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Regions and Clusters as a Focus of Economic Development

Module by: James Abbey. E-mail the authorEdited By: Andrew R. Barron, James Abbey

Regions

This thesis sets out to explore the potential impact of harnessing “international collaboration” to the benefit of the participant regions. The emergence of the role of regions within national and international economies has become a field of increasing interest and importance (Karlsson 2007 and Ketels et al. 2008). This chapter explores the concepts of regions and clusters in the context of the facilitating the development of sustainable knowledge driven local economy and in particular the role of government policy in its facilitation.

Knowledge Economy - Global, European and UK Global

As described earlier, the emergence of the knowledge-based economy around the world has been widely acknowledged at an international level, (OECD 1996 and Work Foundation 2006), and also increasingly so at national (DTI 2003 and Shapira et al. 2005) and regional levels. This has led to many countries large and small developing strategies to harness the opportunities of the Knowledge Economy, including nations as diverse as the US, UK (DTI 2004), New Zealand, Malaysia and Scotland (Scot Exec 2001).

Knowledge creation is a key driver of the Knowledge Economy and the United States is the world leader in this regard investing the most into the creation of knowledge; some $285bn annually. This compares with other leading nations as shown in Table 1 (OECD 2005).

Table 1: R&D Expenditure by leading nations (OECD 2005).
Country R&D Investment % of OECD expenditure % of National GDP
United States $285bn 42 2.6
EU $211bn 31 2.0
Japan $114bn 17 3.2

EU and UK

Developing the world’s strongest Knowledge-based economy has become a key goal for the European Union as launched at the Lisbon 2000 Council (Lisbon 2000 EU Council Strategy).

…to become the most dynamic and competitive knowledge based economy in the world

At a European level the disparities in economic performance between regions, even within countries, are highlighted by Figures compiled by the European Commission (EUROSTAT 2004) and shown in Figure 1. The United Kingdom provides the most striking example of this with Inner London generating GDP per capita at 288% of the EU average while at the other end of UK performance are the Isles of Scilly registering 65% (Wales Objective One region – 73%).

Figure 1: GDP per capita 2001, NUTS 2 level in % of EU-25 average (EU-25 = 100).
Figure 1 (graphics1.jpg)

The leading regions are typically those including the capital city and this performance aligns with the intensity of knowledge-based activity as has been shown in Cooke and Clifton (2005). However, this measure serves to highlight one of the limitations of simple GDP measures. As ‘output’ location is recorded rather than ‘income’ region the apparent prosperity of regions can be misleading. For example, relatively few people live in Central London, though a huge amount of GDP is generated. Much of the wealth created in the capital flows out in pay packets to be spent in the commuter-belt. Wales experiences the same phenomenon, with workers flowing into the capital, many from the relatively poor Valleys, to create GDP that registers as an output of Cardiff.

Much of the Community level action focuses on issues such as reform of state aid, removal of obstacles to physical, labour and academic mobility and completion of an agreement in the ongoing World Trade Organisation negotiations. However, as described in Chapter 2, this follows through down to the national and regional levels, including strategy for Structural Funds interventions.

Considering the intentions of the European Union, how does it currently perform in terms of the knowledge-based economy? Statistics compiled by EUROSTAT show that over 40% of EU employment is in knowledge-based industries with about half of this in manufacturing and market services (i.e., not Health or Education), as shown in Table 2.

Table 2: EU Knowledge Based Employment – 2005, Work Foundation (2006).
Sector % of total employment
Tech based manufacturing 6.9%
- High-tech manufacturing 1.1%
- Medium tech manufacturing 5.8%
Market Services 15.3%
- High tech services 3.5%
- Financial services 3.2%
- Business / Communications 8.6%
Health, Education, Cultural 19.4%
Total 41.5%

The importance of the Knowledge Economy is continually growing in the UK. Current trends would see manufacturing and agriculture account for only 15% of UK output by the end of the decade as the service sector continues to grow (Leadbeater 1999). These trends are reflected in the growth of employment in knowledge-based industries since the mid-80s shown in Figure 2.

