Chapter 3—Regional Economic Development and Clusters

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  • 3.1 Role of the community: two examples from Tasmania
  • 3.2 Regional economic development policies in developed countries
    • 3.2.1 Australia
    • 3.2.2 Canada
    • 3.2.3 United States
    • 3.2.4 European Union
  • 3.3 Case Studies
    • 3.3.1 Pennsylvannia, USA
    • 3.3.2 Schleswig-Holstein, Germany
    • 3.3.3 Styria, Austria
  • 3.4 Examples of forestry support measures from the EU
    • 3.4.1 Sweden
    • 3.4.2 Austria
    • 3.4.3 France
    • 3.4.4 Other countries
  • 3.5 Diversification from forestry
    • 3.5.1 Sweden
    • 3.5.2 Spain
  • 3.6 Not successful/not recommended
  • 3.7 Conclusions to examples
  • 3.8 Clusters and agglomeration effects

 

Regional economic development is defined as the application of economic processes and resources to create sustainable economic development to meet the values and expectations of businesses, residents and visitors.5 Both the community (widely defined to include individuals, institutions and businesses) and government are involved.

The inputs from government into regional economic development have changed in the last three decades. From the 1950s to the 1980s governments encouraged large industrial projects; the main motivation was to support exports as a source of regional income. Individual companies and whole industries were attracted to regions by government grants, tax breaks and subsidies, together with large government investments in infrastructure. The approach to regional development changed after the late 1980s, partly driven by low success rates in developed countries for government efforts to create regional industries from scratch.6 While many regions still lagged behind national averages for income, employment and demographics, globalisation and a reduction in regional development budgets limited government interventions. As a result, regional development policy focussed on the retention of existing industries, greater involvement of the private sector to reduce costs, and support for small and medium-sized businesses, viewed as an engine of economic growth.

The prevailing view today is that government intervention is easier and more effective when there is something to work with, for instance, when private economic activity has already developed independently, often by building on competitive advantages such as natural resources or skills. Under these conditions, governments can encourage additional economic growth by providing missing infrastructure or encouraging cooperation and the coordination of economic activity. This is why the current report focuses on existing industries in Tasmania with a potential for faster economic growth, rather than supporting 'high tech' sectors with high growth potential which do not currently exist in Tasmania.

The current approach to regional economic development has several challenges. Some of the main problems include coordination between government agencies and the sustainability of private—public partnerships and funding. The last two are related since partnerships are rarely sustained without public sector funding. Investments into infrastructure, such as transport and communication, are important under past and current approaches to regional development, especially for countries with vast distances and difficult landscapes.

Economically viable regional development often depends on attaining 'critical mass', scale and the existence of complementary services, as discussed in the later chapters on the wine, dairy and horticultural sectors. Market forces alone can be insufficient to provide a coordinating function or overcome externalities associated with disparities amongst regions.

Government interventions are successful to the extent that they reduce the risks faced by the private sector, which in turn, encourages private sector investment. Many government actions can reduce risk, examples include: education to improve labour quality; power and transport infrastructure; public research to develop improved plant and animal varieties; and, coordination activities minimising transaction costs and market failure.

Coordination is supported by clusters of related industries, which increases efficiency and consequently reduces costs. For example, an emerging nut growing and processing sector in Tasmania would reap agglomeration benefits if it was concentrated in one area of the state. This would create economies of scale for inputs and the transport of harvests and equipment, permit sharing of expensive equipment, reduce travel costs of professionals, encourage equipment suppliers to set up businesses in the area and create a local labour pool. Further, clusters encourage the sharing of knowledge through frequent meetings, accidental or planned, between all members of the value chain, from suppliers to growers and processors. Natural factors such as the dispersion of suitable growing areas for different varieties of nuts could act to prevent clustering. However, natural factors could also support such clusters, as has occurred for the dairy sector, where the North West corner of the state provides the best natural conditions for pasturage. The government could support clustering by identifying areas of the state that provide optimum growing conditions for nuts (or other agricultural products) and support land use and other regulatory changes that encourage nut growing in these areas.

3.1 Role of the community: two examples from Tasmania

In addition to the role of government, an active community is an essential factor in local economic development. Examples in Tasmania include Deloraine, which overcame its differences to become a vibrant town, and Oatlands which invested in its future by establishing a college.7

Deloraine has had a number of changes over past 40 years, including the influx of alternative 'lifestylers' in the 1970's and a highway bypass with a resulting recession in the 1990s. The response to these changes was a number of community initiatives. The social differences were reduced by establishment of a Craft Fair, resulting in a tourism boost. The business community is supported by the Meander Valley Enterprise Centre, and there are a number of youth events and festivals. As a result of the policies and community involvement the town has won a number of state and national awards for community and economic development.

These successes have created a sense of optimism. The first step was tolerance of differences as different groups understood they had the same goal—developing their town. The smaller successes lead to confidence, with each next project feeding on previous successes. Locals call it the 'spirit of Deloraine'. The successes are celebrated, further sustaining the community involvement. Over the years, the council has played an important role in Deloraine's development providing a catalytic role especially in coordination of community events with tourism activities.

Similar to Deloraine, Oatland's suffered the effects of rural recession and a highway bypass in the 1990's. A desire to improve local economy prompted a number of community initiatives. These were very different to Deloraine's art, craft and tourism approach; possibly because it is not as close to main centres or an airport.

