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All the more recent growth theories are placing innovation at the heart of what drives creativity and growth in countries and regions. However, the available data shows that regional growth is very much a self-reinforcing phenomenon, leading to a huge amount of inertia, a fact that flies in the face of a lot of regional agendas: “When you are stuck at the bottom you are going to stay there for quite an amount of time, it gets quicker when you are already in the middle”.

Regions should, thus, be aware were they are and act accordingly. They should focus on and develop their relative strengths, build their talent base, try to impress investors by focusing on creativity, entrepreneurship and innovation and get their research actors to network globally. This is a good time to do so. Even if many investment decisions are currently on hold, not all is black, there are some bright lights, particularly in all that’s “green”, and, on the whole, Europe’s attractiveness in investor’s eyes is growing. Europe is currently seen by investors as the safest FDI destination for the immediate future.

These are just a few of the conclusions obtained this week from a very enlightening debate we had at ERRIN on “Lisbon in Practice – Regional attractiveness for R&D investment”. We had invited four leading thinkers to help us sharpen our understanding on what fuels growth in the regions and what makes regions attractive for outside investment.

Here is a short account on the main points presented and discussed. Slides are, as always, available on our homepage ERRIN (check our news section).

The aim of this event was to help ERRIN members and our other friends from the Brussels policy community that are, as we, passionate about research, innovation and development to get a clearer understanding of what an innovative region is, what drives growth in regions and how to identify success factors and measure all that.

Moderator Richard Tuffs from West Midlands in Europe kicked the meeting off by pointing to Richard Florida’s new book “Who’s your City?”. Once again, Florida, puts the relevance of place on the map with “Geography being the new economy.” The question is, thus, “how do we attract and retain talent in the global economy?” The idea being very much about regional attractiveness of regions. This is also brought up by the Barca Report that discusses the economic rationale and motivation of an EU place based development policy and provides an assessment of EU cohesion policy. Placed-based thinking and a regional perspective is also gaining traction in the discussions about the European Research Area and its Vision 2020.

BEN GARDINER, Cambridge Econometrics

Ben presented the first results of a 4 year project they are doing with DG REGIO that looks into which regions perform better or worse in terms of growth. The project is entering its second year, with the number crunching and reviewing the literature being now out of the way and starting with its first case-studies. It is important to note that Ben and his team are going to do 45 case-studies with interested ERRIN members being invited to propose their regions as case-studies, the final selection of which is determined very much by DG Regio. More information on this project is available at www.euregionalgrowth.eu.

According to Ben, all the more recent growth theories have placed innovation at the heart of what drives creativity and growth. However, a key problem being that there is no dominant theory available. To solve the riddle of what drives performance, Ben and his team have identified about 60 different variables. Looking at the actual data available to verify their assumptions, is when the real challenge starts, e.g. how to measure trade, how innovation?

One of the key findings so far is that growth is very much self-reinforcing. If we look at GDP per capita levels vs. growth from 1995-2005, we find that about 85% per cent of the regions that were at the bottom of the pile in 1995 were still there in 2005 and only 15% made it up one level (see slides). This demonstrates that there is a huge amount of intertia in the system, which flies in the face of a lot of regional agendas.

The important thing here is that for most EU Member States productivity is the driver behind GDP per capita growth, with the exception of, most notably, Spain and some other countries, where growth was driven by employment. However, driving growth through more employment is just a short adjustment process, there is a logical end to this. But with innovation, the growth potential is limitless, which makes it one of the most robust factors of growth.

Marc Lhermitte, Ernst & Young

Ernst & Young undertake each year a “European Attractiveness Survey”, which is a unique report combining reality and investor’s opinions since 2004. For this year’s survey 809 international executives were interviewed in February 2009 about their perspectives for (business) Europe (i.e. not only EU). The European Investment Monitor, also compiled by E&Y, that scanned 42 European countries for investment projects in 2008 served as a quantitative basis for this survey.

While, obviously, FDI has contracted due to the crisis, meaning that five years of sustained investment growth in Europe is coming to a halt, the good news for Europe is that its attractiveness in investor’s eyes is growing compared to investments in BRIC countries, for instance, which are perceived as more risky at the moment. Europe is seen as the safest FDI destination for the immediate future, compared to last year’s survey when China and India were leading way beyond. According to Marc, it is all about perceptions. We have to keep in mind the way decisions are made at Company Board meetings.

Interestingly, when asked how Europe is doing in terms of innovation capacity, 76% of investors give Europe a thumbs-up, finding Europe’s policies pretty straightforward and understandable, which is a positive vote on the Lisbon strategy.

About 50% of all FDI in Europe is done by European companies. 200 new investments in Europe were made by Chinese and Indian companies that very much see Europe as their next frontier. Europe’s diversity in markets, skills, cost, etc. is generally seen as a strength, even if different and complex regulatory regimes are perceived as a drawback.

