Endogenous Regional Development: Perspectives, Measurement and Empirical Investigation (New Horizons in Regional Science)

Endogenous Regional Development STIMSON PAGINATION (M2469).indd i 20/12/2010 15:12 NEW HORIZONS IN REGIONAL SCIENCE ...

Author: Robert Stimson | Roger R. Stough | Peter Nijkamp

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Endogenous Regional Development

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NEW HORIZONS IN REGIONAL SCIENCE Series Editor: Philip McCann, Professor of Economic Geography, University of Groningen, the Netherlands and Professor of Economics, University of Waikato, New Zealand Regional science analyses important issues surrounding the growth and development of urban and regional systems and is emerging as a major social science discipline. This series provides an invaluable forum for the publication of high-quality scholarly work on urban and regional studies, industrial location economics, transport systems, economic geography and networks. New Horizons in Regional Science aims to publish the best work by economists, geographers, urban and regional planners and other researchers from throughout the world. It is intended to serve a wide readership including academics, students and policymakers. Titles in the series include: Entrepreneurship, Industrial Location and Economic Growth Edited by Josep Maria Arauzo-Carod and Miguel Carlos Manjón-Antolín Creative Cities, Cultural Clusters and Local Economic Development Edited by Philip Cooke and Luciana Lazzeretti The Economics of Regional Clusters Networks, Technology and Policy Edited by Uwe Blien and Gunther Maier Firm Mobility and Organizational Networks Innovation, Embeddedness and Economic Geography Joris Knoben Innovation, Agglomeration and Regional Competition Edited by Charlie Karlsson, Börje Johansson and Roger R. Stough Technological Change and Mature Industrial Regions Firms, Knowledge and Policy Edited by Mahtab A. Farshchi, Odile E.M. Janne and Philip McCann Migration and Human Capital Edited by Jacques Poot, Brigitte Waldorf and Leo van Wissen Universities, Knowledge Transfer and Regional Development Geography, Entrepreneurship and Policy Edited by Attila Varga International Knowledge and Innovation Networks Knowledge Creation and Innovation in Medium Technology Clusters Riccardo Cappellin and Rüdiger Wink Leadership and Institutions in Regional Endogenous Development Robert Stimson and Roger R. Stough with Maria Salazar Entrepreneurship and Regional Development Local Processes and Global Patterns Edited by Charlie Karlsson, Börje Johansson and Roger R. Stough Endogenous Regional Development Perspectives, Measurement and Empirical Investigation Edited by Robert Stimson, Roger R. Stough and Peter Nijkamp

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Endogenous Regional Development Perspectives, Measurement and Empirical Investigation

Edited by

Robert Stimson Professor of Geographical Sciences and Planning, University of Queensland, Australia

Roger R. Stough Vice President for Research and Economic Development, NOVA Endowed Chair and Professor of Public Policy, George Mason University, USA

Peter Nijkamp Professor of Regional, Urban and Environmental Economics, VU University Amsterdam, the Netherlands NEW HORIZONS IN REGIONAL SCIENCE

Edward Elgar Cheltenham, UK • Northampton, MA, USA

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© Robert Stimson, Roger R. Stough and Peter Nijkamp 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2010927669

ISBN 978 1 84980 456 1

03

Typeset by Servis Filmsetting Ltd, Stockport, Cheshire Printed and bound by MPG Books Group, UK

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Contents List of contributors Preface Robert Stimson, Roger Stough and Peter Nijkamp 1 2

3

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6

7

8

9

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Endogenous regional development Robert Stimson, Roger Stough and Peter Nijkamp The economist’s perspective on regional endogenous development Kenneth Button Endogenous regional theory: a geographer’s perspective and interpretation Michael Taylor and Paul Plummer Endogenous rural development from a sociological perspective Frank Vanclay Rural, urban or regional endogenous development as the core concept in the planning profession Edward Blakely Diversity and endogeny in regional development: applying appreciative intelligence Tojo Thatchenkery and Jessica Heineman-Pieper An exploratory approach to model determinants of endogenous regional growth performance Robert Stimson and Roger Stough A theory of entrepreneurial rents in endogenous growth: implications for regional innovation policies Zoltan Acs and Mark Sanders Foreign direct investment, knowledge assets and the economic geography of growth in the Asian BRIICS countries Tomokazu Arita, Chie Iguchi and Philip McCann Implications of European Union structural assistance to new member states on regional disparities: the question of absorption capacity Daniela Constantin, Zizi Goschin and Gabriela Dragan

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1

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39

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11

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Endogenous regional development

Macroeconomic and territorial policies for regional competitiveness: theory and empirical evidence from the EU Roberto Camagni and Roberta Capello Endogenous employment growth and decline in Australian capital city statistical divisions Alistair Robson A case study approach to investigating local development initiatives in rural small towns in Victoria John Martin Economic development incentives and the measurement of local endogenous growth: is there a need for modeling adjustment? Terry Clower Regional growth and development theories revisited Roberta Capello and Peter Nijkamp

Index

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286 301

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Contributors Zoltan J. Acs is University Professor at the School of Public Policy and Director of the Center for Entrepreneurship and Public Policy at George Mason University, USA. He is also a Research Scholar at the Max Planck Institute for Economics in Jena, Germany, and Scholar-in-Residence at the Kauffman Foundation. He is co-editor and founder of Small Business Economics, the leading entrepreneurship and small business publication in the world. Acs is a leading advocate of the importance of entrepreneurship for economic development. Tomokazu Arita is Associate Professor in the Department of Social Systems and Management, Graduate School of Systems and Information Engineering, at the University of Tsukuba, Japan. After earning a PhD at the Regional Science Department of the University of Pennsylvania, he worked for twelve years at the Japanese Ministry of Land, Infrastructure, Transport, and Tourism (the former Ministry of Construction) before being appointed at Tsukuba. Edward J. Blakely is Urban Policy Professor at the United States Studies Centre at the University of Sydney, Australia, and formerly the Executive Director for Recovery in New Orleans. He has over 30 years as an expert and academic in the fields of regional and local economic development. He is a Fellow of the American Academy of Public Administration and a former Guggenheim Fellow. Kenneth Button is University Professor and Director of both the Center for Transportation Policy, Operations and Logistics and the Center for Aerospace Policy Research in the School of Public Policy, George Mason University, USA. He is also Professor in Civil Engineering at the University of Porto, Portugal and Visiting Professor in Applied Economics at the University of Bergamo, Italy. Button is a Fellow of the Chartered Institute of Logistics and Transport, a Fellow of the Institution of Highways and Transportation and an Academician of the Academy of Social Sciences. He is past President of the Transportation Research Forum. Roberto Camagni is a Professor of Urban Economics at the Politecnico di Milano, Italy. He is a past President of the European Regional Science Association. vii

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Roberta Capello is Professor of Regional Economics at Politecnico di Milan, Italy. She is the current President of the Regional Science Association International, is Editor-in-Chief of the Italian Journal of Regional Science, and co-editor of Letters in Spatial and Resource Sciences. Terry Clower is Director of the Center for Economic Development and Research Associate Professor of Applied Economics at the University of North Texas, USA. He is Editor (Americas) of Regional Science Policy and Practice and a board member of the Council for Community and Economic Research. Daniela Constantin is a Professor of Regional Economics at the Academy of Economic Studies of Bucharest, Romania, where she is also Director of the Research Centre of Macroeconomic and Regional Forecasting. She is the President of the Romanian Regional Science Association and a member of the European Regional Science Association Council. She is the Director of the Romanian Journal of Regional Science. Gabriela Dragan is a Professor of European Integration at the Bucharest Economic University, Faculty of International Business and Economics and the General Director of the European Institute of Romania. She is a member of the Romanian Regional Science Association, the Team Europe, the European Commission’s panel of independent conference speakers, and Director of the Romanian Journal of European Affairs. Zizi Goschin is a Professor of Statistics, Econometrics and Regional Statistics at the Academy of Economic Studies of Bucharest, Romania, and a Senior Scientific Researcher at the Institute of National Economy of the Romanian Academy. She is a member of the Romanian Regional Science Association Council and the Editor-in-Chief of the Romanian Journal of Regional Science. Jessica Heineman-Pieper is an Assistant Professor in the Master of Science program in Organization Development and Knowledge Management in the School of Public Policy, George Mason University, USA. She has consulted to the National Institute of Mental Health (USA) on science policy, has worked as a management consultant with Booz Allen Hamilton, and is on the Executive Committee of the Critical Management Studies Division of the Academy of Management. Chie Iguchi is Assistant Professor of Global Strategic Management at Rikkyo University College of Business in Tokyo. She gained her PhD at the University of Reading Business School. Before joining Rikkyo University she previously held a full faculty appointment at Ritsumeikan

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Contributors

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University, Kyoto, and was also a Visiting Research Fellow at Rutgers University. John F. Martin is Professor and Director of the Centre for Sustainable Regional Communities at LaTrobe University in Bendigo, Australia. His research interests include the role of local institutions in the sustainability of rural and regional communities across Australia. Philip McCann is Special Adviser to Johannes Hahn, the European Commissioner for Regional Policy and currently holds the University of Groningen Endowed Chair of Economic Geography in the Faculty of Spatial Sciences at the University of Groningen in the Netherlands. He is also a part-time Professor of Economics at the University of Waikato, New Zealand. He has won academic awards in five countries, is a keynote speaker in conferences around the world, and advises major international organizations and governments. Peter Nijkamp is at present Professor of Regional, Urban and Environmental Economics at the VU University in Amsterdam, the Netherlands. He has published extensively in the area of regional development and innovation. For many years, until 2009, he has served as President of the Netherlands Organization for Scientific Research (NOW). He is also a past President of the Regional Science Association International. Paul Plummer is a Professor at the University of Calgary, Canada. He has published widely on the foundations of analytical political economy, competing theories of spatial competition and the dynamics of regional growth and change. Alistair Robson has worked as an economist in both academia and government in Australia. Currently he is an economist in New South Wales Treasury. Prior to that he was a Research Fellow at the Institute for Social Science Research at the University of Queensland, where he also gained his doctorate. Mark Sanders is Assistant Professor in Economics at Utrecht University, the Netherlands, and research fellow of the Max Planck Institute of Economics in Jena, Germany. He conducts research in innovation economics, entrepreneurship and economic development, with a special focus on the role of entrepreneurial activity in the introduction of renewable energy technologies. Robert J. Stimson is Professor of Geographical Sciences and Planning at the University of Queensland, Australia, where he was also Director of the Urban and Regional Analysis Research Program in the Institute

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for Social Science Research, and was the Convenor of the Australian Research Council Research Network in Spatially Integrated Social Science (ARCRNSISS) until 2009. He is a Fellow of the Academy of the Social Sciences in Australia, a past President of the Regional Science Association International, and the current Chair of the Applied Geography Commission in the International Geographical Union. Roger R. Stough is the Vice President for Research and Economic Development at George Mason University, USA, where he also holds the NOVA Endowed Chair and is an Eminent Scholar and Professor of Public Policy. He is a past President of the Regional Science Association International and holds an honorary doctorate from Jonkoping University in Sweden. Michael Taylor is Professor of Human Geography at the University of Birmingham, UK. He has held academic positions in New Zealand and Australia, and also worked for the Australian Federal Administration in Canberra. His research is focused on enterprise and regional economic development and particularly on the theory of the firm. He is Chair of the International Geographical Union Commission on the Dynamics of Economic Spaces. Tojo Thatchenkery is Professor and Director of the Masters in Science program in Organization Development and Knowledge Management at the School of Public Policy, George Mason University, USA. He is a member of the NTL (National Training Laboratory) Institute for Applied Behavioral Science, the Taos Institute, the Editorial Board of the Journal of Applied Behavioral Sciences, the Journal of Organizational Change Management (JOCM), and the book review editor of JOCM. Frank Vanclay is Professor of Cultural Geography at the University of Groningen, the Netherlands. He is a past President of the International Rural Sociology Association (IRSA).

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Preface The role of endogenous processes in regional economic development and as potential explanatory factors in accounting for spatial variations in the pattern of regional growth and decline has been attracting increasing interest from regional scientists and from regional development policymakers and practitioners. Among researchers there are a range of perspectives on endogeneity and endogenous regional growth processes. There are challenges in developing suitable measures of endogenous regional growth and in building and implementing operational models to analyse endogenous regional development and growth across spatial systems. It is also important for research to generate in-depth analysis of endogenous processes at the scale of the local region to enhance our understanding of the different contextual bases in which endogenous processes occur in local regional economic development. The chapters in this book address these important issues. They are based on papers presented at an international workshop on ‘Regional Endogenous Development: Measurement, Models and Empirical Investigation’ held at The University of Queensland’s Customs House facility in downtown Brisbane, Australia, in February 2008. It was hosted by the Australian Research Council Research Network in Spatially Integrated Social Science, with financial assistance from the Australian government’s Bureau of Infrastructure, Transport and Regional Economics. The workshop brought together researchers in regional science from around the world to address these issues. The workshop was one of many held over the last decade in which a small international group of about 20 to 25 established and emerging researchers come together to discuss topics relating to regional economic development, with an emphasis on innovation and entrepreneurship. The workshops have been held under the banner of the Tinbergen Institute (named after the Nobel Laureate in Economics) and are normally held in Amsterdam. The workshops are sponsored by the Tinbergen Institute; the Department of Spatial Economics at The Free University, Amsterdam; the School of Public Policy at George Mason University, Fairfax, Virginia, USA; and the Australian Research Council Research Network in Spatially Integrated Social Science. xi

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This book is, we believe, a unique contribution to the growing literature that addresses endogenous issues in regional economic development in that it deliberately presents a series of different disciplinary perspectives on endogeneity and the nature and role of endogenous factors in regional development and growth. Those contributions come from the perspective of an economist, a geographer, a sociologist, a planner and a researcher in organizational management/social psychology. In addition, the book includes chapters in which researchers explore new frameworks to model endogenous regional development, focusing on a range of factors including regional resource endowments, entrepreneurship and institutional factors. Contributions to the book also include empirical investigations conducted at a variety of levels of spatial scale, from cross-national megaregional level of scale, to the national level of scale, to the city level of scale and the local small town level of scale. We thank the participants in the Brisbane workshop for their participation in the processes leading to the publication of this book, which we hope will attract the interest of researchers, students and practitioners in regional science and regional development. The financial and other assistance of the sponsors of the Brisbane workshop is gratefully acknowledged. And we are indebted to the Edward Elgar team for their encouragement to produce this book and for that publisher’s ongoing commitment to publishing research in regional science. Robert Stimson, Roger R. Stough, Peter Nijkamp February, 2010

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Endogenous regional development Robert Stimson, Roger Stough and Peter Nijkamp

INTRODUCTION Over the past few decades the emphasis in regional development theory has shifted from a focus primarily on exogenous factors to an increasing focus on endogenous factors. Traditional regional economic development approaches were erected on neoclassical economic growth theory, based largely on the Solow (1956, 2000) growth model. The emerging endogenous approaches – while recognizing that development is framed by exogenous factors – attribute a much more significant role for endogenous forces. In that context, a suite of models and arguments that broadly convey the ‘new growth theory’ have been directed towards endogenous factors and processes (see, for example, Johansson et al., 2001). Those developments are of great interest to regional development analysts and also to practitioners for several reasons, including the recognition of the importance of cities and regions in the development process, and also because they introduce an explicit spatial variable into economic development and growth theory, which was a mostly ignored element in neoclassical thinking. This evolutionary development is particularly significant as the importance of regions in national economies – and in particular the role of many of the world’s mega-city regions – has changed considerably since the 1970s as a result of globalization, deregulation and structural change and adjustment. Understanding these recently recognized processes of change are crucial for analysing and understanding different patterns of regional economic performance and in formulating and implementing regional economic development planning strategy. This book focuses explicitly on endogenous regional development, attempting to provide a range of disciplinary perspectives on the nature of endogeneity and what endogenous regional development is about, how it might be conceptualized, measured and modelled, and how empirical analysis taking an endogenous perspective may be conducted at different levels of spatial scale. 1

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THE NATURE OF REGIONAL DEVELOPMENT A Product and a Process Stimson et al. (2006, p. 4) observe that it is often difficult in regional economic development planning strategy formulation and implementation to match desired outcomes of regional economic development with the processes that create them. That gap in understanding the relationship between the apparent causes and effects of development poses a dilemma for those responsible for managing regional economic development in the making of policies and strategies, and the implementation of plans. The dilemma they face is how to achieve some form of congruence between desired outcomes and appropriate and acceptable economic development tools and processes. The dilemma is further compounded by the frequently unstable and changing nature of economic environments, where externalities or exogenous factors (such as exchange rates, new technologies, foreign competition) increasingly impact the decision-making processes that influence economic policy and strategy in cities and regions. Blakely (1994) emphasizes how regional economic development needs to be viewed as both a product and a process but often not by the same groups or actors in the development milieu. For example, economic agents that live, work and invest in regions are those most concerned with economic development outputs or products such as job and wealth creation, investment, quality of life or standards of living, and conditions of the work environment. Contrary to this view is the more process orientation of regional scientists, development planners and practitioners where concern focuses on the creation of infrastructure, labour force preparation, human capital and market development. So it is important when considering regional economic development to maintain an awareness of its product and process aspects. Regional economic development is also known in terms of quantitative and qualitative attributes. In that context, and with respect to the benefits it creates, our concern has typically been with the quantitative measurement of such factors as increasing/decreasing wealth and income levels, job creation or employment levels, the availability of goods and services and improving financial security. At the same time – and especially in recent times – our concern has also been with such qualitative considerations as generating creative capital, creating greater social and financial equity, achieving sustainable development, creating a spread in the range of employment and gaining improvements in the quality of life. Thus, the regional economic development process needs to be informed by both quantitative and qualitative information.


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This multidimensional aspect of economic development led Stimson et al. (2006) to propose the following definition of regional economic development: Regional economic development is the application of economic processes and resources available to a region that result in the sustainable development of, and desired economic outcomes for a region and that meet the values and expectations of business, of residents and of visitors. (Ibid., p. 6)

Changing Paradigms Policy for economic development and regional planning strategy has undergone a series of evolutionary changes since World War II, driven by different paradigms of economic thought as discussed by Stimson et al. (ibid., pp. 11–17). In the post-World War II era there was emphasis on Keynesian approaches to economic policy with an associated focus in regional development planning on master planning and then goals and objectives planning approaches. The era was very much embedded in the notion that differential regional development largely reflected differences in the comparative advantage/disadvantage of regions. Then, from the 1970s and into the 1980s there was a shift in economic policy to embrace monetarist thought and then rationalist economic thought in the 1980s and into the 1990s. That era was also associated with a refocusing in regional development planning on structure and strategic planning approaches. That reflected the notion that the enhancing of regional competitive advantage as a driver of regional development was an important objective. But over the last two decades there has been a further shift to a focus on the principles of sustainable development in regional development and planning, with planning strategies being based on an integrated approach whereby a strategy would seek to advance the capacity and capability of a region to better utilize its resource endowments through a focus on endogenous processes encouraging collaborative advantage across the private, public and community sectors. Those changing paradigms have shaped the way regional and local communities and people think and plan for the future. But much thinking on regional economic development still remains embedded in the paradigms of the 1970s, because of an inherent reluctance of many regions and local communities to proactively embrace change. Subsequently, as suggested by Stimson et al. (ibid., p. 11): many regions are not re-equipping themselves fast enough to compete effectively in the global age of business and technology of the post-industrial economy. To compete successfully in the global economy, regional organizations and


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Endogenous regional development businesses need to understand the implications of the paradigm shifts occurring in economic policy and strategy, and to build the flexible strategic infrastructure to do so.

We now turn to a more detailed consideration of the emergence of the so-called ‘new growth theory’ in regional development, with its increasing emphasis on endogenous factors and processes.

THE EVOLUTION OF THE NEW GROWTH THEORY APPROACH During the 1980s – by which time the focus in economic policy paradigms had shifted from a focus on Keynesian thought and the focus in regional development thinking on the Solow (1956) model emphasizing exogenous forces, to a new paradigm represented by monetarism and economic rationalist thought – there had been a shift from concerns about developing a regional comparative advantage to developing a regional competitive advantage. There had also been a shift in regional development planning strategy from master planning and structural planning to strategic planning paradigms. Thus a new way of conceptualizing regional economic growth and development had begun to emerge, which today is known as the ‘new growth theory’. As early as the late 1970s, Rees (1979) had proposed that technology was a prime driver in regional economic development, and since then over the ensuing two to three decades the regional science literature has shown how technology is directly related to traditional concepts of agglomeration economies in regional economic development. Economists such as Romer (1986, 1990), Lucas (1988), Barro (1990), Rebelo (1991), Grossman and Helpman (1991) and Arthur (1994) sought to explain technical progress in its role as a generator of economic development as an endogenous effect rather than accepting the neoclassical view of long-term growth being due only to exogenous factors. In macroeconomic models of endogenous growth, technological progress was mainly seen as an endogenous process in an economic system, where knowledge is generally embedded in human capital that is enhanced through education, training, creativity and R&D. Thomas (1975) and later Erickson (1994), among others, showed how technological change was related to the competitiveness of regions. Norton and Rees (1979), Erickson and Leinbach (1979) and Markusen (1985) showed how the product cycle, when incorporated into a spatial setting, demonstrated that some regions could be seen as the innovators, while others become the branch plants or recipients of the


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innovation, and those might even then become innovators via endogenous growth. The concept of ‘innovative milieu’ was formulated to explain the ‘how, when and why’ of new technology generation. That notion linked back to the importance of agglomeration economies and localization economies that had been viewed as leading to the development of new industrial spaces (Scott, 1988; Porter, 1990). In particular, research by Krugman (1991, 1995, 1996) and Krugman and Venables (1996) led to a greater emphasis on knowledge as a tacit and primarily local good and the recognition of it as a driving endogenous self-reinforcing mechanism for regional development. There has also been an emphasis on the importance of investment in human capital and its role in regional development, as demonstrated in work by the OECD (2000, 2001). In addition, writers such as Fukuyama (1995) suggest that it is not just economic but also ‘value’ and ‘cultural factors’ – including social capital and trust – that are important in the rise of technology agglomerations as seen in the Silicon Valley phenomenon, where collaboration among small and medium-size enterprises through networks and alliances and links with universities forge a powerful R&D and entrepreneurial business climate. How to enhance regional economic development through engendering regional collaborative advantage (Huxam, 1996) began to be seen as a desirable component of regional development planning strategy. There has emerged as well a considerable emphasis on the role of leadership and institutions as factors that can enhance or even act as a catalytic effect in endogenous regional development, as demonstrated by Stimson and Stough (2009). As Rees (2001) has pointed out, technology-based theories of regional economic development need to incorporate the role of entrepreneurship and leadership, particularly as factors in the endogenous growth of regions, and it is the ‘link between the role of technology change and leadership that can lead to the growth of new industrial regions and to the regeneration of older ones’ (p. 107). Especially in the period since the mid-1970s, the processes of globalization have resulted in the emergence of an increasingly borderless economic world with increasingly unrestricted mobility of capital and labour and increasing freedom of trade in merchandise and services. Seemingly, the influence of the nation state was reduced in a world where cities and particularly mega-city regions assumed increasing importance as strategic hubs and as the drivers of creativity, innovation and entrepreneurial activity and as they increasingly became the dominant engines of economic growth (Knight and Gappert, 1989; Ohmae, 1995; Prud’homme, 1995; Florida, 2002). That created new stresses for both nations and for regions and their governments in developing strategies to find a competitive edge


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in a globalized economy and a highly competitive and rapidly changing world. There was a considerable shift in regional development planning strategies towards the notion of enhancing regional self-help. More recently the emergence of concern for achieving sustainable development has diversified the goals for regional development and intensified competitive pressures. And it is presenting new challenges for institutional reform, leadership and governance. Thus, the ‘new growth theory’ models have allowed for and indeed have implied the importance of both agglomeration effects (economies of scale and externalities) and market imperfections, with the price mechanism not necessarily generating an optimal outcome through efficient allocation of resources. And there has been a considerable emphasis on factors such as leadership, institutions, creativity, innovation and entrepreneurship, which might be regarded as the endogenous ‘intangibles’ that may enhance the performance of cities and regions. The processes of capital accumulation and free trade have not necessarily led to convergence of wage and price levels between regions, with positive agglomeration effects tending to often concentrate activity in one or a few regions in many nations through the self-enforcing effects that attract new investment. That process may be mediated positively by the endogenous ‘intangibles’ we have referred to. The ‘new growth theory’ has actually allowed for both concentration and divergence in regional development. Most importantly, as the spatial distribution of knowledge and its spillovers are now considered to be important success factors in regional development in framing and implementing regional development strategies, it is now seen as being crucial for a city or region to fully understand the nature of the geographical patterns of knowledge diffusion and the barriers to access to knowledge as they relate to creativity, innovation and entrepreneurship as being catalysts for employment and wealth generation (see, for example, Keeble and Wilkinson, 1999; Acs et al., 2002; Döring and Schnellenback, 2006).

THE CONTEMPORARY CHALLENGES We certainly live in a rapidly changing and increasingly competitive world in which uncertainty and risk are considerable. As discussed by Stimson et al. (2006), in many countries the challenge facing economic development planners in contemporary times has been how to formulate economic policy that will respond to both global dynamics and sometimes (or maybe even more often than not) the existence of a national vacuum in adopting a regionally oriented macro-policy.


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At one time regions were protected from outside competition, and to some extent their economies could be manipulated by national governments. But that ability has been overwhelmingly compromised as the economic rationalism pursued by many national governments left many cities and regions to fend for themselves. Many cities and regions have continued to look to higher levels of government for support and resources to provide economic direction and investment to stimulate economic development. Unfortunately, many cities and regions have failed to understand that globalization has left those higher levels of governments relatively weak when it comes to using their inherent power to apply economic and policy mechanisms to enhance the competitiveness of regional economies. In the literature a number of key themes have emerged regarding what constitutes regional growth and development and what drives regional competitiveness. Not surprisingly there have been differences of views among regional development scholars, and some of those differences relate to the relative focus given to the roles of exogenous forces on the one hand and the roles of endogenous processes and factors on the other. But there does now seem to be an almost universal realization of what Garlick et al. (2007) have referred to as the ‘institutional embeddedness’ of endogenous processes and factors in regional development. Of course exogenous factors are likely to remain important to a region’s economic performance and how it develops over time. But increasing importance is being placed on endogenous forces as determinants of a region’s competitiveness. However, regional economic development policy initiatives now tend to be more oriented towards measures that enhance local capacity and capability for a city or region to develop and cope with rapid change in an increasingly competitive global environment. While endogenous growth theory makes mention of leadership, entrepreneurship and institutional factors, little systematic analysis has occurred to thoroughly conceptualize or, even more, measure their roles as endogenous factors in the development process. But as discussed by Stimson et al. (2006), in the contemporary policy era of the last decade or two, it would seem that it has been more and more up to regions to develop and use their own devices to compete internationally in order to survive. Thus, it had become increasingly common in regional development planning strategy for there to be a reliance on endogenous processes, and typically that has been espoused in regional economic development policy. To do that a region would need first to have understood what the factors were that set the dynamics of the new economic age that had emerged in the late twentieth century. In the wake of the current global financial crisis and recession conditions, it will be


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interesting to see whether these much-changed macro-circumstances will set the conditions for a rethinking of that regional self-reliance philosophy and usher in a new era of innovation in institutional arrangements that might incorporate more interventionalist policies in regional development strategy planning. In the regional growth literature there is no doubt that the strategic importance of knowledge for innovation and entrepreneurship has been increasingly recognized. That has built on the notion of the ‘learning region’ as proposed by Simmie (1997). As discussed by Capello and Nijkamp (2009), in a neoclassical framework of analysis, long-range factors – such as education, R&D and technology – have played a critical structural role in the context of the spatial mobility of production factors, which could remove disparities (for example, in terms of per capita income) in the long run and, as a result, may equalize factor productivity across a nation’s regions. And in the endogenous growth literature we have seen how knowledge spillovers and institutional arrangements in local regions are widely acknowledged as factors explaining how knowledge spillovers are spread (as growth spillovers), with those knowledge spillovers representing pure externalities that produce noncompensating advantages for the receivers (Nijkamp and van Hemert, forthcoming). But Capello (2009) has pointed to a discrepancy between the private and social optimum that creates the emergence for ad hoc policy interventions. In the current economic climate of the global financial crisis and recession, Nijkamp and van Hemert (forthcoming) have suggested that in trying to capture the catalytic effect of creativity, innovation and R&D in generating knowledge growth spillovers: ‘more than ever there is a role for government in focusing strong and directed efforts to boost the translation of scientific ideas into useful technologies, and to reinforce the base of science skills that drives this innovation’ (p. 1). They go on to say: ‘Currently, there are different forces at play in the science domain that need attention and support from governments. Besides tensions between local and regional demands, the current crisis has highlighted the growing frictions between the individual and societal needs’ (ibid.). The challenges today include the need to revolutionize transport technologies, meet climate-change targets and secure diversity of energy supply. On a national level, that will require more directed research, education and training innovation to develop the required skills to enact the new technologies, and the active participation of industry in government–science relations to help encourage innovation. This changing socio-political environment, Hertz (2009) suggests, will require different research disciplines to work together more than ever.


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In the context of regional development, Taylor (2009) has referred to the ability to capture ideas and discoveries that flow from research as the main test of whether the UK can recover growth and prosperity. He says that at present the UK does not have the workforce needed to enact new technologies to address the challenges just mentioned, and that is also the case across many if not all countries. While it is a major policy challenge it does, nonetheless, represent an opportunity for local initiatives to be taken to boost investment in education and R&D, particularly in science and technology. The notion is that through what has been termed the ‘triple helix scenario’ (Etzkowitz and Leydesdorff, 1996, 1997, 2000), whereby investment in innovation and R&D inputs will lead to greater innovation outputs when they originate from local sources, cities and regions might be able to catalyse future economic growth. That notion affirms the existence of a spiral pattern of relations and links between the three major institutional actors in a local environment – industry, university and research institutes, and government – in which the education and research sector tends to have a critical part to play in the context of economic growth and regional development in the contemporary knowledge-based economy and in helping societies to address the technological and policy challenges they face with respect to issues such as climate change and achieving more sustainable development. Thus, as Nijkamp and van Hemert (forthcoming) say: ‘Concentrations of outstanding scientific facilities and activities are very important to create challenging and attractive working conditions and opportunities for talented people’ (p. 6). That reinforces what Florida (2002) has suggested in his work on the ‘creative class’ and the emergence of some cities as centres of creativity. Understanding the institutional barriers that mitigate against achieving this creativity and the associated economic dynamism of a city or region and how to unlock those barriers for the emergence of a ‘learning region’ is an obvious priority in regional development strategy planning if the pentagon model proposed by Nijkamp (forthcoming) is to be pursued. A big issue will be the degree to which regional development and growth will converge or diverge as a result of the ‘institutional embeddedness’ of endogenous processes to which Garlick et al. (2007) refer (and which we have discussed in this chapter) and what will be the nature of the ‘jumps and anomalies’ in urban and regional systems that Nijkamp (forthcoming, p. 6) refers to. Endogenous growth theory can help us to understand the complexities of a dynamic space-economy (including shock and bifurcations), but contextual drivers and government policies offer another cause of unexpected dynamics. Consequently, the evolution of complex spatial systems will partly remain an unresolved mystery.


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TOWARDS A SUSTAINABLE DEVELOPMENT MODEL In the contemporary context of a focus on sustainable development in regional economic development strategy it becomes even more necessary to place concerted attention on harnessing endogenous factors in pursuing regional growth and development. Towards that end, from the writings of Nijkamp et al. (1994) and Capello et al. (1999) it is possible to propose a production function for sustainable innovative development based on a pentagon model of five critical success factors (CSFs) as illustrated in Figure 1.1. The five elements of that model that need to be mobilized for the regional development process are: 1.

2.

The availability of productive capital (PC): this corresponds to neoclassical production theory where output is determined by the traditional production factors labour and capital. The presence of human capital (HC): this refers to the quality of labour input obtained by means of education, training or new skills (for example, in ICTs) and may be seen as a productivity-enhancing

PC

EC

HC SID

CC

SC

Source: Compiled by author Peter Nijkamp.

Figure 1.1

A pentagon model of creative forces for sustainable regional development


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3.

4.

5.

11

factor. Clearly a balanced distribution of human capital over people is of great importance. The access to social capital (SC): this condition comprises interaction and communication between people, socioeconomic bonds, social support systems, business networks (formal and informal), relations based on trust, and so on. The usage of creative capital (CC): this may be seen as a great ability to cope with challenges and new opportunities, and is reflected in entrepreneurial spirit, new ways of thinking and acting, trend-setting artistic expressions, innovative foresights, and so forth. Such a factor is often found in a multicultural urban melting pot. The existence of ecological capital (EC): this condition takes for granted that a favourable quality of life, an ecologically benign condition in a city, presence of green space and water, or an attractive living climate (for example, recreation and entertainment possibilities) contribute significantly to the innovative and sustainable potential of a region.

The pentagon factors can in principle be measured and quantified, and then be put in an explanatory econometric model (for an empirical estimation see Capello et al., 1999).

