Why territories also need a strategy

This week we welcome over 450 delegates from around the world to the Basque Country for the annual global conference of The Competitiveness Institute (TCI Network). This year’s conference seeks to address the critical issue of how to construct place-based competitiveness in times of rapid global change. Putting the conference together has been a real team effort, combining enormous amounts of energy and ideas from a whole range of stakeholders. The many months of planning, alongside other related research projects I have been working on recently, have led to some personal reflections on what it means to build place-based competitiveness.

Teamwork! (photo courtesy of Luis Silveira)

While it is common to talk about corporate strategies, it is much less common to analyse territorial strategies. This is perhaps strange given that cities, regions and nations are building blocks of the world economy. Competitiveness is essentially constructed from place: people, firms and other institutions all need the right environment to thrive, and yet it is they themselves that must create that environment in the places where they are based.

Indeed, while part of the international scrutiny of the Spanish economy in recent months has focused on the problems of devolving policy competences to regions, there are in fact large advantages from regions and cities taking control of policy if coordination issues can be overcome. In particular, well-functioning regions and cities bring decision-making closer to the people and firms that make up the economy, and can enhance accountability, efficiency and the chances of making the right decisions to boost competitiveness. See for example the conclusions of this recent ESPON project regarding cities and territorial development in Europe.

So what makes for a successful region or city? The key is to harness the creativity and energy of its people and firms towards a common set of goals. Above all it is important that there exists a coherent and evolving strategy with which government policies can be flexibly aligned. This is where regions have a big advantage, as such strategies are much more difficult to construct at national level, where there is more geographical (and sometimes cultural) distance and less opportunity for face-to-face interaction between stakeholders.

As with corporate strategy, the central issue when it comes to constructing a territorial strategy is the type of soicioeconomic activities that should be developed, both now and in the future. Experience in different parts of the world has uncovered some guiding principles. Firstly, a territorial strategy should build from what is already there; it is much easier to develop new activities from existing strengths. Secondly, it is important not to specialize too much in one activity; this leaves the region vulnerable to changes in demand, prices, technologies, etc..

In general, evidence suggests that successful regional strategies are based on an ‘intelligent diversification’ that seeks and creates synergies across different socioeconomic activities. These synergies strengthen the productive and social texture of the region, making it both more resilient to changing circumstances and more innovative. To achieve this, an inclusive process that builds linkages between different stakeholders is critical. While never an easy process, it should encourage continual exchange of ideas and visioning of the shape of the future economy to ensure that the region is always one step ahead and, most importantly, heading where it wants to go.

It is exciting to think that right now people are travelling from around the world to convene in the Basque Country to discuss these sorts of issues, and I am looking forward to learning a lot from the discussions and sharing of experiences over the coming days. Indeed, while place is important in constructing competitiveness, transcending place through such global networks of mutual learning is equally important and should be a key part of any territorial strategy.

A shorter version of these reflections was published in Spanish as an opinion article in elconomista.es.

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Employment creation without fast growth

The economic scenario in Spain and throughout most of Europe at the moment is characterised by a depressing mix of low demand, restricted public and private investment, high and rising unemployment, and a general feeling of instability. What is most significant amidst all of this, however, is that we are being challenged in terms of our expectations from socioeconomic development. We are used to being part of economies that grow steadily, positioned within a fairly stable world economic order, and to not worrying too much about the environmental constraints of our activities. This has changed, raising new challenges and requiring a fundamental shift in attitudes and expectations.

A specific and urgent issue is how to generate and maintain good quality employment opportunities in this new context. If we are unable to meet this challenge quickly then we risk a ‘lost generation’ who don’t know the world of work, something with deep ramifications for economy and society. In Spain, where youth unemployment is already above 50% in some regions, a serious debate is needed around how to create employment opportunities in an economy that is unlikely to grow in the sense that we are accustomed in the coming years. There are many potential ideas to contribute to this debate, and here I want to highlight two that I have been reflecting on recently.

Firstly, I wonder if there is a need to re-think how we organise employment if we want to create jobs in a scenario of low growth. According to Eurostat’s Labour Force Survey, Spain is one of the European countries with the longest official working hours (and there are widespread tales of large unofficial hours). Perhaps individually we are working too much, and there is a case for redistributing work (and reward for work) to some extent. This would require a radically more open and flexible approach to the employment contract, alongside addressing inequalities at the top and bottom of wage structures. However the benefits could be enormous. The UK’s New Economics Foundation recently published a report suggesting that a normal 21 hour working week would address a range of urgent, interlinked problems including unemployment, over-consumption, high carbon emissions, entrenched inequalities and lack of time to live sustainably, to care for each other, and simply to enjoy life.

