Foders 060323

Fostering European Competitiveness: The Role of Innovation Clusters: 

Fostering European Competitiveness: The Role of Innovation Clusters Prof. Dr. Federico Foders Kiel Institute for World Economics

OUTLINE: 

OUTLINE Part I: Innovation clusters: why ? Part II: What ingredients ? Part III: Additional ingredients Part IV: What are the risks ?

Part I: Innovation Clusters: Why ?: 

Part I: Innovation Clusters: Why ? Innovation creates and supports regional and national prosperity Clusters turn ideas into prosperity and help manage the risk that regions fail to sustain income and employment Innovation always occurs locally In a globalised and thoroughly networked world economy the importance of physical location is not diminished Clustering drives regional development by building private and public partnerships to mutual benefit which are based on formal and informal linkages Those regions in the world which have been able to achieve a clustering effect (either by accident or design) tend to be more successful than others in the global marketplace

Part II: What Ingredients ?: 

Part II: What Ingredients ? How does clustering work ? It is more than good luck, inherited assets or serendipidy Inventory of assets: identify a region’s true economic strength Leverage regional strengths: concentrate on existing strengths; don’t emulate other regions Invest in research: fast-growing firms are located near universities – where the new ideas are Build the talent: skilled labour constitutes a scarce resource; let it grow in your region Supply finance: Continental Europe is not the U.S.

Part II: SME Finance: 

Part II: SME Finance Finance is the scarce resource for new SMEs, not ideas Stages: pre-seed, seed/start-up, early firm, growing firm U.S.: founders invest their own savings (pre-seed), business angels and/or angel alliances provide seed capital, growing firms resort to venture funds and eventually go public and raise their own equity in the capital markets. In some cases mergers and acquisitions solve the problem. Universities and local government also may help to find adequate finance Europe: funding gap: limited supply of angels and venture capital; access to capital markets too expensive for most SMEs

Part II: SME Finance: 

Part II: SME Finance Risk capital is essential in turning new ideas into competitive products. Even if, in Europe, some rare sources of risk capital may be tapped, risk capital will always tend to pick the winners and rather flow to the few leading clusters What can be done ? Create regional centres that match public and private funding and attract angel investors Use EU instruments to attract private funding for SMEs and to prepare SMEs for growth through M&As and access to corporate finance

Part III: Additional Ingredients: 

Part III: Additional Ingredients Helping clusters succeed is hard work Although universities and governments play a key role, private initiative drives the process: the private sector is in a better position to identify opportunities and to supply the leadership needed for success (entrepreneurship) In those regions in which clusters have to be designed, Special Economic Zones could help attract entrepreneurs and private capital SEZ: supply tax holidays and possibly other regulatory waivers for a limited period of time (example: Shannon, Ireland)

Part IV: What are the risks ?: 

Part IV: What are the risks ? ◊ No region may create sustainable income and employment focusing on high technology alone. Regions should think in terms of a portfolio of clusters in order to diversify away as far as possible the risk of failing to sustain regional income and employment (tourism, shipbuilding, medical products and services etc.) ◊ Demographic change exerts a strong pressure on European regions for them to be successful. If they fail, Europe will have to rethink its role in the world economy

Managing risk: 

Managing risk “ …trading of the biggest risks … allows the most massive risk sharing, and such massive risk sharing can make possible all kinds of risk management products…” (Robert J. Shiller, The New Financial Order. Risk in the 21st Century)

Part IV: How to manage the risk ?: 

Part IV: How to manage the risk ? ◊ After creating a portfolio of clusters each region should seek to develop appropriate financial instruments in order to diversify the remaining risk that the region fails to sustain regional income and employment ◊ A financial proposal: issue regional bonds (RBs) backed by clusters (let the regions share the risk !). RBs could be traded in the international capital markets. One region would seek to hold bonds of other regions to effectively manage the own economic risk