Smart Specialization

What is smart specialization?
Smart specialization strategies are built on a foundation of existing or future comparative advantages at a regional level which lead to economic growth.  For entrepreneurs or firms, implementation of such a strategy translates into better processes and products, new business models or simply, realizing a more innovative and productive business.
 
There are many factors which distinguish these strategies from traditional industrial policy initiatives.  These include the focus on specific “activities” rather than broad sectors, and the inclusive nature of the consultation process in designing such a strategy.  For example, a priority activity such as the development of advanced ceramic materials would be targeted rather than general development of the manufacturing sector.  These types of activities are typically multidisciplinary in nature, are built on existing workforce and academic strengths, have the potential to expand into future strengths and have the greatest opportunity for economic spill-over into other activities and sectors. A broad consultation process which includes a wider range of stakeholders (i.e., academia, entrepreneurs, NGOs) has also shown to be effective in identifying the priority activities and is seen as one of the most critical tools for implementing evidence-based innovation policies.
 
The core elements of the smart specialisation concept for policy include:
 
Self-discovery or entrepreneurial discovery process. Prioritisation is no longer the exclusive role of the state planner (top down) but involves an interactive process in which the private sector is discovering and producing information about new activities and the government provides conditions for the search to happen, assesses potential and empowers those actors most capable of realizing the potentials. But entrepreneurship in the knowledge economy recognises that value added is also generated outside sole ownership, in spillovers, in networks of complementarity and comparative advantage. These are the two sides of the smart specialisation coin. Implicit in this is the need for better co-ordination mechanisms between regions and national governments for allocating resources in an environment of structural change and uncertainty, risk, and information asymmetries.
 
Activities, not sectors per se are the level for setting priority setting for knowledge investments. While sectors still matter, the issue is not to target sectors but rather activities. Activities can be tied to specific technologies or the technology mix, to specific capabilities, natural assets etc. In general what is discovered as future priorities are those activities where innovative projects complement existing productive assets, hence the need to differentiate the target of smart specialisation according to the overall position of a given activity (e.g. modernisation, transition, diversification, radical foundation and the key notion of related diversity).
 
Smart specialisation entails strategic and specialised diversification. Rather than encouraging specialisation along pre-determined paths, the smart specialisation approach recognises that new or unexpected discoveries of activities might emerge within a given parts of an innovation system leading to “specialised” diversification.
 
Evaluation and monitoring. As other versions of new industrial policies, smart specialisation emphasises the need for policy makers to carry out evidence-based monitoring and evaluation and to feed-back into policy design. It also requires flexibility in policy making to be able to terminate or reallocate public support to R&D and innovation. For that purpose, clear benchmarks and criteria for success and failure are needed. Smart specialisation policies need to have measurable goals, whether it involves an increase in business R&D, R&D commercialisation or research excellence.
 
Developing and implementing a Smart Specialization Strategy consists of six primary components:
 
  • Analysis of the Regional Context
  • Ensuring Governance and Participation
  • Elaboration of a Regional Vision
  • Priority Activity Identification
  • Definition of Policy Mix, Roadmaps and Action Plan
  • Integration of Monitoring and Evaluation
 
These six components can be implemented simultaneously and in concert with each other, while recognizing the overlap between the components.  For example, a fair and balanced analysis of the regional context will lead to the identification of the priority activities with the greatest growth potential in a region.  Similarly, establishment of appropriate governance mechanisms from the beginning will assist in the elaboration of a regional vision and the integration of a valid monitoring and evaluation system.
Why is smart specialization important?
Combined with regional strengths and support mechanisms, leadership and governance at the national level are equally critical for the implementation and sustainability of any smart specialization strategy. The consolidation of funding resources from the regional and national levels towards priority investments has the greatest opportunity to stimulate growth.
 
The main justification behind policy attempts to affect specialisation is the presence of externalities or market failures preventing an efficient allocation of resources. Here, public intervention is justified based on:
 
  • Information externalities: both the government and the industry have imperfect information on their own. Governments should ensure mechanisms through which they exchange information with entrepreneurs in order to learn about costs and opportunities and engage in strategic coordination and;
  • Co-ordination externalities: private activity and ‘discovery’ opportunities may be restricted due to the high fixed costs and large-scale investments required by some projects, and in particular by the spillovers that are specific to knowledge driven investments. Policy intervention is required to facilitate the coordination of investments and decisions of different entrepreneurs.
 
A second set of rationale(s) for smart specialisation concern:
 
  • Incentive problems that lead to underinvestment in the “discovery process”;
  • The discovery of pertinent specialisation domains may have a high social value (development of the region’s economy), but the entrepreneur who makes this initial discovery will only be able to capture a very limited part of this social value because other entrepreneurs will swiftly move into the identified domain (“first-mover disadvantage”);
  • Entrepreneurial individuals that are well-placed to explore and identify new activities often will not have sufficient external connections to marketing and financing sources, reducing their incentives to enter in the first place;
  • The quality of specialised infrastructures is initially a given for the search and later an objective of support policy.
 
Concentration of public investments in R&D and knowledge on particular activities is crucial for regions/countries that are not leaders in any of the major science or technology domains. Past policies tended to spread “knowledge investment” (e.g. high education and vocational training, public and private R&D) too thinly, not making much of an impact in any one area. However, concentration in the smart specialisation context is about focusing knowledge investments on ‘activities’ – those ‘business functions’ carried out by firms which range from the conception of a product to its end use and beyond (e.g. design, production, marketing, distribution and support to the final consumer).
References:
  • OECD (forthcoming), Innovation driven-growth in regions: The Role of Smart Specialisation, OECD.
  • EC-IPTS S3 (2012) Guide on national/regional Research and Innovation Strategies for Smart Specialisation (RIS3) http://s3platform.jrc.ec.europa.eu/s3pguide
  • Foray, D., David and Hall (2009), “Smart Specialisation – The Concept”, http://ec.europa.eu/invest-inresearch/pdf/download_en/kfg_policy_brief_no9.pdf?11111
  • Hausmann  R. and Rodrik D. (2003), “Economic Development as a Self-Discovery”, Journal of Development Economics, Volume 72
  • McCann, P. and Ortega-Argilés R. (forthcoming 2013), “Smart Specialisation, Regional Growth and Applications to EU Cohesion Policy" Regional Studies, available at:  http://ipts.jrc.ec.europa.eu/docs/s3_mccann_ortega.pdf
  • Rodrik D. (2004) “Industrial Policy For The Twenty-First Century”, This paper has been prepared for UNIDO. To link to this article: www.hks.harvard.edu/fs/drodrik/Research%20papers/UNIDOSep.pdf

 

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