Europe is very much perceived as a refuge in these difficult times. Western and Central and Eastern Europe are currently seen as the most attractive regions for FDI and in the long term (next 3 years) Central and Eastern Europe are top of the list, seen as even more attractive than China.

Half of the canvassed investors say they want to invest in Europe, but 53% say they don’t have any immediate plans. This will certainly have impact on 2009, where we are already seeing a minus of 20 pct. 50% of investors are currently reconsidering their international expansion strategies because they are focusing on the immediate future, securing the present and protecting current assets.

While there are some “bright lights” and green industries are still on the upside, some industries were severly hit, e.g. (see slides for more detail):

IT and Finance: Especially true for Western Europe. Attracting related services, especially in cities, has become a weakness. Automotive: Down 30% in 2008. Electronics: Hit hard, especially in Eastern Europe.

But even in this time of crisis there are FDI winners, e.g.: Germany (fuelled by headquarters for Eastern European markets), Ireland (call centers), Italy, Sweden (see slides for more detail).

Investment goes very much to urban areas, which is what Florida describes well. Europe’s clients are very loyal clients. So retaining these companies is absolutely critical for countries and regions. One out of two new jobs came from extension of existing investments!

Promising sources of innovation and growth are clearly seen by investors in green technologies and environment, Energy and utilities, ICT, Pharma and Biotech and logistics/distribution channels.

When asked where innovation will come in their own companies, investors put interaction between the company and clients at the top. Most plan to innovate in communication channels (i.e. data mining, internet, software) and supply chain management, which scored way beyond products, sales and marketing and management.

And where do investors see main areas of reform to encourage innovation in Europe? Asked about this, they said they would like governments to develop a culture of innovation and creativity, improve education and training, establish tax incentives for innovative companies, develop entrepreneurship and develop joint research programs at European level.

First round of debate with the audience:

An interesting debate arose around the cluster concept, which for many academics is all water under the bridge by now. Marc brought home the point that when everybody else says we’ve had enough of that, that’s when companies start understanding it, so the cluster concept and related support measures is by no means something we should easily discard.

When asked by the audience how to pitch regions to foreign investors, Marc said that out of their practice in working with companies (and advising governments and regions), Richard Florida was right about talent. This was initially a theoretical thing but is now fast catching up with companies. He said investors get very impressed by creativity and multiculturalism and a culture of entrepreneurship, which is something countries, regions and cities should encourage and create right from the primary schools. However, regions should be well aware of their historical DNA and understand what can be changed and what not.

Ben added that it is important take stock of one’s skills base. However it is not only about university graduates. Successful regions need a full range of skills, white and blue collar, and also have the necessary infrastructure and ability to access the wider world. In this respect establishing links with other regions to learn from best practice is crucial.

Regions need to analyse their relative (and not necessarily their absolute) strengths [Note from the autor: This reminded me very much of Ricardo’s comparative advantage], look at what their assets are and not try to invent something that is not there. For instance, the number of regions that want to develop a Biotech cluster is legend. There are clearly too many.

Concerning Florida, he advised to read the paper “The wrong stuff”, which was written in response to Florida. A finding quoted in the Barca report, according to which five European capital cities grew lower than their surrounding, was suggested to mix up the whole idea of what drives what: “You don’t drive growth by building an opera house.”

[Note from the author: The paper examines Florida’s ideas, focusing on the evidence in British cities. It finds little evidence of a ‘creative class’, and little evidence that ‘creative’ cities do better. Businesses look for skilled workers when making location decisions, but skilled people also move to where the jobs are. Buzz attracts young people to city centres for a short time, after which most move out to suburbs. The paper concludes that the creative class model is a poor predictor of UK city performance. There is other, stronger evidence that diversity and creativity are linked to economic growth in cities, not least through rebranding and boosting tourism. Decision-makers should focus on the basics: creativity is the icing, not the cake.]

Vincent Duchene, IDEA Consult

While IDEA’s FP6 ex-post evaluations concluded that FP6 generated European added value mainly through driving network externalities, improvement in knowledge infrastructure, involving first-rate projects and top-quality researchers, fostering mobility and internationalisation, providing step towards co-ordination of EU and MS research policies and leading to significant changes in research system in New Member States, it is also evident that there was a downward trend in industrial participation, particulary of SMEs, a complex and slow administration and limited structuring effect of new instruments.

A major area of concern was that the FP has become more and more academic and is funding mainly public research. Overall, the new instruments, like networks of excellence, failed to address the problem they were designed to tackled, i.e. sustainability to structure the ERA.

In the meantime (FP7), the European Commission has countered this trend by, for instance, introducing European Technology Platforms (ETPs). However, as concerns the low participation of SMEs and the low success rate of SME projects, there has been no fundamental change in this trend up to now. The complexity and slow administration of programme are clearly not in sync with business reality. Also, the problem of IPR regulation maybe harmful for some companies, which explains why, for instance, the pharma industry was not present in the FP6.