Figure 2: UK Employment in knowledge based (solid line) and other (dashed line) industries, from Coates and Warwick (1999).
Figure 2 (graphics2.jpg)

However, this overall growth of the Knowledge Economy sits above a wide variance in performance amongst UK regions that is acknowledged by both Government (Edmonds 2000 and DTI 2001) and academic observers (Hughes 1999, Cooke 2002, Clement 2004 and K Group 2006).

Knowledge Economy - Welsh and Regional Context

Over recent years there has been a restructuring of the Welsh economy in the face of global challenges that have squeezed traditional sectors, in particular manufacturing. In this regard, the Welsh Assembly Government is trying to support the development of the knowledge-based economy. This ambition, reflecting the pillars of the knowledge economy is captured in the Wales Spatial Plan (WAG 2004c):

We need an innovative, high value economy for Wales which utilises and develops the skills and knowledge of our people: an economy which both creates wealth and allows that prosperity to be spread throughout Wales: an economy which adds to the quality of people’s lives as well as their living and working environments.

Great differences in prosperity can be noted within the regions of Wales (Morgan 2001). This is demonstrated by Figure 3 presenting the disparity between East Wales, and West Wales and the Valleys (K GROUP 2006).

Figure 3: GVA by South Wales region compared to UK average – 2003 from Knowledge Economy Theme: Interim Report (Stats Wales Welsh Assembly Government 2006).
Figure 3 (graphics3.jpg)

Wales Spatial Plan, Swansea Bay, Waterfront and Western Valleys Using a definition developed from the OECD sectoral description of the knowledge economy (OECD 1996), De Laurentis and Cooke (2003) present the regions of West Wales and the Valleys against other key European regions (in Table 3).

Table 3: Selected regions from the Knowledge Economy Index (1998) (De Laurentis and Cooke 2003).
Region % knowledge economy Ranking
Stockholm, Sweden 58.65 1
London, UK 57.73 2
Helsinki, Finland 51.50 11
Paris, France 50.17 16
South West Scotland, UK 47.59 24
East Scotland, UK 47.05 30
East Wales, UK 43.91 53
West Wales and Valleys, UK 42.87 60
Rhone-Alpes, France 42.22 67
South and East Ireland 40.18 86
Gelderland, the Netherlands 39.99 87
North East Scotland, UK 38.09 101
Northern Ireland, UK 37.31 107
Sachsen, Germany 35.97 119
Highlands and Islands, UK 34.45 132
Upper Austria 34.28 133
Athens, Greece 33.79 135
Calabria, Italy 31.29 151
Navarre, Spain 32.06 145
Aegean Islands, Greece 12.70 188

This suggests that both ‘East Wales’ and the ‘West Wales and Valleys’ regions ‘qualify’ as regions with a knowledge-based economy, meaning that there is an existing knowledge-economy to be supported and developed.

‘West Wales and Valleys’ includes the Wales Spatial Plan region of Swansea Bay, Waterfront and Western Valleys, which is developing its own Knowledge Economy strategy as part of the Spatial Planning process. The neighbouring region of ‘East Wales’ is also developing a strategy for development of the Knowledge Economy using the services of an external commercial consultancy (Local Futures 2006).

The research and strategy development of the South West Wales effort is being driven by the Knowledge Economy Research Group at Swansea University. This work has focused on identifying regional challenges, relating to human capital, innovation and infrastructure, and developing recommendations and actions through use of regional and international experts (K-Group 2006 and Davies et al. 2007).

Note:

The identification of regional challenges in this process forms part of this study of Technium.

This approach to developing ‘regional’ knowledge economy strategies has been adopted in the United States, Europe and the UK (Boddy 2005).