THE ORGANIZATION OF THIS BOOK The remainder of this book is arranged around a number of themes. These are outlined below. Different Disciplinary Takes on Endogenous Regional Development First there are five chapters in which scholars from different disciplinary backgrounds provide their ‘take’ on endogenous regional development: from an economist, a geographer, a sociologist, a planner and a behavioural/management scientist. Kenneth Button provides an economist’s viewpoint (Chapter 2) in which he refers to the powerful tool-kit of powerful techniques economists have for analysing and understanding why some countries and regions grow faster than others. He refers to a world without endogenous growth and the well-known exogenous growth models in neoclassical economics – as illustrated by the Solow model – before turning to discuss the emergence of the ‘new’ or ‘endogenous growth theory’ from the 1980s, while also reminding us of important precursors to the new growth theories


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such as Schumpeter’s discussion of entrepreneurs in the 1930s. The Romer model in particular is discussed, along with the contributions of Arrow and Lucas, with technology, R&D and knowledge being considerations of key importance in the development process. And there is a discussion of the important issue of the empirical testing for regional convergence and diversity in regional development. Button raises the question that if indeed there are endogenous growth effects and if there is endogeneity in the development process, then the opportunity for wider policy options certainly opens up. The geographer’s perspective is provided by Michael Taylor and Paul Plummer (Chapter 3) in which the discussion of regional development is placed firmly within the contemporary process of globalization and the transition from the Fordist to a post-Fordist production regime. They refer to the ‘new economic geography’ and the ‘new regionalism’ discourses, focusing the discussion mainly on the latter and plugging forcefully for the adoption of both quantitative and qualitative approaches to analysis in bringing these discussions to bear in the empirical investigation of regional development. There is discussion of the ‘abstract’ nature of theoretical models of regional growth and criticism of what are referred to as ‘stylized’ facts about local economic development and a dependence on proxy variables in regional econometrics. At the same time the authors are critical of the simplistic and under-theorized approach often taken in the geographic literature. There is discussion of the notion of ‘embeddedness’ to explain the dynamics of local growth, especially as it related to learning, innovative milieu and regional innovation systems in the ‘new regionalism’ debate, with the added emphasis on the advantages of geographical proximity. Importantly there is a detailed discussion of how mixed-method, but theoretically informed empiricism, research might be of use in framing policy advice for regional development, with the authors providing a case study of a project in which they were involved in Australia with a focus on institutional capability in human capital development to enhance regional development. A sociologist’s perspective is provided by Frank Vanclay (Chapter 4) in which he sets the discussion specifically in the context of rural development in a local situation where the focus is explicitly on place-based dimensions and initiatives. In keeping with much of the concern of the sociologist, the emphasis is on understanding the natural, human and cultural attributes of place. Vanclay refers to the notion of development being about how a place might realize its potentialities to create sustainable activity. Much consideration is placed on ‘values’ and the achievement of ‘multifunctionality’ and a concern about the ‘subsidiarity principle’ to renew and revitalize the countryside and its community. In many ways the


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approach outlined by Vanclay is very micro in scale and takes a cultural economy approach to local development, with detailed reference being made to the operation of the EU’s LEADER (‘Liaison Entre Actions de Développement de l’Economie Rurale’) programme. Edward Blakely (Chapter 5) provides a planner’s perspective that focuses on how to derive development outcomes from local resources, the harnessing of which is necessary to produce results that are tangible. He discusses how planning relies on what he calls ‘indigenous activities and/ or endogenous resources’ to shape outcomes in space and place. To assist this it is necessary to formulate a ‘Plan’, as plans (about which there is a lengthy discussion) are descriptive instruments but they need implementation. Thus, there is a considerable emphasis on what might be called institutional factors. Not surprisingly for a planner, Blakely places considerable emphasis on ‘land’ as a resource – which needs to be capitalized on – and its use as an endogenous base in local or regional development. There is also discussion of the importance of planning strategy that seeks equitable and sustainable wealth outcomes. Institutional capability and capacity building is crucial for the process to succeed. Blakely provides a discussion of how for many places the challenge is how to overcome the ‘product cycle trap’ through harnessing their endogenous resources, and of how social capital can play an important role. A behavioural/management science perspective is provided by Tojo Thatchenkery and Jessica Heineman-Pieper (Chapter 6) in which the emphasis is on human capital, cultural and organizational dimensions. They show how an endogenous ecology coupled with technology innovation may spontaneously create cascading entrepreneurial activity, as highlighted in the case of Silicon Valley and the social and cultural embeddedness of its actors. The authors present a framework they call ‘appreciative intelligence’ and discuss how this concept may be transferable as an endogenous process in a wider context of regional development. The discussion of this perspective also incorporates the broader regional science literature on knowledge spillovers and industrial districts and the long-established notion of agglomeration. Measuring and Modelling Endogenous Regional Growth and Development The second theme that is addressed in this book relates to the measurement and modelling of endogenous regional growth and development. Somewhat surprisingly there are few examples of models that have been explicitly developed and empirically tested to actually measure endogenous regional growth or to investigate the determinants of spatial variations in regional performance on an endogenous growth measure.


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In Chapter 7 Robert Stimson and Roger Stough demonstrate how they have used the regional (differential) shift component derived from a shiftshare analysis of regional employment change, standardized by the size of the regional labour force at the beginning of the period, as a surrogate measure of endogenous regional growth (or decline). The authors present a new model framework for endogenous regional growth. They then provide summary results from two exploratory attempts to model regional endogenous employment change using spatial econometrics regression modelling, first in a study of non-metropolitan government local areas across Australia, and second in a study of metropolitan regions in the US. In the second application of the model framework the authors are able to incorporate proxy variables for institutional and leadership factors and measures of entrepreneurial activity, in addition to a large set of resource endowment measures, as explanatory variables in their model. A specific attention is paid to entrepreneurship in regional development in the chapter by Zoltan Acs and Mark Sanders (Chapter 8). The focus is on analysing rents and endogenous entry in regional growth. The authors present a model in which incumbent firms finance R&D for a clear profit motive but entrepreneurs capture the rents of commercializing the opportunities that this R&D generates through regional intra-temporal knowledge spillovers. The model formalizes the ‘knowledge spillover’ theory of entrepreneurship, predicting that in a decentralized equilibrium R&D will be under-funded and that there is room for welfare gains through policy. But a delicate balance now needs to be found when R&D and entrepreneurship compete over the same resources, and the social optimum is to stimulate both R&D and entrepreneurship and invest resources in facilitating the knowledge spillover to entrepreneurs. This modelling approach is seen to turn the Romer argument on incentive structure on its head. Acs and Sanders show that their results can carry over to the regional level when considering the impact of limited geographical labour mobility, transport costs and communication costs. That has important policy implications at the aggregate and regional levels, but the challenge is to ascertain the exact channels through which such spillovers arise. Addressing Endogenous Factors at Different Levels of Scale There follows a series of chapters in which endogenous factors in regional development are considered at a number of different levels of scale. Taking a national economy perspective, in Chapter 9 Tomokazu Arita, Chie Iguchi and Philip McCann address the role that foreign direct investment plays in three of the world’s largest newly industrializing countries: China, India and Indonesia. The focus of their analysis is on an evaluation


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of institutional factors that are operating in the context of globalization and rapidly improving information technologies. The combination of these features produces complex interrelationships between economic geography, economies of scale and global trade and investment, and the authors review those interrelationships in the three rapidly developing case study countries. The authors highlight how the economic growth of these three countries is dominated by specific large urban regions where agglomeration economies appear to be critical, likely exacerbating regional disparities. But the authors identify differences in roles played by localized technology spillovers. In a study of disparities in inter-regional performance across the EU, Daniela Constantin, Zizi Goschin and Gabriela Dragan (Chapter 10) focus on the performance of ten new member states and evaluate the institutional capabilities affecting their absorption capacity. The discussion focuses on the implications of the EU’s structural assistance programmes (a part of the social cohesion policy) on regional disparities for the new member states and the regions within them. The authors use Gini coefficients and the covariation, weighted by population, to investigate the degree to which convergence is occurring, showing how divergence has actually increased. Institutional inefficiencies and ineffectiveness are highlighted as potential endogenous barriers or impediments. In Chapter 11, Roberto Camagni and Roberta Capello also discuss the issue of differentials in the performance of regions across the EU nations. Their concern is with investigating regional competitiveness through the concept of ‘territorial capital’. They provide a set of theoretical perspectives on the regional convergence/divergence debate, and discuss the relationships between regional performance and exogenous and endogenous factors. Using the regional economic growth simulation model known as MASST, the authors investigate the impact of macroeconomic policy at the regional level across EU regions, the impact of EU regional policies such as the structural funds and the role of specific elements of territorial capital on regional growth patterns. Moving to the level of scale of the city, in Chapter 12 Alistair Robson provides a comparative analysis of endogenous regional employment growth performance for each of Australia’s five largest cities – Sydney, Melbourne, Brisbane, Perth and Adelaide – over the decade 1996 to 2006. He conducts a shift-share analysis of employment change and focuses in particular on the regional shift component as an indicator of endogenous performance. The analysis includes segmenting the analysis by industry sectors. Marked differences are apparent in the performance of the cities. At a much more local level of scale, in Chapter 13 John Martin looks at the performance of four small towns in two rural shires in the state of


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Victoria in Australia in the wider context of population and economic decline that is apparent widely across small towns. Martin focuses on the role of local leadership – in particular the role of local government – and social capital in those four small communities through a ‘sociometry framework’. The author demonstrates how leadership and institutional factors, including strategies enhancing social capital, have played a significant role in the local planning process to try to enhance the survival and functioning of some of those small towns in a rural region. In Chapter 14 Terry Clower investigates the influence of economic development incentives through government industry assistance programmes as an institutional factor in the states of Alabama and Texas in the US. These are common initiatives in response to plant closures at the local level. The author provides a detailed case study of a food manufacturing firm relocation to Grayson County in the Sherman-Denison Metropolitan Area of Texas under the Texas Enterprise Fund. The distorting effect of such a one-off exogenous incentive on the results of a regional employment shift-share analysis is clearly demonstrated. There is also a discussion of what might be better endogenous incentives to grow and attract industry in local development policy. A Way Ahead? In the final chapter (Chapter 15) Peter Nijkamp and Roberta Capello point out that regional growth theory covers a little more than half a century and during that time we have deepened our knowledge and understanding of the complex backgrounds and impediments to balanced regional development. In that context endogenous considerations are of great importance. Nijkamp and Capello provide a provocative review of approaches to investigate regional development, which begins with a discussion of the vexed question of convergence hypothesis in the debate on regional disparities. In particular they draw attention to the policy issues involved, referring to the need for regions to achieve a role in the international division of labour and maintain it over time, and pointing to the implications of regional growth trajectories in coping with sustainability issues and scarcity of environmental resources, such as environmental quality, natural resource security, urban quality of life, or spatial biodiversity. The authors debate the need for theories of regional growth and development to be more realistic and to better incorporate the complex and interactive behaviour and processes that take place in space and to understand regional competitiveness in terms of endogenous factors. In particular they refer to the importance of the spatial distribution of knowledge and


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its spillovers as important success factors for regional development in an open competitive economic system and how they are critical for regional welfare creation. Nijkamp and Capello argue strongly for a more dynamic approach to theories and models while recognizing the difficulties of the complexity of time with spatial analysis through non-linear approaches. Finally, the authors write of the institutional challenges for regions pursuing a sustainable development path and the crucial role of innovation processes. The chapter concludes with the prophetic statement that ‘regional growth is thus a race without a finish; and that also applies to regional growth theory’. Hopefully, the chapters in this book contribute to that race.

REFERENCES Acs, Z.J., Anselin, L. and Varga, A. (2002): Patents and Innovation Counts as Measures of Regional Production of New Knowledge, Research Policy, 31(7), 1069–85. Arthur, W.B. (1994): Increasing Returns and Path Dependency in the Economy, University of Michigan Press, Ann Arbor. Barro, R.J. (1990): Government Spending in a Simple Model of Endogenous Growth, Journal of Political Economy, 98(5), S103–S125. Blakely, E.J. (1994): Planning Local Economic Development: Theory and Practice, 2nd edition, Sage Publications, Thousand Oaks, CA. Capello, R. (2009): Spatial Spillovers and Regional Growth: A Cognitive Approach, European Planning Studies, 17(5), 643–60. Capello, R. and Nijkamp, P. (eds) (2009): Handbook of Regional Growth and Development Theories, Edward Elgar, Cheltenham, UK and Northampton, MA, USA. Capello, R., Nijkamp, P. and Pepping, G. (1999): Sustainable Cities and Energy Policies, Springer-Verlag, Berlin. Döring, Th. and Schnellenback, J. (2006): What Do We Know About Geographical Knowledge Spillover and Economic Growth?, Regional Studies, 40(3), 375–95. Erickson, R.A. (1994): Technology, Industrial Restructuring and Regional Development, Growth and Change, 25(3), 353–79. Erickson, R.A. and Leinbach, T. (1979): Characteristics of Branch Plants Attracted to Non Metropolitan Areas, in: Lonsdale, R. and Seyter, H.L. (eds): Non Metropolitan Industrialization, Winston, Washington, DC. Etzkowitz, H. and Leydesdorff, L. (1996): The Future Location of Research: A Triple Helix of University–Industry–Government Relations, II, EAAST Review, 15(4), 20–25. Etzkowitz, H. and Leydesdorff, L. (1997): Universities and the Global Knowledge Economy, a Triple Helix of University–Industry–Government, Pinter, London. Etzkowitz, H. and Leydesdorff, L. (2000): The Dynamics of Innovation: From National Systems and Mode 2 to a Triple Helix of University–Industry– Government Relations, Research Policy, 29(2), 109–29.


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Florida, R. (2002): The Rise of the Creative Class: And How It’s Transforming Work, Leisure, Community and Everyday Life, Basic Books, New York. Fukuyama, F. (1995), Trust: The Social Virtues and Creation of Prosperity, Free Press, New York. Garlick, S., Taylor, M. and Plummer, P. (2006): An Enterprising Approach to Regional Growth: The Role of VET in Regional Development, NCVER (National Centre for Vocational Education Research), Australian National Training Authority, Adelaide. Grossman, G.M. and Helpman, E. (1991): Innovation and Growth in the Global Economy, MIT Press, Cambridge, MA. Hertz, N. (2009): Cooperation Must Rule, Nature, 457(7232), 962–3. Huxham, C. (1996): Collaborative Advantage, Sage, Thousand Oaks, CA. Johansson, B., Karlsson, R. and Stough, R.R. (eds) (2001): Theories of Endogenous Regional Growth, Springer, Berlin. Keeble, D. and Wilkinson, F. (1999): Collective Learning and Knowledge Development in the Evolution of Regional Clusters of High-technology SMEs in Europe, Regional Studies, 33(4), 295–303. Knight, R.V. and Gappert, G. (eds) (1989): Cities in a Global Society, Sage Publications, Newbury Park. Krugman, P. (1991): Geography and Trade, MIT Press, Cambridge, MA. Krugman, P. (1995): Development, Geography and Economic Theory, MIT Press, Cambridge, MA. Krugman, P. (1996): The Self-Organising Economy, Blackwell, Oxford. Krugman, P. and Venables, A. (1996): Integration, Specialization and Adjustment, European Economic Review, 40(3–5), 959–67. Lucas, R.E. (1988), On the Mechanics of Economic Development, Journal of Monetary Economics, 22(1), 3–42. Markusen, A. (1985): Profit Cycles, Oligopoly and Regional Development, MIT Press, Cambridge, MA. Nijkamp, P. (forthcoming): E Pluribus Unum, Region Direct. Nijkamp, P. and van Hemert, P. (forthcoming): Knowledge Infrastructure and Regional Growth, Regional Symbiosis. Nijkamp, P., Vleugel, J., Maggi, R. and Masser, I. (1994): Missing Transport Networks in Europe, Ashgate, Aldershot. Norton, R.D. and Rees, J. (1979): The Product Cycle and the Decentralization of North American Manufacturing, Regional Studies, 13(2), 141–51. OECD (2000): Links between Policy and Growth: Cross-country Evidence, draft paper for Working Party 1, Economics Department, OECD. OECD (2001): The Well-Being of Nations: The Role of Human and Social Capital, Centre for Educational Research and Innovation (CERI), OECD Publishing, Paris. Ohmae, K. (1995): The End of the Nation State: The Rise of Regional Economics, Free Press, New York. Porter, M.E. (1990): The Competitive Advantage of Nations, MacMillan, New York. Prud’homme, R. (1995): On the Economic Role of Cities, in Cities and the New Global Economy, papers from an international conference presented by the OECD and the Australian Government, Australian Government Publishing Service, Canberra, 3, 728–42. Rebelo, S. (1991): Long Run Policy Analysis and Long Run Growth, Journal of Political Economy, 98(5), S71–S102.


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Rees, J. (1979): State Technology Programs and Industry Experience in the USA, Review of Urban and Regional Development Studies, 3(1), 39–59. Rees, J. (2001): Technology and Regional Development: Theory Revisited, in: Johansson, B., Karlsson, Ch., Stough, R.R. (eds): Theories of Endogenous Regional Growth, Springer-Verlag, Heidelberg, pp. 94–110. Romer, P.M. (1986): Increasing Returns and Long-run Growth, Journal of Political Economy, 94(5), 1002–37. Romer, P.M. (1990): Endogenous Technological Change, Journal of Political Economy, 98(5), S71–S102. Scott, A.J. (1988): New Industrial Spaces: Flexible Production Organization and Regional Development in North America and Western Europe, Pion, London. Simmie, J. (ed.) (1997): Innovation, Networks and Learning Regions?, Jessica Kingsley, London. Solow, R.M. (1956): A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, 70(1), 65–94. Solow, R.M. (2000): Growth Theory: An Exposition, Oxford University Press, New York. Stimson, R.J. and Stough, R.R. (with Salazar, M.) (2009): Leadership and Institutions in Regional Endogenous Development, Edward Elgar, Cheltenham, UK and Northampton, MA, USA. Stimson, R.J., Stough, R.R. and Roberts, B.H. (2006): Regional Economic Development: Analysis and Planning Strategy, revised edition, Springer, Berlin. Taylor, I. (2009): Learn to Convince Politicians, Nature, 457(7232), 958–9. Thomas, M.D. (1975): Growth Pole Theory, Technological Change and Regional Economic Growth, Papers of the Regional Science Association, 34(1), 3–25.


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2.

The economist’s perspective on regional endogenous development Kenneth Button

There must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. (J. Schumpeter, Preface to the Japanese edition of Theorie der Wirtschaftlichen Entwicklung, 1911, transl. 1934) Economic progress, in capitalist society, means turmoil. And, . . . in this turmoil competition works in a manner completely different from the way it would work in a stationary process, however perfectly competitive. Possibilities for gains to be reaped by producing old things more cheaply are constantly materializing and calling for new investments. These new products and new methods compete with the old methods not on equal terms but at a decisive advantage that may mean death to the latter. (J. Schumpeter, Capitalism, Socialism, and Democracy, 1942)

INTRODUCTION Economists have developed a tool-kit of very powerful techniques for analyzing a wide range of social phenomena but they have, beyond gaining a very general understanding, been singularly unsuccessful in unanimously agreeing on an explanation of why some regions’ or countries’ economies grow faster than others.1 This is an important intrinsic question, but it also raises issues about the roles of institutions that have been established to narrow the gap between the rich and the poor. Those involved in trying to explain economic growth have included the luminaries of their generations, and their political leanings range from the capitalist market orientation of Joseph Schumpeter to the centralism of Karl Marx. Indeed, if one accepts Milton Friedman’s (1953) criteria for a good model, namely its ability to produce good forecasts, then economic growth models have been sadly inefficient, although, one might add, that by the standards of other social science disciplines, the notions of precision used by economists are particularly demanding. The expansion of material development and enhanced human welfare 20


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The economist’s perspective

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has always been at the core of modern economics. Adam Smith, David Ricardo, Malthus and other early classical economists offered a variety of explanations for improving economic efficiency, focusing on the benefits of the division of labor in one way or another, but they were largely focused on squeezing more production from a given resource base than economic growth per se.2 Their concern was essentially with what we now consider comparative statics rather than dynamics. More recently the importance of technological progress in economic growth has attracted attention. Initially, and following the pioneering work in the 1920s of Frank Ramsey (1928), strenuous intellectual efforts have been made to incorporate into economic models the changes in technology that have manifestly affected economic growth since the Industrial Revolution. The basic point being that capital and labor ‘augmenting’ technology continually increases returns to factors of production, leading to additional investment, allowing per capita output to increase seemingly indefinitely. The challenge has been to understand where this technical progress comes from, how it becomes embedded in production processes and how it will, in quantitative terms, influence the economic growth rates of different regions. While this has largely been treated as a question of macroeconomic interest, there are important spatial implications especially because technological progress is not ubiquitous or cannot always be easily and quickly transferred between regions.

BACKGROUND: A WORLD WITHOUT ENDOGENOUS GROWTH In the 1960s the UK’s Royal Economic Society and the American Economics Association commissioned a series of survey papers by leading figures in their fields. Two of these, that by John Meyer (1963) on ‘Regional Economics’, and by Frank Hahn and Robin Matthews (1964) on ‘The Theory of Economic Growth’ provide a useful basis for considering how and why endogenous growth theory has developed over the past 45 years or so. While there was concern at the time amongst regional economists over spatially differential growth patterns, the emphasis of academic work, and possibly reflecting the dominance of Keynesian economics at the time, was more on short-term considerations. In particular there was interest in the tracing through via multiplier and input-output analysis the local implications of expanding a region’s export base. The neoclassical world of macroeconomic growth theory before the 1980s thought that growth was the result of forces that impinged from the outside rather than being a product of the economic system itself.


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Per capita income growth was seen as dependent on saving rates and on exogenous shocks to the steady-state growth path that resulted. The empirical work of the time focused on extracting the inputs of the factors of production – de facto, labor inputs – from the growth process and then treated differences in national or regional growth as an accounting residual. To be fair, however, in part this was as much due to data weaknesses as to intellectual understanding.3 As we see below, endogenous growth theory goes beyond this and seeks to look at the private and public sector choices that cause these residuals to vary. Comparative Statics Traditional macroeconomic, long-run growth theory at the time these papers were written was largely divided between theories that assumed economic growth could occur without technical progress and those that focused, albeit in a particular way, on technology impacts. The former were very much in the classical tradition of Smith with a focus on growth in the labor force. In equilibrium, the growth of output is limited by the growth of the labor force and that implies a constant per capita income. Where regional, as opposed to macro, growth (at any level of aggregation) models differed from this to some extent was to treat labor supply as both dependent on the internal demographics of a region and upon migration between regions. Basically, it allows for the spatial mobility of factors of production. Hence, a specific region may grow when there is capital abundance by ‘importing’ labor from other regions. This, combined with the natural growth in labor supply within the region, can lead to growth through more efficient use of the labor stock although in the long run there will be convergence in per capita income. Figure 2.1, developed from Hart’s (1975a, 1975b) synthesizing work, offers a simple illustration of the point. We assume there to be two regions, A and B. The former enjoys high-income levels and low unemployment whilst B is the mirror image of this.4 There are decreasing returns to factors. The classical economic model assumes that with zero costs of migration and a homogeneous labor force, labor will move from B to A seeking work and higher pay whereas, on the assumption of uniform commercial risk across regions, capital will move from region A to B where it can be combined with abundant, cheap labor to maximize returns. Wages will fall in A, unemployment will increase, and the return on capital will rise as the labor supply increases and capital becomes scarcer. The additional amount of capital and the decreasing size of the labor force in region B will push down the marginal return on investment and concurrently push up wages. The process continues until labor costs and unemployment levels are


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The economist’s perspective Region A

Capital

23 Region A

Labor

Region B Classical Model

Capital

Skilled Labor

Region B New GrowthTheory Model

Note: I = income; U = unemployment. Source:

Developed form Hart (1975a and 1975b).

Figure 2.1

Simplified theories of migration

equalized.5 This equalization is achieved in a world of zero transportation costs and full information about employment and investment opportunities. There are no legal impediments to factor mobility, and racism is absent. Essentially the model is devoid of any real geographical consideration. Exogenous Growth Modes The neoclassical theory can be treated as an extension to the well-known Harrod-Domar model6 of economic growth developed in the 1940s that includes an additional term reflecting productivity growth. The broad theory is typified by the work of Robert Solow (1956) and the Australian Trevor Swan (1956) on changes in the factor endowment of a country. In their neoclassical models, the long-run rate of growth is exogenously determined – in other words, it is determined outside of the model. A common prediction of these models is that an economy will always converge towards a steady-state rate of growth that depends on the rate of technological progress and the rate of factor accumulation. A country with a higher saving rate, for example, will experience faster growth. In the Harrod-Domar framework, steady-state growth is unstable; it is on a ‘knife-edge’ in the sense that any deviation from that path would result in a further, and subsequently cumulative, move away from that


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path, either up or down. However, Solow, Swan and others argued that the capital–output ratio of the Harrod-Domar model should not be regarded as exogenous. They proposed a growth model where the capital– output ratio was precisely the adjusting variable that would lead a system back to its steady-state growth path. The key assumption of the neoclassical economic growth model is that capital is subject to diminishing returns. Given a fixed stock of labor, the impact on economic output of the last unit of capital accumulated will always be less than the one before. Assuming for simplicity no technological progress or labor force growth, diminishing returns implies that at some point the amount of new capital produced is only just enough to make up for the amount of existing capital lost due to depreciation. At this point, because of the assumptions of no technological progress or labor force growth, the economy ceases to grow. Assuming non-zero rates of labor growth complicates matters at the regional level, where migration may be large, somewhat, but the basic logic still applies – in the short run the rate of growth slows as diminishing returns take effect and the economy converges to a constant steady-state rate of growth (that is, no economic growth per capita).7 Including non-zero technological progress is very similar to the assumption of non-zero workforce growth: a new steady state is reached with constant output per worker-hour required for a unit of output. However, in this case, per capita output is growing at the rate of technological progress in the steady state (that is, the rate of productivity growth). More formally, an exogenous growth model can be formulated by taking a simple Cobb-Douglas production function of the form, Y = Y = A(t)K1−b Lb (where Y is net national product, K is the capital stock, L is the labor stock and A is the level of technology). The fact that A is a function of time (t) indicates the standard neoclassical assumption that technology only improves over time for reasons external to the model.

ENDOGENOUS GROWTH MODELS Adherents to endogenous economic growth theory cite three main limitations of the neoclassical model: 1.

2.

It relies heavily upon technological change to supply growth in per capita income but has no mechanism for explaining the sources for such change. It offers only a very rudimentary framework for assessing the effects of government policy, and while government actions may not be


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able to raise long-run growth rates, government interventions do affect behavior and this, in aggregate, affects the growth path (be it positively or negatively). The model has limited capabilities for analyzing trade between regions or countries and the links between such trade and economic growth.

According to the ‘new’ or ‘endogenous growth theory’ that began to emerge in its current form in the 1980s, economic growth can be understood as a process of learning-by-doing, within a firm, within an industry and within a given spatial jurisdiction such as a region or metropolis. While there were earlier attempts to indigenize technical progress much of the credit for the modern formulation of endogenous growth theory is attributed to Paul Romer (1986, 1990a) and Robert Lucas (1988, 1993). By way of a counterpoint, while exogenous growth theory sees rising output per capita as resulting from externally given increases in the quantities of labor and capital with no internal technological or organizational change, and no economies of scale, but only constant returns in an environment altered solely by investment levels and labor force growth, endogenous growth models see economic growth over time entailing increasing returns to scale for a metropolis or a national economy. A proportionate increase in labor and capital gives rise to more than proportionate gains in output. The explanation lies in better ‘recipes’, as Romer terms innovations, and in spillovers that operate over time, enhancing skill and productivity levels throughout the economy. This approach to growth has the advantage of supplementing the neoclassical model, without destroying it, by refining the ways in which technology change is stimulated and absorbed in economies. The need for a more complete theory of technical change was there in the 1980s, as pointed out by Romer (1994), but earlier efforts aimed at bringing technology in from the cold had not been analytically developed or fully embraced in the theorizing. Precursors to Modern Endogenous Growth Theory In his Capitalism, Socialism, and Democracy, Schumpeter (1942), albeit not in a mathematically rigorous fashion, laid the foundations for much of the subsequent work on endogenous growth theory. The basis of his analysis, however, had more to do with the nature of general political systems, and their implications for national welfare than with per capita income per se, and it was not developed at the regional level.8 Nevertheless, the idea was that within a capitalist system the continual pressure on profit margins of incumbent businesses generated by the pressures of entrepreneurs and


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imitators led to an inevitable push within business to be at the cutting edge of technology. Put another way, in Schumpeter’s interpretation of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power. Part of the subsequent stimuli to develop a more technically rigorous endogenous framework in the 1950s and 1960s also came from reassessments of earlier empirical findings.9 According to calculations by Solow (1957), for example, 87.5 percent of growth in output in the US between 1909 and 1949 could be ascribed to technological improvements alone, suggesting that the ‘Solow residual’ was large. One of the first reactions of the neoclassical economists was to argue that by reducing much of that influence to pure capital improvements in the calculations, capitalintensity seemed to play a larger role than suggested by the arithmetic, although, Solow (1960) did later argue that increased capital-intensive investment embodies new machinery and new ideas as well as increased learning for even further economic progress.10 Nevertheless, there were still significant issues to be addressed. Nicholas Kaldor was really the first major post-war economic theorist to consider endogenous technical change as a potentially important element in explaining differences in regional and national growth rates. In a series of papers, including the oft-cited contribution with James Mirrlees (Kaldor and Mirrlees, 1962), Kaldor posited the existence of a ‘technical progress’ function and that per capita income was indeed an increasing function of per capita investment. Thus, ‘learning’ was regarded as a function of the rate of increase in investment. However, Kaldor held that productivity increases had a concave nature (i.e., increases in labor productivity diminish as the rate of investment increases). This proposition falls short of Solow’s insistence on constant returns. Kenneth Arrow (1962) took the view that the level of the ‘learning’ coefficient is a function of cumulative investment (i.e., past gross investment). Unlike Kaldor, Arrow sought to associate the learning function not with the rate of growth in investment but rather with the absolute level of knowledge already accumulated, a stock rather than a flow concept. Because Arrow claimed that new machines are improved and/or are more productive versions of those in existence, investment does not only induce productivity growth of labor on existing capital (as Kaldor would have it), but it would also improve the productivity of labor upon all subsequent machines made in the economy. The trick is to utilize the concept that while firms face constant returns, the industry or economy as a whole takes increasing returns into account. This can be formalized using the Cobb-Douglas production function:


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Y 5 AKaL1 2a where there are constant returns to scale for all inputs together (i.e., a 1 (1 2 a) 5 1). Therefore, it seems as if output per capita, and with it consumption per capita, does not grow unless the exogenous factor, A, grows too. To indigenize A, the Cobb-Douglas production function for each individual firm is defined as: Yi 5 AiKai L1i 2a where the output of an individual firm is related to capital and labor as well as the ‘augmentation’ of labor by Ai. Arrow assumed that Ai, while it looks specific to the firm, is in fact related to ‘knowledge’ in the economy. This knowledge and experience is common to all firms. Arrow argued that knowledge accumulation arises from the past cumulative investment (G) of all firms, that is, the technical augmentation factor is related to economy-wide aggregate capital in a process of ‘learning-bydoing’. In other words, the experience of the particular firm is related to the stock of capital in the economy, G, by Ai 5 Gz. Hence, as the physical capital stock G accumulates, knowledge used by a particular firm also accumulates by a proportion z such that 0 , z , 1. Transferring to the production function for an individual firm yields: Yi 5 G 2zK ai L1i 2a where only G does not have a subscript i, it is a productive force external to the firms and assumed a quasi-public good. Thus, constant returns to scale are maintained at the firm level, but in the aggregate G 5 K because it is only the accumulated stock of capital for the economy. The ‘economywide’ aggregate production function is therefore: Y 5 K a 1 zL1 2a Arrow assumed that a 1 z , 1; hence increasing only capital does not lead to increasing returns. Increasing returns to scale can be obtained by a 1 z 1 (1 2 a) 5 ‘z’ . 0, but capital and labor must both expand. However, by adding this restriction, Arrow’s original model meets Solow’s condition by exhibiting non-increasing returns to scale in aggregate if the rate of growth in an economy is steady.


