AN AGENDA FOR A REFORMED COHESION POLICY

Hearing on cohesion policy and regional innovation

15 September 2008

Brussels (DG REGIO building, CSM1)

Report Hearing Paper 2

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15 September 2008

The hearing was held on the basis of a paper prepared of Luc Soete, UNU-MERIT, University of Maastricht – see Annex

Participants:

Barca Fabrizio, Director General - Ministry of Economy and Finance, Italy Bachtler, John, Professor of European Policy Studies University of Strathclyde Soete, Luc, Professor UNU-MERIT, Maastricht Sapir, Andre, Professor, ECARES - Université Libre, Bruxelles Verspagen, Bart, Professor, Maastricht University Morgan, Kevin, Professor, Cardiff University Fagerberg, Jan , Professor ,Centre for Technology, Innovation and Culture

University of Oslo Seravalli, Gilberto, Professor, Dipartimento di Economia, Parma University

European Commission:

Mathernova, Katarina, Deputy Director General (DG REGIO) Kazlauskiene, Natalija, Director, (DG REGIO) Landabaso, Mikel (DG REGIO) De Michelis, Nicola (REGIO) Berkowitz, Peter (DG REGIO) Von Breska, Eric, (DG REGIO) Dijkstra, Lewis (DG REGIO) Sanches Luisa (DG REGIO Cal, Vasco, (CAB-GRYBAUSKAITE) Droell, Peter (DG ENTR) Miege, Robin (DG ENV)

MATHERNOVA explains that the objective of the hearing is to investigate whether and how EU Cohesion Policy can contribute to regional innovation. To this end, the discussion is divided into three parts. First of all, there will be a review of the conceptual foundations: What does economic theory tell about the different ways to promote regional innovation? What are the complementarities and contradictions of the different schools of thought? What are resulting policy recommendations? The second part of the seminar will be dedicated to the role that regional innovation policy can play in this context: Which policy is most suited to promote at the same time innovation in Europe as a whole and innovation in specific areas where there is untapped innovative potential? Can these two tasks be pursued at the same time? The third part of the seminar will deal with implementation questions: On which type of interventions should EU regional innovation policy focus? What forms of conditionality need to be established to ensure cost-effectiveness and efficiency?

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Part I: Conceptual foundations

BARCA points out that from a cohesion perspective it is necessary to find convincing arguments that there is an economic rationale for investing in innovation in non-excellence areas. One answer could be that there are innovation traps which prevent regions from fully exploiting their resources in order to become “learning regions”. These innovation traps may be caused by skills mismatches, by the lack of cooperation to bring in best practice expertise from other regions etc. The question then arises what public policies can do to transform a 'conventional' non-innovative region into an innovative region and even more important how to identify a potential “learning region”. Another question which needs to be answered from a European perspective is whether successful regional innovation policies negatively affect the global innovation performance of the Union by distracting financial resources and reducing mobility. If we come to the conclusion that there is indeed a trade-off we need to know how minimize it. Last but not least, the question needs to be answered why regional innovation policies should be run by the EU. What is the added value the EU can bring? Since a cohesion supported regional innovation policy will not support excellence per se, what type of contracts between the Commission and the Member State/region need to be set up to reduce the risk of capture by non-innovative rent-seekers.

LANDABASO and SERAVALLI present an outline of different theories on innovation highlighting the different justifications for public intervention, specific policy fields, preferred tools, appropriate actors, and policy recommendations. Traditional (neo-classical) theories focus public involvement on traditional means (i.e. infrastructures, competition policy) as well as on innovation related activities (i.e. funding of basic pre-competitive research, support to higher education and centres of excellence). These policies tend to be mainly national (i.e. national governments, science foundations, universities) and militate in favour of concentrating EU funding on R&D Framework Programme, based on pre-competitive research in a limited number of leading edge technologies (international character of projects and competitive tendering based on excellence criteria). Evolutionary theories, on the other hand, emphasize the radical nature of the uncertainty which characterizes innovation. They see a broader role for public interventions, going beyond the solution of market failures. They also tend to stress the relevance of context and territorial conditions and to lend support to innovation policy in bringing a given place out of a non-innovative trap. Regional diversities are stressed as an asset for innovation, while it is argued that innovation policy should be tailored to places. Accordingly, EU support to innovation should be directed towards catalytic incentives to promote innovation, i.e. technology and knowledge transfer between education establishments and businesses.

SOETE underlines that major disparities in terms of innovation capacity exist within the EU, both at Member States as well as regional level. The 4th Cohesion Report highlights a trend towards innovation "polarisation" in Europe, i.e. on the one hand the multiplication of technological “hotspots” in Europe and on the other hand the “falling behind” in terms of average European performance of a growing number of regions: Leaving aside the Finnish and Swedish northern regions, Europe’s innovation “polarization” appears to be determined by a centre-periphery pattern. Many of the regions located in a physical sense on the outskirts of Europe or farthest from the European centre, appear to lag behind in research and innovation. As regards conceptual foundations, other theories are also applicable, notably international trade theory and its implications in terms of regional specialisation. Against this background, it may be most appropriate to start the conceptual debate from a cohesion perspective, rather than from the innovation perspective. This is particular true in view of the so-called "migration paradox" of European integration: whereas goods and capital flows have become more mobile across Europe, labour seems to have become more immobile, further segmenting labour markets at the national level and reducing adjustments to shifts in structural change as a result of globalisation of trade, FDI and R&D. From this perspective, the debate on cohesion policy and innovation is about

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increasing the effectiveness of such policies through focusing more on internal regional dynamics across Europe associated with local innovation and entrepreneurship

SAPIR agrees that the questions put forward are the right ones. However, theoretical discussions never provide an answer. One has to look at both theory and evidence and the evidence provided for this discussion is not sufficient to draw any conclusions. He does not know whether there is too much or too little agglomeration in the EU. In addition, the new economic geography does not tell us whether agglomerations are good or bad for welfare.