The Oatlands approach concentrated on creation of the Central Tasmanian Community College, which had effects on retaining young people in the town and associated flow-on effects. One of the main challenges, when starting such a facility, is to make it relevant to the region. There is a need to coordinate level and type of skills offered to the employers' requirements. An example from North West Tasmania showed a mismatch in the supply and demand of type and amount of education provided. Engineering was the largest group of qualifications employed by industry, but received only 4.1 per cent of VET effort from 2002–2006.8 Similar to the Deloraine example, the Oatlands revival was driven by the community, which wanted a positive future for their town and had a distinct focus on youth. The approach relied on outside funding, strong council leadership and its partnership with the community.

These two examples display one of the main features of successful regional economic development—it is community oriented. The private sector is unlikely to expand economic activity unless the community is socially and economically viable with good public services such as health care and schools. Without these, the community could decline, resulting in a shrinking labour force and a lack of professionals to provide ancillary services. The study by Plowman et al.,9 on innovation in rural Queensland found the most innovative town had the highest proportion of 'experts' in its population and that the least innovative town had the smallest proportion of 'experts'.10 Experts bring diversity and independence to the town and hence play a very important role in economic development.

For many towns economic development is an effort to improve their economy, quality of life and future. It is a process of creating more choice. The Municipal Association of Victoria provides the following principles for survival and revival in regional communities and these are recurring themes in case studies on regional economic development:11

  • Belief and expectation
  • Collaboration
  • Local leadership
  • Strategic planning and action
  • Opportunism

Confidence comes from experience and celebration of achievements. This means towns need to start from 'bite-sized' projects and gradually increase the scale.12 An initial failure of a development may lead to a loss of community participation and emotional wellbeing. Maintaining confidence and a drive for change from a town with such attitude is hard. Richard Putnam13 found intensity and quality of citizen involvement was the difference between prospering towns and those not prospering. He finds that social capital or civic engagement is an important factor in driving prosperity.

3.2 Regional economic development policies in developed countries

This section provides examples of regional economic development in Australia and in other developed economies, with the focus on the latter.

3.2.1 Australia

The objective of regional development in Australia is to improve the economic, social, cultural and environmental well-being of communities. 14 Regional, State and National governments are determined to support stronger, more sustainable regional communities through provision of services and investments into economic and social infrastructure.

There are three levels to regional policy. The first one focuses on national macroeconomic priorities to promote growth across the whole nation. The second level targets key sectoral programs such as health and education. The third level, regional policy, supports regions through a range of programs and co-ordination of three levels of government.

Regional development policies are often aimed at building a foundation for economic activity such as business-related infrastructure that can attract new firms and reduce costs. An example is the provision of piped natural gas in Mildura Rural City which began in 1999.15 The region produces the majority of Australia's dried vine fruit and table grapes, as well as some asparagus, wine and citrus. With the initial research conducted in 1994, the Mildura Council identified a number of value adding opportunities, which required gas supply. After further studies and a strong interest in gas supply from the business community, the Council managed the project, culminating with the opening of a pipeline from South Australia in 1999.

Numerous education projects around the country constitute investment into 'soft' infrastructure. Other ways to attract capital is through the provision of relevant information for potential investors. Generally these include brochures and data packs, such as the "Wine Industry in Tasmania—a Guide for Investors" published by DEDTA.16 Other initiatives aim to assist local firms by identifying possible partners and providing information on the local business environment. For example, the City of Greater Geelong's Economic Development Unit compiled a manufacturing and processing register in 1995.17 It accounts for up to 95% of all manufacturing and processing companies in the region and includes brief descriptions of activities, market profiles, background information and history. The register is updated every three years and is designed to assist businesses to locate local sources of supply and partners. It also provides relevant information for potential investors. There is a similar register for technical and business services sectors as well as the Economic Indicator Bulletin for the area. Such programs can reduce capital outflows by improving import substitution and increased networking between businesses.

3.2.2 Canada18

Due to the failure of regional development policies in the 1980s, the Federal government puts little investment into rural development, with programs focused on urban regions and existing industries. The emphasis is on developing internationally competitive, innovative clusters, for instance through supporting National Centres of Excellence for specific sectors. These are usually based in universities and closely linked with industry and are similar to Australia's Cooperative Research Centres (CRCs).

In Western Canada about 15% of the economy is based on primary industries.19 Since these industries are vulnerable to shocks such as forest fires, droughts, diseases and fluctuations in

global demand, there was a drive for diversification.20 A program on Vancouver Island aided diversification from forestry into other products such as berries, mushrooms, and flowers.21

3.2.3 United States22

Regional development in the US is shaped by political fragmentation. There are few programs coordinated at the federal level and the federal government is less pro-active in encouraging cooperation between states as in Canada. The approach has been erratic with the focus on subsidies and redevelopment with programs targeting very specific issues in export-oriented sectors. The outcomes are measured by the number of new jobs created. The success of redevelopment was measured by increases in the tax base, as a result of increasing property values.

There have been some attempts to implement a "Centres of Excellence" policy, but the centres did not get linked with each other due to the decentralised nature of the approach. According to Drabenstott,23 most of the $180 billion of federal funding in 2004 was spent on infrastructure for industry. Almost all programs assumed development in a form of industrial regions with Drabenstott arguing that this approach should not be uniform for all the regions.

3.2.4 European Union

The European Union includes a wide range of countries at differing levels of economic development. A goal of the European Commission is to reduce these disparities. The Structural Fund program provides funding for infrastructure in less developed countries. In order to provide a semblance of fairness, structural funds are also available for the less developed regions of affluent member states. The effect is to encourage national governments to identify poorer regions, develop regional policies, and combine EU funding with national and regional funds for economic development. Consequently, there are many examples of regional economic development in the EU. The Regional Development Monitor (RIM) is the European Commission's initiative for analysing these support measures. The RIM publishes annual reports and thematic papers on the subject.