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The More Recent Models The 1980s saw an upsurge of interest in economic growth theory partly because major structural shifts were occurring as the service sector, and particularly information-based industries, began to grow in importance and as entities such as the EU began to fulfill some of their potential. Essentially, changes were taking place at both the technical and institutional levels that were seen as potentially affecting economic growth. Paul Romer (1986), for example, went to great lengths to disqualify the restriction retained by Arrow – decreasing returns to capital. His main initial thesis, however, was that long-term economic growth stems from the accumulation of knowledge; knowledge being seen as a factor of production embodied in capital and labor.11 Taking Kenneth Arrow’s idea of disembodied knowledge, Romer concludes that there indeed could be constant returns, but argues that the rate of growth of K alone may yield increasing returns; de facto he assumed (a 1 z) . 1 was possible. With this externality, the growth rate of capital gK equals the growth rate of per capita consumption gc 5 gC 2 gL such that gK 5 gc . 0; that is, there is constant positive growth in per capita consumption and capital. It is the externality, from learning-by-doing, that gives a positive growth rate for consumption and output. In addition, the higher the level of disembodied knowledge, the more ‘soil’ exists upon which innovation (i.e., increases in productivity) can work and the higher the rate of technical progress.12 There is a problem with Romer’s model. The size of the labor force enters as an argument. Thus, if L increases, then the growth rate of consumption increases – the Malthusian effect. This is an unattractive feature that could be solved if we had originally divided the accumulated knowledge equation by L. However, the notation in the model gets unnecessarily complicated after this and is not included here.13 Finally, the social planner’s solution to the overall Arrow-Romer model would inevitably be different from the competitive solution presented. Arrow assumed that any firm is so small relative to the overall economy that its investment decisions cannot have any important effect on the aggregate stock of capital or knowledge. In sum, the firm takes no account of the second-round effects of its investments on technological progress, but rather maximizes profits through its choice of labor and capital taking the stock of knowledge as given. A social planner’s idea of the marginal product of capital would be different, as she would take the externality into account and that, in turn and if it could be done effectively, would yield a higher steady-state growth rate. Thus, the equilibrium growth rate under a competitive system is smaller than the optimal growth rate under


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a social planner because firms are not, individually, taking the externality into account. In other words, with full information and an effective toolkit there is a role for public policy. Learning-by-doing within a firm means current unit costs are a function of experience (as measured by the firm’s cumulative past output). Given the learning curve for a single firm, then imitation of successful firms on the part of other firms in the industry spreads the ‘learning’ around, such that the industry as a whole can benefit from falling-forward supply curves. The process links unit costs to cumulative industrial output within a country or region. The ease of imitation and learning then increases within spatial agglomerations, which in turn can be understood as what are often called ‘little nations’ benefiting from increasing returns. Romer refines his work by looking at why private firms directly invest in technical knowledge by undertaking R&D when it has the characteristics of a quasi-public good; knowledge only being partially excludable means that the firm will not reap the full benefits. Patents, trademarks and copyrights are assumed by Romer, as they had been in previous work by Joseph Schumpeter (1942),14 to protect, at least for a time, part of the knowledge acquired, but even without them a firm generally enjoys a first mover advantage and can costlessly reproduce for sale or internal use a new ‘design’. It can sell these new products for a time at prices above marginal cost and earn super-normal profits, but even as the short-term monopoly position is eroded there is the incentive to further innovate because of the lowered R&D costs that stem from the previous experience.15 In effect, R&D activities become a barrier to entry of competition into the market. Robert Lucas (1988, 1993) takes a somewhat different approach to the spillovers from investment, focusing on education and on-the-job training. Essentially, the interest is more on human capital rather than in physical capital and R&D as in Romer’s framework. One approach followed by Lucas involves assuming that personal human capital is built up by workers through their postponing current consumption in the hope that education will allow for greater consumption in the future. To develop an endogenous growth effect from this, he assumes that there is an externality from this activity because the actions of these individuals will enhance the overall productivity of the labor force, including those that do not defer consumption. Lucas found empirical support for this in the spatial agglomeration that can be observed, especially in cities. A second approach is to assume that knowledge is obtained on the job rather than through explicit formal educational programs. Hence, labor does not leave the workforce to acquire and develop knowledge, but gains it from having to produce an ever-increasing range of more sophisticated


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products.16 Lucas supports this line of argument by looking at the experiences of some of the newly industrializing countries of Eastern Asia that have experienced rapid growth in per capita income through selling to diverse and continually changing export markets despite a much slower expansion in the formal education system than his earlier work suggested would be needed. In sum, interpreted variously in terms of Arrow’s learning curves, Romer’s recipe for growth, or Lucas’s vector-autoregressive (VAR) time-series specifications, the key ideas underlying endogenous economic growth are learning-by-doing and cross-fertilization over time. There are effective feedback-loops in the economic system.

IS THERE A SPECIFIC REGIONAL CONTEXT? As we have seen, one implication of Solow’s neoclassical growth model is that each country or region should converge on to its own steady-state growth path at a predictable rate. If one is willing to assume that technology is identical across countries, then one should expect any two countries with identical saving rates and population growth rates to converge to the same level of income. Similarly, all countries should converge to a level of income that can be predicted by its saving rates and population growth rate. Regions, in theory, simply mirror this process, although the greater flexibility in capital and labor markets within a country would suggest that intra-national convergence would be more rapid than international convergence. Empirical evidence for convergence has repeatedly been interpreted, at either level of aggregation, as providing support in favor of the neoclassical model and against endogenous growth models, which we move onto, in both the national and regional context.17 The new growth theory, in contrast to the neoclassical framework, is consistent with divergence in economic growth along the traditional lines of Myrdal’s (1957) ideas of circular and cumulative causation, albeit for somewhat different reasons. The situation can be illustrated by returning to Figure 2.1.18 Taking the initial starting positions for two regions, this approach argues that not only will equalization of real wages and employment levels not be attained but that there may be cases where they diverge further. Labor mobility between regions A and B may be impeded by the various costs of migration – embracing social and search costs as well as simple financial costs – and heterogeneity in the labor market – the jobs available in A not being compatible with the skills and knowledge of labor in region B. This is a potentially serious constraint in knowledge industries in either of the Lucas cases because of the costs of acquiring education in


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his initial model, and the lack of appropriate on-the-job training in the second.19 Equally, capital does not move from region A to B because of the higher returns and less uncertainty that are to be found in regions that already have a high level of prosperity and a pool of complementary labor. While the earlier regional models of Kaldor, in particular, focused largely on divergent growth rates in the context of traditional-style manufacturing industries that still dominated Western economies, the more contemporary form of the theory pays particular attention to the endogenous growth that occurs in regions that have an established high-skilled workforce, and the ability to further develop their knowledge-based industries. Again, there is no substantive difference in the modeling whether it is conducted at the national level or for smaller regions, although institutional and cultural factors may influence the speed and detail of the growth paths of either.

EMPIRICAL TESTING FOR ECONOMIC CONVERGENCE Testing the validity of the alternative theories, in the absence of easily quantifiable counterfactuals, has frequently involved looking at secondary evidence, and in particular at situations that shed light on whether there is convergence in the economic growth paths of regions or, at the macrolevel, nations. The empirical question that is explored at the specific regional level of aggregation becomes one of whether there is convergence in economic growth rates in, generally, per capita income as is a natural outcome of the neoclassical model, but only possible with endogenous growth under rather particular circumstances.20 The aim here is not to even try to provide a comprehensive critique of the numerous studies of growth paths for the variety of economic variables (e.g., income, employment and prices) that have been conducted across a range of different levels of spatial aggregation, locations and time periods, but rather to offer a flavor of what has emerged at the regional level, from some of the more cited, and thus influential, pieces of analysis. The extensive empirical analysis that has emerged has been assisted by improved data sets made available in recent years, as well as new modeling frameworks, enhanced econometric techniques and better understanding of how to measure convergence. In particular, there has been the development of the concept of b-convergence measures (Barro and Sala-i-Martin, 1992; Sala-i-Martin, 1994) that has allowed


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a more rigorous analysis of economic convergence than the more traditional s convergence measure.21 The estimation of possible b convergence involves a mean-reversion calculation and it occurs if there is a negative relationship between the growth rate of income per capita and the level of initial income.22 Much of this type of analysis has been done at the national level, but it, and the more limited body of analysis that has been conducted at the regional level, does offer some insights into the validity of the idea of endogenous economic growth. Much of the early work on spatial economic convergence relied upon aggregate, national data sources and focused on s–convergence measurements (e.g., Abramovitz, 1986; Baumol, 1986; Maddison, 1987). The findings indicated that labor productivity, and with it per capita income in the world, was converging in the long run and thus rendered support to the neoclassical growth theory. The difficulty with this work was that the data sets used only contained countries that had already industrialized, and even for those there were periods of divergence (De Long, 1988).23 Improved data, most notably the Heston-Summers panel data set that embraces a large group of countries, subsequently indicated a lack of any general economic convergence (Romer, 1994). The more recent work that has made use of b–convergence measures, and embraces a number of subnational studies, tends to find little support for overall convergence. Barro and Sala-i-Martin (1991) in a number of studies that, for example, have examined the economies of US states and European Union regions find that while there is evidence of convergence in per capita income, it is slow – about 2 percent per annum and well below the 12 percent or so that neoclassical theory would suggest. These are also conditional convergence measures that allow for homogeneity between, for example, the regional economies within an EU economy but diversity between countries that would suggest potential differences in steady-state growth rates for the regions within them.24 Hence, overall there is little support in this body of work for the exogenous growth idea.

POLICY IMPLICATIONS From a policy perspective, if there were indeed endogenous growth effects this would seem to provide decision-makers with some opportunity to intervene to stimulate growth and to combat spatially divergent growth paths, in effect overcoming the frustration with neoclassical theory expressed by Schumpeter at the beginning of the chapter. This contrasts to the Solow model where only a change in the savings rate could generate long-run growth in per capita income. When in disequilibrium, the


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neoclassical model does allow for fairly limited public policy interventions that would de facto lubricate the system and facilitate a more rapid move to a steady-state growth path. It would not, however, produce movement along it or shift it. In the context of migration, for example, this may involve improved information and enhanced transportation services to allow existing resources to migrate and be used more effectively along Adam Smith’s lines of argument of greater divisions of labor. If there is endogeneity in the growth process then the policy options are somewhat wider. Since knowledge is important, then diffusion of ideas and broader national policies for R&D can be deployed to bring lagging regions up to the production frontier enjoyed by the leading regions. To stimulate a nation’s growth, Romer, for example, argues for a reduction in the US’s federal deficit to reduce interest rates that would in turn increase the amount of human capital devoted to R&D by raising the discounted value of any given stream of future revenues associated with a new design. The Romer framework would also suggest subsidies for R&D because of the currently uncompensated external benefits that it generates; in contrast the Lucas models suggest that these subsidies should largely go to the education and training of workers.25 There is also a case for freer trade in that it allows for the more rapid diffusion of knowledge and thus breaks down the monopoly of those regions and countries that currently enjoy its ‘ownership’. More generally, it releases knowledge workers to invent new designs rather than for those in the lagging regions having to expend energies on catching up and effectively continually having to reinvent the wheel. If one pursues the Richard Florida (2005) line of argument that the creative classes are attracted and retained by the larger environment in which they live and work, then investment in various forms of social and economic infrastructure become important.26

CONCLUSIONS In a way there is no lack of economic theories seeking to explain why some regions or countries grow faster than others. Indeed there may be too many theories. What the recent developments in endogenous growth theory have done is to introduce the less tangible elements of labor and capital (‘knowledge’ in short) much more systematically into the analysis of national and regional economic growth modeling. The accompanying body of econometric and statistical work has helped fine-tune these models and provide numerical methods for policy development and assessment. But the understanding of variations in economic growth paths


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is still far from complete. In part this is because the economic modeling remains controversial and this in turn can partly be explained by gaps in the work that has been completed by complementary disciplines. While there are now relatively powerful economic and programming techniques available to examine macro- and meso-data our understanding of some of the fundamental micro-forces that lead to economic growth is still relatively poor.27 To more completely understand the motivations for companies to undertake R&D, and for individuals to invest differentially in enhancing their knowledge bases, requires more systematic analysis by, in the first case, management scientists, and in the latter by sociologists and social psychologists. Even at the more macro level there appear to be fundamental cultural differences that affect the speed and nature of uptake of new technologies, and especially those that emerge in other regions that are not normally seen as within the scope of economics. Similarly, there appear to be variations in the flexibility to which nations or regions can deal with shocks to their economic systems even within what superficially appear to be relatively similarly educated populations (Pack, 1994). As the old saying goes, ‘The devil is in the detail’, and useful analyses of many of these details require a broader set of tools than those conventionally deployed by traditional economists.

NOTES 1.

2.

We generally discuss development here as an economic phenomenon, and thus in terms of regional incomes. Of course, there are many other elements to development, including such things as the distribution of this income, the condition of the regional environment and a plethora of cultural factors that must be embraced in any holistic approach. The excuse for the narrow approach is, in part, because the author is an economist, but also it allows a focus on the more tangible elements of development. Adam Smith (1776) in explaining the Wealth of Nations posited a supply-side-driven model of growth. Taking the simplest of production functions, Y = g(L, K, T) where, Y is output, L is labor, K is capital and T is land, so output is related to labor and capital and land inputs, output growth (gY) is driven by population growth (gL), investment (gK) and land growth (gT) and increases in overall productivity (g): gY = f(gL, gK, gL, gT). The growth in population is endogenous depending on the sustenance available to accommodate an increasing workforce. Investment is also endogenous, being determined by the rate of savings; land growth was dependent on conquest of new lands or technological improvements of fertility of old lands. Technological progress could also increase growth. Smith’s thesis that the division of labor improves growth was fundamental to his argument. The Smithian and Ricardian models implicitly had technical


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3.

4. 5.

6. 7. 8.

9.

10. 11. 12. 13.

14.

15. 16. 17. 18. 19.

35

change arising from profit-squeezes or, in the particular case of Smith, arising because of previous technical conditions. This was understandable. At the time of his writing, the UK economy was moving into an extended period when economic growth reached about 1 percent per annum compared with the 0.5 percent per decade that had previously been the norm (i.e., effectively people’s living standards did not change over their life-times) and Smith was, in a way, groping to understand this new world. Harry Richardson (1978, p. 18) says of the empirical work on regional growth up to the 1980s that, ‘The models developed so far have been handicapped by severe data limitations, too few observations, the reliance on static models, their recursive structure, the heavy dependence on national economic variables, and the neglect of space.’ Because of its market-clearing assumptions the pure classical model would be driven only be income differentials. Strictly, with full, instantaneous market clearing there is no unemployment in this type of model, labor movements being determined by real relative wages. The unemployment effect is added to indicate possible imperfections in the short-term labor markets in the two regions. This model synthesizes the work of Evsey Domar (1947) and Roy Harrod (1939). The Malthusian model, because of its implied capital productivity function, may be seen as an extreme case of this whereby society cannot rise above the subsistence level of per capita income. McCraw (2007), for example, argues that part of Schumpeter’s motivation for the style of presentation in the book was due to a degree of chagrin felt over the popular success of John Maynard Keynes’ General Theory that had overshadowed his own analysis of trade cycles. Strict modeling along Schumpeterian lines did not emerge until the 1990s. Another of the stimuli for the interest in developing a more complete understanding of economic growth in the 1950s and 1960s was institutional and founded on concerns about the economic performance of the economies of the newly independent, excolonial nations and the role that institutions such as the World Bank should play in assisting them. This was at a time when it became clear that developing countries were not catching up with higher-income nations. For Solow’s later thoughts on the roles between endogenous and exogenous growth theory see Solow (1994). Romer’s assumption that knowledge and physical capital are related stemmed from empirical observations that there were greater correlations between investment and output than the neoclassical model would predict. Romer (1990b) provides a series of anecdotal examples to support this view. How the stock of knowledge is to be measured is a moot point (Steedman, 2001). There are various elements or components to knowledge that need weighting to determine the stock, even if they can be defined and measured. There are also questions as to the extent that knowledge is non-rival rather than being unique to individuals. Joseph Schumpeter provided a general model of economic growth in which through the forces of creative destruction in oligopolist markets, entrepreneurs were stimulated to develop new technologies. His discussion of endogenous growth was couched very much in terms of a critique of Karl Marx but now emerged into a rigorous model of the type Romer and others later developed. This raises issue of whether endogenous growth is, in effect, an assumption in the model or a result of the model. The model is not closed, however, because Lucas only assumes that new goods are continually being produced without having an explicit model of why. Studies of economic convergence provide a pragmatic way of indirectly testing endogenous growth theory without the need to specifically define and measure ‘knowledge’. For a much more rigorous analysis of endogenous growth involving two regions or countries see, Segerstrom et al. (1990). Richard Florida (2005) has added to these ideas by arguing that ‘creative classes’ having preference for where they live, and that the attributes required to attract and retain


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20.

21. 22.

23.

24.

25.

26. 27.

Endogenous regional development them are more likely found in regions with an established high-income and educated labor force. In either the older or more recent formulations of this framework, the implications are often circular-and-cumulative causation; essentially richer regions get richer and poorer regions, poorer. Theoretical divergence is not an automatic outcome of endogenous growth (Kelly, 1992). Robert Tamura (1991), for example, by making the simple assumption that an idea is more difficult to discover than it is to learn, and following from this that there is a higher payoff from education for people with a lower basic level of education, demonstrates that convergence can occur. Put another way, if a person is at the technology frontier, movement out requires new knowledge whereas for someone within the frontier it is possible, and easier, to move out by acquiring existing knowledge. This approach essentially looks for changes in standard statistical indicators of dispersion – normally the variance. A standard estimating equation takes the form D(yit) = a + b(yit−j) + DiG + e it, where the yit is that being tested for convergence, Di is a (n × k) matrix of k variables capturing spatial economic heterogeneity, G is a (k × 1) vector of parameters, a and b are constants and eit is a white noise error term. The condition b > 0 is a necessary but not sufficient condition for b-convergence (Bernard and Durlauf, 1996). A critique of the empirical work using this and similar tests for convergence is provided by Howard Pack (1994). Bradford De Long and Lawrence Summers (1991) make the general point in their specific analysis of investment in equipment, to which they credit much of the positive spillover effects on economic growth, that markets are not perfect and that bad policy decisions (government failures) inevitably occur and will influence the nature of the growth path for any economy. Some studies seek to embrace such effects in the analysis, for example, Barro (1991) includes political stability, potential rent seeking, and other ‘political’ variables in his calculations while Button and Pentecost (1995) embrace monetary policy within their work on the European Union. Button and Pentecost’s (1995, 1999) work on the regional economies of the EU find that there is evidence of divergence when no allowance is made for possible national steady-state growth path differences. The national boundaries used by Barro and Salai-Martin would not seem to correspond to natural economic units. There would seem to be another policy difference in terms of the types of industry that central policy-makers may seek to encourage to locate in economically slow-growing regions. The tradition of seeking any form of economic activity to stimulate Keynesian multiplier effects is alien to both approaches. Romer’s framework suggests that there is a need to locate more knowledge-based elements of firms and industry in such regions to stop their cumulative decline. Lucas, in contrast, because of the perceived importance of ‘learning-by-doing’, may well argue that provided industry achieved this it would set in motion an effect to stimulate faster long-term growth. The evidence that investment in more traditional infrastructure in slow-growing regions can stem the tide of divergence is less certain (Button, 1998). This is not to say that these techniques are always fully exploited. As Pack (1994) argues, there are likely strong interactive effects between the factors that lead to economic growth but there is a tendency for econometric analysis to miss these interactions in the specifications used.

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Barro, R.J. (1991), Economic growth in a cross-section of countries, Quarterly Journal of Economics, 106(2), 407–43. Barro, R.J. and Sala-i-Martin, X. (1991), Convergence across states and regions, Brookings Papers on Economic Activity, 22(1), 107–82. Barro, R.J and Sala-i-Martin, X. (1992), Convergence, Journal of Political Economy, 100(2), 223–51. Baumol, W. (1986), Productivity growth, convergence and welfare: what the longrun data shows, American Economic Review, 76(5), 1072–85. Bernard, A.B. and Durlauf, S.N. (1996), Interpreting tests of the convergence hypothesis, Journal of Econometrics, 71(1–2), 161–73. Button, K.J. (1998), Infrastructure investment, endogenous growth and economic convergence, Annals of Regional Science, 32(1), 145–62. Button, K.J. and Pentecost, E.J. (1995), Testing for convergence of the EU regional economies, Economic Inquiry, 33(4), 664–71. Button, K.J. and Pentecost, E.J. (1999), Regional Economic Performance within the European Union, Edward Elgar, Cheltenham, UK and Northampton, MA, USA. De Long, B. (1988), Productivity growth, convergence and welfare: comment, American Economic Review, 78(5), 1138–54. De Long, B. and Summers, L.H. (1991), Equipment investment and economic growth, Quarterly Journal of Economics, 106(2), 445–502. Domar, E.D. (1947), Capital expansion, rate of growth and employment, Econometrica, 14(2), 13–147. Florida, R. (2005), The Flight of the Creative Class: The New Global Competition for Talent, Harper Collins, New York. Friedman, M. (1953), The methodology of positive economics, in M. Friedman (eds) Essays in Positive Economics, University of Chicago Press, Chicago. Hahn, F.H. and Matthews, R.C.O. (1964), The theory of economic growth: a survey, Economic Journal, 74(296), 779–902. Harrod, R.F. (1939), An essay in dynamic theory, Economic Journal, 49(193), 14–33. Hart, R.A. (1975a), Interregional economic migration: some theoretical considerations (Part I), Journal of Regional Science, 15(2), 127–38. Hart, R.A. (1975b), Interregional economic migration: some theoretical considerations (Part II), Journal of Regional Science, 15(2), 289–305. Kaldor, N. and Mirrlees, J.A. (1962), A new model of economic growth, Review of Economic Studies, 29(3), 174–92. Kelly, M. (1992), On endogenous growth with productivity shocks, Journal of Monetary Economics, 30(1), 47–56. Lucas, R.E. (1988), On the mechanics of economic development, Journal of Monetary Economics, 22(1), 3–42. Lucas, R.E. (1993), Making a miracle, Econometrica, 61(2), 251–72. Maddison, A. (1987), Growth and slowdown in advanced capitalist economies: techniques of quantitative assessment, Journal of Economic Literature, 25(2), 649–98. McCraw, T.K. (2007), Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Belknap Press of Harvard University Press, Cambridge, MA. Meyer, J.R. (1963), Regional economics: a survey, American Economic Review, 53(1), 19–54.


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Myrdal, G. (1957), Economic Theory and Underdeveloped Regions, Gerald Duckworth, London. Pack, H. (1994), Endogenous growth theory: intellectual appeal and empirical shortcomings, Journal of Economic Perspectives, 8(1), 55–72. Ramsey, F.P. (1928), A mathematical theory of saving, Economic Journal, 38(152), 543–59. Richardson, H.W. (1978), The state of regional economics, International Regional Science Review, 3(1), 1–48. Romer, P.M. (1986), Increasing returns and long-run growth, Journal of Political Economy, 94(5), 1002–37. Romer, P.M. (1990a) Endogenous technological change, Journal of Political Economy, 98(5), S71–S102. Romer, P.M. (1990b), Are nonconvexities important for understanding growth?, American Economic Review, 80(2), 97–103. Romer, P.M. (1994), The origins of endogenous growth, Journal of Economic Perspectives, 8(1), 3–22. Sala-i-Martin, X. (1994) Cross-sectional regressions and the empirics of economic growth, European Economic Review, 38(3–4), 739–47. Schumpeter, J.A. (1942), Capitalism, Socialism, and Democracy, Harper and Brothers, New York. Segerstrom, P.S., Anant, T.C.A. and Dinopoulos, E. (1990), A Schumpeterian model of the product life cycle, American Economic Review, 80(5), 1077–91. Smith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of Nations (Oxford University Press edition, Oxford, 1976). Solow, R.M. (1956), A contribution to the theory of economic growth, Quarterly Journal of Economics, 70(1), 65–94. Solow, R.M. (1957), Technical change and the aggregate production function, Review of Economics and Statistics, 39, 312–20. Solow, R.M. (1960), Investment and technical progress, in K.J. Arrow, S. Karlin and P. Suppes (eds) Mathematical Models in Social Sciences, Stanford University Press, Stanford. Solow, R.M. (1994), Perspective on growth theory, Journal of Economic Perspectives, 8(1), 45–54. Steedman, I. (2001), On ‘measuring’ knowledge in new (endogenous) growth theory, paper presented to the Growth Theory Conference, Pisa. Swan, T.W. (1956), Economic growth and capital accumulation, Economic Record, 32(63), 334–61. Tamura, R. (1991), Income convergence in an endogenous growth model, Journal of Political Economy, 99(3), 522–40.


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Endogenous regional theory: a geographer’s perspective and interpretation Michael Taylor and Paul Plummer

INTRODUCTION The question posed in this chapter is: ‘How do we understand and intervene in processes of regional economic growth and change?’ Globalization is eroding the old economic certainties, increasing competition, reconfiguring the demand for skills, forcing the pace of technological and managerial change, transforming inter-firm relationships and changing (through commodification) the role of finance. Some would argue that there has been a sea change in the workings of national, regional and local economies with the end of Fordism and the coming of post-Fordist flexible specialization and mass customization. For policymakers, the pressing issue is how can appropriate and workable policies and programmes be developed to cope with the internationalization of production and consumption leading to rapid and radical change, foster sustainable and robust local growth and enhance local capacities beyond providing short-term palliatives for unemployment and its associated social problems? From an economic geography perspective, two bodies of discourse currently dominate our understanding of the processes driving local economic change: (1) the discourse of endogenous growth in the ‘new economic geography’ of the economists; (2) the ‘new regionalism’ discourse along with its social constructionist and relational underpinnings in economic geography proper and equivalent areas in other social sciences. Based upon seemingly contradictory criteria of success, derived from either the ‘stylized facts’ of endogenous growth theory or the ‘contingency’ of new regionalism, these bodies of discourse have become reified into a discourse of policy and practice based upon stereotypical understandings of the mechanisms that are supposed to characterize the development of local economies in a world of globalization. Here we argue that, despite 39


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different conceptual foundations, and seemingly contradictory criteria of empirical success, increasingly these two bodies of work are beginning to overlap in terms of the substantive forces that each hypothesize to drive local economic growth. The critical difference between those discourses is placed into sharp relief when we are asked to interpret the causal efficacy of their respective explanatory claims and translate those claims into effective and implementable policies and practice. On the one hand, drawing on the theoretical and methodological presuppositions of neoclassical economics, there is regional endogenous theory. According to its leading proponents this represents a ‘new’ perspective on understanding the process of regional growth and change that is capable of providing clarity, rigour and relevance to a field of research that has hitherto been characterized by anti-clarity, anti-rigour and anti-relevance (Krugman, 1991; Overman, 2004). Typically, the ‘new’ geographical economics is dismissed by many economic geographers as being based on ‘under-socialized’ ill-conceived theory constructs and superficial empirical regularities derived from ‘extensive’ research designs that are considered to be inappropriate means with which to identify the causal mechanisms driving local economic growth. According to Plummer (2007), quantitative methodologies are tolerated in economic geography only to the extent that they are capable of providing background information as a prelude to the real, and preferred, business of the ‘intensive’ qualitative research. Faced with the apparent inadequacies of superficial ‘extensive’ methodologies, many economic geographers have simply abandoned quantification completely in favour of a suite of supposedly ‘deeper’ causal explanations provided by qualitative methodologies (Sayer, 1984; Massey and Meegan, 1985; Clark, 1998). As an alternative discourse, economic geography ‘proper’ has constructed its own ‘new regionalism’ that blends ideas on institutions, individual agency and social regulation (IAR) in an approach, drawing heavily on Polanyi (1957) and Granovetter (1985), which argues that all economies are socially constructed. Eschewing the constraints of theory construction through mathematical modelling and quantitative reasoning based upon stylized facts, this new regionalism attempts to establish the empirical adequacy of its explanatory claims through qualitative description, close dialogue and fine-grained case studies. In contrast with the economists’ emphasis on economic mechanism and quantitative analysis, this more discursive methodology celebrates the supposed inherently complex construction of societal processes and the contingency of the geographical world. In practice, this means exploring the workings of socially constructed regional economies through the lived experience of individuals living and working within it. The perspective that we adopt in this chapter is at odds with both the


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‘new’ geographical economics and economic geography proper. We are, in effect, advocating a critically engaged pluralist approach to understanding local economic growth and change (Plummer and Sheppard, 2007). Unlike many geographers, we reject what we believe to be an unsustainable dualism between quantitative and qualitative economic geographies in favour of a meaningful and grounded multi-method research design that allows us to triangulate the insights of both economists’ and geographers’ ways of knowing. Put differently, as economic geographers, we reject the tout court dismissal of ‘extensive’ research designs of the type employed by endogenous regional theory. Instead, we argue that the way forward is to blend the economism of ‘endogenous theory’, and its ‘extensive’ research strategy, with the social constructionism of ‘new regionalism’ and its ‘intensive’ research strategy. We want to suggest that multi-method research strategies can provide us with critical understanding and explanation of social reality, which can both empirically evaluate the explanatory claims and inform policy debate (King et al., 1994).

CONTRASTING RESEARCH STRATEGIES: CARICATURES AND STYLIZATIONS It can be argued that both endogenous regional theory and geography’s ‘new regionalism’ are caricatures of functioning regional economies, both of which posit processes that are necessary to developing an understanding of economic change at the regional scale, but neither of which offers sufficient explanation on its own. Put differently, all conceptualizations are partial representations of complex real world processes; where they differ is over which aspects of geographical reality they choose to prioritize and how those characteristics that are identified are thought to be related to one another. It is in this sense that all theories or models are stylized descriptions of imitations or local economies, and hence caricatures. The trick, however, is to avoid the exaggerating, comic and/or grotesque characteristics that are typically associated with caricatures! Endogenous Regional Theory With its origins in contemporary economics, endogenous regional theory is driven by a methodological commitment to accounting for a set of established ‘stylized facts’ using abstract mathematical reasoning. To constitute an adequate explanation of these stylized facts, economists’ models of local economic growth need to be formulated in a particular style of mathematical reasoning in which representative agents maximize


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their inter-temporal objective function, subject to resource constraints. Ideally, the actions of these representative agents are supposed to ensure an optimal and stable equilibrium configuration whose properties act as a guide to empirical work (see Sheppard, 2000; Plummer and Sheppard, 2006). Notwithstanding the existence of path dependence and multiple equilibria that are characteristic of models derived from the core model of geographical economics (Brakman et al., 2001), there remains an ontological commitment to the proposition that geographical reality can be understood using equilibrium-based models. Within the constraints of optimum-and-constraints theorizing, endogenous regional theory is grounded in the logic of aggregate production functions relating per capita output (income) to the degree of ‘capital’ intensity and technological change. In its classical Solow-Swan formulation, long-run growth of per capita output (income) is sustained through a constant and smooth, but exogenous, process of technological change (Fingleton, 2003). As a corollary, technological change represents the untheorized determinant of long-run local economic growth and change. In contrast, the ‘new’ regional growth theory attempts to ‘endogenize’ technological change by explicitly modelling processes of learning-bydoing, knowledge spillovers and/or Schumpeterian ‘creative destruction’ (Martin and Sunley, 1998). Typically, endogeneous technological change is introduced either through the ad hoc augmentation of a conventional production function with ‘factors’ such as ‘social’ and/or ‘human’ capital or in the form of a knowledge production function, which is derived from the decision of a rational profit-seeking capitalist to invest in ‘knowledge’ and ‘innovation’ (Jones, 1998). These theoretical specifications form part of a wider class of models, which form the core of geographical economics, and have replaced the conventional assumption that competitive markets exhibit constant returns to scale with the assumptions specifying increasing returns and imperfect competition based upon product differentiation (Fujita et al., 1999; Brakman and Heijdra, 2004). As has been pointed out by many observers, the abstract nature of the theoretical models proposed by endogenous regional theory, coupled with the unrealism of the assumptions that are necessary to generate closedform solutions to these abstract models, means that empirical testing has lagged behind theoretical developments (Neary, 2001; Fingleton, 2007). Nonetheless, recently we have witnessed an explosion in empirical models attempting to evaluate the explanatory claims of endogenous regional theory using ‘third-way’ growth econometrics (Fingleton, 2001). The new growth econometrics represents a particular research strategy that has become the work-horse of economists’ attempts to account for both the convergence that is hypothesized to operate between regions, resulting from


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the inter-regional mobility of factors of production and commodities, and the set of ‘structural’ conditioning factors that are hypothesized to produce persistent, and perhaps divergent, regional growth differentials. Much of the literature emphasizes five ‘stylized facts’ determining, to varying degrees, aspects of change at the regional level, including (Glaeser, 2000): ● ● ● ● ●

technological change and innovation; human capital, embracing research and education; agglomeration and externalities; knowledge spillovers, including entrepreneurship and new firm formation; sectoral specialization/diversification.