VERSPAGEN shares the view of the previous speakers and highlights that there are differences but also complementarities between different theoretical approaches. Consequently, empirical evidence constitutes a useful starting point. The two fundamental issues that need to be looked at are the nature of agglomerative forces and agglomeration externalities as well as link between knowledge creation and diffusion.

MORGAN states that the relevance of agglomeration forces that rely on proximity appears to have increased in a globally-connected knowledge-driven economy. Agglomeration seems to be central to the quest for regional development. However, there are also environmental and social costs associated with agglomeration that are difficult to measure.

SAPIR points out that there are phases where agglomeration effects dominate and phases where neoclassical effects dominate. It is therefore important to take a dynamic picture when conceiving convergence policies.

LANDABASO acknowledges that the impact of cohesion policy on regional innovation has only been evaluated with regard to pilot projects involving relatively small amounts of funding. Still, the question remains whether it makes sense for cohesion policy to support innovation everywhere in Europe, i.e. both in convergence and non-convergence regions. He also wonders whether cohesion policy should only support poles of excellence or also small scale innovation. In addition, the question needs to be answered how to ensure complementarity with the Research Framework Programme. Shall cohesion policy for example prepare the ground for lagging regions to participate in the Framework Programme?

BACHTLER confirms that the evaluations of the 2000-2006 programming hardly identify positive examples in terms of promotion of innovation through cohesion policy. Only little amounts were spent on innovation (the bulk of funding still being reserved for investments in infrastructure). The focus was often put on small-scale initiatives, which were rarely well justified and did not form part of a comprehensive innovation strategy. Results are only available from EU15 regions, whereas in EU12 regions institutional capacity has been identified as one of the main weaknesses for promoting regional innovation.

BARCA is surprised about the lack of evidence of the effectiveness of cohesion policy. On the other hand, it is widely acknowledged that Europe needs to increase its efforts on 'frontier innovation' (Philippe Aghion) which requires excellence. This brings us back to the question of equity and efficiency which should not be confused. In other words, shall cohesion policy only aim at ensuring equity? If this is the case, then it should not spend any money on innovation. How can we justify the efficiency side of cohesion policy? Is there a conceptual framework from which we can draw any conclusions in terms of criteria to be applied and conditionalities to be set?

SAPIR underlines that Philippe Aghion's theory on frontier innovation does not make a distinction between Europe and Europe’s regions. Consequently, it does not apply to all of Europe but only to some of its parts. We need to define what the type of innovation we are discussing. This requires a distinction between frontier research and innovation.

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VERSPAGEN argues that one should consider a combination of both frontier innovation and ‘less’ frontier innovation. Regional innovation policies need to invest in the innovative capabilities of regions to catch-up with frontier innovation.

DIJKSTRA states that the question is whether we want a policy only justified by discrepancies. If cohesion policy aims at boosting the economy of the EU as a whole it makes sense to invest in innovation all over Europe.

MORGAN refers to two alternative conceptual narratives either to concentrate resources on frontier Europe or to focus on polycentric development through developing secondary agglomerations in regions. In his view the polycentric model appears to be more civilized and sustainable and ensure ‘healthier’ talent flows and brain circulation.

DROELL emphasizes that we should not give up on non-learning regions. We have to promote clusters building in these regions and link them with wider European networks. Innovation is not only about high-technologies, but also about services, particularly in the new Member States. Europe still lacks a micro-credit framework for entrepreneurs.

MIEGE highlights that globalization and climate change affect the way in which we should look at innovation (e.g. eco-innovation). Regional specialisation will change rapidly. Some sectors which are considered to be declining now may see this trend reversed soon. The objective should be to increase the adaptive capacity, ‘reactivity’, of the economy to future shocks.

LANDABASO points out that in the 1990’s EU cohesion policy through its Community Initiatives used to be a pioneer in terms of promoting regional innovation. EU funding was only granted when specific conditions were fulfilled by the recipient region such as a proven institutional capacity, a credible commitment of regional public-private partnership etc. These initiatives promoted small scale experimentation, mutual learning and the set up of clusters.

BERKOWITZ underlines that it is necessary to bear in mind the policy objectives of cohesion policy. According to the Treaty, the objective of cohesion policy remains the reduction of regional disparities. What is the place for innovation policy in this context, in particular in the least developed areas?

SOETE pleads in favour of “smart” innovation policies coherent with the ideas of “smart” specialisation formulated by Dominique Foray. By doing so, regions will only be competing with a small number of other territories to attract and capture specialise knowledge resources in its domain. They will more easily reach the tipping point to turn increasing returns in their favour and the critical size threshold is far lower. Innovation systems associated with these knowledge bases need to be developed in conjunction with the application domains essential to the economy of the region. Although smart innovation policies are likely to be more risky, necessitating strong entrepreneurial culture, they also need to be highly focused and clearly articulated. Each region has its capacity to develop a ‘smart’ and open regional innovation policy. Differentiation in policy approaches, focus on niches and new business models are crucial. Regional innovation policies in this sense are less about research excellence, but more about local innovation application, while at the same time attracting highly skilled activities and human capital in particular local specialisation areas. They might play a central role in compensating and if possible off-setting regional trends towards talent brain drain from less-favoured regions towards a limited number of research excellence hotspots in Europe.

