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Weak bridges and missing sectors in Nordland

Publisert: 1.7.2014Skrevet av: Åge Mariussen

Arbeidsnotat nr.: 1008/2014ISSN-NR: 0804-1873Prosjektnr:

ARBEIDSNOTAT

ARBEIDSNOTAT NR: ISSN-NR: PROSJEKTNUMMER: ANTALL SIDER:1008/2014 0804-1873 <NR> 36

FORFATTER(E): SALGSPRIS NOK:Åge Mariussen 50,-

Weak bridges and missing sectors in Nordland

This working paper was commissioned by the Nordland County Council as a follow up analysis related to RIS3 planning in Nordland. It is based on analysis of the IO-PANDA model of the regional economy in Nordland, and inspired by a discussion on relatedness with professor Ron Boschma, director of Circle, Lund University.

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CONTENT

POLICY RECOMMENDATIONS......................................................................................................................... 3

1 SMART SPECIALIZATION: MAPPING WHERE WINNERS MIGHT SURFACE................................................5

1.1 PANDA – BACK TO THE FUTURE...............................................................................................................5

2 SMART SPECIALIZATION IN NORDLAND................................................................................................8

2.1 HOUSEHOLD CONSUMPTION...................................................................................................................92.2 MEASURING VALUE CREATION BASED ON NATURE, SALMONS AND HOTELS........................................102.3 RELATEDNESS.........................................................................................................................................132.4 THE SEAFOOD (MARINE) CLUSTER.........................................................................................................162.5 THE GREEN ENERGY CLUSTER................................................................................................................192.6 KIBS........................................................................................................................................................222.7 TOURISM AND THE EMERGING EXPERIENCE ECONOMY CLUSTER.........................................................252.8 THE MARITIME – PETROLEUM NETWORK..............................................................................................26

3 SMART STRATEGY IMPLICATIONS........................................................................................................ 29

3.1 VALUE CREATION...................................................................................................................................293.2 SEAFOOD – STRENGTHENING A WEAK BRIDGE......................................................................................293.3 THE GREEN ENERGY CLUSTER: PUTTING IN PLACE THE MISSING LINK...................................................303.4 THE EXPERIENCE ECONOMY CLUSTER: AN INNOVATION SYSTEM UNDER CONSTRUCTION..................31

ATTACHMENT.............................................................................................................................................. 33

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POLICY RECOMMENDATIONSThe S3 strategy for Nordland suggested by Nordland Research Institute (Smart 4H) identified 3 strong export peaks and 36 regional sectors which are supporting them. The specialization of the regional economy was seen as based on exploitation of resources in nature, combined with skills in local labor markets. A core recommendation was supplier development. In carrying this analysis further, this paper is based on an analysis of an Input Output matrix of the regional economy of Nordland (PANDA), provided through cooperation with SINTEF. The report applies Input-Output data to map supply and demand relations, and other variables, such as import and export, between 50 sectors in the regional economy (see appendix). The point of departure is that supply-customer relations, as well as competitors in the same sector, are crucial parts of the system of innovation. They also indicate relatedness. This approach was discussed with professor Ron Boschma at a seminar organized ny the Nordland County Council. Based on PANDA data, and other knowledge, a conceptual map of the regional economy, which is the framework for the recommendations below, is presented. The figures underpinning this conceptual model are presented in section 2.

1) Tourism. This paper presents the result of estimates of the strong nature component in value creation in one of the peaks, seafood, with mass production of a standardized and highly sophisticated product with a high level of R&D input, salmon. In comparison, the profitability within tourism is marginal. Production is craft based, with limited direct R&D input in the product innovation phase. The current answer to this challenge is the experience economy strategy and platform, arguing for a business model where the successful entrepreneur creates a well-paid experience together with the visitor. There is a need to move from this phase of diffusion of the business model of experience economy into the construction of regionally embedded systems able to innovate sophisticated experience economy products for the mass market.

A. One solution to these challenges is transnational learning based on co-specialization with regions with stronger cultural industrial sectors and successful results in cluster and destination development in tourism.

B. Closely related challenge is to identify strategies of destination development with a sustainable financing mechanism, as well as systems of certification and quality control.

2) Stronger regional bridges to the leading sectors. In addition to tourism, the leading sectors into the global markets are metal / other processing industries and aquaculture. In various ways they draw upon wider suppliers and service providers in the region. These suppliers and service providers are the bridge between these two leading global sectors and the regional economy. The analysis shows that aquaculture, and the wider seafood cluster has strong links within the core flows of natural resources, with linkages between fishing, fish processing, aquaculture, and fish food industries supplying aquaculture. This production system is deeply embedded in the regional economy, in particular through linkages to knowledge intensive businesses (KIBS) and the maritime cluster. Aquaculture/ seafood is related to the region through this production system. The sector of aquaculture itself is also

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embedded in a national system of innovation and the global food industry. There is also a green energy cluster in metals, minerals, chemicals, supply industries, and electricity production, with links to the maritime cluster, which is embedded in the region. Metal industry is in various ways connected to the regional economy through these supply industries. However, metal production as a sector is strongly linked to the global economy. There is a need to strengthen the relations between the two leading sectors and their bridges into the regional economy.