Fundamentally, we should remain sceptical about the existence of the economists’ ‘stylized facts’ about local economic growth. Indeed, it may well be the case that diminishing returns have set in regarding the empirical efficacy and policy relevance of growth econometrics. In studies that have adopted the growth regression approach, over 50 different ‘proxy’ variables have been identified as potential conditioning variables, ranging across societal preferences, techniques of production, rates of population growth and government policy regimes (Durlauf et al., 2004). Whilst ad hoc ‘proxy’ variables may fit satisfactorily, the significance of individual variables is not robust, and tends to be sensitive to the set of other conditioning variables that are included in the model (Durlauf and Quah, 1999). Furthermore, it may be difficult to give these ‘proxy’ variables a meaningful interpretation in terms of the economic reasoning underlying the economists’ growth theory, especially when mechanistic variable selection searches are driven by data availability rather than theoretical relevance or plausibility. It is, perhaps, ironic that economists insist on employing sophisticated mathematics to ensure that the parameters related to a local economy’s production function are derived from economic reasoning based upon inter-generational rational choice models, yet they seem willing to rely on casual empiricism when selecting the appropriate (assumed exogenous) set of conditioning variables. At the same time, from the perspective of both theoretical and empirical research in geography, many of the relationships posited in the endogenous regional approach appear simplistic and under-theorized, merely a set of control variables that allows us to focus on the convergence amongst and between local economies. For example, uncritically, agglomeration is assumed to be a source of external economies, reducing transaction costs when there is empirical evidence that agglomeration offers not cheaper production, even in transaction cost terms, but simply easier production


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in purely behavioural terms (Taylor, 1975). Similarly, the presence of knowledge in a place is assumed to lead to spillover effects without any real conceptualization of the transmission mechanism through which knowledge is supposed to diffuse between individuals and/or regional economies. Even casual empiricism would suggest that the facts that: contract law is one of the fastest-growing components of the legal profession; the protection of IPR is a growing corporate concern (reflected in the ‘inimitability’ version of the competencies theory of the firm); and that the spat between Ferrari and McLaren teams in Formula 1 racing in 2007 was so acrimonious when an employee moved between the two organizations and took technical data with him that it brought a multi-million dollar fine all point to knowledge spillover effects being a far more complex process than endogenous regional theory would imply. The point we want to make here has been made before (Clark, 1998); that endogenous regional theory is based on stylized facts that need seriously to be unpacked. Even within the terms of reference of endogenous regional theory, in order to understand both the existence and persistence of local growth differentials, we need to understand the nature of the mechanisms that are hypothesized to diffuse technological change through a regional economic system. Certainly, this form of analysis offers a way to prioritize the theorized drivers of regional economic change that ‘new regionalism’ lacks. However, the whole comes together not as a consistently articulated theory of local economic growth but as a series of conceptual and/or empirical explorations of the components of what might be developed into something fuller. In practice, attempts to bridge the gap between abstract, but untestable, models and the ‘messy’ contingency of the social world using growth econometrics has produced some insights, but can be more broadly caricatured by the use of sophisticated techniques and poor data to make inferences and gain insights into the processes driving local economic growth (Plummer, 2001). New Regionalism and Embeddedness In the past decade, an increasing body of research has built upon Granovetter’s (1985) concept of ‘embeddedness’ to explain the dynamics of local economies. This perspective emphasizes the role of social relations in economic transactions, holding that anonymous markets are non-existent and that economic life and transactions are built on social connections. The concept of embeddedness has given rise to a powerful model of local economic growth that draws on a range of complementary literatures on ‘new industrial spaces’, ‘learning regions’, ‘innovative milieus’ and ‘regional innovation systems’ (e.g., Storper, 1997; Braczyk


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et al., 1998; Porter, 1998; MacKinnon et al., 2002) – now more generally captured under the term ‘new regionalism’ (Rainnie and Grobbelaar, 2004). Building directly on the ideas of Granovetter, the new regionalist writing suggests that economic growth is linked not only to market conditions, but also to repeated inter-firm interaction and knowledge exchange, collaborative long-term buyer–supplier relationships, the creation of social capital (including trust, reciprocity and loyalty) and a supportive tissue of local institutional thickness (see Putnam, 1993; Cumbers et al., 2003; Malmberg and Maskell, 2006). The ‘new’ regionalism and embeddedness ideas have prompted renewed interest in the advantages of geographical proximity between firms in related industries (Keeble and Nachum, 2002) and it is a significant shift away from traditional understandings of agglomeration based on input– output relations and transaction costs, focusing instead on the social and institutional drivers of growth. Whilst the approach has theorized new drivers and has added richness to the local growth debate, it has been less rigorous in how we might measure those processes or detect their impact on long-run economic growth. It is also a model of economic growth with great policy appeal, but the application of this new orthodoxy has often been implemented uncritically and in the absence of detailed empirical evaluation (i.e., evidence-based policy). The new regionalism approach may be popular but it also has significant and prominent limitations (see also Taylor, 2005). First and most importantly, the mechanisms of local economic growth transmission are not clearly articulated in the model, and this limitation has four interconnected components: 1.

2.

The model lacks a meaningful explanandum. It does not measure growth or change, just ‘success’ in that the qualitative data on which the model is based are drawn from apparently successful regions and places, with the processes identified within them being taken to account for that ‘success’. As a consequence, sample selection bias is combined with a truncated and ‘censored’ distribution to increase the threats to validity when attempting to draw inferences about the processes driving local economic growth from self-elected case studies. Time, too, is poorly incorporated into the model, and local firm networks are seen to translate unproblematically and instantly into local structures of knowledge mobilization and exchange, learning, innovation and social capital that create growth. This is a caricature of transmission mechanisms, leaving us without any knowledge of how and when economic potentialities are actualized within a local economy. All that the model alludes to is a mass (or morass) of contingency.


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3.

4.


New knowledge is assumed to translate unproblematically into new business ventures, neglecting processes of coalition formation, third party referral, the commercial translation of ideas and knowledge, the securing of finance, for example. Transmission mechanisms are again ignored. The model fetishises proximity (Oinas, 1999). As a consequence, it underplays geographically more extensive transmission mechanisms and networks that might be as, if not more, important than those of a particular locality (see Glückler, 2007).

Second, the new regionalist model fails to recognize the importance of unequal power relations between firms; inequalities that privilege some and peripheralize others within both local and geographically more extensive networks (Taylor, 2000). Third, the model also fails to deal adequately with the capitalist imperatives of profit generation, the price mechanism and wage discipline as mechanisms of personal wealth creation (Hudson, 1999). Finally, much of the work on new regionalism is based on theoretical speculation, rather than empirical research, thus providing only a limited understanding of processes at work (Maskell and Malmberg, 1999). Empirical research has focused on high-technology clusters and dynamic growth regions, neglecting those localities, places and regions experiencing decline, industrial restructuring, or socioeconomic marginalization. Taken together, these limitations raise the spectre that without clearly articulated theories specifying the manner in which posited mechanisms operate both within and between local economies, the ‘new regionalism’ is in danger of degenerating into a morass of contingency, the qualitative analogue of over-fitting econometric models. It is not clear whether this observed contingency is the result of local capacities and competitive mechanisms working themselves out in different contexts or whether there are simply different drivers of local economic growth that operate idiosyncratically in each local economy at any time. As a corollary, the new regionalism fails to address the methodological questions of how, and in what ways, local economic capacities might be actualized in a particular empirical context. New regionalism, therefore, offers a differently limited caricature of regional economic processes. It is a caricature built on over-theorization in which layers of contingency have been laid one over another, obscuring as much as clarifying processes of growth and change. In part, this accounts for its popularity, especially in policy circles, because it can be all things to all people. Again, it is built on stylized facts, in this case relating to trust, networks, institutional support and knowledge transfer, for


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example. However, as more theorizing has been added to the model, it has become evident that there is no mechanism to say what the importance of the separate, postulated processes is in promoting or retarding regional economic growth. It is here that the modelling strategy of endogenous regional theory has much to offer.

ANALYTICAL CAPABILITIES AND POLICY ADVICE There is, perhaps, a more targeted and appropriate way to develop a richer understanding of growth and change at the level of the local economy that goes beyond the dualism of ‘stylized facts’ and ‘contingency’, and yet is capable of providing policy advice that can be used to formulate effective strategies that are capable of being implemented in practice. We advocate a mixed-method research design that is grounded in critically engaged pluralism (Taylor and Plummer, 2003). This necessitates moving beyond the types of econometric modelling strategies employed by endogenous regional theory and the intensive case studies of qualitative geographers to triangulate our knowledge claims about local economies. In practice, this entails a research design that can accommodate and use a blend of qualitative and quantitative information to articulate local capacities and transmission mechanisms and evaluate empirically the likelihood that these capacities are actualized in any particular context (Plummer and Taylor, 2001a, 2001b). In short, we reject neither approach to regional analysis but suggest that their combination offers important synergies for both analysis and policy formulation. It is the combination of these approaches that we illustrate in the analyses of the remaining sections of this chapter. A recently completed study relating to policy advice on vocational education and training undertaken for the National Centre for Vocational Education Research (NCVER) in Australia (Garlick et al., 2007) explored the potential and limitations of such a mixed-method research design. This study was motivated by the need to develop evidence-based policy outcomes in the context of vocational education and training (VET) in Australia. We can use our experience of trying to implement this research project to illustrate the virtues of a pluralist methodology when developing analysis to inform policy advice. Based upon these methodological norms, this study produced controversial and provocative conclusions that, we would contend, are essential if new policy approaches are to be developed that go beyond repeating the tired and increasingly hackneyed initiatives suggested in the one-size-fits-all ‘guru’ theorizing on ‘clusters’ and ‘creatives’.


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Theoretically Informed Empiricism The Garlick et al. (2007) study of vocational education and training (VET) provision in Australia focused on providing advice on policy alternatives that might better target VET to foster regional economic growth that was consistent with the long-run processes shaping those regional economies. The study asked two key questions: (1) What processes are driving economic change at the regional scale in Australia? (2) How can VET work sympathetically and in a targeted manner to modify those processes, create growth and, therefore, more fully realize national economic potentials? From an institutionalist perspective, successful local economies are said to depend on complex processes of integration and embedding – built on trust, reciprocity and loyalty – that create social capital. They involve the exchange of information, ideas and innovation through mechanisms of quasi-integration that creates new knowledge through processes of situated learning. In addition, the support of local institutions (labelled as institutional thickness; Amin and Thrift, 1994) is seen as bolstering these local economic processes. Enmeshed in webs of global coordination and value transfer, these local economies are seen as nodes of untraded interdependencies (Storper, 1997) that are tapped into by large corporations and TNCs, which, for their part, act as global information arbitrageurs (Economist, 2003). To reflect institutionalist thinking on the propulsive elements of local economic growth, eight ‘drivers’ were distilled from the broad range of theories, each of which prioritized different sub-sets of drivers as operating in different ways, depending on local context. These were: ● ● ● ● ● ● ● ●

technological leadership at the enterprise level; knowledge creation and access to information; the local integration of small firms – their propensity to deal one with another within a locality; infrastructure support and institutional thickness; human resources – the skills and capacities of a local workforce; the power of large corporations – the assets and authority they are able to wield; local demand and inter-regional trade; local sectoral specialization – the existing specialist skills and knowledge of a locality or region (see Plummer and Taylor, 2001a).

To perform the ‘quantitative’ element of the multi-method project, these drivers were incorporated into a growth econometrics model consistent with existing models derived from endogenous regional theory.


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The eight drivers distilled from theory were measured empirically using a unique Australian data set generated across Australia between 1984 and 2002, with the country divided into 94 functional regions. The nature and origins of the data set are outlined in Appendix 3A.1 at the end of this chapter. These empirical measures were incorporated into a conventional gap convergence (mean reversion) econometric model (Plummer and Taylor, 2001b; Taylor and Plummer, 2003) in which regional growth (measured in terms of unemployment relativities) is broken down into three components: 1. 2. 3.

transition dynamics: the speed at which a region’s growth rate returns to a long-run equilibrium after a shock; that is, mean reversion; ‘structural’ characteristics: the extent to which there are growth differences between neighbouring regions; random shocks: the unanticipated and unpredicted factors that can impact on the regional growth rate (Martin and Sunley, 1998).

The modelling exercise is fully explained in Garlick et al. (2007). Here, however, it is the final model specification that is important. The findings are quite stark. Regional growth in Australia in the last two decades has been driven by four mechanisms: 1. 2. 3. 4.

human capital: fundamentally the local stock of skilled and educated people; access to high technology and technological leadership at the enterprise level; industry specialization: reflecting local stocks of specialist knowledge; while, interestingly, government intervention: through direct institutional support held back regional growth.

Very clearly, human capital and enterprise are the life blood of regional economic growth, especially when there is appropriate government intervention. Qualitative Information and Facilitated Workshops However, the study recognized that not only must positive drivers of growth be found at the regional scale as the quantitative modelling shows, but, to achieve success, it is also important that growth transmission processes at that scale are faced by as few impediments as possible. To address this aspect of the local growth process, qualitative information was


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Table 3.1


Australian case study regions and their characteristics

Region (State)

Growth Characteristics

Orange (NSW) Western Sydney/ Penrith (NSW) Wollongong (NSW) Mount Isa (Qld) Wide Bay Burnett (Qld) Shepparton (Vic.) Horsham (Vic.) Burnie (Tas.) North-East Adelaide (SA) Pilbara/Port Hedland (WA) Alice Springs (NT)

A rural city with high growth A peri-urban metropolitan area with high-technology enterprise A provincial city with static growth A remote mining centre with low growth A region with rural cities, and low and declining growth Centred on a rural city and shows virtually no growth Centred on a rural city, and with relatively high growth A rural city with declining growth A peri-urban metropolitan area with low growth Remote mining communities with rapidly declining growth A remote city with recent relatively high growth

Source: Authors’ compilation.

collected through facilitated workshops in 11 case study regions (Garlick et al., 2007), and this information adds significantly to the interpretation of growth dynamics across Australia’s regions. Workshops were held in regions across the spectrum of growth rates in Australia, spread across states and territories and embracing a mix of urban and rural regions. These regions and their growth characteristics are listed in Table 3.1. Between 12 and 30 people attended each workshop, with participants from VET and technical and further education (TAFE), local government, state government, business, schools, universities, regional development organizations and social development bodies. There were managers from small and large business, institutional managers, students, teachers, social entrepreneurs and others. A number of salient findings from these workshops are disturbing. In particular, there was a general inability to fully appreciate the global dynamic influencing business development. Also, there was an apparent naivety about the way companies use their capital and labour and the way networks are used for corporate rather than community gain. There was a penchant for off-the-shelf, ‘quick-fix’ solutions brought in from outside the region, and a parallel lack of local strategic thinking. In some regions, with economic problems, there was a disturbing tendency towards selfdelusion. Though local economic problems were recognized there was a


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tendency to argue that, of course, things had changed and that the future promised growth. This could only be interpreted as ‘the optimism of the immediate’. It highlights, however, the potential limitations of qualitative analyses and, possibly, the unreal expectation that consultants can create. Not all regions were the same, and in some outstanding initiatives had been taken. However, where plans were developed, there was a tendency for people to be transfixed by the plan and not to move to implementation. It was concluded that 20 years of bottom-up regional development policy and practice in Australia had produced disturbingly low levels of local action and that government-mandated regional leadership might not be the most effective way to encourage local growth that depends on free-flowing ideas and enthusiasm across the whole of a region (Garlick et al., 2007). On a more positive note, the workshops did recognize a range of impediments to growth transmission. In particular, they recognized a general complacency and lack of dynamism in some regions. They pointed to human capital being exported to major metropolitan regions across the country, with this exodus being seen as ‘normal’. Key industries were not seen as producing business spin-outs at the regional level, and that facilitative regional planning to realize opportunities appeared to be disorganized. At the same time, there was a recognition that the education system was unable to inspire a region’s human capital to be enterprising. What is more, the workshops saw an overemphasis on specific sectoral ‘winners’, pushed by institutions and consultants from outside the region, as the ‘silver bullets’ to achieve local economic growth rather than building on unique local capacities, attributes and abilities (ibid.). Enterprising Human Capital and Regional Engagement When the ‘extensive’ and ‘intensive’ analyses of regional economic growth in Australia are combined, a clear picture of its dynamics and transmission emerges that highlights the roles of enterprising human capital and regional engagement (ibid.). It is a picture that neither research strategy could generate independently of the other. Enterprising human capital, we would contend, is created by ‘enterprising’ people who take ideas and turn them into outcomes using the attributes, competencies and capabilities at their disposal. This is very different from the ‘creative’ human capital that Richard Florida (2002) has emphasized that sees people with skills and knowledge generating new ideas. The translation of new ideas into socially and commercially viable enterprises is a non-trivial process. Rather, it is a process at the very heart of the regional growth process, which needs to create wealth, income


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and jobs at least to maintain and possibly to enhance the well-being and standard of living of entire communities that are currently facing global competitive pressures. It involves having a strong grasp of, amongst many other things, markets and market potentials, sourcing, financing, business planning, accountancy, cost control, timing, coordination and negotiation. It involves outcome-orientated people who, at their most successful, are able to work in teams that blend complementary skills. The enterprising outcomes of these people are not necessarily just economic in the sense of creating new businesses. They may also emerge as new social, cultural and environmental outcomes that reshape the very nature of the communities within which they operate and may, in turn, create a climate for further ‘enterprising’ in that place. All the case study regions pointed to the lack of a local enterprising culture within them and none had mechanisms in place to facilitate the creation of such an enterprising capacity. Essential to the creation of enterprising human capital are mutual and creative connections among a region’s human capital – what more broadly can be called regional engagement. It is, at its most fundamental, a framework of mutual cooperation and dialogue that complements and extends the processes of enterprising human capital. However, it is more than a process. Regional engagement is also about achieving results and generating outcomes. It is the community equivalent of the enterprising human capital of individuals. Towards a Policy The question posed by these empirical findings on regional growth dynamics in Australia is: how do you translate these ideas into a policy that can be used to guide the development of vocational education and training (VET) in Australia’s regions? The report we prepared (Garlick et al., 2007) suggested four new roles for VET, building on local knowledge and skills, consistent with the processes shaping the country’s regional economies. Those roles are described below: 1.

VET should aim to develop competencies within communities by building ‘enterprising skills’. Consistent with the theoretically informed analysis, this role might be achieved in two ways: by developing locally the skills to enable enterprising opportunities of all types to be turned into outcomes; and creating greater knowledge and awareness of how the global economy works. The first of these approaches to competency building is essentially entrepreneurship education. It is hard, if not impossible, to teach people to be entrepreneurial.


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However, it is possible to equip those who are keen to try to take risks with the skills that can help them succeed, including: –

issues involved in identifying commercial and other ‘enterprising’ opportunities; – business planning; – marketing contracts – their drawing up and enforcement; – accessing venture capital and development finance; – entrepreneurialism; – networking; – risk management; – communication.

2.

3.

4.

The second approach to competency building is a broader educational provision that discusses the workings of the global economy, the competition it brings and the opportunities and limitations it offers together with the mechanisms to facilitate change. Here it is important to understand the inter-company relationships in supply chains, and the unequal power relationships that operate within them. VET can assist local capacity building by taking a lead in developing coalitions of people with ‘enterprising’ ideas in competitive areas, and equipping them with connections and synergies with other businesses and institutions. Firms are essentially temporary coalitions of people who deploy assets in an effort to achieve anticipated commercial outcomes. As yet, our understanding of the dynamics of those coalitions is relatively underdeveloped (Taylor, 2006), but it is an area where ‘intensive’ case study evidence can be used to great effect. VET needs to target 40+ year-olds to provide them with the skills to be ‘enterprising’ and to build businesses, and realize their capacities and capabilities. In this context, vocational education and training has the opportunity to realize the otherwise lost potential of this section of society as was pointed out in the workshop element of the Australian study. VET has an important role in bringing together information of a region’s knowledge resources. This is a significant additional facilitative role that can speed up processes of ‘enterprising’.

The reaction to these policy proposals for VET has proved very contentious. It proposes a very different educational agenda from the one that has traditionally been followed. It makes educators uncomfortable because it disturbs people’s comfort zones and involves doing something new!


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CONCLUSION In developing a geographic perspective on endogenous processes operating in regional and local economies, this chapter has sought to highlight the differences in methodology in this discipline compared with economics: between the ‘intensive’ qualitative approach in geography’s ‘new regionalism’ and the ‘extensive’ modelling strategy of economics’ endogenous growth theory. Both are distinctive caricatures of local economic processes built on sets of differently stylized facts. It has been suggested that the two approaches are complementary and, through integration, have the potential to bring a fuller and more nuanced perspective on local economic growth processes and issues that are capable of reflecting the unique characteristics and capabilities of places rather than generating a one-size-fits-all policy prescription. As such it is an approach that has the potential to suggest new policy initiatives. A multi-method analysis of Australian regional change using theoretically informed empirical modelling coupled with qualitative information collected through facilitated workshops in case study regions, threw new light on regional growth processes in this economy. Focused on a review of VET in Australia, this approach was shown to have the capacity to generate new policy perspectives that fall outside the usual comfort zone of bureaucratic policy-makers. From this it might be suggested that a multimethod approach to the analysis of endogenous processes in regional economies might be a useful way of developing new regional policies and programmes.

REFERENCES Amin, A. and Thrift, N.J. (1994), ‘Living in the Global’, in A. Amin and N.J. Thrift (eds), Globalization, Institutions and Regional Development in Europe, Oxford University Press, Oxford, pp. 1–22. Braczyk, H.J., Cooke, P. and Heidenreich, M. (eds) (1998), Regional Innovation Systems: The Role of Governances in a Globalized World, UCL Press, London. Brakman, S. and Heijdra, B. (2004), The Monopolisitic Competition Revolution in Retrospect, Cambridge University Press, Cambridge, UK. Brakman, S., Garretson, H. and Von Marrewijk, C. (2001), An Introduction to Geographical Economics, Cambridge University Press, Cambridge, UK. Clark, G. (1998), ‘Stylized Facts and Close Dialogue: Methodology in Economic Geography’, Annals of the Association of American Geographers, 88(1), 73–87. Cumbers, A., MacKinnon, D. and Chapman, K. (2003), ‘Innovation, Collaboration and Learning in Clusters: A Study of SMEs in the Aberdeen Oil Complex’, Environment and Planning A, 35(9), 1689–706. Durlauf, S.N. and Quah. D. (1999), ‘The New Empirics of Economic Growth’,


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in J.P. Taylor and M. Woodford (eds), Handbook of Macroeconomics, NorthHolland, Amsterdam, pp. 235–308. Durlauf, S., Johnson, P. and Temple, J. (2004), ‘Growth Econometrics’, in P. Aghion and S.N. Durlauf (eds), Handbook of Economic Growth, North-Holland, Amsterdam. Economist, The (2003), ‘The New Geography of the IT Industry’, The Economist Newspaper, 368(8333), 53–5. Fingleton, B. (2001), ‘Equilibirum and Economic Growth: Spatial Econometric Models and Simulations’, Journal of Regional Science, 41(1), 117–48. Fingleton, B. (ed.) (2003), European Regional Growth, Springer-Verlag, New York. Fingleton, B. (ed.) (2007), New Directions in Economic Geography, Edward Elgar, Cheltenham, UK and Northampton, MA, USA. Florida, R. (2002), The Rise of the Creative Class: and How It’s Transforming Work, Leisure, Community and Everyday Life, Basic Books, New York. Fujita, M., Krugman, P. and Venables, A. (1999), The Spatial Economy: Cities, Regions, and International Trade, MIT Press, Cambridge, MA. Garlick, S., Taylor, M. and Plummer, P. (2007), An Enterprising Approach to Regional Growth: The Role of VET in Regional Development, report prepared for the National Centre for Vocational Education Research (NCVER), funding provided by the Australian National Training Authority (ANTA). Glaeser, E. (2000), ‘The New Urban and Regional Growth’, in G. Clark, M. Gertler and M. Feldman (eds), Handbook of Economic Geography, Oxford University Press, Oxford, pp. 83–99. Glückler, J. (2007), ‘Geography of Reputation: The City as the Locus of Business Opportunity’, Regional Studies, 41(7), 949–61. Granovetter, M. (1985), ‘Economic Action and Social Structure: The Problem of Embeddedness’, American Journal of Sociology, 91(3), 481–510. Hudson, R. (1999), ‘The Learning Economy, the Learning Firm and the Learning Region: A Sympathetic Critique of the Limits of Learning’, European Urban and Regional Studies, 6(1), 59–72. Jones, C. (1998), Introduction to Economic Growth, Norton, London. Keeble, D.E. and Nachum, L. (2002), ‘Why do Business Service Firms Cluster?’, Transactions of the Institute of British Geographers, 27(1), 67–90. King, G., Keohane, R. and Verba, S. (1994), Designing Social Inquiry: Scientific Inference and Qualitative Research, Princeton University Press, Princeton, NJ. Krugman, P. (1991), Geography and Trade, MIT Press, Cambridge, MA. MacKinnon, D., Cumbers, A. and Chapman, K. (2002), ‘Learning, Innovation and Regional Development: A Critical Appraisal of Recent Debates’, Progress in Human Geography, 26(3), 293–311. Malmberg, A. and Maskell, P. (2006), ‘Localized Learning Revisited’, Growth and Change, 37(1), 1–18. Martin, R. and Sunley, P. (1998), ‘Slow Convergence?: The “New” Endogenous Growth Theory and Regional Development’, Economic Geography 74(3), 201–27. Maskell, P. and Malmberg, A. (1999), ‘Localised Learning and Industrial Competitiveness’, Cambridge Journal of Economics, 23(2), 167–90. Massey, D. and Meegan, R. (1985), Politics and Method: Contrasting Studies in Industrial Geography, Routledge, London. Neary, P. (2001). ‘Of Hype and Hyperbolas: Introducing the New Economic Geography’, Journal of Economic Literature, 39(2), 536–61.


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Oinas, P. (1999), ‘Activity-Specificity in Organizational Learning: Implications for Analysing the Role of Proximity’, GeoJournal, 49(4), 363–72. Overman, H. (2004), ‘Can We Learn Anything From Economic Geography Proper?’, Journal of Economic Geography, 4(5), 501–16. Plummer, P. (2001), ‘Vague Theories, Sophisticated Techniques, and Poor Data’, Environment and Planning A, 33(5), 761–4. Plummer, P. (2007), ‘Economic Geography, by the Numbers’, in A. Tickell, E. Sheppard, J. Peck and T. Barnes (eds), Politics and Practice in Economic Geography, Sage, London. Plummer, P. and Sheppard, E. (2006), ‘Geography Matters: Agency, Structures and Dynamics at the Intersection of Economics and Geography’, Journal of Economic Geography, 6(5), 619–37. Plummer, P. and Sheppard, E. (2007), ‘Toward Critically Engaged Pluralism in Geographical Debate’, Environment and Planning A, 6(5), 1275–81. Plummer, P. and Taylor, M. (2001a), ‘Theories of Local Economic Growth: Concepts, Models and Measurement’, Environment and Planning A, 33(2), 219–36. Plummer, P. and Taylor, M. (2001b), ‘Theories of Local Economic Growth: Model Specification and Empirical Validation’, Environment and Planning A, 33(3), 385–98. Plummer, P. and Taylor, M. (2003), ‘Theory and Praxis in Economic Geography: “Enterprising” and Local Growth in a Global Economy’, Environment and Planning C, 21(5), 633–49. Polanyi, K. (1957), The Great Transformation, Beacon Press, Beacon Hill, MA. Porter, M. (1998), On Competition, Harvard Business School Press, Boston, MA. Putnam, R. (1993), Making Democracy Work: Civic Traditions in Modern Italy, Princeton University Press, Princeton, NJ. Rainnie, A. and Grobbelaar, M. (eds) (2004), New Regionalism in Australia, Ashgate, Aldershot. Sayer, A. (1984), Method in Social Science: A Realist Approach, Hutchinson, London. Sheppard, E. (2000), ‘Geography or Economics?; Conceptions of Space, Time, Interdependence, and Agency’, in G. Clark, M. Gertler and M. Feldman (eds), Handbook of Economic Geography, Oxford University Press, Oxford, pp. 99–125. Storper, M. (1997), The Regional World: Territorial Development in a Global Economy, Guilford Press, New York. Taylor, M. (1975), ‘Organizational Growth, Spatial Interaction and Location Decision-Making’, Regional Studies, 9(4), 313–23. Taylor, M. (2000), ‘Enterprise, Power and Embeddedness: An Empirical Exploration’, in E. Vatne and M. Taylor (eds), The Networked Firm in a Global World, Ashgate, Aldershot, pp. 199–234. Taylor, M. (2005), ‘Embedded Local Growth: A Theory Taken Too Far?’, in R. Boschma and R. Kloosterman (eds), Learning from Clusters: A Critical Assessment from an Economic-Geographical Perspective, Springer, Dordrecht, pp. 69–88. Taylor, M. (2006), ‘The Firm: Coalitions, Communities and Collective Agency’, in M. Taylor and P. Oinas (eds), Understanding the Firm: Spatial and Organizational Dimensions, Oxford University Press, Oxford, pp. 87–116. Taylor, M. and Plummer, P. (2003), ‘Promoting Local Economic Growth: The Role of Entrepreneurship and Human Capital’, Education and Training, 45(8/9), 558–64.


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APPENDIX 3A.1 THE NATURE AND ORIGINS OF THE DATA SET The variables used in this analysis were generated initially in the 1980s and early 1990s for a series of studies published through the Australian Government Publishing Service (AGPS) in the Office of Local Government’s (OLG) Australian Regional Developments series. The publications were part of a large database describing the economic, social and accessibility vulnerability and resilience of 94 Australian regions (see Australian Regional Developments monograph A Regionalisation of Australia for Comparative Economic Analysis, 1988). The data are unique, developed from initially unpublished data sources and major empirical analyses. Where possible, they continue to be updated. Technological leadership at the enterprise level (HITECH) The data surrogate for this measure is the regional significance of R&D-intensive industries. The Department of Industry, Technology and Commerce (DITAC) identified the following ASIC industry groups and classes as Measures of Science and Innovation (1987, pp. 378–9) containing high-technology components: (1) Pharmaceutical and Veterinary produce; (2) Aircraft Manufacturing; (3) Photographic, Professional and Scientific Equipment: (4) Data Processing Services; (5) Research and Scientific Institutions. The HITECH measure is calculated as the proportion of employment in each region in these four-digit ASIC industries using the unpublished data from the Integrated Regional Information System (IRIS) database. Knowledge creation and access to information (INFOACC) This measure is based on a simple interaction model in which the size of information activity at a place is measured as employment in professional and managerial jobs in each region, and the distance between pairs of regions measured as time-distance by the quickest means available. The measure is more fully described in the OLG Working Paper, ‘Accessibility and Remoteness’ (1992, pp. 21–4), which describes six elements of regional accessibility (access to goods and services, access to intermediate goods markets, the cost of access to intermediate goods markets, access to export ports, access to information and the cost of access to information). The local integration of small firms (MLOCN) This measure is the inverse of the proportion of establishments in a region that belong to multi-location enterprises, taken from the Australian


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Bureau of Statistics’ IRIS database. This enables the removal from the region of establishments with the weakest local affiliations. Infrastructure support and institutional thickness (PROT) This measure is the regional effective rate of industry protection drawn from the OLG Working Paper (1992) ‘The Regional Impact of Changing Levels of Protection in Australian Industries’. A weighted averaging method has been used to allocate industry-effective rates of protection to regions using sectoral employment levels using the IRIS database. Local human resource base (DEGREE) The measure used here is the proportion of the population in each region without university degrees. This is a surrogate not only for local skill levels but also for issues of income and, indirectly, for the local availability of capital. The power of large corporations (TOTPOP) An index of corporate control in the region was constructed using the head office regional address for companies listed in the top 1000 in the Business Review Weekly magazine. Employment for each business was expressed as a quotient of the total employment of the particular region in which it is located using IRIS data. Inter-regional trade (MKTACC) The measure for this driver for regional growth is taken as a region’s accessibility to intermediate goods markets within Australia and has been taken from the OLG Working Paper ‘Accessibility and Remoteness’ (1992, p. 16). It is expressed as a function of the employment level in each pair of regions in intermediate goods industries such as manufacturing and construction, and the direct road distance between the pairs of regions. Local sectoral specialization (SPEC) This is a simple measure of the numbers of business establishments taken from the IRIS database for each industry category in each region.


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Endogenous rural development from a sociological perspective Frank Vanclay

DEFINING ERD SOCIOLOGICALLY For many sociologists and some social geographers1 endogenous regional development is synonymously ‘endogenous rural development’ (both abbreviated ‘ERD’). It is a multidimensional concept, ‘a multi-level, multi-actor and multi-faceted process’ (Van der Ploeg et al., 2000, p. 391). Much more than a statement about the origin of development initiatives, in the sociological perspective ERD has layers of meaning. Above all, ERD is a new paradigm, worldview and philosophy about appropriate development, rural renewal and a multifunctional, post-productivist countryside (Slee, 1994; Van Broekhuizen et al., 1997; Ray, 1997; Van der Ploeg et al., 2000; Marsden, 2003; OECD, 2006). At a very basic level, if exogenous development is development that is initiated outside a local region (i.e., externally) then endogenous development is the opposite. In other words, ERD is development that is initiated and controlled by the local community. However, from a sociological perspective, ERD implies much more than this. Whereas exogenous development is seen as modernist, Fordist and top-down, ERD is seen as bottom-up and a reaction to modernization, or as resistance to it (Bassand et al., 1986). To some extent, post-modernism and post-Fordism are characteristics of ERD in that it accommodates niche-marketing of value-added product and flexible specialization, while at the same time valorizing local culture, tradition, artisanal production and regional typical food. In general, ERD refers to the utilization and celebration of local and place-based dimensions of a region as the basis of its economic activity and livelihood. The emphasis in most sociological approaches to ERD is in understanding the characteristics (natural, human and cultural) of a place that makes it special and/or distinctive (different from other regions), and how these may become the focus of sustainable economic activity. Some sociologists critique the concept and especially how it has been 59


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appropriated by the state to devolve not power and control but responsibility and costs (see, for example, Herbert-Cheshire, 2000). ERD has had much policy significance in the European Union (EU) because of the realization that conventional subsidies to agriculture were not effective in promoting growth or development in rural areas and that a new approach focusing on local potentialities was needed (OECD, 2006). Considerable interest in ERD occurred because of the EU LEADER programme (discussed later in this chapter), which ‘was conceived as an integrated and endogenous approach to rural development’ (ibid., p. 90). There is not a singular coherent position to ERD in the sociology discipline, but a range of approaches. Furthermore, there is no agreed-upon definition (Ray, 1999; Van der Ploeg et al., 2000). Nevertheless, perhaps Long and Van der Ploeg (1994) best sum up the sociological perspective. For them ERD is ‘founded mainly, though not exclusively, on locally available resources, such as the potentialities of the local ecology, labour force, knowledge, and local patterns for linking production to consumption, etc’ (pp. 1–2). ERD and exogenous development should be seen as a dualism of ideal types that blend in the development strategies of regions rather than as a mutually exclusive dichotomy (Cristovao et al., 1994; Kneafsey et al., 2001). They are, in essence, a heuristic device (Van der Ploeg et al., 2000).

