The Challenges of a Globalized Europe:

Policy Implications for SMEs and Clusters Chiara Del Bo and Massimo Florio

Presented by Massimo Florio

OPEN DAYS 2008Workshop 07A03 “Growth poles for territorial

cohesion”Brussels, 7 October 2008

Outline

SMEs and clusters in Europe: role and challenges

Existing policy measures and critical assessment

New approaches to cluster financial policies: Cluster Strategic Programmes

SMEs: economic impact

SME LSE Total

Micro Small Medium-

sized Total Number of Enterprises 1000 17 820 1 260 180 19 270 40 19 310 Employment 1000 55 040 24 280 18 100 97 420 42 300 139 710 Employees per enterprise 3 19 98 5 1 052 7 Turnover per Enterprise 1.000 € 440 3 610 25 680 890 319 020 1 550 Value added per enterprise 1.000 € 120 1 180 8 860 280 126 030 540 Share of exports in turnover % 9 13 17 12 23 17 Value added per employee 1.000 € 40 60 90 55 120 75 Share of labor costs in value added % 57 57 55 56 47 52 Note: Micro enterprise: less than 10 employees; small enterprises: between 10 and 50 employees; medium-sized enterprise: between 50 and 250 employees; LSE: 250 or more employees

Economic impact: New Member States

SME LSE Total

Micro Small Medium-

sized Total Accession Countries (2001)

Enterprises 1000 5 670 230 50 5 950 10 5 970 Employees 1000 10 210 4 970 5 350 20 530 10 150 30 670 Employees/enterprise 2 22 107 3 919 5 Size-class dominance Small/Medium-sized

Europe

Enterprises 1000 17 820 1 260 180 19 270 40 19 310 Employees 1000 55 040 24 280 18 100 97 420 42 300 139 710 Employees/enterprise 3 19 98 5 1 052 7 Size-class dominance Micro

SMEs: challenges

EU enlargement and world-wide globalization have a wide impact on the European industrial structure and composition and will be long-lasting.

This will deeply affect SMEs and clusters in several traditional industries, especially in the relatively labour-intensive industries (e.g. in manufacturing).

Clusters: a tentative definition

- A group of interconnected and spatially linked companies and associated institutions;

- positioned in a common or related industrial sector; - characterized by commonalities and complementarities; - enjoying positive location-specific externalities.

Clusters: some evidence

Empirical studies: cluster determinants

Local prerequisites:

Qualified labour; Universities and Technology parks; Industrial structure; Local policies; Infrastructure (social and hard); Wages.

Facilitating events:

Specific policy measures and promoting activities; Historical events; Founding of leading firms.

Self-augmenting processes:

Up and down stream relations; Geographical proximity and cooperation among firms; Accumulation of human capital; Spillovers; Start-ups and Spin-offs; Interaction with policy makers and venture capital.

Empirical studies: possible identification methods

Employment location quotient: ratio between a sector’s regional employment share over the national counterpart.

Growth share matrix: employment size of a sector in the region, the regional employment growth rate in that sector and its location quotient.

Statistical procedure: compare the relative firm and employment regional distribution in a sector, controlling for triggering events, local characteristics and regional size (Brenner 2006).

Cluster mapping projects.

Example of cluster mapping: the European Cluster

Observatory More than 2000 regional clusters were identified across the European regions, based on three main dimensions. The criteria used are:

- employment size in a particular industry cluster within a region; - the degree of specialisation within the region; - the cluster focus of employment within a region.

Example of cluster mapping: automotive

Automotive clusters classified by employmentLeading European automotive clusters

Source:European Cluster Observatory

Example of cluster mapping: furniture

Furniture clusters classified by size Furniture clusters classified by specialization

Source:European Cluster Observatory

Clusters and performance Support to cluster formation rests on the

evidence that this form of industrial structure may be beneficial in terms of: economic performance; employment; innovative output.

Geographical concentration and inter-firm collaboration may enhance innovative activity and ultimately promote competitiveness of the area (Baptista 2001).