The RIM 2010 Annual Report24 concludes that most regional development policies in Europe focus on the supply side, such as building resources for innovation, and concentrate on the manufacturing sector. There is some evidence of cluster policies that build on the existing

strengths of given region. Some regions support too many clusters to the extent that funding is dissipated among too many economic activities. There is a concern about the sustainability of some policies due to budget cuts associated with the economic crisis.

Generally there is a combination of bottom-up and top-down approaches to regional innovation support measures. It is reported however that there is a tendency to create new institutions to manage regional policy, resulting in an unnecessary duplication of services.

In the EU, regional innovation policies are shaped both by the European Commission and national governments. Their popularity is due to the success of clusters around the globe and the shortcomings of traditional policies as a result of increased international competition. Interest in regional innovation policies began in the 1990s with systemic approaches to innovation, instead of a single-minded focus on science and technology policy, such as subsidies for R&D. The 'competitiveness clusters' method brings industrial and scientific institutions to one location and has been implemented in France the since early 2000s. The most recent approaches follow a 'Doing-Using-Interacting' theory that recognises that tacit learning is important for incremental innovations. This further supports the clustering of both research and companies.

Within a general framework of supporting innovative clusters, countries follow different approaches that reflect their different economic histories and competitive strengths. Austria's policies are focused on strengthening competitiveness and innovative capacity. This is done through developing entrepreneurship, cooperation and establishing firms in particular regions. There is a strong emphasis on partnerships across regions. In Belgium there is a focus on 'grand projects' with an emphasis on human capital, business networks, scientific research and clusters of competitive firms. Baden-Wurtenberg, in Germany, targets science-based industry and science-industry cooperation; Bavaria supports networks in its key industries, and North Rhine-Westphalia focuses on areas for next-generation innovations. Regional innovation programs in Spain concentrate on public R&D, fulfilling industry needs and eco-innovation. There is attention to existing regional strengths in Poland, with development of industrial parks, various organisations, financial support and development of clusters. In France, the Ile-de-France region focuses on collaborative R&D and support to technology while Nord-Pas-de-Calais targets attracting high-technologically intensive investments and research activities in rail transport and health. Regions in Portugal follow the French Competitive Clusters model. There is emphasis on promotion of public-private partnerships in some regions in Sweden. Other regions focus on platforms for innovation in sectors such as transport, biomedicine, marine industries, etc. Policies in the UK target collaboration between research and industry, innovation parks and knowledge transfer activities. Generally, new member states with below EU average per capita GDP such as Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovakia tend to support enterprises to improve their competitiveness. This includes subsidies to purchase advanced technologies while the EU-15 countries experiment more with innovation policies.25

Lower Saxony was amongst the early adopters of systematic regional innovation policies. The "Support Fund for Regional Development" was established in 1977 and the "Lower Saxony Institute for Economic Research" in 1981. The policies explicitly targeted innovation and were a foundation for modernisations of the industry during the 1980s and 1990s. Since 2003, policies became more inclusive of SMEs, more systematic and institutionalised.26

Similarly to Lower Saxony, Silesia in Poland has shifted to an innovation approach for regional development. The policies of mid 1990s concentrated on direct funding support, intermediary organisations and attraction of foreign direct investment. With the decline of traditional industries, the direction has shifted towards innovation in 2000s. New policies included support to SMEs, scientific research and modernisation of the agro-food sector, clusters and the promotion of an innovation 'culture'.27

There are examples of very concentrated support on a regional level. The optical industry, with around 170 firms employing about 14,000 people, is a key for regional development in Thuringia, Germany. Because of the significance of this industry, the regional government has established a CoOptics Initiative to improve co-operation between research institutions and internationally competitive firms. The aim was to create 200 jobs. Total funding was €21.6 million (from both EU and national sources) with €6.2 million (€ 310,000 per job) from the public sector.28

Another example of concentrated support is the Solar Valley excellence centre in Saxony-Anhalt. It is one of ten centres of national excellence. Funding of €45 million is from the EU and €7.5 million from national and regional governments was allocated for the "Fraunhofer Centre for Silicon Photovoltaics" and a research centre at the University of Halle-Wittenberg. These actions are targeting cooperation with private firms.29

The state of Hesse in Germany has adopted a novel approach to regional innovation. The Kapital I project (€50 million in total with €25 million from the EU) provides equity capital to SMEs which intend to innovate and grow. The policy improves the credit rating of SMEs, but

firms must obtain capital for projects themselves. The fund is targeted to disadvantaged areas, but is integrated with other wider programs that support firms with less than 500 employees.30

Another novel approach is adopted by Bremen in Germany. The BRUT project aims to identify innovative ideas early on and to increase the quality of university start-ups. Half of the €4.2 million project is funded by the EU and support is in the form of training, coaching, feedback and access to cheap office space in technology parks.31

In England, €755 million of EU funds were allocated for the North West Development Agency to invest during 2007-2013. The main goals of the development program are to create 26,700 additional net jobs (€ 28,277 per job) with the expectation of earning the investments back); 2,500 businesses and improve the region's Gross Value Added by €1.38 billion by 2015. The main rationale behind the use of venture capital funds is that viable businesses may have difficulties accessing finance. The identified equity gap is for business seeking £250,000-£2 million. There is a history of using the venture capital approach with the previous funds terminating in 2008. The newer funds are sector specific and focus on regional areas.32

The Enterprise Fellowship program in Scotland focuses on the commercialisation of research by providing incentives to public sector researchers to become entrepreneurs. The support measure provides a year's salary to develop a product hosted at a research institution, business training and access to advisors. Since 2007 there have been 35 businesses set up, creating at least 220 jobs in Scotland. At least €54 million was invested into new firms, mainly by Venture Capital Funds. One of the main benefits of such program is that it attracts private sector investors for start-ups selected for the program.