CHARACTERISTICS AND VALUES OF ERD Despite the lack of a common definition, there is general agreement around the characteristics of ERD in the sociological perspective. Expanding on Slee (1994) and Bowler (1999), the key elements are: ● ● ● ● ● ● ● ●

a goal to create diversified, resilient and sustainable local economies; local determination of development options; local control over the development process; retention of benefits locally; utilization of locally available resources (natural, human and cultural); valorization of ‘the local’ and ‘place’, especially what is locally unique or special, and respect for local values; awareness of the rural as being post-productivist – that is, being a site of consumption as well as a site of production; appreciation of multifunctionality.

The multifunctionality element recognizes that rural areas (and agriculture) provide a range of non-market (as well as market) goods and services


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such as environmental protection, landscape management, preservation of biodiversity and habitat protection, ecosystem services, carbon sinks, maintenance of cultural heritage, employment and livelihoods for rural people and food security. The social values implied by ERD in a sociological approach primarily relate to development as a social concept rather than to economic growth (Brugger, 1986). Perhaps in contrast to some other chapters in this book, ERD should not be taken to infer regional economic growth! Sustainability, in its broadest possible understanding, is a key value (Murdoch et al., 1994). Local control and self-determination are also fundamental – ERD highly values the rights of people to have a say in the things that affect their lives. The principle of subsidiarity – that decisions should be taken as closely as possible to the citizen and that larger groupings should encourage the autonomy of smaller groupings (Carozza, 2003) – is firmly embodied in the sociological and policy approach to ERD. Notions of equity, capacity building, community development and building resilient communities that have vitality, viability and health, are all part of the concept.

CONTRASTING ENDOGENOUS AND EXOGENOUS ERD arose because of the failing of exogenous development to deliver benefits to rural areas. Exogenous development, with its focus on economies of scale and concentration of activity, has led to the industrialization of urban growth poles, despite regions attempting to attract multinational corporations by providing incentives, lowering taxes and sometimes reducing other regulations in a ‘race to the bottom’. In that model, the role of rural areas was to provide cheap food, and as a result they were increasingly marginalized (Lawrence, 1986; Vanclay and Lawrence, 1993, 1995; Vanclay, 2003). In the words of Ward et al. (2005, p. 4; italics original): [Exogenous development] was criticised as dependent development, reliant on continued subsidies and the policy decisions of distant agencies and boardrooms. It was seen as distorted development, which boosted single sectors, selected settlements and certain types of business (e.g. progressive farmers) but left others behind and neglected the non-economic aspects of rural life. It was cast as destructive development which erased the cultural and environmental differences and considered to be dictated development devised by external experts and planners from outside local rural areas.

There has been some criticism of ERD along the lines that it is a nice ideal but not practical, that local areas will never be free of external


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influences especially in a globalizing world, that rural will always exist in juxtaposition to urban, that local will always interact with extra-local, and that exogenous and endogenous processes need to be balanced (Lowe et al., 1995; Ray, 2001a; Ward et al., 2005). As a result, Ray (2001a) coined the term, ‘neo-endogenous (rural) development’ to mean ‘endogenous-based development in which extra-local factors are recognised and regarded as essential but which retains a belief in the potential of local areas to shape their future’ (p. 4). Ray’s term ‘neo-endogenous development’, has generated much discussion in the academic literature and at conferences. Personally I am not fully convinced of its merits – as indicated earlier, the concepts were never intended to be a mutually exclusive dichotomy. However, perhaps the popularity of the new term can be attributed both to the need for increased emphasis that an integrated approach is necessary, and the erroneous assumption that ERD was necessarily in opposition to extra-local factors. ERD is meant to stimulate local business to supply local markets, and also to create external interest in local places and stimulate place-based consumption, for example through ecotourism, cultural tourism, farm-stays, rural B&Bs and the purchase of place-based products for consumption in situ or at home. External interest is thus vital to an ERD approach.

THE CULTURE ECONOMY APPROACH In ERD the focus of attention of development initiatives is local resources, not as traditional inputs for large extra-region or multinational firms, but as the basis of the economic activity of local small to medium firms. The concept of what a resource or asset can be thus expands from natural and human capital to cultural capital. Ray (1998) calls this the culture economy approach to rural development. With the valorization of local culture, many things potentially become of interest to people with spare time and/or disposable income in an information-rich, post-Fordist, postmodern society. Expanding considerably from Ray (1998, 2001a), the potential local cultural assets and how they could be utilized by regions to promote tourism and/or add value through place-based marketing are listed in Appendix 4A.1 at the end of the chapter. Regions that have highly significant features, for example that might qualify for UNESCO World Heritage status, have a clear advantage. The intention with the culture economy approach is for all regions to identify the particular strengths they each have that could be capitalized on, even though they may not be globally significant. The list in Appendix 4A.1, long as it is, nonetheless remains a small


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selection of the many possible cultural assets regions can identify to make their region special. Many regions may also have natural resource assets that would also attract interest. Perhaps it should be noted that there has been some critique of this approach. Graham Day (1998), for example, argues that it shows a misunderstanding of the concept of culture in that it focuses on the material artefact rather than on social relationships and shared understandings, meanings and values.

THE SIGNIFICANCE OF THE EU ‘LEADER’ PROGRAMME LEADER is an acronym deriving from the French expression ‘Liaison Entre Actions de Développement de l’Economie Rurale’,2 which means ‘links between actions for the development of the rural economy’ (European Commission, 2007). The LEADER programme was conceived as ‘an integrated and endogenous approach to rural development’ within the European Union (OECD, 2006, p. 17). Ray (2001b, p. 280) suggests that: the official rationale of the LEADER intervention portrays it primarily as a tool with which to redirect the trajectory of the rural economy so as to meet concerns about the failure of regional economic convergence, the fragility of primary sectors of the economy (especially agriculture) and the financial burden of the [Common Agricultural Policy].

It was targeted at ‘territories’ of less than 100 000 inhabitants. Phases There were three phases to the LEADER programme: ● ● ●

LEADER 1 from 1991 to 1994; LEADER 2 from 1994 to 1999; LEADER + from 2000 to 2006.

The LEADER programme is now regarded as having ‘reached a level of maturity enabling rural areas to implement the LEADER approach more widely in mainstream rural development programming’ (European Union, 2005, Clause 50). From 2007 on, the LEADER approach will continue to persist, but has been integrated into mainstream rural development programmes (European Commission, 2006). LEADER 1 with a budget of EUR417 million was implemented in 217 territories. LEADER 2 was


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applied in approximately 1000 territories with a budget of EUR1755 million (LEADER European Observatory, 2001, p. I.14). There were 893 LEADER + local action groups in 2004 prior to enlargement (i.e., admitting the new member nations) with a budget of EUR2143 million (European Commission, 2007, pp. 2, back cover). Components There are seven components to the LEADER approach (condensed from European Commission, 2007, pp. 2–3): 1.

2.

3.

4.

Area-based approach: this entails defining a local development policy on the basis of an area’s particular situation, strengths and weaknesses. Areas should be fairly homogeneous and characterized by internal social cohesion, shared history and traditions, a sense of common identity, and so on. Bottom-up approach: this aims to encourage participatory decisionmaking at local level for all development policy aspects. Its objective is the involvement of local players, including the community as a whole, economic and social interest groups and representatives of public and private institutions. The bottom-up approach relies on two major activities, ‘animation’ (facilitation of activities) and training of local communities. It is important that the project is initiated by local actors and that the public concerned with the action has been consulted. Partnership approach and the local action group: the LAG is a body of public and private actors, united in a partnership that identifies a joint strategy and a local action plan for developing an area. The LAG represents a model of organization that can influence the institutional and political balance of the area concerned. The LAGs provide appropriate mechanisms for participation, awareness raising and organization of local actors in favour of rural development. Innovation: LEADER demands that proposed actions are innovative. They may be: actions to promote local resources in new ways; actions that are of interest to local development but not covered by other development policies; actions providing new answers to the weaknesses and problems of rural areas; or actions that create a new product, new process, new forms of organization, or a new market. Innovation is also embodied in the programme’s pedagogical and networking components: disseminating information to other groups of players wishing to gain inspiration from achievements elsewhere, or to carry out joint projects.


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6.

7.

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Integrated approach: the actions and projects in the local action plan should be linked and coordinated as a coherent whole. Integration may concern actions within a single sector, all programme actions or specific groups of actions, or, most importantly, links between the different economic, social, cultural, environmental actors involved in the area. Networking and cooperation between areas: by facilitating the exchange and circulation of information on rural development policies and the dissemination and transfer of good practice and innovative strategies and actions, the LEADER network aims to limit the isolation of LAGs and to create a source of information and analysis of the actions. Some LAGs have spontaneously organized themselves into informal networks. Another core part of LEADER is the cooperation between rural areas. Cooperation between areas can be transnational but may equally take place between areas within the same member state. Local financing and management: delegating a large proportion of the decision-making responsibilities for funding and management to the LAG is a key element of the LEADER approach. However, the degree of autonomy varies considerably depending on the member state’s specific mode of organization and institutional context.

Significance LEADER was significant in many ways. The foundations of LEADER directly addressed the sociological critique of earlier models of development and incorporated the sociological advocacy for a more participatory, cultural economy approach. Sociologists were directly involved in devising LEADER as an EU-level framework and often at national and local levels. They were involved in evaluating individual LEADER projects and the LEADER programme as a whole. The various evaluations of LEADER at project, member-nation and programme-wide (EU) level, although identifying a number of specific shortcomings (see, for example, Barke and Newton, 1997), overwhelmingly praised the approach. While Ray (2000) somewhat cynically argued that the funding levels were a very small proportion of the EU funding allocated for rural development and that this reflected a lack of commitment, he also admitted that LEADER was of considerable sociological interest. From an Australian perspective, a country that eschews rural subsidies, the fact that the approach potentially can be applied with a low level of government funding is important. It was feasible in Europe to divert finances from a very expensive system of payments to farmers under the Common Agriculture Policy to fund LEADER, especially since this was expected to


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have a greater return on investment (benefit to rural areas) and because this partly addressed World Trade Organization concerns about protectionism and trade distortion. Whether such an approach would be feasible, politically and otherwise, in countries without Europe’s resources and past experience of government investment in rural areas is another question. Therefore, the fact that this programme can be carried out ‘virtually without money’ (ibid., p. 165) is a virtue.

CONCLUSION Endogenous rural development (ERD) is a powerful way of renewing and revitalizing the countryside. Its benefits have been documented in the OECD (2006) report, The New Rural Paradigm, and in much literature emanating from the LEADER programme (e.g., European Commission, 2007). Because of a focus on local resources and on mobilizing (‘animating’ in LEADER language) local community activity, ERD has far greater potential to be sustainable than, typically, do exogenous forms of development (Gralton and Vanclay, 2006, 2009). The benefits of ERD extend far beyond what is normally considered by traditional economic indicators or measured as ‘growth’. They include, for example: ● ● ● ● ●

increased pride in where people live; increased sense of being part of a community; increased interest in participating in community activities; increased social networks (social capital); an increased sense of place (Vanclay, 2008).

All of these can be summarized as increased social well-being and quality of life. Most likely this translates into improved health as people lead more active, engaged lives. Despite the practical experience provided by LEADER, ERD is primarily a philosophy about appropriate development at the local level. ERD argues for a shift in thinking about development initiatives and what local resources might entail, and how endogenous and exogenous development can work together for sustainable regional development.

NOTES 1. As I have been requested to take a ‘sociological perspective’, I will use the words ‘sociology’, ‘sociologist’ and ‘sociological’. However, I point out that a sociological perspective


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is not necessarily distinguishable from a more generic social science position and certainly blends with and draws heavily on the social and human geography literature. Further, although I have been a member of the Australian Sociological Association for over 25 years and am a former President of the International Rural Sociology Association, I also identify as a human geographer and am a member of the Institute of Australian Geographers and a fellow of the Royal Geographical Society in the UK. In general, I take an eclectic approach and ascribe to transdisciplinarity. 2. It is curious that the OECD report The New Rural Paradigm (OECD, 2006, p. 101) has a peculiar wording of ‘Liaison Entre Activités du Développement de l’Economie Rurale’ rather than what is most likely correct, ‘Liaison Entre Actions de Développement de l’Economie Rurale’, at least according to the majority of sources consulted including the FAQ website for LEADER + http://ec.europa.eu/agriculture/rur/leaderplus/faq_en.htm and the French language version of the EU portal: www.welcomeurope.com (both accessed 19 May 2010.).

REFERENCES Barke, M. and Newton, M. (1997), ‘The EU LEADER Initiative and Endogenous Rural Development: The Application of the Programme in Two Rural Areas of Andalusia, Southern Spain’, Journal of Rural Studies, 13(3), 319–41. Bassand, M., Brugger, E.A., Bryden, J.M., Friedman, J. and Stuckey, B. (eds) (1986), Self-reliant Development in Europe: Theory, Problems, Actions, Gower, Aldershot. Bowler, I. (1999), ‘Endogenous Agricultural Development in Western Europe’, Tijdschrift voor Economische en Sociale Geografie, 90(3), 260–71. Brugger, E.A. (1986), ‘Endogenous Development: A Concept between Utopia and Reality’, in M. Bassand et al. (eds), Self-reliant Development in Europe, Gower, Aldershot, pp. 38–58. Carozza, P. (2003), ‘Subsidiarity as a Structural Principle of International Human Rights Law’, The American Journal of International Law, 97(1), 38–79. Cristovao, A., Oostindie, H. and Pereira, F. (1994), ‘Practices of Endogenous Development in Barroso, Northern Portugal’, in J.D. Van der Ploeg and A. Long (eds), Born from Within: Practices and Perspectives of Endogenous Rural Development, Van Gorcum, Assen, pp. 38–58. Day, G. (1998), ‘Working with the Grain?: Towards Sustainable Rural and Community Development’, Journal of Rural Studies, 14(1), 89–105. European Commission (2006), The EU Rural Development Policy 2007–2013 (Fact Sheet), Office for Official Publications of the European Communities, Luxembourg. European Commission (2007), A Selection of Leader + Best Practices 2007/1, European Observatory of Rural Areas, European Commission, Brussels. European Union (2005), ‘Council Regulation (EC) No. 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)’, Official Journal of the European Union L 277 (21 October 2005). Gibson, C. and Connell, J. (2005), Music and Tourism: On the Road Again, Chanel View Publications, Clevedon. Gralton, A. and Vanclay, F. (2006), ‘Quality Food Production, Diversity and Sustainability: Opportunities for Small Towns’, in M. Rogers and D. Jones


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(eds), The Changing Nature of Australia’s Country Towns, VURRN Press (Victorian Universities Regional Research Network Press), Ballarat, pp. 126–38. Gralton, A. and Vanclay, F. (2009), ‘Artisanality and Culture in Innovative Regional Agrifood Development: Lessons from the Tasmanian Artisanal Food Industry’, International Journal of Foresight and Innovation Policy, 5(1/2/3), 193–204. Herbert-Cheshire, L. (2000), ‘Contemporary Strategies for Rural Community Development in Australia: A Governmentality Perspective’, Journal of Rural Studies, 16(2), 203–15. Kneafsey, M., Ilbery, B. and Jenkins, T. (2001), ‘Exploring the Dimensions of Culture Economies in Rural West Wales’, Sociologia Ruralis, 41(3), 296–310. Lawrence, G. (1986), Capitalism and the Countryside, Federation Press, Sydney. LEADER European Observatory (2001), LEADER, From Initiative to Method: A Guide to Teaching the LEADER Approach, available online at: http://www.fao. org/sard/static/leader/en/index.htm; accessed 20 May 2010. Long, A. and Van der Ploeg, J.D. (1994), ‘Endogenous Development: Practices and Perspectives’, in J.D. Van der Ploeg and A. Long (eds), Born From Within: Practice and Perspectives of Endogenous Rural Development, Van Gorcum, Assen, pp. 1–6. Lowe, P., Murdoch, J. and Ward, N. (1995), ‘Networks in Rural Development: Beyond Exogenous and Endogenous Models’, in J.D. Van der Ploeg and G. Van Dijk (eds), Beyond Modernization: The Impact of Endogenous Rural Development, Van Gorcum, Assen, pp. 87–105. Marsden, T. (2003), The Condition of Rural Sustainability, Van Gorcum, Assen. Murdoch, J., Ward, N. and Lowe, P. (1994), ‘Sustainable Agriculture and Endogenous Development: A Socio-Political Perspective’, in J.D. Van der Ploeg and A. Long (eds), Born From Within: Practice and Perspectives of Endogenous Rural Development, Van Gorcum, Assen, pp. 262–79. OECD (2006), The New Rural Paradigm: Policies and Governance, Organisation for Economic Co-operation and Development, Paris. Ray, C. (1997), ‘Towards a Theory of the Dialectic of Rural Development’, Sociologia Ruralis, 37(3), 345–62. Ray, C. (1998), ‘Culture, Intellectual Property and Territorial Rural Development’, Sociologia Ruralis, 38(1), 3–20. Ray, C. (1999), ‘Towards a Meta-framework of Endogenous Development: Repertoires, Paths, Democracy and Rights’, Sociologia Ruralis, 39(4), 521–37. Ray, C. (2000), ‘The EU LEADER Programme: Rural Development Laboratory’, Sociologia Ruralis, 40(2), 163–71. Ray, C. (2001a), Culture Economies: A Perspective on Local Rural Development in Europe, University of Newcastle, Centre for Rural Economy, monograph available online at: http://www.ncl.ac.uk/cre/publish/books.htm; accessed 19 May 2010. Ray, C. (2001b), ‘Transnational Co-operation Between Rural Areas: Elements of a Political Economy of EU Rural Development’, Sociologia Ruralis, 41(3), 279–95. Slee, B. (1994), ‘Theoretical Aspects of the Study of Endogenous Development’, in J.D. Van der Ploeg and A. Long (eds), Born From Within: Practice and Perspectives of Endogenous Rural Development, Van Gorcum, Assen, pp. 184–94. Van Broekhuizen, R., Klep, L., Oostindie, H. and Van der Ploeg, J.D. (1997), Renewing the Countryside: An Atlas with Two Hundred Examples from Dutch Rural Society, Misset, Doetinchem.


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Vanclay, F. (2003), ‘The Impacts of Deregulation and Agricultural Restructuring for Rural Australia’, Australian Journal of Social Issues, 38(1), 81–94. Vanclay, F. (2008), ‘Place Matters’, in F. Vanclay, M. Higgins and A. Blackshaw (eds), Making Sense of Place, National Museum of Australia Press, Canberra, pp. 2–11. Vanclay, F. and Lawrence, G. (1993), ‘Social and Environmental Impacts of Economic Restructuring in Australian Agriculture’, International Journal of Sociology of Agriculture and Food, 3, 97–118. Vanclay, F. and Lawrence, G. (1995), The Environmental Imperative: Ecosocial Concerns for Australian Agriculture, Central Queensland University Press, Rockhampton. Van der Ploeg, J.D., Renting, H., Brunori, G., Knickel, K., Mannion, J., Marsden, T., Roest, K., Sevilla-Guzman, E. and Ventura, F. (2000), ‘Rural Development: From Practices and Policies Towards Theory’, Sociologia Ruralis, 40(4), 391–408. Ward, N. et al. (2005), ‘Universities, the Knowledge Economy and “Neoendogenous Rural Development”’, Centre for Rural Economy Discussion Paper Series, 1, University of Newcastle upon Tyne.


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APPENDIX 4A.1 POTENTIAL LOCAL CULTURAL ASSETS ●

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Regional typical food, traditional foods, bushfood (native or wild food), place-based foods and new foods (see Gralton and Vanclay, 2006, 2009). Winery trails, real-ale trails (and micro-breweries) and, for example (in Scotland especially) promoting visits to malt whisky distilleries and/or the sampling of malts at pubs near to where they are distilled. Regional languages and dialects and their associated cultures. Local folklore and, for example, developing and promoting community museums (ecomuseums), festivals and fairs that celebrate local culture and folklore. Local arts and crafts, especially those of high quality and that are inspired by and/or depict local settings and/or utilize local materials, for example, the extensive craftwork using Tasmanian native timbers (e.g., Huon Pine, myrtle, sassafras) that is on sale at the weekly Salamanca Craft Market and in Tasmanian galleries and boutiques. Local festivals, especially where they celebrate sense of place such as the Mountain Festival in Hobart, Tasmania; or some other activity with local relevance such as the Wooden Boat Festival in Tasmania, which partly celebrates Huon pine as a timber that was once used to make boats. Sites that have architectural significance, either because of a distinctive architectural style (e.g., Art Deco), or as examples of the works of specific architects such as, for example, colonial Tasmanian Georgian architect, John Lee Archer, or Gothic revival architect and designer, Augustus Pugin, who designed the interior of the English Houses of Parliament as well as numerous churches and religious paraphernalia in Australia and especially in Tasmania. Sites that have musical significance, such as the buildings where now renowned composers or performers once played, the houses they lived in, or their birthplaces, deathbeds and final resting places; or significant concert halls, recording studios, opera houses, organs or carillons around the world (see further discussion in Gibson and Connell, 2005). Sites that are depicted in the movies or on television, for example New Zealand has promoted the settings used in the Lord of the Rings films, Barwon Heads in coastal Victoria promotes itself as the location of a popular Australian TV series, SeaChange. Sites that have literary significance, for example locations mentioned by Wordsworth, Thomas Hardy’s Wessex, or Lorna Doone


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in Exmoor, or Gundagai in NSW where the ‘dog sits on the tuckerbox’ (a statue nearby). Sites associated with particular artists, for example Constable country on the border of Essex and Suffolk in the UK, Albert Namatjira in Central Australia, or Hans Heyson in South Australia. Sites that have religious significance, such as places where there may have been apparitions, places along the pilgrim route(s) to Santiago de Compostela in Spain (El Camino), the journeys of Saint Paul in modern-day Turkey, or places visited by significant religious figures, for example, Sister Mary MacKillop, the only Australian to have been beatified. Another example is Walla Walla, a small town of around 600 people in south-central NSW, which boasts not only the largest Lutheran Church building in Australia, but a story of an 1890s trek of German Lutherans cross-country from the Barossa Valley in South Australia. Sites that have sporting significance, such as the locations of sport museums, famous playing fields, locations where some champion was born, raised, played as a youngster, had success (or failure), lived or died. For example in 2008, the centenary anniversary of the birth of cricketer Don Bradman, many regions in Australia advertised their connection to him. Sites that have political or ideological significance, or where there were political struggles or massacres (e.g., Robben Island in South Africa where Nelson Mandela was incarcerated); places where political leaders were born or grew up, or where significant political events took place. Sites with military significance, such as Gallipoli, the battlefields of Flanders, the Kokoda Trail in Papua New Guinea, or the sites of various incidents during the Vietnam war, or for example, the location of the memorial to the loss of the HMAS Sydney in Geraldton Western Australia, or the many battlements installed around the coast of Australia. Sites with industrial significance, such as the locations of mines or factories, especially ones that have become culturally iconic, such as the Cadbury chocolate factory in Hobart, or the Line of Lode in Broken Hill (NSW). Sites with historical significance, for example Burra in South Australia, which had the largest mine in Australia in the middle of the nineteenth century, and even though now a small town of only around 2000 people has become famous in the form of the Burra Charter (The Australia ICOMOS Charter for Places of Cultural Significance).


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Endogenous regional development ●

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Sites with criminal or penal significance, for example buildings that were built by convicts, that housed convicts, or places where bushrangers hid (e.g., Ben Hall’s cave in Grenfell NSW) or conducted their hold-ups (e.g., Glenrowan Victoria where the Ned Kelly Gang had their last stand). Sites of current indigenous or archaeological/anthropological significance, for example any place where there are Aboriginal rock paintings or engravings, sites where significant artefacts or middens have been found, sites where indigenous people may have lived, burial sites, massacre sites, spiritual or sacred areas. [Note that there will need to be negotiations with traditional owners before any attempt is made to promote these areas.] Even locations that were notorious can make a feature of their infamy.


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Rural, urban or regional endogenous development as the core concept in the planning profession Edward Blakely

INTRODUCTION The basic concept of endogenous development – or deriving outcomes from local resources – is based on the notion that the local resource is primary or essential to organizing or producing any results or tangible products such as a building location or an intangible, such as a public policy. Planning in all forms relies on elements of indigenous activities and/or endogenous resources because planning as a policy science is based on the use of rules to shape outcomes in space and place. All communities in the world – no matter how large or small – declare themselves to be unique in some dimensions. In some respects this is correct because no bounded area, such as a metropolitan area, is identical with any other. On the other hand, human habitats in systems do not vary markedly around the world from the most primitive to the most advanced. There are similar features in all landscape and social organizations. Nonetheless, the particular mix of these resources is endogenous – that is, it is local-specific. No matter what the prime resource is – from a coal mine to a park or housing development – some rules have to be devised to determine how the natural resource is extracted or modified or manipulated, requiring decisions on how the resource is to be exploited to enhance benefit for the local community. Thus, planning is the means to provide order to protect the environment, public safety and movement of goods. ‘The Plan’ is the base of the resource exploitation. Plans are descriptive instruments. That is, a plan in the sense of rural, urban or regional planning is contained in a specific locality and meant to engage the resource of that locality for advancement, enhancement or preservation. In a much larger sense, planning and plans are ways to articulate the endogenous character, assembly and use of human and physical resources. The one that they use frequently becomes 73


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the regulatory and monitoring instrument that exemplifies the resources’ depictions. Even building height limitations act to provide ways for the visual ‘uniqueness’ of a place to be preserved. For example, the sight-lines to the US national capitol, Washington DC, are preserved so that it is the central feature of and the manifestation of the US nation state. The evolution of the planning discipline comes from these former notions of ‘The Plan’ as the defining instrument for the preservation and articulation of the relationship between humankind and space. The notion of ‘plan’ has refined the ways in which a plan becomes a code or legislative instrument for local endogenous resource control. In many respects, planning as a science rests on the concept of how well local spatial and social/human resources are mobilized and utilized for endogenous development. The plan is thus the mechanism that matches human and physical resources for developing the better use of local resources in the development of a high quality of life in a specific place. Planning styles arise from various ways of understanding how local human and spatial endogenous resources can be combined within a city or other jurisdictional form. Planning as described here is as proclaimed by leading US planning theorists Charles Hoch, Linda Dalton and Frank So (Hoch et al. 2000): ‘A community’s physical aspects – its size, climate, location and geography – shape many of its planning issues. Other less immediately visible feature factors – such as a community’s history and social and demographic make up – also contribute to its uniqueness’ (p. 33). However, some scholars consider planning as being a-spatial; that is, planning is organizing any activity from running companies to organizing social organization. In this chapter we focus on the professional practice of planning that creates the link between organizing and controlling an indigenous land resource base or creating ways to develop, organize and use resources within a landdefined space that is in a rural, urban or metropolitan setting.

THE EVOLUTION OF PLANNING AS INDIGENOUS/ ENDOGENOUS ASSESSMENT The earliest formal literature of settlement describes how the local earth endowed and the resources generated a rationale for placing certain infrastructure, from roads and bridges to aqueducts, in an orderly fashion designed to maximize resource exploitation and protect or advance some form of settlement scheme. This set of activities evolved into what we now term professional planning. The earliest records indicate that the Romans, the Egyptians, the Greeks and other early civilizations had a very high regard for laying out settlements to advance specific purposes. The


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Pharaohs of early Egypt were particularly adept at settlement design and planning for the use of natural local resources. The Bible extols the virtues of layout and design of places like Babylon. In this respect the notion of indigenous planning was central to the development of the mighty Inca and Aztec empires as well as the guiding principles of China’s great cities. So, the idea of an indigenous base for plans is as old and as deep as the notions of professional planning. Indigenous asset development in this concept is the bedrock of the modern planning profession and manifests itself in several contemporary ways that are a continuum of the field’s ancestral roots. Here we will only describe the current form of local and parochial resources as they provide the template for the profession of planning. Planning needs to be regarded as being both a process and a form. As a process, planners in the last century have placed as a central tenet the notion of citizen engagement and assessment of local needs as the critical bedrock of ‘The Plan’. In essence, a plan can only hold legitimacy if it grows out of a collective engagement with locality (defined as the geographic area the plan embraces) and deals with a collective understanding of the resources that the plan purports to advance. As a result, the planning process considers all local indigenous resources – human, physical, architectural, historical and cultural – as necessary elements to form the base for the planning process. This means the reification of local assets is part of the indigenous resource base. Collective description of resources is as important as the actual scientific investigation and revelation of any local indigenous asset. That is, if the community does not see a local stream or creek as a value, then the planner’s science is challenged by community ascription versus real evidence. One of the classic examples is the often cited instance where a naive planner attempts to convince villagers in the Amazon to build a vegetable garden to improve local nutrition. The villagers object because they will not build any new projects until a monument is built honouring a local earth god. In essence, the planner has to consider belief as central to the plan as material goods. The villagers view plans as incidental to larger cosmic forces over which humankind has little control. So, planning as a practice as we know it recognizes the local endowments and is rooted in the notion of human control over natural environments. This has led to the sad consequences of climate change through too much planned carbon use with automobiles and factories. Clearly, communities can view cultural and related practices as indigenous assets even if they are contentious, such as religious historical roots or community practices that may be at variance with larger mores or laws.


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Several obvious examples of this are well documented by Tomlinson et al. (2003) and others as they describe the use of planning processes to justify racial segregation as valued as indigenous resources in South Africa and Northern Ireland, Israel and Palestine. For many years, so-called Jim Crow Laws were codified in planning codes in the US to spatially separate blacks and whites. In essence, planning is a policy tool that incorporates and institutionalizes human values spatially. Clearly, there is more illustration of the reification of local indigenous/endogenous cultural resources. New Orleans, post-Katrina in 2005, is using its past indigenous cultural base as the primary object in re-planning the city after the hurricane. In the case of New Orleans, the old indigenous spatial separations were challenged in a post-storm setting when people could articulate another set of values that were not based on race and class as the way space can and should be organized.

LAND AND ITS USES AS ENDOGENOUS PLANNING BASE Thus, the larger and more profound aspect of indigenous resources for planning is how land is used and controlled, ranging from parcel sizes and heights to access and transportation. In this case the use of land for various purposes is based on an assessment of how the in-place resources might be used for various purposes and linked together to form new opportunities. Planning a railroad to carry natural mineral resources is a good example. In this case, the natural resource that is a collective resource is exploited as a reasonable plan for current and future use. But as the exploitation takes place other natural resources may well be jeopardized. So, the fact that the plan is to use something indigenous is not in itself an attribute so the planning process of collective assessment has to include all of the options, opportunities, barriers and threats this resource requires. This is how planning is based on the endogenous aspects of the setting. As we enter a new millennium the local asset is no longer what the place is but who is in the place and how they understand the use of place assets in presenting the human knowledge base to the local region and the world. Computer technology transforms the notion of endogenous advantage since global interchange can potentially now take place from any location thus making many activities completely footloose in that regard. Until the advent of computer technology, places were valued by their connectivity via water, rail, road or air. Now, the place as natural setting or collection of human skills can be an endogenous value. For example, call centres handling airline reservations around the world can be located


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in a picturesque rural area that is attractive for lifestyle reasons for the call centre workforce or because the area is less expensive but the quality is very high. Many small rural communities in the US are now economically robust because they are attracting a cross-section of people who can work from these locations locally and globally. In Australia, the so-called ‘sea-changers’ who move to coastal locations are founding new business in small coastal villages and linking to the world (Gurran et al., 2007). So the endogenous resource to be planned in this case is how to provide locally access to the ITC infrastructure that is necessary for small- and mediumsized businesses (including one person operations) to have access to the web, so that a local endogenous advantage in this regard is equivalent to that elsewhere where such infrastructure access is available.

ENDOGENOUS ECONOMIC DEVELOPMENT PLANNING Within planning the activity of local economic development planning is based on endogenous processes. The basic theory associated with local economic development planning is that capitalizing on local indigenous resources is the springboard for creating a sustainable economy. Blakely and Bradshaw (2002) have laid a strong foundation for the notion that jobs and wealth are not produced by attraction or altering incentives for firms but must be induced by the quality of the location and the use of local resources to develop equitable and sustainable wealth. Blakely and Bradshaw reject the old theories of development that based the process of progress on the attraction and retention of firms to what they term the Third Wave Theory: 1. 2.

3.

4. 5.