A. Supplier development. Are the two leading sectors happy with their regional suppliers? What can be done to strengthen these suppliers? An answer to this question is a gap analysis identifying strengths and weaknesses in the regional supply networks of aquaculture and metal production.

B. Broader systems of innovation, by connecting the global leaders to their regional helpers. The possibilities for strengthening and expanding the leading cores involved the regional suppliers of these sectors. In the case of metal production, the core issue is increased production of green energy at competitive prices. In the case of salmon, the core issue is new concepts for use of sea areas, and new technologies for fish food production. Both of these issues open up the relation between the leading sectors and a broad range of regional helpers. The challenge is to create regional systems of innovation where the leading sectors can share their deep knowledge with their regional helpers, and in that way create new regional systems of innovation.

i. Efforts to use the deep internal knowledge of the aquaculture/ seafood leaders in promoting spin-offs and spin-outs, as new firms, should be strengthened.

ii. The aquaculture/ seafood cluster needs to open up for its close friends in the region, and invite them into cooperation on exiting innovation projects and future plans they are involved in. Table 3 in this report identifies these sectors.

iii. The green energy cluster is a production system where the system of innovation and the core institutional mechanisms enabling growth has been removed. Further development of the green energy cluster depends on:

1. improved framework conditions for new investments in processing industries, including

2. improvements of supplier networks and following up on the triple helix gaps identified in the 4H report

3. a reconstruction of the core institutional and technological mechanisms of growth of this cluster, through co-specialization with European regions which can provide technological innovations in green energy production, in other words, regions with strong electro-technical industries.

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1 SMART SPECIALIZATION: MAPPING WHERE WINNERS MIGHT SURFACE

Analysis of innovation may have many different points of departure. In the 1980s, it was about “picking winners”, supporting specific sectors which were believed to be the sectors of the future. For instance, all countries should have their own biotech cluster. That approach failed. In Europe today there are too many small biotech clusters competing with each other without achieving critical mass. Analysis may look for preconditions of success from the point of view of “the innovative firm” or “the entrepreneur”, or it may consider innovation as driven by shifting conditions of technologically based competition between sectors, regions and firms with different knowledge bases and technological platforms.

The Smart Specialization paradigm has a place-based understanding of innovation-driven economic development, where the theory of related varieties argued by professor Boschma is influential. Basically this theory says that in order to be successful, you should have a network of firms and other sectors around you whom you can relate to, as in learn from, share experiences with, and trade with in a way which gives possibilities of development for your own firm. A brilliant innovator or a firm which is unrelated to everybody else in the region is not likely to stay. She will find another place to develop her idea, where there are firms or sectors around her which can support what she is doing. Professor Boschma has suggested that relatedness analysis can be used to identify areas where new innovators or sectors are likely to emerge, or where they should be encouraged, based on his approach to the analysis of the structure of the economy. There are two approaches, either in looking for missing pieces, sector which could have been there because all the other related sectors are there, but are missing, or in looking for weak bridges, links between two or more dense clusters which can be made stronger.

We will come back to this later.

Relatedness may be measured in different ways, as similarities in products, or through labor market mobility, sharing the same people with similar professions or skills. This paper is using an IO model of the regional development, developed as a part of the Norwegian planning tool PANDA. We combine this tool with what we know from other sources.

1.1 PANDA – BACK TO THE FUTURE

The development of PANDA as a planning tool goes back to the 1950s and 1960s. At that time, the Norwegian Ministry of Finance was looking for models which could be used to understand and guide investments in a national economy deeply dependent on natural resources. In order to meet this challenge they developed an at the time highly sophisticated tool for national economic planning, an Input Output Matrix of the Norwegian economy, which they equipped with quite sophisticated, detailed data. They used this tool in designing the industrial policies of the 1960s and 1970, characterized by development of new industrial towns based on cheap, locally available hydroelectric power and investments from

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sophisticated foreign industrial companies. In Glomfjord in Nordland this policy had deeper roots, and went back to the 1920s. In Mo, the same strategy was applied, but with the state as the owner and investor, in an industrial policy which developed a complete cluster. During the 1970s this policy became discredited. In the 1980s, the Iron Works in Mo went into a deep restructuring and privatization, driven by consultancy companies who had read Williamson on market and hierarchy and believed in the idea of outsourcing. Finally, in the 1980s came the wave of neo-classical economic theory, which opened up for the dismantling of the institutions which had been used to promote industrialization and provide local coordination between production of energy and use of energy in industries. Neo-classical regulations, which are at odds with any strategy to develop regions where Mother Nature provides the basic resource, were put in place. This trend was supported by the understanding of the “post-industrial society”, as well as the growth of oil industry in Norway, which seemed to make all other industries unnecessary.

The green energy region referred to in this report is a regional production system which has survived this attack.

