Smart specialisation and the new industrial policy agenda Dominique Foray 2013 ERAC Mutual Learning Seminar 20th March 2013

D.Foray, P.A. David and B.Hall : Smart Specialisation: the Concept Knowledge for Growth expert group for the EC

Ex ante conditionality Criteria for fulfilment Thematic ex-ante conditionalities … state-of-play regarding RIS3 conditionality… Thematic objectives Ex ante conditionality Criteria for fulfilment 1. Strengthening research, technological development and innovation (R&D target) (referred to in Article 9(1) ) 1.1. Research and innovation: The existence of a national or regional research and innovation (strategy) (strategic policy framework(s)) for smart specialisation in line with the National Reform Programme, to leverage private research and innovation expenditure, [ which complies with the features of well-performing national or regional research and innovation systems.] For research infrastructures only: 1.2 The existence of a multi-annual plan for budgeting and prioritization of investments. is based on a SWOT analysis to concentrate resources on a limited set of research and innovation priorities; outlines measures to stimulate private RTD investment; contains a monitoring [ and review ] system. A framework outlining available budgetary resources for research and innovation; A [indicative] multi-annual plan for budgeting and prioritization of investments linked to EU priorities [and, where appropriate, the] European Strategy Forum on Research Infrastructures -ESFRI).

Horizontal - Vertical Main logic of regional innovation policy : horizontal measures and neutral policy: improving framework conditions and capabilites S3 emphasizes a more ‘vertical and non neutral’ logic of resource allocation and prioritization Why is it important? The logic of ‘specialisation’ is intact Significant returns to size in R&D and innovation activities. Indivisibilities, gains from specialisation, even the abitility to capture spillovers depnds on the existence of sufficiently large nearly R&D sector Small is not (necessarily) beautiful (even in the information age)! Horizontal: easy to identify; vertical : difficult to identify S3 is difficult because it implies guessing future development of technologies and markets. Mistakes and failures are possible S3 = Defining a method to help policy makers to identify desirable areas for interventions in such a ‘vertical’ logic (some technologies, fields, sub-systems)

Granularity Entrepreneurial discovery & entries Evolving priorities (diversification) Inclusiveness Evaluation

1 – Granularity What level of agregation to observe, detect and set priorities? A too high level transforms smart specialisation into sectoral prioritization… ..but a too fine grained level transforms smart specialisation into an horizontal policy (all projects of some merits will be funded)

1 – Granularity (cont.) Relevant level of mid-grained granularity Examples The pulp and paper/nano case, what needs to be prioritized is not the sector as such but the activity of exploring the potential of nano In the plastic industry case, what is supported is not the plastic industry as such but the activity of exploring diversification path These activities: Are new, aim at experimenting and discovering opportunities, have the potential to generate learning spillovers; Are likely to generate desireable structural changes (modernisation, diversification, transition) Need public funding to emerge and grow (have scale and agglomeration economies, can fail because of coordination failures) In doing so, the government achieves two things: i) improves the general performance of a sector; and ii) builds capabilities

2 - Entrepreneurial discovery The best bet is entrepreneurial trial and error Priorities will be identified where and when opportunities are discovered by entrepreneurs Entrepreneurial… Prioritization is no longer the role of the omniscient planner but involves an interactive process, in which the private sector is discovering and producing information about new activities and the government assesses potential and then empowers those actors most capable of realizing the potential A principle that allows to make two critical and somewhat conflicting requirements compatible: Identifying priorities in a vertical logic and.. …keeping market forces working to reveal domains and areas where priorities should be selected Entrepreneurial knowledge

2 - Entrepreneurial discovery (cont.) More than a ‘simple’ innovation – rather a new activity exploring, experimenting and learning what this industry or sub-system should do in terms of R&D and innovation to improve its situation ..and spillovers «Public information about discoveries is socially valuable in redirecting productive decisions» (Hirshleifer) Entrepreneurial discovery – entry – agglomeration – structural changes

2 - Entrepreneurial discovery (cont.) Information externalities Aligning incentives Capabilities Capabilities for KETs’ co-invention of applications are essential The needed entrepreneurial knowledge is not always available ex ante under a compact form within one single entity

