Leadership and Institutions in Regional Endogenous Development

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Leadership and Institutions in Regional Endogenous Development

NEW HORIZONS IN REGIONAL SCIENCE Series Editor: Philip McCann, Professor of Economics, University of Waikato, New Zealand and Professor of Urban and Regional Economics, University of Reading, UK 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: 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

Leadership and Institutions in Regional Endogenous Development Robert Stimson The University of Queensland, Australia

Roger R. Stough George Mason University, USA with

Maria Salazar Fundacion Rafael Preciado Hernandez, A.C., Mexico City, Mexico

NEW HORIZONS IN REGIONAL SCIENCE

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Robert Stimson, Roger R. Stough and Maria Salazar 2009 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: 2009928604

ISBN 978 1 84844 059 3 (cased) Typeset by Cambrian Typesetters, Camberley, Surrey Printed and bound in Great Britain by MPG Books Group, UK

Contents List of figures Preface Acknowledgements 1.

vi vii ix

A new perspective on regional endogenous development

1

PART I DEVELOPING A NEW CONCEPTUAL MODEL FRAMEWORK FOR ENDOGENOUS REGIONAL ECONOMIC GROWTH AND DEVELOPMENT: INCORPORATING RESOURCE ENDOWMENTS AND MARKET FIT, LEADERSHIP, INSTITUTIONAL FACTORS AND ENTREPRENEURSHIP 2. 3. 4. 5. 6.

A new conceptual framework for regional endogenous development Resource endowments and market fit Leadership Institutions and institutional factors Entrepreneurship

19 25 32 43 64

PART II EXAMPLES OF REGIONAL DEVELOPMENT INITIATIVES INVOLVING LEADERSHIP AND INSTITUTIONAL FACTORS: CASE STUDIES FROM NORTH AMERICA, EUROPE AND THE PACIFIC RIM 7. 8. 9. 10.

Case studies from the United States Case studies from Europe Case studies from the Pacific Rim Modeling endogenous regional economic development: measurement, operational issues and conclusions

References Index

75 90 112 122 133 147

v

Figures 1.1 1.2 1.3 2.1 2.2 2.3

The Harrod–Domar and the Solow production functions The neoclassical production function Production function and increasing returns to scale The virtuous circle for sustainable regional development The regional competitiveness performance cube (RCPC) A new model framework for regional endogenous development

vi

5 6 9 20 21 23

Preface Increasingly leadership and institutional factors are being seen as playing important roles in the process in regional endogenous growth and development. The so-called ‘new growth theory’ emphasizes endogenous processes and while some of the literature does refer to leadership and institutional factors, including entrepreneurship, there has been little analysis of the explicit roles that leadership and institutional factors play in the growth and development of cities and regions, and in particular there seems to be no published material that attempts to model and measure the impacts of leadership on regional growth and development and limited work that considers such a role for institutions. In this book we set out to give explicit attention to the role of leadership and institutional factors in the growth and development of cities and regions. Our objective is to provide a detailed rationale for the study of leadership and institutional factors, including entrepreneurship, in the growth and development of cities and regions, and to demonstrate why leadership, institutions and entrepreneurship can – and indeed do – play a crucial enhancing role as key elements in the process of regional endogenous growth. The book is organized into ten chapters and two parts. The introductory chapter provides a brief overview of the evolution of the new growth theory in regional economic development in which the emphasis is on endogenous factors. We discuss leadership and institutional factors in that context. Part I of the book contains five chapters in which we focus attention on endogenous processes. In Chapter 2 we discuss a framework for regional endogenous development which incorporates a ‘virtuous circle’ for the sustainable development of a region. The chapter proposes what we call a ‘regional competitiveness performance cube’ (RCPC) as a conceptual model in which the interplay between regional resource endowments and market fit, on the one hand, and leadership and institutional factors, incorporating entrepreneurship, on the other hand, may interact to propel a region on a path of enhanced growth and development. A ‘new model framework for regional endogenous growth and development’ is proposed, which explicitly incorporates these factors as mediating variables in the model. In Chapters 3, 4, 5 and 6 we focus the discussion in turn on ‘resource endowments and market fit’, ‘leadership’, ‘institutional factors’ and ‘entrepreneurship’. The chapters provide a discussion of the nature of those factors and vii

viii

Leadership and institutions in regional endogenous development

how they affect and/or enhance the process of regional growth and development. Those chapters incorporate reference to some of the key literature on those topics. Part II of the book contains three chapters of ‘case studies’ of cities and regions from around the world in which we highlight how leadership and institutional factors have enhanced the regional development process. Chapter 7 has case studies on places in the US, while Chapter 8 has case studies from Europe and Chapter 9 has case studies from the Pacific Rim region. The case studies reviewed in these chapters are from already published works, and are chosen to explicitly demonstrate how leadership and institutional factors have played crucial roles in the development of the particular city or region in question and how those factors have played crucial roles in the endogenous growth and development process, especially as catalytic factors in helping turn around regions that were in decline. The final chapter proposes a new ‘operational model framework of endogenous growth and development’ which incorporates proxy measures of leadership, institutional factors and entrepreneurship as variables that mediate the impacts of resource endowments and market fit on regional growth, placing emphasis on the effects those endogenous factors may have on the development of cities and regions. There is a discussion on how to operationalize the model. This book represents ‘work in progress’, and much remains to be done in empirically testing the new model frameworks of endogenous regional growth and development that are proposed. As we discuss in Chapter 10, that presents considerable challenges because of the lack of readily available information and data bases to generate the variables on leadership and institutional factors that are required to operationalize the new model framework discussed. However, we trust that this book does demonstrate the potential significance of leadership and institutional factors, including entrepreneurship, as key intervening or mediating factors in the process of regional endogenous growth and development. We believe it fills a notable gap in the regional science literature that focuses on endogenous growth within the context of the ‘new growth theory’.

Robert Stimson and Roger Stough October 2007

Acknowledgements There are a number of people who have provided invaluable assistance to the authors in the preparation of this book. First and foremost is Dr Maria Salazar, who was a graduate student at George Mason University working with Roger Stough. She collaborated with the authors as a research assistant and prepared much of the material for the case studies in the chapters in Part II of this book. She also co-authored several papers that were written by the authors while undertaking the research which led to the development of the new theoretical framework for conceptualizing regional endogenous growth and development on which the chapters in Part I are based. Alistair Robson, a former graduate student at the University of Queensland who worked with Robert Stimson, also contributed to the research on which the chapters in Part I draw. Secondly, we wish to thank Ginta Palubinskas in the School of Public Policy at George Mason University who drafted the initial version of the case study on Tampera, Finland and Tracey Johnstone in the UQ Social Research Center at the University of Queensland who worked with the authors to help prepare the text and diagrams for publication. The authors wish to acknowledge the financial support of the Australian Research Council Linkage International Scheme (grant #LX0346785) and the George Mason University Foundation for a research project on ‘Regional Economic Development and Performance: Roles of leadership and Institutional Factors in Endogenous Growth’ which forms the basis of this book.

ix

1. A new perspective on regional endogenous development 1.1

REGIONAL ECONOMIC DEVELOPMENT: A PROCESS AND AN OUTCOME

This book is about the role that leadership and institutions play in regional economic development. A major, if not the most important, long-term objective of regional economic development is to internalize a process that ensures sustainable development. Such a process begs for and enables a proactive strategic approach to development, as against a reactive approach, to managing risk in adjusting to changing circumstances. We propose that leadership and institutions, along with entrepreneurship, play crucial roles in maintaining and enhancing regional economic performance and achieving sustainable development. Of course a region’s resource endowments, and the regional economy’s ‘fit’ with respect to market conditions, are also crucial factors affecting regional economic performance. But our argument is that leadership (including entrepreneurship) and institutional factors may serve to enhance or detract from the effectiveness and efficiency with which those resource endowments are used and how markets are captured. Our view is that strong leadership means a city or a region will be proactive in initiating regional economic development strategy to: • • •

set a vision for the future development of the region implement plans and processes that facilitate institutional change monitor regional performance and adjust strategies and plans.

This, in turn, will 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 book we outline a new framework to conceptualize regional economic development that explicitly encompasses this perspective. Theories 1

2


and approaches to endogenous regional growth and development that have been emerging – particularly over the last 20 years or so (and even longer into the past) – tend to neglect or at best underplay the role of leadership, and the way institutional factors are considered is usually simplistic. Our approach, which builds on the contributions of many writers who have addressed endogenous processes in regional growth and development, is an integrative approach in which we propose a model of regional endogenous development that puts leadership and institutional factors, along with entrepreneurship, as explicit and key mediating variables between the traditional focus on resource endowments and market factors as independent variables impacting regional growth and development. Regional economic development seems to defy precise definition. For example, Blakely (1994) proposes that local or regional economic development is a function of a wide range of factors. He says it is: a process in which local governments or community based organizations are engaged to stimulate or maintain business activity and/or employment. The principal goal of local economic development is to stimulate employment opportunities in sectors that improve the community, using existing human, natural and institutional resources. (p. xv)

Blakely gives this definition of regional economic development (RED): RED = f (natural resources; labour; capital; investment; entrepreneurship; transport; communication; industrial composition; technology; size; export market; international economic situation; local institutional capacity; national, local and state government spending; development schemes). (p. 53)

Such an array of factors encompasses both exogenous and endogenous variables. These concepts are encapsulated in Malecki’s (1991) definition of regional economic development, which he defines as: a combination of qualitative and quantitative features of a region’s economy, which the qualitative or structural [are] the most meaningful … The qualitative attributes include the types of jobs – not only their number – and long-term and structural characteristics, such as the ability to bring about new economic activity and the capacity to maximize the benefits which remains within the region. (p. 7)

And he goes on to say: the standard theory of economic growth and development has concentrated on quantitative changes, despite an increasing awareness that regional growth depends, often critically, on aspects that are understood only in comparison with other regions or nations. The facts of regional development suggest that it is not enough to rely on the concepts of growth without an equivalent concern for the forces which


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commit growth to take place, or prevented it from occurring. These are the concerns of regional development, whether examined at the national, sub-national or local scale. (p. 7)

Regional economic development might thus be viewed as: • • •

being a multi-dimensional phenomenon involving a wide array of factors representing a complex process.

It needs to be seen as: • being both a product and a process • incorporating both qualitative and quantitative characteristics • incorporating a policy dimension • being influenced by strategy and the implementation of plans and mechanisms to facilitate regional change • being dynamic. Regional economic development is quantitative with respect to the measured benefits it creates through increasing wealth and income levels, the availability of goods and services, improving financial security, and so on. It is qualitative in creating greater social/financial equity, in achieving sustainable development, and in creating a spread in the range of employment and gaining improvements in the quality of life in a region. Regional economic development might no longer be viewed as something that is concerned primarily with the manipulation of capital, labor and technology to maximize production in response to prices and markets; rather, there are fundamentally new value systems and factors that are beginning to underpin economic systems, many of which we do not yet fully understand. The multi-dimensional aspect of economic development led Stimson et al. (2002) to propose the following definition: Regional economic development is the application of economic processes and resources available to a region that results 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. (p. 7)

While that definition is far from perfect, it does reflect a shift in economic product and process thinking. Stimson et al. (2002) say this: A balance between the qualitative and quantitative goals of economic development presents a challenge to traditional neoclassical economists and to the emerging

4

Leadership and institutions in regional endogenous development breed of economists who recognize that regional economic development can occur on a more sustainable basis. This is not to suggest that neoclassical theory ideas should be dismissed – far from it. Rather, they need to evolve to accommodate those changing values that society holds on expected gains from economic development. (p.7)

1.2

EVOLUTION OF REGIONAL DEVELOPMENT THEORY

Over time, various approaches to theory about economic growth and development have evolved, and much of that theory has been formulated in a nonspatial context. Traditional neoclassical economic growth theory, based largely on the famous Solow (1956) model, has been replaced by a suite of models and arguments that are known as new growth theory (Romer, 1986, 1990; Barro, 1990; Grossman and Helpman, 1991; Rebelo, 1991; Arthur, 1994) and evolutionary economics (Nelson and Winters, 1982). 1.2.1

Neoclassical Theory and Production Functions

Most models of economic growth focus primarily on the basic factors of production: the capital stock and the labor force. Natural resource endowments are sometimes incorporated as a third factor but most often are subsumed as part of the capital stock. Standard growth models have at their core one or a series of production functions. Production functions measure the value of output, given the value of the factors of production (that is, capital and labor). In the basic growth model, economic growth (Y) occurs by either increasing the capital stock (K) through new investment in factories, machinery, equipment, roads and other infrastructure, and through increasing the size of the labor force (L), or both. Thus, Y= f (K, L)

(1.1)

This production function is at the heart of every model of economic growth. It can take many different forms, depending on what we believe is the true relationship between the factors of production and output. Recent work by Audretsch and Keilbach (2005) that adds the notion of entrepreneurship capital to the mix of inputs illustrates this point. The relationship being modeled by the production function approach depends (among other things) on the relative abundance of each factor, how efficiently each is used, and the mix of economic activities. Much of the debate in the academic literature on economic growth seems to be about how to best represent the aggregate


5

production process. Audretsch and Keilbach (2005) and others are driving the debate in new directions. The Harrod–Domar (H–D) growth model in the 1940s assumed that K and L are used in constant ratios and always used in fixed proportions to produce different levels of output. Over short periods and in the absence of severe economic shocks the model predicts growth pretty well. However, that model is very rigid since it requires that the capital–labor ratio must always grow at the same rate. In the mid 1950s, Robert Solow (1956, 2000) recognized the problems that arose from the rigid production function in the H–D model, which did not allow for substitution between factors of production. Solow’s answer was to drop the fixed coefficients production approach and replace it with a neoclassical production function that allows for more flexibility and substitution. The difference is illustrated in Figure 1.1. Two influential studies by Abramovitz (1956) and Solow (1956) presented a major challenge to the then conventional view that capital and labor are the main engines of economic growth. While examining different time periods and using different methods, those studies reached the important conclusion that no more than 15 pe cent of the measured growth in US output in the late 19th century and the first half of the 20th century could be accounted for by the growth in measured inputs of capital and labor. A prime candidate accounting for the ‘residual’ was technological change (T), although the residual captured or served as a measure of all the growth in input that could not be attributed to growth in measured inputs of capital and labor. Y

Y (Harrod–Domar) Y (Solow) K Source:

Adapted from Bretschger (1999: 26).

Figure 1.1

The Harrod–Domar and the Solow production functions

6


The neoclassical production function, which allows substitution between capital and labor in its general form, is thus augmented to: Y= F (K, L, T)

(1.2)

However, a limitation in this neoclassical growth model is that T is not a production factor like K or L. Neoclassical theory credits the bulk of economic growth to an exogenous or completely independent process of technological progress. That is, to obtain ‘unceasing growth’, one must consider an external factor that increases the productivity of inputs over time (Freeman, 1997: 325; Hayami, 2001: 171). Though intuitively plausible, that approach had at least two drawbacks. First, using the neoclassical framework, it is impossible to analyse the determinants of technological advance because it is completely independent of the decisions of economic agents. Second, the theory fails to explain large differences in residuals across countries with similar technologies. The neoclassical production function is illustrated in Figure 1.2. 1.2.2

Comparative Advantage

A fundamental principle in regional economic development is that of spatial interaction through the movement of goods, services and people. International trade theory has held as a central tenet the notion of comparative advantage and disadvantage in the factor mix between regions which renders a region advantageous or disadvantageous vis-à-vis another region as a result of those differentials in cost and resource endowments. Thus trade occurs and regional specialization emerges. Y y′ y

Technical Progress

K Source:

Adapted from Bretschger (1999: 31).

Figure 1.2

The neoclassical production function


7

Export-based theories of regional development have placed emphasis on foreign investment and/or outside exploitation, the income raised from exports being the impetus for growth, with regional specialization emerging as a consequence of the play out of these factors. For example, Rostow’s (1960) model of sequentially staged economic development provides this perspective of internal growth, export base and economies of scale, attributing economic development to changes occurring within a region through processes such as the application of technology to a local resource and/or the rise of purchasing power. Rostow introduced into this analysis the notion of a leading sector in the process of regional development. However, an important consideration in the notion of export-led growth driving internal growth is that as trade develops, involving larger numbers and a larger scale of production, then certain competitive advantages emerge through scale and scope economies. Counter-arguments to neoclassical theories of growth that emerged from the 1950s included polarization theory, as represented by Perroux (1950), Myrdal (1957) and Hirschman (1958), and more recently work on industrial districts and business clusters (Feser, 1998). Advocates of polarization theory argued that production factors are non-homogeneous, that markets are important, and that the price mechanism is disturbed by externalities and economies of scale. Deviations from equilibrium are not corrected by counter effects; rather, they set off a circular or cumulative process of growth or decline, with a complex set of positive and negative feedback loops contributing to a growth process the direction of which is fundamentally undetermined. In the spatial context of regions, these feedback effects generate spread and backward effects, transferring impulses from one region to another. Spatial structure can be an important element in this process of growth, generating leading and lagging regions that are interdependent. It is argued that it is not only economic, but also social, cultural and institutional factors that explain why some regions prosper while others do not. 1.2.3

‘New Growth Theory’ and the Competitiveness of Regions

Increasingly, with the transformation from an economy based on physical production to one based on knowledge-intensive production, there was questioning of the traditional neoclassical models of economic growth, and by the late 1980s and early 1990s endogenous growth became a new model focus for regional growth and development. For example, in a study of the US, Japan, France, Germany and the UK, Denison (1979) found that capital investment growth in those countries accounted for less than half of their economic growth. That is, increases in output were not as heavily attributable to capital investments as thought but more to improvements in human capital (the quality of labor, education, training and experience) (Malecki, 1991). The influence of

8


that type of empirical study, and the attempt to incorporate those mechanisms into theory led to the emergence of what is called the new growth theory. Work in new growth theory does separate endogenous and exogenous factors for analytical purposes. However, the importance of endogenous factors – through which growth is a product of factors within the region – is viewed as being fundamental, arising from the knowledge base of a region and how it is enhanced through learning to become a continuous process (as proposed early on by Arrow, 1962) and an internally created source of competitive advantage (Romer, 1986, 1990; Lucas, 1988). The driving force of regional economic development is the endogenous capability of a region to learn and innovate (Saxenian, 1994; Jin and Stough, 1996). While somewhat eclectic in nature and still evolving, the new growth theory represents the contemporary thrust in development theory (Todaro, 1994: 88–9). Advocates of new growth theory seek 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. In new growth theory, models of regional economic development allow for either agglomeration effects or market imperfections. And they also allow for both convergence and divergence through the development process. In this new approach those cumulative processes which self-reinforce continuous growth or decline in a region assume a new significance through the explicit recognition of additional endogenous change processes, including entrepreneurship, learning, education, acquiring institutional capacity, the adoption of new technologies, as well as recognizing exogenous processes, such as the migration of firms and households (Karlsson et al., 2001: 4). Thus, the production function is expanded to include research and development (R) and human capital (H) development through education:

Y= f (K, L, T, R, H)

(1.3)

These variables are seen as ‘endogenous growth conditions’, and are supposed to generate spillovers and externalities, including economies of scale (Malecki, 1998a: 43–4). The term endogenous implies that economic growth is influenced by the use of ‘investment resources’ generated by the economy itself, in contradiction to the reference made to exogenous factors in the Solow model (Johansson et al., 2001: 3). Models of endogenous growth bear some structural resemblance to their neoclassical counterparts but they differ considerably in their underlying assumptions and the conclusions drawn (Todaro, 1994: 89). The most significant difference is that these models assume that the national economy is subject to increasing returns to scale; that is, a doubling of capital, labor and

A new perspective on regional endogenous development y

9

Production function of the new growth theory

Neoclassical production function

k Source:

Bretschger (1999: 180).

Figure 1.3

Production function and increasing returns to scale

other factors of production leads to more than a doubling of output. For example, investment in research or education not only will have a positive effect on the firm or the individual making the investment but also may have a positive spillover effect on others in the economy. This beneficial effect on others – called a positive externality – results in a larger impact from the investment on the entire economy. This interaction constitutes the externality. Since growth can perpetuate in these models without relying on assumptions of exogenous technological change they often are referred to as endogenous growth models. The production function may be represented as illustrated in Figure 1.3. What is significant about endogenous growth theory is that it places emphasis on the importance of local factors in creating and maintaining sustained development as opposed to ones external to the region. That is, models of endogenous growth suggest an active role for public policy and domestic actors in promoting economic development (Stimson et al., 2002: 277; Johansson and Karlsson, 2001: 3). 1.2.4 Explicit Considerations in the ‘New Growth Theory’ A considerable focus in the new growth theory literature has been on the notion that: • • •

research and development (R&D) innovation and new technologies the development of an innovative milieu

have been fundamental in explaining the rapid growth of some regions, and in

10


particular in accounting for the emergence of technology-intensive regions such as the Silicon Valley in the US (Saxenian, 1994). But that does link back to the importance of agglomeration and localization economies that lead to the development of new industrial spaces (Scott, 1988; Porter 1990; Krugman, 1991). In addition, some writers – such as Fukuyama (1995) – suggest that not just economic but also cultural factors are important in the rise of those new technology regions, supporting the innovative milieu thesis (Castells and Hall, 1994) and giving weight as well to the roles of entrepreneurship and leadership as key factors in regional growth (Rees, 2001). Modern production systems are centered on skills, information and interpersonal contacts. For example, evidence from Japan and from the newly industrialized countries (NICs) showed that the success derived from bringing these factors into play in an economy will determine the success or failure of nations in achieving sustainable development. The NICs have emphasized development of human resources through education, an emphasis on R&D, and technological learning. At the same time, these factors have been linked to both local networks of suppliers and to external markets (Malecki, 1991: 152–279). R&D generally serves two functions – learning and the pursuit of technological innovation – which provide industries with the tools to absorb new technology and create new products. As Malecki (1991: 53) says: ‘New product innovations are the primary route of entry on new firms and new industries, and thus the greatest source of new jobs in an economy’. In most developed countries, R&D is highly linked to production, and as a result R&D is mostly performed by private sector industries. However, linkages between universities, government research institutions and industries are common and even more such linkage is promoted by government policies since evidence shows that market mechanisms alone might be insufficient (Malecki, 1991). Silicon Valley in California and Route 128 in Boston in the US are examples of this phenomenon. Skills are crucial to R&D and for the creation of new products. As Malecki (1991) says: Skills make possible the accepting and interpretation of information, for improvement and enhancing technology, and for generating new knowledge. They ultimately determine economic outcomes. (p. 320)

Evidence from developed countries show that ‘skilled people are the key element in the networks that tie a place to other places and keep innovativeness alive’ (Malecki, 1991: 272). The contrary is also true, with the lack of an adequate base of skills preventing or complicating technology transfer and making it more difficult for learning capabilities to take place (ibid.: 275).


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There is plenty of evidence to show that the proliferation of technology is increasingly driving economies into knowledge-based, capital-intensive production rather than labor-intensive production. Writing in the 1990s, (Porter, 1990: 77; Malecki, 1991: 319) indicated that in the proximate future, few high paying jobs would exist for the unskilled and low skill jobs (such as laborers) and that those jobs were expected to decrease by more than 50 percent. Linkages between economic and education units create spillovers not only because of the development and diffusion of new technologies, but also because of the process of learning and innovation that is created through the interaction between researchers, producers and suppliers (Malecki, 1991: 173). Moreover, networks of firms and the existence of an active R&D environment complement and allow firms to gain access to the links and assets necessary to succeed in the new or knowledge-intensive economy (ibid.: 190). University research is shown to greatly influence the location of high technological clusters and high technology employment (Anselin et al., 2000). An analysis by Malecki (1998a) of seven high-tech areas (such as Silicon Valley, Greater Boston, Research Triangle and Western Crescent in the US, Cambridge in the UK, Munich in Germany and Kyushu in Japan) found that the linkages between R&D units, the education infrastructure, and the size of the city are: ‘the most significant factors behind the success of these high-tech areas’ (Malecki, 1998a: 264). In the development of endogenous growth conditions organizational and institutional structures seem to play important roles. For example, the three main actors in the development of human resources are: • • •

governmental agencies education institutions innovative firms and entrepreneurs.

The role of government with the influence of diverse stakeholders establishes many of the institutional norms and makes decisions regarding educational actions. The role of higher education institutions is to provide education and R&D services, employ personnel and R&D activities according to their specific requirements for production; and the competencies that originate and devolve from the educational system. This general realization has led several authors to expand the theory of endogenous growth to include a broader array of variables into models of regional economic development. For example, some models now do attempt to provide a way to see how community and institutional and non-traditional economic variables influence economic development (Johansson and Karlsson, 2001: 3). Some examples of institutional and non-traditional economic variables might be leadership and the

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cooperation of local leadership groups in influencing regional economic performance, entrepreneurship and the associated spontaneity which may alter the economic orientation of the region, and social capital which may contribute to increasing returns to a regional economy by reducing transaction costs (Johansson and Karlsson, 2001; Stimson et al., 2002).

1.3

ENDOGENOUS GROWTH: POLICY AND STRATEGY CONSIDERATIONS

The concept of a learning region has evolved, based on the premise that the agility and/or response capability of a region is dependent on its learning infrastructure (Simmie, 1997; OECD, 2000) and the way it uses knowledge and ideas to maintain a competitive advantage through the learning process (Maillat and Kibir, 2001: 255). Florida (1995) says learning regions: function as incubators and repositories of knowledge and ideas, and provide an underlying environment of infrastructure which facilitates the flow of knowledge, ideas and learning. Learning regions are increasingly important sources of innovation and economic growth, and are vehicles for globalization. (p. 520)

Knowledge creation through learning has thus become a central proposition of the endogenous growth theory formulation (Stimson et al., 2002: 276). Through learning it is not possible to envisage how a closed regional economic system could survive, develop and maintain itself. However, exogenous factors – such as trade, labor mobility and migration, knowledge and innovation diffusion, foreign exchange, business cycles, capital mobility, monetary and fiscal policies imposed by higher levels of government, and the decisions made in headquarters of firms affecting operations locally – all remain important to a region’s economic performance and its development over time. Those factors are not substantially under the control of local decision-makers. The increasing importance being placed on the role of endogenous forces in regional economic development does raise significant issues for the role of policy and strategy and their meaning. Karlsson et al. (2001: 5–6) pose these questions: What is the role for national policy and for regional policy? Are top-down policies appropriate, desirable and effective? Are bottom-up policies capable of impacting locations beyond the region and in what ways? What should be the combinations of top-down and bottom-up policies?


13

What are the roles of culture and values, and how do they vary from place to place? Can policies be created and implemented that will effectively and efficiently induce self-organizing adjustment processes? Not surprisingly, contemporary thinking is diverse on how to plan for a process to facilitate regional economic development in an environment of global competition, rapid change and a concern over sustainability (Stimson et al., 2002: 8). Imbroscio (1995) advocates strategies for greater self-reliance; McGee (1995), Park (1995) and Ohmae (1995) advocate regional economic development strategies based on strategic alliances and inter- and intraregional network structures, including digital networks (Tapscott 1996); and Sternburg (1991), Hall (1995), Henton (1995), Stough (1995), Waites (1995) advocate the need to base regional economic development on the growth of clusters of industries. But as Stimson et al. (2002) point out, there remains: ‘no universal model or framework guaranteeing success for regional economic development’ (p. 38). It can be argued that the focus on endogenous growth processes in policy terms is related to the philosophies of both liberalism and neoliberalism: • Liberalism embraces the belief that unencumbered individual decisionmaking and individual action are the appropriate and beneficial basis for the socio-political and economic organization of society. • Neoliberalism, while embracing that view, additionally asserts that the best outcomes for society will be achieved when the state retreats from intervention in such matters. The latter is seen in much of the current policy dogma in local or community development (see, for example, Ife, 2002), which argues that enhanced self-reliance amongst an empowered local population has the potential to bode positive social and economic change, with local integration into national and international economies occurring through local regions exploiting their competitive advantage and fostering economic diversification (OECD, 1993), aided and abetted by free market, enhanced competition, efficiency and effectiveness policies (D’Arcy and Giussani, 1996; Stillwell, 2000). HerbertCheshire and Lawrence (2001) draw attention to the link in these arguments to entrepreneurship and the role of the entrepreneur as an innovator (Kurato and Hodgetts, 1998), an issue to which we return later. Stimson et al. (2002: 277) state that: what is significant about endogenous growth theory is that it emphasizes the importance of local factors in creating and maintaining sustained development as opposed

14

Leadership and institutions in regional endogenous development to ones external to the region … [it] … provides a way to see a broad array of community and institutional and non-traditional economic variables – including learning, leadership and social capital – as major inputs to a successful regional economic development process … Endogenous growth theory embodies the notion that it is possible for regional economic growth and development to be sustained by local internal forces.

Stimson et al. (2002) refer to the importance of the following in that process: • • • • • •

1.4

learning and learning agents leadership institutions and institutional structure infrastructure (and especially ‘smart infrastructure’) human capital networks and alliances.

CONCLUSION

There have been criticisms of the new growth theory. For example: • It can be argued that it is extremely difficult to identify anything approximating a knowledge-producing sector in real economies. • Significant problems do remain over how human capital should be measured in empirical work; for example, whether stocks of, or increases in, education best reflect human capital. • There is no agreed mathematical model that can capture properly the effects of factors such as leadership, institutional arrangements, social capital, or values. Thus, while new growth theory has made important contributions to our understanding principal sources of endogenous growth, it has not as yet provided a specific model for measuring their impact. And nor has it developed an operational procedure demonstrating how to incorporate those endogenous factors and processes into models of growth and productivity. But what endogenous growth theory does do is to make it abundantly clear that, in addition to factor costs or price differentials, factors such as those discussed in this chapter are important in regional economic development. Regional economic development thus cannot be reduced to a narrow set of economic factors; rather it will be influenced by a range of social and cultural factors as well. That includes leadership and institutional factors. The ability of a region to effectively address these endogenous factors will significantly


15

determine its agility and rapid response capability in responding to changing circumstances and will affect its capacity to ride shocks. Thus, the new framework we propose in this book to conceptualize the economic development and competitive performance of a region is firmly embedded in endogenous growth theory.