The planning model itself, however, got a second life, as it proved to be highly relevant in the analysis of regional impacts of the oil and gas industry in the 1980s. For this purpose it was regionalized, and became PANDA. PANDA includes several components, among them an I-O model of the regional economy of in this case Nordland. The strengths of PANDA is first that it makes it possible to relate to and understand value creation based on natural resources in a relevant way, and secondly that it models the basic transactions inside, into and out of the regional economy with a framework which is pretty detailed, a 50X50 sector matrix. The 50 PANDA sectors are referred to in the appendix. In this way, PANDA can be used to simulate changes in these sectors and impacts of changes on the regional economy at large. In this report, PANDA is just used in a more modest way, as data to describe some of the basic structures of connectivity, based on trade within the regional economy. In our case we are looking at trade within clusters, trade between clusters and the rest of the economy, and trade relations between clusters and the global/ national economy. We are also looking at trade between clusters and sectors.

Connectivity analysis often has other methods, such as labor market analysis, where flows of labor are expected to connect different sectors and open up for transfer of knowledge and innovation. This is not accounted for by PANDA. Neither is connections based on communities of practice or communities of expertise which are not directly related to trade. So what are the other weak points of this application of PANDA? PANDA does not see the impacts of tourism. This has to do with statistical limitations, mainly because tourists buy services and other products from different sectors in the same way as the local Norwegians do. Tourism, in other words, is hidden as a part of household consumption. A more fundamental criticism is that PANDA with its 50 sectors is not able to observe the new cultural industries, and related emerging phenomena, such as the experience economy. Our method, with a focus on trade, overlooks relatedness between sectors which is based not on trade relations, but on communities of expertise. We have therefore drawn upon other sources to identify the maritime cluster, which is deeply related with everything else in the economy, as well as the KIBS sectors, providers of knowledge intensive services to the economy at large. Since these two sectors are related to almost everything else, we have

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placed them at the center of the regional economy. What is detectable through PANDA is close relations in clusters integrated through value chains. In this way, PANDA is actually quite good in observing and measuring the strengths of the regional economy of Nordland in two important areas, the seafood cluster and the green energy cluster. This approach brings us to the map of the regional economy, which we will use to discuss where the winners probably are hiding, based on the recommendations from professor Boschma, to look for bridges and missing pieces.

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2 SMART SPECIALIZATION IN NORDLAND

Historically, specialization in Nordland started with exploitation of natural resources based on craft skills and experiences learnt through hardship and labor. It became smart through application of science, which opened up for two processes, first, new technologies and methods, enabling new ways to exploit nature, and secondly, institutions managing natural resources in sustainable ways, which enabled the development of regional green energy and marine clusters.

These connections between science and industry are not isolated to the region itself. Quite the contrary, core elements of the regional economy relies on national and global systems of innovation. Based on regional export numbers, the following major export clusters have been identified as the core of the economy:

Marine cluster (aquaculture/ seafood). The region has a strong fishing sector, which has evolved into production of domesticated salmon and other species based on aquaculture. The core is a strong combination of aquaculture and other seafood.

Green energy region (including some carbon). Processing industries, where metals, minerals, chemicals, metal products and machines are produced, with mining and hydroelectric power as core suppliers. This cluster is now supplemented by a closely related oil and gas industry.

Experiences in nature, based on a strong tourist industry with the wonderful archipelago of Lofoten as the main destination.

These major clusters are supported by maritime industries which make it possible to operate in coastal waters, cross deep fjords, and handle the complex logistics and technological challenges involved in extracting resources and connecting them to the global markets. They are also supported by a strong KIBS (knowledge intensive business) sector which connects the nature based industries with the dynamic internal economy, based on private consumption, growing credit based housing sector and a public sector providing services.

Several of these support industries have developed export activities themselves, following the logic of innovation through related varieties and entrepreneurial discoveries. Examples are oil spill equipment, closely related both to equipment for salmon production, as well as mechanical and other products well suited for a maritime cluster operating in challenging coastal waters. Some of the KIBS sectors which connects private consumption, public sector services and export industries are also exporting. Then based on these factors, the region is well equipped when it comes to logistics, transportation and other infrastructures. As a result, the Nordland economy is open, based on natural resources, and extremely successful, measured in net trade balance. The trade balance between Nordland and the rest of the world shows a net surplus in favor of Nordland of +30%, excluding oil and gas. In comparison, the Norwegian balance of trade is +20%, including oil and gas exports. The corresponding number for Saudi Arabia including oil and gas is 45%.

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2.1 HOUSEHOLD CONSUMPTION

Household consumption by PANDA sectors is illustrated in the figure below.

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 470

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Figure 1 Household consumption in Nordland, by PANDA sectors

The two big peaks are banks (sector 38), followed by cars (sector 27) and food (sector 9). The peak to the right is PANDA sector 47, culture, sport and art.

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2.2 MEASURING VALUE CREATION BASED ON NATURE, SALMONS AND HOTELS

Since our approach starts with export of natural resources and products based on natural resources as the core indicator, it is worthwhile to ask how the value of these resources can be measured. Many economists start with the concept “gross product”. However, if we look closer at the data on the regional economy of Nordland provided by the PANDA model developed by the Central Bureau of Statistics, some remarkable figures arise.

The figure below shows gross product and export in the 50 PANDA sectors in Nordland (see attachment).

1 5 9 13 17 21 25 29 33 37 41 450

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exportgross product

Figure 2 Gross product and export in sectors in Nordland. Source: PANDA

If one looks at this figure from the point of view of gross product, it appears as if the public sector (49 and 50) and certain private based providers of services and infrastructure in the rapidly growing housing market feeding household consumption are the cornerstones of the regional economy.