The Welsh economy has been underperforming since the 1980s. The main reasons include industrial decline and structural deficiencies.33 There is a history of low value-added sectors, such as electronics and automotive assembly and business services in Wales. There is a limited number of R&D performing enterprises. Wales surpasses the EU-27 only on one of the R&D performance measures—expenditure on R&D by the higher education sector. While universities are relatively strong in R&D, there may be missed opportunities in the spin-off and cluster development because of a lack of other government research institutions. The potential growth sectors include aerospace, opto-electronics and bio-sciences.

The main innovation programs have a total budget of £100 million over six years. Wales has a history of innovation support programs and the newer ones utilise lessons from the earlier approaches. The current focus is relatively narrow with limited attention to process, management and service innovations. The main programs are poorly integrated and only offer fragmented support. One of the largest problems is the availability of future funding.

3.3 Case Studies

Three large-scale case studies of regional development in Pennsylvania, Schleswig-Holstein in Germany, and Styria in Austria are outlined below.34 The main purpose of case studies is to evaluate the effect of regional development policies over time. However, the effects are difficult to measure, as changes in economic indicators could be attributed to unrelated effects.

The three case studies were selected because they are relevant to Tasmania: all three regions underperformed the national average, experienced declines in their main industries (both primary and manufacturing), are on the periphery, and are relatively thinly populated.

Workforce development to meet current and future needs and stakeholder cooperation are common themes in these regional development approaches. In Pennsylvania, the goal was to attract in investment into the region and to improve workforce skills. There was a strong emphasis on education in Germany and Austria by linking universities and industries. Austria is the first large scale example of a cluster policy, which was dictated to a degree by already existing industries. After the boost to production, one of the programs in Austria concentrated on a search for new markets in the EU member states and nearby countries. All the regional policies were relevant to their region through bottom-up approach and implementation. Some of the policies were more successful in some regions than in others, for example Pennsylvania had a culture of industry partnership which was an advantage for the industry partnerships program.

While injecting funds into a region is bound to have a positive influence through a multiplier effect, there were a number of recurring issues in all three case studies. One of the most frequent problems is availability of funding. A policy is a signal that produces expectations and improves business confidence. To be successful, it requires long term and credible policies. Funding is required for further tailoring, extensions of existing programs or duplication of the most successful ones in other areas. The example from Pennsylvania highlights this problem. Industry partnerships tend to dry up without consistent public sector involvement or ongoing interest from the government. Strict rules and timing restrictions around funding can reduce flexibility of the policies, as in the case study for Germany.

Regional development policies can be political decisions influenced by political incentives. For example it has been argued that policy makers have selected already successful clusters for support in the case study from Germany. There is a trade-off between strengthening already relatively well performing sectors further and diversification into new ones. Continued support can hit diminishing returns while diversification can be risky. Regional policy in Styria in Austria may have lacked adequate diversification by mainly concentrating on existing industries. These are common challenges for any regional policy: identifying the optimum mixture of existing and new components and consistency of leadership.

3.3.1 Pennsylvania, USA35

Pennsylvania was an underperforming state around 2003, characterised by a decline in manufacturing industries, out migration, higher than average unemployment, education levels below the national average and a budget deficit.

The main initiative of the development policy was to establish a network of industry linked partnerships and to develop workforce skills in order to make the region competitive. Initial studies were conducted in 2002 and the policy was put into legislation (Job Ready PA) in 2005. Training programs for critical industries were established shortly after that. One of the reports, relied on by policymakers, examined the state's capabilities from the perspective of potential investors and identified key industries. It also recommended coordination of education institutions with workforce systems. The idea of matching workforce skills with the types of skills required by local businesses is the approach taken by Oatlands in Tasmania.

The main goal of the program was to increase the competitiveness of the region. The policy used existing industry partnerships and provided structure for joining additional programs. The main focus of industry partnerships was education and training. Training is an expensive exercise for individuals firms. Similar firms have similar training needs and industry partnerships can identify them. This way, skill needs can be met at lower training costs. Partnerships also promote communication between firms. There were 89 industry partnerships with more than 6,100 firms involved. Partnerships and collaboration is not new for Pennsylvania, with efforts dating back to the 1900s.

It is difficult to attribute any improvements in economic performance to one policy alone, however it can still be an important contributor. The unemployment rate was above the national average before the program during 1998–2001 and below the national average during the 2002–2008 period. In 2008, the IBM Consulting Group had ranked Pennsylvania first for foreign and domestic investment and second for jobs created by investment. In a review for the

Washington Workforce Training and Education Coordination Board by the Social Policy Research Associates, Pennsylvania was among six states selected for their best practices for workforce programs.

Strong and consistent leadership was the main strength behind the policy. The State Governor's leadership was followed by administrators and coordinated through agencies down to the local level. There also was significant private sector participation.