PART I

Developing a new conceptual model framework for endogenous regional economic growth and development: Incorporating resource endowments and market fit, leadership, institutional factors and entrepreneurship

2. A new conceptual framework for regional endogenous development 2.1

A ‘VIRTUOUS CIRCLE’ FOR REGIONAL DEVELOPMENT

The idea of ‘sustainable development’ – paying explicit attention in regional development to what is being called the ‘triple bottom line’ – may be conceptualized as a virtuous circle as set out in Figure 2.1. We suggest that that circle is maintained by effective leadership as it is used to change and adjust institutions in order to adopt the structure, processes and infrastructure of a regional economy to meet and anticipate changing circumstances, and to facilitate the optimal use of its resource endowments and to assist industries to tap their full market potential and achieve market fit. As outlined at the beginning of Chapter 1, our view is that strong leadership means a city or a region needs to be proactive in initiating regional economic development strategy to monitor regional performance. It needs to set a vision for the future development of the region, and implement plans and processes that will facilitate institutional change and encourage and facilitate entrepreneurship. This, in turn, will likely have the effect of enhancing the capacity and capability of the city or region to positively adjust to changing circumstances helping it to attain a good and/or improved fit with market conditions, and for it to more effectively harness its resource endowments in order for it to maintain and improve regional performance and for it to achieve a sustainable development path as a learning region, and for it to be one that is competitive and entrepreneurial. We are advocating this process; and we are also arguing that this is the process that, while often used, is all too often used in a less than thoughtful manner and not in a pre-planned way. Our argument is derived from the notion that the presence of leadership in regions that are performing well, or which have been re-engineered and turned around from performing poorly to perform better, has been crucial in providing the right policies and creating and facilitating the right environment. The Silicon Valley region in the US, for example, has channeled resource endowments into efficient allocations (Leipziger, 1997). In such places, leaders have initiated crucial institutional reforms, policies, projects and environments that benefited citizens in general (Rowen, 1998). 19

20


Source:

The authors.

Figure 2.1

2.2

The virtuous circle for sustainable regional development

A CONCEPTUAL FRAMEWORK: THE REGIONAL COMPETITIVENESS PERFORMANCE CUBE (RCPC)

A three-dimensional conceptual model has been proposed (Stimson, Stough and Salazar, 2003) to illustrate how a city or region’s economy might move from a sub-optimal to an optimal position within what we have called the regional competitiveness performance cube (RCPC). This is represented in Figure 2.2. The dimensions of the cube are: • • •

strong vs. weak leadership (L) effective vs. ineffective institutions (I) good vs. poor resource endowments and market fit (REM)

The REM dimension may be split into (a) resource endowments, and (b) market fit, to produce a four-dimensional RCPC hyper cube. However, for simplicity we use the three-dimensional representation as our focus in this book is more on the L and I dimensions of the cube. At any point in time a city’s or a region’s economy will locate somewhere within the sphere of the RCPC. Regions will vary greatly on the REM dimension, particularly concerning the magnitude, quality and mix of their resource

A new conceptual framework for regional endogenous development

The most desired or optimal position for a region

I RE M

RE M

21

L

L d

G oo

R E eso an ndo urc Fi d M wm e t( a e RE rk nt M et s )

r

RE M

I

Po o

Leadership (L)

Source:

Weak

The least desired or sub-optimal position for a region

L

Strong

I

Ineffective

Institutions (I)

Effective

The authors.

Figure 2.2

The regional competitiveness performance cube (RCPC)

endowments, and also with respect to the prevailing market circumstances, the competitiveness of their industries and the effectiveness of their institutions in seeking to achieve a ‘fit’ with prevailing market conditions. Those in turn affect the capacity of a region to tap into market opportunities and facilitate entrepreneurship. Our proposition is that the performance of a region on these three dimensions – L, I and REM – in the RCPC will condition a region’s position at a given point in time within the RCPC and its path or trajectory over time through the RCPC. Few, if any, cities or regions will have a perfect fit because markets and market demand are dynamic due to the changing circumstances of both endogenous and exogenous factors. Our proposition is that at all times a regional economy needs to be trying to adjust its institutions and productive organizations so as to maintain and enhance market fit by efficiently and effectively harnessing its resource endowments to be competitive, and thus to sustain itself. Some regions do this better than others; and how well a regional does it can change dramatically over time, for better or for worse. Thus, the trajectory over time of a city or region through the performance space represented by the RCPC will be dependent on the evolving interactions between the efficiency and effectiveness with which L and I provide catalytic

22


processes and create situations conducive to the harnessing of its REM. We would argue that regional economic development strategy needs to be formulated, and that appropriate plans need to be developed and mechanisms implemented that are geared towards shifting the position of a region within the RCPC towards the top right-hand corner of the cube in order to achieve a position that reflects performance optimality for a sustainable development outcome.

2.3

A MODEL OF REGIONAL ENDOGENOUS DEVELOPMENT

Using the three dimensions defining the axes of the RCPC in Figure 2.2, and in addition giving explicit consideration to the importance of entrepreneurship (E), Stimson et al. (2003), Stimson, Stough and Salazar (2003) and Stimson and Stough (2004 and 2005) have proposed a new model framework for regional endogenous growth and development that is depicted in Figure 2.3. That model may be represented as follows where REM is resource endowments and market fit: RED = f [REM mediated by (L, I, E)

(2.1)

In the model the outcome of the regional economic development process (RED) is the degree to which a region has achieved a competitive performance, displays entrepreneurship, and has achieved sustainable development. Those outcome states are defined as the dependent variables in the model. That outcome state is conceptualized as being dependent on a set of quasiindependent variables relating to a city or region’s resource endowments and its ‘fit’ with market conditions (the REM axis in the RCPC in Figure 2.2), that being mediated through the interaction of sets of intervening variables that encompass factors defined as leadership and institutions (the L and I axes in the RCPC in Figure 2.2) which may interact to facilitate, encourage or suppress entrepreneurship (E). Importantly, the new model framework represented in Figure 2.3 is seen to incorporate both direct and indirect effects in the interactions between REM (the quasi-independent variable) and L, I and E (the intervening variables). Also, the interactions between the intervening variables L, I and E may be both direct and indirect. It is suggested in Figure 2.3 that these dynamic interrelationships and how they evolve and operate over time will shape the nature of the development and performance of a region, which may be measured and evaluated and benchmarked using well-developed and tried tools of regional economic analysis, including, for example, shift–share analysis (Stimson et al., 2006) and in particular through a focus on the regional shift component.

23 (L) Leadership

(I) Institutions

(E) Entrepreneurship

The dynamic interrelationships that act to create the catalysis for regional development

Intervening Variables

A new model framework for regional endogenous development

The authors.

Figure 2.3

Source:

Indirect Effects

Direct Effects

Resource Endowments and Market Conditions (REM)

Quasi-Independent Variables

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

(RED)

OUTCOME A Region that is: Competitive Entrepreneurial Sustainable

Dependent Variables

24


The crucial dynamic depicted in Figure 2.3 is how the intervening variables (L, I and E) interact to create catalysts for more effective and efficient utilization of a city or region’s resource endowments and how effectively it captures market opportunities. In other words, the interaction of L, I and E become the crucial catalytic factors in shaping not only the performance of a region – especially in influencing how effectively the REM factors are utilized and tapped – but also in enhancing the capacity and capability of a city or region to efficiently, effectively and successfully address the challenges and contingencies it faces over time in dealing with uncertainty and risk and in coping with change.

2.4

OVERVIEW

Our proposition is that regions inevitably are influenced by their institutions, leadership, social composition, economic structure and the degree of entrepreneurial activity – all of which interact and evolve in a unique manner over time and display a unique set of circumstances and a particular outcome state at specific times. The conceptual model framework developed above stresses the dynamic uncertainty of reality that confronts regions in the contemporary world. Regional economic development over time is the outcome state of those independent and mediating factors and processes that affect regional economic development. In the model in Figure 2.3, RED may be measured and evaluated through performance indicators which relate to: • the competitive performance of a city or region vis-à-vis other places • the degree of entrepreneurial activity occurring • the degree to which it has attained sustainable development vis-à-vis ‘triple-bottom-line’ economic growth and performance, social equity, and environmental quality indicators. A way to conceptualize that outcome state for a city or region at any point in time, and its progress in economic development and its performance through time, is to envisage its path through the regional competitiveness performance cube (RCPC) as proposed in Figure 2.2. In the four chapters that follow we elaborate on the components of the model framework that represent the independent and mediating variables – REM, L, I and E – and explain why they are such crucial interrelated factors shaping the competitive performance of a region (RED), the dependent variable in the model.

3. Resource endowments and market fit 3.1

INTRODUCTION

This chapter considers the REM dimension in the model discussed in Chapter 2, namely resource endowment and market fit. It is widely recognized that economic growth and performance are related or tied to the resource endowments of a region and also to market conditions and the markets a region serves and which it potentially might tap – what we refer to as market fit. Thus, as stated by Stough et al. (2001: 178): ‘The better endowed a region is in terms of resources the better it should perform ceteris paribus.’ The capacity of local leaders to act and the capacity of institutions to be effective will be considerably dependent on the resources available to them; but conversely the effectiveness and efficiency of leadership and of institutions in a region can act to enhance its resource endowments and its capacity to tap markets.

3.2

THE NATURE OF RESOURCE ENDOWMENTS

3.2.1 Factors of Production and Other Considerations In the context of local economic development planning, Blakely (1994: 144) refers to the ‘5Ms’ that represent resources crucial to the economic development process and which need to be evaluated as part of strategy formulation. These are: • • • • •

materials manpower management markets money

They are similar to those resource endowments traditionally considered in economics as factors of production, namely: natural resources, land, labor, capital and entrepreneurship. 25

26


The resource endowments of regions are diverse and differ markedly from place to place. They include: • • • • • • • • • • • 3.2.2

the area size of the region natural resources, such as climate, land, topography, materials regional locational and environmental assets historical economic base and industry structure and diversity entrepreneurship investment capital competitive position population and human capital technological and other infrastructure access to markets; agglomeration economies and so on (Fainstein, 1983: 32; Judd and Parkinson, 1990: 21). Enhancing Resource Endowments

Traditionally resource endowments of a city or region were seen to bestow either a comparative advantage or disadvantage on a place. However, a well endowed city or region might succeed even if it has few or relatively poor resource endowments or if there are few opportunities for economic expansion (Jessop, 1998: 96), and this may be achieved through strong leadership and effective institutions acting as the catalysts and facilitating entrepreneurial activity to stretch and leverage those resource endowments that exist and to enhance market capture. Conversely, poor leadership and inadequate, inappropriate or ineffective institutions often means those resource endowments are not being used effectively and that market opportunities are not effectively pursued and tapped. In that way a city or region might experience a competitive advantage or disadvantage. De Santis and Stough (1999) have linked the notions of leadership and resource endowments to develop an operational model to test the interaction of those dimensions with regional economic performance in a study of 35 metropolitan areas in the US. Their proposition is that once exogenous factors are controlled for, then regional economic performance depends on leadership and resources, with leadership modeled as a variable that amplifies the independent effect of resources. Their study is interesting because it links institutional factors to measures of resource endowments, focusing on corporate strength and human capital, as well as the presence of financial institutions, as aspects of resource endowment. Leadership variables are drawn from the notion of slack institutional resources, which Cyert and Marsh (1963: 36) define in the context of the firm as the difference between the resources made available to a firm and the total necessary for it to be maintained. De Santis

Resource endowments and market fit

27

and Stough (1999) propose that slack exists at varying levels and at various times in all organizations, representing ‘excess’ resources that may be manifest as sources of voluntary contributions to ‘civic activities’, or locally-based and focused community efforts by public, private and non-profit organizations and foundations. Such allocation of excess resources to those types of organizations and activities may be seen as enhancing both the leadership potential and the institutional capacity of a region. The De Santis and Stough (1999) study demonstrates that local regional leadership factors do enhance the resource base and are critical in explaining the strength of regional economic performance. Special importance is now also being placed in those resources that the public, private sector and non-profit sectors (NGOs) can direct towards community economic development or community problem-solving (Stough et al., 2001). The degree to which such actors and decision-makers commit resources into the community as well as the availability of resources for economic development will determine the scope and scale of local action, thus potentially enhancing the resource endowments of a region.

3.3

MARKET FIT

In the conceptual model framework outlined in Chapter 2 we specifically incorporate the notion of market conditions/market fit within the REM component of the model of regional endogenous growth and development, because the ability of enterprises in a region to engage in trade with other regions to capture market share outside as well as inside the region is crucial. For a long time economic base theory has told us this. 3.3.1

Comparative Advantage

Trade theory in economics tells us that the resource endowments of a region may bestow either a comparative advantage or disadvantage on a place. But more recently – as Johansson and Karlsson (2001) emphasize – the role of the functional region vis-à-vis its location, trade and industry specialization is being viewed in a different light. Location specialization and regional growth are more dependent on technology and scale effects together with influences from durable regional characteristics. Until the 1980s, comparative advantages were mainly seen as being derived from resource-based models, but since that time economic specialization has, to a large extent, increasingly been viewed as dependent on increasing returns, with differences in resources (factor initiatives) explaining only parts of trade flows and the location of production (this argument follows Krugman, 1981,

28


1991). With increasing returns as a basic explanation, trade was seen as developing because there are advantages in specialization among regions with similar resource endowments; thus specialization and trade are driven by scale rather than by comparative advantage, with the gains from trade arising because production costs fall as the scale of output increases. Johansson and Karlsson (2001) also show how the internal market potential of a functional region is the prime home market which, together with increasing returns to scale, may give rise to processes of endogenous growth (or decline). 3.3.2

Scale Effects and Agglomeration

Of course scale factors relating to the size and to the industrial diversity of a city or region and the market opportunities it represents, as well as its external markets and their size and scope, will also affect a region’s potential and the feasibility of it to tap markets and that will be of considerable importance in impacting the nature and rate of economic development and growth that might be achieved in a city or region. Maier (2001: 132) points out that new growth theory places increased emphasis on agglomeration effects. Patten (1991) argues that re-agglomeration of economic activity is occurring with the shift towards more flexible production modes. The scale effects of agglomeration do suggest that larger places – particularly large metropolitan cities – are likely to have a combination of resource endowments, market fit and other factors that provide them with an important advantage vis-à-vis smaller places. It is evident also that industry diversification is associated with urban scale, and that the role of new technologies – such as ICTs – is acting to enhance those effects (Duranton and Puga, 2000). Thus, we are not underestimating the effects of scale and agglomeration in our model of regional endogenous growth and development outlined in Chapter 2. Indeed, as seen in much of the recent work in theories of endogenous growth, local externalities (Scott, 1988; Feser, 2001) are key factors in the regional economic development process. 3.3.3

Competitive Advantage

Johansson and Karlsson (2001) propose a simple model that emphasizes the role of the functional region vis-à-vis: • location • trade • industry specialization


29

They see location, specialization and regional growth as dependent on technology and scale effects together with influences from durable regional characteristics. Johansson and Karlsson point out that up until the 1980s comparative advantages are mainly derived from resource-based models, but that since then economic specialization is, to a large extent, dependent on increasing returns and that differences in resources (factor initiatives) explain only parts of trade flow and the location of production (this argument follows Krugman 1981, 1991). With increasing returns as a basic explanation, trade develops because there are advantages to specialization among regions with similar resource endowments; thus specialization and trade tend to be driven by scale rather than by comparative advantage, with the gains from trade arising because production costs fall as the scale of output increases. Johansson and Karlsson (2001) also show how the internal market potential of a functional region is the prime home market which, together with increasing returns to scale, can give rise to processes of endogenous growth (or decline). Thus, resource-based and scale-based mechanisms combine. Regional market size is important as it extends market potential. When a region has both, its competitive advantage increases, and there will be an increased possibility of the region growing a wide range of industry sectors, many of which may be exported to other regions. Porter (1990: 1) notes how: competitiveness has become one of the central preoccupations of governments and industry in every nation [yet] there is no accepted definition of competitiveness. (p. xii)

However, it is now certainly regarded as a key element of regional economic development and it is a central thrust in many regional development strategies and plans. Stimson et al. (2002) state: if regional development is primarily concerned with the competitiveness of ‘factor costs’ of production and the maximization of profits to establish a favorable environment for investment or to compete for trade, [then] this may lead [regional] economies along unsustainable development paths, with undesirable social and economic outcomes. We need, therefore, to rethink the relationship between competitiveness and sustainable economic development. (p. 29)

Moore (1996) links competitiveness to collaborative arrangements, which include strategic alliances, partnerships and resource sharing, which we have discussed as endogenous factors in the context of institutions and institutional arrangements.

30

3.4


EXOGENOUS INFLUENCES

While the issues discussed above relate predominantly to factors that are endogenous to a region, in the context of contemporary globalization and the associated rapid growth in trade, increasingly some factors may be exogenous as well. This is seen, for example, in the internationalization of capital flows and the interregional movement of labour. Physical resources in particular are often playing less important roles as a result of the ability of regions to readily substitute between endogenously and exogenously sourced factor inputs. Thus, it is not necessarily the magnitude of volume of endogenous resource endowments that is crucial in the regional economic development process; rather, it is the capacity and capability of a region’s institutions and its leadership to capture those exogenous factors needed to enhance endogenous deficiencies and as well to create new endogenous capacity and capability. Doing so may be greatly enhanced through the effectiveness of the other two dimensions in the RCPC in Chapter 2 – the L and I dimensions – which we have already discussed at length. It is the combination of the way the L and I dimensions interact to enhance the REM dimension that is crucial, particularly in the context of the shift in focus from the comparative advantage to the competitive advantage of a region as being key in the development process to ensure a region’s industries and its supporting infrastructure to achieve a ‘fit’ with market opportunities in the broadest sense. Global and national processes of economic and political restructuring increasingly are imposing new challenges and opportunities to cities and regions. For example, deep-seated sectoral shifts have redefined the economic base of advanced capitalist economies. In places such as North America, Western Europe and Australia, these shifts have manifest themselves in the stagnation and decline in many mass production labor-intensive activities such as textiles and heavy manufactures. As a result, many cities and regions have experienced unfamiliar uncertainty as they could no longer rely on past practices but had to search for new economic activities and development strategies. For example, in the US, steel jobs in the city of Pittsburgh practically disappeared as firms closed and residents left before its reemergence as a center for information technology-based activities and producer services (Sheppard and Leitner, 1998: 286–7). The revolution in information and communication technologies (ICTs) and the accelerating pace of technology change, along with the mobility of capital, exacerbate that uncertainty and the rate and scope of the transformation that may occur in a city or region (Sheppard and Leitner, 1998: 287).


3.5

31

CONCLUSION

From the foregoing discussion it is evident that resource-based and scalebased mechanisms combine to impact regional development. Regional market size is also important as it extends market potential. When a region has both, its competitive advantage increases, and there will be an increased possibility of a region ‘growing’ a wide range of industry sectors, many of which may be exported to other regions. The recently popular concept of industry clusters is largely based on such premises. The challenges of globalization and other exogenous forces means that cities and regions – or even locations within them – need to create a favorable set of conditions among the intervening variables in our model. Those regions that do offer a favorable set of conditions derived not only from their resource endowments but also through enlightened leadership and effective institutions and which encourage and facilitate entrepreneurship will be more likely to become places with a competitive advantage (McGuirk et al., 1998: 110).

4. Leadership 4.1

INTRODUCTION

This chapter focuses on the L dimension in the model discussed in Chapter 2. As we will see in the discussion that follows, leadership is a complex issue. It can occur in many ways and it can assume many different forms. It can have a profound effect on institutions. Also it can exhibit aspects of entrepreneurship. However, leadership warrants special attention because of the catalytic effect it can have as an explicit factor in the regional endogenous development process.

4.2

LEADERSHIP IN THE CONTEXT OF REGIONAL DEVELOPMENT

Leadership has been given many definitions. It is not a straightforward concept, particularly in the context of regional economic development, and there has not been a lot of published research that has systematically analysed the nature of leadership and its role in regional economic development. Nonetheless, it is important to try to define it so that it can be articulated with respect to the goals of this book. While it is common for leadership to be defined in terms of a ‘great person’, in the context of regional development it might be more appropriately seen as an expression or result of ‘collective action’. Thus, in regional economic development, leadership has been given not a ‘starring role’ but has been viewed as a ‘collaborative action’ (Fairholm, 1994; Heenan and Bennis, 1999). Referring to regional economic development, Parkinson (1990) defines leadership as: the capacity to create stable and durable mechanisms and alliances that promote economic regeneration and identifies a range of micro-level skills and macro-level resources that can generate that capacity. (p. 241)

And Stough et al. (2001) suggest that leadership might be thought of as: the tendency of the community to collaborate across sectors in a sustained, purpose32

Leadership

33

ful manner to enhance the economic performance or economic environment of its region. (p. 177)

4.2.1 Definitions of Leadership Despite our attempt above to bind the concept with a definition we think fits the context of regional economic development, it is important to review the range of definitions that have been used in other contexts. By way of illustration, we take a number of definitions of ‘leadership’ that reflect the diversity of approaches and focuses that researchers from a variety of disciplinary perspectives have taken. Burns (1978) defines leadership as: [the act] of persons with certain motives and purposes to mobilize, in competition or conflict with others, institutional, political, psychological, and other resources so as to arouse, engage, and satisfy the motives of followers. (p. 19)

Gardner (1990) sees leadership as the: process of persuasion or example by which an individual (or group) induces a group to pursue objectives held by the leader or shared by the leader and his followers. (p. 1)

Bennis and Nanus (1991) treat leadership as that which: invents and creates institutions that can empower [individuals] to satisfy their needs, chosen purpose and visions that are based on key values of the work force and creates a joint architecture that supports them, and, finally moves followers to higher degrees of consciousness. (p. 218)

Rost (1991) defines leadership as: an influence relationship between leader and followers who intend real changes that reflect their mutual purposes. (p. 102)

4.2.2 Why Leadership is Crucial Heenan and Bennis (1999) point out that, in the ‘new economy’ of increasing interdependence and technological change, collaboration is not just desirable; it is crucial. In a previous era, influence, power and decision-making often depended on single individuals or very small groups and leadership was based on a traditional hierarchical authority relationship between a leader figure(s) and followers. But in today’s world, power, influence and decision-making are

34


more dispersed among power stakeholders working together towards a common goal (Judd and Parkinson, 1990; De Santis and Stough, 1999; Heenan and Bennis, 1999). It is through collaboration and collective processes that regions possess or acquire sufficient flexibility and knowledge to adjust to shocks and continuous changing conditions (Saxenian, 1994; Stough et al., 2001) – hence the connection between leadership and institutions. In this sense Stimson et al. (2002) say that: leadership for regional economic development will not be based on traditional hierarchy relationships; rather, it will be a collaborative relationship between institutional actors encompassing the public, private and community sectors – and it will be based on mutual trust and cooperation. (p. 279)

It will be about: • • •

shared power flexibility entrepreneurialism

in order to ‘energize’ a city or region to meet its competitive challenges and adapt its environment to the needed challenges (Porter, 1990). In this sense, Stough et al. (2001) see leadership as ‘the vehicle that steers that adjustment process’, operating by targeting and guiding adjustment in institutions (social rule structures) that enable a region to change in ways that help to sustain regional economic development and that involves the capacity to engage in risky behavior (Doig and Hargrove, 1987; Hofstede, 1997). It is in this context of risk that there is an obvious link between leadership and entrepreneurial activity, and this has been a focus of attention from both a management and a business development perspective in studies of the firm as well as in regional economic development. With respect to the former, the entrepreneurial role of a leader is to: • •

innovate and develop products or services to market effectively compete with – or out-compete – competitor firms.

In the latter context, community leadership for regional development may contain many individual entrepreneurs; however, their desire to collaborate – to work together – to create positive externalities beyond their own self-interest or profit is what generates and/or enhances effective leadership in a collective context for regional economic development. This is illustrated by Saxenian’s (1994) proposition that leadership will be characterized by horizontal structures rather than by vertical structures.

Leadership

35

It is evident also that there is interdependency between leadership and institutional considerations. Collaboration, trust, power distance and entrepreneurialism are products or outcomes of the interactions between those two dimensions in the regional competitive performance cube (RCPC) discussed in Chapter 2, and it thus becomes a moot point as to whether the key components referred to above belong to one or the other or both of the L and I dimensions. In regional economic development, it is the dynamic, or more precisely the catalytic effect of leaders and of leadership that is crucial.

4.3

PERSPECTIVES ON LEADERSHIP

It is useful to consider in more detail a number of perspectives on leadership in order to more fully understand the context in which it is being used in regional economic development. 4.3.1

Social Psychology Perspectives

Vaughan and Hogg (2002: 231–41) provide the following perspectives on leadership from the point of view of social psychology. 1.

2.

3.

4.

One perspective is the great person theory, which attributes effective leadership to innate or acquired individual characteristics, where the focus is on personality attributes. Explanations that emphasize the functional requirements of tasks or situations, where the focus is on explaining the actions of collectivities rather than individuals or on attributing to the leader an important role in group achievement, but where leadership is not seen as an invariant property of individual personality. Behavioral perspectives on leaders (after Lippitt and White, 1943) have made the distinction between three leadership styles: autocratic leadership based on giving orders to followers; democratic leadership based on consultation and obtaining agreement and consent from followers; and laissez-faire leadership based on disinterest in followers. Interactionist perspectives of the leadership effectiveness of particular leadership styles emphasize contingency or situational factors and task factors (Fiedler, 1995). The distinction is made between socio-emotional leaders, who are concerned with group member feelings and relationships rather than with group tasks, and task-oriented leaders, who are concerned with group tasks rather than with relationships among group members. The effectiveness of either style of leadership is contingent on

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5.


situational control, which is influenced by leader–member relations, task structure and positional power. Another perspective suggests that without followers there can be no leader, with the role of the leader being conferred on an individual by members of the group. This perspective is one of leadership as a growth process, there being a dynamic transaction between leaders and their followers (Hollander, 1958; Bass, 1990), with leadership defined as a process of social influence through which an individual enlists and mobilizes the aid of others in the attainment of a collective goal (Vaughan and Hogg, 2002: 238). • One basis of this process may be interpersonal equity transaction, where the leader–member exchange theory of leadership suggests that effective leadership rests on the ability of the leader to develop hierarchical exchange relationships with individual members of the group; and the group value model takes the view that procedural justice within groups makes members feel valued, and thus leads to enhanced commitment to and identification with the group (Tyler and Lind, 1992). • A second basis of this process is that leaders are group members (Lord, 1985) and that they are either (more or less) prototypical or schematic members of leader categories or are able to embody the ideal norms of the group based on self-categorization theory (Turner et al., 1987). • A third basis of the process is that, paradoxically, on the one hand leaders epitomize and represent the group while on the other hand they are agents of change within the group (and are thus simultaneously conformist and deviant), which is represented by the notion of idiosyncrasy credit. Hollander’s (1958) transactionalist theory proposed that followers reward leaders for achieving group goals by allowing them to be relatively idiosyncratic, and thus display tranformational leadership (Bass, 1990) characterized by charisma, inspirational motivation, intellectual stimulation and individualized consideration, which motivate followers to work for group goals that transcend individual self-interest.

The orientation in social psychology is thus on leaders as individuals in a variety of group contexts – teams, committees, organizations, friendship groups, groups – with leaders being people with ‘great ideas’ that group members agree upon, and who people follow. As Vaughan and Hogg (2002) say: ‘leaders enable groups to function as productive and coordinated wholes’ (p. 231). A considerable focus in the social psychology literature on leadership has been on measurement of the key characteristics of leaders, as seen in the pioneering work of Fiedler (1995), who developed two different but related measures.

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These are often used interchangeably, and involve leaders’ perspectives of their co-workers to measure leader–member relations. Recent developments of this contingency approach to leadership may be seen in Fiedler’s (1995) cognitive resources theory. It attempts to search for the qualities that would predict success among leaders. As pointed out by Oskamp and Schultz (1998: 89), an ‘exciting offshoot’ of this work is a leader training program that: ‘attempts to improve organizational effectiveness by manipulating levels of situational control and leadership styles’ (p. 89). 4.3.2 Management Perspectives The social psychology perspectives on leadership have, to a considerable degree, been incorporated within an organizational context and adopted and adapted into management perspectives on leadership. Here the focus is on leaders and leadership in business organizations, and in particular within the firm. The management literature abounds with books on leadership, but there is evident an era shift in focus on style and substance. The 1980s and 1990s tended to glamorize the ‘leader at the top’ (such as Lee Iococca and Jack Welch) and draw lessons from history’s great leaders (for example Gandhi, Churchill and Lincoln). Abramson (2002) reviews a shift to new perspectives on leadership evident in a number of recent books which emphasize leadership as: hard work performer by people who are presented with opportunities to lead every day in their organization. It is not just the leader at the top who leads, but also individuals at all levels throughout organizations who are presented daily with opportunities to make a difference. (p. 37)

Heifetz and Linsky (2002) place importance on the need for leaders to consciously build effective personal relationships, find partners, keep close to their opposition, accept responsibility and acknowledge losses when necessary. Leaders need to ‘orchestrate’ conflicts by ‘controlling the temperature’, ‘holding steady’ and ‘pacing’ when new work needs to be done. Of course there are always situations where leaders may need to take exception with the general view of colleagues or followers in order to move a process along. Badaracco (2002) focuses on the ‘ordinary’ as opposed to the ‘heroic’ leader, who moves quietly, patiently and incrementally. He calls them the ‘quiet leaders’, exercising modesty and restraint, focusing on solving big problems through a long series of small efforts, which, he claims, often turn out to be the best and quickest way to make an organization a better place. Badaracco provides a ‘tool kit’ of approaches for quiet leaders – ‘busy time’, ‘drill down’ to uncover new information and ‘seek compromises, not total victories!’

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Kotter and Cohen (2002) emphasize eight steps for successful change. These are: • • • • • • • •

increase urgency build the guiding team get the vision right communicate for buy-in empower action create short-term wins don’t let up make change stick.