Clusters

Economic development based on sole, albeit sometimes large, investments are not a recipe for sustainable knowledge based economic development. To ensure enterprise becomes embedded and sustained within the region it must form links and dependencies upon and amongst neighbouring firms.

All firms in a region have a certain level of interdependence, in what are ultimately aggregated to represent regional, national and international economies. However, where geographically concentrated groups of interrelated businesses and other organisations participating in a certain field exist, they are regarded as a cluster (EU 2003).

Knowledge-Based Clusters

While the term ‘cluster’ has been increasingly used over recent years, the concept has been apparent for centuries and acknowledged for some time, though perhaps subject to different terminology. Rocha (2004) for example charts how academics have studied the phenomenon since the ‘Industrial Districts’ described by Marshall in the 1890s, all the way through to Porter (1990) at the end of the last millennium. Rocha’s work cites early examples of silk traders in China, along with the coming together of suppliers and manufacturers during the industrial revolution, together with their contemporary equivalents, such as the software companies of India or the call centres of Sydney.

These groupings of companies suggest that much of the competitive advantage enjoyed by their members lies outside the firm (Porter 2000), such that the ‘the whole is greater than the sum of the parts’. Porter describes how ‘clustering’ can help the productivity of both firms and regions in a number of ways:

  • Increasing the productivity of constituent firms or industries.
  • Increasing the capacity of cluster participants for innovation and productivity growth.
  • Stimulating new business formation that supports innovation and expands the cluster.

Elsewhere Porter and Stern (1999) provide a formal definition of the concept (which is also used by the DTI (2001);

Clusters are geographically proximate groups of interconnected companies, industries, and associated institutions in a particular field, linked by commonalities and complementarities.

As the definition suggests a cluster does not include solely competing firms, but is a much broader phenomenon, which “extend(s)downstream to channels or customers and laterally to manufacturers of complementary product (and services) or companies related by skills, technologies or common inputs” (Porter 2000). This encompasses the roles of other stakeholders within clusters including universities, trade associations and government.

Porter and Stern (1998) also point out that not all actors within a cluster are necessarily aligned with a particular industry, though rather they come together to support each other’s innovative activity. However, when considering a cluster it should be done with regard to the sector under investigation as aggregation to the level of industry or broad groupings such as ‘manufacturing’ or ‘high-technology’ lose the meaning of the connections and interrelationships.

Clusters exist in all manner of industries, though are of particular interest in knowledge-driven sectors because of the importance of localised skills and tacit knowledge spillovers. Clusters differ from networks in that they do not rely on any formal or informal organisation of actors such as chambers of commerce, industrial fora etc. (EU 2003).Furthermore, clusters are not necessarily dominated by large companies: an EC study (EU 2003) shows that they typically involve a mix of small and large firms, as shown in Figure 4.

Note:

The role of these different sized actors is specifically addressed as part of this study.
Figure 4: Dominating firm size of clusters included in European Commission study (EU 2003).
Figure 4 (graphics4.jpg)

Clusters historically often developed around a natural resource, such as mineral deposits or a natural harbour, or a large market, such as towns or cities (Figure 5). This last influence is still reflected in the European Commission study of European clusters, which shows most exist in urban settings (EU 2003);

Figure 5: Geographic location of clusters included in European Commission study (EU 2003).
Figure 5 (graphics5.jpg)

Many clusters have developed around the availability of knowledge in the region and this is evermore important in the modern Knowledge Economy sectors. This leads to co-location of firms, the spin-off and start-up of new related firms and the development of other businesses to support their activities, and the growth of a cluster. The nature of such firms is not just competitive and often occurs with overlap between sectors (e.g., venture capitalists, patent attorneys, recruitment agencies, accountancy firms etc.). The interrelationships that give rise to this are presented in Porter’s ‘Diamond’ Model shown in Figure 6.