Clusters and performance

Benefits for firms belonging to a cluster comprise: Economies of scale; Higher productivity due to lower

transaction costs; Cooperation and exchange of knowledge

and human capital between members.

Cluster Policies

According to the OECD: “Industrial policies with cluster programmes tend to focus either on the drivers of national and regional growth or focus on the needs of SMEs. The cluster approach provides a more transparent, inclusive and potentially less trade-distorting framework for efforts to strengthen strategic sectors than the prior policies of supporting large and often state-owned firms.”

Cluster Policies

The main instruments used in the OECD area to support clusters fall under one or more of the following categories:

- engage actors by identifying ad supporting networks and clusters; - develop collective services; - support collaborative R&D and encourage commercialization.

Cluster Policies

When designing and implementing a policy initiative aimed at clusters, it is important to:- identify local resources that can be hampering renovation (lock-ins and detrimental path dependencies);

- identify sectors with innovative potential (not necessarily limited to high-tech and knowledge intensive industries);

- respond actively to external dynamics; - coordinate involved actors (firms, local, national and supranational policy

makers); - evaluate progress achieved through the policy initiative.

Cluster Policies: critical assessment Choosing beneficiaries of policy

intervention: Clusters should build on existing specialties and

technical competencies within a region. Government support should go to clusters that promote incremental innovation and build on existing specialties.

Importance of cluster identification and mapping. Defining cluster boundaries:

Cluster boundaries should reflect economic links and relations, and the existence of knowledge spillovers, and not be limited to a geographical dimension or political and administrative boundaries.

Cluster Policies: critical assessment Aims and goals of cluster policies:

Encourage development and dissemination of knowledge among the firms in the cluster.

Increase firms’ awareness to the benefits of cooperation of results, information sharing and active networking.

Encourage and facilitate spin-offs from existing clusters.

Instruments: Performing cluster studies, setting up facilities

and institutions for fostering dialogue, providing direct subsidies for cooperation and establishing networking schemes for private firms.

Cluster Financial Policies Most of the existing policy measures are aimed at

promoting cluster formation and functioning, and concentrate on organizational and administrative aspects.

Existing policy instruments rely on two broad sets of measures:

1. Directed towards labour and capital markets. Aimed at reducing labour costs and softening financing budget constraints for SMEs and clusters.

2. Focuses explicitly on innovation, recognizing its growth-enhancing role, and points to R&D and human capital costs.

These measures, while useful in cases of market imperfections, may not be enough to deal with the competitive pressure faced by European SMEs and clusters in this new globalized scenario.

Example: District Bonds

Financial Instruments The main problems with existing

cluster financial instruments can be summarized as follows: The small scale of the operation (which

implied high incidence of fixed costs); The lack of national institutions’ public

support; The general crisis of securitization.

Cluster Strategic Programmes

Systemic approach, aimed at clusters of SMEs, which stresses the importance of innovation and competitiveness. Based on a mix of financial and non financial instruments well suited to help SMEs and clusters to adapt to the changes to cost structures, upstream, downstream or within the production process.

Main underlying principles: competitiveness scenario analysis; stake-holders involvement; concentration and selectivity; integrated innovation packages for regional industrial

systems.

Cluster Strategic Programmes Three main actors:

The public sector; A managing body representing the stakeholders; A financial institution.

Three steps:1. identify industry clusters that need public funds’

assistance to achieve competitiveness targets due to globalisation and enlargement challenges.

2. ask stakeholders in the selected clusters to propose a feasibility study for a Cluster Strategic Programme.

3. approval or rejection of the Programme by national or regional authorities, and finally the commitment of public funds

CSP: main ingredients A managing body, representing the stakeholders and

the beneficiaries. It could be a consortium, an individual large company, or a public sector body. This body will be in charge of implementing the Strategy.

A financial investor, typically an investment bank, who declares to be ready to co-finance the CSP, against a share in its future returns.

A set of targets to be achieved in terms of cost reductions, increase of revenues, and profitability through specific investments (e.g. investments in opening new distribution channels, in recurring to new financial mechanisms, in creating export organizations, in international joint-ventures), and the detailed supporting cost benefit analyses.