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FAGERBERG highlights the need to have a better understanding of firm behaviour, i.e. why and how firms are acting and making their choices, to formulate responsive policies. He mentions CIS surveys as useful tools as they use comparable indicators and provide information about context specificities. He agrees that innovation needs to be understood in a broad sense. There has been excessive focus on R&D in Europe. R&D is both a consequence of innovation and a source for innovation. Excessive comparisons between Europe and the US should be avoided.

Part II: The role of regional innovation policy

LANDABASO starts the second part of the seminar by asking the following questions: Does it make sense to fund innovation in order to promote economic development in Convergence regions? EUR 86 billion are earmarked for innovation in the period 2007-2013. Shall we pursue this orientation? (ii) Shall we continue funding innovation in better-off, non-Convergence areas? If so, what is the value added at European level?

RMIEGE agrees that it should be continued but not only for the sake of economic development but for economic adaptability. Ensuring adaptability to structural changes would justify public intervention in better-off areas as well.

BACHTLER questions whether lessons of some successful initiatives from the past have been mainstreamed into current programmes. He wonders whether a fertile ground for a systematic approach to regional innovation exists in Europe's regions. Institutional and administrative capacities remain an issue of concern. In addition, innovation has to compete with many other investment priorities so that the outcome remains dubious despite increased funding. Member States and regions need to balance between short and medium-term priorities and between national, regional and local actions in terms of economic development. The contribution of innovation to this process will depend on the capacity of region s to manage change. One should therefore take into consideration the cultural and institutional context in which cohesion policy operates.

SAPIR underlines that the pre-allocation of funds leads to low opportunity costs. Should innovation still remain a key element of cohesion policy post2013? We see favourable developments in the new Member States manifested in high economic growth rates. A large proportion of firms of old Member States operate in Central and Eastern European countries demonstrating that the market provides for integration. There is a need to assess the rapidly changing environment influenced by market forces prior to defining a new policy for innovation. One should also not disconnect cohesion policy from other national and Community policies which have an impact on European regions.

MATHERNOVA points out that national convergence in the new Member States is accompanied with regional divergence. However, in contrast to some EU15 regions, all regions are growing in the new Member States, albeit at a different pace.

SOETE emphasizes that it is also necessary to look at absorption capacity. In this context, it would be useful to analyse investment policies in the new Member States in order to find out whether they generate mismatches between demand and supply. This needs to be avoided because it would equal a waste of money.

MIEGE refers to Estonia as an example of a country which has invested heavily in IT. At the same time, however, Estonia is lagging behind in the field of innovation manifested by its high energy dependency. This raises the question how the EU decides about the appropriate mix of national and regional policies and priorities.

FAGERBERG underlines that the promotion of innovation is most effective as being integral part of other policies; for instance innovation policy for regional development, health or education. This needs to be taken into account when cohesion programmes are conceived.

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VERSPAGEN says that the rapid catch up process in the new Member States may suggest that there is no need for such policies. However, if there is no policy, which targets regional innovation capabilities, regions may risk ending up in stagnation. The regional innovative capacity should therefore be addressed in the long run as part of the rational of the policy. Another part of the rationale of the policy is related to efficiency as it helps to mobilize unused resources and thus part of the economy to grow. In this context, it might be useful to strictly define innovation, i.e. whether it is related to technological innovation potentially generating significant externalities or to other types of innovation with less externalities. Cohesion policy funding for regional innovation should focus on the former and be coupled with other policies, for instance EU climate policy. The EU should make choices.

MORGAN points out that there are two major problems related to cohesion led regional innovation. First of all, when regional innovation initiatives have been mainstreamed, the ‘shell’ has been maintained but not the dynamics. Secondly, the evidence base for efficiency and effectiveness remains weak. In many regions parallel structures operate for the Research Framework programme, the Competitiveness and Innovation Programme (CIP) and for the Structural Funds, i.e. different pots of funding all promoting innovation.

FAGERBERG disagrees that focus should be put on technological innovation: Defining technology is difficult. There is a need for innovation in the public sector as well, in areas such as health, education and public administration. Since innovation is an important part of economic development, it needs to be pursued everywhere including in convergence regions.

SOETE highlights the complementary nature of the European policy contribution. Given the policy intelligence required in the design and articulation of “smart” regional innovation policies, outside external (EU) expertise which is capable of assessing regional innovation proposals and capacities independently seems to be very useful. Moreover, institutional learning from other European regions that have been particularly successful in designing “smart” innovation policies (learning from diversity) is important. The methods of the Open Method of Cooperation (OMC) of assessing policies could be considered to be applied at regional level. In addition, there is a danger that the world of local networks and clusters can quickly become a rather closed one. Ensuring the openness of regional innovation policies to international competition, foreign researchers and innovators could be an additional task of the European policy contribution. A good example of an open innovation policy supported by EU cohesion policy dates back to 1990s, when the Dutch region of Limburg granted so-called innovation vouchers that could be used outside the domestic region. Finally, there is the question of contributing to the development of a regional identity which is clearly a political issue. European funds have for example supported the development of the Basque region into a highly innovative region. This had a positive impact on the image of the EU since it is now being identified with this success story.