Figure 6: Porter’s ‘Diamond’ Model for Competitive Advantage of Nations (Porter 1990).
Figure 6 (Picture 72.png)

Clusters of businesses related to a specific sector not only draw upon the common innovation infrastructure (or innovation system as discussed later), but also add to it, creating a self-reinforcing virtuous circle (Porter and Stern 1999). This effect is also demonstrated by the work of Varga (2000), who notes, however, that a critical mass of agglomeration within the region is needed for this to occur.

The study conducted by the European Commission also investigated the interaction and types of networking between businesses in the clusters examined. As shown in Figure 7 most of the clusters investigated had extensive informal networking and collaborative R&D activity;

Figure 7: Networking between firms in clusters: European Commission study (EU 2003).
Figure 7 (graphics6.jpg)

The virtuous circle can lead to growth that is then compounded by the establishment of reputation, further attracting skills, investment and opportunities to the region. Examples of this include ‘Silicon Valley’ (Bresnehan et al. 2001, 2007) and ‘Route 128’ (Dorfman 1983), along with Silicon Glen (Turok 1993) and Cambridge Biotechnology clusters in the UK (Keeble and Tomlinson 1999 and Todtling and Trippl 2005).

As described earlier the effects of clusters do not solely relate to existing firms therein, but also to the formation of new enterprise. The availability of new opportunities within a cluster helps promote entrepreneurship and the presence of support organisations, potential customers and suppliers’ acts to facilitate innovation and entrepreneurship (Rocha 2004). The presence of local networks can also help decrease cost and uncertainty in the development of start-ups, aided by flow of knowledge (Almeida and Kogut 1997).

Knowledge and Innovation

Clusters also represent a foundation for the formation of formal and informal knowledge distribution networks that support innovation (OECD 1996), which ties in with the concept of knowledge spillovers discussed earlier. The information and knowledge exchange within clusters is the key driver in their development in what Keeble and Wilkinson term an ‘innovative milieu’ (Keeble and Tomlinson 1999) as part of ‘regional collective learning’. This concept describes the development of a collective regional knowledge base caused through interactions such as networking, research collaborations and the movement of personnel between companies and other organisations.

Proximity

Proximity is a key component in successful clusters (OECD 1996 and Porter 2000), particularly in regard to facilitating knowledge-spillovers (EU 2003), described as:

The proximity of customers, competitors, suppliers, universities and research institutions provided impetus (for) the creation and exchange of information and increases opportunities for innovation.

Maskell and Malmberg (1999) outline how the competitiveness of a firm, particularly in the long-term, depends upon its ability to continuously upgrade its knowledge base. To achieve this it must find knowledge sources that provide competitive advantage. As tacit knowledge is the least transferable it requires that businesses place themselves close to its source. Additionally, cost is a factor in developing and maintaining a company’s knowledge base, making proximity to knowledge sources a cost-effective way of closer and more frequent personal contacts.

While proximity to sources of knowledge and other linkages are important elements of clusters, it must not be forgotten that high-technology companies generally exist in national and international networks, serving global markets (Keeble and Tomlinson 1999; Muller, 2007).

UK and Wales

On a global scale the DTI report ‘UK Competitiveness: Moving to the Next Stage’, (Porter and Ketels 2003), presents the UK as a whole as figuring in a number of significant clusters including services, defence, telecommunications, health care, entertainment. Further sectors such as biotechnology and motor sport are also noted to be of particular significance.

Wales as recorded in documents such as the Wales Spatial Plan already acknowledge a number of sector clusters including electronics, biotechnology, automotive and aerospace. These have been identified in the DTI study of UK clusters (DTI 2001). Each of these represents a significant employment and numbers of businesses (Table 4).

Table 4: Employment in selected Welsh clusters (DTI 2001).
Cluster Employment
Electronics 22,000
Automotive 12,000
Aerospace 5,650
Biotechnology 2,147

While not all of the employment may refer to higher skilled employment or ‘knowledge workers’ the sectors involved fall within sectoral definitions of the knowledge economy (OECD 1996) and present the importance of the knowledge economy employment within the region.