Entrepreneurial discovery Collège du Management de la Technologie – CDM Chaire en Economie et Management de l'Innovation – CEMI

Entrepreneurial discovery Collège du Management de la Technologie – CDM Chaire en Economie et Management de l'Innovation – CEMI

Entrepreneurial discovery

Entrepreneurial discovery

2 - Entrepreneurial discovery (cont.) Entrepreneurial discovery : the corner stone of smart specialisation and.. ..clusters : favorable (?) framework conditions to deliver entrepreneurial discoveries A S3 needs to go beyond the «simple» identification of the regional clusters; S3 is a process not a structure The most important policy challenge: structuring the entrepreneurial knowledge (which is dispersed and divided) to drive discoveries (and clusters are possibly a good tool)

The conceptual space of S3 Logic of novelty Granularity Innovation Entrepreneurial discovery Individual agents Horizontal policies NA Activities Targeted horizontal policies Smart specialisation Sectors Old fashioned industrial policy State as entrepreneur/large technological project

3 – Evolving priorities New activities at t0 are no longer new at t5 Need for sunset clause for withdrawing support after an appropriate amount of time has elapsed and so new priorities can be funded Smart specialisation helps diversification and options’ generation

4 - Inclusiveness Vertical choices : identification?? Thought experiment Huge agro-food sector : sleeping giant High tech cluster: excited goblins Low tech SMEs: hungry dwarfs With a wait and see policy, it is likely that the excited goblings will corner the whole funding (they have so many good projects!) while the other sectors are sleeping. But they need also to be part of the strategy (need for modernisation, diversification, transition)

Excited goblings high tech cluster Sleeping giant agrofood Excited goblings high tech cluster Hungry dwarfs low tech SMEs Sectoral level mapping

Excited goblings high tech cluster Sleeping giant agrofood Excited goblings high tech cluster Hungry dwarfs low tech SMEs Sectoral level mapping Activity level priorities

Excited goblings high tech cluster Sleeping giant agrofood Excited goblings high tech cluster Hungry dwarfs low tech SMEs Sectoral level A narrow view of smart specialisation!

4 – Inclusiveness (cont.) Does not mean that you need to support a project in every sector…but to give every sector a chance to be present in S3 through a good project «While dynamism is crucial, we want dynamism with economic justice – with what I call economic inclusion. It means drawing companies and people into the economic sector of a modern economy, where new ideas for new processes and products are conceived and experimented» (E.Phelps, 2012) How to stimulate and promote entrepreneurial discoveries in all sectors (incl. the less dynamic)? Inclusiveness will imply different paces and tempo of the policy

Sectoral level mapping prioritization Activity level Modernisation of the old agro-food: nano and ICT in agroo-food Diversification of SMEs: from automotive to biomedical sector Transition of the cluster: from ICT to med-tech

5 - Evaluation Smart specialisation is experimental in nature The point is not to try to decrease the number of failures but to minimize the cost of failures Ex ante and ex post evaluation as a central policy task

5 - Evaluation (ex ante) «Time to market» Does the activity open a new domain potentially rich in innovation and spillovers? What is the degree of collaboration, the number of partners involved? Is public funding needed? What is the significance of the activity for the regional economy (we want to see it in the statistics!)? What is the capacity of the region to keep the successful activity on its space (innovation here benefits elsewhere syndrom) Can this activity realistically drive the region towards a leadership position in the considered niche? Collège du Management de la Technologie – CDM Chaire en Economie et Management de l'Innovation – CEMI

Smart specialisation as part of the NIP agenda Key words Non neutral (vertical) policy Entrepreneurial discovery (strategic interactions) New activities (mid-grained level of granularity) Evolving targets Inclusiveness Experimental nature What is important is the process for the continuous stimulation, observation and detection of entrepreneurial discoveries and the support of early growth of the new activities

Goals of smart specialisation Facilitating the emergence and early growth of new activities potentially rich in innovation and spillovers Diversifying the regional systems Generating critical mass, networks, clusters within a diversified system Implementation is not trivial: requires strong capabilities at regional level and good institutions