LANDABASO draws the attention to the fact that the innovation vouchers in Limburg emerged from a pilot project in context of a Community initiative. By providing financial incentives the policy helped regions to "think outside the box".

SAPIR expresses his doubts that this assumption can be tested.

MIEGE advocates that innovation should focus on overriding EU policy objectives, such as climate change. In a globalised world, increased focus should also be on improving the adaptation capacity of regions. Investment in science and technology is a ‘no-regret’ investment and contributes to attaining other policy objectives.

SOETE agrees that regional innovation policies need to be focused. As regards the question whether they should be designed/implemented at national or European level, he underlines

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the necessity of Openness. This is a strong argument for a European dimension, especially with regard to small countries which risk pursuing closed policies.

MORGAN shares this view since such policies provide an additional avenue towards open innovation systems by providing supplementary options, partners and financial incentives.

CAL insists however that the financing system of cohesion policy is ‘closed’ by providing ring-fenced regional allocations. This calls for a reform of the financing rules.

BACHTLER questions the added value generated by the EU. While it did happen in the past, there are doubts whether the Commission is still in the position to deliver knowledge, partly due to its gradual withdrawing from regions. Prior to saying here is a policy to which we attach funding, one needs to ask, especially in more advanced region, what they are not yet doing, what is not working and why. In addition, the delivery rules do not encourage pursing sophisticated interventions. Consequently, under the heading ‘innovation’, Member States/regions often build technological parks.

FAGERBERG underlines that policy implementation should take into account different contexts. He expresses the idea that EU support should be given in particular to policy experimentation which is risky business and sometimes difficult to defend internally. Consequently, local/regional actors may not use domestic resources for such purposes. Programmes, in particular the ones containing sophisticated innovation measures, should be opened up to international knowledge flows.

SOETE summarizes the debate by saying that there are good reasons for a regional innovation policy both in EU15 and EU12. However, actual implementation does not seem to provide much of an added value. The question arises how the expertise in the Commission could be strengthened to carry out a more effective policy. Would it make sense to set up advisory boards following the example of DG Research?

BARCA underlines that policy coherence is crucial. It is evident that the strategic role and power of the Commission has decreased throughout the years. If openness and diversity are to be guaranteed by the EU, one cannot have fully pre-allocated resources. The Commission should be recognised as a centre of competence and knowledge. The system of impact evaluation should also be

Part III: Policy implementation

BACHTLER referring to the issue of low opportunity costs suggests re-thinking the mechanism for allocation of funding. This could be a powerful incentive to increase the efficiency and effectiveness of interventions. The Commission should also insist on policy additionality requiring from the regions to demonstrate that what they plan to do is innovative and contributes to European objectives. Institutional deficits need to be addressed as well before funding is approved to ensure multiplier and spill-over effects. He recalls five areas where the EU could provide added-value: financing by going beyond what regions and MS are able fund, institutional coordination, providing a strategic framework and administrative capacity and knowledge.

SAPIR emphasizes that the main issue is one of incentives. There is broad agreement, for different reasons both political and economic, that public interventions are justified, maybe even at EU level. Nobody argued that such policies should be stopped and there is no political consensus to do so. The problem lies in the implementation of these policies which has led to general dissatisfaction. This raises the following questions: "What elements in the system are producing these problems? Why are we where we are at Community, national or regional level? What kind of mechanism/incentive system should be built in to change it?" He proposes the following elements for consideration: first of all, there is a need for better evaluations adding information which is currently missing. These

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evaluations should be carried out independently, not by Commission itself. Secondly, there should be an increased focus on meaningful and properly justified cross-country activities. Finally, there should increased competition and less pre-allocation. The more narrow financial envelopes are defined, the more likely the risk of rent-seeking.

MORGAN emphasizes that there is an urgent need to better integrate the research and cohesion policies. More intelligent conditionalities should be designed to create the conditions for openness and to reducing risk of rent-seeking alliances. He suggests that the Commission should provide a menu and leave it up to the regions to decide. However, the Commission should become tougher on outcomes, not only on delivery rules, such as n+2/n+3.

VERSPAGEN points out that the European value-added for non-technological innovation is not obvious. One should not confuse conditionality with control. One should also be careful not to overstate the value and potential outcome of conditionality. Evaluation is crucial, however not necessarily based on a conceptual, theoretical frame; but following more of an experimental path.

FAGERBERG mentions that collaborative schemes including cross-country dimensions should be considered in other policy areas as well. The Commission should focus on creating an environment for (social and economic) experimentation.and dissmeniate innovative ideas. Bottom-up approaches should be encouraged; the role of the EU is to enhance learning, adaptation at regional level and ensure the maximum openness for information flows.

SOETE agrees that smart specialisation policies should be encouraged. The focus should be on learning, experimentation, information gathering and evaluation. Cooperation between regions across borders also needs to be enhanced. More competition should be pursued without undermining the principle of (non-competitive) pre-allocation. There is a need for more coherence between policies and different levels involved. As regards knwoledge actvities, there is no sense to maintain 27 research councils. Research policy should become a common policy (European Research Area, European Research Council). Higher education on the other hand is a national prerogative. Transfering scientific results to the market however has a strong regional dimension. This calls for a more integrated approach both in terms of complementary expertise and funding.

DROELL does not agree that the different policies and funding mechanisms of the EU are contradictory. They operate according to a different logic (consortia-based, venture capital, structural policies). Openness is important as well as the links to meta-EU objectives. He considers the menu option as positive as it leads to increased competition.

