This CIMR Debate in Public Policy “Leapfrogging or levelling up? Driving place-based growth” was stimulated by the increasing focus of UK Government economic policy on initiatives such as place-based R&D and levelling up, as well as a desire to better understand the potential role of R&D interventions in support of levelling up areas across the UK.
Emma Palmer Foster, who chaired the session, introduced the panel comprising of experts from the field of place-based growth. Dr. Jonathan Potter, from the OECD, discussed “stickiness” in troubled areas, how a pattern persists in the long run and occasionally patterns are broken by areas which have sudden changes in performance – known as “leapfroggers” or “plungers”. Dr. Enrico Vanino, from the University of Sheffield, explained growth pathways and how they can drive industrial and innovation policies and improve the performance of lagging regions. The discussant, Jacadi Nicholas from the Department for Science, Innovation and Technology (DSIT), developed a discussion of R&D typologies in regions and how growth can be promoted.
The OECD study
Jonathan Potter introduced an OECD project, analysing long-run (90-100 years) and medium-run (60-30 years) changes in the regional league table of entrepreneurship performance – measured by start-up rates – in the USA compared to West Germany and England and Wales based on pre-published material for the latter two countries.
There is established evidence of wide regional variations in entrepreneurship performance within OECD countries, implying levelling up is essential. New evidence also indicates that in some European countries the regional performance (regional rankings) changes little over time; thereis regional path dependence. Jonathan pointed out that, while the entrepreneurship metrics vary across regions within a country and are correlated with regional prosperity, the regulatory framework and government strategies for promoting entrepreneurship are at the national level, using national policy levers like interest rates, tax regimes.
Having a large number of regions with relatively low levels of entrepreneurship is undesirable because of the link between entrepreneurship rates and economic welfare. Policies that raise entrepreneurship rates in low-enterprise areas can contribute considerably to regional and national output and well-being. This is the “foregone potential” argument for regional entrepreneurship policies. New research shows that regional differences within countries are considerable and strongly persistent over very long periods.
“Responding to a weakness in entrepreneurial ecosystems research”
In pursuit of a solution to the problem, Jonathan discussed the limits of the “entrepreneurial ecosystems” approach, which is cross-sectional–not longitudinal. This approach identifies current characteristics of top-performing entrepreneurial ecosystems. But the factors driving good performance in top regions may not show the policy levers needed for weak regions (no single factor will be identified, and weak regions’ needs may differ). Moreover, current performance may be the consequence of past factors rather than of today’s ecosystem characteristics. Jonathan emphasised that to identify causation, long-term analysis is needed to better understand what causes leapfrogging and plunging in top areas, such as good access to finance and strong entrepreneurial culture.
In this sense, a new factor has been introduced: the self-employment rate for the long periods in different geographical units, commuting zones, MSA (Metropolitan statistical areas), labour market areas, and local authority districts. Data since the 1970s indicate that the correlation between self-employment and start-up rates is similar in the USA, England and Wales and West Germany. However, some differences exist where regional industrial restructuring is essential in England and Wales, while not significant in the USA and West Germany.
Policy implications
At the end of his presentation, Jonathan emphasised the importance of improving the performance of low entrepreneurship regions and considering it a foregone opportunity for the regions and the national economy. But the necessary policy measures are not just limited to national policy tools, like the interest rate, taxation, or simplifying regulation for business start-ups. He highlighted the importance of developing region-specific factors and exploring long-term factor effects as some of these factors take decades to play out and cause leapfrogging or plunging. And the final implication is the clarity on the metrics of entrepreneurship that policy targets; whether entrepreneurship should be measured by self-employment, or by start-up rates that lead to different regional league tables..
Leapfrogging or Levelling Up? Driving place-based growth
In the second part of the session, Enrico Vanino highlighted productivity as one of the main drivers of economic growth and long-term economic performance of regions driving capital accumulation wages, knowledge intensity, etc. However, he pointed out that the UK still has a long-standing productivity gap with its major competitors. Moreover, significant spatial disparities within nations and regions characterise this gap. The existing spatial disparities extend the inequalities across regions and cause huge variations within the regions that make the UK one of the most spatially unequal countries in the OECD.
Based on the previous literature, Enrico identifies several potential drivers to explain these imbalances: 1. human capital disparities, with highly skilled people moving into places with higher productivity. 2. differences in investment in infrastructure 3. differences in institutional and governance arrangements across the country, and 4. composition of the local business environment.