An observation in the DTI assessment of clusters (DTI 2001) in Wales; is that while there exists significant specialisation with a number of clusters, they are generally and often weakly embedded and dependent upon foreign owners and markets or industries across the border in England. This reflects the concerns regarding the ‘embeddedness’ of businesses in the region and the focus given to developing indigenous enterprise within sectors and clusters (Cooke and Clifton 2005).

Government Policy

Clusters on Demand?

Clusters are generally built up spontaneously (EU 2003). However, the question remains as to whether it is possible to develop them in cities and regions and how it could be achieved. The conclusion put forward by governmental organisations (EU 2003), academics (Cooke 2002, Porter 2000) and other bodies is that it is possible, subject to the availability of key components including leadership and vision (Porter 1990, Cooke 2002).

This is in keeping with the model proposed by Porter (1990, 2000), where government can affect aspects including factor conditions, firm strategy, and rivalry and demand conditions. Examples of each of these include provision of training or new knowledge (e.g., funding training schemes or funding academic research), competition policy (regulation/deregulation of industries) and changing consumer behaviour (e.g., environmental legislation), as shown in Figure 8 (Porter 2000). It is also suggested that because of the importance of proximity regional administrations are best placed to assist cluster development (EU 2003).

Figure 8: Aspects of Economic Policy in Cluster Development (Porter 2000).
Figure 8 (graphics7.jpg)

European and United Kingdom Policy

Europe: the Lisbon Agenda

The need to invest in the Knowledge Economy is at the heart of the European Union’s Lisbon Strategy. Investment in human capital and development of innovation is recognised as the key mechanism for realising the strategic objectives. The European Commission’s accompanying ‘Community Lisbon Programme’ proposes development of policy measures under the themes of (EU 2005):

  • Knowledge and innovation for growth
  • Making Europe a more attractive place to invest and work
  • Creating more and better jobs

Recognising R&D as a key driver for innovation, the European Union has set the objective of raising expenditure on R&D to 3% of GDP by 2010. If left to follow current trends by the end of the decade it would remain at 2.2% (EU 2005), just below the OECD average of 2.3% (OECD 1996).

United Kingdom: Strengthening Innovation

The UK Government has put much emphasis on the promotion of Innovation to reduce the productivity gap with our major competitors. This was the focus of the Department of Trade and Industry ‘Innovation Review’ undertaken in 2003 (DTI 2003).

One of the most pivotal pieces of work on University Collaboration was the Lambert Review of Business – University Collaboration by Richard Lambert the former Editor of the-Financial Times from August 2002 Lambert spent a semester at the Kennedy School of Government at Harvard University. He was subsequently asked to write an independent review of Business-University for the then known Department of Trade and Industry.

It is reported in the Lambert Review of Business University Collaboration, that the exploitation of university IP played a vital role in improving UK’s innovation.

The number of patents issued to business and universities has increased rapidly in the US, EU and Japan since the mid 1980s. The highest levels are found in the most innovative countries such as the US, Sweden and Finland. In many industry sectors, businesses will not invest in research and development (R&D) to develop early stage technologies without a patent to guarantee them exclusive rights to commercialise their work. (DTI 2003)

Patent application numbers in the UK are low and have been falling relative to the US, France and Germany, mainly because of its low investment in R&D. The UK’s investment in R&D is heavily concentrated in the pharmaceutical industry, which has a high propensity to patent. So its low level of patent output is especially worrying. The UK has a strong science base, which is highly productive in creating “pure” research outputs such as publications and citations. There is significant potential to transfer this knowledge to industry through IP. (DTI 2003)

Universities account for only a small share of the UK’s patents each year. The highest proportion is in Scotland where, partly due to low industry investment in R&D, universities file around 10 per cent of patent applications. This is more than double the proportion across the UK. (DTI 2003)

It has been noted in the Lambert review that there is a change in the way that business and universities are interacting and that there is optimism in the prospect of creating innovation from these interactions.