The second idea relates to the reality we face today in terms of more binding environmental constraints on our activities. While this requires a deep-rooted change of attitudes and expectations in our day-to-day lives, it also opens significant opportunities to generate employment from the re-direction of economic activity and the upgrading of our societies to be more sustainable. The International Labour Organisation has identified 8 key sectors – agriculture, forestry, fishing, energy, resource-intensive manufacturing, recycling, buildings, and transport – that will undergo major transformations as we move to a greener economy. These transformations can form the basis for significant employment opportunities.

In terms of a green transformation of society, employment opportunities fall broadly into two categories. Firstly there are opportunities locally as we solve environmental problems and ensure that all of our socioeconomic activities are sustainable. For example, a shift from private transport to efficient, coordinated and inclusive public transport systems has the potential to bring large gains in employment. Secondly there are opportunities globally from developing green technologies and innovative solutions to common problems that can be sold around the world, generating export-led employment. A clear example from the Basque Country region is a company like Gamesa, which has become a global leader in wind turbine manufacture. A key finding of the ILO report, however, is that outcomes from greening the economy in terms of employment will be largely determined by the policy instruments used and the institutions that implement them. Green upgrading neither creates nor destroys jobs per se; it all depends on how it is done.

One of the key challenges for social scientists is to understand which approaches, institutions and policy instruments are likely to have the best impacts on competitiveness, employment and socioeconomic development in specific territorial contexts. A first step in the Spanish context is to accept the reality of our predicament and to launch an informed debate around how we can rise to the challenge of creating quality employment in the absence of fast growth and the presence of binding environmental constraints.

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Is Spain mortgaging its future competitiveness*

The last few weeks have seen a stream of bad news regarding European economies, from which it is clear that growth problems are no longer confined to the south of Europe. Just days after the Spanish economy officially slipped back into recession so did the UK economy, joining the Belgian, Dutch, Danish and Irish economies, and with predictions that Germany will soon follow. This has led to renewed intensity in the debate around whether or not austerity has been the correct response.

It could be argued that if there is a key difference between Spain and our northern neighbours, it is that they have greater choice over whether or not to pursue the austerity path; their immediate predicament in terms of public borrowing is not quite so constrained. However even in Spain there are choices over degrees of austerity and over where and how austerity measures bite. We may need to take some measures to balance budgets, but we have to do so in the context of a bigger picture. What good will drastic cuts serve if they jeopardise the competitiveness of our economy and society for the next ten or twenty years?

A case in point is policy for science, technology and innovation, a pillar of long-term competitiveness for any economy. A few weeks ago it was announced by the Spanish government that public funds destined for research and development in 2012 would be cut by a staggering 25%. Just days afterwards I listened to Maria Bendl from the Austrian Federal Ministry of Economy, Family and Youth explain to the European Cluster Conference in Vienna that Austria was planning to increase research and development spending in 2012, a trend that is also planned in Germany, for example. What does this mean for Spain?

In the short term it means that we will paint a poorer statistical picture, as we fall even further behind leading European countries in terms of how much money and effort is invested in science and technology. Given the long-term nature of research, it also means that the Spanish economy will incur a large ‘sunk cost’ with respect to the research that has been started over the last few years and now sees its funding cut; without continued investment a lot of previous investment is wasted.

To evaluate the long term effects we must reflect on why investment in science and technology is so critical. The widely-agreed answer is that in a highly competitive global economy our firms need to innovate in order to create products and services with added-value. In Spain this is particularly important if we want to avoid a drastic and long-term decline in wages; the increased productivity needed to compete globally has to come from somewhere. In short, the future viability of Spanish firms and the employment they are able to create depends on being able to innovate. This in turn requires strong foundations in science and technology, and above all a well functioning ‘innovation system’.

In the face of austerity measures, an interesting question is whether there is a ‘cheap route’ to a successful innovation system. We had the privilege of listening to Bjorn Asheim from Lund University give a seminar at Orkestra recently. He talked about the different Scandinavian approaches to innovation systems, highlighting a contrast between the investment intensive science and technology model of Sweden, and the Norwegian approach of facilitating strong capacity to absorb ideas and knowledge from elsewhere. This potentially opens the way to a cheaper approach to innovation focused on learning by doing, using and interacting. However it still requires a certain base of science and technology and a very strong and stable investment in education and training. Thus when I see the extent of the parallel education cuts planned in Spain, it makes me think that we really are dangerously mortgaging our future competitiveness.