They propose that leaders move from an ‘analysis–think–change’ approach to a ‘see–feel–change’ approach. They say people do not change because of persuasive analytical argument; rather, they change because they have been ‘emotionally reached’ by dramatic visualizations of problems or solutions. The message is that ‘change leaders make their point in ways that are emotionally engaging and “compelling” as possible … supply valid ideas that go deeper than the conscious and analytic part of our brains—ideas with emotional impact’. That emotional side of leadership is taken up by Goleman et al. (2002) who describe six leadership styles: • • • • • •

visionary coaching affiliative democratic pacesetting commanding.

The first four styles tend to build a positive emotional environment within organizations, while the last two frequently create a negative environment. 4.3.3

Entrepreneurial Perspectives

There is an obvious link between leadership and entrepreneurial activity, and this has been a focus of attention from both a management and business development perspective in studies of the firm as well as in regional economic development. With respect to the former the entrepreneurial role of a leader is to innovate and develop products or services to market and to effectively compete with – or out-compete – competitor firms. In the latter context, community leadership for regional development may contain many individual

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entrepreneurs; however, their desire to collaborate to create positive externalities beyond their own self-interest or profit is what generates and/or enhances effective leadership in a collective context for regional economic development. The role that entrepreneurs play in economic development dates to the work of Schumpeter (1934) and his theory of economic development where the entrepreneur is seen as a ‘risk-bearer … [as] a person who has characteristics such as: initiative, authority or foresight’. For Schumpeter, entrepreneurs are the prime movers of economic development: the agents who initiate new combinations of means of production [and] who supplied the will and the action necessary to disrupt the position of production and establish the new. (Schumpeter, 1934; High, 2002).

Kurato and Hodgetts (1998) refer to the entrepreneur as an innovator who: recognizes and seizes opportunities; conveys those opportunities into workable/marketable ideas; adds value through time, effort, money or skills; assumes the risk of the competitive market place to implement those ideas; and realizes the rewards from these efforts. (p. 30)

In terms of local communities or regions, Herbert-Cheshire and Lawrence (2001) suggest that an entrepreneurship model will: become dependent on the ability of motivated individuals to find their place in the global economy by becoming more inventive, business-like and risk-taking in creating new opportunities for value-adding and niche marketing. (p. 4)

While the entrepreneurial effect on economic development is widely accepted and proven (Kirzner, 1973; Malecki, 1991; High, 2002), Schumpeter (1934), as well as many other authors (Hirschman, 1958; Doig and Hargrove, 1987; Weiss, 1988), often treat leaders and entrepreneurs as synonymous. Although it is true that both share such characteristics as initiative, risk bearing, vision, determination, and so on, they cannot be seen as being equivalents; that would make sense only if one sees the effect of individuals alone. Acting by themselves entrepreneurs can advance products and industries and be leaders within their range. However, as the world becomes more integrated and interdependencies assume increasing importance, a separation of leadership and entrepreneurs becomes more apparent, especially when we are talking about carrying or taking individual economic success (at a business level) to the more complex level of the development of a region as a whole. To illustrate, as seen commonly through the world, such as in Latin America, individual entrepreneurs have created successful companies and instituted innovative combinations of factors of evolution, but economic development for the region has not only been less than desirable, but also

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highly unequal in its impact. In some contexts, however, such as we see in part of East and Southeast Asia, the existence of entrepreneurs could not have created the externalities their actions led to without the right or supportive policies and the right environment. In that case leadership at a collective (community) level, rather than individual entrepreneurs, has steered or guided power stakeholders to organize themselves for development (Leipeizeger, 1997; Rowen, 1998). Community leadership, rather than individual entrepreneurs, has forged horizontal and collaborative relationships which have been crucial to the innovative milieu and the technological advantage of places such as the Silicon Valley in the US (Saxenian, 1994). Take Australia as an example. Over the last couple of decades the efficacy of entrepreneurship has become a feature of government policy, particularly as it relates to research and regional development (Beeson and Firth, 1998; Kenny, 1999) as seen, for example, in the views and policy recommendations encompassed in a series of federal government reports, including: the Hilmer Inquiry of 1993 into national competition policy; the 1995 Karpin Report into industry, leadership and management skills; and the 1994 McKinsey and Company report into how to unlock the growth potential of regions. Those reports advocate improvements in economic performance through the improved performance of firms and institutions (Hilmer Inquiry) and the adoption of more appropriate attitudes and behaviors more widely across society (Karpin and McKinsey Reports). Wright (1998) discussed how entrepreneurship now involves a whole range of enterprising qualities associated with self-reliance, autonomy and accountability; it involves ‘active citizenship’ (Cruickshank 1994; Kearns 1995), whereby individuals are expected to become ‘entrepreneurs of themselves’, acting in a responsible and self-reliant manner to improve the conditions of their own existence (Rose 1989, 1993). And according to Day (1998) it involves the fostering among local populations of a new cultural trust through changes in attitudes and behavior to: ‘free the spirit of competition, initiative, self-reliance, risk-taking and so on’ (p. 92). In the context of rural and regional development in Australia, HerbertCheshire and Lawrence (2001) state that the emphasis on competition, selfinterest and personal advancement is: ‘inherently individualistic and lies at odds with the rhetoric of community spirit and social capital that characterizes the bottom-up approach to local development’ (p. 5). But the implicit assumption seems to be that the entrepreneur’s motivation is no longer self-interest but the facilitation of community initiatives and the empowerment of others through what Herlau and Tetzschner (1996) refer to as ‘the provision of leadership, motivation, passion and vision’ (p. 116). In the UK, Boyett and Findlay (1997) refer to these as ‘community entrepreneurs’, while in the US Henton et al. (1997) refer to them as ‘civic entrepreneurs’. In this work there is a focus on capacity building of skills for

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development, leadership and collaboration to help create a competitive community.

4.4

KEY COMPONENTS OF LEADERSHIP FOR REGIONAL ECONOMIC DEVELOPMENT

Leadership for regional economic development that is community-based and/or region-wide in its impact will not be based on traditional hierarchy relationships; rather it will be a collaborative relationship between local institutional actors – encompassing the public, private and community sectors – and it will be based on mutual trust and cooperation (Bower, 1983; Osborne, 1988; Gray, 1989; Judd and Parkinson, 1990; Bryson and Crosby, 1992; Fosler, 1992; Stimson et al., 2002). This proposition is supported by a comparative case study of leadership in regional economic development in ten metropolitan regions in the US sponsored by the W.K. Kellogg Foundation and published in 1997 by the Academy of Leadership at the University of Maryland. No single individual or organization has the authority or power to undertake fully effective region-wide economic development; consequently, to be effective regional leadership is a collective responsibility, and it involves local leaders who need to inspire and motivate followers through persuasion, example, data-informed arguments and empowerment (Burns, 1978; Bunch 1987; Kouzes and Posner 1987; Neustadt and May, 1990). Bryson and Crosby (1992) perceive an environment in which no single organization is ‘in charge’ nor has the legitimacy, power, authority and the knowledge required to tackle any major public issue, so that institutions must ‘join forces’ in a ‘shared-power world’ of intermediate institutions. Stimson et al. (2002) say that these are ‘the basic elements of local leadership for economic development’ (p. 280). The following might, then, be proposed as key components of, or even preconditions for, effective regional leadership to enhance the economic development process in a city or region: 1.

2.

3.

Collaboration, as leadership is about an expression of vision and the implementation of processes for the collective good – and for the whole community – of a region (Fairholm, 1994). Trust is essential for effective collaboration. Leaders and followers must have mutual trust to risk participation in collective action (Fairholm, 1994). If trust is lacking, leaders will find it difficult to have their views accepted. Shared power, which is characterized by low power distance and decentralized leadership power. The ‘power distance’ concept is defined by

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Hofstede (1997) as the degree of inequality in power between a less powerful individual and a more powerful individual, the existence of which engenders mistrust and makes cooperation and collaborative difficult. Power and responsibilities need to be dispersed while power bases are independent. 4. Flexibility, which is necessary for innovation and creative thinking and which rigidity in control mechanisms hinders (Bentley, 2002: 33). 5. Entrepreneurialism, where community leadership shows entrepreneurial characteristics, believes in change, and initiates it to ‘energize’ a region to meet its competitive challenges and adapt its environment to the needed challenges (Porter, 1990), and this involves the capacity and willingness to engage in risky behavior (Doig and Hargrove, 1987; Hofstede, 1997). From the foregoing discussion and examples it is evident that leadership encompasses the notion of: • • • •

shared vision or purpose proactivity collaboration creating change.

Heenan and Bennis (1999) claim that in the new economy of increasing interdependence and technological change, collaboration is not simply desirable. It is crucial. In earlier times, leadership tended to be based on traditional hierarchical authority relationships between leader and follower, with influence, power and decision-making dependent more on individuals. But today the more common view is that these are shared among stakeholders working together towards a common goal. It is through collaboration and collective processes that a region will have the sufficient flexibility and knowledge to adjust to shocks and continuous changing conditions (Saxenian, 1994; Stough, 2001). In this sense, leadership might be seen as ‘the vehicle that steers that adjustment process’ (Stough et al., 2001), operating by targeting and guiding adjustment in institutions (social rule structures) that enable a region to change in ways that help to sustain regional economic development.

5. Institutions and institutional factors 5.1

INTRODUCTION

This chapter focuses on the I dimension in the model discussed in Chapter 2. Institutions and institutional factors have for a long time been seen as playing crucial roles in the process of regional endogenous growth and development, and have been widely discussed in the regional economic development literature as well as in the general literature on economic development. Institutional factors cover a wide range of issues concerning governance and government, and may refer not only to the role of the public sector but also to private sector and NGO and community actors and structures, and as well to the contemporary notion of public–private–community partnerships. And they encompass notions of social capital, and networks and alliances of collaborative arrangements. The discussion of institutions and institutional factors that follows provides a comprehensive overview of their nature and roles with respect to regional development and indicates why they can be important enhancing or detracting forces influencing the growth and development of cities and regions and how they affect regional competitiveness. It will be evident that leadership in particular, and also entrepreneurship are interrelated to institutions, and some scholars do not draw the explicit distinctions which we choose to do in this book. However, institutions and institutional factors warrant specific and detailed consideration.

5.2

INSTITUTIONS AS RULE STRUCTURES

Institutions are of vital importance in any society. They provide the rule structures and the organizations within a society for it to operate. The nature of institutions and the institutional structures in a society can have a profound influence on how effective and efficiently a society operates and on the competitiveness of a national economy and on regional economies. They represent both endogenous and exogenous forces depending on the level of scale and the nature and structure of governance and government as it pertains to a nation and the regions within a nation. What might be an endogenous 43

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factor at one level of spatial scale (such as the nation or a state or province) becomes an exogenous process at another level of scale (such as a local area or city). Rule structures are about the: • • • •

principles standards laws regulations

within which a society and economy operate and actors function. They are the structures and processes which govern or inform: • • •

what may or may not be done, what the consequences are if violated, (and thus) how things may be done.

It is important to distinguish between government and governance: 1.

Government is the system by which a nation, state or region is governed, through a body of persons elected or appointed to govern or conduct the policies and affairs of an organization. 2. Governance is the act or manner or process of governing and the office or function of governing.

In the context of regional economic development, the terms ‘institutions’ or ‘institutional arrangements’ are used in a broad way to refer not only to these structural and process issues, but also to those things that are provided or influenced by those structures and processes, such as: • the provision and cost of infrastructure and services and facilities • fiscal and monetary mechanisms • the redistribution of resources and benefits for purposes of equity and social justice information • the regulation of land and development • the organization of territory. These may facilitate or influence the interactions between the public and private sectors and the community in either a positive or a negative way. It is self-evident, thus, that there will be a symbiotic relationship between institutions and leadership. Blakely (1994) refers to the necessity of having appropriate institutional

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arrangements to manage and fund the regional economic development strategy process, and to ensure the implementation of plans and actions. Assessing the capacity and capability of local organizations to initiate, undertake and carry through local regional economic development strategy planning is a fundamental component of the tasks of that process. Institutional capacity building is often part of the implementation of plans and actions that come out of a local or regional economic development strategy planning process. In that context, institutional capacity and capability is a crucial issue that can have an enhancing and/or catalytic effect or which can have a detrimental or stultifying effect on the growth and development path of a city or region. That is now being discussed as well in the context of the creation of ‘learning infrastructure’ and the ‘learning region’ (Simmie, 1997; OECD, 2000).

5.3

INSTITUTIONS, LOCAL GOVERNANCE AND ECONOMIC PERFORMANCE

5.3.1

Constraints

In economics, one of the most significant contributors to the debate on the role of institutions and institutional change and its impact on economic performance is Douglas North (1990), who defines institutions as the ‘rules of the game’, stating that they: ‘define and limit the set of choices of individuals’. They are the ‘humanly devised constraints that shape human interaction’ (pp. 3–6). Those constraints can be formal (designed and enforced by political authority) or informal (evolved as a result of custom or tradition as codes of conduct). According to North (1990): ‘The major role of institutions is to reduce uncertainty by establishing a stable (but not necessarily efficient) structure to human interaction’ (p. 4). A distinction is made between institutions and organizations. Organizations, while being similar to institutions, are seen by North as: ‘groups of individuals that have a common purpose, let it be economic, political or social’ (p. 4). He says that what organizations come into existence and how they evolve will be: ‘fundamentally influenced by the institutional framework, that is, organizations are the players, and institutions are the rules’ (p. 4). North goes on to say that: Institutions, together with the standard constraints of economic theory, determine the opportunities of a society. Organizations are created to take advantage of those opportunities, and as organizations evolve, they alter the institutions. Therefore, institutions and organizations are mutually related and share a symbiotic relationship. (p. 7)

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It is accepted that economic performance over time is fundamentally influenced by the way institutions evolve, how they decrease uncertainty through making predictable the rules of the game and the behavior of players, how they allow individuals to have access to proper information about the decisionmaking process, and how they decrease market imperfections that in turn decrease transaction costs. As stated by Clingermayer and Feiock (2001): ‘Institutions can provide the stability in collective choices that otherwise would be chaotic’ (p. 3). Institutions will affect the performance of an economy through their effect on exchange and production (North, 1990). According to Clingermayer and Feiock (2001), institutions matter because they affect the behavior of policymakers, they provide incentives for political exchange and affect political and policy outcomes, and they impact upon not only policy adoption but also administration and implementation of policies. Those authors say: Policy choices derived from institutional constraints at one point in time may result in path dependent development. Once a particular path is taken, it might be costly, if not impossible, to move local government policies in a dramatically different direction. Local government institutions may constitute self-reinforcing mechanisms in that they bolster the power of key interests advantaged by the existing set of institutions. (p. 126)

5.3.2

How Institutions may Enhance Capital Accumulation

Vazquez-Barquero (2002: 12) emphasizes how institutions can condition the capital accumulation process and as a result the economic development of cities and regions. That is because their behavior can: • • • • •

reduce transformational and production costs increase trust among economic and social actors improve entrepreneurial capacity increase learning and relational mechanisms reinforce networks and cooperation among actors.

It is thus widely argued that securing economic growth at the local level cannot be reduced to a set of narrow economic factors, with institutions – along with social and cultural factors – being of great importance. Amin and Thrift (1995: 10) refer to what they call ‘institutional thickness’, which is a combination of features including the following: • • •

the presence of many institutions inter-institutional interaction a culture of collective representation


• •

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identification with a common industrial purpose shared norms and values.

All these serve to constitute the ‘social atmosphere’ of a particular locality. Thus, broadly conceived, institutions include not only formal organizations but also informal conventions, habits and routines which are sustained over time. Amin and Thrift (1995) say that the notion of ‘thickness’ is conceived to: ‘stress the strong presence of both institutions and institutionalizing process, combining to constitute a framework of collective support for individual agents’ (p. 10). While institutional thickness is a strong indicator of their ability to offset transaction costs, too much ‘thickness’ will increase time involved in meeting them and thus transaction costs. Thus, it is more appropriate to think of the relationship between transaction costs and institutional thickness as a Ushaped relationship rather than as a monotonically decreasing one. In a study of total factor productivity growth and economic performance in East and Southeast Asia, Rodrick (1998) says: ‘differences in the quality of government agencies are a plausible source of the variation in economic performance in the region’ (p. 79). He concludes that: ‘the quality of governmental institutions matters for growth’ (ibid.). He found that the association between institutions and growth is remarkably close: Taiwan, Japan and Singapore have the best institutions, and the highest growth rates; the Philippines and Indonesia have the worst institutions and the lowest growth rates; and Thailand, Korea and Malaysia are intermediate. (p. 32)

Rodrick finds the key factors concerning governance to be: • quality of the bureaucracy, especially autonomy from political pressure, expertise and efficiency in the provision of government services and superior modes of recruitment and training; • rule of law, particularly sound political institutions, strong courts and orderly succession of political power; • risk of expropriation, particularly relating to the possibility of confiscation and forced nationalization; • repudiation of contracts by government, including postponement, scaling down due to budget cuts, and changes in government priorities. 5.3.3 Local Governance Thus, along with economic resources, important factors that create competitive advantage are the existence of local mechanisms and alliances, or what is generally called local governance.

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As discussed by McGuirk et al. (1998), local governance ‘incorporates the range of interests, both private and public and community based, that are involved in managing, servicing and regulating the local urban region’ (p. 111). For example, the strength, structure and stability of the private and public sectors in a city or region, and the character of the political relations between them, the degree of social division, and the existence or not of favorable legislation, will all affect the capacity of a place to respond to external threats or opportunities. Political antagonisms within a city, for example, might be so great that no coherent response, negotiation or agreement among a broad range of political and social groups is possible (Parkinson, 1990: 21–2). Jewson and MacGregor (1997: 14) suggest that, in the local context, ‘politics matter’. That is, changing forms of governance present opportunities for resistance, innovation and participation, along with attempts at more effective social discipline. The effectiveness of local governance is also intricately linked to attributes of leadership, and in particular to the uncertainty that may derive from leadership turnover, weak or ineffectual leadership and incoherence or inconsistencies in the interrelationships between the elected politicians and officials and the bureaucracy. Furthermore, uncertainty can also be created by the lack of clear political goals and unclear divisions of tasks between actors and stakeholders, which is often the case where the public policy process is characterized by reactive as against proactive action and initiatives. These triggers of uncertainty, and the typically short-term perspectives that accompany them, may result in increased transaction costs reducing the competitive standing of a city or region. Local governance, then, becomes part of the competitive advantage of cities. Some examples of city governance include (McGuirk et al., 1998: 111): • central government initiatives, often with statutory authority, instituted in a local context, for example Newcastle’s Honeysuckle Development Corporation (HDC); • local public or quasi-public development agencies, often with statutory powers, carrying out local economic development activity, for example the Hunter Economic Development Council (HEDC); • newly formed organizations or alliances of local business elites that may or may not coordinate their activities with the local authority, e.g. Newcastle’s City Centre Committee. McGuirk et al. (1998) have this to say: The combined task of these institutions of local governance is to create investmentready production sites equipped with all the requisite social and physical infrastructure, and favorable business climate. (p. 111)


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5.3.4 Central–Local Relations As most cities or regions are a part of a larges de jure entity it is inevitable that they will be influenced by the decisions of higher levels of government. Thus, central–local relations have important implications for the responsibilities of sub-national or sub-state governments on how regional development is managed (Bentley, 2002: 33). Rigid controls hinder the flexibility necessary for innovation and creative thinking (Brooklyn et al., 2002). Decentralization of power can enable community leaders to make their own decisions according to the specific needs of a city or region. That is, they have wide-ranging authority or are part of the key decision-making group (Fainstein, 1983: 44). According to Jessop (1998), it can be said that the extent of local action and access to funds will ‘depend on the amount of institutional decentralization existing within a nation’s urban system’ (p. 2292). Thus the focus needs to be on the degree to which the city or region has a wide-ranging authority to make decisions.

5.4

INSTITUTIONAL ARRANGEMENTS SHAPING POLICY OUTCOMES

We now turn to consider some of the specific ways in which institutional arrangements may shape policy outcomes and the implications for regional economic development. These considerations include: • • • • • • • • •

the political institutional environment the nature of executive government uncertainty and leadership turnover external constraints on local policy choices inter-institutional collaboration and network interaction trust as a governance device institutional decentralization organizational culture culture of governance

5.4.1 Political Institutional Environment Policy stakeholder relationships tend to influence the nature of leadership in government. Mouritzen and Svara (2002) say that relationships that are generally characterized by interaction, interdependency, reciprocal influence, dynamic tension and mutual respect between policy stakeholders makes a difference in leadership characteristics and performance. A less fragmented

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political system provides greater opportunities for executive leadership to implement policies and enables considerable continuity and stability to be achieved in public management (Clingermayer and Feiock, 2001; Pollitt and Bouckaert, 2002). Because such local policies involve making deals (for example, coalitions, contracts, bond issues, intergovernmental agreements and public–private partnerships), having the support of strategic groups in the community is necessary to negotiate and carry out complex deals. Successful negotiations or coalitions will depend on the level of intimacy and the effectiveness with which actors in the business community and in the various levels of government work. Therefore, the nature of a local community or region’s political environment will determine particular kinds of behavior and encourage particular kinds of people to participate in local politics and local policy-making. As stated by Clingermayer and Feiock (2001): The ability of elected officials to achieve their preferred goals depends substantially on their ability to control line departments [and on] their ability to influence strategic stakeholders. (p. 13)

Hambleton (1994: 62) cites the example of Chicago where the former Mayor Daley used the party and informal networks to build up enormous power in the mayor’s office. 5.4.2

The Nature of Executive Government

Mouritzen and Svara (2002) argue that: the form of local government structures defines the rules concerning how political power is obtained, maintained, exercised and shared. Institutions set up how political power is constituted. (p. 79)

Thus, incumbent mayors, for example, will fill that office in different ways ‘depending on their personal characteristics and political forces and other conditions within specific cities’ (ibid.). Mouritzen and Svara (2002) say that mayors can provide leadership in three areas. They can be: • policy leaders who shape the context of progress and projects; • public leaders who help determine the direction that citizens want their city to take; • political party leaders who promote the interests of their political organization.


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In addition, mayors can differ in their style of leadership, some ‘reacting to circumstances as they arise, others positively anticipating and helping to shape change’ (p. 80). Hambleton (1994) refers to the two dominant forms of local government in the US: 1.

2.

The mayor–council form of government where there may be a strong mayor, who serves as a strong and directly elected chief executive and is highly visible, or a weak mayor, where there is fragmentation of authority and the mayor has limited powers and authority. The council–manager form of government where the city manager resembles the managing director of a private company, which can create a leadership gap but where the mayor acts as a facilitated coordinator and guide rather than an executive.

Clingermayer and Feiock (2001: 32) note that the form of local government can also determine the ability of officials to deal effectively with external actors and provide the local executive with the ability to ‘speak for the city’ and act as an entrepreneur for economic development in dealing with ‘private sector elites’. In the US, case studies have shown the importance of a politically powerful mayor for economic development efforts, citing the examples of Mayor Lawrence in Pittsburgh, Mayor Daley in Chicago and Mayor Schaeffer in Baltimore as strong mayors who exercised internal control over city agencies and dealt effectively with external actors in the business community and in the state or federal government (Fosler et al., 1982; Clingermayer and Feiock, 2001: 15; Mouritzen and Svara, 2002: 288–9). It is argued that city managers cannot provide political leadership as they are not elected. The form of government and system of representation a city chooses will influence its ability to pursue certain kinds of policy options, and institutional factors that strengthen the executive may enhance the ‘grantsmanship’ of a city government (Clingermayer and Feiock, 2001: 19, 33; Pollitt and Bouckaert, 2002: 50). 5.4.3 Uncertainty and Leadership Turnover Clingermayer and Feiock (2001) claim that: local leadership turnover affects transaction costs and policy choices involving long-term objectives and future commitments [and that the resulting uncertainty] affects the ability of the municipality to negotiate contracts, make credible commitments to suppliers, and faithfully uphold and enforce contacts once they are in force. (p. 73)

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They go on to say that communities entertaining substantial personnel change within the local bureaucracy, among chief administrative officers, or within the city council can ‘create political uncertainty that may reduce time horizons of long-term commitments with vendors, investors and contractors’ (p. 76). The result is often less consistent organizational outcomes. Uncertainty can also be created by the lack of clear political goals and unclear division of tasks between the key stakeholders; that is the related effects on the bureaucracy (Mouritzen and Svara, 2002: 89). In addition the implementation of reactive rather than proactive policy initiatives ‘creates a lack of direction that naturally would leave community stakeholders wondering what their goals are and how tasks will be accomplished’ (p. 90), that can result in low trust in institutions. 5.4.4

External Constraints on Policy Choices

As discussed by Clingermayer and Feiock (2001) constraints imposed by higher levels of government ‘establish the basic rules of governance’ since they ‘explicate the boundaries of legitimate local government activities and delineate procedures for making choices’ (pp. 114–15). Constitutional level institutions may increase or decrease the costs associated with pursuing particular policy goals, and they may, therefore, induce certain outcomes by determining what policies are in the interests of local citizens and public officials (ibid.). Moreover, external constraints may directly affect the incentives of local actors and their ability to pursue their interests successfully, as seen, for example, in the limited tax advantages of certain municipal bonds as a consequence of the US Federal Tax Reform Act of 1986 (ibid., 93). 5.4.5

Inter-institutional Collaboration and Network Interaction

Fairholm (1994) says that leadership is not so much a function of the individual leader as it is a function of collective action, of association and cooperation – it is an expression of community. Thus, according to Amin and Thrift (1995), the involvement of key community institutions (for example, local chambers of commerce, development agencies, trade associations, financial institutions, firms, political parties, government agencies, business service organizations, and so on) in the local area ‘provides a basis for the growth of particular local practices and collective representations of social networks’ (p. 102). Those institutions need to be ‘actively engaged with and conscious of each other, displaying high levels of contact, cooperation and information interchange that may lead, in time, to a degree of mutual isomorphism’ (ibid.). Such high levels of interaction should lead to the development of what Amin and Thrift (1995) refer to as:


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sharply defined structures of domination and/or patterns of coalition resulting in both the collective representation of what are normally sectional and individual interests, and the socialization of costs. (p. 102)

Those interactions can also generate mutual awareness of involvement in a ‘common good enterprise’ in which the interdependency between actors is understood and appreciated (Conti and Giaccaria, 2001: 119). Amin and Thrift, (1995: 103) refer to this as the ‘process of institution institutionalization’. Mouritzen and Svara (2002) argue that passiveness is manifested by isolation of key stakeholders who operate with relatively weak connections and few partners. Where participation is achieved from a diversity of key sources in policy advice, then the scope of accountability and its perceived legitimacy will be greater through it being ‘home grown and owned’ (Mouritzen and Svara, 2001: 101–3; Pollitt and Bouckaert, 2002: 55). 5.4.6 Trust as a Governance Device Fairholm (1994: 3) emphasizes how local or community leadership takes place in situations or cultures where leaders and followers need to trust each other enough to accept the risk, vulnerability and uncertainty of being involved in collaborative action. Storper and Scott (1992) discuss how differing levels of trust in a region may explain the degree of cooperation and the establishment of alliances and partnerships among actors. The less the level of trust the greater will be the accumulating efforts of exchange. This is the other side of the coin from the institutional thickness concept in that places that lack institutional thickness will tend to be places that have low levels of trust. Pollitt and Bouckaert (2002) put it this way: ‘trust is a governance device in the sense that it contributes to prosperity by reducing transaction costs. It does so by enabling much shorter contracts and radically reducing monitoring costs’ (p. 7). 5.4.7

Institutional Decentralization

The decentralization of power is claimed to enable community leaders to make their own decisions according to the specific needs of the region. According to Weiss (1988) it is seen as a key ingredient for close working between government and local and regional businesses to ‘materialize entrepreneurial ideas’ (p. 89). Decentralization entails a significant degree of vertical dispersion of authority, with community leaders having wide-ranging authority and/or being part of key decision-making groups (Pollitt and Bouckaert, 2002: 41). Fainstein (1983: 44) states that the extent of local action and the access to

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funds depends on the amount of institutional decentralization existing within a nation’s urban system, and notes the difference between the US and the UK systems. In the former there is widespread acceptance of ‘home rule’, while in the latter the presence of a highly centralized system prevents local councils from having more active local action to foster growth. It is also claimed that decentralization entails that power does not reside in a single person or entity; rather, power and responsibilities are dispersed. Nations with high power-distance relations are characterized by centralization and expect the upper echelons of the hierarchy to give directions and exercise control (Hofstede, 1997; Mouritzen and Svara, 2002). Pollitt and Bouckaert (2002) claim that those extra layers increase the distance of the government’s top to its bottom and ‘hinder the always difficult job of translating broad goals into specific goals and manageable objectives’ (p. 52). Further, they suggest that: ‘centralized states lead towards narrower focus on service specific outputs and results while decentralization leads towards a more strategic concern with policy and impacts’ (p. 43). 5.4.8

Organizational Culture

The culture of an organization affects leadership as does leadership affect organizational culture. Wallach (1983) says organizational culture includes: • bureaucratic dimensions relating to hierarchal, procedural and structural aspects of culture; • innovative dimensions relating to levels of freedom for creativity and a challenging work environment; • supportive dimensions relating to teamwork and encouraging a trusting working environment. Fairholm (1994) notes the presence of such dimensions in public sector organizational culture accounts greatly for government performance and how things are done. Osborne and Gaebler (1963: 11–12) point out that governments that are rigid, narrowly focused and preoccupied with rules and regulations do not function well in the contemporary rapidly changing, information rich, knowledge intensive society and economy. A regime with a flexible, fast moving, performance-oriented form of organization is the type of administrative culture that can better respond to the new global requirements (Pollitt and Bouckaert, 2002: 59–60). Highly structural bureaucratic organizations are slow to respond to the individual needs of either internal or external stakeholders, focusing more on process and procedures than on responsiveness to the needs of their various stakeholders (Fairholm, 1994: 138).


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5.4.9 Culture of Governance Pollitt and Boukaert (2002) propose three models to describe administrative cultures: 1.