Historically, US universities were Land Grant universities or colleges, which are US institutions, which have been designated by a Congress to receive the benefits of the Morrill Acts of 1862 and 1890. These acts funded educational institutions by granting federally controlled land to the states. The mission of these institutions, as set forth in the 1862 Act, is to teach agriculture, military tactics, and the mechanic arts, not to the exclusion of classical studies, so that members of the working classes might obtain a practical college education (www.wordiq.com 2007).

The US also has private schools that are schools not administered by local or national government, and retain their right to select their student body and are funded in whole or in part by charging their students tuition rather than by public funds many of which receive endowments from businesses. Strengthening universities links to business and industry. Also in the US, the universities are governed by boards, several of the people on these boards are also lead business people in the region and in their fields of expertise, which help guide the university into what areas are in demand from the market, so that the universities can better set their curricula to match the market needs. The US Universities also have a very strong alumni base that contributes endowments to the university strengthening its funding resource.

These links have perpetuated a culture that is underlying in the US universities and academics of collaboration between them and business. It should also be stated that US universities allow for their academics during non-contract hours to work with business in their field of expertise. Thus creating a deeper interaction on a personal level, and allowing transfer of knowledge from business back into the university. These links also aid in the interaction of marketing of university IP, a majority of licensing in US universities comes from the network that the academic themselves has created through their interaction with business.

While in the UK the view of business is quite different, the view of business was not held in regard by academics and the contracts that they are employed through do not allow for the interaction as it does for their US counterparts. Yet as Richard Lambert stated in his review,” there has been a marked culture change in the UK’s universities over the past decade; most universities are actively seeking to play a broader role in the regional and national economy” (HSMO 2003).

“Two thirds of growth comes from innovation” Chancellor Exchequer, June 2002

Welsh Assembly Government Policy

Economic Development

A Winning Wales and Wales: A Vibrant Economy

The Welsh Assembly Government outlines its overarching strategic agenda in ‘Wales: A Better Country’ (WAG 2003b) with policy areas including:

  • Helping more people into jobs.
  • Improving health.
  • Developing strong and safe communities.
  • Creating better jobs and skills.

This agenda ties together the policy areas of health, education, transport, local government and economic development.

The economic development agenda is captured in ‘A Winning Wales’, which was first delivered in 2001 (WAG 2001), updated in 2003 (WAG 2003a). It is supported by a host of interrelated strategies and accompanying action plans for aspects of economic development including innovation (WAG 2003), entrepreneurship, skills, (WAG 2005c), the environment and specific industry sectors (Figure 9). The Strategy also aims to outline how Structural Funds, including Objective 1 funding are to be used in economic development for West Wales and the Valleys.

Figure 9: A Winning Wales and associated Action Plans, from Wales for Innovation (from WAG 2003).
Figure 9 (graphics8.jpg)

The strategy is built around a vision that clearly reflects the ambition to develop a strong and vibrant Knowledge-Based economy in Wales (WAG 2001):

“To achieve a prosperous Welsh economy that is dynamic, inclusive and sustainable, based on successful, innovative businesses with highly skilled, well-motivated people”

To realise this vision the strategy (WAG 2001) outlines the key targets, again reflecting the agenda of a knowledge-based economy:

  • Raising total employment by 135,000.
  • Improving enterprise and innovation.
  • Raising not just skill levels but learning performance at every level.
  • Ensuring Wales uses world-class electronic communications to their full potential.

In order to achieve these, the Strategy outlines key requirements including:

  • Improving rates of new business formation.
  • Addressing under representation of rapidly growing sectors such as financial and business services.
  • Building upon strengths in key sectors including aerospace, opto-electronics and automotive.