VON BRESKA notes that he is encoraged that there is consensus for a regional innovation policy supported by Structural Funds. However, he is not convinced that the proposals put forward by the experts to tighten conditionalities will be accepted by the Member States. Successive negotiations in the the past have demonstrated the difficulty to convince Member States to accept rules which would lead to a more performance orientated policy.

BERKOWITZ agrees that putting in place more conditionalities appears to be difficult. More incentives are needed and we need to reflect on how they are designed. Regarding evaluations he underlines that the difficulty the Commission faces is that it is operating in a system of shared management. Consequently, the Commission relies on the information generated by the programmes. There appears to be strong consensus today that innovation should be done at regional level. An important question is how our policy fits into the overall governance system of the EU and with other mechanisms, e.g. the micro-pillar of the Lisbon framework.

LANDABASO suggests that policy delivery should gradually move away from increased focus on audit to rewarding quality. Incentives should be introduced, on-going evaluations should be encouraged and allocation ranges considered. In convergence regions, funds

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should be linked to the achievement of national macro-economic objectives, while in non-convergence areas broader sustainable development considerations should be taken into account.

DE MICHELIS is convinced that the political economy of the negotiations only allows for pre-allocated resources to countries with maybe some room on the margin, e.g. allocation ranges which existed for the Cohesion Fund in 2000-2006. He agrees that institutional and policy coordination as well as coherence between regional, national and community policies are essential. However, it is sometimes difficult for the Commission to assess in which direction national/regional policies are moving.

MIEGE agress with previous speakers on need for better evaluation, more cross-country collaboration and more competition. He suggests that policy relevance and its coherence with other policies should be examined. The EU should not prescribe, but provide a menu as was the case in the time of the Community Initiatives. Best practices should be systematically disseminated.

CAL is convinced that innovation will become even more important on the European political agenda. This may call for a genuine European innovation policy. If we have such a policy, the question arises what role should regional policy have in this overall policy framework. Governance and institutional capacity-building in lagging regions may be the answer. Why not establish a European Innovation Council which decides on innovation policies, instead of different departments of the Commission? Such a council could help Member States and regions to create a favourable environment for innovation.

MATHERNOVA concludes the discussion. She notes that today’s reflection has demonstrated the importance of providing empirical evidence. The lack of empirical data can be attributed to a combination of factors, notably shared management, lack of political will to be evaluated and general administrative culture. There has been a discussion of possible trade-offs between supporting frontier innovation/excellence and less-frontier innovation. A consensus has emerged to address regional innovation traps and that there is a role for the EU to play in terms of promoting open innovation systems, supporting cross-country collaboration and disseminating best practice. However, there is a need for better coordination with other national and Community policies. A final issue which needs to be addressed are the prerequisites for efficient and effective policy implementation. In particular, the question of setting the right conditionalities and incentives deserves further rflection.

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ANNEX

Current Theories of Growth and Development: How to Promote Regional Innovation

through Cohesion Policy

Luc Soete UNU-MERIT, University of Maastricht

1. By way of introduction: the issues at stake

In this introductory section we look at some of the recent evidence on regional innovation disparity in Europe. There is by now a large literature on regional growth disparities in Europe; we limit ourselves here to some of the evidence presented in the 4th 2007 Cohesion Report: Growing Regions, Growing Europe (European Commission, 2007) where some factual evidence is presented on the so-called regional “innovation deficit” (see Figure 1 below on Regional Innovation Performance Index 2002-2003).

The innovation “polarisation” in Europe, as illustrated in Figure 1 below, highlights on the one hand the multiplication of technological “hotspots” in Europe and on the other hand the “falling behind” in terms of average European performance of a growing number of regions:

• The first feature of growing research and innovation concentration goes now well beyond the old European research archipelago region described in many EU reports in the 80’s as a geographical “banana” running across EU member states from the English South-east region to Lombardy and ending in Catalonia, including with each new wave of European enlargement the core research centres of such “new” member states becoming now new European research agglomeration hotspots such as in Sweden and Finland in the past and Hungary, the Czech Republic and Slovakia today.

• The feature of further falling behind expands in a broadly similar fashion including old (such as Southern Italy) as well as new peripheral regions.

Leaving aside the Finnish and Swedish northern regions (which are in physical terms large, lowly populated regions for which relevant disaggregated data does not exist), Figure 1 conveys a visual impression that Europe’s innovation “polarization” appears strongly determined by some form of European centre-periphery positioning.

Many of the regions located in a physical sense on the outskirts of Europe or farthest from the European centre appear more reddish coloured or, in other words, appear to lag behind in research and innovation1. Adding the data from Switzerland, a non EU-member country but part of the EEA, would further reinforce that impression.

1 It might be worthwhile noting that the difference with the US is most striking here, where research and innovation concentration is actually strongest on the outskirts of the country: the well-known North-East and West coast regions but also the hotspots on the South coast/boarder with Mexico and in the North with Canada. See, for instance, Audretsch and Feldman (1996), and Breschi and Malerba (2005).

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Fig. 1

Source: Growing Regions, growing Europe: 4th Report on Economic and Social Cohesion, Danuta Hübner presentation, Brussels 30 May 2007, “Slide 5: Situation and trends: the Innovation Deficit. Regions in Scandinavia, Germany, the UK, and the Netherlands emerge as the best performers; while in 86 regions home to a third of EU population, performance is below average.”