The main weakness of the program was funding. While there was enough to start some initiatives, it was not enough to broaden and extend the better performing ones. The design of such a program can be complicated as its new components were mixed with existing ones. As a result it may lack coordination and integration in certain areas. Another concern is preservation of industry-linked partnerships. While it can be expected that after the initial round of funding, they would be sustained by own finance, in many situations this expectation has not been met. This is further supported by experiences from other states.36

3.3.2 Schleswig-Holstein, Germany37

Schleswig-Holstein is the most northerly German state. It has few urban areas and was shaken by a period of restructuring. GDP was declining by 0.45% in 1995.The main industry clusters are the maritime industry, wind energy and tourism. The transition from manufacturing to a service based economy contributed to a reduction of per capita incomes during 1991–2006. Schleswig-Holstein had a weaker manufacturing industry in terms of value-adding than other German states in 2007. Small and medium enterprises dominated the business environment, with spending on R&D and the qualifications of employees were amongst the lowest in Germany.

The combined goal of a number of policies was the generation of jobs and growth. The EU development policies are co-financed with the EU, states and regions. Because funds come from a number of sources, these policies are subject to a number of rules. The general approach is that members adapt policies to their own requirements. For example, some countries focus on modernisation (Mediterranean countries), some on environment (Northern European countries) and some on support for farmers (France and Belgium). Programs in Schleswig-Holstein were very broad, targeting unemployment, labour market policies, assistance to small businesses, strengthening of rural areas and agriculture, targeted support to key industries, education, etc.

The first development program (Z.I.E.L.) ran during 2000-2006. Oversight for this broad program was provided by three ministries. This allowed for a more targeted approach. The

main component of this program was "Regional Program 2000" with total funding of €362 million (€ 120 per capita). It was focused on structural change in underdeveloped industries, essentially dividing the state, with the wealthier regions not eligible for support. A new government modified the program in 2005 and it expired in 2006. It was replaced by another program, the Future Program Schleswig-Holstein running over 2007–2013 with €1.4 billion in subsidies (€ 388 per capita). Similarly to the previous initiative, it is managed by separate agencies, allowing for a bottom-up approach.

The first component of the program targets the best performing areas and is aimed at growth and innovation. It is implemented under the concept of German regional planning. The second component is based on an equity target and is focused on a reduction of disparities between regions. The main differences with the previous round include emphasis on innovation, science, support to local firms, reduction of unemployment among young people and extension to the whole region, not just the underperforming areas. It also includes large business-related infrastructure projects such as airports and harbours. Support for clusters includes grants to cluster managers and subsidies to projects that facilitate development of clusters. This support comes from the state level.

The new program began only a year before the OECD study was conducted, which is too early for evaluation. The earlier program has been evaluated by the Ramboll consultancy. There was €235 million granted for projects, resulting in total investment of around €610 million in the region over 2000–2004. The tourism, business and education sectors were expected to benefit from infrastructure projects. It is estimated that the "Regional Program 2000" 'secured or created 10,500 jobs' (€ 22,380 per job). The actual benefit is unclear because of vague definitions.

The main strength of this policy was a well-developed bottom-up approach. This ensured that projects were relevant to the region. The downside was that projects needed to be implemented within two years. Given some inevitable delays this was too restrictive. Given that such an expensive program is bound to be political, policy makers tend to select clusters that were successful already. The clusters were also defined too broadly and policy makers had a strong influence on managing clusters.

3.3.3 Styria, Austria38

Styria is an area in south-west Austria with industry based on raw materials, iron, wood and coal. At the time of the study, the population was 1.2 million with 250,000 in the capital city of Graz. GDP was growing at 1.43 per cent per year. The region has been in comparative economic

decline since the 1970s and was among the worst performing areas in Austria during the 1990s, with a below average rate of growth of output, innovation and firm creation.

The main reason for the development policy in Styria was to overcome the decline of industry between 1970–1980. Government took on a strong role in promoting cooperation, knowledge generation and exploration of new markets. It was the first use of large-scale cluster-based policy in Austria. Even though a number of well-funded policies have been implemented since 1990s, Styria was still lagging behind the Austrian average in GDP per capita in 2005, at the time of writing the OECD report. Economic conditions have however improved and the approach is accepted as a success.

Regional development initiatives were targeted at the rejuvenation of existing clusters and the promotion of the new ones. The new automotive cluster was established and relies on output of the existing steel cluster. The production tended towards specialisation and niche markets. As a result, the region has areas with high concentration of activity and a small range of technology. Generally, specialisation improves efficiency and productivity, but it also makes regions vulnerable to market fluctuations which can be risky. The solution is to support economic diversification.

Some firms emerged as innovators and drove innovation in the region together with newly created universities and community colleges.

The general approach to the development policy was an alteration of periods of implementation and periods of monitoring. Each successive round of policies was designed to build on the previous round. For example, after the initial cluster formation period, succeeding policies focussed on innovation, the creation of preconditions for other clusters and the exploration of new markets. Some of these markets were within the EU while others opened up in the Balkans.

The direct economic contribution of the development programs is difficult to measure. Overall, economic conditions improved between 1995 and 2007. The number of established firms increased, exports grew from €10 billion in 2000 to €18.7 billion in 2006, R&D expenditures grew, and unemployment declined from 8.1% in 1997 to 6.4% in 2007.

The development policy faced the usual difficulty of a gap between plan and implementation. The budget was €100 million in 2003, €88 million in 2004, €104 million in 2005, €101 million in 2006 and €40 million in 2007. Given the scale of the policy, there were some coordination challenges, in part due to different governments changing the policy to suit their own needs. One of the main features of the development policy for Styria is that it relied extensively on the existing industries and that there were only a small number of leaders of innovation.

