The role of business networks in regional economic development

Mike Danson

Professor of Scottish and Regional EconomicsUniversity of the West of Scotland

+ 44 (0)141 848 3936; michael.danson@uws.ac.uk

“Entrepreneurial Networking and Learning within Regional Economies”

Centre for Enterprise Development & Regional Economy (CEDRE)

Waterford Institute of Technology, Ireland7th & 8th December 2011

Presentation structure

Introduction – research background

Learning, regions and institutions

Importance of SMEs

Clusters, networks and partnerships

Agencies and support

Some research findings

Discussion

Conclusions

Research and knowledge

• Expect focus should be on business networks• Much of academic literature is theoretical or rarefied • A few case studies – but mostly in high tech, media

or sectors dominated by MNEs• But texts and policy approaches stress networking• Strong research and policy lead from Nordic

countries, and latterly certain Asian economies • Lot of articles, policies and prescriptions about

institutions, especially around 2000• Fashions and models• Similar to employer engagement?

Learning, regions and institutions

Learning organisation : learning regionPerformance, Best Practice, Best Value ~

benchmarking Institutional thickness and capacityCatalyst and cooperationNetworking ~ 1980s, external, passivePartnership ~ 1990s, internal, active

engagement, formalised, routinised

Importance of SMEs in economy

• Jobs, enterprise, dynamism, innovation, ...• Excluded from many oligopolies, large capital

sectors• e.g. Scotland: electronics, whisky,

petrochemicals, oil & gas. Local firms on the periphery of these sectors, low value added, low wage, low skill, ... But may be better than rest of local economy.

• In this periphery of these sectors and in wider economy: benefits of cooperation, networking, industrial district or cluster

Externalities and SMEs• Competitive external economies = internal

economies • Exogenous external economies =

agglomeration economies• Cooperative external economies = benefits of

belonging to a network, industrial district, industrial cluster.

• Trust and cooperation = essential => belonging• Promotion of networks, networking, devt of

trust and cooperation.• Across agencies in Scotland = very successful.• SMEs?

Networking and the small firm

• Industrial ]• Support ] dyadic focus ignores the social• Personal ]• Important role in formation, growth & development• But requires lot of effort; maintenance and devt

require considerable investment• => market failure? => interventions to encourage

and support• Improve with age• Membership, linkages, transactions, function,

morphology, geographical .... Significant in success

Agencies and strategic support

• Much of official support and some textbooks focus on development agencies ...

• And networking between them, and between them and the firms

• Also encouragement of networking with consultancies, business angels, chambers of commerce, ...

• Most SMEs rely on accountants, banks, solicitors, ... Low Pay Unit, TUs, etc

Experience of networks and networking

• Third Italy• Marshallian industrial districts• Clusters (Porter)• Scotland: large sectors – poor

understanding and support • Small sectors – not a happy history e.g.

textiles• Experiments with clusters• Learning process through 1990s and 2000s

1990s : clusters and policies

Scotland’s cluster development approach (SE, 1998)