Following the recognition of the importance of RTD and innovation for regional growth, the European structural funds were gradually redirected towards such knowledge investment activities, and shifting over time from RTD inputs towards more innovation related activities. This is reflected in the trend of structural funds devoted to R&D, innovation and the information society as illustrated in Figure 2 below, again from the Fourth Report on Economic and Social Cohesion.2

2 See also the Synthesis Report by Reid, et al. (2006)

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Despite the fact that data for some key technologically leading regions are missing for the period 2007-2013, the figure again conveys well the issues at stake. Both in the technologically leading, as well as many lagging regions, more than 40% of all structural funds are currently being devoted to research and innovation. There is in other words, a nearly pervasive, across the board reliance on innovation expenditures in Europe to bring about regional growth: in technologically leading regions so as to remain ahead; in peripheral regions so as to catch up.

It is clear though that the actual design and implementation of such “pervasive” innovation policies will have to be very different between the two sorts of regions; that the extent to which such policies are strongly complimentary with national and/or domestic regional policies will be very different depending on the dominance of European regional funding over national-regional funding. Furthermore, it is also clear that the scope for overlapping EU, national and regional policies and the extent of regional locational tournament competition for setting up research and innovation activities must have greatly increased as a consequence of this pervasive reliance on research and innovation investments in European regional policies, raising questions about the effectiveness of regional innovation policy.

Fig 2.

Source: Growing Regions, growing Europe, 4th Report on Economic and Social Cohesion, Danuta Hübner presentation, Brussels 30 May 2007, “Slide 12: The share of cohesion spending on R&D, innovation and ICTs has more than doubled between 2000-2006 and 2007-2013.”

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2a. Theory: on the conceptual foundations

In my view a relevant theoretical approach, to the policy questions raised by the Directorate General for Regional Policy, can be found in international trade theory3 and its implications in terms of regional specialisation within an integrated region such as Europe. The theoretical contributions under the heading of e.g. “new” trade and “new” geography theory are probably less controversial, yet they do bring to the forefront a number of central policy trade-offs with significant implications for regional innovation policy, its scope, its role from a social cohesion perspective and its possible complementary nature with other national and European “knowledge” policies in the areas of higher education, fundamental as well as applied research and innovation.

It might be good, in other words, to start the conceptual debate rather from the (social) cohesion perspective, rather than from the innovation perspective. Cohesion is still something absolutely unique to the European project. It was and still is inherent to Europe’s economic integration and enlargement process aimed ultimately at offsetting some of the European and national agglomeration effects following increased trade and production specialisation within the Union. While national growth and income convergence between member states is one of the most striking success factors of European integration, regional divergence as documented a.o. in the Fourth Report on Economic and Social Cohesion and emphasized by many economic geographers remains a major EU policy concern.

Hence the continuous readiness across most EU member states4 to pursue a policy of financial transfers from rich to poor regions across national boundaries, despite growing concerns about lack of effectiveness. In prioritizing "cohesion", the European economic union became gradually characterized by an economically integrated zone with free movement of goods, consumers and financial flows, but much less of labour. As a matter of fact certainly in the early periods of enlargement and despite a strong desire to achieve free movement of labour, intra-European migration often declined following enlargement. While limited intra-European labour migration fits to some extent the objectives of European cohesion, i.e. to transfer financial resources to less favoured regions and create employment opportunities rather than have employment migrate to richer regions, the lack of intra-European migration reduces of course in a significant way possible adjustments in the labour market at the European level, and adjustments to shifts in structural change as a result of globalisation of trade, FDI and R&D5. It amounts to what has sometimes been called the "migration paradox" of European integration: as goods and capital flows became more mobile across Europe, labour seems to have become more immobile, further segmenting labour markets at the national level.

From this perspective, the current debate on “cohesion policy and innovation” is ultimately about increasing further the effectiveness of such cohesion policies through focusing more on internal regional dynamics across Europe associated with local innovation and entrepreneurship.

3 See, for instance, Gomory and Baumol (2000). 4 It is in this sense that cohesion has intrinsic limits in being effective and capable of carrying full support by all member states. If European enlargement involves countries with much lower levels of development, the impact of European cohesion policy objectives will tend to become national and no longer regional. Thus it is being claimed that the impact of cohesion policies on the growth path of (new) member states will be up to 2013 an increase in GDP (compared to a baseline scenario without cohesion policy) of around 9.0% in the Czech Republic and Latvia, 8.5% in Lithuania and Estonia, 7.5% in Romania, 6.0% in Bulgaria and Slovakia, 5.5% in Poland and 3.5% in Greece and 3.1% in Portugal. But it seems very difficult to separate such cohesion effects from “normal” market driven convergence processes resulting directly from EU membership. At the same time, the substantial growth in regional disparity in new members states tend to suggest that European cohesion policy has not been effective. 5 See Foray (2006).

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2b. Resulting policy recommendations

As already mentioned in the introduction, the economic integration process became gradually accompanied with an expanding set of specific European industrial and technological policies, fostering intra-European cooperation in the field of pre-competitive R&D, mobility of European researchers and university students, and various technology transfer and local innovation policies. These policies which were aimed at strengthening European competitiveness in high tech sectors have probably been most successful in some of the "big science" RTD areas, where essential scale economies could be achieved and a number of regional high tech clusters could be established.6

The further strengthening of European research policy over the last decade with amongst others the creation of the ERC, the EIIT, and more generally the coming into operation of a European Research Area with increased mobility of researchers and new forms of financial transfers based on portability of research grants will further strengthen the emergence of strong regional hotspots of research excellence across Europe.