The Rechtsstart model, where the state is a central integrating force with a focal concern on the enforcement of laws. Here the instinctive bureaucratic stance is one of rule-following and precedent, and the actions of both individual public servants and citizens is set in that context of correctness and legal control. France and Germany are cited examples of this model. 2. The public interest model, where the state has a less extensive and dominant role within society, with ‘government’ being regarded as something of a necessary evil and where ministers and officials must constantly be held to account. While law is an essential component of governance, its particular perspectives and procedures are not as dominant, and the process of government is seen as one of seeking to obtain public consent (or at best acquiescence for measures devised in the public (general, national) interest. It is recognized that different interest groups will compete with one another with government playing referee. Fairness and independence are key values, with pragmatism and flexibility as qualities prized above technical expertise. The US is cited as an example of this model. 3. A complex mixture of the above two models exists in societies such as the Netherlands, Finland and Sweden, where the administrative culture is mixed, with a communal approach and open attitude that brings a range of experts and groups into the policy-making process. It is interesting that the examples of this are mostly for countries that are relatively small. So scale may be an important variable in building and maintaining a successful ‘complex mixture’ model. Each of these models affects the process of administration, with its own pattern of values and assumptions. The Rechtsstart system would be characterized by stickiness and slowness when reform or implementation of new ideas comes into play. Pollitt and Bouckaert (2002) say: This is because change would always require changes in the law, and culturally, because senior civil servants highly trained in administrative law may find it more difficult to shift to a ‘managerial’ or ‘performance-oriented’ perspective. (pp. 53–4)

At the same time, the public interest model may also face impediments to adjustment depending on multiple stakeholder or interest group negotiation and collaboration.

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5.5

INFRASTRUCTURE, NETWORKS, ALLIANCES AND THE LEARNING REGION

Increasingly the private sector is composed not only of businesses but also of non-profit organizations and other social and or political organizations that have a stake in the community. In the contemporary world of ever-increasing complexity, uncertainty and change, those who occupy the upper levels of organizations or government often become increasingly unable to understand what is really happening within the organizations or within the community. Command and control models of decision-making will often lead to the solving of the wrong problems and might generate conflict and confrontation within the community (Jewson and MacGregor, 1997: 8–9). Partnerships or collaboration among stakeholders may allow governments to decrease their financial constraints and to diffuse responsibility for success or failure (Stimson et al., 2002: 279). There seems to be a tendency today among local stakeholders (public, private, immediate and individuals) to participate in collaborative approaches to local problem-solving in a city or a region (McGuirk et al., 1998: 109). 5.5.1

Smart Infrastructure

A fundamental aspect of institutions and institutional arrangements for regional economic development is the way infrastructure is provided and the degree to which it is ensured that the appropriate type of infrastructure provision is facilitated. Infrastructure is often seen as underpinning the business attractiveness of a region or locality (Florida, 2002), and as an incentive for firm attention. However, the concept of what constitutes infrastructure has changed dramatically as governments and organizations in regions contemplate the requirements of the contemporary knowledge-based economy. That requires a consideration of: • •

what constitutes smart infrastructure the facilitation of networks and alliances

to engender collaborative advantage, and the provision of a learning infrastructure through strategy that will provide the strategic infrastructure for a region to be competitive. The notion of smart infrastructure has been developed by Smilor and Wakelin (1990) to refer to the milieu of hard and soft infrastructure services needed to support value-adding activity, enhance creativity and innovation, mobilize resources and provide quality lifestyles. In addition to the more traditional infrastructures – including airports, seaports, telecommunications,


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education and R&D facilities, and cultural facilities and services – smart infrastructure is seen to comprise: • • • •

talent for innovation and role models technology for innovation and R&D climate for business support, finance and technology venturing know-how for business and technology support and development.

Public policy is influential in determining how these factors are harnessed in promoting innovation and value added production. Smilor and Wakelin (1990) see organizations and the institutions that support them – public, private and intermediate – as being a component of the crucial smart infrastructure for facilitating an innovative milieu. These include, for example, business angles, networks, venture capital pools, consortia and professional support organizations. Regulatory and government support environments need to facilitate: • • • • • • • 5.5.2

enlightened but quality-oriented planning and development controls business incubators technical support programs competitive taxation arrangements intellectual property protection maintenance of quality indicators advanced transportation and telecommunications systems access. Networks and Alliances

Increasingly networks and alliances are being seen as part of the infrastructure not only for business operations but also for regions enabling them to successfully compete. For example, the Silicon Valley Joint Venture Network (SVJVN) in California in the US is a strategic partnership initiative created in 1995 to help develop new enterprises. And Cooke and Morgan (1998) tell how the development of networks in the UK and Europe are important instruments of economic infrastructure for regional and local development, with networks of association involving learning, and enhancing capacity building to improve knowledge, production and industry development. Networks and alliances involve collaborative effort, and are seen by Jarillo (1988) as providing the strategic infrastructure for supporting regional development, creating a catalytic effect in technology-based development, as seen in Italy’s Tuscany region (Bianchi 1996). What we are seeing is the notion of collaborative advantage (Huxam, 1996) emerging as an attribute for a region to attain in addition to it possessing competitive advantage. Stimson et al.

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(2002) note that: ‘it is this new thrust toward collaborative advantage and how to achieve it that will be a focus of new methods in regional economic development strategy formulation, planning and implementation’ (p. 12). Addressing networks and network infrastructure is particularly important in fostering innovation. Thus, Tijssen (1998) proposes a network as an: evolving mutual dependency system based on resource relationships in which their systemic character is the outcome of interactions, processes, procedures and institutionalization. Activities within such a network involve the creation, combination, exchange, transformation, absorption and exploitation of resources within a wide range of formal and informal relationships. (p. 792)

Discussing networks and systems of networks in regional development, Fischer (2002) has this to say: The interactions between the organizations and institutions should be facilitated by means of policy if they are not functioning sufficiently well. In periods of structural change, regions might have to redesign many of its (sic) organizations and institutions as well as the interface between them … this widens traditional supply-side diffusion measures towards policies that recognize innovation and diffusion as interdependent processes. This translates into a greater role for demand-driven programs, network-building initiatives, measures to upgrade the technology diffusion infrastructure and improve its relevance for and accessibility by smaller firms. In order to achieve maximum leverage technology diffusion policies have to build on existing interrelationships in regional innovation systems, especially networks within which firms collaborate and exchange tacit forms of knowledge. (p. 27)

The objective of all of this in the context of regional economic development strategy formulation and planning may be seen as being about how to facilitate or create the development learning infrastructure for a learning region (Simmie, 1997; OECD, 2000), with the provision of technology and knowledge infrastructure, information and telecommunications (ICT) infrastructure, transport infrastructure and linkage infrastructure between the government, business and research sectors. Stimson et al. (2002: 294) identify the following examples of regional learning infrastructure: 1. Transportation infrastructure, including intelligent transportation systems, which increase the accessibility and mobility of people and goods in a region. 2. Communications and information infrastructure, including agglomerated competencies and capabilities, which provide complementary and core competitiveness and capabilities for the effective co-evolution of technological innovations. 3. Dense business networks and a high trust business environment that makes possible organizationally effective and quick knowledge creation, transformation, synthesis and diffusion.


4.

5.

6.

7.

5.6

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Institutional infrastructure – including business networks, public/private partnerships, business–government–university linkage – that provides effective organizational linkage and institutional trust to reduce transaction costs of doing business and enhancing learning capability of institutions and individuals. Effective information infrastructure for the exchange of information and knowledge and for monitoring changes in regional structure, regional competencies and capabilities, and regional development. Existence of agile regional governments so that essential decisions and coordinated actions can be made to improve and strengthen the learning infrastructure of a region. Existence of agile communities and associations – including effective cooperation among stakeholders in knowledge creation, transformation, synthesis and diffusion – and the cooperative provision of training and education to enhance the knowledge and skills stocks in a region.

PLACE SURPLUS AND SOCIAL CAPITAL

Bolton (1992) discusses the notion of a ‘sense of place’ in referring to: ‘the complex of intangible characteristics of place that make it attractive to actual and potential residents and influence their behavior in observable ways’ (p. 193). He suggests that sense of place is a form of social capital, a locationspecific asset that has some of the characteristics of ‘capital’. De Santis and Stough (1999) link leadership and social capital to resource endowments, proposing the notion ‘organizational slack’ which exists at varying levels at different times as voluntary contributions to ‘civic activities’ and which may help create what Bolton (1992) describes as ‘place surplus’. A city or region needs to have the institutional fabric – that is, a culture or tradition of political coalitions and collaboration among stakeholders – to work and create a broad constituency for change that has the breadth and the integrity to push beyond the parochial interest of certain groups, whether it be private or public (Fairholm, 1994). Social capital has emerged over the last decade or so as a new way of thinking about the role of the more intangible factors in local community performance and development. It is a concept that is rather imprecisely defined and is difficult to measure. Basically it is about factors such as institutions, networks and trust relationships. Coleman (1988) sees it as that which ‘infers the structure of relations between actors and among actors’. Fukuyama (1995) sees it as the ‘20 percent’ solution, it being able to reduce considerable friction in market transactions in regional systems. Malecki (1998b: 11) notes that such friction is reduced in three ways by:

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• creating a system of generalized reciprocity; • establishing information channels and providing sorted and evaluated information and knowledge; • simplifying market transactions through instituting norms and sanctions by which economic exchanges can occur, bypassing costly and legalistic institutional arrangements associated with market transactions. In the context of regional economic development, social capital contributes to increasing returns across the board by reducing transaction costs. Embedded in social capital and often supported by institutional thickness is the notion of trust (Granovetter, 1985; Fukuyama 1995), which makes it possible for nonroutine transactions to take place with a minimum of friction. Some innovative regions, such as Emilia Romana (the third Italy), are said to have high levels of trust among firms and to possess the institutions upon which competitively and collaboratively productive activities rest, including the provision of finance. Stimson et al. (2002: 278) note that usually high levels of trust and social capital in a region are indicative of effective leadership. However, relating social capital to local or regional economic development is not well developed. Bolton (1999) draws attention to Hirschman’s (1970) distinction between ‘exit’ and ‘voice’, saying that a reasonable interpretation of Hirschman’s analysis is that people’s perspectives of the quality of the social network shape their choice between exit and voice – a choice people may feel compelled to make as a response to a decline in quality of life in their community. According to Bolton (1999): ‘Exit is out-migration; voice is persistence and participation in public discussion’ (p. 13). Thus local government will need to work to facilitate ‘voice’, and to invent new initiatives that increase the effectiveness of ‘voice’. While Hirschman (1970: 49–50) notes that people with the most consumer surplus are most likely to exercise the most voice, because they have most to lose by acquiescence or a quick exit, they will continue to speak up and delay exit as long as their surplus is still intact. In an analogy, Bolton (1999) refers to ‘place surplus’, which is attributed to the combination of goods the consumer buys in a place and also to the unpaid goods consumed that are provided or are available at the place. Full consideration of place surplus should also take account of producer surplus, from the participation of labor and the provision of capital. Bolton suggests a goal of local planning should be to operate a network that generates large place surplus for many citizens, thus creating an incentive for voice and delaying exit. Hirschman (1970: 79) also discusses ‘loyalty’ as a ‘spatial attachment’. Bolton (1999) suggests that loyalty can reinforce place surplus as a force promoting voice rather than exit, and that it might actually be a substitute for place surplus. For Bolton the critical issue is how social networks build loyalty.


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The analogy discussed by Bolton (1999) thus leads him to the proposition that there will be a positive correlation between the level of place surplus, and thus the propensity to use voice, and the ‘quality’ of a sense of place defined by tangibles and intangibles that incorporate attributes such as good neighborhoods and school districts, low crime rates, clean streets, civic amenity, and so on. Loyalty is achieved through fostering of tolerance, trust and reciprocity. Bolton’s attempt to analyse social capital within the traditional concept of consumer surplus being extended to aggregate surplus or place surplus is a promising step to better link the notion of social capital to institutions in the context of local economic development and enhancing community performance. Thus Bolton, in his various writings, stresses how policymakers need to take account of the distribution of place surplus, of the costs of creating and monitoring it, and to encourage voice. Governments make investments through place-based policies and programs that have the intentions of building community and attracting investment. This might be thought of as network-augmenting capital, ranging from community facilities to ceremonial occasions to institutions that improve the political process. Governments develop pricing and subsidy schemes to attract firms to expand the tax base load, increase employment opportunities and maintain and grow population. Often that is done in selective and targeted ways, with governments acting as entrepreneurs and taking risks, internalizing externalities with the objective of enhancing place prosperity. This is just the same as private groups (business or community) developing and augmenting networks to achieve benefits (economic and otherwise) external to each member of the group, with those benefits also becoming internal to the group, taking advantage of what are known as the ‘adoption externalities’ of networks which Liebowitz and Margolis (1994: 1416) refer to as the ‘tragedy of the commons turned on its head’. Strategies for social capital development will involve ‘support for continuous life-long learning, initiatives to improve community awareness important to social and economic well-being, encouraging the development of community and professional organizations and building trust amongst different groups that comprise a local community’ (Stimson et al., 2002: 349).

5.7

IMPLICATIONS

Institutions do have a powerful influence on how organizations and regions adjust to change and stressors. They can be powerful positive or negative endogenous influences on how the impacts of exogenous forces are managed. It is not the nature and structure of institutions per se that is necessarily important, but rather the capacity of institutions to be fast and flexible to adjust

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appropriately to change and to anticipate change and manage risk in an increasingly uncertain and competitive world. Here the link between institutions and leadership is evident. The question is: what does all this mean for institutions and policy? Clearly with the shift in emphasis in regional economic development strategy towards how to build, maintain and enhance regional competitive advantage, this has put the focus on ‘value factors’, including efficiencies, performance and intangibles such as quality of life, human capital and social capital (Putnam, 1993; Fukuyama, 1995). But Stimson et al. (2002: 11–12) note that it is still common for governments to ‘promote comparative difference and provide incentives to attract industries to regions’. These include public policy mechanisms such as: • business attraction efforts, including strategies to ‘pick winners’; • business retention efforts, such as propping up declining industries; • business creation approaches, including attempts to ‘grow’ new enterprises; • import substitution by expanding local production to combat an imported good or service; • incentives, such as tax relief, infrastructure augmentation, marketing and training assistance, and subsidies to firms. Porter (1990) is highly critical of such incentive and subsidy approaches because they encourage governments and regions to bid against each other and create negative externalities. Rather, Porter advocates that: by investing in specialized training, building cluster-specific infrastructure, and improving the business climate with streamlined regulations, states can attract investment and upgrade the national economy. (p. 89)

Blakely (1994: 58) points to a change in emphasis that is occurring from firm attraction policies and mechanisms in local economic development strategy to attracting and generating entrepreneurial people and skills, and in improving and promoting amenity and other quality of life attributes of communities. It is now about building institutional capacity and capability, enhancing network development and facilitating public–private community partnerships. It is about the way ‘place prosperity’ can be enhanced through flexible innovative institutional development and through strong and effective leadership to generate an improved resource endowment of a region. Furthermore, enhancing network development is crucial as today, according to Powell (1990), increasingly in a network mode of resource allocation, transactions occur neither through discrete exchanges nor by administrative fiat but through networks of individuals or institutions, engaged in reciprocal,


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preferential and supportive actions. In addition, in the contemporary era of globalization, Florida (1995) says: the shift to knowledge-intensive capitalism goes beyond the particular business and management strategies of individual firms. It involves the development of new interests and a broader infrastructure of the regional level on which individual firms and production complexes of firms can draw. The nature of this economic transformation makes regions key economic units in the global economy. (p. 531)

That represents a major challenge for both the institution of government and for leadership in ensuring that appropriate infrastructure is provided and available within a region and for the region to link into in terms of national and international networks (physical, electronic and knowledge). In an overview of successful regional development initiatives, Stough (1995) identifies five attributes that communities that have successfully undertaken regional economic development have and the implications for institutional arrangements: • local initiative is crucial for initiating and sustaining regional economic development; • local initiative is consistently undertaken by non-government or intermediate regional/community organizations; • such intermediate organizations are effective economic development planning organizations; • economic development plans are a basis for cross-sector collaboration; • successful regions have access to or create access to a broad range of local and extra-local resources. In their later work, De Santis and Stough (1999) note that local economic development effectiveness is related to: • the degree of political jurisdictional fragmentation; • the degree of cooperation among local stakeholders (public, private, intermediate and individuals); • the tendency for a region to participate in local problem-solving; • the availability of resources locally for economic development. These findings represent useful pointers to the institutional considerations that should be addressed in regional economic development strategy formulation.

6. Entrepreneurship 6.1

INTRODUCTION: ENTREPRENEURSHIP IN THE REGIONAL DEVELOPMENT PROCESS

Entrepreneurship in leadership-driven regional economic development is different from the concept as applied in the private sector where the motivation for entrepreneurial discovery and innovation is deeper than the direct profit motive. Sometimes this form of leadership is referred to as civic leadership and involves private and public entrepreneurs. Where traditionally the entrepreneur is motivated by the promise of ‘pure profits’ – that is, above and beyond the normal level expected from the pursuit of venture formation and development – the private or public entrepreneur in the regional development process is differently motivated. Those involved in leadership-led development are often motivated by what we call here ‘love of region’ that stems from longer term, often intergenerational ties to their place through legacy effects related to their family and/or their business history. They see redirecting the economy as a way to reduce the effects of economic decline/threat and thus maintenance of their family position and business viability at that place. While they may also be motivated by responsibility to their region and the improvement of the social or community milieu it is personal benefit of their family and business that is often at the core of their motivation to help implement change that will enhance economic sustainability of their region. Thus, entrepreneurship in regional economic development is not directly, at least, a response to the lure for pure profits but rather to the lure of maintenance and sustainability of one’s family and business and position. But what more specifically is entrepreneurship in this development context? The behavior is similar to private sector entrepreneurship in that it is the seeking and recognition of opportunities and new ways of achieving goals and objectives that underlie regional development strategy. Examples might be: • finding and developing new industrial sectors to bridge the economy to emerging opportunities, such as technology clusters • finding and obtaining new resources to implement development strategy, such as obtaining funds from higher levels of government to create new infrastructure that underpins development strategy. 64

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In this context, entrepreneurs are from diverse backgrounds including government, community organizations, bankers, CEOs who head up committees to solve bottlenecks in development strategy implementation, and so on. They may also include elected officials and bureaucrats who act in an entrepreneurial way, often in conjunction with business and community leaders. What is important here is that as leadership broadens to include multiple stakeholders – from business, the public sector and non-government organizations – in the future development of the region, those stakeholders need to become increasingly entrepreneurial (aware, creative and opportunistic) in their quest to implement the strategy. This is the form entrepreneurship takes in successful leadership in initiating, fostering and implementing regional economic development strategy. Beyond the above discussion, the concept of entrepreneurship in the leadership-driven regional economic development context needs clarification in that leadership and entrepreneurship are not mutually exclusive concepts or actions: • Effective leadership must convey and convince participants in a development process that both new and creative approaches and actions are necessary. • Successful entrepreneurship needs to be executed in a way that supporting actors contribute to if not follow the path or vision the entrepreneur has on where greater profit and/or community benefits can be achieved. So while the two concepts overlap and are related in significant ways they are also different. A major purpose of this chapter is to clarify this relationship and make clear how the two are similar and how they are different, and how this symbiosis operates in the context of leadership executed in the economic development process. The chapter first examines the nature of entrepreneurship and leadership and then explores their relationship in an effort to explain how the two operate in the regional economic development process on the one hand, and the nature of their complementarity on the other. It then lays out examples of how regions have behaved entrepreneurially in pursuit of leadership-driven economic development strategy. It concludes with a discussion of the attributes of entrepreneurial behavior in pursuit of economic development strategy.

6.2

ON THE NATURE OF ENTREPRENEURSHIP AND LEADERSHIP

6.2.1 Classical Economic Theory The formalization of entrepreneurship and related theory stemmed from the

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work of Schumpeter (1934). Classical economic theory was erected on the premise that supply determined demand and that as supply changed a new equilibrium would be achieved as demand ‘sopped up’ that supply – that is, the demand curve moved up to meet the new supply curve. In short, supply determined all and economic systems were seen as in or moving toward equilibrium in the long run as with the classical economic model. However, the behavior or performance of economic systems witnessed major disequilibrium episodes that persisted over relatively long periods throughout the 19th and much of the 20th centuries (for example, the Great Depression of the 1930s). Consequently, despite the possibility, or not, that such systems moved toward equilibrium and/or achieved it in the long run, these systems were often not in an equilibrium state for extended periods – if at all – thereby creating huge disruptions in the maintenance of jobs and wealth, and their creation. Attempting to understand this was the focus of the work of many economists including such luminaries as John Maynard Keynes who turned the basis of the classical perspective on its head arguing that the problem was that demand determined the performance of economic systems, not supply. Thus, the solution could be achieved by increasing demand which would in turn increase employment, and wealth creation, and thus drive the system toward equilibrium. This of course has since been replaced with a series of adjustments in the theory erected on the expectation behavior of economic agents (Lucas, 1998) which in turn meant that government policies designed to increase demand mostly through government spending failed to work, at least in the long run. This was emphatically demonstrated when the behavior of the economy contradicted the prediction of the Philips Curve relationship which argued that interest rates were negatively related to unemployment. The point of this discussion is to illustrate that large-scale economic systems are difficult to keep in equilibrium or even to keep moving toward equilibrium. Schumpeter’s thinking on entrepreneurship is important in this context in that he argues that the nature of large-scale systems is to be essentially in a state of disturbance and thus while they may be viewed as moving toward equilibrium are thrown out of equilibrium before they reach it. The entrepreneur is the agent that creates such disequilibrating behavior – that is, the agent that drives Schumpeter’s ‘creative destruction’. In Schumpeter’s view, entrepreneurs are driven to create new goods and services or alternative ways to produce existing ones because the entrepreneur sees opportunities to achieve ‘pure profits’ – that is, profits above those that would be expected under prevailing conditions. Of course there are inherent risks to such first movers. This is where the notion of entrepreneurs as risk takers comes from. By taking the risk of creating a new product or service the entrepreneur is banking on her ability to see beyond existing conditions to a future where the envisioned product or service will be wanted and in so doing

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receive profits above those that would be achieved if she entered into the production of known items or adopted known processes. Later, Kirzner (1973) stood Schumpeter’s argument, at least in part, on its head. He argued that economic systems by their nature experienced disequilibrating effects due to cyclical forces, and natural and man-made disasters. In this view the entrepreneur perceives opportunities in the market place to create new goods and services that would help drive the disequilibrated system toward equilibrium. In short, Kirzner’s entrepreneur was an equilibrating force in contrast to Schumpeter’s entrepreneur. In many ways Schumpeter and Kirzner agreed in that they both see the entrepreneur as discovering and acting upon opportunities in the market place and being motivated to this end by the anticipation of ‘pure profits’. And they both argue that economic systems are not by their nature stable and thus, at best, are moving toward and/or away from equilibrium conditions. They differ, however, in their view of the effect of the entrepreneur’s behavior: Schumpeter seeing the effect as disequilibrating, and Kirzner as it being equilibrating. 6.2.2 A Regional Development Context This discussion is of interest because it lays out the basic foundations of entrepreneurship as it evolved in a profit-making context and how it may relate to the behavior of large-scale economic systems. As such, it provides a platform on which to erect a view of the entrepreneur in non-market situations. Entrepreneurial behavior on the part of a region is only partly analogous. The entrepreneur in this context is a fuzzier construct and raises questions such as: Is the entrepreneur a government economic development organization or is it a non-profit or community development corporation or some ad hoc group? While it might be argued that such groups perceive the opportunity for the region to improve economic performance with increased job and wealth creation in aggregate, it is seemingly clear that the motivation on the part of such group agents is not just for the pursuit of ‘pure profits’. In fact, the pursuit may be for improvement in the aggregate social welfare of the region. So where does the motivation for this come from? To answer this question it is necessary to expand the notion of individual and group motivation or goaldriven behavior to a broader frame that goes beyond the pursuit of exceptional individual gain. At the same time, however, communally or group-directed entrepreneurial behavior may be viewed as: • either contributing to ‘creative destruction’ and disequilibrating forces in the economy (after Schumpeter); or • contributing to equilibration (after Kirzner).

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The motivation for this broader view of entrepreneurship is embedded in potential but relatively vague individual or corporate gain on the one hand and possibly for social welfare benefit on the other. 1.

2.

It is possible to see individual and/or corporate economic gain occurring from enhanced regional economic culture or context (business climate). This can occur from strategy implementation that enhances the physical and institutional infrastructure of a region. Most often such benefits accrue initially to older business owners who have family, personal and corporate history in the region (and thus may be viewed as possessing ‘love of region’) in that their historical relationship or role acts to preserve legacy effects and social position. Social welfare gain and community benefit can occur from the spillover effect of improved physical and institutional infrastructure on job and wealth creation for a broader set of actors. Here, the literature on social and non-profit entrepreneurship is informative in that it argues that motivation for entrepreneurial behavior in the other than profit sectors comes from the fact that humans are social agents and thus may achieve personal returns (profits or psychic benefits) from helping to achieve specific outcomes that are perceived to be good for society. This argument or sets of arguments span the range of non-profit entrepreneurship from social to public sector entrepreneurship.

6.2.3 Contingency Theory Before finalizing the above line of thought it is important to return to the leadership construct. As noted in Chapter 4, there are a number of theories of leadership. Further, elements of these have been reviewed and assessed. Here, however, the focus is on the contingency theory of leadership because it provides a strong basis for exploiting and deepening our understanding of the link between leadership and entrepreneurship. Contingency theory argues that leadership is evoked by an event, occurrence or perceived opportunity that threatens an actual or perceived status quo or in the above referenced terminology, ‘equilibrium’. Such contingencies or events may be natural (earthquakes, tsunamis, hurricanes, droughts, famines) or man-made (economic cycles, wars, new technology, new social theories, large-scale theft, misguided public policies). While this theory may be applied to explain incremental acts of leadership motivated by minor opportunities or threats, our concern here is with regard to major leadership processes where whole regional systems are directed in a new or modified direction due to a major disequilibrating event (physical or man-made). Contingency theory may be used to bridge, explicate and define the relationship between leadership and entrepreneurship:

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• major contingencies evoke or beg for change and breaking with old traditions and processes • such contingencies may be viewed as the catalyst or pre-conditions for the emergence of significant new leadership • that leadership must be energized by a different vision of how the regional economy can evolve and offset the conditions causing poor performance such as job loss and wealth stagnation or degeneration • in discovering or creating a new model for economic growth and development, that leadership is entrepreneurial • however, implementing such a model also requires discovery of new techniques, methods, products, industrial sectors, finance, and so on • this is where entrepreneurship is fundamentally important in the leadership-driven adjustment process of regional economic development. Contingencies are thus seen as the primary catalyst evoking the leadership that guides the redevelopment process and in turn evokes entrepreneurial responses to implementing that process. In our view, leadership is the critical mover that may play a catalytic role in redevelopment initiatives, and entrepreneurship is the critical process for discovering and creating the methods, processes and products/services that propel the movement of the old economy to the new. 6.2.4

Contingencies: Roles and Examples

Contingency theory posits destabilizing events or occurrences that serve as the catalyst that evokes leadership needed to move systems toward equilibrium. In this regard it is consistent with Kirzner’s (1973) view of the relationship between entrepreneurship and the operation or direction of economic systems. As noted above, this view may serve to explain responses to incremental or less than system-wide impact events. Certainly leadership occurs in sub-units of organizations and sub-parts of economic systems and thus may be viewed as incremental in nature. Such cases of leadership are ongoing and likely exist quite broadly even in near equilibrium conditions. However, broad systemwide impacting leadership rarely occurs unless existing conditions are severely threatened or are exposed to an unanticipated or misunderstood and thus not well predicted system disequilibrating event. As noted earlier there are many different sources of such events as the world is exposed to considerable uncertainty. Consequently, natural disasters and man-created shocks (often not intended to create destabilizing events) most usually are the sources of such events. At the same time they are not always the source as it is conceivable that perceived opportunity if properly marketed to stakeholder groups could be a catalyst of leadership that drives a

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system toward a different outcome or equilibrium. For example, one might argue that the development strategy of Hyderabad to become a second center of the IT services industry in India is a case of opportunity-driven rather than threat-driven leadership. Another similar case is the rise of Austin in Texas as a technology center. However, the cases of opportunity-driven systems impacting leadership are rare compared to threat-event-driven ones. Most of the cases that are discussed and assessed in Part II of this book are threat-event-driven ones. For example, many of the North America cases (Chapter 7) deal with leadership that arose or failed to arise to the threat of deindustrialization. Some of the cases in Europe also are such examples. Others such as Freiburg (Chapter 8), Hong Kong, Singapore, and Chihuahua in Mexico (Chapter 7) were driven by political change. Further, there are many cases of regions that have experienced leadership-driven redevelopment in response to natural disasters (and there are many where leadership failed or is still in question despite the transfer of significant amounts of resources from higher levels of government, as seen recently in New Orleans and the dysfunctional responses to the hurricane Katrina disaster). Contingencies appear to be at the heart of the forces that evoke systemic impacting leadership. Further, most of these seem to be threatening contingencies. Although there are cases that appear to be driven primarily by discovery or opportunity, and by the successful marketing of such approaches to capitalize on the opportunity, these seem to be rare or at least much less frequent than threat-driven contingencies.

6.3

ENTREPRENEURIAL CHARACTERISTICS OF LEADERSHIP-DRIVEN ECONOMIC DEVELOPMENT

Regional leadership needs to show entrepreneurial characteristics. Derived from Schumpeter’s (1934) and Kirzner’s (1973) ideas of entrepreneurialism, a region may be thought of as being entrepreneurial if such leadership shows the following characteristics: • It believes in change and initiative to ‘energize’ it to meet competitive challenges and to keep progressing. In short, leadership needs to exhibit discovery, opportunistic and innovative behavior. • It possesses insights to enable it to identify opportunities and pursue innovative ideas to improve or adapt a region’s environment to meet the needed challenges facing it through ‘new combinations’ or innovation in institutional arrangements (Jessop, 1998: 84–5; McGuirk et al., 1998; Jessop and Sum, 2000: 2290).