It assumes that better and not more populations is the key to economic improvement. It bases economic growth not on attracting firms but attracting and retaining high-quality human resources with the institutions, learning, research and innovation to retain them. It places all communities in the global economy and not competing with one another within their regions for the same market share of a diminishing resource base. It proposes multi-economic bases versus single industrial or sector bases for all communities, both urban and rural. It views social equity as critical to community well-being and stability. It places technological and social innovation at the forefront of economic expansion. (Ibid. pp. 47–8)


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Sustainable wealth cannot be imported – as Blakely and Bradshaw illustrate above – but must rest on local endogenous resources that are not transferable. Even if the form of the indigenous resource is altered – that is, the factory is not competitive – the people and place can alter their competitive strategy by reconfiguring their resources to compete and not attempt to copy some other place or relocate a firm from another location. As the base for manufacturing changes from machine and natural resource, a community must maintain its leadership by increasing the skills of its population or adding other value to the goods or services. In this way the real assets, the people and place, are recreated by planning. In this model Blakely and Bradshaw (ibid.) assert that local economic development planning is not a one-time but a continuous process of adjusting resources internally and developing new means to compete with those resources in different ways. To illustrate this point, communities that redefine their current position can use a combination of place features and institutional resources. A community that was a fishing village and has a picturesque setting can leverage the setting after the fish are gone by repositioning itself with its local college as a new music and arts venue that attracts artists and musicians all year round using the old fish factories as studios for music and art as well as the teaching staff at the college as the artists in residence for the programme. This type of transformation might attract new year-round residents who retire to the place for continuing artistic education for themselves or to be part-time teachers and thus improve their own lives in the process of developing a new economic niche. The Product Cycle Trap Places that import economic activity become victims of the import rather than the resource to build continuing wealth. Thus, it is no accident that poverty and natural resource extraction are so closely linked because the extraction of the natural resources usually degrades the human resources as well. Of course, when the natural resource is gone, the human resources are discarded. Factory towns are the prime example. In the early years, the town has a competitive advantage with energy and or labour cost being low. The wage, transport or resource arbitrage as it is called – the difference between the costs and profit margin – is reduced over time as other places closer to the markets or with lower labour or energy cost compete for the same goods production. As a result, the factory town dies and its workers are stranded. The only way for places to remain competitive in a global economy is to build on local resources and retain the wealth or added-value components as close to the source of exploitation as possible. Similarly, manufacturing and related mass production activities – as


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standardized as Vernon (1966) in his classic work has shown – will move to the lowest-cost areas, leaving the last host denuded to the capacity to adjust and use the same skilled workforce or other resources to maintain economic perch. The product cycle theory goes like this according to Vernon (ibid., p. 52): Economic development is defined as the creation of new products and the diffusion of standardized products. Development originates in the more developed region and is exported to the less developed region through trade and investment. Establishing a new industry in the less developed region creates a progressive force that can help eliminate the barriers to interregional equality.

Beyond the Product Cycle Youngstown in Ohio is a classic example of the deindustrialization process. Once a thriving rubber manufacturing centre that could boast that it produced the majority of rubber tyres in the world, it was to lose all its rubber factories in the 1970s. Now Youngstown is a model of economic recovery as it incubates with the local university to support new-technology firms in rejuvenated old derelict downtown retail spaces. Similarly, Emeryville in California, once a troubled industrial suburb of San Francisco, is home to some of the world’s fastest-growing biotechnology firms because it created good links with the nearby University of California at Berkeley, luring firms to old factory spaces with local land use zoning for start-up firms in biotechnology. So in these cases new resources were generated from old endogenous resources that were thought to be of low or no value. Planning endogenous resources is thus essential in local economic development planning. Planning is the key in local economic development. Plans must be based on the flexible and continuous improvement of local resources so they meet the needs of changing times and markets. Local economic development planning then is the epitome of endogenous planning. Local resources put together in the correct manner can remain competitive only through planning processes that recognize how these resources can be positioned, organized and reorganized to meet altering conditions regionally, locally and globally. Moving to a new strategic approach does not neglect the older assessments and engagement of community in determining local physical assets but provides a new crucible in which these resources fit. This is a stage and not a finish of indigenous asset incorporation into the planning process. As human resources are increasingly important the social links among people as discussed previously are being examined in new ways to help understand how people can form the endogenous base for planning.


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ENDOGENOUS PLAN AS SOCIAL SPACE Social capital is a new vocabulary but an old idea. For many years, the concepts of social capital have been understood. Cities and towns have reputations with respect to how people feel included or excluded and can play a beneficial or hostile part in the social dimensions of the place. Physical endowments are sometimes described as drivers for social interactions and the formation of social space. For example, people who live in cold wet places are said to be less sociable than people who live in warm sunny places. In this sense the climate is an endogenous resource that planners acknowledge in the planning process that promotes or impedes social capital formation. Furthermore, people who live in some cities seem to be bound by traditions that impede new projects or programmes. As mentioned earlier, New Orleans has experienced many failures when ideas that succeeded elsewhere were attempted there. The New Orleans World Fair in 1984 is an illustration of this. The city newspaper and leadership of the old guard did not like the idea so they conspired to let it fail rather than embrace it. On the other hand, San Jose in California built a downtown arena with no sports team and eventually got an ice hockey team to play in the arena. The idea of a northern-temperature ice hockey team surviving in sunny San Jose was derided nationally but the team and arena led to a downtown renaissance because of the civic spirit that led the effort (Henton et al., 2006). So, human civic spirit is an endogenous resource that firms and global capital is beginning to recognize in the form of places like Dubai that offer almost no other resource than a strong ‘can do’ attitude from its civic leaders. As discussed earlier, natural assets are not as pivotal in planning. Furthermore, social and cultural attributes are increasingly important as human capital attractors. Social capital is an endogenous resource that comes from social contacts that generate social contracts among a set of people who usually bond by space. That is, bonds of social relationships can be a resource as much as any hard fixed assets. Social capital is integral to planning since it is the interactions that create new ideas as well as act as the glue for capital formation and wealth generation. Individual reliability is enhanced with collective obligation. Thus, social capital in planning means sharing opportunities and resources to maximize desired outcomes. So, simple social capital might be thought of as in friends and colleagues working to fix a group member’s home for habitation post a disaster, and it can in fact extend across multiple geographic scales from a local community to the nation to the world (Putnam et al., 2003). Some communities treasure this form of community collective action. There are


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several excellent examples of endogenous social capital as the base for planning both economic and land use activities. The Basque Madrigon region is a prime example of collective social capital infusing all aspects of community life and planning all activities related to it. And a recent and well-known illustration of planned social capital is the Grameen Bank pioneered in Bangladesh with many off-shoots around the world in various formulations of micro-credit (Yunus, 2007). These forms of social capital are not part of the lexicon of planning at every level. The concept of restoring social capital as one of the essential pillars of planning is increasingly popular in the planning literature. Communities that lack endogenous social capital cannot determine their own destiny because they lack the social glue to articulate a direction and the common sense of long-term vision and spirit to hold that vision through time. No plan can survive if the society does not view the plan as an articulation of common purpose and protect that purpose through an array of social capital institutions.

SUMMARY AND TAKE-HOME POINTS Regional is local in the sense of endogenous planning (Stimson et al., 2002); that is, the base resources set in a locality, no matter how defined, are essentially at the smallest organized units of economic and social space. So a region is a collectivity of interlocking resources, human and physical, that can articulate a common planned use of these resources. The planning paradigm: ● ● ● ●

incorporates the notion of endogenous to assets or locates the common regional resource base; creates a vision for these resources that can be communicated through an instrument called a plan; generates the social cohesion/capital to forge a destiny based on the local/regional resources; creates an economic system from these resources that is in a continuing state of planning so that the region/locality remains competitive by inducing a consistent flow of ideas and resources to it and through it.

In these ways endogenous planning is basically the bedrock of quality social, physical and economic development. Without a plan to link and forge common purpose new endogenous resource won’t be sustainable for long. Planners are not merely police officers of rules for the present


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but crafters of the future by organizing and expressing how to use local/ regional resources optimally in ways that sustain any region or community.

REFERENCES Blakely, E.J. and Bradshaw, T.K. (2002), Planning Local Economic Development, Sage Publications, Thousand Oaks, California. Gurran, N., Blakely, E.J. and Squires, C. (2007), Governance Responses to Rapid Growth in Environmentally Sensitive Areas of Coastal Australia, Coastal Management, 35(4), 445–65. Henton, D., Melville, J. and Walesh, K. (2006), Grassroots Leaders for a New Economy: How Civic Entrepreneurs Are Building Prosperous Communities, Jossey Bass Nonprofit and Public Management Series, San Francisco. Hoch, C., Dalton, L. and So, F. (eds) (2000), The Practice of Local Government Planning (3rd edn), Washington, DC: International City/County Management Association, Municipal Management Series. Putnam, R.D., Feldstein, L. and Cohen, D. (2003), Better Together: Restoring the American Community, Simon & Schuster, New York. Stimson, R.J., Stough, R.R. and Roberts, B.H. (2002), Regional Economic Development: Analysis and Planning, Springer, New York. Tomlinson, R., Beauregard, R.A., Bremner, L. and Mangcu, X. (2003), Emerging Johannesburg, Routledge, London. Vernon, R. (1966), The Myth of Urban Problems, Harvard University Press, Boston. Yunus, M. (2007), Creating a World Without Poverty, Public Affairs Books, Washington DC.


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Diversity and endogeny in regional development: applying appreciative intelligence Tojo Thatchenkery and Jessica Heineman-Pieper

INTRODUCTION Endogenous processes in regional economic development have received renewed attention by regional scientists and regional development policymakers, due in part to the increasingly apparent contradictions within increasingly globalizing economic development. Globalization is a largely homogenizing force, and so the diversity required for innovation must come from residual uniqueness of local cultures and contexts (Sachs, 1992; Shiva, 2000; Thatchenkery, 2006). Endogenous vibrancy is both threatened by and a requirement for the engines of globalization, which are thus self-limiting (Sachs, 1992). Both as oases of possibility within a globalizing world and as reservoirs of possibility for a post-globalizing future, endogenous vibrancy is indispensable. Most importantly, it is a fundamental value in its own right. Focusing on human, cultural and organizational dimensions, this chapter examines a case study in how an endogenous ecology spontaneously created cascading entrepreneurial activity (one of infinite possible forms of vibrancy that could be studied, and a popular focus in economic development studies). In particular, the chapter analyzes the endogenous ecology of Silicon Valley in the US, and highlights some of the key cultural, organizational and human factors contributing to the technological innovation, creativity and entrepreneurial impact of the region. Many of these factors can be situated within the framework of ‘appreciative intelligence’ to provide generative and transferable lessons. At the same time, these lessons apply not at the level of content (replicating structures and systems) but rather at the level of ‘being’ or fundamental stance. At this level, the message also challenges some deeply held theories and beliefs about what leads to a thriving economy and a thriving society. 83


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DIVERSITY AND ENDOGENY IN EXPLANATORY PARADIGMS Diversity and endogeny are important not just as the topical focus but also at the level of underlying theoretical orientations and explanatory paradigms. One of the recurring tensions in social science theory and research comes from different views about the nature of social reality (Burrell and Morgan, 1985; Gergen, 1994) between researchers in search of a unitary, ‘objective’ truth and those who treat social reality as constituted by multiple, often competing perspectives on reality, arising out of the subjective interpretations and sense-making processes of a variety of actors and coalitions. Some would even argue that the interpretation of reality that usually seeks and gains dominance is the one actively promoted by those in power and that the challenge of building an egalitarian social order would be one of creating emancipatory spaces in which suppressed or muted views are allowed room for expression. For example, Zinn’s (2003) classic, A People’s History of the United States, demonstrates the impossibility of providing an ‘objective’ account of US history and the importance instead of listening to perspectives that are usually elided in dominant narratives. Based on extensive archival data and interviews, Zinn argues for recognizing the salience of multiple histories, and he demonstrates empirically that African American, Native American and European Caucasian settlers’ perspectives on and experiences of US history differ dramatically from each other in ways that cannot merely be assimilated one to the other. To speak about US history as if it were a singular, objective representation of facts would be simplistic, distorting and highly political. These considerations are not limited to history but infuse the sciences as well. In biology, a field that is analogous to economics in its combination of historical and experimental methods with complex systems, Lewontin (1994a, 1994b) has shown how the conceptual resources of the entire field are shaped by ‘organizing metaphors’, which structure, frame and circumscribe the search for evidence while operating outside of and immune to evidence. Lewontin demonstrates how these organizing metaphors are also laden with values, ideology and politics. At stake is not just representational correspondence but, much more importantly, what kind of world we contribute to creating (HeinemanPieper, 2009). Ever since the publication of Kuhn’s (1962) The Structure of Scientific Revolutions, a growing literature has demonstrated as untenable the earlier views of science as a neutral, value-free window onto the world (Wimsatt, 1976; Galison, 1987; Gergen, 1994; Lewontin, 1994a, 1994b; Rosnow and Rosenthal, 1997). Biological, ecological, psychological, social and cultural realities are open, dynamic and complex systems


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(Wimsatt, 2007; Heineman-Pieper, 2009). Moreover, human beings (including researchers) do not stand outside of these systems but rather are participants in them. As a result, how we interact with these systems makes a difference in what we come to know about them (Wimsatt, 1976; Rosnow and Rosenthal, 1997; Heineman-Pieper, 2009), especially when our own human limitations and imperfections are further taken into account (Wimsatt, 2007). In this context, it should not be surprising that researchers and the results they produce are impacted by their interests, values, culture and disciplinary socialization, among other factors (Haraway, 1990; Sachs, 1992; Rahnema and Bawtree, 1997; Gergen and Thatchenkery, 2004). For example, Alvares (1992) has shown how at its very core the concept of ‘efficiency’ has been defined so as to focus on factors that favor high-temperature industrial production over ambienttemperature natural production while effacing considerations favoring natural, ambient temperatures over industrial production, even though from a long-term systems perspective this choice is leading to far greater and potentially deadly inefficiencies (global warming, destruction of natural ecosystems, dispossession of highly sustainable traditional people and cultures by ‘development’ projects, etc.; Rahnema and Bawtree, 1997; Gowdy, 2000; Shiva, 2000; Farmer, 2004). Much of the work in economics and regional science proceeds without reflective attention to the underlying framework assumptions and values that structure the research, while simultaneously reproducing and often even enforcing adherence to the dominant frameworks. The dominant framework assumptions and values that are usually reproduced occur both at the level of the content and at the level of the ‘rules of the game’ – what counts as doing ‘good’ research in the field (Gergen and Thatchenkery, 2004; Wimsatt, 2007; Heineman-Pieper, 2009). For example, at the level of the ‘rules of the game’, readers embedded in positivist methodology have objected to our approach on the grounds that good scientific research should either allow for verification (Hempel, 1965) or refutation/ falsification (Popper, 2002). These positivistic requirements on research impose a particular set of values and assumptions that have cascading effects (Heineman-Pieper, 2009) and ignore half a century of scholarship across a variety of fields showing these strictures to be untenable, misleading and distorting (Heineman, 1981; Gergen, 2009). For example, Galison (1987) has shown how Hempelian verification and Popperian falsification are unviable even in experimental particle physics (so how much more in the social sciences!). Galison shows how, in the debate over the existence of neutral current, the ‘critical tests’ required by verificationist/ falsificationist models amounted to a subjective process of social consensus building because the vital distinction between experimental fact


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and experimental artifact can be decided neither in advance nor on the basis of logic (ibid.). In biology, and on grounds equally applicable in economics, Lewontin (1994a, 1994b) shows how, contrary to the claims and requirements of verificationism and falsificationism, biologists are never forced to abandon their theories but can always merely revise their range of applicability – and yet these same theories embed values of social and political import. Kohn (1993) provides a parallel example of this in psychology and economics regarding the inexhaustible faith in the value of incentives, despite decades of evidence showing that incentives undermine intrinsic motivation, reduce creativity, destroy relationships and have a variety of other unintended consequences. Kohn shows how for 50 years researchers continue to ignore or dismiss this and other evidence and, determined not to admit to the detrimental effects of incentives per se, continue to search for the ‘right’ incentive schemes. At the level of content, regional economics has many standard explanatory constructs, ranging from external economies of scale and agglomerations (Marshall, 1890; Hoover, 1948, 1971; Blumenthal, 1955; Krugman, 1991) to industrial clusters (Porter, 1998), to regional competition (Isard, 1949; Begg, 1999; Camagni, 2002), to knowledge spillovers (Henderson, 2007), to high-technology networks (Audretsch and Stephan, 1996), to market structure and firm size (Acs and Audretsch, 1987). This chapter adds an important perspective to the literature by offering a novel way of framing, understanding and supporting endogenous development based on a principle that is incommensurable with a core framework principle in economics and the existing literature on regional economic development, namely: valuing people, communities and activities as ends in themselves rather than as means to other ends (such as making money). Rather than attempting to reconcile or homogenize these divergent frameworks and explanatory strategies we will allow both to stand on their own terms, like the multiple histories of the US (Zinn, 2003). For the benefit of those who nonetheless insist on seeing their familiar categories, we will briefly mention the following points. Alchian’s (1950) account of adopted outcomes in regional economies relates only to sufficiency and not optimality of outcomes and thus has no bearing on the case studies that ensue. Other constructs operated in both Route 128 and Silicon Valley (the comparison set for the case study) and thus are not sufficient to explain the special vibrancy of Silicon Valley. Examples of these constructs include: external economies of scale, knowledge spillovers and academic/industry relationships. In the case of the more specific investigations of Acs and Audretsch (1987), the small-firm advantages they show still do not explain why cooperative-culture firms outperformed standard autocratic firms in the region (Baron and Hannan, 2002), and thus only


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underline the contribution of the present chapter. The chapter does not claim to provide a comprehensive account of all of the factors involved in the vibrancy of Silicon Valley; however, it does claim to elucidate a very important factor that is systematically overlooked by the intersecting disciplines that constitute regional economics. The chapter further claims that this factor has been overlooked for reasons related to systematic biases in the values, framework assumptions and organizing metaphors through which these disciplines structure, relate to and attempt to explain reality.

CASE STUDY: ECOLOGY OF SILICON VALLEY VERSUS ROUTE 128 High-tech regions, clusters and industrial districts have attracted serious scholarly attention in the last two decades. Porter’s (1998) treatment of industrial clusters highlights the importance of the local to the global: ‘enduring competitive advantages in a global economy lie increasingly in local things – knowledge, relationships, motivation – that distant rivals cannot match’ (p. 78). Even within high-technology clusters in the US, different locales have had very different histories and trajectories. In this vein, many scholars have contrasted Silicon Valley, California, and the older technology corridor on the East Coast near MIT and Harvard in Massachusetts, Route 128. Numerous studies (Weiss and Delbucq, 1987; Saxenian, 1999, 2006; Delbecq and Weiss, 2000; Florida, 2002, 2003; Lee et al., 2000; Shipley, 2006; Hulsink et al., 2007) have documented organizational, cultural and regional differences between Silicon Valley and the long-standing East Coast high-technology corridor, Route 128. Both of these regions, Silicon Valley and Route 128, are characterized by a concentration of high-technology firms and access to top tier universities (e.g., Stanford, MIT and Harvard). However, Silicon Valley has bypassed the longerestablished Route 128 in number of viable firms created as well as in other Western management measures of economic and innovative success. As Saxenian (2006, pp. 27–8) writes: The region’s technology upstarts proved more adaptive than their older, vertically integrated counterparts in an environment of fast-changing markets and technological advances. In the 1960s and 1970s, Silicon Valley’s semiconductor companies outperformed older East Coast corporations like RCA and Sylvania, and in the 1980s the region’s personal computer industry outperformed large, established companies including NCR, Honeywell, and Digital Equipment Corporation.


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Using data from interviews, questionnaires, lists of associations and custom databases, researchers (Weiss and Delbecq, 1987; Saxenian, 1999, 2006; Delbecq and Weiss, 2000; Florida, 2002) have identified several key factors as contributing to the high levels of IT entrepreneurialism in Silicon Valley as compared with Route 128. Whereas Route 128 was dominated by traditional, highly vertically integrated firms with hierarchical management and control cultures seeking to hoard as much as possible within the walls of their own firms (a zero sum game attitude), in Silicon Valley there was a fluid flow of people and ideas among firms and a relatively flat organization. Some of the early firms, such as Varian Associates, were explicitly founded as an ‘association of equals’, and the founders stated that ‘We did not want to have the hierarchy of a company owning facilities and employing employees’ . . . [and ] . . . ‘We wanted to be a cooperative. We wanted to create a cooperative organization’ (Lecuyer, 2007, p. 98). For example, employees switched firms regularly and without penalty in Silicon Valley, whereas such movement was frowned on and often contractually limited in Route 128 firms. Whereas Route 128 took a judgmental attitude towards failures, in Silicon Valley, failures were viewed as just part of a process of getting things right. Saxenian quotes WebEx cofounder Min Zhu: ‘The advantage of Silicon Valley is that you can fail and learn and try again. It’s the only place where you can screw up once and try again’ (Saxenian, 2006, p. 31). Researchers have also documented key differences in the cultures underlying Route 128 versus Silicon Valley. Whereas Route 128 is traditional, ‘stodgy’, hierarchical and conformist, in Silicon Valley technological fluency made relative equals of people of diverse ages, nationalities, backgrounds, levels of social skill and various other ancillary characteristics (Delbecq and Weiss, 2000). However, this egalitarianism is not absolute but relative (to Route 128); limitations and exceptions existed within Silicon Valley, such as the persistence of discriminatory limitations in advancement for some groups (Saxenian, 2000). In Silicon Valley, and especially in the early days, many people engaged in innovation primarily as a form of self-expression and creativity, with financial gain as merely a secondary benefit. This important and prevalent quality can be seen at cultural, organizational and individual levels. For example, at an organizational level, useful data can be found in Baron and Hannan’s (2002) longitudinal study of nearly 200 Silicon Valley start-ups. In addition to collecting a variety of other data, these authors conducted interviews with founders and CEOs in order to excavate the assumptions and mental models that ‘guided their thinking about how to organize employment relations and manage personnel’ (ibid., p. 10). The authors found the ‘notions about how work and employment should be organized


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varied along three main dimensions . . . each characterized by three or four fairly distinct options or approaches’ (ibid.). The three main dimensions are: ● ● ●

the basis of employee ‘attachment’ to the company; the criteria for coordinating and regulating employees; criteria for selecting employees.

In the first of these, employee attachment, the authors noted three bases envisioned by founders, which they called ‘love, work and money’ (ibid.; italics original). ‘Work’ corresponds to founders’ recognition that ‘the primary motivator for their employees is the desire to work at the technological frontier’ (ibid.). ‘Love’ corresponds to ‘creating a strong family-like feeling and an intense emotional bond with the workforce that would inspire superior effort and increase retention’ (ibid.). This is a form of social motivation that could be seen as providing a supportive relational context in which the employees’ could express themselves freely. It is a culture that values people over money and creates an environment of trust and broader human valuing that can encourage more courageous self-expression. The final form of attachment is ‘money’ – an exchange relationship of labor for money. After coding the data into all possible combinations of subtypes across the three main factors, the authors found that firms clustered into five main types or organizational blueprints. Only one of these involved money as a form of attachment, and this blueprint formed only 6 percent of the distribution of organizational types (ibid., p. 13). Moreover, even when the authors controlled for a variety of variables, the money-based blueprint was the most likely to fail of all the blueprints, including a catch-all ‘nontype’ category blueprint. In addition, although the underlying statistics are not sufficiently presented to clarify the precise meaning of this result, the magnitude of the percentage difference in failure likelihood that the authors report was greater between this worst-performing money-based blueprint and the next worst-performing blueprint than existed between the second-worst performing blueprint and the best-performing blueprint. While it is true that the focus on money to attract and retain employees was only one of three elements within this poorly performing blueprint, the other two qualities in the other two dimensions – selecting employees based on specific skills and a hierarchical form of control – are not independent of the money-based mindset (as suggested by the fact that not all of the possible cells represented by the intersection of the three dimensions were occupied) and are part of the same world-view and gestalt. The commitment to meaningful activity for its own sake, as a form of


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self-expression, rather than to make money can also be seen at a cultural level. Florida (2002) notes some of Silicon Valley’s roots in 1960s’ counterculture. Unlike organized labor, which fought for ‘powers and rights within the framework of the existing economic system’ (p. 203; italics original), the counter-culture in northern California ‘included a wide spectrum of views on work and economics’, including operating outside of it: Some in the hippie milieu preferred simply to ignore the world of work, perhaps living by their wits or the generosity of friends or parents. Some sought to rob ‘the system’, as described how-to-do-it style in Abbie Hoffman’s Steal this Book. For many the strategy was to grudgingly coexist with the system. Get a job, even a haircut if you must; earn the money you need to do what you have to do, but no more. (Ibid., p. 203)

Freed from the bonds of greedy materialism, the innovators of Silicon Valley were free to focus on following what they most enjoyed, innovating for the love of it, and making things work. Economic and capitalist ideology pretends that people can be driven primarily by a profit motive and then claims that this assertion represents either the base reality of human nature, a useful lubricant for the market mechanism, or else a neutral fact. The success of Silicon Valley offers a counterweight to that view and shows that it matters why we do what we do and that there’s no substitute for doing things for their own sakes and treating people as ends in themselves rather than as means (e.g., rather than as in the labor for money model in Baron and Hannan, 2002). At an individual level, the importance and prevalence in Silicon Valley of people motivated not by money but by love of what they do – work as play or hobby – can be seen both in famous founding stories (e.g., Apple) as well as in stories from the more ‘everyday’. For example, Google Desktop came to be because an employee had decided to create that function for himself on his own computer in his spare time. Simultaneously, at an organizational level, Google had structured the work week to give employees a free day every week to pursue their own personal interests – and did not demand that anything ‘productive’ or ‘useful’ come of it – in recognition of the fact that employees were intrinsically motivated to create and would do this best when they were given the freedom to follow what they enjoyed, unconstrained by top-down agendas (Elgin, 2005). Delbecq and Weiss (2000) write that people who would be considered ‘misfits’ in regions (such as Route 128) that are concerned with ‘superficial impressions’ such as those based on elegance of expression (versus unfluent English as a second language), elegance of social skills, or elegance of physical appearance (note that many psychology studies have shown the biasing effects in business and other environments of what mainstream


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society identifies as canonical ‘good looks’) are given prime projects to lead and prime resources to command in Silicon Valley. According to Delbecq and Weiss (ibid.), Silicon Valley is much less concerned with superficial impressions than are other parts of the US (such as Route 128): In Silicon Valley, it is the quality of ideas, the willingness to creatively problem solve, the ability to arrive at a breakthrough technical solution, which is valued. I have heard senior managers listen with rapt attention in briefings to young talent whose modality of presentation is rough. . . . As one venture capitalist expressed it, ‘I don’t care how the talent is wrapped’ (ibid., p. 40).

Also, these authors report that in Silicon Valley there is an ethos that gains are shared not based on hierarchical position, as in Route 128 firms, but instead based on contribution. Fleming and Marx (2006) present the concept of ‘small worlds’, social networks that cut across individual firm boundaries, in explaining how the effective management of innovation in an environment of ongoing knowledge exchanges was a critical factor underlying the success of Silicon Valley. Small worlds, families of interconnected firms, are more likely to be the source of innovation than individual firms (see also O’Brien, 2007). Saxenian (1999 and 2006) shows how this small worlds phenomenon was also made especially effective by the many highly educated immigrants who came to Silicon Valley. Saxenian (1999, 2000, 2006) shows how these families of interconnected firms went global as a result of the social networks of immigrants/expatriates largely from Asian countries (also reported in Adams, 2005). Saxenian documents the social networks of Indian, Chinese, Taiwanese and other immigrant groups and how these associations, interactions and knowledge-sharing not only substantially advanced the development within Silicon Valley, but also created global technological and business networks beyond what would otherwise have been possible. In both of these contexts, domestic and international, the immigrant communities significantly augmented the overall ‘size of the pie’. While Route 128 firms were busy protecting their turf, Silicon Valley firms and individuals, inspired by innovation itself and coming from a mindset of abundance rather than scarcity, shared freely and thereby created a better result at each level from the individual through to the whole. Across diverse metrics, Saxenian (2000) shows that immigrants, often from Asian countries such as China and India, were a vital part of the Silicon Valley technological and entrepreneurial success. For example, approximately one-quarter of ‘Silicon Valley technology firms founded between 1980 and 1998 had Chinese or Indian executives’ (p. 252), and this number is likely to be an underestimate because racism powered by and


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instituted through restrictions on venture capital required many non-white immigrant founders to choose white American CEOs (Saxenian, 2000). The (likely underestimated) immigrant-founded firms created significant wealth and employment in Silicon Valley, and in 1998 ‘collectively accounted for more than $168 billion in sales and 58 282 jobs’ . . . [and the] . . . ‘rate of immigrant entrepreneurship in Silicon Valley has increased significantly over time’ (ibid., p. 253). The experience of immigrants in Silicon Valley points to a serious shortcoming of the culture and place. While it may have been more open than Route 128, Silicon Valley was still a place of advancement limitations and discrimination against the very immigrants who were in large part fueling its success (ibid., p. 251). Saxenian cites a 1991 survey of Asian professionals in Silicon Valley that showed that ‘two-thirds of those working in the private sector believed that advancement to managerial positions was limited by race’, and this is further supported by the fact that ‘Chinese and Indian engineers remain concentrated in professional rather than managerial positions, despite superior educational attainment [to the white Americans occupying equal or higher positions]’ (ibid.). Interestingly, ‘those surveyed attributed these limitations less to “racial prejudice and stereotypes” than to the perception of an “old boys” network that excludes Asians’ . . . [and the] . . . ‘“lack of role models”’ (ibid., p. 25). At the same time, overt discrimination also existed, as is demonstrated by the requirement of many venture capitalists that non-white immigrant founders choose a white American CEO instead of running the company themselves. For example, Saxenian reports the story of David Lee, who ‘left Xerox in 1973 to start Qume after a less experienced outsider was hired as his boss. Lee was able to raise start-up capital from the mainstream venture capital community, but only on the condition that he hire a non-Asian president for his company’ (ibid., p. 251). Despite (or perhaps partly because of) these barriers, immigrants in Silicon Valley created local ecologies within the larger Silicon Valley ecology to support themselves and their compatriots. Immigrant groups and subgroups founded associations that provided both social networks and professional contacts, as well as connecting people with role models and sources of tacit knowledge and experience. For example, David Lee, the founder of Qume described earlier, and a handful of others like him, became ‘community leaders and role models for subsequent generations of Chinese entrepreneurs’ (ibid., p. 252). Putnam (2000) has shown the importance of these forms of civic engagement in building social capital and community (see also Beugelsdijk, 2003). While the immigrant experience shows how the social networks were racially divided, indicating that Silicon Valley was not quite as free


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of racism as some accounts suggest, all of these accounts point to the importance of social networks as a factor in Silicon Valley entrepreneurship. Audia and Rider (2005) show how the ‘garage legend’ creates a false impression of entrepreneurs as individual founders, whereas these authors document the importance of organizational ties even in the case of canonical founder stories such as Apple and Hewlett-Packard. Ferrary (2003) explicates one of the many modalities in which social networks are important. He outlines three mechanisms of exchange that underlie the circulation of economic goods: ● ● ●

the ‘arm’s length transaction’; the ‘power relationship’; the ‘gift exchange’.

Those correspond to the modalities of the market, the organization and the network, respectively. The social embeddedness of the actors in Silicon Valley (arising from having worked in the same firm, graduating from the same university or sharing a common ethnicity) resulted in a majority of the exchanges being informal exchanges based on reciprocity and a strong sense of community and modeled on the metaphor of the gift exchange. By this argument, Ferrary (ibid.) would suggest that the social architecture that normally accompanies urbanization forces the actors unwittingly toward more legalistic and formal forms of exchange and may explain the difficulties in mechanistically replicating Silicon Valley’s success if the underlying culture of the system is not oriented toward a sense of community (‘gemeinschaftfuhl’), a feature that is much harder to copy through rational intention. Another dimension of distinctiveness for the region is the way in which the different strains of the underlying culture and counter-culture themselves in turn created a variety of organizational cultures. As we have seen, Baron and Hannan (2002) contrasted five different blueprints of human resource practices among Silicon Valley companies. These are: the Star (marked by the attitude that ‘We recruit only top talent, pay them top wages, and give them the resources and autonomy they need to do their job’), the Commitment (represented by ‘I wanted to build the kind of company where people would only leave when they retire’), the Bureaucracy (exemplified by ‘We make sure things are documented, have job descriptions for people, project descriptions, and pretty rigorous project management technique’), the Engineering (captured by ‘We were very committed. It was a skunk-works mentality and the binding energy was very high’) and the Autocracy (implied by ‘You work, you get paid’.). They found that firms whose founders practiced the Commitment


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blueprint have performed better over the ensuing years compared with ventures based on the other blueprints. The Commitment blueprint highlights a reliance on emotional connections and family-type relationships; Baron and Hannan (ibid.) argue that perhaps given the rarity of such signals in the corporate world, the few companies that send out these signals end up enjoying a competitive advantage that is hard to imitate, particularly because it runs counter to conventional corporate ideology in ways that are humanistic and thus that people readily find valuable. It should perhaps not be surprising that the most successful variant, the Commitment blueprint, is one in which people are treated and valued as people rather than instrumentally. In short, researchers have identified a number of unique cultural features of the Silicon Valley region that have contributed to its ability to bypass the more traditional high-tech corridor, Route 128. These features include but are not limited to: ● ● ● ●

● ●

vibrant social networks; an underlying counter-culture; intense diversity of national background; relative (to Route 128 – though still less than it might be) valuing of persons as persons rather than as objects in the production process and sources of income and other ‘measurable results’ for distant owners; willingness to fail without passing judgment, to learn, and to try again; relatively flat organizational structures versus hierarchies.

