Strength of innovation system determines regions’ crisis sensitivity

Innovation has supported employment both during the economic downturn and in its aftermath. The most resilient regions are regions with strong performance in the three analyzed intellectual property rights (IPRs); patents, trademarks and design. Regional innovation systems that link technology-intensive innovation in industry to a strong service-intensive sector have emerged best from the economic crisis, according to a report ‘How to survive an economic crisis’ 2019) by the JRC. The differences between European regions have increased in recent years. This does not automatically concern differences between Eastern and Western Europe. In Eastern Europe, too, there are regions that have continuously improved their innovation performance and therefore perform better economically.

Innovation process has changed

The report examines two important phenomena that endanger European cohesion today. The first is the underlined process of structural change. This process has characterized the entire world economy over the past decade, driven by technological change and international integration.

The second is the Great Depression that started in 2008. Economic systems in most developed countries had a major transition from an economic paradigm focusing on the manufacturing sector combined with the Fordist mode of production as an engine of productivity, innovation and job creation, to a service-based economy organized around flexible specialization and rapidly adapting innovation processes.

In the Schumpeterian world, outlined in “Capitalism, Socialism and Democracy” (1942), large companies were the engine of technological innovation, developed in large R&D laboratories. However, the path is now paved for the emergence of flexible and lean organizations, which learn and innovate by relying on a number of different sources, both internally and externally of the company (Chesbrough et al., 2008; Freeman, 1998; Lundvall, 1998). The generation of science as the engine of technological innovation has also had major changes, moving from the so-called linear model of innovation to more complex and interactive modes of production (Archibugi and Filippetti, 2015; Gibbons et al., 1994; Leydesdorff and Etzkowitz, 1996; Rosenberg, 1994; Stokes, 1997).

Competitiveness of regions

This process of structural change was simultaneously influenced and enhanced by greater international integration. In the new globalization paradigm, most of the cross-border circulation of goods and knowledge is taking place within the global value chains of large transnational companies, who are looking internationally for the most suitable location for their production of goods and knowledge. As a result, the sources of economic development of regions, cities and peripheral areas have changed markedly.

Building infrastructures and pumping public money is no longer a viable policy. In fact, the convergence of labor productivity in European countries and regions has been driven mainly by the accumulation of fixed capital; lagging regions, on the other hand, have failed to close their technology gaps with the more advanced regions (Filippetti and Peyrache, 2015, 2013).

The search for competitiveness of places has emphasized the need for more tailor-made policies that could promote the endogenous process of economic growth. This shift in emphasis is clearly visible in cohesion policy, which has received increasing attention, towards a policy focused on intangible forms of investment, such as innovation, human capital, cluster policy, industry-university connections and, more recently, an emphasis on institutions.

The bottomline of this policy shift is the general emphasis on so-called place-based policy (Barca et al., 2012). A recent report prepared for the European Commission argues that since “regional economic divergence has become a threat to economic progress, social cohesion and political stability in Europe”, it is necessary to develop different development policies depending on the type of region.

What makes a region resilient?

In a world characterized by rapid and continuous change, the regional economic system’s ability to manage exogenous shocks is increasingly a concern for policy makers. The current pressing question is therefore: what makes a region more (or less) resilient? The crux of the question is whether it is better to deal with an economic crisis if a region is highly specialized, or by having a degree of variety in its industrial structure. The argument is that in the latter case regional economic systems are better positioned to adapt and move away from industries and sectors affected by the crisis in more profitable sectors.

This report introduces the role of innovation as a source of regional resilience in this debate. They base their hypotheses on Schumpeter’s argument long ago in an article, which has been relatively neglected compared to the other works of the Austrian economist. In his article “The Creative Response in History”, Schumpeter makes an important distinction between how economies respond to what we might describe as exogenous change today, and which was defined by Schumpeter as “a change in data.”

Schumpeter distinguished between adaptive response and creative response. The first is a response to a change “as traditional theory describes”; this is a form of change that can be predicted in advance from current economic theories. A creative response, on the other hand, is when “the economy or industry or some companies in a sector do something different, something that is beyond the scope of existing practice.” According to Schumpeter, the creative response has three characteristics. First, it can only be understood afterwards. Second, the long-term economic path. Third, it has something to do with the level of human capital and its behavior, especially the behavior of the entrepreneurs.

Measurement indicators for the innovation profile

The study bases its findings on examining three measurement indicators: patents, trademarks, and designs. Patents can be interpreted as an indicator of technological innovation, trademarks as an indicator of innovation in knowledge-intensive services (KIBS) and design registrations as an indicator of innovation in medium and low-tech industries in the manufacturing sector. A region with better patent performance compared to others is more focused on technological development and can be considered high-tech; conversely, a relatively stronger region in the trademark is more focused on “soft” knowledge than on technology.

In previous blogs I have made comments on rankings of countries based on these kinds of indicators, however, due to the application in this study, this study give another perspective. They looked at the correlation between the indicators.

In the period 2007-2016 there has been a qualitative transformation in the innovation profiles of European regions. A general trend has emerged confirming that many regions of central and eastern Europe have achieved relative performance for all three indicators of innovation. This suggests a general trend for these countries to improve their innovation activity, both in terms of technological innovation, service innovation and design-oriented innovation. In addition to this general convergence trend, another qualitative pattern also appears. There are a significant number of regions that have improved their scores in one indicator and decreased in another. A process of servitization of the economy also affects the underlying innovation activities of the regions, which as a result tend to innovate more than the knowledge-intensive sector.

The combination of technology and services works

The report also examines the extent to which innovation contributes to making European regions more resilient by looking at innovation’s role in regional employment performance during the 2009-2010 economic downturn (resistance) and their capacity to recover in the wake of the crisis during the period 2010-2016 (response). The results demonstrate the lack of clear geographic patterns of both resistance and response, apart from a general lack of responsiveness in the regions of southern Europe. Innovation has helped support employment both during the economic downturn and in its aftermath. In particular, the most resilient regions are regions with strong performance in patents, trademarks and design. This suggests a number of comparative advantages for those regional innovation systems that combine technology-intensive innovation in production with a strong service-intensive sector.

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