In 2003 WAG published an Annual Report (WAG 2003a) on the progress towards fulfilling the vision of ‘A Winning Wales’ (WAG 2001), prior to delivering an updated version of the strategy in 2004 (WAG). This reinforced the WAG objective of bringing the prosperity of Wales to 90% of the UK level within a decade and in line with that of the UK within a generation.

‘A Winning Wales’ has also been recently supplemented by Wales: A Vibrant Economy’ (WAG 2005b) which presents WAG’s ‘Strategic Framework for Economic Development’. This further reinforces the agenda of the Knowledge Economy, with specific regard to the West Wales and the Valleys region, with its focus on:

  • Promoting the knowledge economy, by fostering research, technology and innovation, building a stronger entrepreneurial environment, supporting the development of clusters/centres of excellence in key sectors and improving access to business finance.
  • Improving skills levels, both as a means of tackling innovation and providing the skills for higher value-added employment. This will include supplying young people and new entrants to the labour market with the skills needed to in turn develop the skills and qualifications needed for more senior jobs in the economy.
Wales for Innovation - Innovation Action Plan

The Innovation Action Plan aims to set out how innovation can be fostered in Wales to help deliver the Knowledge Economy aspired to in ‘A Winning Wales’ (WAG 2001). Actions proposed by the plan consist of five groupings namely;

  • Communicating what can be achieved through more innovation.
  • Developing more high growth potential businesses.
  • Better equipping people to innovate.
  • Simpler, more accessible, business innovation support.
  • Maximising the economic development impact of our universities and colleges.

Core to the Plan is the further development of the ‘Technium’ initiative where the plans for this pan-Wales network were described with a pledge to invest “up to £150m…rolling out across Wales … (to) act as innovation focal points within their regions”.

The plan also describes how innovation and skills are to be supported through programmes such as the Technology Exploitation Programme (TEP) and SMARTCymru.

Note:
SMARTCymru is a WAG initiative created to support the development of new products and processes.

It also describes how this would be achieved in conjunction with other WAG bodies including the Higher Education Funding Council for Wales (HEFCW) and Education and Learning Wales (ELWa).

A Science Policy for Wales

The Science Policy for Wales (WAG 2006) underlines the importance given by WAG to the Knowledge Economy in the future of the country, citing the vital role of science, engineering and technology. Three key priority areas were identified for focus of support and resources of:

  • Health/life sciences.
  • The low carbon economy.
  • Sustainable economic and social regeneration.

The policy recognises the potential for enterprise developing from scientific endeavour in Wales, though recognises fundamental challenges including the relatively low intensity of scientific research within the country and the low level of Research Funding Council resources won by Welsh Higher Education Institutes (HEIs). This is reflected in much of the evidence supplied to the review that preceded the policy (NAW 2006). However, the Policy does also acknowledge that Wales is a small nation that could not and should not aspire to the breadth and depth of science activity in which much larger territories have the resources to engage. It is though recognised that despite this, scientists and engineers working in Wales will be working in their specific fields with science of the highest quality on national and international stages.

A Science Advisor for Wales

In 2008, the First Minister for Wales Rhodri Morgan commissioned a study on the appointment of a Science Advisor for Wales. The First Minister in Wales also has the role of Science Minister.

It was seen that the promotion of science in Wales is fundamental to developing the country as a world-respected knowledge-led economy by building up the science base, and the ability to quickly commercialise on the science base that is in place. Also, the promotion of STEM subjects in the schools and colleges, to ensure that there is a throughput of students that are choosing to study science subjects in schools and universities, and pursuing science careers thereafter.

This appointment was built on the already high standard of science and research in Wales in areas such as medical technology held in high regards in Europe, and a track record of innovations, including automated DNA testing, dispersive X-ray spectrometry and 3D intelligent sensor technology In addition to this is the people that have been conducting pioneering work, such as Professor Sir Martin Evans, who was awarded the Nobel Prize for Medicine for his research into stem cell technology.

