-CORDA.

Description of variables used in the
econometric analysis
Variable(
Definition(
Type(
Source(
annual(average(VA(per(
capita(growth(2000;09(
log(SF2007;13((Core(RTDI(
&(Business(Innovation)(
per(capita(
region(in(EE(country(
Average(annual(growth(rate(of(value(added(per(capita(
over(the(period(2000;09.(
Allocation(of(Structural(Funds(2007;13(per(capita(in(the(
areas(of("Core(RTDI"(and("Business(Innovation".(
continuous(
Eurostat(
log,(
continuous(
DG(Regio(
Localization(of(the(region(in(an(Eastern(European(
country.(
Value(added(per(capita,(stock(level(in(the(base(year(
2000.(
Framework(Programme(6(total(subsidies.(
dummy(
;(
log,(
continuous(
log,(
continuous(
log,(
continuous(
Eurostat(
log,(
continuous(
log,(
continuous(
log,(
continuous(
log,(
continuous(
Eurostat(
log(value(added(per(
capita(
log(FP6(total(funding(per(
researcher(
log(SF2000;06((Core(RTDI(
&(Business(Innovation)(
per(capita(
log(BERD(per(capita(
log(HR(S&T(/(population(
log(economic(activities(
Herfindahl(index(
!
Expenditure(of(Structural(Funds(2000;06(per(capita(in(
the(areas(of("Core(RTDI"(and("Business(Innovation".(
Business(expenditure(for(R&D(per(capita,(stock(level(in(
the(base(year(2000.(
Share(of(population(employed(in(Science(&(
Technology,(stock(level(in(the(base(year(2000.(
Number(of(economic(activities,(stock(level(in(the(base(
year(2000.(
Herfindahl(index(in(the(base(year(2000.(
E;CORDA(
DG(Regio(
Eurostat(
Eurostat(
Eurostat(
Step 1: does EU funding drive value
added (VA) growth ?
The econometric analysis tests the impact of access
to EU funding on regional economic growth.
  We assessed whether access to SFs and FPs funding
drives to any extent VA growth and in particular, if
these subsidies have any effect on EE regional
growth performance.

Step 1: results
OLS$regression$
(1)$
(2)$
Dep.$Var.:$annual$average$VA$per$capita$growth$2000A09$
$$
$$
$$
region$in$EE$country$
0.0988**$
0.0674**$
$
[0.0202]$
[0.0183]$
log$value$added$per$
capita$
A0.0215**$
A0.00614$
$
[0.00807]$
[0.00772]$
log$fp6$total$funding$per$
researcher$
0.00272**$
0.00354**$
$
[0.000849]$
[0.000930]$
log$sf00A06$core$
RTDI+Business$
0.000842$
A8.96eA05$
Innovation$per$capita$
$
[0.00151]$
[0.00142]$
int.$log$sf00A06$core$
RTDI+Business$
Innovation$per$capita$&$
EE$
A0.0256**$
A0.0226**$
$
[0.00369]$
[0.00307]$
log$BERD$per$capita$
$
A0.00694**$
$
$
[0.00149]$
int.$log$BERD$per$capita$
&$EE$
$
0.0131**$
$
$
[0.00252]$
log$HR$S&T$/$population$
$
$
$
$
$
log$economic$activities$
$
$
$
$
$
Herfindahl$index$
$
$
$
$
$
Constant$
0.217**$
0.0966$
$
[0.0789]$
[0.0730]$
$
$
$
Observations$
232$
214$
RAsquared$
0.536$
0.618$
Robust$standard$errors$in$brackets$
**$p<0.01,$*$p<0.05,$+$p<0.1$
“convergence” effect
confirmed
  FP6 research
subsidies drives
growth very modestly
  SF 2000-06 did not
drive VA growth
significantly.
But
  Access to SF had a
lower effect on
growth in EE regions
than in other
European regions !

!
(3)$
(4)$
$$
0.0622**$
[0.0197]$
$$
0.0412+$
[0.0230]$
A0.00888$
[0.00838]$
A0.0205**$
[0.00780]$
0.00330**$
[0.000955]$
0.00403**$
[0.00108]$
A7.71eA05$
[0.00143]$
A0.00110$
[0.00174]$
A0.0228**$
[0.00288]$
A0.00759**$
[0.00151]$
A0.0245**$
[0.00394]$
A0.00952**$
[0.00174]$
0.0136**$
[0.00248]$
0.00794$
[0.00582]$
$
$
$
$
0.143$
[0.0865]$
$
214$
0.622$
0.0152**$
[0.00303]$
0.0228**$
[0.00743]$
0.000117$
[0.00201]$
A0.103+$
[0.0592]$
0.318**$
[0.0819]$
$
169$
0.650$
Step 1: results (continued)

BERD expenditure has a negative impact on growth ! A finding to
interpret with some caution:





The result is very small - for 100% increase in BERD per capita, VA per
capita diminishes by less than 1%
There is a parabolic concave relationship between BERD and growth –
with to the left of the maximum point EE and other low income European
regions and to the right RCE regions with high levels of BERD per capita.
Some sort of “Swedish Innovation Paradox” is taking place in Europe,
with high levels of expenditure on R&D not driving economic growth.
The opposite in the case for EE regions, where we estimate that
BERD investments drive economic growth, even if by a small margin.
Finally, our results confirm the findings of other economists that
investment in HRST has a positive effect on economic growth
Step 2: Testing the paradox
Second step of the econometric analysis is based on
the same model but we introduced as a dependent
variable regional access to EC SFs for the current
programming period 2007-13 expressed in log.
  Low income regions have larger access to funding
for the programming period 2007-13 but ceteris
paribus location in EE countries does not have a
significant impact on access to funding.

Step 2 : results

Cumulative effects are found for both FP6 and SF2000-06
funding, as larger participation in FP6 and larger access to
SFs in the past drives access to funding in the current
programming period.



However, no significant difference in the impact of the absorption
of SFs in 2000-2006 period between EE and other regions.
As expected, given the mission of EC SFs, regions with lower
levels of business expenditure in R&D have larger access to
funding in the current programming period, especially those
regions in EE countries.
We found no significant effect of investments in HRST on
allocations of SFs to RTDI in 2007-13.
What do these results imply ?
A first general finding is that SF RTDI funding has so
far not made a significant contribution to growth
especially in EE regions.
  Moreover, there is some evidence that the Regional
Innovation Paradox is alive and kicking, as EE
regions (that badly need funding) are not
advantaged in terms of access to SF RTDI funding
once all other factors are held constant (HRST, BERD,
etc.).

Conclusions: smart specialisation in
(post-)transition economies



Our work suggests that the 2014-20 Structural Fund
period may be a make or break one for the EE
countries if they are to achieve structural change and
break-out of the ‘middle-income trap’.
Evidence suggests the current EE innovation systems may
be reaching (have reached) a ceiling in terms of
capacity to absorb RTDI (infrastructure) funds.
The potential of smart specialisation strategies to foster
‘innovation-driven growth’ is seriously constrained by
weak governance capacities.
  This
constraint will bite not primarily at the strategic (priority
setting) level but at the programme implementation level.