As figure 1 illustrates, in the strong export oriented clusters just referred to, the value of export is larger than the gross product. But how can these sectors export more than the gross product of their firms?

It is a question of inputs.

Gross product is value creation going on inside the firms which makes up the sector. These firms have inputs, which add value to their products, in addition to their own gross product. Some of these inputs come from other firms, other crucial input is the value of the natural resource these sectors are exploiting. The source of the wealth created by these firms is natural resources which are flowing though their factories and production facilities and are carried with logistics into their global market.

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These firms are surviving inside a national economy, Norway, where the level of costs is extremely high. The reason why they have survived is that they are minimizing their own impact on these flows of natural resources, in other words, their own gross product. They do that by increasing productivity, and focusing on the minimum of lean processing which is necessary to create a standardized high quality and cost competitive product that can be shipped and sold to the global market. Their strategy is to exploit nature efficiently, through minimizing their own efforts, i. a. their own gross product. This means that growth through exploitation of more nature is a much more interesting strategy than extending processing up the value chain. As an example, the production value of aquaculture may be broken down in gross product, input from other sectors (inside and outside the region) and nature in the following way:

gross productother firmsnature

Figure 3 Value creation in aquaculture in Nordland, (source: own calculus, PANDA)

The total production value is 6.7 billion. The gross product is 2.7 billion. Input from other firms is 1.5 billion. This leaves us with a residual input factor which is 2.3 billion. This kind of difference between input and gross product can at the level of the firm be seen as the balance between costs of production and the value the market gives to your product. It is the basic source of super-profits. These super-profits can be created through various competitive advantages, such as advanced technologies, advanced forms of organization, a good location, and so on. In a rapidly expanding urban housing market driven by credits, sectors like construction, property management and financial services experience a similar logic, boosting their profits.

In the case of natural based industries, these competitive advantages are the result of a good combination of processing technologies and input from nature. This reflects the advantages of location of aquaculture and processing industries in Nordland which, in the case of aquaculture, gives the operators access to unique natural resources, such as lots of clean and fast-moving sea water, which provide optimal conditions for the biological process going on, where the happy and healthy salmon is eating and growing, based on regionally provided and healthy fish food, and medicine provided from the national system of innovation. In short, a substantial part of value creation is a gift from Mother Nature, skillfully harvested and efficiently brought to the market by these industries. As we will see below, aquaculture in Nordland is also a part of a wider regional cluster which includes other

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natural based resources, fishing, fish processing and most importantly fish food industries. This means that the values received from “other firms” also contain substantial “green” components. The closest we can get to tourism in PANDA is the hotel and restaurant sector. Here, profitability is marginal, as illustrated by the following figure.

lossgross productinput

Figure 4 Value creation in hotel and restaurant, Nordland

If we add gross product and input from other firms inside and outside Nordland, and compare this sum to product value, we end up with a loss.

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Figure 5 production values and gross product in Nordland, according to PANDA.

Figure 5 shows the difference between production values and gross products by PANDA sectors. The three top peaks are related to the internal regional economy: construction (sector 26), property development (sector 39) and public sector (sector 49 and 50). Construction and property is also important for industries, as we will see below.

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2.3 RELATEDNESS

Trade between firms inside Nordland can be seen from two sides, either as input to one firm who buy from another firm, or as supplies from a firm to another firm. This generates four categories, import, supplies from other firms in Nordland, sales to other firms in Nordland and finally export.

In the following discussion we will see relatedness of sectors through trade volumes in three contexts,

1. National/ global. Export from the region and import to the region, or relatedness to the national/ global market,

2. Regional. The involvement of the sector in the regional economy, either as provider of goods and services, or as receiver, (INPUT AND OUTPUT) and finally

3. Cluster. The relation to a specific set of other sectors inside the region, or the cluster.

The relatedness of sectors to the regional economy may be measures as the sum of inputs and outputs within the regional economy.

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inputoutput

Figure 6 Regional relatedness (input + output) by sectors

According to this indicator the sector which is most related to the region is construction (sector 26), followed by car sales (sector 27). Close to car sales are wholesale and retail (sector 28 and 29). Electricity production is sector 24. The peaks within primary industries and manufacturing is food for salmon (sector 9), fishing (sector 3), and chemicals (sector 14). Large volumes of trade relations inside the region are also provided by the KIBS sectors (knowledge intensive businesses, sector 37 - 41). Here, sector 38 (banks) and 39 (property) are peaks. Other peaks are transportation and infrastructure. A set of sectors which provide services to a broad range of other sectors through sharing a common expertise is the maritime cluster (see below). These clusters and the trade relations within and between them will be discussed in the following section. As an overview, transactions within the

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clusters, between firms in the clusters and the rest of the regional economy, export from the region and import to the region are specified.

maritim kibs marine metal0%

10%

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100%

global/ nationalclusterregional

Figure 7 Global, regional and cluster relatedness in clusters in Nordland

In the maritime almost 80% and in the KIBS almost 90% of transactions are going on inside the region, between firms inside these two clusters, and with firms in a broad range of other sectors.