3.4 Examples of forestry support measures from the EU39

The RIM database contains case studies of support measures for forestry within the EU. Most of the regional policies include support for R&D cooperation and sectoral innovation, direct support via grants and loans to business R&D, support for science-industry linkages, knowledge transfer and cluster policies. Some examples are given below.

3.4.1 Sweden

The ÖvreNorrland (Upper Norrland) region has 26% of Sweden's forests. The goals of the TräCentrumNorr (Wood Centre North) project are to increase turnover and employment within the wood products and sawmill industry. The centre is designed to increase interactions between public R&D and industry, with approximately €985,000 in funding over 2007-2010. The project developed a strong network between parties and led to the industry becoming a leader in the use of sensors. The centre is expected to continue operation after the current period.

Another support measure implemented in Sweden is the TPP Future Factory, a co-operation between university, industry and the public sector to develop the pulp and paper business sector. The project began in 2007 and has resulted in spinoffs and new business ideas. One such spinoff is the Packaging Arena, an award winning project focusing on consumer needs and packaging design. One of the key achievements of the project is its operation on international markets. Total funding for the Packaging Arena project was around €2.2 million in 2010. Another example is the Energy Square, which is now a separate project on energy efficiency in pulp and paper manufacturing. The budget is around €2 million and is half funded by the EU, with funding approved till 2013.

3.4.2 Austria

Austria has adopted targeted support for innovation and technology transfer within the wood and digital media sectors. The two year program with an annual budget of €300,000 covers up to 50% of eligible costs (up to €100,000) for firms in regional areas and focuses on co-operation between companies. Support for co-operation is given if there is visible progress (e.g. market presence, new technologies, etc.). This program follows three stages: surveys on opportunities to co-operate, planning of the project and its implementation.

Wood is a potential regional strength for Southern Austria. The Technology Funds Program is an innovation scheme which focuses on strengthening the regional innovation system by implementing cross enterprise projects especially with intra-regional impact. The program operates on very broad basis—enterprises need to address technology or skill issues common

to a number of enterprises. The amount of funding (grants and subsidised loans) depends on factors such as the project difficulty, innovativeness and the number of companies that could potentially benefit.

Another support measure is implemented in the region of Salzburg. A program co-funded with the EU is aimed at enhancing the economy through networks and co-operations. There is a high share of small businesses in the region and the program should result in increased competitiveness. Three types of activities are eligible: intra-regional cooperation projects, projects in key sectors (wood is one of them) and co-operation projects between enterprises and R&D institutions.

3.4.3 France

Support to Research, Development and Innovation in Enterprises (ARDIE) is a broad measure implemented in France in response to the economic crisis. The nationally funded (€500,000 annually) program supports enterprises to develop new products and services through R&D investments. It provides assistance for R&D projects, feasibility studies, the cost of obtaining intellectual property rights, consultancy services and temporary hiring of qualified personnel. The wood sector is one of the priority sectors targeted by the program.

Another support measure, Actions collectives: Pôles, Filières, Mutations Economiques et Thématiques Transversales supports clustering in the Bourgogne region of France. Priorities include support for clusters, assistance with strategy, economic intelligence and trade promotion. The program is financed by national and regional funds, €2,035,715 annually since 2007. SMEs in the wood sector are listed as final beneficiaries of the program.

3.4.4 Other countries

A very recent clustering program in Italy—'Productive Districts' recognises a wood and furniture district with 84 firms for support. The program is focused on clustering and promotion of long- term innovative activity. The program is too recent to provide results.

3.5 Diversification from Forestry

3.5.1 Sweden

Biotechnology-Berries is a support measure that focuses on research and co-operation in the berries industry in the Northern Sweden. The measure targets co-operation and research efforts between new and existing firms. There is an abundance of wild berries with only 2%-4% picked, with blueberries exported for bio-extraction and used as food. The innovation program is targeted at establishing contacts between firms in the region as well as abroad, motivating research into new extraction techniques and creating a berry research network. The program is 50% co-funded by the EU with annual budget of €260,000 in 2009. This is a narrow support measure targeting a specific approach in a single sector.

3.5.2 Spain

Murcia is a small region (less than 1.5 million inhabitants) in the south of Spain. The EU co-funded Grants Program assists companies to participate in international bidding on projects. The program has a budget of €1.5 million and high aid intensity covering up to 60% of the costs of a bid. It excludes fishing, fish farming, coal extraction and financial services, but can be used complimentary to other subsidies.

Additionally, the Information Technologies Promotion Program is aimed at enabling investments of Murcian SMEs into advanced IT projects. This program is also co-funded with the EU with a budget of €6 million (there was no 2011 call and the 2012 call is not yet open). Activities supported by the measure include advanced business management software projects, customer relationship management software projects, store management software projects, logistics software projects, etc. To date there have been 190 beneficiaries, 155 jobs created already (expected to create 215 jobs) and the measure is estimated to keep 6,206 jobs. An important criticism is that large companies should also be beneficiaries, due to their regional importance. The program is limited and does not apply to agriculture, primary production, dairy products, cork, fishing, fish farming, coal, steel, transport, naval construction and manufacture of synthetic fibres. Total investment on innovation in Murcia was €256 million in 2010.

3.6 Not successful/not recommended

Not all of regional innovation support measures can be recommended as examples of regional good practice for other regions.

An Acquiring of Skills and Fostering Community Action program implemented in Severozapaden, the north western region of Bulgaria during 2010–2011 was targeted at entrepreneurship and innovation support services through formation and support for Local Initiative Groups. These groups, consisting of citizens and businesses have some influence on local development issues and partner with local authorities. The €90,620 scheme, wholly financed by the EU had a very limited scope.