Somewhat surprisingly given the importance of the “social cohesion” dimension in European economic integration, the regional implications of these new European and national research and higher education policies towards research excellence have not really been discussed nor studied7. The regional social cohesion innovation policy focus emerged from a desire to assist less-favoured regions to increase their technological level, while the ERA dimension shifted gradually away from any “territorialisation” of research. The central argument which could be made today is that cohesion-inspired regional innovation policies should effectively become complements for ERA policies8: focusing less on research excellence in abstracto but more on local innovation application, while at the same time attracting highly skilled activities and human capital in particular local specialisation areas.

In short, regional innovation policy might well have to play today in Europe a much more central role in compensating and if possible off-setting regional trends towards talent brain drain from less-favoured regions towards a limited number of research excellence hotspots in Europe. In line with the ideas of “smart” specialisation, as formulated by Dominique Foray and Bart van Ark (2007), such policies are likely to be much more risky though: of a strong entrepreneurial nature while at the same time highly focused and clearly articulated. The extent to which such intelligent regional innovation policies will succeed today in a much more competitive European research area where they failed in the past, will undoubtedly be at the centre of the hearing.

3. Which role and motivation for a regional policy run by the EU?

It might be useful to go back to a more fundamental discussion about the appropriate institutional level (regional, national, European) at which the main components of knowledge activities (higher education, research, innovation) should be carried out in Europe, even if such a discussion remains a purely normative one; the political feasibility of re-allocating such activities amongst different levels of policy making remaining within the framework of the current European treaties, even the Lisbon one, more or less non-existent.

It could be argued that higher education remains first and foremost a nationally organized and funded activity even though the curricula, the evaluation and accreditation of an increasing 6 Sophia-Antipolis as the first and probably most well-known case with amongst others, alongside local University of Nice departments, a local hub of the French national research institute INRIA, European institutions such as the European Telecommunications Standard Institute and the European Research Consortium for Informatics and Mathematics (ERCIM), and the European location of the World Wide Web Consortium (W3C) 7 The only early paper on this topic was a mimeo paper by Paul David and Stanley Metcalfe on the implications of the ERA for the labour mobility of highly skilled researchers and European cohesion. David and Metcalfe drew attention to the lack of research and policy discussion on this issue. See David and Metcalfe (2007). 8 What Dominique Foray calls the ERA+

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number of study fields are becoming increasingly internationally organised. Over the last decades students in Europe and beyond have become partially mobile thanks to the Erasmus programs and the Bologna reforms with the growing transparency of the amount of study points allocated to studies abroad. Full student mobility, with the exception of the inflow of foreign students in the UK and Ireland, and cross-border flows in studies limited in terms of admissions, has been limited primarily because of language barriers. However, masters’ studies are increasingly been given courses in English in the “war for talent” across European universities. Overall though the dominance of national students in higher education is such that national (regional in those federal member states where higher education is governed at the regional level) governments are likely to remain both in terms of administering as well as in terms of financing, in control. This being said it is clear that higher education in Europe will be subject to substantial structural reforms in the coming years9, with the establishment of a European higher education area and the proposed minimal national investment target of 2% of GDP).

Public research by contrast should ideally be governed at a supra-national, European level. The current existence of a ERC next to 27 individual member countries research councils is in the long term unsustainable. Research excellence is heavily dependent on scale: the European scale seems to be the most logical scale for most publicly funded research activities, for reducing the costs in selecting and evaluating research proposals and for enabling high quality research specialization. The flurry today of individual EU countries’ plans for achieving research excellence provides today actually the perfect example of a “locational tournament” in Europe today. The normative claim could be made here that European research policy should ultimately evolve into a Common Research Policy, similar to the CAP governed at the level of the EU and no longer at the level of members states. From this perspective it is interesting to note that research integration had been historically considered as one of the core areas for European integration at the time of the early days of the ECSC.

Applied research, technology transfer, the use and re-use of technology from elsewhere as well as innovation and entrepreneurship have a strong regional and local focus. One of the core problems of the “locational tournament” tendencies amongst competing regions in innovation policy is to some extent the lack of local anchorage of many of such public policy initiatives. What Foray describes as the “innovate here, benefit elsewhere” pattern characteristic of poorly locally integrated regional innovation policies. Regions are likely to lack though the capacities to design the sort of “smart” innovation policies discussed above. Would Europe be able to play this role?

The Directorate General for Regional Policy highlights the complementary nature of the European policy contribution as follows:

• Assisting in the identification and promotion of the “untapped innovative potential”. Given the policy intelligence required in the design and articulation of “smart” regional innovation policies, outside external expertise which is capable of assessing regional innovation proposals and capacities independently seems at first sight to be particularly welcome. However, it remains difficult to combine such independence with the strong local pressures for financial transfers to the region.

• Bringing in regional “best practice” expertise from other European regions that have been particularly successful in designing “smart” innovation policies. There exist already a number of quite detailed studies on successful regional innovation policies, providing also insights not just in the local context conditions but also in the nature of the relationship between the region and the centre, the degree of autonomy in the articulation and management of those policies, etc. The discussion is here to some extent similar to the one with respect to the institutional factors explaining the relative success of universities in Europe (Aghion el al. 2007).