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Those entrepreneurial characteristics can be seen if attention and effort is focused on the following actions (Jessop, 1998: 85): 1.

2.

3.

4.

5.

6.

Using new methods to create location-specific advantages for producing goods/services or other urban activities to shift the economic base of the city. Examples include technopoles, agglomeration economies, and so on. Introduction of new types of urban place or space for producing, servicing, working, consuming, living, and so on. Examples can include gateways, intelligent cities, multicultural cities, creative cities, and so on. Refiguring or redefining the urban hierarchy and/or altering the position of a given city within it. Examples include the development of a regional gateway, hubs, and so on. Finding new sources of supply to enhance competitive advantage. Examples include attracting inward investment or reskilling the work force. Therefore, the focus on this factor will be on the tendency shown by the community to undertake entrepreneurial local initiatives. Opening new markets, whether by place-marketing specific cities in new areas and/or modifying the spatial division of consumption through enhancing the quality of life for residents, commuters or visitors. Finding new sources of supply to enhance competitive advantages. Examples include changing the cultural mix of the cities, finding new sources of funding, or re-skilling the workforce.

In each regard, entrepreneurialism in the context of a region contains the element of uncertainty that many see as the very essence of entrepreneurial activity. In this sense, ‘it is speculative in design and therefore dogged by all the difficulties and dangers which attach to speculative as opposed to rationally planned and coordinated development’ (Jessop, 1998: 84–5).

6.4

CONCLUSIONS

This chapter has shown the relationship between leadership and entrepreneurship and has laid out the nature of entrepreneurship in the context of leadership-driven regional economic development. It used contingency leadership theory to further elaborate on the nature of regional economic development leadership and to draw an analogy between such leadership and both Schumpeterian and Kirznerian theories of entrepreneurship. This served to illustrate that the concepts of leadership and entrepreneurship are related so to speak at the ‘hip’ but are different in that leadership is most often catalyzed by disequilibrating contingencies and entrepreneurship (taking here the Kirznerian view) is driven by discovery and opportunities in response to such

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contingencies. It was also recognized that raw opportunities sometimes serve the role of threat contingencies but not often. Entrepreneurship in the context of leadership-driven economic development takes on a number of characteristics such as new methods, new industry targets, new institutions, new methods of finance, provision of new and different physical and institutional infrastructure and new actors. The next two chapters illustrate these characteristics through a variety of case studies taken from North America and other parts of the world.

PART II

Examples of regional development initiatives involving leadership and institutional factors: Case studies from North America, Europe and the Pacific Rim

7. Case studies from the United States In this chapter we present five case studies from the US. These are for: Pittsburgh, Pennsylvania, Houston, Texas, Austin, Texas, the State of Colorado and Indianapolis, Indiana

7.1

PITTSBURGH, PENNSYLVANIA, USA

7.1.1 Background: An Industrial Collapse The collapse of the steel industry in the early 1980s hit Pittsburgh so forcefully that, in the period from 1979 to 1988, the region suffered a decline of 44 percent in manufacturing jobs (Clark, 1989: 41; Sbragia, 1990: 53–4). Such a decline caused the region to lead the nation in population loss during those years. However, by the late 1980s, Pittsburgh was rising from the debris of a collapsed steel industry, towards a city of standing in cultural offerings, with one of the best public education systems in the country, and very livable neighborhoods. Such an urban renaissance was not only due to the fact that Pittsburgh possessed potential sources of new employment and therefore was able to develop ‘new exports’, but also because it was the result of private and public leaders concerned with the region’s economic development (Sbragia, 1990: 53–4). In Pittsburgh, there has been a long history of cooperation. The culture of cooperation between the public and private sectors has been so sustained that it has given Pittsburgh policymaking a distinctive character. The recent prominent involvement of the non-profit sector in the city’s economic development strategy has also been noteworthy. The ‘politics of consensus’ describes Pittsburgh politics more accurately than it does that of many other eastern and mid-western cities in the US (Sbragia, 1990: 58–9). In the background has been strong leadership on the part of the many Fortune 1000 companies in Pittsburgh through the Allegheny Conference organization. This organization played an important role in Pittsburgh’s regeneration and in building the culture of cooperation that has resulted in Pittsburgh’s economic regeneration.

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7.1.2


The Process of Regeneration

The process of regeneration in Pittsburgh may be divided into phases. The first two phases, Renaissance I and Renaissance II, describe the strategies introduced by private and public leaders who were concerned about the region’s future. In both phases, public and private leaders implemented projects that were directed towards the regeneration and the renewal of the city. 1.

Renaissance I was built on a relationship between a strong Mayor, David Lawrence, and a strong businessman, Richard King Melon. This partnership, mainly led by the private sector and with the public sector playing a facilitating role, was based on a series of environmental, physical and institutional changes (Sbragia, 1990: 60). 2. Renaissance II coincided with the collapse of the steel industry in the region and was designed to redevelop real estate and help the city cope with the economic problems of the 1980s. During this period, first Mayor Peter Flaherty and then Mayor Caliguiri made neighborhood revitalization a priority. The public sector took the leading role in the partnership. In that context, those mayors and neighborhood groups became important elements of the city’s political and policy equation, and their incorporation into the city’s policymaking laid the basis for the strikingly consensual nature of redevelopment in Pittsburgh in the 1980s (Sbragia, 1990: 59–60). Sbragia (1990) and Judd and Parkinson (1990) point out that both of these periods of high development generated important lessons: the importance of commitment from the top in the face of changing political leadership; subordination of personal or business interests; a bond of trust being present between the private and public executives and organizations; and both the public and private sectors being active in initiating and implementing development strategies. 3. Renaissance III sought to address the problems of the city’s economic base. With the realization that the steel industry would not be able to generate enough jobs, both the University of Pittsburgh and Carnegie Mellon University adopted a strategy that sought to change Pittsburgh’s economic base. Developing advanced technology firms was seen as the appropriate strategy to follow (Clark, 1989; Sbragia, 1990). Named Strategy 21, it was characterized by the consensual-style policymaking rooted in Renaissance I and II. However, Renaissance III differed from the past in that it was characterized by the interdependence between the public and the non-profit sectors (universities and science centers). According to Sbragia (1990: 62), this strategy involved bargaining that forced actors to listen and cooperate with each other.

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7.1.3 The Success Despite the fact that traditional industries were unable to remain competitive, Renaissances I, II and III all helped the city address unemployment by diversifying its economy. Pittsburgh’s subsequent economic growth derived mainly from the educational and advanced technology industry sectors. While it is true that the economy did not recuperate entirely from the 1980s crisis – particularly when compared with neighboring counties – it is clear that local leadership was the crucial variable in determining how the city responded and readapted to economic changes (Sbragia, 1990: 53; Judd and Parkinson, 1990b: 298). The involvement of the private, public and non-profit sectors in Pittsburgh’s economic development made the city better off than if no such effort had been made. The absence of such partnerships would have exaggerated and exacerbated the economic decline.

7.2

HOUSTON, TEXAS, USA

7.2.1

Background: Free-wheeling Capitalism

Between the late 1930s and early 1980s, the city of Houston was known for its remarkable record of economic progress. ‘Urban Reaganomics’ and ‘urban entrepreneurialism’ were concepts pioneered in Houston long before they were given those names (Parker and Feagin, 1990: 216). Houston was characterized as having a modern weak government and being an unplanned and free enterprise city (Parker and Feagin, 1990: 217–18). Houston’s economic success was rooted in its oil industry, the value of trade through its port, its federally subsidized space-defense complex, and its evolution into a national medical center. The combination of such diverse economic resources allowed Houston to become known as ‘the city that never knew the Great Depression’ (Parker and Feagin, 1990: 221). 7.2.2 A Recession Nevertheless, by the mid-1980s, the oil recession, along with many bank failures and considerable out-migration, generated more hardship in the city than was the case in the nation at large. In the face of growing economic downturns and despite the obvious need for action ‘Houston’s elites were slow to respond to economic decline and they were slower to recognize the full range of its causes’ (Parker and Feagin, 1990: 221). In 1982, Houston was spending 11 cents per capita on economic development while states such as Louisiana or Arizona were spending 94 and 68 cents respectively (Parker and Feagin, 1990: 221). Parker and Feagin argue that the

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reason for such a relaxed approach was that prior to the 1980s Houston’s economic development seemed to take care of itself, and thus business elites concentrated on creating and perpetuating a ‘good business climate’ (ibid.). 7.2.3

An Entrepreneurial Approach

As was the case with many cities in the ‘sunbelt’ areas of the US, Houston has been characterized by its aggressive entrepreneurial elites. Houston’s business elites have been particularly successful in creating private-public partnerships in which the governments are little more than sycophants and servants of business interests. Since Houston’s founding, the power structure of the city has been dominated by a succession of leaders from the business community and more specifically high-level corporate executives. Entrepreneurial groups – such as the Suite 8F Crowd or The Greater Houston Chamber of Commerce – were deeply involved in Houston’s development. Virtually without interruption, the local business elites have been able to exercise dominance over governmental decisions, use public expenditure to support business goals, and limit the scope of government regulation (Parker and Feagin, 1990: 227–9). This is partly due to a weak civic tradition and limited involvement of other non-business stakeholder organizations such as unions, voluntary groups, and so on. Thus, in Houston: ‘business leadership towers over almost everyone else’ (Savitch and Kantor 2002: 77). In 1984, the leaders of the Houston Chamber of Commerce established the Houston Economic Development Corporation (HEDC) in an attempt to help Houston’s economy diversify. However, few of the nine pivotal areas regarding diversification and economic development had firm roots in the Houston economy. Besides such diversification attempts, the HEDC tried to maintain Houston’s reputation as a city with a favorable business climate in order to bring money into the city. Ironically, some argue that such an advantage is at the root of Houston’s downturn since the tax giveaways led to minimal impact and a general lack of local and state services, and thus the impoverishment of many (Parker and Feagin, 1990: 229). In fact, according to Savitch and Kantor (2002: 86) the civic gospel in Houston is that the city government should be managed like a business corporation and thus, limit public expenditures and maximize personal revenues. 7.2.4

Lack of Leadership and Institutional Capacity

Parker and Feagin (1990) argue that Houston’s incapacity to exercise alternative options for economic development is rooted in the fact that there is no active arena for political debate through an organized opposition to contest and challenge the status quo. Therefore:


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Houston’s leaders operate in a reactive mood, trying to hold off the worst effects of economic downturns. Much of the HEDC focus has been on narrowly drawn business concerns. (p. 229)

According to Savitch and Kantor (2002: 77), politics in Houston are nonpartisan. Rather than parties, private interest groups (chamber of commerce, realtors, and so on) select political candidates, diminishing competitive politics and emphasizing personality over programs. The Houston economy became shaped by the entrepreneurial efforts of business elites; however, the policy responses of a ‘favorable business climate’ have not resulted in collective benefits. The main causes of this seem to be the lack of community leadership that promotes the economic development of the region as a whole rather than for the benefit of a single group and related institutional infrastructure. This is despite the presence of an entrepreneurial and strong business community group that has dominated the politics of the city, but this has not resulted in an attempt to create a more inclusive style of politics. The focus on making Houston a city with a ‘good business climate’ has created economic benefits only for some (Parker and Feagin, 1990; Parkinson, 1990: 305).

7.3

AUSTIN, TEXAS, USA

7.3.1 Background: Technology-induced Growth Austin represents a unique case for having launched spectacular technologically induced growth in the 1980s and 1990s, despite the fact that it had previously been a relatively limited regional economy, albeit a state capital dominated one. Formerly known as a sleepy college town of 200,000 residents, whose principal employers were the state government and the University of Texas, it is now a region that has transformed itself into one of the most vibrant technology-intensive regions in the US, with a population of almost one million (Miller, 1999: 1). Austin’s economy is now based on technology-intensive industries such as software development, semiconductor R&D, computer system integration, software consulting, data processing and Internet-related services. Over the period 1994–98, employment grew 4.7 percent per annum. Technology-related industries comprise Austin’s largest employment sector (European Commission, 1999: 5). 7.3.2 The Turning Points According to Miller (1999), the Austin success was the result of several actors working together to create a new economic base; that is, Austin’s high-tech

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transformation was driven by a vision and a plan that was aggressively pursued by a group comprised of businesses, academics, and government leadership and partnership (Miller, 1999: 1). Universities and other centers of learning have also played a key role in educating and training the workforce, conducting research and transferring technology to the market place. Access to capital, a friendly business environment, and the quality of life that the city offers, were also behind the Austin economic development success (European Commission, 1999: 5). However, it is important to note that while state and local government played a crucial role, the driving force behind this vision sprang from the private sector through the Greater Austin Chamber of Commerce and a visionary, Dr George Kozmetsky (Miller, 1999: 1). Kozmetsky was one of the cofounders of Teledyne in Silicon Valley, who came to Austin in 1966 to become the Dean of the UT-Austin College of Business and Administration. By the 1980s, he had helped to create numerous high-tech entrepreneurial organizations and promoted the development of a technology-based city (Miller, 1999: 3–4). The turning point in Austin’s high-tech development occurred in 1983 when the city won the nationwide competition for hosting the Microelectronics and Computer Technology Corporation (MCC). MCC chose Austin over 57 cities across 27 states. Determined to win the competition, Governor Mark White’s office, the University of Texas and the business community, led by the Austin Chamber of Commerce, put together a package of incentives totaling US$20 million. The establishment of MCC served as the ‘trigger point’ for Austin’s development as a future technology center (Miller, 1999: 4). The successful recruitment of MCC became the focal point for local leaders to develop the next phase of Austin’s economic development. In 1984–85, the Austin Chamber of Commerce started to look for new ways to update the last plan that dated to 1957. The Chamber requested SRI International to design a plan for Austin’s development over the next 10–20 years. The resulting plan – entitled Creating an Opportunity Economy – proposed that the future of Austin should be molded in terms of a 5-sector economy, with three sectors being science and technology-related, and the other two being government and support services. The focus was on research and development; technology manufacturing and technology-based information (Miller, 1999: 4). Miller (1999) tells how ‘the Austin region’s leaders took the recommendations to heart and created a plan to implement them’ (p. 5). The next major event that helped build the reputation of Austin as a hightech, R&D and manufacturing center came in 1988, when the semiconductor research and development consortium Sematech was attracted to and located in Austin. Sematech is a public–private partnership created between the Federal Government and the domestic semiconductor industry originally to


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face the competition that Japan posed to the domestic US sector. Sematech is regarded as responsible for the revival of the US semiconductor industry. The experience that Austin gained with the establishment of MCC made the job of recruiting Sematech much easier. Recruiting Sematech involved virtually the same cast of players with the addition of US Representative J.J. Pickle, who represented Austin in Congress. Using his influence, Congressman Pickle, along with the aid of the rest of the Texas congressional delegation, ensured that Sematech would receive sufficient government funding to exist. UT provided the site to create the facility and build a 92-acre university research park around it (Miller, 1999: 5). During the period 1993–98, technology-based industries added almost 130,000 to the regional employment base, representing a growth rate of 4.7 percent per annum over this period (Miller 1999: 1). In 1998, the economy of Austin grew at a rate of 4.6 percent and created 26,200 jobs, the highest growth rate in 1998 for any metro area in Texas. The unemployment rate in 1999 for Austin was the lowest (2.2 percent) when compared to 4.6 percent for the state of Texas, and 4 percent for the US. Per capita GDP also grew from about US$9,000 in 1980 to about US$18,000 in 1996 (Miller, 1999: 1). 7.3.3

The Success Factors

There are several factors that led to Austin’s development as a technologyintense economy. These are: 1.

Entrepreneurial spirit: Technology entrepreneurship in Austin has had a long history and it played a key role in the development of the region’s high tech economy. A good example can be seen in Michel Dell, founder of Dell Computer Corp. Dell is the second largest manufacturer of computers in the world and the world leading direct computer system’s company. Started in Dell’s dorm room at UT, Dell Computer is now the largest private sector employer in the Austin region (Miller, 1999: 5). 2. Public–private partnerships: According to a study carried out by the European Commission (1999), ‘Austin’s economic boom was built entirely on public–private partnerships’ (p. 13). As mentioned above, winning the nationwide competition to host MCC was the result of an all-out recruitment effort involving Austin’s Governor Mark White’s office, the University of Texas and the business community led by the Austin Chamber of Commerce. Later on, recruiting Sematech involved cooperation among virtually the same cast of characters that had landed MCC (European Commission, 1999: 13). Thus, Austin had benefited from the ability of these three groups to work together in support of a common plan in

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transforming Austin into a center for technology-intensive employment. The Greater Austin Chamber of Commerce took the lead (among the other players) and had a notable tracked record in aggressively recruiting high-tech firms to Austin. The UT-Austin had the resources (financial and talent) to offer significant incentives to prospective arrivals. Furthermore, the governance arrangements were appropriate to ensure the provision of financial incentives and to attract businesses when necessary, as well as to provide the necessary salesmanship by the governor and the mayor (Miller, 1999: 6). 1.

Economic resources and positive business climate: States can foster and attract economic activity by offering a business friendly regulatory and tax environment. For example, the state of Texas has no income, business or property tax and the regulatory burden is considered low (European Commission, 1999: 8). The state of Texas also offers a number of incentive programs designed to make capital more available for business expansion and relocation. These incentive programs, along with the adequate supply of venture capital, have fueled technology growth in the Austin region. For example, Austin Venture is the largest venture capital firm in Texas and one of the largest in the US. More than 40 percent of the firm funds are invested in Austin and typically on activities related to information technology (Miller, 1999: 9). 2. Educated workforce/training: The Austin area is well known for its high level of education, which is a result of a solid primary and secondary education system, strong community colleges, and an accomplished research university (UT-Austin).

Although Austin has become a ‘technopolis’ and a knowledge-intensive economy, renowned for its high technology and high economic growth rates, civic leaders started to look ahead in preparing Austin’s economy for the 21st century. Consequently, the Greater Austin Chamber of Commerce and many civic leaders commissioned a new economic development strategy report, that put emphasis on developing emerging industry clusters of the future such as multimedia, logistics/distribution, telecommunications, transactions services, biotechnology, and so on (Miller, 1999: 11).

7.4 7.4.1

COLORADO, USA Background: Resource Dependence and Boom and Bust

In the State of Colorado, the traditional emphasis on mining, oil and gas, and agricultural industries has been replaced by an emphasis on greater industrial


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diversity, from aerospace, communications and computing, to the environmental industries, biotechnology and biomedical industries (Snow, 1999: 1; European Commission, 1999: 4). A trend toward ‘niche’ manufacturing sectors – such as high-tech mountain bikes and skiing equipment – is also evident (European Commission, 1999: 4). Since the 1980s, Colorado emerged as a favored location in the United States for job growth in technologyintensive industries: A strong Federal presence, good research universities, a highly educated and well trained workforce, a State government focused on fostering a positive business climate, an exceptional environment, a superior quality of life, and the opening of Denver International Airport, all contribute to attract venture capital to Colorado. (Snow, 1999:1)

However, this level of success did not always exist. In fact Colorado was characterized by a ‘boom and bust’ economy with its dependence on traditional sectors, such as agriculture, mining, and oil and gas. In the mid 1980s, as the state was in the midst of a severe depression and Denver was seemingly becoming an economic ‘ghost town’, the new Governor, Roy Romer, took seriously the urgent need to diversify Colorado’s economy: His administration focused on creating an environment favorable to the development of business, particularly small business, through the use of tools such as ‘enterprise zone’ tax credits, customized job training programs, financial assistance, and small business development centers. (Snow, 1999: 1)

By 1998, the Development Report Card for the State – an economic benchmarking report prepared annually by the non-profit Corporation for Enterprise Development – rated Colorado highly among all states in the US (Snow, 1999: 1). It was rated: • 2nd place for business vitality, measured by the number of new businesses formed each year, and the competitiveness of existing businesses • 3rd in the nation for development capacity, measured by the quality of its human technology, financial and infrastructure resources • 4th for economic performance, as measured by employment growth, earnings and job quality, equity, social and health conditions. 7.4.2 The Actors and the Factors Involved in Promoting Regional Development The actors involved in promoting the regional development of Colorado are numerous. However, these actors can be placed into several broad groups, including: business, individual entrepreneurs and other leaders; local, state and

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federal governments; and universities. According to the European Commission (1999) ‘It is often difficult to separate the role of each; their contribution to regional economic development, are [sic] often the result of cooperation encouraged by public-private partnerships’ (p. 6). The central factors in the success seem to have been the following: 1.

Public–Private Partnerships: Through public–private partnerships and other arrangements, business has played a key role in promoting conditions that led to the creation of new enterprises (European Commission, 1999: 6). One example is the Boulder Technology Incubator (BTI), a nonprofit corporation that assisted many firms in developing technologybased business by providing management resources, capital access, training, and promotion of technology transfers and joint ventures. It is estimated that BTI has added nearly 800 jobs and $200 million in the economy (European Commission, 1999: 6). 2. Venture Capital and Entrepreneurial Spirit: Venture capital and entrepreneurial spirit has fueled the application of market technology and enabled committed individuals to bring good ideas to the market (European Commission, 1999: 6). According to Snow (1999), in Colorado ‘individuals are willing to take risks, work very hard for many years in order to bring an idea to fruition and in the process gain material rewards. Promising individuals may find “angel” investors, “mentors” and business advisors willing to help’ (p. 7). One example is the Colorado Capital Alliance Inc., a non-profit angel capital network formed in 1996 by business leaders around the state of Colorado. This non-profit network has helped many entrepreneurs find mentors to support their needs (European Commission, 1999: 6). 3. State and Local Government: State governments can influence the pace of innovation and economic growth in a region (European Commission 1999: 8). In fact in Colorado, state governors, mayors and other local leaders have often provided personal leadership and the vision needed to rebuild the state economy. They have done this by catalyzing and coordinating activities to promote economic growth, by facilitating flexible regulatory and favorable tax policies, by supporting research and university activities related to technology transfer, by improving transportation and communications infrastructures and by fostering an overall good quality of life to attract and retain investment (European Commission, 1999: 8). There are many examples that show Colorado leaders’ commitment to the state’s economic growth. One such instance was when: ‘in the midst of a severe economic downturn, former Colorado Governor, Roy Romer, declared his state “Open for Business”. This set the tone for an economic turnaround based on the promotion of small business’ (European Commission, 1999: 8).


4.

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Universities and community colleges: Educational institutions have tailored the skills of the workforce to the needs of the industry, and have been crucial to research and development and technology transfer in the region (European Commission, 1999: 6); that is, at the request of individual companies, or the state government, they have developed curricula geared to specific company needs. For example, the Colorado Bioprocessing Center on the Colorado State University Campus helped Synergen Inc. of Boulder to obtain trained process personnel for their manufacturing plan (Snow, 1999: 5).

Coalitions among government, business and research communities have thus allowed Colorado to achieve economic growth based on an agreed plan (European Commission, 1999: 6). The State government has created a good business climate. The availability of ‘angel’ and ‘venture’ capital has been an essential factor in the development of new business, bringing many entrepreneurial ideas into reality. Universities and community colleges have also played a key role in educating, training and carrying out joint applied research with industry. Finally, Colorado’s geography and its exceptional environment have also mattered in the location decisions of businesses (Snow, 1999: 15).

7.5

INDIANAPOLIS, INDIANA, USA

7.5.1 Economic Collapse Indianapolis is located in the State of Indiana in the heart of the Mid West of the US. It was part of the US Manufacturing Belt that extended from Chicago, Illinois and Milwaukee, Wisconsin eastward to New York and Boston. In the 1960s and 1970s this was the heartland of US manufacturing producing nearly two-thirds of US value added in the 1950s, much as the Golden Triangle in Europe that extends from the Midlands in Great Britain across the English Channel through Paris to Turin and Milan in Italy and then northward to the North Rhine-Westphalia region (lower Rhine river valley) and the Randstad in the Netherlands. Indianapolis was a mid-level center of the Manufacturing Belt with an urban region population of less than one million. Its primary economic activities ranged from pharmaceuticals (headquarters of Lilly Pharmaceuticals, Inc., one of two or three of the largest companies in that sector in the world), a variety of automotive-related plants, for example Allison Diesel, Inc. (engines and transmissions) and the state capital of Indiana. As Japanese production methods gained acceptance and demonstrated that such methods could produce superior products, both more efficiently and with

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lower cost labor, the whole US economy became increasingly threatened. By the mid-1960s job growth in Indianapolis stagnated, and plants began to relocate to lower wage areas mostly in the South and Southeast of the US as the nascent rise of economic centers in the so-called Sunbelt in the US began to occur. In short, the Indianapolis economy was under serious threat as the foreign competition utilizing new production processes and in some cases technology, and with lower wages, increasingly demonstrated superior output. Indianapolis had been pushed out of the comfortable equilibrium it had enjoyed with few exceptions (for example, during the Great Depression) since the beginning of the industrial revolution. A more detailed description of the forces impacting competitiveness in Indianapolis in the 1950s and thereafter appears in City of Indianapolis (2007). 7.5.2

Developing a Strategy

At this time in the mid-1960s senior business and community leaders, facing the growing reality of economic decline, began to understand the threat and to discuss how to address it. One of the first acts was to form the Greater Indianapolis Progress Committee (GIPC – pronounced ‘gipsy’). GIPC was composed of CEOs of major corporations such as Lilly (the Lilly Foundation; at that time one of the largest if not the largest foundation in the US), various auto components-related firms and the Indianapolis Water Company (an old organization that had for over 100 years been led by senior community leaders). There were several reasons why the membership of this ‘club’ was only CEOs. First, these were the heads of organizations that were historically rooted in Indianapolis. Second, CEOs usually play a minor or no role in such broad-based private sector organizations as Chambers of Commerce. Consequently, the broader and more diverse and thus representative organizations did not have the senior leadership needed to drive the development of a new and different economic strategy. Third, these were heads of organizations that provided a major portion of regional employment. Fourth, CEOs more than any other persons controlled the ‘slack resources’ (Cyert and Marsh, 1963) of their companies. This was important because any initiative to counter the economic competitiveness would require resources and many of these would have to come from outside government. CEOs were the persons who controlled the ‘slack’. Slack resources are those that are available to be used at the discretion of senior leadership and historically have been deployed for community and philanthropic purposes deemed important by such leaders. The size of slack tends to vary with level of performance. Fifth, persons who head established corporations in a region most likely have their lives and livelihood, their families and associates embedded in the region and thus will have, for lack of a better term, ‘love’ and thus commitment to the health of


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their region. In short, they will care a great deal about the maintenance of the region as the home of their family, employees, associates, friends and company and thus will have a high level of motivation to find a solution to threats. GIPC, with the services of a major ‘think tank’, developed a strategy to stabilize and regenerate the economy. The heart of the strategy was targeted to the service sector. Under this strategy Indianapolis would initially become the amateur sports capital of the United States and then the primary center for association headquarters in the middle part of America. It is important to note here that the leadership for the Indianapolis response to the extreme competitiveness threat came primarily from the private sector in the form of CEO leaders. For sure then mayor Richard Lugar was soon to join in and back the effort, but the prime movers came from non-government sources (see City of Indianapolis, 2007; Hudnut, 1995 for more background on the development of a strategy). 7.5.3

Implementation and Outcomes

As the strategy was formed and implementation began it was necessary to create the infrastructure to support the amateur sports capital theme. This included the construction of a wide variety of sports infrastructure elements such as pro-quality stadiums, a natatorium that would support national and international sports events, a veladrome, and so on. Neither the State of Indiana nor the City of Indianapolis had the resources to fuel the construction of these facilities on its own. Only when the Lilly Foundation agreed to redirect its yield (amounting eventually to several hundreds of millions of dollars) to the infrastructure development objective was it possible to create a resource pool large enough to support the construction part of the strategy. It is important to note that one part of the strategy was the construction itself as many jobs were created and maintained over a ten-year or so period in this way. Another element at the core of the strategy was the attraction of amateur sports associations to Indianapolis. As construction of the infrastructure began to unfold the region was able to attract the American Athletic Union (AAU) headquarters to the region. This was a centerpiece organization and thus began to convey that the Indianapolis strategy was serious and that it could work if the plan implementation continued. As more associations were attracted to the region, infrastructure in the form of conference facilities and spaces for accommodating meetings were needed. For sure, as national associations were attracted they in turn attracted others for exchange of information, planning, program development and other meetings, thus creating a need for hotel, meeting and conference infrastructure. In short, by the early 1980s the implementation of the strategy was gaining notoriety nationally and internationally. For

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example, by the mid-1980s Indianapolis had been selected as the site for the 1987 Pan American Games (one of the pre-competitive events leading up to the Olympics), had attracted a premier team from the National Football League (The Baltimore Colts), and other professional sports teams as well as an increasingly wide diversity of associations of all kinds. This part of the case study draws on works by the City of Indianapolis (2007) and Hudnut (1995, 1998). 7.5.4

A Model Success Story and Lessons

By the late 1980s the economic development strategy created in the late 1960s had achieved success and was recognized as a model for the redevelopment of other city regions in the US and abroad. Its mayor, William Hudnut, who followed Richard Lugar in the early 1970s and remained in office for more than 15 years, became one of the most sought after city mayors in the US for speaking engagements with requests to explain how Indianapolis achieved such extraordinary revival. While much of the success was due to continued and focused leadership on the part of Mayor Hudnut, it is important to recognize that initially the leadership came from the private sector and resources for the major investments that were needed to make the vision a reality came from the private sector as well as the public sector at the state and local level. In short, the private sector played an initial major leadership role and provided critical resources that could not have been amassed otherwise. Also, it is important to recognize that significant stakeholder involvement occurred with the State of Indiana, Indianapolis and private sector organizations like the Lilly Foundation partnering to create success. Further, it is not difficult for organizations like GIPC to create strategies for their region; what is difficult is to build broad stakeholder participation of those who were not members of the organization. It may be claimed that GIPC was and is an elite organization and that is true. However, it worked carefully to market the strategy concept and to attract diverse stakeholders into the strategy development process. So while it was elite in nature it also used its leadership to attract other partners and to incentivize their commitment and participation. This of course was easier once senior public sector leadership committed to the strategy. This discussion on achievements and outcomes draws again on such works as the City of Indianapolis (2007), Hudnut (1995, 1998) and Stough (2007). It is important to recognize pattern elements that appear to be characteristic of leadership in the US that evolve out of the US case studies. First, there are more than a few cases where private sector leadership provided catalytic leadership for a redevelopment strategy and its implementation. The role of the Allegheny Conference in Pittsburgh (see above) is a case in point. Another case that supports this claim, not reported here, is that of Baltimore, Maryland.