Another negative characteristic of support measures are delays in evaluating proposals and not enough involvement of regional authorities. This was a feature of a support program targeted at firms without previous R&D activities in the Kentriki Makedonia region in Greece. The program is aimed at encouraging R&D directly, in collaboration or via outsourcing to public research institutions. The EU co-financed measure has an annual budget of €745,000 over 2010-2013 and includes agriculture, food and biotechnology among eligible sectors.

Another issue cited in evaluation of support measures is a lack of correspondence of projects with objectives of the measure and collaboration that exists only on paper. This was an outcome of the development program aimed at clustering and innovation networks in the Swietokrzyskie region in the south of Poland. The role of managing authorities is emphasised by the fact that beneficiaries are mostly interested in getting investment grants. The program is running till 2013 with the EU co-financed budget of over €4.5 million focusing on collaboration activities and clusters. There are provisions for purchase of R&D results and intellectual property rights by clusters under this measure.

3.7 Conclusions to examples

The above examples show that there are three main approaches for regional development: infrastructure support, encouragement of clustering and collaboration among existing sectors, and support for innovation, R&D and university spin-offs to create new industries. Funding is often provided through direct grants or subsidies, such as for R&D by firms. Other methods include subsidies for technology acquisition, venture capital, and hiring of skilled staff.

In the Tasmanian context, support for infrastructure is relevant in some areas, such as to provide irrigation and electrification or improve transport services to the Mainland. R&D subsidies to firms is covered under existing Australian tax incentives are unlikely to be customised to serve firms based in rural areas, although rural requirements are served by public sector R&D institutions such as TIA in Tasmania. The most applicable lesson to be drawn for Tasmania from international experience is to support clustering and cooperation among firms, both within a specific sector and across sectors, for instance to create complementary economic activities.

3.8 Clusters and agglomeration effects

A cluster is a geographic concentration of interconnected companies, specialised suppliers, service providers, firms in related industries, and associated institutions (e.g. universities, standards agencies, trade associations) in a particular field that compete but also cooperate.40 Industry clusters are not a new phenomenon. Interest in the drivers and economics of clusters is commonly associated with the economist Alfred Marshall and economic theories of agglomeration.41 These theories attribute regional industry clustering to benefits derived from lower costs—including for transport, access to supplies, markets, and labour supply, as well as benefits deriving from diverse sets of economic activity, markets and demand inherent to clustered populations and high firm densities. Alfred Marshall introduced the notion of "industrial districts" in the early 20th century. While the early view was focused on single industries, Porter's42 analysis has extended it to 'related industries'.

Clusters are generally formed by market processes and not necessarily in places with locational advantages. Companies can achieve lower costs through the agglomeration effects of proximity as well as greater access to specialised inputs, labour, institutions and shared systems, such as trade associations for marketing. The usual trade-off between costs and product differentiation can be bridged by linking scale production with flexibility of many businesses. Clustering however, is more than the proximity of businesses. It is characterised by their interactions and a combination of competition and cooperation. A number of authors stress the exchange of knowledge (tacit knowledge in particular) as a reason for clusters.43 The combination of natural and constructed assets can lead to the clustering of industries and their related value chains.

Porter44 observes that regions with low productivity are characterised by weak local competition. The main competitive point tends to be price, and competition itself is imitation based. Advanced economies are characterised by fierce competition, which is focused on innovation and high investment. Clusters are pro-competitive constructs in their nature and increase competition through increases their productivity, innovation, and formation of new businesses.45 Most new businesses are established in existing clusters.46 This is because the cluster itself is a signal of an opportunity, and has assets and institutions required for business. The formation of new businesses aspect is particularly relevant for increasing opportunities in potential wine, cider and tourism clusters in Tasmania.

It is very difficult for a government to create a cluster from scratch, but there is a role for government intervention in development of established or emerging clusters. According to Porter, "There should be some seeds of a cluster that have passed a market test before cluster development efforts are justified".47 Often there are many constraints to development and some can only be dealt with through public sector as opposed to the market process. Typically these include regulations, legislation and infrastructure. Identifying and understanding the cluster are the important roles for the government. Only then should the cluster be reinforced through policies. Input from businesses and the community is vital to ensure that policies do

not overlook the specific needs of an emerging cluster. There is a fine line of balancing the information—industry can lure policies towards own agendas, but ignoring the industry may produce ineffective results.

Clustering can be viewed as a system of vertically and horizontally integrated companies. Aylward and Glynn48 conducted a study on comparison of innovation activities in wine industry clusters in South Australia, Victoria and New South Wales.49 The main result of the study was the level of innovation and activity was higher in more developed clusters.

A local cluster example is the Tasmanian Light Shipbuilding Industry.50 Government has played a role in development of this cluster, but only after the industry had demonstrated successes. Initially an 'arm's length' approach had been used to test the entrepreneur's intentions and capabilities. From the early stages, government efforts concentrated on creating a reputation as a centre of southern oceans activity for Tasmania. The State Government had raised funds and achieved relocation of CSIRO to Hobart. After success of Incat's exports, there was a direct involvement into provision of infrastructure such as a marine park. This has put firms in geographic proximity with each other in the Prince of Wales Bay. From 1999, the government has broadened the enhancement of Tasmania's reputation to the entire industry and formalised relationships through the Industry Council. It had also begun a process of diluting Incat's importance for suppliers and safeguarding them from reliance on one major business by encouraging other shipbuilding enterprises.