Another trend identified was that the Commission promotes more and more large networks, whereby it is not easy for company to have joint projects with their competitors. “Networks of excellence are so big that they are not excellent anymore because everybody is in!” With larger and larger consortia projects, one runs the risk of stimulating the emergence of oligopolies in the research market.

However, other conclusions suggest that without EU funding research projects fall back on your domestic biotope and that they are less ambitious in terms of technological level.

It is also important to note that 90% of organisation applying for FP6 draw already on regional/national funds and that 65% build their project on past R&D conducted in national/regional programmes. Ergo, FP6 participants were well-experienced RTD performers that first got their learning curve through obtaining getting funding from national/regional programmes before jumping to the champions league.

As regards SME participation, two types of SME can be distinguished:

1. SMEs with in-house high-tech R&D capabilities, e.g. university spin-offs: They are doing fine but the target of 15% is not reached.

2. Lower capabilities SME’s, the “technology followers” with low/no in-house R&D capacity: This large group is mainly targeted by SME specific measures. The principle is to provide money to give them the opportunity to buy in R&D expertise. You put them in an international consortium together with RTD performers with the aim to address their innovation needs, increase their RDI capabilities and improve transnational R&D collaboration. However, there has been a very low success rate. SMEs are rarely in the driving seat of these consortia, so it is really the performers that are putting together a research agenda and look for SMEs to access EU funding.

How does that deal with innovation needs of SMEs? Support for SMEs is a worthy and necessary ambition, but is this the best use of resources? Is it really the role of the FP to to attract lower capabilities of SMEs or is it better to focus on frontier technologies, on excellence? What is the right division of labour?

As a consequence and as a good way to trigger debate around the above questions, Vincent suggested to implement an integrated impact assessment tailored at regional level with:

1.Sound empirical, methodological base;

2.Internationally harmonised approach / method

3.Multi-level approach: integration with national / EU levels

Second round of debate:

How robust drivers are these research programmes?

Ben answered that for obtaining this kind of information for the regional level, the data is missing. One issue was whether EU funding makes a difference in country/regional performance, which is difficult to observe, since, typically the regions that are worst get the funding in the first place, so you would have to ask whether they would be even worse off, had they not received funds, which doesn’t get you very far.

A comment from the audience suggested that concerning SMEs it was sort of miraculous that so many have engaged in the FP in the first place, given that the language of the programme is alien to them and that there is no adequate knowledge transfer system. It was also suggested that if we invest in innovation, shouldn’t we better invest in commercialisation of ideas and assess the return on this investment over time, along the lines of the Eurostars programme.

Vincent said that Eurostars is an important type of intervention of the new family of instruments, which might be one of the options for the future.

Asked how the regions should play this game, he said it depends very much on the starting conditions and the initial human capital stock. Assuming everything was equal, he would first see in which field a country/region has a competitive advantage and then concentrate the efforts in participating in sustainable networks and projects via FP funding, such as Eureka and COST and in stimulating research teams to interact globally with top researchers.

Ben said that regions should focus on providing assistance with the red tape, all the paperwork to be done. It was crucial to break down those barriers to make it more transparent and attractive to participate.

A comment from the region of Navarra highlighted their efforts to hire consultants to help SMEs to identify valuable projects for the FP.

Andrew Davies, OECD

Andrew sent his apologies, since important engagements in Paris had prevented his attending the debate. Instead Claus Schultze, Director of ERRIN, presented shortly an outline of the joint OECD/European Commission project on “A new innovation strategy for regions: Improving the effectiveness of innovation policy and innovation-related spending at regional level“, to which ERRIN acts as a member of the advisory group.

The aim of this global project is to take stock of the different approaches to supporting innovation at regional level. On the basis of a review of current policies and implementation mechanisms, the project will lead to identification of best practices and recommendations for improving policies in this field. The project is being organised around three broad “modules” that cover key themes that have been identified as of particular interest for regional policymakers. These modules will use a mixture of quantitative analysis, cross-national comparative research and case studies illustrating good practice. The modules are:

1. The role of public investment: measuring policy impact and performance at the regional level.

2. Collaborative mechanisms at the regional level

3. Multi-level governance and funding

Wrapping it up, moderator Richard Tuffs, suggested that the debate underlined that there is no one way to excellence in research and innovation. There seems to be a ‘decalage’ between the academic, the public policy and business front. It was most interesting to hear that we should not dump clusters, since people have just found about it. He also highlighted the role of the Brussels regional offices, which may not always have the expert knowledge of the subject but can provide the multipliers to animate the debate and spread the message.

For more info, feed-back and suggestions contact:

Claus Schultze?

Director

European Regions Research?and Innovation Network (ERRIN)

Avenue Palmerston 23,?B-1000 Brussels

Tel +32 2 230 44 41?

GSM +32 496 30 54 36?

Email: claus.schultze@errin.eu

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