UniversitiesUniversitiesCollegesColleges

Research Institutes e.g SABRIs

Research Institutes e.g SABRIs

Upgrading & Innovative Institutions

Training ProvidersTraining Providers

Auction MartsAuction MartsFarmersFarmers

Critical linkage - strong

Critical linkage - weak

WeakNo presence

MediumStrong

FeedFeed

Basic Processing Customers

End Users

Value Added ProcessingFish

MarketsFish Markets

Consumers

Infrastructure/services

Marketing/ Design

Marketing/ Design

Industry Bodies

Industry BodiesLegislationLegislation Market

IntelligenceMarket

IntelligenceEquipment Suppliers

Equipment Suppliers

Transport and Distribution

Transport and DistributionPackagingPackaging

Rendering/ By ProductsRendering/ By Products

Scotland’s Food & Drink Cluster1999

AbattoirsAbattoirs

Specialist GrowersSpecialist Growers

Multiple RetailersMultiple Retailers

Food BrokersFood Brokers

Food ServiceFood Service

In Mkt Agents/ Distrib’s

In Mkt Agents/ Distrib’s

Specialist ConsultantsSpecialist

Consultants

Key driver

Overseas MarketsOverseas MarketsValue Added

IngredientsValue Added Ingredients

Imported Commodities/ Raw Materials

Imported Commodities/ Raw Materials

CerealsCereals

VegetablesVegetables

DairyDairy

Red MeatRed Meat

Prepared Meats & FishPrepared Meats & Fish

Ready MealsReady Meals

Gourmet FoodsGourmet Foods

SnacksSnacks

Bakery & ConfectionaryBakery & Confectionary

Non-Alcoholic DrinksNon-Alcoholic Drinks

BeerBeer

WhiskyWhisky

Fishing IndustryFishing Industry

Fish FarmingFish Farming

Breeding Co’sBreeding Co’s PoultryPoultry

FishFish

Wholesalers DistributorsWholesalers Distributors

DiscountersDiscounters

Independent/ Speciality Retailers

Independent/ Speciality Retailers

Further Processing Outwith Scotland

Further Processing Outwith Scotland

Critical linkage - medium

2000s and 2010s: modified and key sectors

• Scottish Enterprise – Quick Links

Start your businessEnterprise FellowshipsHigh Growth Start UpProof of Concept Programme

Investment opportunitiesInvest in early-stage technologyInvest in growing businessesCommercialisation opportunitiesOther investment opportunities

Fund your businessInnovation and R&D grants

Grants for investment projectsScottish Investment BankSector fundingOther funding

Grow your businessFind new marketsOperationsLeadershipInnovationEnabling technologies

Textiles strategy 'Textiles Scotland' industry strategy 2011-2015 ... vision to create 'a flexible, innovative and efficient industry, characterised by world class reputational excellence and a collaborative approach to new products and processes' sets out clear objectives and actions.

Under the 'Textiles Scotland' name the entire industry in Scotland comes together to focus on promoting the very best design, innovation and quality. Working with partners such as Higher Education, Sector Skills Council and Highlands and Islands Enterprise, the industry will focus on:

ProfileBuilding the 'Textiles Scotland' profile in key markets

SkillsStrengthening the world class workforce

InternationalisationDeveloping globally competitive businesses

Textiles•Overview Strategy How we can help Networking •Find companies Partners and investors News Contact us

Find partners and investors

The Scottish Textile Industry Association (STIA)STIA assists Scotland’s textile design and manufacturing sector to build on its strengths in a rapidly changing global industry. The STIA benefits members through interaction and collaboration with industry partners and colleagues, provide access to information and assistance, and promotes Scottish textile products and companies to buyers, suppliers and interested parties.

Textiles Scotland brings together industry members to focus on promoting the very best design, innovation and quality. Scottish Enterprise works with the textiles industry to encourage innovation, optimise the workforce and enhance its global profile.

Find investment partnersThe Scottish Investment Bank can help Scottish companies with the ambition and ability to grow to find funding through private sector investors

Networking opportunities

The textile industry advisory group invites any textile-related organisation to meet and discuss the future of the textiles industry in Scotland and the activities that will support its growth. The advisory group informs the National Textiles Forum, a group that includes members from the Scottish Government, Scottish Textile Industry Association, Scottish Trade Union, Higher Education and Scottish Enterprise.

The textile industry advisory group discusses topics such as; international markets, skills development, innovation and workforce development. It is through these discussions that we build a strategy to support the sector.

If you would like to attend any future textile industry advisory group meetings then please contact the Scottish Textiles team

Collaborate for success

lack some of the critical skills or capacity. formal collaboration ~ in research, marketing, production or procurement.

Benefits from joint marketing/ selling, collective purchasing, sharing premises or other resources. outside the UK.