These features will next be considered from the framework of ‘appreciative intelligence’ (Thatchenkery and Metzker, 2006).

APPRECIATIVE INTELLIGENCE Howard Gardner (1993) famously demonstrated that, contrary to notions generally believed at the time in the US, intelligence is not unitary. In the US, there has been a long (and unfortunate) tradition of viewing intelligence as springing from an essential, innate and fixed source in individuals, and measurable through standardized IQ tests. The resulting measure, the ‘G-factor’, was presumed to reflect the quantity of intelligence in any individual. The IQ assumptions and methodology have all been roundly critiqued by a host of scholars (see, e.g., Block and Dworkin, 1976), who have shown that:


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the assumption of an innate fixed ‘quantity’ of intelligence is entirely unfounded; intelligence is highly situated for all of us, such that each of us may show high levels of a particular kind of intelligence in certain kinds of situations or contexts and at certain times and not in others; intelligence itself has myriad forms (as demonstrated by Gardner, 1993).

Thus, in this part of the chapter we consider a quality that has been ignored in the literature, namely ‘appreciative intelligence’, or the ability to focus not on problems and shortcomings but on the beauty and potential inherent in any moment, including moments of suffering (e.g., to ‘see the mighty oak in the acorn’). This is the type of intelligence that our best school teachers have shown when they saw and brought out more in us than we may even have known at the time that we had. In contrast to intelligence focused on ‘problem-solving’ – which inevitably thereby everywhere sees problems and solutions – appreciative intelligence is a way of being in the world that always sees the constructive side of persons and situations without being utopian or unrealistic. It is about seeing and taking a stand for our own and each other’s best selves. When we take this stand completely and holistically, rather than partially and with limits, it gains enormously in power and authenticity. In other words, if we see an opportunity to make money by exploiting others, the narrowness of our ‘appreciative’ focus, and especially the lack of appreciative intelligence towards other persons, constitutes a blind spot that will in some way feed back around to impact our own well-being. One of the most powerful aspects of the appreciative intelligence shown in Silicon Valley is the very fact that it was focused on creating possibilities that were positive intrinsically and in multiple dimensions – in how people organized work together, in the authenticity of their intrinsic enjoyment in creating helpful and useful technologies and in their love of what they did – rather than being focused on competing with others and winning. We have already seen several examples of this, such as the case of Google seeking ideas from anywhere in the organization (rather than just the top) and providing its engineers with a day a week to work on whatever personal pet projects they wish. This practice demonstrates both how the employees were motivated by the love of discovery and problem-solving, such that the day a week to work on their pet projects was a perk of working at Google, and the organizational wisdom of Google that people usually do their best work when they are doing what they most enjoy. In the end, the organization will be enhanced from allowing people to be maximally self-expressive, whether or not that self-expression ever yields financial or


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other ‘measurable results’. In allowing employees total freedom to choose to engage in what they enjoy on those days and to pursue it for their own personal interest and benefit, Google recognized and refused to be caught in the irony that as soon as people’s work is held to the standard of ‘measurable results’, the freedom to pursue and experiment with what they truly and intrinsically enjoy has been destroyed – along with the profound breakthroughs (such as Google Desktop in the example previously described) that it may – or may not – spawn. Components and Qualities of Appreciative Intelligence Appreciative intelligence has three components, and leads to four qualities (Thatchenkery and Metzker, 2006). The three components or elements are: ● ● ●

reframing; appreciating the positive; seeing how the future unfolds from the present.

The four qualities that result from appreciative intelligence are: ● ● ● ●

persistence; conviction that one’s actions matter; tolerance for uncertainty; irrepressible resilience.

The three components are discussed in turn. Reframing This is the ‘psychological process whereby a person intentionally views or puts into a certain perspective any object, person, context or scenario. One of the most common examples of framing is that of calling a glass “half empty or half full”’ (Thatchenkery and Metzker, 2006, p. 6). We have tremendous choice in how we see situations, ourselves and others: what we pay attention to; what we take to be important; whether we see things as a liability or an opportunity for learning and growth, and so on. Often life appears to us as a ‘given’ reality, and older traditions in Western social science reinforced that way of seeing (contemporary social sciences and philosophy of science have seriously revised this view, however). In fact, we can always choose how we make meanings out of situations and how we respond, and people exercising their appreciative intelligence do just that. Viktor Frankl (1963, p. 104), a concentration


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camp survivor, famously wrote: ‘everything can be taken from a man but one thing: the last of the human freedoms – to choose one’s attitude in any given set of circumstances, to choose one’s own way’. Appreciating This second element of appreciative intelligence builds on the first and is the most constructive aspects of a situation in a realistic fashion. We can see the power of this element most forcefully when we think about being on the receiving end of it. If you go well out of your way to do something nice for someone, and they focus only on flaws in the content of how you selected to express this goal, you can see that they are missing the most powerful and generative aspect of the situation – your good intentions. If, instead of focusing on the problems in the execution, they focused on the beauty of your intentions and from there, in a space of alliance, requested a different mode of expressing the intention, the experience and result of the interaction, as well as of downstream results and interactions, would be very different indeed. In Silicon Valley, this positive valuing was largely present along some dimensions and in some ways, and not in others. For example, relative to Route 128, Silicon Valley often embraced people regardless of the superficial polish and sheen important in most traditional business environments – the pattern quoted earlier of not caring ‘how the talent is wrapped’. This valuing sometimes also may have extended to seeking to value employees as persons rather than as means to ends, as is suggested somewhat by the prevalent ‘commitment blueprint’ of organizations described by Baron and Hannan (2002). At the same time, this valuing was incomplete in that immigrants faced discriminatory limitations in advancement in many firms and from many venture capitalists. Moreover, the valuing was somewhat limited in that, while technical insight may have functioned to create greater equality across people who might have been discriminated against based on other superficial dimensions, this valuing did not extend universally to persons as persons such that people of all sorts and in all professions (janitors, construction workers) were accorded the same levels of social appreciation, support and opening of possibilities, along the lines Paolo Freire sought to establish in his emancipatory educational institutions (Freire, 1996). While much more common than in other parts of the country, this valuing wasn’t universal, as the example of PayPal shows, where employment was based on being ‘like’ the founders along many superficial dimensions including aversion to sports (O’Brien, 2007). At the same time, these exceptions existed in a context in which organizations themselves had diverse cultures and thus, across organizations, the result would have been a valuing of a distribution of characteristics. While less


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than holistic, this organization-level distribution still provides greater opportunities for valuing more diverse people (or aspects of people) than other parts of the country were doing at the time. In other words, while far from perfect, Silicon Valley offered greater opportunity and valuing than the other members of its reference class. Seeing how the future unfolds from the present This is the third element of appreciative intelligence. Since in fact, as the second element has implied, ‘useful, desirable or positive aspects already exist in the current condition of people, situations or things’ (Thatchenkery and Metzker, 2006, p. 33), the final element involves attunement to how to nurture and amplify these constructive elements. In short, when people are showing high levels of appreciative intelligence, they: see the oak in the acorn. They also go beyond – they plan[t] their acorns and persevere to help them grow. While others may doubt the potential of the acorns, these leaders believe in their own and others’ abilities to water and fertilize the plants from sapling to tall oak. They deal with the risk and uncertainty that comes with planting something new and hoping for growth. Finally, they find a way for the oaks to survive and thrive despite unpredictable circumstances or a challenging environment. (Ibid., p. 33)

Relevance to Silicon Valley How does all of this relate to the Silicon Valley experience? Examples abound along many of the dimensions (reframing, appreciating the positive, seeing the future unfold in the present) and qualities (resilience, persistence, conviction that one’s actions matter, and comfort with ambiguity) of appreciative intelligence. For example, we have just encountered elements of a general Silicon Valley culture of allowing everyone to be who they are, regardless of how the more traditional firms might view them as ‘misfits’, socially inept, counter-establishment, or otherwise failing to have the outer demeanor and sheen that traditional business culture unfortunately trains people to value. In the words of the venture capitalist quoted earlier from Delbecq and Weiss (2000), ‘I don’t care how the talent is wrapped’. There are, as we have seen, limitations and exceptions to this, such as the fact that at the organizational level, PayPal was fairly intolerant of various dimensions of difference internally, though those dimensions were themselves offbeat – as an early employee described it, ‘We’re all a little weird’ (O’Brien, 2007, p. 106). Likewise, consider the application of appreciative intelligence to technological problems by the young techies. This was a culture of making things work with whatever materials might be available in the garage


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and through social networks (Saxenian, 2000; Audia and Rider, 2005). It also shows a willingness to fail and to persevere in the face of failures. YouTube and Yelp founders ‘learned a valuable lesson from PayPal: The first idea isn’t always the best. Yelp was a convoluted e-mail referral service before becoming a top review site. YouTube started as a video dating play’ (O’Brien, 2007, p. 106). Google’s Marissa Ann Mayer says that Google’s innovation relies on its ‘fearlessness’ – she launches products ‘early and often’ without fear of failure (Elgin, 2005). Referring to Apple Computer and Madonna, Mayer says ‘Nobody remembers the Sex Book or the Newton. Consumers remember your average over time. That philosophy frees you from fear’ (ibid., p. 90). A founder of PayPal had so much confidence in his own actions that he founded a financial transactions company even though when he started, ‘Peter Thiel didn’t know what a chargeback was.. . . That’s one of the fundamental things of any credit card payment system. Chargebacks almost killed the company’ (O’Brien, 2007, p. 106). At PayPal, ‘the executive team made up for nonmastery of details with unwavering vision, which inspired the troops’ (ibid., p. 106). Moreover, a can-do approach of getting in and trying things and learning on the fly inspired other employees to found their own businesses. For example, Chad Hurley, CEO of YouTube remembers his PayPal days as an education in business. When he arrived in California with a degree in art from Indiana University of Pennsylvania, building a successful company seemed like something other people did. ‘“You never think it could happen to you,” Hurley says: “But seeing Peter and Max and the guys come up with ideas and seeing how to make things work gave me a lot of insight. You may not have a business degree, but you see how to put the process into effect”’ (ibid., p. 106). We also should not underestimate the fact that appreciative intelligence was frequently applied not individualistically to advance one’s own personal gain at the expense of others, but rather collectively, holistically, and in a more communitarian way to appreciating, supporting and valuing the success of others. Rather than a scarcity-based zero-sum-game mindset, Silicon Valley was frequently characterized by a mindset of sharing, abundance and mutual encouragement and support. Founders of one firm would support former employees in founding their own firms – with capital, knowledge-sharing and other resources. This happened within myriad social networks, from the immigrant associations documented by Saxenian (2000), to the organizational support in which employees would be supported by their current and former employers to start companies (Audia and Rider, 2005; O’Brien, 2007).


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PayPal founders claim to have supported employees to such an extent that the ‘PayPal mafia’ now runs $30 billion in businesses (O’Brien, 2007). This even occurred sometimes in cases of separations under contentious and acrimonious circumstances, as in the case of Musk at PayPal, who continued to provide financial support to projects by people from PayPal even after he’d been removed by the board while on a flight to Australia for his first vacation in years (ibid.).

TRANSFERABLE LESSONS The history of management thought is full of examples in which a meteoric ‘success’ is identified and everyone rushes to imitate – often even as the original inspiration for the success story is itself being indicted for accounting fraud (e.g., Enron) or going extinct (e.g., Wang Labs). What makes us think that Silicon Valley will not burn itself out and end up worse off than if it had developed more quietly, moderately and sustainably? When we think about transferable lessons we must first make sure we really want what we are seeking to transfer. A second important irony is that Silicon Valley was not the result of deliberate planning. How then can we expect to create by deliberate planning something that itself emerged organically through a confluence of complex and historically contingent factors? What, if any, lessons can be learned from Silicon Valley? Metcalfe (1998, p. 123), 3Com’s founder, pointed out that Silicon Valley is the only place on Earth not trying to figure out how to become Silicon Valley. There we argue that the most important, generative and transferable lessons from Silicon Valley are not at the level of replicating the content or structure of so-called success factors. Instead, the most powerful lessons are to be found at the level of a fundamental stance. In particular, what worked in Silicon Valley was authentically and thoroughly valuing, supporting and inhabiting its own positive uniqueness – not trying to be Route 128, not trying to be Detroit and not trying to connect with its best qualities in order to make money. The example of Silicon Valley forces us to recognize the deepest level of appreciative intelligence: seeing and celebrating the most life-affirming aspects of each community, rather than trying to import a set of ‘best practices’ from one place to another. When seen to operate at the level of a fundamental stance, the lessons from Silicon Valley also challenge some deeply held theories and beliefs about what leads to a thriving economy and a thriving society. As we have seen, the culture in Silicon Valley combined intensive and vibrant transnational diversity with a counter-culture that valued technological work and innovation intrinsically rather than instrumentally in terms of


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whether or how they would translate into economic gains (Saxenian, 1999, 2000, 2006; Florida, 2002). Of course, the opportunity to make money was not squandered, and it may even have been primary for some firms, but this was relatively rare in the organizational and underlying cultures, and when it did occur in organizations they failed in disproportionately high numbers (Baron and Hannan, 2002). In the core incubating culture spawning the phenomenon of Silicon Valley, money was a secondary rather than a primary driver for large segments of the population. Baron and Hannan (2002) showed that the Commitment blueprint – treating employees as persons rather than instrumentally as means – was the most successful within Silicon Valley. This model had the least likelihood of failure, while the autocratic model, with a central exchange relationship of working for money, had the greatest likelihood of failure. This ‘blueprint’, along with some of the others focused on work for the joy of it, can be seen as an extension to the organizational level of a counter-culture that refuses to value money as the end and persons as the means, but instead values relationships and authentic activities as valuable in their own terms – rather than instrumentally for their monetary potential. Again, this highlights the fallacy of trying to replicate Silicon Valley in order to create economic wealth: paradoxically, part of what made Silicon Valley economically successful may have been the very fact that many of the original innovators were not motivated because of money but instead as a result of intrinsic enjoyment of the technology and the company created around it. The Silicon Valley experience also challenges other framework assumptions of Western management. For example, traditional management prizes asymptotic levels of efficiency, and yet one of the most important sources of success in Silicon Valley was the willingness to fail and the acceptance of failure as part of the process. From a traditional management perspective, failure is ‘waste’, and something that should progressively be eliminated. Not only has the cult of efficiency in Western management been eroding personal lives and the ability of employees to bring their whole selves to bear in the workplace, but also it is, like global capital’s destruction of the regional and local, self-defeating. Traditional management theories also collude with the hierarchical structure of salaries based on power and control within the company. Management ideologies usually rationalize these modes of apportioning wealth with patently false (and irrelevant: Kohn, 1993) claims that pay is related to actual contribution to the organization. These claims have now been dramatically exposed by the US financial meltdown, where CEOs who ruined their companies continued to reap handsome bonus pay immediately before, during and even after their firms received millions of dollars in bailout funds from taxpayers or were bought as a distressed sale (as in


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Bank of America buying Merrill Lynch as the latter verged on collapse). Many of the early Silicon Valley firms at least partially and relatively contravened these hierarchical and extorting structures and mindsets by adopting a relatively ‘flat’ organizational structure and apportionment of gains. Again, however, this structure was rooted in the ecology of the region. When other regions adopt a stance of appreciative intelligence towards their own organizational structures, they will not merely import either the hierarchical or the flat models, but will consider (authentically, and not just based on the narrowly conceived self-interest of the powerful) the kinds of organizational structure that can best support their highest potential. At the same time, in most cases, when the interests of the powerful are not in the driver’s seat, the most effective structure is indeed most likely to be a relatively flat one in which everyone has the autonomy, power and, thereby, ability to be their best and contribute fully to the organization. In identifying the transferable lessons from Silicon Valley, this chapter raises a fundamental paradox: why are we seeking imitations in the first place – and what does that say about what we are choosing to value and the relationship between what we are valuing and what those we’re imitating were valuing? Imitations of Silicon Valley abound because economic growth has become the new global obsession, to the point that whole countries are losing sight of invaluable treasures – of social fabric, spiritual depth and resilience, emotional intelligence – in their own backyards. And yet Silicon Valley achieved its economic growth in part precisely because it was not focused on economic growth. It was focused on the joy of innovating for the sake of innovating. Thus, we have seen many examples of transferable lessons from Silicon Valley, including the caution that the act of seeking transferable lessons may already violate one of the key conditions that was important for Silicon Valley to be Silicon Valley (e.g., that it ‘wasn’t trying to be Silicon Valley’). And yet, it is only human to find things elsewhere that we want to incorporate into our lives and communities. Under these circumstances, what are some things we should keep in mind? When we analyze a phenomenon for ‘transferable lessons’, we create a ‘figure-ground’ distinction, to use the famous gestalt terminology (e.g., Rubin, 2000), in which we focus on the salient components of the model that got our attention in the first place (the ‘figure’), and we tend to deemphasize or overlook the interdependencies of those aspects with the other aspects of reality that have become part of the ‘ground’. Instead, we need to pay attention to the deep ecology impacting the functioning of the whole and parts, both in the original context as well as in the context into which we seek to import. It is also important to consider other collateral,


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unintended consequences an import may have on interrelated aspects of the milieu into which we seek to place it. When we look outside and see something we value, how or when might we or might we not want to try to adopt it? We will illustrate the question of transferrability in Silicon Valley with an analogue that shows kinds of interdependencies and deep ecology that should be considered. Twenty-five years ago Karl Weick (1983) introduced the notion of ‘reverse simulation’ into management literature. In a typical management or organizational simulation the goal is to test the relationships between variables in the controlled condition of a laboratory or classroom, extract a few principles or theories and propose various ways these lessons learned may be applied to ‘real world’ organizations. Following fields such as engineering, Weick suggested the opposite: instead of trying to simulate reality, create new realities in the lab and transfer them to the real world. What happens when we create in a laboratory (simulated environment) new forms of organizational processes and structures that differ from what are available in our lives outside, and we would like to incorporate some of those possibilities in our real lives? In such situations, we often look too narrowly at the conditions that made the possibility come alive in the particular context in which it occurred, and we often similarly overlook the conditions in the new context that might alter the meaning or valence of the import in the new environment (Wimsatt, 2007). We should attend not just to the phenomenon and its structure, but also to the nature of the broader relationships and ‘being’ of the totality of the context that allows a phenomenon to occur as it did (Wimsatt, 1980, 1994, 2007; Thatchenkery et al., 1999). We should also keep in mind a healthy humility about our ability to see and understand these complexities or to anticipate or resolve unintended consequences. Often our ‘solution’ to our last problem ends up creating many more – and worse – problems. Consider a deliberately simplified example: after a few days of specially structured group interactions, participants in a group dynamics laboratory learned several key principles of open communication, giving and receiving feedback and influencing others, and so on. Participants learned in the laboratory that when they spoke with authenticity and from their hearts, others listened to them better than when they had related superficially. However, when they tried to apply the learning at work after a few days it did not work, leading them to blame the ‘too theoretical academic knowledge’ as the root cause. Telling the boss that ‘I feel intimidated when you speak to me like that’ did not yield the type of open response the participant had received in the group dynamics lab a few days earlier. How can we apply the lessons learned about open communication to


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the real world? If we are to apply the principle of reverse simulation with an understanding of the biases of figure and ground phenomena, we will focus more on the conditions that facilitated the emergence of the learning than on the content of the learning as such (Thatchenkery et al., 1999). For example, a certain level of trust had to develop in the small group lab before a member was willing to give or receive feedback. Therefore, what should really transfer to the outside world is not a technique of giving feedback, but the conditions that allow trust to develop in a group. If sufficient trust had been developed between the boss and the employee, the feedback cited earlier might have been received more positively. Behara et al. (2008) have applied Weick’s notion of reverse simulation in an organizational context. While designing and implementing two distinct product delivery processes for a large financial services company in the Organizational Learning Laboratory at George Mason University, which one of the authors had founded, a new methodology called Empathic Knowledge Management was developed. It used the appreciative inquiry framework (Cooperrider and Srivastva, 1987) and utilized tacit knowledge of participants for process redesign in a learning laboratory environment. The focus in the lab was to create conditions that would allow staff from dispersed units in the organization to come together and share knowledge so that the process redesign time could be cut by half. Once a prototype loan processing tool was designed in record time in the Organizational Learning Lab, the focus was not on applying the new tool in the rest of the organization, but on figuring out how to create and maintain in their financial services organization the unique learning climate that had flourished in the laboratory during their three weeks of stay. In any such endeavor, it is important to keep in mind not just the similarities but also the differences between the original and transferred context at every level from content to process to the ‘being’ of the facilitators, participants and organizational actors and cultures. It is also important to remember that, since human and social systems are far more interdependent and complex than we will be able to theorize in our (necessarily) simplified views and models of them, whatever we think we ‘know’ is but a small and fallible veneer on what we don’t know. When other regions see value in what Silicon Valley has done, they need to look not just at the superficial level of success factors or salient characteristics, but also at: ● ●

the deeper context of Silicon Valley that allowed those characteristics to blossom; the deeper contexts in their own region that are and are not resonant with what they are valuing from Silicon Valley;


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what additional collateral, cascading effects might result from importing and valuing the Silicon Valley model within their own community and how that fits or doesn’t fit with the endogenous values and vibrancy of their own community.

Perhaps a region that has not become highly commercialized can recognize, celebrate and support the contexts and cultures in which people can continue to express themselves and be motivated intrinsically as opposed to extrinsically (e.g., in which people engage in activities fundamentally as ends in themselves vs. instrumentally as means to other ends such as making money; Kohn, 1993). Perhaps a city’s residents can reframe and examine their unique strengths and regional advantages to come up with new services and innovation that will further support the community? What does it look like to reframe the fear of failure into embracing failures as learning opportunities? Appreciative intelligence and the embeddedness of human social and cultural realities suggest that the real message and transferable lessons from Silicon Valley are the following: 1.

2.

3.

Each locale should appreciate, value and embrace its own unique character and beauty, and be fully, thoroughly and elegantly itself rather than trying to imitate models plucked from a distant and foreign ecology. That when communities see aspects of life they appreciate in other places, they should be circumspect and reflective in why and how they may adopt these elements and what cascading unintended effects adoption might have. Value is not unitary but has many and diverse forms, and thus economic riches are not necessarily even the ideal or goal for a community to seek.

While the venture capitalist John Doerr may announce to the world that Silicon Valley represents ‘the largest legal creation of wealth in the history of the planet’, we must not forget that it is only one form of wealth that he is noticing. If we extend our conception of wealth, making it more diversified and pluralistic to include other forms of wealth such as spiritual and relational wealth, there are a number of Silicon Valleys in the world that we are not celebrating. It is only in our modern Western discourse that the creation of material and technical wealth has become an obsession held out for all humanity to replicate, and that the pursuit of its accumulation and concomitant concentration in certain regions appears to be a goal worth replicating (Sachs, 1992; Escobar, 1995). Moreover, a


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focus on materialist wealth accumulation may in fact even be incompatible with, and at the expense of, authentic relational and spiritual wealth, since it usually involves treating ourselves and each other instrumentally as means, rather than as ends. Amid the scholarship extolling the success of Silicon Valley, a few dissenting voices also can be heard. Rogers and Larsen (1984) in their book Silicon Valley Fever have raised fundamental questions about the social and business conditions of that environment, lamenting the veneration of the workaholic high-tech achiever lifestyle, the stinginess of the region in supporting the arts, the ‘dark side’ of life in the less affluent South County and a variety of other downsides that are often overlooked or taken to be unimportant when we extol a model for its successful outcomes. Florida and Kenney (1990) also caution us against embracing Silicon Valley as an unmixed blessing, reminding us that neither Silicon Valley nor Route 128 have been able to rectify the fissures that have become increasingly apparent in the US economy and social structures, and that our infatuation with Silicon Valley stems from the fact that their image of freewheeling, high-technology entrepreneurship and quick-shooting venture capital fits in nicely with the free enterprise ideology. If there ever was an ‘Eden of Cooperation’ these authors suggest it has degenerated into a fiery pit of destructive cut-throat competition when confronted with huge potential sums unleashing equal levels of greed. When other regions look to Silicon Valley for inspiration to promote economic and technological breakthroughs, policy-makers must look not merely at the success but also at the degree to which the spread of a highly mobile venture capital mindset might erode age-old traditions and cultural norms that have constituted the wealth of these societies. By teaching us to seek happiness in an ever-receding horizon of material externals, rapid economic growth may indeed cause more human unhappiness than the stable, sustainable lifestyles usually disparaged as ‘stagnant’. In depicting the Silicon Valley as an attractive model worth emulating, Gary Hamel’s description in his award-winning article in the Harvard Business Review unintentionally captures this paradox – simultaneously great and terrible, depending on one’s vantage point – of Silicon Valley culture: The Valley is the distilled essence of entrepreneurial energy. Its ethos is simple: If it’s not new, it’s not cool; if it’s not cool, it’s not worth doing. If you don’t own shares, you’re getting screwed. If you’ve been in the same job for more than two years, your career is over. If you haven’t been through an IPO, you’re a virgin. This is where a $2 million house is a teardown. This is where a Porsche is just one more compact car and sushi’s just another fast food. Never has so much wealth been created in so little time by so few people. If the Valley’s residents pause to think about it for even a nanosecond, they know they’re as


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blessed as those who lived in Italy during the Renaissance. Like the Florentines and Venetians, they’re building a new age – an age of virtual presence, of globally interconnected communities, of frictionless commerce, of instantly accessible knowledge and stunningly seductive media. (Hamel, 1999)

In sum, through applying appreciative intelligence we can discern that what made Silicon Valley the poster child for economic development ‘best practices’ manuals and the envy of the world was its own deep authenticity and celebration of itself. The paradox of Silicon Valley is that attempts by other regions to emulate it are therefore fraught with challenges and lead to problematic choices. As suggested by, among other examples, the reverse simulation illustration above, rather than trying to be another Silicon Valley, regions should look deep within, find the many different forms of value in which they are rich, and celebrate their own unique constellation of strengths and possibilities for realizing a better world.

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W.F. Miller, M.G. Hancock and H.S. Rowen (eds), The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship, Stanford University Press, Stanford, CA. Saxenian, A. (2006), The New Argonauts: Regional Advantage in a Global Economy, Harvard University Press, Cambridge, MA. Shipley, C. (2006), ‘What Makes Silicon Valley So Different?’ (19 Oct.), Wisconsin Technology Network, available at: http://wistechnology.com/articles/3416, accessed 23 May 2010. Shiva, V. (2000), Stolen Harvest, India Research Press, New Delhi. Thatchenkery, T. (2006), ‘Organization Development in Asia: Globalization, Homogenization, and the End of Culture-specific Practices’, in B. Jones and M. Brazzel (eds), The NTL Handbook of Organization Development and Change: Principles, Practices, and Perspectives, Pfeiffer/Wiley, San Francisco, pp. 387–403. Thatchenkery, T. and Metzker, C. (2006), Appreciative Intelligence: Seeing the Mighty Oak in the Acorn, Berrett-Koehler, San Francisco. Thatchenkery, T., Behara, R. and Kenney, C. (1999), ‘Building Capabilities for Change through Laboratory Simulations’, Developments in Business Simulation and Experiential Learning, 26, 144–6. Weick, K. (1983), ‘Utilization as Reverse Simulation: Making the World More Like the Laboratory’, in R.H. Kilmann, K.W. Thomas, D.P. Slevin, R. Nath and S.L. Jerrell (eds), Producing Useful Knowledge for Organizations, Praeger, New York, pp. 494–520. Weiss, J. and Delbecq, A. (1987), ‘High-technology Cultures and Management: Silicon Valley and Route 128’, Group and Organization Studies, 12(1), 39–54. Wimsatt, W. (1976), ‘Reductionism, Levels Organization, and the Mind-Body Problem’, in G. Globus, G. Maxwell and I. Savodnik (eds), Consciousness and the Brain: A Scientific and Philosophical Inquiry, Plenum, New York, pp. 205–67. Wimsatt, W. (1980), ‘Reductionistic Research Strategies and Biases in the Units of Selection Controversy’, in T. Nickles (ed.), Scientific Discovery, Reidel, Boston, pp. 213–60. Wimsatt, W. (1994), ‘The Ontology of Complex Systems: Levels of Organization, Perspectives, and Causal Thickets’, Canadian Journal of Philosophy, 20(Suppl.), 207–74. Wimsatt, W. (2007), Philosophy for Limited Beings: Piecewise Approximations to Reality, Harvard University Press, Cambridge, MA. Zinn, H. (2003), A People’s History of the United States, Harper-Collins, New York.


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7.

An exploratory approach to model determinants of endogenous regional growth performance Robert Stimson and Roger Stough*

INTRODUCTION Regional economic development may be viewed both as a process and a product (or outcome). It is a multi-dimensional phenomenon, involving many actors and being influenced by many factors. It seems to defy precise definition, incorporating both quantitative and qualitative dimensions. Further, the study of regional economic development incorporates a concern not only with analysis and modelling, but also a concern for policy and strategy that may facilitate the regional development process and facilitate regional change. The process of regional economic development is certainly dynamic. Over time, various theoretical approaches to theorizing about and modelling regional growth and development have evolved, and, during the last couple of decades, there has been an increasing emphasis on the role of endogenous factors. Stimson et al. (2003) have proposed the notion of the ‘virtuous circle’ as a path to achieving sustainable regional economic development (see Figure 7.1). They suggest that the ‘virtuous circle’ may be maintained through the mediating or intervening effects of factors such as effective leadership as it might be used to change and adjust institutions in order to adapt the structure, processes and infrastructure of a regional economy that is appropriate and needed to meet and anticipate changing circumstances, and to facilitate the optimal use of the region’s resource endowments and to assist industries to tap their full market potential. Stimson et al. (2003) put forward the proposition that: ●

strong leadership means a region will be proactive in initiating regional economic development strategy to monitor regional performance; 111


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Endogenous regional development Strong proactive leadership Good use and tapping of potentials Sustainable development Market conditions

Resource endowments

Mechanisms for using and tapping

Vision for future development

Strategy, plans, processes

Facilitate institutional change to enhance regional capacity and capability Effective institutions and regional infrastructure

Source: Stimson et al. (2003).

Figure 7.1

● ●

The virtuous circle for sustainable regional development

leadership will set a vision for its future development; and the institutions in the region will implement processes and plans that will facilitate institutional change.

That, in turn, might enhance the capacity and capability of the region to: ● ● ●

positively adjust to changing circumstances; attain a good fit with market conditions; and harness its resource endowments,

in order to maintain and improve its performance and to achieve sustainable development as a learning region and to be one that is competitive. In this chapter we first provide a brief discussion of the evolution of approaches to regional economic development, emphasizing endogenous factors. We then outline an approach we have been developing to formulate and operationalize a new model framework to measure regional endogenous performance and model the determinants of spatial variations in regional endogenous growth performance. Third, we briefly summarize the results of those exploratory attempts to apply a model framework.


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An exploratory approach to model determinants

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THE EVOLUTION OF REGIONAL ECONOMIC DEVELOPMENT THEORY The importance of endogenous factors in regional economic development and growth (and decline) has long been recognized and is largely the basis of the so-called ‘new growth theory’ that has been popularized over the last couple of decades. Theories of endogenous growth place emphasis not only on regional resource endowments and human capital – which have always been viewed as important factors affecting economic development – but also on technology, entrepreneurship and institutional factors, including the role of leadership. However, there is neither a standard definition of nor a method of measuring endogenous growth, nor the consistent specification of the factors that determine variations in regional endogenous growth and performance. The evolution of theories on regional economic growth and development has seen a shift in the emphasis placed on exogenous factors to endogenous factors. Traditional regional economic development approaches were embedded in neoclassical economic growth theory, based largely on the Solow (1956, 2000) model. These have been replaced over the last couple of decades by a suite of models and arguments that are commonly known as the ‘new growth theory’ where the focus is directed towards endogenous factors and processes (see, for example, Johansson et al., 2001). Some of the key contributions to this shift in emphasis towards endogenous processes as drivers in regional growth and development are discussed in a recent review by Stimson et al. (2009a). This includes, inter alia, the following developments and contributions: 1.

2.

3. 4.

In the late 1970s, Norton and Rees (1979) and Rees (1979) proposed that technology was a prime driver in regional economic development. From that time, theorists such as Romer (1986, 1990), Lucas (1985), Barro (1990), Rebelo (1991), Grossman and Helpman (1991) and Arthur (1994) sought to explain technical progress as it generates economic development as an endogenous effect rather than accepting the neoclassical view of long-term growth being due to exogenous factors. Thomas (1975) and later Erickson (1994), among others, showed how technological change is related to the competitiveness of regions. Norton and Rees (1979) and Erickson and Leinbach (1979) showed how the product cycle, when incorporated into a spatial setting, may impact differentially on regions through three stages, namely an innovation stage, a growth stage and a standardization stage.


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5.

6.

7.

8.

9.

10.

11.

12.