There is no single model of cluster development, Silicon Valley and wine industry clusters in Australia are very different. Stimson, Stough and Roberts51 provide a very broad approach to cluster development. In summary, key success factors include:

  • Strategic leadership and infrastructure
  • Maximising the use of endowed resources
  • Networking
  • Capacity building

Box 1 outlines some conditions for clustering to occur. These conditions arise from observation that some industries are more likely to cluster than others.

 

Box 1 Conditions for clusters

When do companies cluster?

Not all industries are equally affected by clustering. Steinle and Schiele52 focus on a number of conditions for clustering. Necessary conditions are the activities such that clustering is not observed in their absence and can be seen as a foundation for clustering.

The two necessary conditions are divisibility of process and transportability of the product. It is less likely for clustering to occur if the product value chain cannot be divided into several specialised steps, with several actors at each step; or if the final product cannot be transported. Clustering is magnified if the inputs (as opposed to final products) cannot be transported.

Steinle and Schiele53 describe sufficient conditions for clusters. These conditions are not deterministic, but increase the possibility of clustering. The more of these conditions are present, the greater is the potential for clustering.

Long value chain and presence of multiple dissimilar, but complementary competencies are conditions leading to clustering. Often the long value chains develop due to technical reasons. Sometimes they develop due do incompatibility of scale, which is related to firms having different optimal quantities of production. The value chain lengthens when firms start to source capacity from other firms to increase output without compromising their optimal production quantities. Value chains and co-innovation has been studied extensively by Bonney.54 When it becomes hard for the firm to be involved in a number of dissimilar tasks, it will align itself with partners who a specialised in these tasks. Network innovation55 is the other condition for clustering. There is no consensus however on which type of innovation promotes clustering. Radical innovations usually require complementary innovations. This means that a radical innovator needs other companies in proximity resulting in clustering. Some scholars infer that clustering is more important at the beginning of the product life cycle. The opposing view expects incremental innovations to lead to clustering. This is because this type of innovation is encouraged by the direct exchange of knowledge. According to this view, clustering is the process pronounced in mature industries where radical innovations are substituted with incremental ones. These two views are not exactly mutually exclusive. The former one supposes that clusters appear with radical innovation, while the latter one expects clusters to form (or solidify) through incremental innovation around the radical one. Market volatility also leads to clustering. A multi organisational system can adapt faster in a volatile environment. Industries that depend on fashion, cycles and individualisation would cluster to respond to the volatile environment quicker.

Footnotes

  1. Stimson, Stough and Roberts, 2006
  2. Peters and Fisher, 2004; Sorensen, 2000
  3. Kenyon et al., 2001
  4. Skills Tasmania, 2008
  5. Plowman et al., 2003
  6. Experts are defined by a survey question where the respondents were asked to identify whether other people would regard themselves as (a) one of the community leaders, (b) somebody with k knowledge and expertise that could be called upon or (c) a support person Plowman et al., 2003, 52.
  7. Kenyon et al., 2001, 18
  8. These ideas are further discussed in Appendix 3.1
  9. Cited in Kenyon et al., 2001
  10. OECD, 2010. Regional Development Policies in OECD Countries
  11. O'Neil Pollock and Associates Pty Ltd, and Spiller Gibbins Swan Pty Ltd, 1999
  12. www.development.tas.gov.au/__data/assets/pdf_file/0006/58452/Tas_wine_industry_-_A_guide_for_investors.pdf
  13. O'Neil Pollock and Associates Pty Ltd, and Spiller Gibbins Swan Pty Ltd, 1999
  14. Green Leigh and Clark, 2011; OECD, 2005
  15. OECD, 2005
  16. OECD, 2005, p.51
  17. OECD, 2005, p.52
  18. Green Leigh and Clark, 2011; Drabenstott, 2005
  19. Drabenstott, 2005
  20. RIM, 2011a
  21. RIM, 2011a, p. 35
  22. RIM, 2011a, p. 31
  23. RIM, 2011a, p. 31
  24. RIM, 2011a, p. 67
  25. RIM, 2011a, p. 67
  26. RIM, 2011a, p. 70
  27. RIM, 2011a, p. 70
  28. RIM, 2011a, p. 70
  29. RIM, 2011b
  30. OECD, 2008
  31. OECD, 2008
  32. OECD, 2008 p.58
  33. OECD, 2008
  34. OECD, 2008.
  35. RIM (online), 2012
  36. Porter, 2000
  37. See Marshall, 1920; cited in Hofe and Bhatta, 2007; Stimson et al., 2006, Peters, 2004
  38. Porter, 2000
  39. It is via face to face contacts that tacit knowledge is most effectively passed on, and often through informal networks comprising of trust based relationships, which importantly affect regional innovation performance (Asheim and Gertler, 2005; Dolereux and Parto, 2004; Maskell and Malberg, 1995). This describes a 'sticky' nature of tacit knowledge—it is not easily transferable or mobile (in a codified structure), is regionally clustered and essential for much innovation and regional growth (Asheim and Gertler, 2005).
  40. Porter, 2000
  41. Porter, 2000
  42. Porter, 2000
  43. Porter, 2000
  44. Aylward and Glynn, 2006
  45. See Appendix 3.2 for an outline
  46. For more see Appendix 3.3
  47. Stimson, Stough and Roberts, 2006
  48. Steinle and Schiele, 2002
  49. Ibid
  50. Bonney, 2011
  51. Network innovation is very different from the "inventor-based" innovation and the "laboratory-type" innovation. It does not arise from a new invention ("inventor-based") or improvement of the existing one ("laboratory-type"), but through cooperation of actors with distinct skills.