Finding a partner strong business case that relies on seeking a partner, SE networks work on behalf. Enterprise Europe Scotland can:work with you to define what type of partner you need carry out a search help you assess potential partners facilitate negotiations with a likely match. Partners already identified?Collaborate to achieve scale (eg joint selling/ buying, sharing premises etc), and have already identified partners, a consortium co-operative structure may provide the perfect platform. This low risk, non beurocratic approach preserves the independence of members, and decisions are make on an equal basis.

Co-operative Development Scotland offers support and advice to help establish a consortium co-operative

Co-operative business models

Four co-operative models :

Consortium co-operatives - collaborating with other businesses run on a shared and equal basis by, and for the benefit of, members. Members may be businesses, partnerships or individuals. The co-operative may be for buying, selling, marketing, sharing facilities or joint bidding for contracts.

Employee ownership - transferring part or whole ownership to employees the employees hold the majority of the shares either directly or through an employee benefit trust. Employee buy-outs are customised to the needs of the vendor and the employees.

Community co-operatives - sharing ownership of a community service provide for shared ownership and control of services or assets, such as shops or utilities. This can be vital in areas where external investment is not readily available.

Mutualisation owned and controlled by their members, who may be employees, users or other stakeholders. The opportunity to boost productivity, together with the pressures on government budgets, is fuelling interest in mutualisation.

Internationalisation of SMEs in Scotland

• Importance of Global Companies• Contribute disproportionately to

the Scottish Economy:High value added employmentHigh levels of innovationOperate in networksProvide a magnet for foreign

investment into Scotland

Power in clusters/industries• Economic power determines strength of advantages and

spillover effects in regional economies• Weak Chamber of Commerce system /dual economy

excludes most indigenous entrepreneurs from decision making within trade and employer associations => interests of the mass of locally owned concerns are muted in local clusters and industry networks.

• Without strong local presence among the commanding heights of the economy and in the leading sectors especially, efforts to promote improved networking and clustering have not been very successful.

• Geographically distant from the core of the cluster =>practically insurmountable obstacles to effective involvement

• i.e. geography matters and the neglected backwash effects of Myrdal’s thesis dominate.

Clusters and cluster strategies for regional development

• Focus on the potential advantages of agglomeration economies to regions and for their central places

• Relatively limited attention given to the implications for areas outwith the core: for rural and peripheral economies

• Barriers to involvement by firms and other actors in areas which are geographically peripheral

• Aspatial policies and strategies• Territories attempted to adopt networking and

cluster building as a defensive strategy

Core – periphery wider issues• Costs of capital may be lower in larger economies though rural

enterprises do not report finance access problems as such• Transport costs lower• but labour costs generally lower in rural and smaller

communities, though complex forces here• Continuing concentrations of population and labour in

“megalopoles” strongly suggest that the agglomeration economies dominate higher labour and land costs

• In-migrants to core of Europe and metropolitan areas based on capital cities - consequent expansionary economic effect

• Spirals of out-migration from distressed peripheral regions, feedback for public service costs and provision, scarcity of labour and skills, haemorrhaging of talent and enterprise – all raising social and private costs further

SMEs and competitiveness in the periphery

• Competitiveness agenda dominates• Flexibility and downgrading of EU funds• Competition for finance capital, HQs, arts

& cultural – cumulative causation• Focus on Paris, London, Dublin, Helsinki ....• Creation of “shadow towns”: towns in ‘the

shadow of a cluster’ or at ‘the tail end of a cluster’ . . . (where there are) ‘incomplete’, ‘thin’ or ‘damaged networks’

E-business to business

• Fillip to literature and prognosis in 2000s from e-business revolution

• Same basic relations but some nuances• Markets wider – global?• Trust and cooperation still important but

more problematic?• Agencies able to support?• Broadband accentuate peripherality

Summary• SMEs important• Overcome some of disadvantages through

networking, cooperation and partnerships• Trust and cooperation critical• Coordination and strategic planning ~ project

and policy levels• Knowledge – learning• Strong centripetal forces in industries,

geographies, technologies, occupations • Need for countervailing powers• Networks not enough but have role• B2B key to acceptance of change