Enrico suggested that significant differences in regions’ industrial structures raise serious concerns about the design of place-neutral industrial policy trying to design to address all sub-geography in the same way and targeting, in particular, a few very narrow high-tech sectors. The economic structures across regions can shape the possibility of future economic development in the region. In this sense, policy intervention could try to build on local capabilities and the comparative advantages of existing industries to enable industrial transition or industrial branching, promote diversification and higher added value, and expand new sectors not directly related with the existing industrial structure of the region.
Policy interventions should build on local capabilities and comparative advantages, enabling industrial transition and branching, promoting diversification towards higher added-value and related sectors. Industrial policies need to leverage existing strengths and recombine existing knowledge to support new productive trajectories in high-value-added activities. This strategy contrasts with “one-size-fits-all” policies developed at the national level and generalist industrial strategies that prioritise high-technology sectors.
Enrico also argued that Path Dependence between new firms and pre-existing regional activities may foster knowledge spill-overs underpinning new similar ventures. Yet, this may hamper opportunities for entry away from established paths. Therefore, attention should be placed to the variety of local industries. Also,entry of new firms in rooted sectors is positively defined by industrial path dependence, reducing entry of pioneering firms in industries new to the region. These effects are moderated by industrial variety: related varieties reinforce firm entry in rooted sectors. In contrast, unrelated varieties foster connections between more distant knowledge, counterbalancing the negative effects of industrial path dependence and supporting the emergence of pioneering firms operating in sectors new to the region. He suggested that path renewal and path extension can be more effective in lagging regions, helping them to diversify and become more resilient to economic crises.
Finally, Enrico concluded that R&D and innovation policy, including direct and indirect intervention, could significantly address systemic failures. He emphasised the importance of understanding the effect of the national, regional and sectoral levels on R&D policy and, more importantly, that all these three levels of policies are complementary with each other, basically by targeting entirely different firms and industries. National-level R&D policies usually promote radical R&D innovation by large firms and universities.
Public R&D factors and entrepreneurship metrics
Jacadi Nicholas distinguished between entrepreneurship and R&D and innovation levelling up missions and suggested that using a national lens is not a proper tool for regional R&D policies. The government’s broader landscape drives R&D policies by concentrating funds, resources and excellence in regions that do well as areas of high entrepreneurship. She emphasised locally-led policies by evaluating and understanding regions’ capability, interests, and sectoral strength. In this context, locally-led innovation accelerators focus more on innovation intervention than innovation zones, leading to long-term partnerships with local government.
Jacodi raised a question about the role of culture in comparison between the USA and the UK, considering that the USA tends to have a more entrepreneurial culture than the UK, and how this fact has been looked into. Jonathan argued that culture has been put forward as the fundamental reason for path dependence, but the problem is that it is difficult to measure culture.
Jacadi then asked Enrico’s opinion about whether clusters with firms in diverse sectors are likely to have more pioneering firms than clusters with similar sectoral strengths. In answering the above question, Enrico argued that the diversity of the industrial ecosystem in the region is significant in promoting the start-up rates in pioneering industries. However, a problem would arise when the region does not have diversity in the industrial composition, and in that sense, innovation policy could play a role. He also pointed out the narrow type of R&D collaboration based on the Gateway to Research data. He suggested that firms not targeted by UKRI or InnovateUK collaborative grants should look at other types of collaborations such as innovation hubs and catapults. Enrico concluded that it is important to use different policy levers to try to target different needs.
We wish to thank the chair, panelists and discussant for this stimulating debate, and the audience for their participation. The recording of this event is available here.
Readings:
Fritsch, M. and S. Kublina (2019), “Persistence and Change of Regional New Business Formation in the National League Table” Journal of Evolutionary Economics, Vol. 29, 891-917. https://doi.org/10.1007/s00191-019-00610-5
Fotopoulos, G. and D.J. Storey (2017), “Persistence and change in interregional differences in entrepreneurship: England and Wales, 1921–2011”, Environment and Planning A, Vol. 49(3), 670–702. https://doi.org/10.1177%2F0308518X16674336
Corradini C. and Vanino E. (2022). Path dependency, regional variety and the dynamics of new firm creation in rooted and pioneering industries. Journal of Economic Geography, 22 (3): 631–651.
Vanino E. (2022). Identifying Industrial Renewal Paths of Places for Levelling Up. The Productivity Institute Insights. Available at: https://www.productivity.ac.uk/news/identifying-industrial-renewal-paths-of-places-for-levelling-up/
Roper S., Vanino E., and Hewitt-Dundas N. (2022). Exploring spatial and sectoral complementarities in public support for innovation: Two UK experiments. ERC and QUB Insight Paper 09/2022.
Vanino E., Roper S. and Becker B. (2019). Knowledge to money: assessing the business performance effects of publicly-funded R&D grants. Research Policy, 48 (7): 1714-1737.