9 See the Bruegel Policy Brief by Aghion et al., (2007)

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• There are of course in Europe numerous cross-border, so-called Euregions confronted in a much more direct way with the lack of integration of national research and innovation policies. These typically remain for the EU pilot regions in which experiments of further integration of policy tools and instruments can be tried out. The Commission has also at its disposal, INTERREG financial facilities. The cross-border participation of local policy makers in such programs should however be optimized from fund-raising for the own national region to external advisor to the other, cross border region.

4. By way of conclusion: What are the prerequisites for efficient and effective policy implementation?

There are many dangers in the actual implementation of the sort of regional innovation policies discussed above. The world of local networks and clusters can quickly become a rather closed one, where it is intrinsically difficult to get behind the facts.

This holds actually for both high-tech and peripheral regions, but the high-tech regions are likely to be much more open. Open to international competition, foreign researchers and innovators, competing world-wide. The peripheral regions are likely to be much more closed, with their closely knit local social network of people who know (and see) each other well, and might turn into rent-seekers, who will manipulate the regional “environment” without providing real innovation value or potential.

It will be important to brake open those local networks as part of the regional innovation policy. The challenge here is to some extent to pursue “open regional innovation” policies. There are only few countries in the EU who currently have implemented truly “open” innovation policies: in most cases the obsession with making sure that the policies have local impacts, has meant that the policies have been designed as “geographically” closed further exacerbating the locational tournament effects. In a study last year for the Flemish Ministry of Economic Affairs (Soete, 2008), I noticed how closed IWT (the public Flemish innovation support agency) was in the implementation of its R&D and innovation support policies. The same holds for the German länder Reinland-Westphalia’s research and innovation support policies. So closeness is not limited to peripheral regions. But international private firms will in cases of high tech regions typically complain about the closed nature of regional support policies.

Only the Dutch Limburg policy of granting so-called innovation vouchers initiated in the 90’s which could be used outside of the domestic region but elsewhere in the Euregion, was, and still is now at the level of The Netherlands, a good example of an open regional innovation policy10. The innovation voucher case illustrates actually why in peripheral regions such a scheme would be particularly welcome. Entrepreneurs in need of technical assistance or applied research support might be in a strongly disfavoured position confronted with e.g. a much lower quality of higher education establishments or public/private technical support facilities. By providing them with “innovation vouchers” which they can exchange for technical and applied research advice and support outside of their region, they might actually benefit more directly from such voucher schemes.

This is, however, just one example. Many of the questions raised on the issue of cohesion policy are essential for implementing regional innovation policies. These questions should not just form the basis for discussions with academic experts, but should also form the basis for a discussion with innovation policy practitioners.

10 After its success in the Euregion Meuse-Rhine, the policy was taken over by the Dutch Ministry of Economic Affairs for the whole of The Netherlands.

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In this sense it would be good to involve in the current debate on Cohesion Policy and Innovation some of the regional innovation policy makers, particularly from regions which have witnessed over the last decade a relatively successful transformation and are no longer entitled to receive European regional structural cohesion funds. As non-interested parties, but with a proven expertise record, those more practical experts might be invaluable in shedding light on many of the questions raised in the aforementioned debate on Cohesion Policy and Innovation.

The extent to which regional innovation policies, reflecting also a desire for more decentralized, nearer to citizen decision making both in business and government, can indeed enhance the "productive" potential of Europe's enormous variety into regional competitive advantages remains the central question that will have to be addressed in the coming years.

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References

Aghion, P., et al. (2007) “Why Reform Europe’s Universities?”, Bruegel Policy Brief, Issue 2007/04.

Audretsch, D.B., and M.P. Feldman (1996) “R&D Spillovers and the Geography of Innovation and Production”, American Economic Review, 86(3): 630-640.

Breschi, S., and F. Malerba (2005) Clusters, Networks, and Innovation, Oxford: Oxford University Press.

David, P.A., and S. Metcalfe (2007) “Universities must contribute to enhancing Europe’s innovative performance”, Knowledge Economists’ Policy Brief, no. 2. Available at: http://ec.europa.eu/invest-in-research/pdf/download_en/policy_brief2.pdf

European Communities (2007) Growing Regions, growing Europe: Fourth Report on Economic and Social Cohesion, Luxembourg: Office for Official Publications of the European Communities.

Foray, D. (2006) Globalization of R&D: linking better the European economy to “foreign” sources of knowledge and making the EU a more attractive place for R&D investment. “Knowledge for Growth” Expert Group Report to the European Commission. Available at: http://ec.europa.eu/invest-in-research/pdf/download_en/foray_report.pdf

Foray, D., and B. Van Ark (2007) “Smart specialisation in a truly integrated research area is the key to attracting more R&D to Europe”, Knowledge Economists Policy Brief, no. 1. Available at: http://ec.europa.eu/invest-in-research/pdf/download_en/policy_brief1.pdf

Gomory, R.E., and W.J. Baumol (2000) Global Trade and Conflicting National Interest, Cambridge, Massachusetts: MIT Press.

Reid, A., et al. (2006) Strategic Evaluation on Innovation and the knowledge based economy in relation to the Structural and Cohesion Funds, for the programming period 2007-2013: A report to the European Commission Directorate-General Regional Policy Evaluation and additionality, Brussels: Technopolis Group.

Soete, L., et al. (2008) Optimalisatie en rationalisatie van het hoger onderwijslandschap en –aanbod: Rapport van de Ministeriële Commissie aan de heer Frank Vandenbroucke, Vlaams minister van Werk, Onderwijs en Vorming. Ministeriele Commissie Optimalisatie en Rationalisatie in het Hoger Onderwijs.