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Baltimore experienced industrial and port decline in the 1960s due mostly to the same competitiveness forces that so negatively impacted the economies of places like Indianapolis and Pittsburgh, namely de-industrialization. Baltimore formed the Greater Baltimore Committee (GBC) with a membership of 100 CEOs from the region and adopted a strategy to rebuild Baltimore from its harbor outward. This was the same model Baltimore had used to rebuild the region and its economy following a conflagration that destroyed most of the city in the 19th century. The strategy was implemented with great success and Baltimore became another model of urban region regeneration in the face of de-industrialization-driven competitive forces. The Baltimore case represents another pattern related to success and that is that regions that have achieved successful regeneration in the past often adopt anew the strategy used at an earlier time(s). Some of the European cases presented in the next chapter illustrate this thesis, for example, Rennes, France and Birmingham in Great Britain.

8. Case studies from Europe In this chapter we present seven case studies from Europe: Birmingham, UK; Liverpool, UK; Rennes, France; Lille, France; Freiberg, Germany; Tampere, Finland; and Rotterdam, the Netherlands.

8.1

BIRMINGHAM, UK

8.1.1

Background: Adjustment Through Entrepreneurship and Strong Municipal Leadership

Birmingham is Britain’s second largest city ‘Its history is dominated by two themes – its emergence as a great industrial city and a tradition of civic achievement unequalled by any other British city. These themes continue to dominate the city today’ (Loftman and Nevin, 1998: 130). Indeed, ‘Birmingham is regularly described as the most dynamic city in the world’ (p. 131). It is commonly known as a city which, over the years, has been able to provide strong and active municipal leadership, entrepreneurship and political pragmatism. That is, the city has a longstanding tradition of elected leaders, chief officers and political parties working together in the interest of Birmingham: ‘The persistence of this climate of co-operation sets Birmingham apart from other English major cities’ (ibid.). This tradition of enterprise and civic leadership can be traced back to the 1870s when Joseph Chamberlain was the mayor. During that time: ‘Birmingham gained an international reputation as being the best governed city in the world’ (ibid.: 132–3). In more recent years, Birmingham’s civic leaders have continued not only with the legacy of Chamberlain, but also with the history of municipal activism and political pragmatism (ibid.). 8.1.2

Vulnerability

Throughout most of the nineteenth and twentieth centuries, the economy of the city was based on manufacturing. However, that overdependence made the city vulnerable to the structural changes in the national and global economy, particularly during the recession of the 1980s. Within a decade, the West Midlands region was transformed from ‘being one of the nation’s most 90

Case studies from Europe

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economically prosperous regions to a low-wage low-productivity economy suffering chronic levels of unemployment’ (Loftman and Nevin, 1998: 133). 8.1.3 Consensus for Regeneration The manufacturing base was particularly devastated, with the city losing 46 percent of total manufacturing employment between 1971 and 1987 (Loftman and Nevin, 1998: 134). Reflecting the City Council’s tradition of pragmatic politics and cross-party cooperation, a broad consensus emerged between the city’s major players in the 1980s to respond to the collapse of the city’s manufacturing industry. The Council sought to broaden the city’s economic base through the promotion of the service sector and the creation of a new image for the city (ibid.: 135). This consensus emerged despite frequent changes in the political control of the Council over that period. Birmingham’s political and business leaders were able to adopt a non-ideological and pragmatic approach by working in close collaboration with local political opponents and the private sector (ibid.: 134). In the transformation of Birmingham, it is important to mention the success of the city in attracting both private sector and European Community funds, which were to be a key element in carrying out the pro-growth strategy. For example, the Council established the Economic Development Committee in the 1980s to focus on tackling the city’s economic problems. Under the charismatic leadership of Sir Richard Knowles and the efforts of Councilor Albert Bore, the power of this committee grew considerably, allowing Birmingham to ‘succeed in its application to central government Assisted Area status, gaining access to essential European Community funds to support its economic development activities’ (ibid: 139). Another example was the Council’s use of two quasi-public sector companies – Hyatt Regency Birmingham Ltd and NEC Ltd – to finance and raise money to secure funds for the projects (ibid.: 139). In addition to securing funds for carrying out the projects: ‘the city council also sought to engage the private sector in the formulation of policies aimed at re-imaging and promoting Birmingham’s city centre’ (ibid.). In 1988, a City Centre Challenge Symposium was held to debate the future development of the city. The 1988 symposium resulted in the formulation of the strategies for revitalizing the city (Beazley et al., 1997: 188). Some of the projects in this strategy were: • the £180 million International Convention Centre (ICC) • the £60 million National Indoor Arena • the £31 million Hyatt Hotel built as part of the ICC development (Beazley et al., 1997: 189; Loftman and Nevin, 1998: 143, 147).

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It has been argued in research on regional development, the media, and by professional bodies that Birmingham City Council’s £300 million investment in its projects and strategies had generated considerable regional benefits by ‘diversifying the city’s local economy, attracting private investment and placing the city in the international map’ (Loftman and Nevin, 1998: 147). However, it is also noteworthy that many of the successes have resulted in the diversion of scarce Council resources away from ‘basic’ services, such as public housing and education services (Beazley et al., 1997: 189). Furthermore, it is argued that many of the jobs created by the redevelopment programs are of low quality. For example, in 1991, 42 percent of the 275 permanent jobs at the ICC were jobs within cleaning, catering and security occupation sectors (Beazley, et al., 1997: 190). An analysis by Beazley et al. (1997) found that these huge socio-economic impacts are the results of limited general public involvement or debate concerning the development of the city. 8.1.4 Community Reaction Since 1993, increasing community resistance to regeneration proposals saw the election of a new leadership in the Council which has implemented a ‘back to basics’ philosophy whereby local services, such as education and social services, are receiving priority in council resources over prestige development and civic boosterism activities (Beazley et al., 1997: 191). Therefore, it seems that the sustainability of the city’s development will depend on the ability of this new Council to make development proposals more sensitive to community needs (Loftman and Nevin, 1998: 147). However, those shifts in strategies have not changed the way policymaking is done in Birmingham. The new administration has continued to show political pragmatism, municipal activism and political consensus around the city’s strategies. But this time it is being done with the participation of the general public (Beazley et al., 1997:190).

8.2

LIVERPOOL, UK

8.2.1

Background: Industrial Decline and Lack of Capacity to Respond

Liverpool provides a marked contrast to the Birmingham case study discussed above. Parkinson (1990) describes Liverpool in these terms: Liverpool provides a classic location to examine the role of leadership in urban decline and regeneration. During the past two decades it has experienced a profound


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transformation under the impact of international economic restructuring, which has set before it major social and political challenges. However, a crucial feature of the city during this period is the way in which leaders reacted to the challenges it faced. In many respects, the city’s economic failure has been matched by a political failure that has exacerbated the costs of change. Ironically, the importance of leadership in urban transformation is illustrated by its absence – or incoherence – in Liverpool. (p. 241)

Leadership is seen by Parkinson (1990: 241) as the capacity to create stable and durable mechanisms and alliances that help to promote economic regeneration and allows the identification of a range of micro-level skills and macro-level resources that can generate that capacity. Liverpool’s leaders, however, seem to have had a deficit in both these respects. Over the years, the city’s leaders have failed to demonstrate the necessary political skills to form coalitions that are stable enough to promote economic regeneration. Moreover, Liverpool’s leaders have also shown a lack of many of the resources that underpin leadership capacity (ibid.). For example, the relationship between the public and private sectors in the city is seen to be weak, and the controversial relationship of the City Council with the central government has created little national support towards the city (ibid.: 241, 244). Adding to this lack of leadership, Liverpool has encountered problems in its quest for economic growth as the city is highly dependent upon a single industry, namely the port and warehousing (Savitch and Kantor, 2002: 56–7). Liverpool lost much of its competitive advantage when trade shifted away from Western Europe toward North America and when automation took place. In 1950, the port generated 27 percent of Liverpool’s employment, however by the 1990s that had declined to under 4 percent. Today, the port barely employs 500 people, and Liverpool continues to lose jobs as new industries have been established in other cities such as Manchester, which is only 50 miles away (Savitch and Kantor, 2002: 57). Also, the city’s social structure is characterized by a large working class, a relatively small middle class, and the absence of a versatile capitalist class (Parkinson, 1990: 244; Savitch and Kantor, 2002: 57). These negative characteristics had created more than two decades of regime instability in Liverpool. The city’s highly volatile and partisan party politics, a limited governmental capacity, a lack of powerful business leadership, and the inability to construct coalitions between the public and private sectors has not allowed the city to respond proactively to economic decline and build the elements of a regeneration strategy (Parkinson, 1990: 242). The period from 1973 to 1983 saw a dramatic escalation in the city’s economic problems, combined with a period of political paralysis because none of the city’s three political parties could achieve the necessary electoral support to get a majority on the council and develop a coherent response to

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economic decline (Parkinson, 1990: 245–6). While Liverpool’s economic decline is intimately connected to the city’s port, that decline began in the 1920s with the evolution of new technologies in transportation and communication which sent the port into a long-term decline, causing profound impact on the economy, and in particular fostering long-term structural unemployment (ibid.: 242, 245–7). Liverpool was, even at this early time, showing a poor ability to respond to threat and economic decline. 8.2.2

Delayed Reaction and Intervention

Despite the need for urgent intervention, it was not until 1987 that a stream of policy documents came from the City Council advocating the need to diversify the economic base of the city and, in particular, the need to regenerate the city center as the center of a regional market. Moreover: the city commissioned a variety of consultancy studies to examine the tourist potential of the city, the problem of the city’s image and city marketing, the economic potential of the design industry, and most significantly, the merits of creating a partnership between the public and private sectors to guide economic development. (Parkinson, 1990: 253)

Since the turn of the 21st century, things started to change and Liverpool is now showing some signs of regeneration. The economic collapse of the early 1980s has been arrested. Its docklands are going through some degree of renaissance, and new housing and tourist attractions are being built. Furthermore, there has been some growth taking place in modern sectors of the economy that show potential. The political complexion of the city has changed, and many of the internal divisions of the recent past seem to be lessened. However, many old perceptions linger, and the city still bears the reputation of ‘riot city’, with high levels of public employment, an underqualified and unskilled workforce, and a high rate of unemployment. As a result, the city is still at a loss for investment, with much of its land being vacant or derelict (Parkinson, 1990: 305; Savitch and Kantor, 2002: 57, 85).

8.3 8.3.1

RENNES, FRANCE Background to a Transformation

Le Gales (1990: 85), writing on the French city of Rennes, describes it as a dynamic city, which was able to pool its social and economic resources and become a symbol of urban regeneration in the 1980s in France.


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The transformation of Rennes began after 1945 with the election of a Christian Democrat, Y. Freville, as mayor. His vision marked a turning point in the history of Rennes as he implemented innovative strategies to turn the city into an international intellectual and cultural center (Le Gales, 1990: 71). His program had four main elements aimed at: • controlling the expansion of the city • developing higher education • improving the city’s infrastructure • attracting high-tech industries and developing research institutes and universities (ibid.). His time in office is recognized as one of the most innovative eras in the city’s history as he was able to bring together virtually all local actors (the university, the Chamber of Commerce, trade unions, young entrepreneurs, and so on) to be involved in the development of the city (ibid.: 72). Furthermore, Freville was able to secure a close network of high-powered civil servants who supported development projects. The Freville regime also gained strength by building strong ties with various local agencies (public financial institutions, developing agencies, and so on) that contributed the resources necessary to facilitate the projects (ibid.: 79). 8.3.2

A New Crisis

Yet, by the end of the 1970s, an economic crisis hit Rennes. The negative growth rates experienced in the traditional sectors of the economy and the closure of a series of plants brought significant job losses to the city (Le Gales, 1990: 79). In 1981, the increased pressure from the population to revitalize the economy brought a leftist government to power for the first time in 23 years. This new government brought considerable change to Rennes that resembled the years during Freville’s regime. Such changes turned the city again into one of the most dynamic cities of France (ibid.). 8.3.3 Institutional Response The new government strategy was characterized by the creation of a plan for development where the consultation process was very broad. Eight working groups headed by union leaders, business organizations, academics, public and voluntary sectors were established to decide policies for each of the main important economic areas of the city. The major theme of the policy was based on the assumption that job creation in Rennes could be achieved by the mobilization and development of scientific research capabilities (Le Gales 1990:

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78–9). Important institutional arrangements were in place to make it possible for the government to implement such strategies. For example, the political consensus and the broad participation of actors that was achieved allowed the new Mayor to mobilize national financial support and the interest of the locals for economic development (ibid.: 83–4). Important development and planning agencies were developed in Rennes (for example, CODESPAR) which allowed and thus enabled representatives of the business sector, the unions, and local authorities to work together and create partnerships (Le Gales, 1990). Rennes is thus a city characterized by having had emerge local high quality social capital conditions – mayoral leadership, broad consensus, social and economic resources – that allowed it to develop and implement successful strategies. Rennes emerged as a place characterized by high-order services, new technology firms, a good quality of life, high levels of research, and a good employment structure which allows it to remain a symbol of urban regeneration (Judd and Parkinson, 1990: 28).

8.4

LILLE, FRANCE

8.4.1

Background: Industrial Decline

By the end of the nineteenth century, the city of Lille in northern France was the second largest textile region in the world after the Manchester–Lancashire region. Its growth was enhanced by canal access to the ports of Flanders, Ghent and Antwerp. However, during World War I, the city suffered enormous deprivation, and then like other cities during the 1920s, it experienced recession and unemployment (Fraser and Baert, 2003: 87). Although some economic prosperity returned to Lille after World War II, the lack of urgency to restructure or change old patterns of industrial management further decreased investment. As a result, Lille started to experience social and physical decay typical of many former prosperous industrial cities, including those of the Nord regions (ibid.: 88). However, Lille was hit especially hard as the city area was considered peripheral and remote from the country’s economic and cultural life. It is estimated that over the period 1945–1996, the Lille area lost approximately 294,000 jobs in its traditional industries of textiles, agriculture, mining and related sectors. The coal industry lost all its labor force (approximately 90,000), and there were important losses in the chemicals, metalworking and service sectors. The economic decay of Lille was evident by the abandoned and decaying factories throughout the area (ibid.: 88).


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8.4.2 Planning Initiatives for Regeneration The fist initiative to reverse the economic decay of Lille came from the central government in the late 1960s with its strategy to divert growth away from Paris to other regions in France. The strategy, called Metropoles d’Equilibre was designed to divert investment to provincial city regions (Fraser and Baert, 2003: 93). However, a major influence in the recovery of Lille was the high quality of its political and technical leadership that led restructuring in the city over the 25 years (ibid.). Of particular importance was the role played by the Prime Minister, Pierre Mauroy. He was responsible for pushing and incentivizing the construction of the Channel Tunnel, and later on as a Mayor of Lille he pushed for the city to link up to the new European transport infrastructure network and reap the associated benefits (ibid.: 91). After hard lobbying by the authorities in Lille, it was agreed that the city would be the link between London, Brussels and Paris. This link greatly impacted the economic regeneration of Lille. The economic revival of the city was further assisted by local forces which gathered together to form the Comité Grande Lille, a body of some 300 people representing a cross-section of Lille’s society. That group still meets every two months to discuss issues and problems of current importance (ibid.: 102–3). 8.4.3

Major Projects

The economic revival of Lille may be seen in two major projects that signal the process of the regeneration of the metropolitan area: 1.

2.

The first was Euralille. According to Fraser and Baert (2003), securing the Eurostar link through Lille was the first step to drive the city’s economy forward into the post-industrial era. The link led to a reconstruction of a vast area of the city including the creation of shopping centers, the station that links the city of Lille and neighboring areas, office complexes, a park area, and so on (ibid.: 102). The second was the regeneration of Roubaix, the second city of the Lille metro region that signaled the process of regeneration in the region. In the 1990s it was a city in decline, with unemployment rates of approximately 27 percent and declining services and shopping facilities. Furthermore, the city was poorly connected to other parts of the metropolitan area (ibid.: 106). As with the city of Lille, it was a new mayor, M. Rene Vandierendonck, who brought a remarkable change to the unpromising situation of Roubaix. That change started in 1994 when the new mayor attracted the private sector and other actors together and formed them into an integrated team that in turn proposed a strategy based on the investment in three major public assets:

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• the first was the improvement of the city image by upgrading those public facilities that had fallen into decay • the second was the improvement of the transportation links both within the city and between the other centers of the metro region • the third was the physical redesign of the city. As these three initiatives evolved, others were added that progressively attracted the private sector to capitalize on the potential of other assets in the Lille region (ibid.: 104). It is said the entire program has had an impact on employment growth of 2,500 jobs attributed just to the enterprise zone. However, it is not clear if those jobs are being taken by locals who suffer from unemployment or by those who commute into Roubaix but live in other suburbs (ibid.: 105). Most probably it is a mix of the two. 8.4.4

Revival and Altered Image

The dramatic economic revival of Lille has greatly altered the perception and image of the region. For example, according to Fraser and Baert (2003: 102), Euralille is hailed as one of the largest and most stimulating projects in contemporary Western Europe. Furthermore, the regeneration of Roubaix represents a flagship project for the metropolitan area. In the case of both Lille and Roubaix, their respective mayors, backed by the Comité Grand Lille, had a vision of how the metro area of Lille could reinvent itself. In both cities the mayors and their staff had the necessary: skills to negotiate, coordinate and assure [that the] finance [was available] to make things possible, and not to have to wait on that initiative coming from somewhere else. (Fraser and Baert, 2003: 106)

8.5

FREIBERG, SAXONY, GERMANY

8.5.1

Background to Success: Capturing New Industrial Activity

The city of Freiberg in Saxony (in the former East Germany) has been analysed by Musyck (2003) as an example of regional development based on capturing new industry activity in the field of recycling and environmental technologies and services. This case is viewed as a ‘relatively successful process of economic renewal resulting from a combination of endogenous assets and exogenous impulses’ (p. 273), which helped the creation of new and innovative firms. It appears that there are three distinct but interlocking factors that underpinned success in the Freiberg case (ibid.: 271):


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• long-term historical assets and localized capabilities • the restructuring of existing local research institutes • public policies in support of environmental protection and applied research. 8.5.2 Industrial and Political Transformation Until the middle of the 19th century, the mining and metallurgical industries dominated the economy of the Freiberg region through a sustained growth supported by continuous efforts in science, education and technological development. However, from then onwards, the mining industry entered a steady decline, which led to the closure of many of the mines (Musyck, 2003: 277). Thus, the need to restructure and diversify the economy of the region towards other economic activities started in the middle of the 19th century. This process was driven by the creation and expansion of indigenous small and medium enterprises. According to Musyck (2003), at the turn of the 21st century, about half of the inhabitants of the city were engaged in other industrial activities for their livelihood. Most of the newly created firms engaged in chemical, metallurgical, electrical, electronic, scientific instruments, and mechanical engineering industries. The research potential of Freiberg was also significantly boosted with the creation and expansion of several institutes of fundamental and applied research. These institutes were seen as necessary complements to the existing industrial activities (p. 277). The demise of the communist system at the end of the 1980s brought to East Germany significant economic problems that stemmed mainly from the non-competitiveness of the regions’ firms. As a result, a large number of firms disappeared, which translated into the collapse of production and massive unemployment (ibid.: 273). However, the sudden dismantling of the German Democratic Republic, while precipitating a deep crisis in the local labor market, allowed, within a few months, large numbers of qualified scientists to became available. This formidable body of immediately available expertise allowed for the creation of the eco-sector in Freiberg (ibid.: 274). 8.5.3 The Process Underlying Successful Emergence of an Eco-sector The emergence of the eco-sector is seen by Musyck (2003: 274–84) as being the result of three factors: 1.

The first is the entrepreneurial capabilities that exist in Freiberg. There were many individuals desperate to find a job where few existed. They had the vision to make risky decisions and to capitalize on years of

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2.

3.


experience in the fields of science and applied research – in a phrase, ‘to create their jobs’. The second factor was the existence of a large amount of capital that was channeled from the local and central government to promote research and technology activity to solve environmental problems. The institutional support given to these entrepreneurs by the public sector allowed for the development of SMEs in Freiberg. The combination of local actors, institutional support, and the new market conditions allowed for the passage from the ‘old’ structure to the ‘new’. The third factor was the environment of trust and strong local identity that existed in Freiberg. That provided a strong sense of solidarity and collaborative networks that were essential for the development of the eco-sector.

The development of small and medium-size businesses (SMEs) in Freiberg cannot be fully understood without a discussion of the role played by public contracts, subsidies and research grants. The government offered a whole range of specific technology initiatives in addition to ten R&D infrastructurebased measures in the advisory, information and technology transfer fields (Musyck, 2003: 291). The Ministry of Economic Affairs and the Ministry of Education each spent about DEM 2 billion between 1990 and 1996 in supporting technology initiatives and innovation programs. Most of that public intervention came in the form of contract research rather than just subsidies; thus firms had to compete for them and gradually earn their position in their home market. Overall ‘the picture that emerges in Freiberg is that subsidies may have provided a “once-and-for-all-catch-up” for a certain time but that the sector has and probably will not be dependent on public funding in the long term’ (ibid.: 292). 8.5.4

Predisposing Attributes for Ability to Cope and Rejuvenate

The Freiberg case demonstrates how a range of historic, economic and sociocultural factors – such as the accumulation of skills and the tradition of entrepreneurship – may predispose a region to embark on a process of industrial transformation based on indigenous entrepreneurial potential of SMEs. Added to these factors, the presence of a radical shock to the economy in the form of the fall of communism, turned out to be a catalyst for a renewal of the region’s industrial structure. When radical shocks do occur, they might prompt local actors to act and rediscover a common identity, appreciate the role of their social networks and realize the extent of their collective experience and skills. In the case of Freiberg, public–private co-operation and strong social capital were fundamental factors in the initial success of the eco-sector (Musyck, 2003: 281–2).


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The lack of data makes it difficult to document the size and development of the eco-sector in Freiberg. However, ‘different strands of data converge to indicate that the sector has been growing steadily to become a substantial cluster of activity in the region’ (Musyck 2003: 287). But overall, it is estimated that the number of eco-sector firms in Freiberg in the year 2000 was around 106 firms. That figure represents a substantial increase from the 57 firms that were identified in 1994. Furthermore, during the second half of the 1990s, the eco-sector in the region was recognized as a center of excellence for recycling and environmental technologies. ‘This highly localized centre of excellence for recycling is considered to be unique in Germany’ (ibid.). As this case study by Musyck (2003) shows, the development of the ecosector in Freiberg, is the result of a ‘combination of endogenous potential and constructive policies’ (p. 293). It demonstrates how: carefully balanced policy measures provided timely support to a number of highly qualified professionals who found themselves suddenly plunged into a severe economic distress in the early 1990s and were willing to build new (risky) ventures on the basis of their own human capital. (p. 293)

8.6

TAMPERE, FINLAND

8.6.1 Background to Success: Resource Endowment and an Entrepreneurial Spirit Tampere owes its economic success to a well-established entrepreneurial spirit, an endowment of natural resources, as well as a long history of cooperation between public and private leaders. All of these factors have contributed to Tampere’s development into Finland’s industrial capital, as well as to its ability to maintain economic competitiveness after experiencing a deep industrial recession in the early 1990s. Tampere was chartered in 1779 by King Gustav III of Sweden to nurture the development of free enterprise in a traditionally agrarian society. Believing the site to be conducive to the development of industry due to a natural power supply from the Tammerkoski rapids, the King established Tampere as a free town where trade and industrial enterprise were unrestricted and agricultural activities common to existing towns of the time were completely forbidden (Kostiainen and Sotarauta ND). The townspeople were directed or led to link their livelihood with trade, factories or handicrafts and were given special privileges, such as inexpensive loans, and exemptions from taxes and import duties on raw materials, in order to speed the development of industry in Tampere (Tuulasvaara-Kaleva, NDa). The expectation was that the politically granted freedom of enterprise together with the natural power supply from the

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Tammerkoski rapids would enable Tampere to successfully develop into an industrial town. Within a few years, in 1783, Finland’s first paper mill was established in Tampere (City of Tampere, NDb). Later, in 1820, James Finlayson, a Scotsman, founded a cotton mill in town, that was the first major industrial establishment in Finland (City of Tampere, NDb: 1). Then, in 1861, an inland water ship manufacturer and a broadcloth factory combined resources to form Tampella, a company that manufactured grinders, water turbines, ships and locomotives needed by Finish factories (City of Tampere, NDc: 1–2). Over time, a number of other industries were established in Tampere, but the city’s textile, engineering and wood-processing industries formed the core of its economic base. 8.6.2

Institutional Evolution

Shortly after Tampere was chartered, the town’s administrative system began to change. The existing administrative system, broadly used to govern the countryside, was gradually transformed to a system for governing a town. In 1802, a steward was hired to manage Tampere and plans were made to build a town hall (Tuulasvaara-Kaleva, NDb: 2). In 1809, Finland passed from Swedish rule to Russian rule, but Tampere remained relatively undisturbed. In the 1830s, the steward was replaced by a mayor and Tampere’s wealthier merchants were invited to city administrative court meetings to negotiate town issues (Tuulasvaara-Kaleva, NDc: 1). The families who controlled the early industrial institutions of Tampere were central actors in the development of the town. They filled the roles of employers, as well as of town administrators (Tuulasvaara-Kaleva, NDc: 2; Kostiainen and Sotarauta, ND: 10–11). They were politically influential and obtained privileges for the town through personal connections with the Tsar’s court (Tuulasvaara-Kaleva, NDc: 2; Kostiainen and Sotarauta, ND: 10–11). In 1875, a new municipal law was passed making an elected town council the new decision-making body of Tampere, but this did not diminish the industrialists’ influence over town affairs: votes were calculated based on the amount of taxes individuals paid and people who worked for others were not allowed to vote (Tuulasvaara-Kaleva, NDc: 2). Consequently, Tampere’s factory owners and wealthier merchants were those who elected the town council. The power to vote a council member in or out afforded Tampere’s leading families continued authority over town affairs and influence in the town’s development. In the early years, the owners of Tampere’s factories took care of their workers’ basic needs through the provision of housing, schools, libraries and, in the case of Finlayson, a church and a hospital as well (Kostiainen and Sotarauta ND; Tuulasvaara-Kaleva NDd). The industrialists also cared for the


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town’s needs, particularly with regard to education. In 1839, the Finlayson factory founded a school which all of Tampere’s children could attend free of charge (Tuulasvaara-Kaleva NDe). Later, when students emerging from Tampere’s existing municipal schools could not apply to attend the university, a private high school was established for boys to qualify them for entrance to the university (Tuulasvaara-Kaleva NDe). Several years later, in 1886, an industrial school was founded in Tampere to teach students the ‘skills and knowledge that could be demanded from masters and foremen in the different fields of industry’ (Kostiainen and Sotarauta, ND: 10). At the turn of the century, Tampere had a number of educational institutions including elementary schools, secondary schools, a technical school, an agricultural school, as well as an institute where workers could receive education (TuulasvaaraKaleva, NDe: 2). During the course of the 19th century, Tampere was transformed from a small, agrarian-based village into ‘the most highly industrialized locality in Finland’ (Lapintie et al., 2002: 67), where textile mills, paper mills and the metal industry provided thousands of jobs. By the middle of the 19th century, approximately 60 percent of Tampere’s labor force was employed in industrial production (City of Tampere, NDd: 1) and by 1870, 40.5 percent of Finland’s entire industrial workforce worked in Tampere (Kostiainen and Sotarauta, ND: 9). By the end of the 19th century, more than half of the city’s labor force worked in the textile industry’s three largest factories (Tuulasvaara-Kaleva, NDd). At that time, the labor-intensive textile industry dominated Tampere’s industrial structure, with the mechanical engineering industry holding second place among the city’s industries (Kostiainen and Sotarauta, ND: 9). Tampere entered the 20th century as a thriving industrial center known for its skilled workforce and motivated industrialists (Kostiainen and Sotarauta, ND: 10) because its political, economic and institutional factors had complemented each other throughout the 19th century, allowing Tampere to excel. While institutional changes had occurred, they had not hampered the town’s industrial development: when Sweden’s rule of Finland ended and Russian rule began, privileges granted under Swedish rule were continued by the Tsar; when the privileges ceased in 1895, Tampere’s excellent geographical location, natural power supply and industrial heritage enabled it to continue to develop as an industrial center (Kostiainen and Sotarauta, ND: 10). 8.6.3 Decline and Transformation Tampere’s development proceeded relatively smoothly until World War I, which not only shook the region to the core but unleashed events that all but dismantled Tampere’s economy. Shortly after the soviets seized power in Russia in October 1917, Finland took advantage of the opportunity and

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reestablished its independence on December 6, 1917. But, even as Finland distanced itself from Russia, it could not steer clear of the suffering emanating from the Bolshevik Revolution. In 1918, Finland, too, sustained a short, albeit heavy clash between landowners (the Whites) and workers (the Reds). This conflict pushed Tampere to the brink of disaster. Heavily populated by workers, Tampere became the main base of the Reds (Sylvelin, 2004: 3), and this brought the fight directly into the town. Shortly before the end of the war, a decisive battle was fought in Tampere and major portions of the town were destroyed (Tuulasvaara-Kaleva, NDf: 1). Tampere was left in physical, community and psychological ruins: a deep rift remained between those who had supported the Reds and those who had supported the Whites during the war (Tuulasvaara-Kaleva, NDf). Though the tug and pull between competing political forces continued after the war, the 1919 municipal elections showed that Tampere remained a Red town when the Social Democrats won a majority in Tampere’s town administration (Tuulasvaara-Kaleva, NDf). Having arrived at a modus vivendi, the townspeople came together to rebuild their town and to restore their industries: Tampere’s population had suffered a severe political break during the war, but the town’s entrepreneurial spirit had survived. Following World War I, Tampere’s previously dominant textile industry began losing ground to the metal and mechanical engineering industries. The gap closed substantially in 1931 when Finland’s State Airplane Factory was transferred to Tampere, expanding the need for Tampere’s engineering industry (Kostiainen and Sotarauta, ND: 11). The engineering industry gained a further boost when an airport was established in Tampere. In the five year period from 1931 to 1936, more than 12 percent of Tampere’s total workforce came to be employed in the metal and mechanical industry (Kostiainen and Sotarauta, ND: 11). Employment in the metal industry surged again with the outbreak of World War II when Tampere began manufacturing weapons and munitions. In 1943, the metal industry became the largest industrial sector in Tampere, employing nearly 27 percent of the town’s workforce (Kostiainen and Sotarauta, ND: 11; Martinez-Vela and Viljamaa, 2004: 9). Following World War II, Tampere became the production center of metal products and machines to be sent to the Soviet Union as part of the war reparations that Finland was forced to pay to the Soviet Union. This kept Tampere’s metal and engineering industries strong after the war, much as manufacturing weapons, munitions and vehicles had done during the war (Martinez-Vela and Viljamaa, 2004: 9). The end of war reparation payments in 1952 did not cause a drop in the number of industrial jobs. In fact, the number of industrial workers in Tampere continued to grow until 1956, peaking at 31,878 (Kostiainen and Sotarauta, ND: 12). Thereafter, the numbers began to fall as machines increasingly replaced workers.