Some of the main relations between these clusters are illustrated below. The two clusters which clearly are regionally related, maritime and KIBS are also closely related to the two strong export clusters, process industry and marine/ seafood, which are related to the global economy through their globally embedded peaks, metals and aquaculture.

Figure 8 Bridges in green energy and seafood

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In the definitions of clusters referred to below there is a certain overlap between the maritime cluster and the green energy/ process industry cluster. If we look at the rest of the processing industry cluster, and keep the overlap separately, we get the following main relations between the two regionally embedded clusters and the two export oriented clusters:

Table 1 Trade between clustersTo SumRest of process industry Sea food/ marine

From KIBS 169643 614957 784600Maritime 583154 461096 1044250

Sum 652797 1706053

What should be taken into consideration is that the sea food / marine cluster as well as the process industry cluster have a large internal variation between sectors in terms of regional relatedness. What we refer to as the seafood-marine cluster includes traditional sectors such as fishing, fish processing and other food, as well as aquaculture. In both these cases the most export oriented core sectors are more globally oriented than the entire cluster.

This point is illustrated in the figure below. Here, aquaculture and the metal cluster (excluding its regionally embedded component, the maritime cluster) are deeply related to their global/ national markets, whereas the maritime cluster, the KIBS and the marine cluster excluding aquaculture are deeply embedded in the region.

Figure 9 Global – regional relations in selected clusters.

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2.4 THE SEAFOOD (MARINE) CLUSTER

Figure 10 Transactions inside the seafood cluster in Nordland

The core sectors in marine is fishing, fish processing, aquaculture and “other food”, which in this context is a mixture of food for humans, which is a part of this sector, and food for salmon, which explains this sectors relation to aquaculture. What ties these clusters together is strong value chains with flows of natural resources. Both fishing and aquaculture provides input to fish processing. Fish processing and fishing gives input to the core industrial supplier of aquaculture in the region, fish food.

Table 2 Io of the marine/ seafood cluster TO

SECTORS Total input from region

Fishing Aquaculture

Fish processing

Other food

Export

FROM

Fishing 2083314

2483 5121 1984132 55389 313946

Aquaculture

1596260

878 555599 1027880 168 4203150

Fish processing

598282 12093 627 278557 187832 4533440

Other food (fish food)

3202528

19615 1822052 79605 588968 167138

17

Import 224687

546234 387069 1177273

regional

cluster

global/ national

0 5000000 10000000 15000000

Series1

Figure 11 Relatedness profile, marine / seafood cluster

This cluster is deeply connected internally, and to the global market. The strong value chain inside this cluster is carrying natural resources inside the marine sector (fish and food for fish) which makes up deep integration. Compared to these flows, linkages to the rest of the region are relatively weak.

Table 3 shows the major suppliers to the marine cluster from other clusters and sectors in the regional economy in Nordland.

TABLE 3 INPUTS TO MARINE CLUSTER FROM SELECTED SECTORS AND CLUSTERS IN NORDLANDClusters, sectors Panda

sectorinput Input by

clusterOwn cluster 03 2047125 6620999

04 158452508 47910909 2510240

Nets, plastic 10 21444 10444415 73000

Process industry cluster 16 11176 43404217 34118 3489319 1268720 9016321 5713222 784023 219810

Electricity 24 205203

18

waterconstruction

25 5972626 126855

Wholsale retail 27 217928 52230929 364561

Transportationstoragehotels

30 458131 2496032 25532433 24839434 1054035 27007

KIBS 37 48387 61495738 18865439 8523640 28917241 3508

Labor rental 42 56555Other private services 44 86302Repairs 45 10314Art, culture 48 20398Municipal services 49 6348State services 50 26170

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2.5 THE GREEN ENERGY CLUSTER

Figure 12 The green energy cluster

The green energy cluster has an “inner core”, which is the “metal gang”, where everybody is related to everybody else. It is metals (sector 17), metal products (sector 18), machines (sector 21), repair and installation (sector 23), minerals (sector 16), and, maybe somewhat surprising, a PANDA sector which combines ICT and electrical equipment (sector 19). The explanation is that this sector actually includes production of electrical cables, which is further down the value chain from metals.

The “gang” is also closely related to chemicals, mining, and electricity production. Electricity is particularly important for mining, metals, chemicals, electrical and ICT equipment (cables) and minerals.

There is a surprise in the puzzle, electrical and ICT and equipment (sector 19). Sector 19 is buying a lot of electricity (it is producing cables), but it does not provide the electricity producing sectors with very much. The input to electricity from sector 19 corresponds to what one might expect if this refers to the ICT component of this sector. If we look at investment figures for the electricity sector, the same strange things are repeated. If electricity is investing in Nordland the most important supplier is construction, and not electro-technical industries, or sector 19, which is the innovation system of electricity. The energy sector in Nordland does not have a proper electro-technical industry, which could have provided a system of innovation driving more green energy production.

This will be discussed below.