* This post is an English version of an opinion article published in Spanish by El Economista on Monday 7th May 2012.

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Strengthening Competitiveness*

Debate across much of Europe at the moment is focused on how to stimulate our economies to create jobs at a time when national governments are afraid to borrow. While the starkest case is Greece, this problem is also severe in other places. In Spain, for example, there is great concern about the economic and social effects that planned austerity measures will have in an economy where unemployment is over 20% and fast approaching 6 million.

There are no easy ‘big bang’ solutions in this situation, especially when hands are tied with regards to fiscal and monetary policy. In any case, it is important to find the roots of the problems and begin to gradually create a more favourable environment for sustainable job creation. In this regard, I came away with two resounding messages from the global conference of The Competitiveness Institute, held in Auckland last December.**

The first is that competitiveness is created in the daily reality of firms (although see my last post on the need for a broader understanding of what a firm is). Regardless of macroeconomic policies, it is therefore important to pay attention to certain actions at the micro level that can be helpful to enhance the productivity of firms. One is working in ‘clusters’, defined as geographical agglomerations of companies and other actors (universities, technology centres, …) which, through collaboration, can generate a set of positive effects. There is evidence from different parts of the world that clusters can help to strengthen the local business environment by promoting collectively strategic investments in innovation, training and infrastructure, for example. They can also play a critical role in helping SMEs to enter new and emerging global markets, where they often lack the capacity to do so alone.

The second main message is tied to the current economic crisis and its social consequences. While economic success and job creation is strongly linked to fostering productive and competitive enterprises, we must not forget that competitiveness is only a means to an end. The ultimate goal for a country, region or city should always be to generate social welfare. In this sense, Michael Enright (Professor at the University of Hong Kong) argued in Auckland that the key is to combine competitiveness as traditionally understood (i.e. linked to productivity and its determinants), with aspects such as quality of life and environmental sustainability.

Without denying the influence of the macroeconomic environment, a current challenge is therefore to find microeconomic measures which simultaneously support business productivity and social and environmental sustainability. Support for clusters is one potential example because the focus on fostering collaborative relationships is designed to encourage collective efforts that can be geared towards a range of different impacts. Another interesting possibility are policies and regulations designed to promote eco-innovation in firms; these have the potential to boost sustainability at the same time as generating positive effects on innovation, productivity and ability to compete in international markets.

* This post is a rough translation of an opinion article published this week in various Spanish newspapers.

** The 2012 edition of the TCI global conference will be held in the Basque Country, Spain in October.

San Sebastian: Host (with Bilbao) of the 2012 TCI conference in October

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Decision-making and forms of capitalism

It is interesting to see how ideological debates change with time. It wasn’t so long ago that socialism was still widely talked about as the fundamental alternative to capitalism in debates around how we should organise our economies and societies. Today the mainstream debate has moved towards a focus on different forms of capitalism. In particular, there is considerable talk at the moment about cooperativism, and about how cooperative organisations and structures might soften some of capitalism’s more negative features such as short-termism, lack of sustainability and excessive wage inequality.

I have read a couple of interesting contributions recently on the website of the Institute for Public Policy Research (IPPR) in the UK. In one of the posts Noreena Hertz talks about “co-op capitalism”. She argues that this will emerge as an alternative model, taking the best parts of capitalism (Schumpeterian qualities of evolution, innovation and creative construction) and combining them with collaboration, co-creation and working towards collective goals. In the other post Tim Finch reports on a panel discussion with Charlie Mayfield (Chair of the UK cooperative retailer John Lewis) and Will Davies (Director of the Centre for Mutual and Employee-owned Business at Oxford University) that questioned why the cooperative and mutual sector is still such a small part of the economy. Barriers in raising finance were cited, alongside negative attitudes from government towards cooperatives.

What links these contributions, and indeed all debates associated with different forms of capitalism, is that they are fundamentally concerned with how decisions are made. Worker-owned cooperatives such as John Lewis or the Mondragon Corporation (in the Basque Country) offer alternative ownership structures to the typical, privately-owned firm. What makes them really interesting, however, is that they challenge traditional conceptions of firm decision-making as a corporate hierarchy responding to the profit motives of financial shareholders. They represent specific alternatives where strategy within the firm is decided taking into account a wider set of interests. The co-op capitalism set out by Hertz makes the argument on a broader scale: it is essentially a call to widen the basis of decision-making throughout the economy in ways that recognise the value of the collective.