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8.6.4 Institutional Responses As the overall number of industrial jobs in Tampere began to decline, the city’s leaders realized that they had to develop a means of offering more local educational opportunities to young people in order to stave off a brain drain (Kostiainen and Sotarauta, ND: 15). In 1960, while more than half of Tampere’s population still relied on industry for its livelihood (Martinez-Vela and Viljamaa, 2004: 9), city leaders succeeded in having the School of Social Sciences transferred from Helsinki to Tampere. The School of Social Sciences suited Tampere, because it had been developed to ‘offer educational possibilities to people with limited means who had not graduated from high school’ (Kostiainen and Sotarauta, ND: 14). The institution opened new possibilities both for Tampere’s residents, as well as for the city itself. By attracting the School of Social Sciences, Tampere expanded its institutional base and became more than simply an old industrial center – it became a city that could provide young people with a higher education. Tampere prized the School of Social Sciences, financed it, and nurtured its growth. In 1966, the school was renamed the University of Tampere (Kostiainen and Sotarauta, ND: 15). The city’s postindustrial image began to evolve. Just as King Gustav had sensed the potential of the Tammerkoski rapids in developing an industrial center, so did the leaders of Tampere sense the potential of bringing institutions of higher education to Tampere as its industries declined, so much so that even as they were developing the University of Tampere, city leaders were already working to bring a second university to town. The second university would be oriented toward technology. In 1965, city leaders persuaded the Helsinki University of Technology to open a branch in Tampere (Tuulasvaara-Kaleva, NDe), and then, without delay, they concentrated their efforts on separating the branch from its parent university in order to form an independent university of technology in Tampere (Kostiainen and Sotarauta, ND: 15). Tampere’s efforts succeeded; in 1972, the branch broke off, and began operating as the Tampere University of Technology (Kostiainen and Sotarauta, ND: 15). Within the span of twelve years, Tampere had gained two local universities and changed its own destiny. Instead of accepting the inevitable fate of an industrial town brought about by industrial decline, Tampere’s leaders had identified and assembled resources that would both increase the productivity of its existing resources and would position Tampere for success in the future. Tampere’s University of Technology emphasis on cooperation with industry and its dedication to transferring expertise to companies rapidly established it as a pioneer in research services in Finland (Kostiainen and Sotarauta, ND: 15–16). This allowed the town to push forth quickly onto the cutting edge of innovation and to gain respect as a research center. As respect for Tampere

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grew within the research community, the town became a magnet for knowledge workers. Sensing this, the Technical Research Centre of Finland (VTT) established its own laboratories of medical and occupational safety and health, as well as a textile laboratory in Tampere (Kostiainen and Sotarauta, ND: 16), expanding the town’s institutional base. By the mid-1970s, ten years after the transfer of the School of Social Sciences from Helsinki, Tampere was no longer known only for its industrial capacity, but for its academic and research prowess as well (ibid.). Its post-industrial image was gaining strength. Industrial job losses in Tampere continued to accelerate from the mid1970s until 1995, leaving Tampere’s industrial employment reduced from more than 35,000 to 20,000 workers (Kostiainen and Sotarauta, ND: 13; Martinez-Vela and Viljamaa, 2004: 9–10). Job loss numbers increased significantly in the early 1990s, when all of Finland experienced a major recession due, in part, to the collapse of trade with the former Soviet Union (Kostiainen and Sotarauta, ND; Rice and Shadur, ND; Rantala, 2001). At that time, many of Tampere’s industries which had been dependent on exports to the Soviet Union collapsed, unable to offset their losses in the export market through domestic sales since all of Finland was in an economic slide. During the course of 1990–93, Finland suffered a 10 percent drop in its GDP and overall unemployment rose to almost 20 percent (Kautonen et al., 2002; Rantala, 2001: 64; Rice and Shadur, ND: 8). The recession devastated Tampere’s existing economy. Its weaker industries disintegrated, surviving industries downsized, and unemployment skyrocketed. As the recession subsided, Tampere’s mechanical engineering industry emerged as the city’s strongest surviving industrial sector (Kostiainen and Sotarauta, ND: 14; Martinez-Vela and Viljamaa, 2004: 10). Tampere’s city leaders resolved to put an end to the city’s unemployment problem through ‘education and a new kind of entrepreneurship’ (Tuulasvaara-Kaleva, NDf). They decided to reinvent Tampere’s waning industrial economy as a knowledge economy. This proved possible due to the long history of cooperation between public and private leaders, as well as the educational resources that Tampere had developed over the years; Tampere’s business, educational and public sectors worked together to bring about the desired change. In the years following the recession, knowledge transfers from Tampere’s universities strengthened the city’s mechanical engineering industry and automotive innovations fortified what remained of the manufacturing sector. However, overall, the city’s industrial base continued to decline and Tampere’s workforce was increasingly employed in services. By 1999, only 28 percent of the city’s workforce remained in secondary production, while 70 percent of its workforce was employed in services (Lapintie et al.: 71). As many of Tampere’s traditional industries became obsolete, Tampere’s leaders developed a strategy to restructure the empty industrial floor space


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which opened up in the city center. Complementary zoning, preservation of old structures, an expansion of the district heating network to include new construction, and a steady cooperation between the University of Technology, Technology Centre, Technical Research Centre of Finland, local businesses and the municipality were vital factors in helping the city implement its revitalization plan (City of Tampere, NDd). As vacated factories were turned into homes and offices, small and medium-sized business took root and Tampere began to prosper again. 8.6.5 A Strategic Approach By 2001, city leaders had developed a vision for Tampere’s future and had determined that, among other things, Tampere would become a citizen’s information society and a center of expertise growing in a sustainable manner by 2012 (Tampere, ND). At that time, Tampere’s leaders envisioned a society in which the research and education community would have close relations with the local business community and more educated people would be moving in, rather than moving out of the city (ibid.). Instead of seeking to draw industries into town as King Gustav III of Sweden had done in an effort to develop Tampere’s industrial economy, the city’s leaders in the 21st century sought to draw and retain educated minds that would concentrate on generating research of global value through academic and industrial networking and make Tampere a leading center of the knowledge economy. Interestingly, both the strategists of the 18th century and those of the 21st century made use, in part, of the same natural resource to attract the entrepreneurs they sought – the Tammerkoski rapids. Touted as a free source of power to the industrialists of the bygone era, they are now used to generate inexpensive electricity for Tampere, keeping both the cost of business and the cost of living in Tampere down and making it an attractive place to work and live. Today, two-thirds of all Finns live within a 200-kilometer radius of Tampere, 34,000 students attend Tampere’s two universities and polytechnics, and cooperation between companies and universities has expanded the competitiveness of Tampere’s industry (Tampere International Business Office, 2005). Tampere currently boasts several innovative development programs including: BioneXt Tampere – a development and investment program which focuses on research, product development, clinical application and international commercialization of biotechnology; eTampere – a program which seeks to make Tampere the world’s leading information society; and the Region Centre of Expertise Programme which concentrates on helping existing companies to expand and new businesses to emerge. Tampere’s selected fields of expertise are: mechanical engineering and automation, information and communication technology, and health technology (Tampere International

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Business Office, 2005). The university–industry networking that Tampere city leaders envisioned in 2001 has become a reality and resulted in close cooperation between local companies, local research organizations and local universities. It has become one of Tampere’s competitive strengths, drawing global market leaders into the region to take advantage of the adequate supply of competent researchers and the internationally competitive research environment that Tampere has built. The decision to transform Tampere’s industrial economy to a knowledge economy did not represent a sudden, radical shift away from production since Tampere’s business structure had already been moving away from industry toward services during the 20 years that had preceded the recession. Nor was it a decision made outside the normal parameters of Finnish society. Rather, the decision was a well-calculated move on the part of city leaders in a time of crisis, made to ensure Tampere’s economic competitiveness under changing market conditions in accordance with Finland’s national economic development policy; it was a manifestation of the belief that the city’s economic success no longer rested on its manufacturing capabilities, but rather on its ability to create, absorb and trade in new knowledge. Today, 228 years after being ordered to develop as an industrial economy, all indications are that Tampere will continue to grow and prosper as a knowledge economy, led by a City Council that continuously reassesses and adjusts the city’s competitive stance in a global environment.

8.7

ROTTERDAM, THE NETHERLANDS

8.7.1

Background: A Commitment to Partnerships

According to Jacobs (2000: 140), Rotterdam provides an illustration of how ‘local political commitments influenced partnership building and policy implementation’. In Rotterdam, active public–private partnerships have adopted regional policy innovations that have allowed the city to respond to changes (Harding et al., 1994: 23). Furthermore, the presence of active political leaders has allowed Rotterdam to be in a better position with respect to both the central government of the Netherlands and the European Union. For example, with the appointment in 1996 of Mayor Bram Peper, Rotterdam gained strategic importance thanks to his involvement and networking through the Euro-cities. That provided Rotterdam with an influential voice within the European Union, and it subsequently made the city eligible for much needed economic resources. The city of Rotterdam is the summer apex of the wealthy Randstad (Ring City) of the Netherlands, and it plays a vital role in the Dutch national econ-


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omy. It has a population of over a million (including the city and its immediate surrounding municipalities), it is one of the world’s largest ports, and it is a major center for petrochemicals, commerce and corporate services. However, more than any other city in the Netherlands, Rotterdam ‘directly experiences the ups and downs in the international economy’ (Harding et al., 1994: 23). The reason for this is due to the fact that Rotterdam relies heavily on some sectors which are failing or being restructured. For example, the collapse of the ship-building industry, and the restructuring of the oil and petrochemical sector along with port technology development has led to important job losses (Hajer, 1993: 61; Jacobs, 2000). This uncertainty and risky environment has forced the city planners to act in an: ‘entrepreneurial fashion and to work hard to protect its position as the world’s biggest port’ (Harding et al., 1994: 41). Recently, as world trade has been revived, it is expected that strong trade through the port will pick up. However, there is also the belief that for the port to have bigger local effects, it needs to develop greater added value, and it needs to remain competitive, especially when other competitors (such as the port of Antwerp) are performing better (Jacobs, 2000: 38). 8.7.2

Constant Adaptation: The Leadership Role of Policymakers

Thus, it has been necessary for the city to constantly adapt itself to remain competitive and capture new markets (Jacobs, 2000: 65–7). In order to achieve this, policymakers in Rotterdam have developed and demonstrated the following characteristics: 1.

Innovation and flexibility: With the increase in global competition the city of Rotterdam needs to remain competitive. In order to do this, policymakers have supported the development of local labor skills and the connection of the local community to expanding regional economies. Furthermore, the Rotterdam City Development Corporation (OBR) has implemented changes to put greater stress on public–private partnerships and new flexible roles and structures for public institutions (Hajer, 1993: 61). 2. Public–private partnerships: According to Hajer (1993), public–private partnerships are not new in the city of Rotterdam. Jacobs (2000) tells how: ‘In order to protect its position as the world’s biggest port, [the city] has always had to work hand in hand with business’ (p. 19). However, since the beginning of the 1990s Rotterdam has been strongly promoting public–private partnerships as a way to improve competitiveness, economic development and urban regeneration. These networks and partnerships have ‘produced “shared visions” that bring corporate and

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community interests together in a variety of programs’ (Jacobs, 2000: 13). For example, the Rotterdam Port Promotion Council promoted the port through a public–private partnership between the Municipal Port Management and companies in the greater Rotterdam Region. Due to the fact that the promotion of the port is crucial for the economic development of Rotterdam, this cooperative approach seemed essential and necessary (Jacobs, 2000: 151). 3. Consensual politics: Jacobs (2000) points out that municipal sectoral directors, company directors, city aldermen, and economic elites all have influenced and contributed to direct the agenda towards growth and investments in Rotterdam’s port. For example: ‘the local chamber of commerce provided an important link between the political and economic elites driving growth, and individual business influenced the city council through personal networks, the Mayor and public officials’ (Hajer, 1993: 61). Jacobs (2000) and Hajer (1993) attribute the presence of consensus to specific values and institutions that can be found in the local culture of Rotterdam (Hajer 1993: 61; Jacobs 2000: 13). Policies in Rotterdam are characterized by being accommodative and consensual, providing the city with a historical record of orderliness in politics, institutions and economic affairs. The incorporation of political parties, different subcultures and minority interests into the political system has allowed the city to reduce conflicts and cleavages (Jacobs, 2000: 17). 4. Leadership: From 1996 to 1997, Mayor Bram Peper and a multiparty group of Aldermen represented by the Labor Party, Greens, Liberals, Democrats and Christian Democrats governed Rotterdam. According to Jacobs (2000), the Mayor: ‘performed an active role promoting the city and contributing to policy debates along with the political parties, business and communities’ (Jacobs, 2000: 18). During his tenure as Mayor of Rotterdam (1982–98), Mayor Peper ‘attended to maintaining the high profile of the city through influential networks such as Euro-cities’ (Hajer, 1993: 60). According to the author, Mayor Peper and the Aldermen recognized that Rotterdam and its port were facing intense competition in the world market and that a consensual approach to policy was needed. Thus, the city developed a range of policy initiatives that involved extensive consultation with community and business groups (Jacobs, 2000: 149). Other cases of leadership in Rotterdam were also present. Such is the case of the director of Rotterdam City Council, Riek Bakker, whose regeneration plans and dramatic change of institutional norms allowed the council to be a key player in the process of revitalizing the city (Couch, 2003: 118).


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8.7.3 Major Projects The characteristics mentioned above could be seen in the Kop van Zuid Project (South End) in Rotterdam. This project was intended to improve the economic base and ‘marketability’ of Rotterdam’s port (Fraser and Baert, 2003: 86–7). The Kop van Zuid area lies on the south part of the city, known as the ‘old south’. By the 1970s, that part of the port was redundant, with docks, adjoining warehousing and transshipment areas vacant and derelict. However, in 1987, the city council began a master plan for the area that consisted in creating a metro station, a public galleria, retailing, tax offices, customs offices, the court of justice and further office space for commercial letting (Couch, 2003: 120). The project also contained some social housing and private housing, supermarkets and other facilities that serve local need (ibid.: 124). This redevelopment project is credited with bringing great economic resources to the city. It is said that the project yields property tax revenue equal to about 5 percent of the city’s total property tax income (Couch, 2003: 124). Furthermore, the Kop van Zuid project has been important in promoting the city as a leading hub for foreign investment and for its emphasis in creating market and business opportunities for the city (Jacobs, 2000: 163). 8.7.4 Collaboration and Innovation The case of Rotterdam highlights the ability of the city planners to engage in collaborative and innovative projects. Rotterdam is also a case where important efforts have been made to adapt the city to a changing environment. Not only has Rotterdam showed its capacity for extensive consultation, but also it has engaged in positive administrative changes and reforms (Jacobs, 2000: 147, 174).

9. Case studies from the Pacific Rim This chapter presents case studies from the Pacific Rim. They are: Newcastle, Australia, Hong Kong, Singapore and Chihuahua, Mexico.

9.1

NEWCASTLE, AUSTRALIA

9.1.1

Background: An Inner-city Redevelopment Project in an Industrial City in Transformation

Newcastle is a former iron and steel heavy manufacturing city located on Australia’s east coast to the north of Sydney. It is the regional capital of the Hunter Valley region. In this case, the redevelopment of the inner-city 45 hectares Honeysuckle site under the auspices of a development corporation imposed by the state government of New South Wales is examined. The Honeysuckle site stretches along a continuous 3 km strip of Newcastle’s harbor. At that site, the Honeysuckle Development Corporation (HDC) has been implementing a strategy that intends to guide redevelopment over the next 20 years, presenting what McGuirk et al. (1998: 107) have described as: ‘one of the greatest opportunities for urban renewal and revitalization in Australia.’ The Newcastle and Hunter region has had a traditional reliance on heavy industry: ‘Coal, steel, textiles and shipbuilding have been its industrial backbone and have had a profound impact on the economy, landscape and external perception of the region’ (McGuirk et al., 1998: 112). By the late 1980s, however, the city faced severe crisis as its industrial base started to undergo massive contraction. This change, partly caused by the integration of Australia into the global economy, left the locality struggling to respond to the local and regional impacts of global economic change. The economic crisis in Newcastle was reflected by the decline in manufacturing employment from 24.6 percent in 1976 to 13.8 percent in 1991 (McGuirk et al., 1998). The most affected areas of Newcastle have been the urban areas surrounding the Honeysuckle site: ‘Most of its industrial infrastructure had become obsolete, the urban landscape derelict and polluted, and the image of the industrial city had become negative rather than powerful and positive’ (p. 112). 112

Case studies from the Pacific Rim

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9.1.2 A Collaborative Government Initiative The wide-ranging problems of Newcastle prompted the response of a wide range of actors, including the federal, state and local government along with the private sector. These actors took an entrepreneurial approach that sought to create development opportunities to cope with the crisis and rescue the city centre (McGuirk et al., 1998). In 1986, the Newcastle City Council (NCC) sponsored a series of ‘Partners in Progress’ workshops to find out how the city could be revitalized. Together, the council and local business interests identified the unused Honeysuckle goods yard as the single most important development site in the city. ‘It was visualized as a potential catalyst to trigger a broader rejuvenation of the whole central city area while addressing the problematic industrial image in Newcastle’ (ibid.: 113–14). According to McGuirk et al. (1998), more than $50.4 million has been spent in the HDC area. As a result, existing industry and port activity is being consolidated, while abandoned sites are being cleared and groomed for redevelopment, setting the stage for private investment. This regeneration has been accompanied by a marketing campaign presenting Newcastle as a ‘forwardlooking city with a go-ahead attitude and plentiful opportunity for profitable, trouble free investment’ (p. 117). It is estimated that A$120 million has been generated in the regional economy as a result of the multiplier effect of HDC spending. Despite these results, the redevelopment program has been subject to criticism, especially because many have questioned how much such redevelopment has been focused on the local needs of the region. No attention has been paid to the local skills base and employment needs and how they might be adapted to suit the employment generated by the Honeysuckle redevelopment. Current experiences suggest that the jobs created are jobs that serve a new workforce rather than dealing with the sizeable remnant workforce of Newcastle’s industrial economy (McGuirk et al., 1998). Therefore, ‘in the likely absence of an expanding productive base in the region it is questionable whether the Honeysuckle redevelopment can sustain employment expansion in the services and retail sectors’ (p. 123). If the entire community does not reap the benefits of the program it is likely that conflicts will arise. Conflict over the course and outcomes of the redevelopment program can threaten the image so promoted by the locality as a competitive business environment. As a result, investment might fail to arrive into the region and thus, raise questions on the sustainability of the program (McGuirk et al., 1998: 126–7).

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9.2 9.2.1


HONG KONG Background: An Entrepreneurial City-state

Despite the fact that Hong Kong is a city-state with very few natural resources, it has emerged as one of the richest economies in Asia (Chuen-Chau, 1997: 41). Hong Kong’s phenomenal growth can be related to its unique characteristics that have been man-made. Such characteristics derived from a sound macroeconomic environment, a good policy mix and the presence of local institutions, all of which were conducive to a commerce-based development. For example, Hong Kong is considered as a place where one can find: political stability, no exchange controls, a stable currency fully backed by international reserve assets, a well-defined and well administered system, a non-interventionist government with low taxation, and a geographic location between New York and London. (Chuen-Chau, 1997: 57)

Those unique characteristics have attracted outside capital to the region, which was a key factor for the city’s economic development. According to Jessop and Sum (2000), Hong Kong is also a city that embraces the practice of entrepreneurial strategies and political alliances – based on public–private partnerships – that have allowed it to successfully adapt itself to such radically changing circumstances as its incorporation into China. More specifically, Hong Kong’s success can be attributed in great part to two important factors: 1.

Entrepreneurship: Chuen-Chau (1997) notes how entrepreneurialism has characterized Hong Kong since its founding. Hong Kong has maintained an entrepreneurial mentality, where the exploration of new markets and the searching out of new products or sources of supplies have been the norms: ‘Producers in Hong Kong are known for their flexibility, resilience, adaptiveness and focus on short-run profits’ (p. 69). 2. The role of government and institutions: According to Chuen-Chau (1997): ‘enterprise does not function in a vacuum. It depends on the existence of accommodating institutions, supporting infrastructures, a healthy and educated labor force, and certain rules, many of which only the government can provide’ (p. 69). Hong Kong’s government provided such necessary institutional frameworks. From the 1970s, the presence of these two factors could be seen as crucial institutional catalysts for growth. Chuen-Chau (1997: 70) argues that the government of Hong Kong provided an environment conducive to private enterprise – including respect for property rights, low taxes, free and equal


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access to all markets, accessible information, credit availability, good infrastructure, and so on – which were central for the development and attraction of business. The government in Hong Kong is also characterized by bringing predictability and continuity to the economic environment and by providing institutional support (Jessop and Sum, 2000: 2297). 9.2.2 Impact of China’s ‘Open Door’ Policy and Reunification in 1997 However, the open door policy of China, and the later transfer in 1997 of Hong Kong from British rule to absorption in China, opened many questions and concerns about the economic and institutional future of Hong Kong. This is especially true since China had the advantage over Hong Kong in low labor and land costs, putting the Hong Kong manufacturing base at danger. 9.2.3 Response: Leadership, Institutional Factors and Entrepreneurialism In response to this challenge the government as well as private economic actors proposed that the best strategy for Hong Kong would be to shift manufacturing northwards (Chuen-Chau, 1997: 59). Therefore, by the mid-1990s, almost 25,000 factories – mostly labor-intensive industries – were being reallocated to the rapidly growing nearby regions of Guandong and Fujian in China. This resulted in the so-called ‘hollowing out’ of Hong Kong as a manufacturing center, and the beginning of its specialization in ‘front office operations’ – marketing, finance, design, packaging and quality control (Chuen-Chau, 1997: 59). Jessop and Sum (2000) point out that the shifting of manufacturing northwards was also the result of the coalescence of the strategies pursued by various actors – private and public, economic and political – in the Hong Kong region. With the changing global economy and its effect on Hong Kong, two consultancy reports were sponsored by different factions of capital and public organizations (for example, the Trade Development Council) and the government departments (for example, the Trade and Industry Department) to outline strategies to restructure the city. Such reports represented public debates of what constituted the most advantageous mode of inserting Hong Kong into the changing global economy. For example, the first report, called The Hong Kong Advantage, sought to portray the city as a new type of urban economic space that would establish a ‘beyond the gateway’ image, or more specifically, to offer ‘new combinations’ of functions for a knowledge- and information-based economy with access to mainland China (Jessop and Sum, 2000):

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These new horizons of action show certain features of Hong Kong’s entrepreneurial and/or governance capacities that are socially embedded on the interpersonal, institutional and societal levels. (p. 2302)

According to Jessop and Sum (2000), one way to understand the successful implementation of entrepreneurial strategies in Hong Kong is to look beyond city dignitaries. Despite the fact that strong leadership roles are seen in many dignitaries (for example, the Chief Executive of Hong Kong, Tung Chee-Hwa), it is argued that besides city dignitaries there was a wide range of factors and institutional actors that helped to consolidate the strategies that were pursued (Jessop and Sum, 2000: 2291). For example, the strategic alliances among actors in the region were consolidated not only by their linguistic affinities and kinship ties, but also through the socio-cultural practices of guanxi (relationship) (ibid.: 2308). In the strategy to base Hong Kong as a ‘gateway city’, the guanxi helped to build the mutual relationships needed to establish subcontracting partnerships and joint ventures. That is ‘the ability to consolidate in collective action allowed economic actors to share risks and cope with uncertainty through dense social and institutional networks’ (Jessop and Sum, 2000: 2308). Ultimately, one can see in Hong Kong strategies that: ‘envisage complex array of private–public partnerships and networks co-operating under HongKong’s leadership to promote the overall competitiveness of an emerging multi-centered city-region, not only in economic terms but also in cultural and community matters’ (Jessop and Sum, 2000: 2308).

9.3 9.3.1

SINGAPORE Background: Ingredients for Success

In November 1990, Lee Kuan Yew handed over the prime ministership of Singapore to Goh Chok Tong. In the three decades following self-rule in 1959, the first-generation leaders – as epitomized by Lee Kuan Yew, Goh Keng Swee and S. Rajaratnam – had transformed the island-state from a ‘basket economy’ into one of Asia’s four newly industrializing ‘mini-dragon’ economies. As outlined by Soon and Tan (1997: 213), between 1959 and 1990, the second prime minister set out an agenda that placed human resource development at the center of the development effort. Also, he outlined a science, technology and R&D-based strategy to transform Singapore into a developed nation. These two ingredients have been crucial to Singapore’s economic performance (ibid.: 218–19). In the 1960s, Singapore was characterized by the absence of an agricultural


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sector, natural resources, and industrial tradition and entrepreneurship. Normally those factors would have been considered a great handicap. But Singapore’s policymakers turned them into an advantage by transforming Singapore into a competitive base for multinationals (ibid.: 218–19). At the same time, the government also recognized the need for a competent bureaucracy to help implement its policies. It also understood the vital importance of industrial peace, which helped the government to have the support of workers when the government shifted to export-oriented industrialization (ibid.). 9.3.2 Strategic Planning Policies Implemented Although government intervention does not always lead to the desired results, in the case of Singapore they were designed so effectively that they created the preconditions for success (Soon and Suan Tan, 1997: 221). Among some of the reasons for this successful intervention were the following: 1.

The government always took a flexible approach to planning; one that did not depend on a rigid time frame (Soon and Suan Tan, 1997: 226, 229). Policy initiatives were always under continued change and revision according to the necessities of the country (ibid: 223). It was recognized by the government of Singapore that policies are unlikely to be effective without good governance and appropriate institutional frameworks. Therefore, strong institutions were established at an early stage, including the two statutory boards, the Economic Development Board (EDB) and the Housing and Development Board (HDB). Such boards had ample funds and strong powers to promote industrial activities and grant loans and incentives (ibid.: 221, 233). Institutions in Singapore have been recognized for being efficient and dedicated. As Rodrik (1998) points out: ‘the quality of governmental institutions matters for growth … Taiwan, Japan and Singapore have the best institutions and the highest growth rates’ (p. 97). 2. A key element in Singapore’s public policies is that they were built around consensus. The government usually ensured that any major modifications to its development strategy were thoroughly explained, well examined and coordinated among government, industry, businessmen and labor stakeholders (Soon and Suan Tan, 1997: 246). 3. The influence of Singapore’s leaders: According to Soon and Suan Tan (1997): Throughout three decades of rapid economic growth, one fundamental factor has been political continuity. This continuity has been reinforced by the personal characteristics of Singapore leaders. They were intellectually curious,

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Leadership and institutions in regional endogenous development pragmatic, hard-working, with an understanding of global trends, and with personal and professional integrity … [thus] the policies adopted in Singapore cannot be analyzed and understood apart form the people who were driving them. (p. 223)

These key elements are clearly seen in Singapore’s Strategic Economic Plan (1991). That plan was drawn up based on work by eight subcommittees comprising representatives from both government and the business sector. Also, the plan signaled strategies to place Singapore as a global city and emphasized attracting high-tech, knowledge-intensive industries (Soon and Suan Tan, 1997): ‘Singapore’s success shows that even the most unpromising starting point need not stop a country from development. What matters is a growth-oriented leadership with a realistic strategy and intelligent policies’ (p. 265). Specifically, Singapore’s successful experience shows four basic elements: a government with a vision of long-term development; a stable environment conductive to economic growth; a public policy that emphasizes investment; and the capacity for sustained accumulation of human and physical capital (Soon and Suan Tan, 1997).