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TABLE 4 THE INTERNAL MARKET OF THE GREEN ENERGY CLUSTER

Table 5 Inputs to GREEN ENERGY CLUSTER05 54611206 8854108 3984709 6072210 1156413 175215 1961516 150471

Own cluster 14 716452 31066477 59950217 40115418 65277719 19274220 4015821 17864022 1449123 310731

Electricity 24 1081541Water sewage 25 186450Construction 26 68744Sales 27 6710

28 80560929 563832

Sea transport 30 1179631 41829

Land transport 32 43611433 37831034 19811

Hotels 35 5399136 25377

21

To Sector 07 16 17 18 19 21 22 23

From

07 46080 205893 168641 422 794 180 224 38816 4760 86989 8007 3245 3726 544 348 75817 498 18949 313594 34363 17753 5060 1166 250918 11968 9333 292696 157101 131212 15172 2616 2442419 1537 2219 8773 4666 160539 1805 571 710021 14552 11236 49933 8662 16276 28108 853 2366922 391 487 1469 347 849 199 9227 29823 62843 27213 89431 7027 11007 2725 2516 2380024 44256 54488 638023 7697 10719 1484 2979 6836

Table 5 Inputs to GREEN ENERGY CLUSTERKIBS 37 92130 699172

38 32196739 15398240 11519141 15902

Labor rental 42 13122643 9553

Other private services

44 114359

45 575947 602948 62282

Municipal 49 29044State 50 119753Import 52 5039993

cluster

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Figure 13 Relatedness profile, the metal gang

The processing industry cluster consists of several closely related sectors. Some of these relations are based on value chains of natural resources, such as mining, metals, and metal products, some are supplier relations.

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2.6 KIBS

The KIBS or “knowledge intensive industry” sectors consists of telecommunications (sector 37) financial services (sector 38), property (sector 39), consultancy (sector 40) and research (sector 42). Some of these sectors have export. But in general, their main market is inside the region

region

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Figure 14 Relatedness profile of KIBS

These sectors are not very interested in each other, they do not make up a cluster through internal trade, but they are similar to the extent that they provide consultancy, advice and other knowledge intensive services to many other sectors in the region. They have close relations to the public sector, to other service sectors and providers of infrastructure, and they have supplies to processing industries and the marine sector.

This figure shows inputs from KIBS to the PANDA sectors in Nordland, including internal transactions inside the KIBS sectors.

01 06 09 13 16 19 22 25 28 31 34 37 40 43 46 490

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Figure 15 The KIBS market by panda sectors

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The peaks are financial services (Sector 38), sales (sector 29) construction (sector 26), municipal (sector 49) and state (sector 50). The two peaks on the industrial end are aquaculture (sector 4), metals (sector 14) and fish processing (sector 8).The figures are the following:

Table 6 The KIBS market01 7213403 5462804 31651906 149007 7137208 17098809 12937710 1622911 4722613 2067014 16360715 2757816 9695117 21972618 5277519 13817120 213021 1244922 1972023 5562724 44572125 21799126 86693527 18237128 44563629 99780930 2621431 7064932 36797033 22028734 6201635 39614736 7618937 41060538 63888439 125872240 35772841 1431042 201879

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01 7213443 2325444 9190245 7332146 1935147 20605948 15905649 96178350 884066

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2.7 TOURISM AND THE EMERGING EXPERIENCE ECONOMY CLUSTER

Historically, tourists coming to Nordland used the same infrastructure and services as the population. One might have expected that the flow of tourists would result in the formation of a value chain, with trade relations between hotels, logistics and other related sectors, providing more integrated products adapted to the tourists. However, all related sectors were busy serving their ordinary, regional market. The providers of these infrastructures and services looked upon tourists as a welcome seasonal addition to their regional market. Besides, most of these sectors have quite marginal profitability, and no incentive to innovate. This is why tourism is invisible to PANDA, with one exception, the growing export registered by the hotel and restaurant sector. In the figure below, sector 51 is export.

An entrepreneurial “experience economy” network started to develop niche products. They were assisted by regional developers. We will return to a broader discussion of the construction of an innovation system for experience economy which aims to extract value from nature, through commercialization of experiences, below

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 490

50000

100000

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Series1

Figure 16 Market for hotels and restaurants

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2.8 THE MARITIME – PETROLEUM NETWORK

The maritime-petroleum network is partly overlapping with the green energy cluster. It is connected internally through the labor market, and through specific skills and forms of education which is shared across the sectors. It includes the following sectors:

services to oil and gas (sector 6) nets for aquaculture, fishing and oil spill (sector 10) plastics mechanical workshops production of machines repair and installation shipping and sea transport (sector 30 and 31)

The markets for these sectors in the region are:

Table 7 The maritime market01 1561102 270803 25027504 6045705 006 131207 10950908 13515909 7697610 2322311 2939512 013 1004114 14473815 2312416 6670917 17909018 2686719 5857620 1632321 4085922 881723 6770924 1669825 5096326 27562927 11026128 55512

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01 1561129 7985630 5439731 36901232 17993233 14931734 835235 1243536 1187837 3036238 1062539 2259740 1500841 58442 4545243 128244 839945 409246 171447 1637448 1979049 6244050 100245Eksport 957168

region

export

cluster

0 1000000 2000000 3000000 4000000

Series1

Figure 17 Relatedness profile for maritime cluster

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01 04 07 10 13 16 19 22 25 28 31 34 37 40 43 46 490

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Figure 18 Market for the maritime cluster by panda sectors

The peaks are air and sea transportation (sector 32), construction (sector 26) and aquaculture (sector 4).