Another way of thinking about this is in terms of economic democracy, or the governance of strategic decisions relating to economic activity that inevitably have impacts on society that go far beyond the economic. The work of Keith Cowling and Roger Sugden on these issues goes back over 20 years, and the ideas in their 1994 book ‘Beyond Capitalism: Towards a New World Economic Order‘, for example, are an early expostion of many of the ideas that are emerging today around different forms of capitalism.

A weakness in capitalism for Cowling and Sugden is that it concentrates strategic decision-making in the hands of a small elite, in a handful of powerful places (such as New York)

So how can we move from debate to practice with respect to new, softer and more inclusive forms of capitalism? Firstly, as the John Lewis debate illustrates, there are plenty of examples of innovative firms and institutions from which we can learn a lot about how to make decisions in ways that integrate a wide range of interests. For instance, the many examples of ‘social enterprises’ that combine profit objectives with other forms of social purpose, and the universities around the world that are getting used to the pressures of balancing a wide range of interests in their governance (students, employers/business, academics/workers, the general development of the societies in which they sit …). Institutions such as the BBC in the UK (neither privately nor government owned, and designed to be governed in the public interest) also offer potential lessons.

In short, we need to be more open-minded in our understanding of the firm and its goals, and to embrace the plurality of institutions that already exist in our societies to learn where different balances of decision-making might work better or worse. It is clear, for example, that decision-making in the financial sector is currently not working for society as a whole, so what can be learned from elsewhere? Above all we need urgently to break what Will Davies describes as the ‘rigid orthodoxy of what companies are’. This poses a clear challenge to business schools, who are too often stuck in this orthodoxy, from which they pay lip service to issues such as corporate social responsibility. In business education we need to be bolder and more open-minded to different possibilities of governing economic activity within the firm.

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Labour markets, competitiveness and people

I have been thinking about starting a blog for a while, and the combination of a Siberian weekend in San Sebastian and hot debate surrounding last Friday’s new labour legislation in Spain has given me the combination of opportunity and motivation to finally get my act together.

The functioning of the labour market has long been a problem area for the Spanish economy, at least from the perspective of business. The executive opinion surveys that are used to build the World Economic Forum’s ‘Global Competitiveness Index‘, for example, rank Spain’s labour market efficiency as 119th in the world, with the main gripe being hiring and firing practices. The new legislation is designed to tackle this, making it much easier to fire (and in theory therefore also to hire) people, and also making it easier to negotiate wages downwards. The aim is for more flexibility, so that it is easier to create jobs, but also so that it is easier for Spanish firms to make cost adjustments to maintain their competitiveness.

Labour market reform is a sensitive issue at the best of times, and with pessimistic forecasts of unemployment hitting 6 million this year, this is a particularly tricky time. However, despite protests from Spain’s trade unions planned this week, my feeling is that there is fairly general acknowledgement that the labour market does need greater flexibility. It is currently too difficult for Spanish firms to adjust, both as they grow and as they hit difficulties, which hampers the ability of SMEs in particular to compete. Yet there are at least two important caveats to this argument which current policy discussions do not recognise strongly enough (if at all).

Firstly, more flexibility in one area will only have limited effects on making the labour market work better unless the mobility of people is also supported, something which Spanish housing policy (subsidised home-ownership with strict re-sale conditions and a lack of affordable rental property) works strongly against.

Secondly, the other side of the coin from flexibility is potential loss of security. Given the importance of stable work for people’s well-being and fulfilment, it is critical to find a balance that works both for firms and for society. For me this requires at least three complementary measures:

  1. The fostering of a productive dialogue between firms and employees that is built around mutual respect and recognition of each others’ situation (here we can learn much from the cooperative movement, for example, although I suspect little from the current relations between big business and trade unions in Spain).
  2. A very strong policy focus on education and training: good basic education provides a foundation for people to be more flexible in their outlooks and capabilities, and opportunities for upgrading and reskilling should be available throughout people’s lives.
  3. Dignified support for those who lose their jobs, both financial and in the form of an effective employment-search service.

It is these sorts of dilemmas that make competitiveness such a tricky concept, and one that I hope to share and discuss some thoughts on through this blog. Above all, I am interested in understanding how to build and shape an economy so that it supports both the competitiveness of its firms and the well-being of its people, aspects that I believe cannot be treated separately.

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