Markusen (1985) extended the product cycle theory of regional development by articulating how profit cycles and oligopoly in various types of industrial organization and corporate development can magnify regional development differentials. The concept of innovative milieu was formulated to explain the ‘how, when and why’ of new technology generation. That notion linked back to the importance of agglomeration economies and localization economies that may lead to the development of new industrial spaces (Scott, 1988; Porter, 1990; Krugman, 1991). Some theorists, such as Fukuyama (1995), have suggested that it is not just economic but also value and cultural factors – including social capital and trust – that are important in the rise of technology agglomerations as seen in the Silicon Valley phenomenon. The effect of human capital skills and income in explaining differentials in levels of regional economic performance has received a lot of attention (see, for example, Hanushek and Kimko, 2000; Goetz and Rapasingla, 2001). The effect of industrial structure on regional stability and growth has been emphasized, with one argument being that industrial diversity and a trend towards diversification of industry sector employment enhances opportunities for growth and development (see, for example, Henderson et al., 1995; Gordon and McCann, 2000), although some researchers claim that there is scant empirical evidence on that proposition (Kaufman, 1993; Lande, 1994; Productivity Commission, 1998). The power of urban scale and agglomeration on regional performance is also emphasized (Taylor et al., 2002), with a study by Duranton and Puga (2000) reviewing national urban systems suggesting that larger cities are more diversified, that individual city-size rankings and individual city specialization tend to be stable over time, and that specialized and diversified cities co-exist across a national urban system. Rees (2001) points out that technology-based theories of regional economic development need to incorporate the role of entrepreneurship and leadership, particularly as factors in the endogenous growth of regions’ market circumstances. There now seems to be an almost universal realization of what Garlick et al. (2006) refer to as the ‘institutional embeddedness’ of endogenous processes and factors in regional development.

The term ‘new growth theory’ has been coined to describe the transitions such as those referred to above in the evolution of thinking on


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regional economic development over the last three to four decades, with the increasing emphasis being placed on the role of and the importance of, endogenous factors. Importantly, in the new growth theory models that have emerged, allowance is made for both agglomeration effects (economies of scale and externalities) and market imperfections, with the price mechanism not necessarily generating an optimal outcome through efficient allocation of resources. Also, the processes of capital accumulation and free trade do not necessarily lead to convergence between regions, with positive agglomeration effects concentrating activity in one or a few regions through self-enforcing effects that attract new investment. Most importantly, the new growth theory allows for both concentration and divergence. As discussed by Stimson, Stough and Roberts (2006), these evolutionary developments in regional economic growth and development theory are welcome for regional economic development analysts and planners because, among other things, they explicitly introduce a spatial dimension into economic growth theory, a dimension that was ignored in neoclassical economic development theory. That evolution is particularly important as the role of regions in national economies has changed significantly since the 1970s. This has been a result to some degree of the effects of globalization and structural change and adjustment. Understanding those processes of change is crucial for analysing and understanding differentials in the patterns of regional economic performance and for formulating and implementing regional economic development planning strategy. But just as important is the need to carefully address endogenous factors and processes to enhance the capacity and capability of a region to proceed along a path of achieving sustainable development and growth.

AN APPROACH TO MEASURING AND MODELLING ENDOGENOUS REGIONAL GROWTH A New Model Framework The authors and their collaborators have been seeking to develop and operationalize a new model framework (see Figure 7.2) to measure and investigate the determinants of spatial variations in endogenous regional growth performance. In particular, existing theories of regional economic development tend to underplay the significance of leadership and other institutional factors. Stimson, Stough and Salazar (2003, 2005) have proposed a model


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Quasi-independent Variables

Intervening Variables

Dependent Variable(s)

The dynamic interrelationships that act to create the catalysis for regional development (I) Institutions (E) Entrepreneurship

Resource endowments and market conditions (RE, M)

OUTCOME A region that is: competitive entrepreneurial sustainable (RED)

(L) Leadership

Direct effects Indirect effects

Measure and evaluation change over time Benchmark performance (e.g., regional shift component in shift-share analysis)

Source: Stimson, Stough and Salazar (2003).

Figure 7.2

A new model framework for the regional economic development process

framework conceptualizing regional economic development (RED) and to explain spatial variations in regional endogenous growth, which specifies three key intervening or mediating factors:1 ● ● ●

leadership (L); institutional factors (I); entrepreneurship (E);

which are seen as creating both catalysts and vehicles for better utilization of a region’s resource endowments (RE) and its market fit (M). The model may be specified as follows: RED= f [(RE, M) mediated by (L, I, E)] A Definition of Regional Endogenous Growth: A Proxy Measure for the Dependent Variable Despite the evolving focus on endogenous factors in the regional economic development and growth literature, it is somewhat surprising that there


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is no standard definition of endogenous regional economic growth (or decline) in terms of the specification of an agreed variable that measures it. Thus, a key issue is: what is an appropriate proxy measure of a region’s endogenous growth? Furthermore, it is also surprising that there is a lack of operational models to measure the affect of factors such as those discussed above on explaining spatial variations in regional endogenous growth performance in a nation or state. In general economic analysis, most studies derive and measure a variable for endogenous growth by using Ordinary Least Squares,2 or more recently, panel data analysis. However, the data required to do so is often not readily available at the disaggregated regional level. As such, many economic geographers and regional economists have turned to other techniques. Approaches used to measure regional endogenous economic growth/ development have been discussed by Stimson, Stough and Salazar (2003, 2005). It might take the form of a proxy or surrogate measure such as: (1) the aggregated (across all industry sectors) regional differential shift component value in a shift-share analysis, a common technique in analysing regional differential performance used by economic geographers and regional economists; or (2) an employment scale weighted location quotient change over time, standardized by the size of the region’s labour force. Such measures can then be used as the dependent variable in a model of regional endogenous economic growth/development. In the exploratory model applications discussed later in this chapter, there are attempts to combine a range of endogenous factors to reflect regional economic growth (which is measured by employment, given the data constraints on measuring production, at the regional level) rather than one measure, such as technology or level of savings. This is done by using shift-share analysis as proposed (see above) by Stimson, Stough and Salazar (2003b, 2005). The reason for adopting this approach is pragmatic as secondary data tends to be readily available in most countries to perform a shift-share analysis, and typically that may be achieved using census data for industry employment in regions. The regional shift component is a reasonable surrogate measure of the degree to which employment growth or decline in a region is due to endogenous or ‘within-region’ processes after accounting for exogenous factors, such as national shift and the industrymix shift effects. Indeed, that is what the regional shift component is purported to measure. While the authors recognize that using the differential/ regional shift component derived from a shift-share analysis is not an ideal method of measuring endogenous regional economic growth (or decline), it is nonetheless considered to be the most optimal given the lack of data at the regional level to operationalize other measurement approaches.


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Potential Independent and Intervening Variables The potential sets of variables proposed by Stimson, Stough and Salazar (2003b, 2005) that might be appropriate as measures of the independent and the mediating factors in the model3 are the following: 1.

RE = resource endowments, which might be measured by a set of variables such as: – – – – – – – – –

– – – 2.

area size of the region; climate; topography; agglomeration of industry key sectors (measured by location quotients for employment in industry sectors); population size and rate of growth/decline; education levels (a derived index of human capital) and literacy; per capita income, income distribution and income distribution change over time; housing ownership; investment in industrial and commercial construction, benchmarked to the region’s national share vis-à-vis its national share of population; infrastructure investment (per capita), such as on roads, schools, hospitals, and so on; industrial structure and change in industrial structure (measured by an industrial diversity index); regional organizational slack.

M = market fit, which might be measured by a set of variables such as: – – – –

basic economic activity in major industry sectors (measured by location quotients for employment in industry sectors); airline connections with other regions/cities; road freight in/out movements; volume and value of exports in key products and services.

It would also be useful to use variables that measure the degree to which the region’s products fit with changing demand and related markets, to ascertain the degree to which supply fits the local market, and to evaluate the extent to which the local infrastructure provides the necessary linkages to export markets. 3.

L = leadership, which might be measured by a set of variables such as:


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– – – – –

4.

119

the degree of change/stability in local political leadership; expert assessment of leadership quality; corporate headquarters located in the region; density of business and community organizations per 10 000 population; size of regional organizations (public and non-profit) budgets/ employment.

I = institutions, which might be measured by a set of variables such as: –

institutional thickness (corporate and community organizations per 10 000 population); – layers of government/government fragmentation; – formal institutions of governance, measured by number of public agencies per 10 000 population; – number of headquarters of major corporations (e.g., Fortune 1000 firms); – value foundation capitalization per 10 000 population; – government fragmentation; – level of regional organizations (number and budget level); – an index of social capital. 5.

E = entrepreneurship, which might be measured by sets of variables such as: – – – – –

churn rate or business start-up rate; venture capital activity; corporate venturing activity; patents issued per 10 000 workers; location quotient of employment in ‘symbolic analyst’ occupations.

Stimson, Stough and Salazar (2005) argue that RED is positively related to RE, M, L, I and E, but that there are likely to be lead and lag effects in the short to intermediate run, and perhaps cyclical effects in the longer run. Thus: REDt = REt−1 + Mt−1 + (It−1 to It−10/10) + Lt−2 + Et−2 + e Exploratory Model Applications So far there have been two exploratory attempts to apply this model framework to analyse spatial differentials in regional endogenous growth


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performance and identify factors that may explain those variable patterns in regional endogenous growth performance: (1) In the first application, Stimson, Robson and Shyy (2005, 2006, 2009b) have conducted an exploratory analysis using the OLS technique to estimate a model of regional endogenous growth performance across non-metropolitan regions in each of the five mainland states of Australia. (2) In the second application, Stough et al. (2007) have conducted an exploratory study of variations in endogenous regional growth across US Metropolitan Statistical Areas (MSAs). In both of these model applications, the dependent variable measure of regional endogenous growth is the regional or differential shift component across all industry sectors derived from a shift-share analysis of employment change over a specified period of time, standardized by size of the regional labour force. Both studies employ a standard OLS technique to estimate the model of regional endogenous growth. This dependent variable is regressed on a set of endogenously developed regional variables on demography and economy, and, where possible leadership, institutions and entrepreneurship, that are selected as explanatory variables. Both static point-in-time values around the base year and dynamic change-over-time values over the period of time being studied are used to model these explanatory variables, which are assumed a priori to be the possible determinants of regional endogenous growth.4 While stepwise regression is the core of the analytical methodology, OLS is used to estimate the ‘fit’ at each iteration as variables are stepped out of the initial or general starting model. In that modelling, consideration is given to testing for spatial autocorrelation to address spatial proximity/spillover effects. In the sections that follow we provide a summary discussion of the results of these two exploratory model applications.

THE AUSTRALIAN APPLICATION The purpose of the Stimson, Robson and Shyy (2005, 2006, 2009b) exploratory model application was to empirically examine and model patterns of regional endogenous employment growth in Local Government Areas (LGAs) across non-metropolitan areas of the five mainland states of Australia and to identify which factors might explain the spatial variations in the level of endogenous growth performance over the decade 1991 to 2001. It was restricted to using secondary data on regional demographic and economic characteristics derived from the census.


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The five mainland states were modelled separately in order to generate comparative data.5 Model Variables The modelling used a set of 27 independent or explanatory variables (see Table 7.1) – both static and dynamic – representing measures relating to factors that are hypothesized to play a significant role in affecting regional economic development and growth as suggested in the international and local Australian literature appraised by the researcher. Those factors relate to aspects of: ● ● ● ● ●

regional industrial structure and specialization/diversification; population size and growth; labour force participation and unemployment; human capital and income; occupational structure; the effects of proximity to the state capital city (that is the metropolitan area and proximity to the coast.

Those 27 variables were included in an OLS general model, initially a convention to estimate the model of regional endogenous growth across regional LGAs of the five mainland states of Australia. Following that, a stepwise approach was used to determine a specific model.6 Patterns of Endogenous Regional Growth Performance Stimson, Robson and Shyy (2005) mapped and analysed the spatial patterns of variation in the regional endogenous employment growth (or decline) performance over the decade 1991 to 2001 of the nonmetropolitan regional LGAs in the five mainland states of Australia on the REG_SHIFT dependent variable of endogenous growth. It was found that: ●

●

●

in New South Wales, overall 45 of the regional LGAs experienced positive endogenous growth, while 90 had experienced negative growth; in Victoria, only eight of the regional LGAs experienced positive endogenous growth, while 31 LGAs displayed negative endogenous growth performance; in Queensland, 39 of regional LGAs had experienced endogenous growth, while 79 LGAs displayed negative growth;


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Table 7.1


Definition of variables used in the non-metropolitan regions model for the five mainland states of Australia

Variables Dependent variable REG_SHIFT Independent variables SPEC_91 SPEC_CH SCI_91-01 SCI_CH L_INC_01 UNEMP_91 UNEMP_CH L_POP_91 POP_CH LQMAN_91 LQMAN_CH LQPBS_91 LQPBS_CH LQPER_91 LQPER_CH UNIQUALS_91 UNIQUALS_CH TECHQUALS_91 TECHQUALS_CH ROUTW_91 INPERS_91 SYMBA_91


Definition of Variables Regional Shift (from 1991 to 2001)/Labour Force (1991) (i.e., employed + unemployed) Specialization Index for 1991 across 17 industry sectors Change in Specialization Index from 1991 to 2001 Structural Change Index for 1991 to 2001 Change in the Structure Change Index from 1991–1996 to 1996–2001 Log (Average Annual Income for 2001) Unemployment Rate in 1991 (for all persons) Unemployment Rate Change from 1991 to 2001 (for all persons) Log (Population for all persons) in 1991 Percentage Point Change in Population from 1991 to 2001 Location Quotient for Manufacturing Industry in 1991 Change in Location Quotient for Manufacturing Industry from 1991 to 2001 Location Quotient for Property and Business Services Industry in 1991 Change in Location Quotient for Property and Business Services Industry from 1991 to 2001 Location Quotient for Personal and Other Services Industry in 1991 Change in Location Quotient for Personal and Other Services Industry from 1991 to 2001 Proportion of Population with a Bachelor Degree or higher in 1991 Change in Proportion of Population with a Bachelor Degree or higher from 1991 to 2001 Proportion of Population with a Technical Qualification in 1991 Change in Proportion of Population with a Technical Qualification from 1991 to 2001 Proportion of Total Occupations (all persons) as Routine Production Workers for 1991 Proportion of Total Occupations (all persons) as Inperson Service Workers for 1991 Proportion of Total Occupations (all persons) as Symbolic Analysts for 1991

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Table 7.1

123

(continued)

Variables

Definition of Variables

ROUTW_CH

Change in Proportion of Total Occupations (all persons) as Routine Production Workers from 1991 to 2001 Change in Proportion of Total Occupations (all persons) as In-person Service Workers from 1991 to 2001 Change in Proportion of Total Occupations (all persons) as Symbolic Analysts from 1991 to 2001 Border is adjacent to coastline (dummy variable 0 = NO, 1 = YES) Is adjacent to the State Capital Statistical District (SD) (dummy variable 0 = NO, 1 = YES)

INPERS_CH SYMBA_CH A_COAST P_METRO

Source: Stimson, Robson and Shyy (2006). ● ●

in South Australia, 26 of the regional LGAs experienced positive endogenous growth performance, while it is negative for 23 LGAs; in Western Australia, there was positive endogenous growth in 32 of the regional LGAs while 80 of them displayed negative growth.

The mapping approach developed by Stimson, Robson and Shyy 2006, 2009b) is novel, using GIS to visualize patterns of variations in regional endogenous employment growth/decline performance according to the population size category of the region. An example for the state of New South Wales (the state with the highest population) is provided in Figure 7.3. Model Results The OLS general model run for all five of the mainland states produced high R-squared values ranging from top values of 0.98 for South Australia, 0.96 for Victoria and 0.92 for Western Australia, to the slightly lower values of 0.88 for Queensland and 0.85 for New South Wales. The general model thus explains much of the variance in dependent variables on regional endogenous growth measured by the regional shift in employment change over the decade 1991–2001 across the non-metropolitan LGAs. The results from the general model indicated not only some commonality but also a degree of variability in magnitude and direction of the effects of the independent variables in explaining the spatial variation in levels of endogenous employment growth/decline across non-metropolitan regional LGAs in the five mainland states analysed.


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Source: Stimson, Robson and Shyy (2006).

Figure 7.3

Patterns of endogenous growth performance: New South Wales

For the application of the specific model, the adjusted R-squared values derived are high, explaining as much as 98 per cent of the variance for South Australia, 96 per cent for Victoria and 92 per cent for Western Australia, 88 per cent of the variance for Queensland and 86 per cent for New South Wales. The test conducted to investigate the degree of spatial dependence showed that only in South Australia is any significant degree of spatial dependency apparent with the Moran’s I statistic being 0.154, which is well below the maximum value of 1. For the other states the Moran’s I statistic varies from −0.012 for Victoria to 0.051 for Western Australia. Not surprisingly there are differences between the five mainland states in the number of significant variables and the mix of independent variables


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UNIQUALS_91 − UNIQUALS_CH + TECHQUALS_91 − TECHQUALS_CH +

LQMAN_CH+ LQPBS_91 + LQPBS_CH + LQPER_91 +

POP_CH +

UNEMP_91 − UNEMP_CH −

New South Wales

ROUTW_91 − ROURW_CH −

UNIQUALS_91 − UNIQUALQ_CH+

INPERS_CH +

ROUTW_CH +

UNIQUALS_91 − UNIQUALS_CH + TECHQUALS-91 −

INPERS_91 −

ROUTW_91 −

TECHQUALS-91 +

ROUTW_CH + INPERS_91 +

TECHQUALS_CH +

LQPER_91 + LQPER_CH +

UNEMP_CH − L_POP_91 + POP_CH +

SPEC_ 91 + SPEC_CH + SCI_91-01 + SCI_91-01 +

Western Australia

LQPER_91 +

LQMAN_CH+

L_POP_91 + POP_CH +

SPEC_91 + SPEC_CH +

South Australia

LQPBS_91 + LQPER_91 +

UNEMP_CH − L_POP_91 + POP_ CH +

L_INC_01 +

SPEC_91 + SPEC_CH +

Queensland

LQPBS_91 +

L_POP_91 − POP_CH +

SCI_91-01 +

Victoria

Summary of specific model results: statistically significant independent variables explaining spatial differences in regional endogenous employment performance (1991–2001) in the five mainland states, Australia (direction of influence, positive/negative)

SPEC_91 SPEC_CH SCI_91-01 SCI_CH L_INC_01 UNEMP_91 UNEMP_CH L_POP_91 POP_CH LQMAN_91 LQMAN_CH LQPBS_91 LQPBS_CH LQPER_91 LQPER_CH UNIQUALS_91 UNIQUALS_CH TECHQUALS_91 TECHQUALS_CH ROUTW_91 ROUTW_CH INPERS_91 INPERES_CH

Independent variables

Table 7.2

126


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Source:

New South Wales

(continued)

Stimson, Robson and Shyy (2006).

SYBBA_91 SYMBA_CH D_COAST D_METRO

Independent variables

Table 7.2

SYMBA_91 − SYMBA_CH −

Victoria SYMBA_91 +

Queensland

D_METRO −

South Australia

D_COAST − D_METRO −

Western Australia


127

0.04

Residuals

Tweed

0.03

Snowy River Muswellbrook

Residuals

0.02

Tamworth

Cobar

Broken Hill Bega Valley

0.01

Shoalhaven Armidale Dumaresq

Queanbeyan

Dubbo

0

Wagga Wagga

Albury 20

0

40 Bathurst

60

80

Deniliquin 100 Orange

120 Griffith

Wollongong

140 Grafton

Glen Innes

–0.01

Ballina

–0.02

Greater Taree Newcastle

Coffs Harbour

Narrabri

LGAs

Source:

Stimson, Robson and Shyy (2006).

Figure 7.4

Order of regional LGA residuals for the specific model: New South Wales

in the specific model. Table 7.2 provides a summary of those significant explanatory factors. Stimson, Robson and Shyy (2005, 2009a) plotted on a graph the order of residual scores of LGAs from the line of best fit derived from the specific model (that is, the stepwise regression). And they also mapped the spatial patterns of the residual scores for LGAs. Here we only reproduce the plot for New South Wales (Figure 7.4), which shows there are no discernable outliers, with only two LGAs being above the +0.03 deviation. The large majority of LGAs fall within the range +/−0.01. From this exploratory model application to the five mainland states of Australia, it is evident that the specific model gives a relatively good fit, especially in Victoria and South Australia and to a slightly lesser degree in New South Wales, while in Queensland and Western Australia there is a greater degree of deviation in from the line of best fit derived from the model. The modelling conducted by Stimson, Robson and Shyy (2005, 2006, 2009a, 2009b) lends support to the importance of variables relating to industrial structure and industry specialization, population size and to population change, levels of human capital and aspects of job concentration in industry sectors and occupation categories that have been hypothesized as being important in explaining differences in regional endogenous growth performance. But there are considerable differences between the five mainland states of Australia in the degree to which the individual independent variables are significant independent (explanatory) factors accounting for variations between the regional LGAs in their regional


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endogenous growth performance over the decade 1991–2001. Further, there are also some variations between those states in the direction of the impact of some of the variables on regional endogenous growth. From the specific model results, the following conclusions are drawn by Stimson, Robson and Shyy (2006, 2009b): 1.

2.

3. 4. 5.

6.

7.

8.

Population growth emerges as a particular factor with a strong positive impact in all five mainland states, and population size at the beginning of the decade has an important positive impact in all states except New South Wales. The level of industry sector specialization, and the change in it over time, both have an important positive effect in all states except New South Wales, and the structural change index and the dynamics in it over time are important positive factors in Queensland, South Australia and Western Australia. The level of income at the end of the decade 1991 to 2001 is a significant factor only in Queensland. Only in New South Wales do the unemployment variables have an impact. There is a mixed picture regarding the impacts of the degree of concentration of jobs in broad industry sectors, and the effects are most apparent in New South Wales and in Western Australia. But there is neither a consistent directional effect for these variables, nor for the change over time in their location quotients. There is a particularly marked impact from the incidence of people with university and technical qualifications in New South Wales and Queensland, but to a lesser degree in Victoria and the other states. The incidence of people with university qualifications at the beginning of the decade has a negative impact, but the change in that incidence over the decade is a positive impact factor in New South Wales and Western Australia, where the change in incidence of people with technical qualifications also has a positive impact. There is no really discernable pattern in the impact of the incidence of jobs in the Reich (1991) broad occupation categories, except in Victoria where the effects are negative, while in South Australia, Western Australia and Queensland the effects are positive when such a variable is significant. Only in Western Australia and South Australia is it evident that the proxy variables relating to location on or near the coast or proximity to the metropolitan area have a significant effect, and that effect is negative.


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THE US APPLICATION The purpose of the Stough et al. (2007) exploratory model was to empirically examine and model the sources of regional endogenous growth across the US MSAs for the period 1999–2002. Specifically, the modelling attempts to uncover or examine which factors assumed to be endogenous to a region are actually affecting changes in the regional endogenous employment growth of 245 MSAs between 1999 and 2002.7 Method The US study followed the methodology employed in the Stimson, Robson and Shyy (2005, 2006, 2009b) exploratory study in Australia discussed above. It uses the same set of variables relating to demographic and economic characteristics of a region, but in this US application Stough et al. (2007) added to the set of independent or explanatory data variables a selection of variables that are surrogate measures (that is, indicators) of factors relating to leadership, institutions and entrepreneurship. Thus, this model application to MSAs in the US is an exploratory attempt to use the full model framework for modelling regional endogenous growth proposed by Stimson, Stough and Salazar (2003, 2005) and as set out earlier in Figure 7.1. The model uses secondary data available from multiple data sources, including the US Census Bureau, Bureau of Economic Analysis (BEA) and Bureau of Labor Statistics (BLS). Spatial Patterns of Endogenous Employment Growth Performance The map in Figure 7.5 shows the pattern of MSA scores on the dependent variable measuring endogenous employment growth/decline for the period 1999–2002. On the map the MSAs are differentiated according to whether their score on the dependent variable was weak or strong, positive or negative, using the ‘cut-off points’ method of classification. MSAs are differentiated according to their population size category. It is evident that MSAs with different levels of population experienced different levels of regional endogenous growth. Generally MSAs with small population size experience relatively higher regional endogenous economic growth than those with larger populations. However, the variance for the small-size MSAs is much greater than for the larger-sized MSAs. Specifically, the regional endogenous growth rate of the mediumsized MSAs (population size between 0.2 million and 1 million) is lower than that of the MSAs with a smaller population (less than 0.2 million) by


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Pattern of MSA scores on the dependent variable standardized endogenous employment growth, 1999–2002, by population size category

The authors.

Figure 7.5

Source:


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9.53 per cent. Further, the rate for larger MSAs (population size between 1 million and 6 million) is even lower than that of the MSAs with population size less than 0.2 million by 12.52 per cent. It is interesting that the small-size MSAs dominate in the 20 top-ranking MSAs with the highest positive scores on the endogenous employment growth dependent variable, with only four medium-size MSAs with populations between 200 000 and 1 million being in the top 20 ranked MSAs. Not one of the large MSAs with populations more than 1 million is in the top 20 ranked MSAs. In contrast, nine of the large MSAs are in the bottom 20 ranked MSAs with the greatest negative scores on the endogenous employment growth dependent variable, and only one of the small MSAs was in that list of 20 bottom-ranked MSAs. General Model Results For the application of the general model, the R-squared value for the final general regression model was 0.57, with an adjusted R-squared value of 0.55, meaning that about 55 per cent of the variance in the dependent variable is explained by the final general OLS regression model, which includes 11 significant explanatory variables. Table 7.3 lists the variables used in the model, and Table 7.4 gives parameter estimation and statistical fit information for the model. From Table 7.4, some underlying factors capable of affecting regional endogenous economic growth may be specified and explained. A summary of the results follows. Stough et al. (2007) show that four sets of variables measuring resource endowments (POP_CH, BACH_00, DOCT_00), market fit (LQGOV_98, INPERS_99, INPERS_CH), institutions (LGOVEM_CH) and entrepreneurship (EM1_4_CH, EM5_9_CH) have differing levels of effect on regional endogenous growth for the US MSAs over the study period. For example, the following outcomes were identified: 1.

2.

Regional educational attainment level has different effects on regional endogenous growth. A 1 per cent increase in the percentage of population over 25 with a Bachelor Degree in 2000 is associated with a 0.88 per cent decrease in regional endogenous growth, while a 1 per cent increase in the percentage of population over 25 with a Doctoral Degree in 2000 is associated with an increase of 3.61 per cent in regional endogenous growth. Regional government plays an important role in metropolitan regional economic growth. A 1 per cent increase in the regional location quotient for government and government enterprises in 1998 is associated


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Regional Shift (from 1999 to 2002)/employment (1999)

Dependent variable REG_SHIFT

Explanatory variables II: market fit LQMAN_98 Location Quotient for Manufacturing Industry in 1998 LQSER_98 Location Quotient for Services Industry in 1998 LQGOV_98 Location Quotient for Government and Government Enterprises in 1998 LQMAN_CH Change in Location Quotient for Manufacturing Industry from 1998 to 2002 LQSER_CH Change in Location Quotient for Services Industry from 1998 to 2002 LQGOV_CH Change in Location Quotient for Government and Government Enterprises from 1998 to 2002 ROUTW_99 Percentage of Total Occupations (all persons) as Routine Production Workers for 1999 INPERS_99 Percentage of Total Occupations (all persons) as In-person Service Workers for 1999 SYMBA_99 Percentage of Total Occupations (all persons) as Symbolic analysts for 1999

Explanatory variables I: resource endowments L_POP_99 Log (Population for all persons – 1999) POP_CH Percentage change in Population from 1999 to 2002 L_INC_02 Log Per Capita Personal Income for 2002 UNEMP_00 Unemployment Rate in 2000 (for all persons) UNEMP_CH Unemployment Rate Change from 2000 to 2002 (for all persons) BACH_00 Percentage of Population over 25 with a Bachelor Degree in 2000 EDUMP_00 Percentage of Population over 25 with a Master Degree or Professional Degree in 2000 DOCT_00 Percentage of Population over 25 with a Doctoral Degree in 2000

Definition

Definition of variables used in the US MSAs model application

Variable

Table 7.3

BLS BLS BLS

BEA BEA BEA BEA BEA BEA

BEA BEA BEA BLS BLS CENSUS CENSUS CENSUS

BEA

Source

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Explanatory variables V: regional entrepreneurship FIRM0_98 Percentage of Self-employed Firms (do not employ any employee) in the total number of firms in 1998 EM1_4_98 Percentage of the Employment in firms with 1–4 employees in the total employment of an MSA in 1998 EM5_9_98 Percentage of the Employment in firms with 5–9 employees in the total employment of an MSA in 1998 EM10_19_98 Percentage of the Employment in firms with 10–19 employees in the total employment of an MSA in 1998 FIRM0_CH Percentage Change of Self-employed firms (do not employ any employee) in the total number of firms between 1998 and 2002

SBA

SBA

SBA

SBA

SBA

CENSUS CENSUS CENSUS CENSUS DDB

Explanatory variables IV: regional institutions LGOVEX_97 Log Local Government Expenditures in 1997 LGOVEM_97 Log Local Government Employment in 1997 LGOVEX_CH Percentage Change in Local Government Expenditures between 1997 and 2002 LGOVEM_CH Percentage Change in Local Government Employments between 1997 and 2002 SOCIAL_CAP Index of Social Capital Averaged during five years from 1993–98

BLS

BLS

BLS

FORTUNE

Percentage Change of Total Occupations (all persons) as Routine Production Workers from 1999 to 2002 Percentage Change of Total Occupations (all persons) as In-person Service Workers from 1999 to 2002 Percentage Change of Total Occupations (all persons) as Symbolic Analysts from 1999 to 2002

Explanatory variables III: regional leadership FORTU1000 Corporate Headquarters of Fortune 1000 located in an MSA, 2005

SYMBA_CH

INPERS_CH

ROUTW_CH

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Percentage Change of the Employment in firms with 1–4 employees in the total employment of an MSA between 1998 and 2002 Percentage Change of the Employment in firms with 5–9 employees in the total employment of an MSA between 1998 and 2002 Percentage Change of the Employment in firms with 10–19 employees in the total employment of an MSA between 1998 and 2002

EM1_4_CH

Source: Stough et al. (2007).

Explanatory variables VI: population dummies POPDUM_1 Equals 1 if population

Endogenous Regional Development: Perspectives, Measurement and Empirical Investigation (New Horizons in Regional Science)

Leadership and Institutions in Regional Endogenous Development

New Directions in Economic Geography (New Horizons in Regional Science)

New Technology and Regional Development

Local and Regional Development

New Directions in Regional Economic Development (Advances in Spatial Science)

New Dimensions in Regional Integration

Industrial Agglomeration And New Technologies: A Global Perspective (New Horizons in Regional Science)

Assessment and Measurement of Regional Integration

Regional Diversity and Local Development in the New Member States

Regional Diversity and Local Development in the New Member States

Annals of Bioethics: Regional Perspectives in Bioethics

Public Policy for Regional Development

Trade Politics: International, Domestic and Regional Perspectives

Clusters and Regional Development (Regions and Cities)

Regional Development Policies in OECD Countries

Handbook of Regional Growth and Development Theories

Knowledge Externalities, Innovation Clusters and Regional Development

Breaking Boundaries: New Perspectives on Women's Regional Writing

Urban and Regional Planning

Regional Externalities

Regional Airports

Regional Integration and Development (World Bank Trade and Development Series)

Regional Integration and Development (World Bank Trade and Development Series)

Regional Integration

Handbook of Regional and Urban Economics, Vol. 1: Regional Economics

International Knowledge and Innovation Networks: Knowledge Creation and Innovation in Medium-Technology Clusters (New Horizons in Regional Science)

Assessing Regional Integration in Africa: Rationalizing Regional Economic Communities

Endogenous Regional Development: Perspectives, Measurement and Empirical Investigation (New Horizons in Regional Science)

Leadership and Institutions in Regional Endogenous Development

New Directions in Economic Geography (New Horizons in Regional Science)

New Technology and Regional Development

Local and Regional Development

New Directions in Regional Economic Development (Advances in Spatial Science)

New Dimensions in Regional Integration

Industrial Agglomeration And New Technologies: A Global Perspective (New Horizons in Regional Science)

Assessment and Measurement of Regional Integration

Regional Diversity and Local Development in the New Member States

Regional Diversity and Local Development in the New Member States

Annals of Bioethics: Regional Perspectives in Bioethics

Public Policy for Regional Development

Trade Politics: International, Domestic and Regional Perspectives

Clusters and Regional Development (Regions and Cities)

Regional Development Policies in OECD Countries

Handbook of Regional Growth and Development Theories

Knowledge Externalities, Innovation Clusters and Regional Development

Breaking Boundaries: New Perspectives on Women's Regional Writing

Urban and Regional Planning

Regional Externalities

Regional Airports

Regional Integration and Development (World Bank Trade and Development Series)

Regional Integration and Development (World Bank Trade and Development Series)

Regional Integration

Handbook of Regional and Urban Economics, Vol. 1: Regional Economics

International Knowledge and Innovation Networks: Knowledge Creation and Innovation in Medium-Technology Clusters (New Horizons in Regional Science)

Assessing Regional Integration in Africa: Rationalizing Regional Economic Communities

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