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3 SMART STRATEGY IMPLICATIONS

We can now sum up where the weak bridges and missing pieces are.

3.1 VALUE CREATION

The analysis shows that the high performance in value creation and global market competitiveness in two of the three core clusters in Nordland (seafood, green energy and metals) is created through strategies of exploitation of the advantages nature gives economic actors in the region. The implication of this is that the strengths of Nordland in these clusters are invisible if the analytical point of departure is gross value, or value creation inside the firm. It is the input which matters, in this case, input from nature. The PANDA model makes it possible to measure the input of nature in value creation. In this report this is done with aquaculture as an example.

Even though the hotel and restaurant sector has a fairly high level of registered export (tourism), the PANDA data seems to indicate that their profits are relatively marginal. This seems to indicate that the present tourism industry is able to expand the turnover or gross value of tourist related sectors, but only with a marginal profitability. Experiments in the direction of experience economy tourism can be seen as an attempt to extract super-profits from the unique characteristics of nature also in this sector (see below).

3.2 AQUACULTURE/ SEAFOOD – STRENGTHENING A WEAK BRIDGE

The aquaculture/ seafood strategy is extensive harvesting of natural resources and processing restricted to a point where a standardized mass product may be shipped out to markets. Expansion of production of the standardized mass product is more profitable than going up the value chain, into refinement of the product itself (and increased “value added” inside the firm or sector). The critical input factors are the basic natural inputs, which are located in the region. They include clean, fast moving sea water, and biological components used for fish food. This constitutes a regional value chain with a high potential for further growth. Attempts have been made to duplicate the entire value chain of salmon and apply it on other species, such as cod. This led to a competitive race for too early industrialization, followed by a bubble and a crash. Focus today seems to be to expand the success story of salmon through expanded production, through new spatial plans for use of sea water, and new and innovative ways to produce salmon food, for instance through algae production. Entrepreneurs in the cluster have a tradition for taking the lead in the sector in the phase of industrialization of new technologies and production concepts. Nordland is the perfect test-bed for industrialization and up-scaling of new production technologies. The cluster is very well organized for this purpose, with their own national Centre of Expertize in Bodø.

In a phase where this cluster is preparing for further expansion, there are strong reasons for opening it up for a closer collaboration with other sectors in the region. It is obvious that the

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field between the green energy cluster, the maritime cluster and the seafood cluster is interesting. In the previous discussion, we have noticed that there are some activities following this path already, such as fish nets and plastic, and some overlaps, as sectors like machines, mechanics and repair and installation are all over the place. One might also notice that the KIBS are present in this field.

The table below shows supplies to seafood from the maritime, green energy and KIBS by sector.

Table 8 Supplies to seafood cluster from maritime, green energy and KIBSMaritime Nets 21444

Plastics 73000Green energy

Mineral products 11176

Metal products 34893

ICT and electrical equipment 12687Both maritime and green energy

Mechanical workshops shipbuilding

90163

Machines, mechanical equipment

57132

Repair and installation 219810KIBS Telecom 48387

Finance 188654Property 85236Technical consultancy 289172R&D 3508

Sum selected input sectors 1135262

3.3 THE GREEN ENERGY CLUSTER: PUTTING IN PLACE THE MISSING LINK

The green energy cluster is a production system which has been stripped of its system of innovation and the institutions which once made it grow, through coordination of energy production and processing industries focusing on metals and chemicals. The deregulations of energy production in the 1980s also created the institutional preconditions for neglect of updates and improvements of the power grid. As a result of this, increased green energy production through export is at best a long-term option. What remains is to expand the regional consumption of energy, through investments in energy intensive industries. Nordland has a great untapped potential for green energy production. So far, the technology has not been competitive in the regional energy market, because hydroelectric power is a strong low cost competitor. In a longer term, increased green energy production based on local demand from energy intensive industries is seen as a scenario.

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3.4 THE EXPERIENCE ECONOMY CLUSTER: AN INNOVATION SYSTEM UNDER CONSTRUCTION

The development of a proper system of innovation, or a “clustering” on tourism may be seen as composed of several phases.

1. The added value phase. Tourists were using the same infrastructure as everybody else. Profitability was low. The market was seasonal.

2. The entrepreneurial phase. These tourists were discovered by entrepreneurs, who started to develop products and services specially adapted for them. Municipalities facilitated local information, through “destination” information and tourist offices.

3. Local cluster development. In the major tourist destinations (Lofoten-Vesterålen) entrepreneurs, local developers, researchers and consultants started to set up local networks which coordinated the local service production for tourists. Several sectors, like culture, food etc were involved. This work was supported by a special instrument facilitated by Innovation Norway, and ARENA project, aiming at cluster development. The major outcome of this phase was the creation of several important new products and the opening up of new markets, such as the “Lofoten Winter” strategy, which aimed at extension of the season.

4. Discovery and diffusion of the experience economy business model. A network of researchers discovered the experience economy literature. Based on their initiative, a research program on experience economy (“Northern Insights”) was successfully financed from the Norwegian Research Council. In addition a regional development program (VRI) accepted tourism as one of their priorities. One of the core functions of these initiatives was to diffuse the business model of experience economy among the entrepreneurs in the sector. This was based on a successful combination of research and conferences with high profile, with researchers and entrepreneurs as the core contributors in “spreading the message” of the good practices.