9.4

CHIHUAHUA, MEXICO

9.4.1

Background: A ‘Maquiladora’ Region Faces Decline

Chihuahua is a state located in the north of Mexico, which has a tradition of primary sector employment. The state of Chihuahua is a major producer of minerals, both metallic and non-metallic. It is Mexico’s largest state (242,000 sq. kilometers) and has a population of 2.9 million. The income per capita is about US$5,801 annually. In 1998, the state generated 4.3 percent of the national GDP (US$17.1 billion) (Friedman, 1966: 25–65). In the 1970s and 1980s, the economic development of Chihuahua was primarily driven by the Maquiladora (in-bond) model. Taking advantage of being geographically located on the border with the US, and the fact that Mexico had lower wages and land costs, the State of Chihuahua implemented policies to attract foreign firms seeking to reduce costs. Over time, the Maquiladora industry model transformed Chihuahua into the largest Maquiladora region in the world (Avila, 1998: 2), creating great economic growth in the area. For example, it is argued that from 1970 to 1985, the Maquila model in Chihuahua generated the equivalent of 5 percent of Mexico’s GDP (Ruiz Duran, 2000: 5). Over time, however, the huge success of the Maquiladora model also created dependency. By the late 1980s, there was a notorious rate of decrease


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in the number of Maquiladoras established in the state. Some of the reasons for this were that countries with lower labor costs than Mexico were also promoting the siting of foreign industries in their localities (for example, China and Central America).The economic decline of Chihuahua was so large that, according to official data, by 1992 the State was able to create only 154 new jobs out of the 28,000 needed every year to meet the new labor force supply. Unemployment and underemployment combined reached levels of 22 percent (Avila, 1998: 3). 9.4.2 An Entrepreneurial Initiative At this time and in response to this perilous state of economic decline a group of businessmen (called Grupo Chihuahua) met in the late 1980s to plan a strategy that would lead Chihuahua out of the crisis. The intervention of the private sector in Chihuahua was clearly ignited and supported by Francisco Barrio, the new Governor of Chihuahua, who believed strongly that the involvement of the private sector was the key to economic development offering the initiative and much needed governmental support (Avila, 1998; Ruiz Duran, 2000). Those factors gave rise to the creation of public–private partnerships, which up to this point were a rare occurrence in Mexico. Chihuahua Siglo XXI (Chihuahua 21st Century) was an entrepreneurial initiative launched in 1990, first in the city of Chihuahua in Mexico, and later on throughout the entire State of Chihuahua. This initiative had the purpose of redesigning Chihuahua’s economy to make it highly competitive as it entered the 21st century (Ruiz Duran, 2000). Also, the strategy sought to elevate the quality of life of the population, attract foreign direct investment and generate more and higher quality jobs (Ruiz Duran, 2000; INEGI, 2003). The idea for the private sector was to find a strategy that would help the capital city of Chihuahua develop those economic sectors for which there was a comparative advantage. Therefore, the private sector along with state authorities started a process to explore possibilities to redesign Chihuahua’s economy. From this partnership it was agreed to form the Economic Development Association. This agency (formed by a group of businessmen, the government and the two main universities of the city) was in charge of creating Chihuahua’s economic strategy (Avila, 1998; Ruiz Duran, 2000). 9.4.3 Objectives The main objective of the strategy was to promote the integration and the creation of industrial clusters to increase linkages, learning and competitive advantages in the locality. Following the identification of the strategic sectors, the Development Economic Association formulated several strategies to

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promote and augment the comparative advantages of the region. Two requirements were put in place: 1.

2.

The first was that the strategies should aim for the increase in investment in the region; that is, strategies should look for ways of making the region more attractive to foreign and national investors. The second was that the strategies should aim for the improvement in the competitive position of the main sectors of Chihuahua (Avila, 1998).

In 1998 elections took place in Chihuahua. Here, a candidate from the traditional party (PRI) won the elections. As a result and very unfortunately, the initiative has been almost stopped by this winning candidate (from the opposition political party) who considered the initiative as ‘inheritances from past administrations’. Today, Chihuahua Siglo XXI has continued operations (although at a very small scale) since the new government came to power, by demands from the different actors that have participated in the process (Avila, 1998: 9). However, some of the initiatives were able to survive, ‘hidden’ in the working plans and programs of some state agencies (that is, the technology development program, which was aimed at strengthening the economic infrastructure of the main clusters). Moreover, there is an initiative (the Economic Promotion Law) in front of Congress, which attempts to deny the right of new administrations to stop further development of the implemented programs. 9.4.4 Lessons Learned There are some lessons that can be learned from this strategy analysis: 1.

The importance of entrepreneurship: The experience of Chihuahua shows us how an entrepreneurial private sector is needed for some initiatives to get started. The state cannot be everywhere. It acts with imperfect knowledge and limited resources (Friedman, 1966: 25, 65). The Chihuahua Siglo XXI initiative demonstrates that an entrepreneurial private sector has the potential to contribute immensely to local planning. However, the Chihuahua case shows that initiatives can also die if they do not have a strong participation of the government. 2. The role of different actors: In today’s world, the choice is to adapt successfully or fail. Furthermore, in making these changes the role of local leadership is vital (Friedman, 1966: 25, 65). In the case of Chihuahua, we see leadership characteristics in the presence of private businessmen who took the initiative, and in the Governor of Chihuahua, Francisco Barrio, who embraced the initiative and increased the reliance on local action to get things done.


3.

4.

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Develop clusters: After six years of intervention, some of the economic sectors showed the initial signs of clustering: some companies were working together by making strategic alliances and were cooperatively funding economic infrastructure initiatives (Ruiz Duran, 2000). Implement strategy plans: Perhaps the biggest legacy of Chihuahua Siglo XXI is how notorious is its absence. There seems to be a clear awareness among economic actors of the state that currently there is a lack of a comprehensive regional development strategy (Avila, 1998; Ruiz Duran, 2000).

10. Modeling endogenous regional economic development: measurement, operational issues and conclusions 10.1

INTRODUCTION

In this book it has been our proposition that regions inevitably are influenced by their institutions, leadership, and the degree of entrepreneurial activity as mediating or intervening variables that may enhance or detract from their capacity and capability to maximize the effectiveness and efficiency with which they utilize their resource endowments and achieve market fit. All of these factors interact and evolve over time in a manner specific to a city or a region, for the city or region to display a unique set of circumstances and to have achieved a particular outcome state at any point in time and to influence the changing competitive performance of a region over time. The conceptual model framework depicted in Figure 2.3 in Chapter 2 stressed the dynamic uncertainty of reality that confronts regions in the contemporary world. Regional economic development (RED) over time, and the outcome state of those factors and processes that affect RED, might be measured and evaluated through performance indicators relating to: • the competitive performance of a city or region vis-à-vis other places; • the degree of entrepreneurial activity occurring; • the degree to which it has attained sustainable development vis-à-vis the ‘triple-bottom-line’ of growth and performance; namely, economic growth and wealth creation, achieving social equity, and achieving favorable environmental quality outcomes. A way to conceptualize that outcome for a city or region at any point in time, and the progression of its economic development and performance through time, is to envisage its path through the regional competitiveness performance cube (RCPC) as proposed in Figure 2.2 in Chapter 2. Returning to the RCPC, and to the model framework of regional endogenous development set out in Figure 2.3 in Chapter 2, our proposition is that while resource endowments and market fit (REM) is a crucial dimension in 122

Modeling endogenous regional economic development

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differentiating regional economic performance, the interplay of that dimension with the dimensions of leadership (L), institutions (I) and entrepreneurship (E), is increasingly crucial in enhancing the capacity and capability of a region to harness its resource endowments, overcome deficiencies in them, and to achieve market fit for its industries. The interaction between these dimensions will influence how, over time, a region’s relative competitive performance can change vis-à-vis other regions, and how its position within the RCPC can change over time. While a region might have good and plentiful resource endowments, and be strong on the REM dimension, poor institutions and lack of leadership can create sub-optimal performance; and while a region might have some deficiencies in terms of the REM dimensions, if its attributes on the L, I and E dimensions are strong and effective, then the region’s performance can be lifted. The implication of this proposition for a region and its economic development strategy formulation and implementation is for its leadership and institutions to give due and full consideration to the wide range of attributes relating to the REM, L, I and E dimensions, and for the intent of the strategy being to shift the position of a region towards the top right-hand corner of the RCPC cube (as shown in Figure 2.2). That requires a region to develop a strategy process that addresses the virtuous circle for sustainable development (as shown in Figure 2.1 in Chapter 2). That raises the issues of both analysis and strategy: first, how to analyse, measure and evaluate the performance of a region on the REM, L, I and E dimensions of the regional endogenous development model; and second, how to identify and implement the process and tasks involved in strategy development. It is towards these ends that we now turn in this chapter.

10.2

SOME KEY CONSIDERATIONS

Before proposing the development of an operational model of regional endogenous development, first an aside to discuss a number of basic considerations that may help guide that process. The multi-sectoral analysis (MSA) methodology, developed by Roberts and Stimson (1998), and applied by Stimson et al. (2002: 235–74), does provide a potential analytical framework to systematically collect information on, and to measure regional performance with respect to aspects of the L, I and REM dimensions of the RCPC. In particular, that methodology can be useful in helping to create regional strategic architecture by identifying: • What core competencies does a region need to build or maintain? • What sector markets should a region develop or maintain?

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• What strategic infrastructure does a region need to develop? • What resource endowments should a region conserve and maintain? • What approach should a region take to developing marketing intelligence? Stimson et al. (2002: 345) have argued that a regional economic development strategy needs to have three important functions, these being to: • identify the fundamental elements of capacity building to support economic development – what, when taken together, are termed strategic architecture; • define strategic intent in terms of direction, destiny and discovery opportunities for economic development; • define the main thrusts of strategies for achieving strategic intent for managing economic development processes and for capacity building – setting a future path. The interaction of leadership and institutions will need to be effective to deliver a planning process that will provide the ‘details of initiatives, actions, resources, management, timing the delivery of resources, infrastructure, competencies and other supporting structures to execute strategy’ (Stimson et al., 2002: 345). This approach draws on the work of Hamel and Prahalad (1994: 118), who emphasize the importance of what they call strategic architecture. The strategic economic development architecture of a region may be conceptualized as providing the capacity for it to compete in the future. Such architecture is a design or a high level blueprint for the development of new capabilities, the acquisition of new core competencies or the enhancement of existing ones, and the reconfiguring of the interface with customers. It describes the process or recipe for developing and utilizing core competencies, mobilizing resources, developing markets and achieving desired endings in realizing strategic intent for the future development of a region. It includes continuous monitoring and building to leverage and stretch core competencies within a region to create markets and service customer requirements. Central to the development of the strategic architecture for a region is the identification of the existing core competencies – the bundle of resources, skills, technologies, applications and management that give the region its competitive advantage – which develop over time as part of the learning process of organizations and the region. Stimson et al. (2002: 175–7; 257–73) demonstrate the adoption of the Hamel and Prahalad model to a regional development context in the Cairns–Far North Queensland Region in Australia and in a modified form to the Northern Virginia region in the Washington Metropolitan area of the US.


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Stimson et al. (2002) also note the importance of identifying and describing those change agents who are ‘anticipated to influence both the development and future management of regions. These include considering processes of change relating to economic, technological, societal, environmental, legislative and governance considerations’ (p. 347). A region’s leadership and institutional capacity building needs to be of a nature appropriate for agile responses to managing regional risk factors, both exogenous and endogenous.

10.3

DEVELOPING AN OPERATIONAL MODEL

The crucial dynamic depicted in the regional endogenous growth model Figure 2.3 in Chapter 2 is how the intervening variables measuring the L, I and E mediating components interact to create catalysts for more effective and efficient utilization of a region’s resource endowments and how effectively it captures market opportunities (the independent variables measuring the REM component). In other words, the interaction of L, I and E become the crucial catalytic factors in shaping not only the performance of a city or region – especially in influencing how effectively the REM factors are utilized and tapped – but also in enhancing the capacity and capability of a city or region to efficiently, effectively and successfully address the challenges and contingencies it faces over time in dealing with uncertainty and risk and in coping with change. 10.3.1 Difficulties A major impediment to developing such an operational model is the difficulty that arises as a result of not having specifically defined and agreed on variables that might measure the REM, L, I and E components of the model framework for RED. That problem is exacerbated in not having a precise definition of regional economic development and competitiveness performance. There is a considerable degree of what might be described as a ‘nebulous’ quality about the precise meaning of, let alone measurability of the components of the model framework. Furthermore, because the intent is to be able to ‘track’ over time the path of a region through the space in the RCPC, as represented in Figure 2.2 in Chapter 2, a dynamic measure of RED is needed. Even if we are able to propose and agree upon a set of operational variables that might measure the components of the model framework, then there is the further issue concerning the availability of secondary data suitable for providing a data base for regions across a state, province or nation.

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10.3.2


An Endogenous Growth Measurement Approach

One feasible approach to measuring RED performance across the regions of a state or a nation is to take a simple surrogate measure of endogenous growth, namely the regional or differential shift component derived from a shift–share analysis of regional employment or revenue/income change over time. Secondary data tends to be readily available to do that in most countries and typically may be achieved using census data for industry employment in regions. That 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 and factors against changes due to national and industry-mix shift effects. The regional shift component measure is thus proposed as the dependent variable and as a surrogate for RED in the model framework, and it is designated EG in the operational model proposed below. 10.3.3

Proposing Variables for an Operational Model of RED

In what follows we suggest sets of variables that might be appropriate to contemplate as measures of the independent and the mediating factors in the model framework for endogenous economic development. Regional economic development and growth over time is represented as follows: RED = f [(RE, M) mediated by (I, L, E)]

(10.1)

In that model the elements might be measured by combinations of variables such as those proposed below: RED = endogenous growth in region, measured as: • the aggregate regional differential shift component value in a shift–share analysis using employment or revenue/income as the metric • an employment-based location quotient measuring change over time (but this might not explicitly capture just the effect of endogenous factors) RE = resource endowments, measured by a set of variables such as: • area size of the region • climate • topography • agglomeration of industry key sectors (measured by Location Quotients for employment in industry sectors)


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• 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, 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 core competitive locally produced commodities 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. L = leadership, measured by a set of variables such as: • 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 I = institutions, 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 (for example Fortune 1000 firms) • value foundation capitalization per 10,000 population

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• government fragmentation • level of regional organizations (number and budget level) • index of social capital E = entrepreneurship, measured by sets of variables such as: • churn rate or business start-up rate • number of small firms as a proportion of all firms • venture capital activity • corporate venturing activity • patents issued per 10,000 workers • Location Quotient of employment in ‘symbolic analyst’ occupations. We would 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

(10.2)

We have added lags to the independent variables of 1 and 2 years and have taken a ten-year average for the institutional variable. For sure these lags do exist but further research and sensitivity analysis is needed to determine the proper lag periods. For example, there is some literature which suggest that the appropriate lag for E is at least 5 years. The challenge remains as to how best to test such a model of endogenous growth and development, and to develop appropriate data sets for a number of regions and/or nations in order to do so.

10.4

INITIAL ENDOGENOUS MODELING ATTEMPTS

Two attempts have been made to undertake preliminary modeling of endogenous regional economic development. This work began with the authors using the regional shift component from shift-share analysis as a measure of regional endogenous growth. This seemed to make sense given that it is that component of the shift–share model that purportedly measures local effort of contribution. The main concern lies with the fact that it is a residual that results from extracting the national and industry effects from actual economic change (employment, income/earnings or wealth). In this sense it is not a direct measure of endogenous contribution but it is difficult to envision how one might directly measure endogenous regional growth.


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10.4.1 Modeling Endogenous Growth Across Regions in Australia The first attempt was a study by Stimson, Robson and Shyy (2004) that was exploratory in nature (not theory driven) in that measures of a wide variety of variables (including both stock and flow measures) were used in a backward removal stepwise regression analysis of the endogenous regional growth of local government areas of the major states of Australia. The regional shift component from shift–share analysis was the dependent variable. The study period was 1991–2001. The analysis was run on data for non-metropolitan Local Government Areas in each of the five mainland states of Australia separately, thus fitting a model for each state and then for the aggregate of all states. The results of these analyses may be summarized as follows, first for the state level models: • all models had high R2 values • explanatory variables differ across states • population growth had a strong positive effect in all states • population size had a strong effect in most states • industry specialization and change was positive in all but one state • structural change, income and unemployment variables significant in only one or two states • concentration of jobs in broad industry sectors showed mixed directional effects • university and technical qualifications strong in two states but less so in others; change in qualifications positive across all states • occupational categories had mixed effects • coastal location variables were generally not significant and negative where they were. The findings from the Australian study produced some findings that relate to existing theoretical perspectives on economic development, however, the study as much as anything underscores some of the huge measurement issues involved in empirical work in regional endogenous growth research. 10.4.2 Modeling Endogenous Growth in US Metropolitan Cities The metropolitan regions of the US are the units of analysis used in a North American study of regional endogenous growth conducted by Stough et al. (2007). This study, while employing the same methodology as the Australian study, was driven by the theoretical framework that has been evolved in this book. In short, variables (often very crude) that depict the

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dimensions of the framework are operationalized and measures were obtained. The dependent variable was the same as in the Australian study. The results of this second study are summarized below. First, we report the results from the general model – the model when all metropolitan regions are included – and then the three models created when the data are partialed on city size. First, the findings for the aggregate model: • Educational attainment has a positive effect on endogenous growth. • Government plays an important role: relative strength of industry presence; employment change is very important. • Routine personal service workers positive; routine production workers negative; symbolic workers no effect. • Entrepreneurship capital positive effect. • Population size matters in the kinds of variables that are important. Results from the fitting of the specific models are: 1.

2.

3.

Large regions: • Population change positive • Income and unemployment negative • Location quotients manufacturing and government negative • Local government size and change positive • Social capital positive • Entrepreneurship capital negative [enterprises employing 5–9 workers] Medium regions: • Population change positive • Bachelor education level negative; doctoral positive • Personal services positive • Local government employment strong positive • Entrepreneurship capital negative [self employed and enterprises employing 1–4 workers] Small regions: • Population size negative! • Bachelor degrees negative; doctoral positive • Location quotient manufacturing negative • Personal services negative • Change in local government employment positive • Entrepreneurship capital positive [enterprises employing 1–4 workers]; change in [enterprises employing 5–9 workers] positive.


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10.4.2 Implications While the US study application discussed above provides findings that are more specific with respect to the theoretical framework developed in this book, it does leave more questions than it answers. The largest one is that the operationalization of the variables is questionable in a number of cases and thus substantive conclusions at this time are little more than working hypotheses. At the same time, the Australian and the US study applications, while different in a number of ways, are also quite similar in that they use spatial units of analysis, the same methodology and the same dependent variable. So it is useful to ask what if any similarities there are in the two studies and what the differences are. The similarities include: • Methodologies are the same • Endogenous growth measure is the same • There is a relatively small number of independent variables • Statistically significant variables include: population size; population change; human capital level; industrial structure; occupation (and entrepreneurship in the US study) • Explanatory power of the significant variables varies between the two studies and among the disaggregation levels (states in Australia: metro size categories in the US study). The differences are: • Different units of analysis – scale issues • Australian study exploratory in nature; US study theory driven • Some of the institutional and entrepreneurship variables in the US study are significant correlates of endogenous growth • Spatial autocorrelation was tested in the Australian case and found to be modest; not in the US study as the spatial units are not contiguous • US study used a three-year time span for calculations – but some institutional and entrepreneurship variables are likely to have long lag effects, not ones that are likely to be detected over three or four years.

10.5

CONCLUSIONS

This book has outlined a new approach to examine the processes of endogenous growth and how regional development may be influenced by, and facilitated through, leadership, institutional factors and entrepreneurship as

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intervening variables which, it is hypothesized, may have a catalytic effect on the endogenous growth processes, but which also account for local resource endowments and factors relating to the ‘market fit’ of a region. A new model framework was proposed to conceptualize the interaction of those endogenous processes. In the chapters in Part II, a range of case studies of cities and regions from around the world – the US, Europe and the Pacific Rim – were examined to ascertain the nature and significance of leadership, institutional factors and entrepreneurship in the way those places have responded to the challenges they faced which had, in most cases, severely and negatively impacted the performance of once successful regions. Those case studies demonstrated the importance of those endogenous factors as having had a catalytic effect on regional growth and development and the rejuvenation of some of those cities and regions, but where those endogenous forces were lacking or inappropriate, then the outcome for the city or region was less than desirable and certainly sub-optimal. In this chapter we have shown how an operational model to measure endogenous regional growth and development might be formulated, with the suggestion of potential variables that might be used for the independent and intervening components that might explain differences in the level of performance of a city or region or of the dependent endogenous growth outcome variable. Further, we summarized some results from initial attempts in Australia and the US to operationalize this model of endogenous regional growth. While the results are encouraging there still remain significant measurement issues, especially of the leadership and institutional variables. Significant and extended research will be required to develop this approach to the level where it can be fully operationalized and in a way that evokes legitimacy and agreement.

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Index 20 percent solution 59 Acs, Z. 11 adoption externalities 61 agglomeration 28 agglomeration economies 26 agility 15 Allegheny conference 75, 88 alliances 53, 57 American Athletic Union (AAU) 87 Antwerp 109 Arrow, K. 8 Arthur, B. 4 Audretsch, D. 4 Austin 79, 82 Austin Venture 82 autocratic leadership 35 Barro, R.J. 4 benchmarked 22 BioneXt Tampere 107 Birmingham 90–92 Blakely, E.J. 2, 25, 44, 62 Bolton, R. 59–60 bond of trust 76 bureaucracy 52 business environment 58 capital accumulation 46 capital stock 4 Carnegie Mellon University 76 Castells, M. 10 catalytic 32 catalyzed 71 change agents 125 Channel Tunnel 97 Chihuahua 118–19 Chihuahua Siglo XXI 119–20 civic leadership 64 clusters 121 collaboration 33, 41, 56 collaborative action 32

collaborative advantage 56–8 collaborative approaches 56 Colorado 82, 85 command and control models 56 Committee Grand Lille 97–8 community 104 leadership 34, 53 leadership, lack of 79 comparative advantages 27 competitive advantages 57, 71 of cities 48 competitive challenges 34 competitive performance 15 competitive politics 79 competitive position 26 competitiveness arrangements 29 consensual politics 110 consensus 117 Constant Adaptation 109 contingency leadership 71 contingency theory 68 cooperation 53, 106 core competencies 123–4 council–manager form of government 51 cross-party cooperation 91 cross-sector collaboration 63 culture of cooperation 75 cyclical effects 128 Cyert, R.M. 26, 86 De Santis, M. 26, 34 decentralization of power 49, 53 decision-making groups 53 democratic leadership 35 Development Report Card for the State 83 disequilibrating contingencies 71 dynamic interrelationships 22 East Germany 99 economic development 39 economic development strategy 65 147

148


economic environment 115 economic growth 4, 46 economic performance 47 Economic Promotion Law 120 economic revival 97 economic specialization 27 economic structure 24 economic sustainability 64 economic systems 66 educational institutions 103 effective institutions 31 efficiently 21 elites 77 endogenous assets 98 endogenous deficiencies 30 endogenous factors 29, 43 endogenous growth 126 endogenous growth conditions 8 endogenous growth theory 14 endogenous regional growth 129, 132 endogenous resource endowments 30 entrepreneurial 65 activity 24 characteristics 70 effect 39 spirit 81 entrepreneurialism 42 entrepreneurs 39 entrepreneurship 1, 2, 21–2, 25–6, 65, 68, 71, 114, 120, 128 environmental protection 99 environmental quality 24 environmental technologies 98 equilibrium 7, 66 European Commission 84 European Union 108 exogenous forces 31, 61 factors of production 25 Finland 101 Finland’s State Airplane Factory 104 Finlayson 102 Florida, R. 12 Freeman, C. 6 Freiberg 98–100 Freville, Y. 95 Fujian 115 Fukuyama, F. 60, 62 generalized reciprocity 60

German Democratic Republic 99 globalization 30–31 governance 44, 52–3 government 44 Granovetter, M. 60 Great Depression 77 great person theory 35 Greater Baltimore Committee (GBC) 89 Greater Indianapolis Progress Committee (GIPC) 86–8 group value model 36 Guandong 115 Hall, P. 10 Harrod–Domar (H–D) growth model 5 heroic leader 37 hierarchical authority 42 High, J. 39 Hirschman, A. 7, 60 history of cooperation 75 Hofstede, G. 34, 42, 54 home rule 54 Honeysuckle redevelopment 113 Hong Kong 114–15 Houston 77–8 Houston Economic Development Corporation 78 Houston’s economic development 78 Hudnut, W. 88 human capital 14, 26 Hunter region 112 Hyatt Hotel 91 ICTs 30 implement strategy plans 121 Indiana 85 industrial image 113 industrialists 107 ineffective institutions 26 information infrastructure 59 infrastructure 14, 56–8 innovation and flexibility 109 institutional arrangements 70 institutional capacity 45 institutional change 1 institutional considerations 63 institutional decentralization 49 institutional infrastructure 59, 68 institutional norms 11 institutional thickness 46–7, 53

Index institutions 14, 24, 43, 45, 127 intelligent transportation systems 58 intergovernmental agreements 50 internalizing externalities 61 internationalization of capital 30

mini-dragon economies 116 mini-sectoral analysis 123 modern weak government 77 mutual awareness 53 Myrdal, G. 7

Johansson, B. 8, 11, 27–8 jurisdictional fragmentation 63

natural resources 25 Nelson, R.R. 4 neoclassical production function 6 Netherlands 108 network-augmenting capital 61 networks 57–8 networks and alliances 14 new economy 33 new growth theory 14 new model framework for regional endogenous development 23 New South Wales 112 Newcastle 112 newly industrialized countries 10 NGOs 27 niche manufacturing 83 nonpartisan 79 nonprofit sector 75–6 North Rhine-Westphalia 85 North, D. 45

Karlsson, C. 8, 11–12, 27–8 Kirzner, I.M. 67, 69 knowledge-based 11 Kop van Zuid project 111 Kozmetsky, G. 80 Krugman, P. 10, 27, 29 laissez-faire leadership 35 leader–member exchange theory 36 leadership 1, 14, 19, 24, 26, 65, 69, 110, 127 definitions 33 enlightened 31 leadership-driven economic development 72 learning agents 14 learning infrastructure 45, 56, 59 Lille 96, 98 Lilly foundation 86 Liverpool 92, 94 city council 93 local business elites 48 local governance 48 Local Government Areas 129 Location Quotients 127 location-specific advantages 71 loyalty 60–61 Lucas, R.E. 66 Lugar, R. 88 Malecki, E. 2 Maquiladora 118 market conditions 1, 21, 25 market fit 20, 122, 127 market opportunities 21 Marsh 26, 86 mayor–council form of government 51 mediated 126 Metropoles d’Equilibre 97 Mexico 118 Mid West 85

Ohmae, K., 13 oil recession 77 open door policy 115 opportunity economy 80 organizational culture 54 Pacific Rim 132 partnerships 53, 56 Perroux, F. 7 Philips Curve 66 Pittsburgh 75 place prosperity 61 place surplus 59–61 place-based policies 61 place-marketing 71 policy 13 political complexion 94 political leadership 76 political restructuring 30 politics of consensus 75 polytechnics 107 Porter, M. 10, 29, 62 pragmatic politics 91

149

150


pre-conditions 69 primary catalyst 69 production functions 4 public and private sectors 76 public entrepreneur 64 public interest model 55 public policy 57 public–private partnerships 50, 81, 84, 109 Putnam, R. 62 qualitative 3 quantitative 3 R&D 10, 11 Randstad 85, 108 Rechtsstart model 55 reconstruction 97 Rees, J. 10 regeneration 76, 97 regional competitiveness performance cube (RCPC) 21–2, 30, 35, 122–3, 125 RCPC hyper cube 20 regional development strategies 29 regional economic development 2, 63 regional economic development strategy 58 regional economic development strategy planning 45 regional gateway 71 regional leadership 70 regional market size 31 regional performance 19 REM 20 Renaissance I 76 Renaissance II 76 Renaissance III 76 Rennes 94, 96 Research Triangle 11 resource endowments 1, 20, 25–6, 31, 122, 124, 126 resource-based 31 resources 27 response capability 15 reunification 115 role of institutions 45 Romer, P.M. 4, 8 Rotterdam 108, 110

rule structures 44 rules of the game 45 Salazar, M. 20 Saxenian, A. 8, 34, 40, 42 scale issues 131 scale-based 31 Schumpeter, J.A. 39, 66 scientific research capabilities 95 sector markets 123 self-categorization theory 36 Sematech 81 sense of place 61 shared power 41 shift–share analysis 22, 126, 128 significant variables 131 Silicon Valley 11 Singapore 116 slack institutional resources 26 smart infrastructure 56 SMEs 100 social atmosphere 47 social capital 59 social capital development 61 social composition 24 social equity 24 social networks 52, 60 socio-emotional leaders 35 Solow production function 5 Solow, R. 5 Soviet Union 104 spatial attachment 60 spatial scale 44 spatial structure 7 stakeholders 52–4, 56, 65 steel industry 75 stepwise regression analysis 129 Stimson, R. 3, 9, 12–14, 20, 22, 29, 41, 57, 60, 62, 129 Stough, R. 8, 13, 20, 22, 25–7, 34, 42, 59, 63, 88, 129 strategic approach 1 strategic architecture 124 strategic infrastructure 124 strategic intent 124 strategic planning policies 117 sunbelt 78 sustainable development 19 Tampere 101–3, 108

Index task-oriented leaders 35 technical progress 6 Technical Research Centre of Finland 106 technological change 5 technological infrastructure 26 technologically induced growth 79 technology 11 technology firms 76 technology-based city 80 The Hong Kong Advantage 115 threat contingencies 72 total factor productivity 47 tragedy of the commons 61 transaction costs 47, 53 transactionalist theory 36

151

triple-bottom-line economic growth 24 trust 41, 53, 61 Tsar 103 University of Pittsburgh 76 University of Technology, Tampere 105 values 55 Venture Capital and Entrepreneurial Spirit 84 virtuous circle 19 voice 60, 61 Winters, S.G. 4 World War I 103

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Endogenous Growth Theory

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Leadership and Institutions in Regional Endogenous Development

Endogenous Development: Networking, Innovation, Institutions and Cities

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Local and Regional Development

Institutions, Ideas and Leadership in Russian Politics

Management and Leadership Development

Institutions and Planning (Current Research in Urban and Regional Studies)

New Technology and Regional Development

Institutions and Norms in Economic Development

Global Institutions, Marginalization and Development

Leadership and management development in education

Teaching: Professionalisation, Development and Leadership

China, Japan And Regional Leadership In East Asia

Clusters and Regional Development (Regions and Cities)

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

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

Endogenous Plant Rhythms

Regional Development Policies in OECD Countries

Public Policy for Regional Development

Knowledge Externalities, Innovation Clusters and Regional Development

Handbook of Regional Growth and Development Theories

Development Finance Institutions: Measuring their Subsidy (Directions in Development)

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