5. The next phase. There is a need to build on what has been done, and at the same time move beyond limitations which are obvious today, in short, institutional innovations following the principle of related varieties, where we are also identifying missing components. The hero in the experience economy story is the entrepreneur and her visitor. Together, they create experiences in nature worth paying for. This is small scale craft based production. There is an increasing awareness that this duo need some more backing, before and after the experience, something is happening which involves other service providers. In addition, in moving beyond the entrepreneurial hero, the next phase has to innovate in the direction of discovery and industrialization of more complex experience products. In short, there is a need

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to move from innovation based on tacit knowledge of the entrepreneur (DUI) into a more codified system of innovation where new knowledge combinations and re-combinations of complex experience products (combinations of DUI and STI) reaching the mass markets of tourists may be introduced. There is a need for professional quality control and systems of certification. There is a need for more knowledge inputs, from inside the region and from the outside, through transnational learning and new networks. This could involve new products based on knowledge which is not yet there, as for instance natural science, humanists and social scientists, other cultural industries and so on. There is a need for strategic innovation in the direction of product diversification, using the resources we have in the region and resources which can be accesses form elsewhere in new ways. This includes at the same time “engineering” of production, differentiation and segmentation of destinations and products, and also individualization of the product, based on “self-service” transactions, where the visitor is able to discover experiences through the application of ICT.

These new systems of product innovation would have to be based on continued development of local destination networks which are able not just to facilitate interaction, but also to enable the creation of new complex products, through an expansion and differentiation of the knowledge base of the clusters. This challenge is closely related to the need to create new collective goods, which open up for new ways of connecting to local resources, actors and partners, and move to a more network based approach to product innovation and mobilization of resources. One should not expect that collective goods available to everyone should be financed only by private actors in the industry. Destination development strategies must be based on sustainable and competitive financing mechanisms. Transnational benchmarking and learning from advanced European good practices can help us to discover how to establish adequate systems of financing of collective goods (destination development networks) at a sufficient level. An area of product development which has a long tradition is local food experiences. The PANDA analysis shows that food is deeply embedded in the regional economy. There is a strong seafood cluster, food is present in the restaurant sector, in private consumption, and elsewhere.

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ATTACHMENT

APPENDIX: PANDA SECTORS 1 Jordbruk, jakt og viltstell2 Skogbruk3 Fiske og fangst4 Akvakultur (Fiskeoppdrett)5 Utvinning av råolje og naturgass, rørtransport6 Tjenester tilknyttet utvinning av råolje og naturgass7 Bergverksdrift8 Fiskeforedling9 Produksjon av næringsmidler (unntatt fiskeforedling)

10 Produksjon av tekstil- og bekledningsvarer11 Produksjon av trelast og trevarer12 Produksjon av papir og papirvarer (Treforedling)13 Grafisk produksjon og reproduksjon av innspilte

opptak14 Oljeraffinering, kjemisk og farmasøytisk industri15 Produksjon av gummi- og plastprodukter16 Produksjon av mineralske produkter (glass og

keramiske produkter, sement og betongprodukter)17 Produksjon av metaller (jern og stål, aluminium mv)18 Produksjon av metallvarer (inkl konstruksjoner)19 Produksjon av datamaskiner, elektroniske produkter

og elektrisk utstyr20 Bygging av skip og båter, oljeplattformer og moduler21 Produksjon av maskiner og andre transportmidler22 Produksjon av møbler og annen industriproduksjon23 Reparasjon og installasjon av maskiner og utstyr24 Produksjon og distribusjon av elektrisitet, fjernvarme

og gass 25 Vannforsyning og avløp, gjenvinning av avfall og

miljørydding26 Bygge- og anleggsvirksomhet27 Handel med og reparasjon av motorkjøretøy28 Engros- og agenturhandel (utenom motorkjøretøy)29 Detaljhandel (utenom motorkjøretøy)30 Utenriks sjøfart, supplybåter31 Innenriks sjøfart32 Land- og lufttransport33 Lagring og andre tjenester tilknyttet transport34 Post og distribusjonsvirksomhet35 Overnattings- og serveringsvirksomhet

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36 Forlagsvirksomhet, Film-, video- og musikkproduksjon, radio- og fjernsynskringkasting

37 Telekommunikasjon, informasjonsteknologi og informasjonstjenester

38 Finansiell tjenesteyting og forsikringsvirksomhet39 Omsetning og drift av fast eiendom40 Faglig, rådgivende og teknisk tjenseteyting41 Forskning og utviklingsarbeid42 Utleievirksomhet, arbeidskrafttjenester43 Reiselivsvirksomhet

44Vakttjenester og annen forretningsmessig tjenesteyting

45 Reparasjon av husholdningsvarer, datamaskiner og annen personlig tjenesteyting

46 Privat undervisning47 Private helse-, pleie- og omsorgstjenester48 Kunstnerisk og kulturell virksomhet, sport og

fornøyelser, medlemsorganisasjoner og internasjonale organer

49 Kommunal tjenesteyting

50 Statlig tjenesteyting

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