This was compounded by the investment in leading-edge research and development centres, including the £16.5 million PETIC in Cardiff, the £22 million NanoHealth Centre and the £50m Institute of Life Sciences that houses the Boots Innovation Centre at Swansea University

In 2009 Professor John Harries was appointed to the post of Chief Scientific Advisor for Wales.

The Wales Spatial Plan

Spatial Planning refers to the methods used by the public sector to plan activities within a space and has been used extensively in the European Union for planning within regions since 1984 (ESPON 2007). ‘People, Places, Futures: The Wales Spatial Plan’ (WAG 2004c) represents WAG’s vision of future development across Wales. The vision encompasses all aspects of future development including transport, health, education and economic development. The planning process examines Wales in the context of six distinct regions as shown in Figure 10.

Figure 10: Regions of Wales according to the Wales Spatial Plan Vision (WAG 2004).
Figure 10 (graphics9.jpg)

The economic vision for Wales described in the Wales Spatial Plan highlights the importance of the Knowledge Economy with focus upon the provision of opportunities that harness the skills and knowledge of the people (Wales Spatial Plan, 2004):

“We need an innovative, high value economy for Wales which utilises and develops the skills and knowledge of our people: an economy which both creates wealth and allows that prosperity to be spread throughout Wales: an economy which adds to the quality of people’s lives as well as their living and working environments.”

To achieve this vision, the plan lays out the need for engagement between public, business and other partners. It presents a range of actions for the region and Wales as a whole including taking forward of strategies such as the Skills and Employment Action Plan and Creative Industries Strategy along with investment in knowledge transfer initiatives such as Technium.

As part of this Spatial Planning Exercise overseen by the Welsh Assembly Government each region must select and develop themes for its future development.

In line with the Lisbon Agenda of the European Union, the region of Swansea Bay, Waterfront and Western Valleys is focusing on building upon its Knowledge Economy foundations to provide a prosperous and sustainable future for its communities. This embodies in the vision for the region described in the Wales Spatial Plan. The charge to develop the Knowledge Economy described in the Plan makes direct reference to the roles of both Swansea University and Technium:

  • Retaining young people and attract well-qualified people from outside the area to provide a stimulus for improved economic performance.
  • The University, FE Colleges and Technia should embed the Knowledge Economy within the area.

The ‘Objective One’ Era – 1999-2006

The Continuing Challenge

Wales entered the new millennium equipped with a new Assembly to fulfil its ambitions, but much like its devolved neighbours of Northern Ireland and Scotland was about to attempt this in the face of economic decline, poor conditions for entrepreneurship and the disinvestment caused by globalisation (Cooke and Clifton 2005).

The scale of this challenge is highlighted by the fact that Wales, with 5 percent of the UK population, only contributes 4.5 percent of total economically active persons and 3.9 percent of GDP in the UK. The Welsh Assembly Government has set itself the target of closing the gap with the rest of the UK economy by raising per capita GDP to 90% of UK levels within a generation (WAG 2001). This target is an enormous aspiration that would require national economic performance to be raised to a level not seen in a century. This is shown in Figure 11 presented Crafts recently to a conference in Cardiff.

Figure 11: GDP/Person in Wales as % of Great Britain GDP, selected years (Crafts 2005).
Figure 11 (Picture 12.png)

The pressure on manufacturing and basic industries continued with the closure or relocation out of Wales of many inward investors and the termination of steel production at Llanwern. In the period between 1998 and 2003 Wales as a whole lost 57,000 manufacturing jobs. This has again raised the question of how ‘embedded’ multinationals are (or were) in the Welsh economy, with the suggestion that the presence of functions beyond assembly such as research and development would improve embeddedness (Phelps et al. 2003).

In addition to the continued pressure on manufacturing, the supply of FDI opportunities available was starting to fall during the end of the 1990s due to a slow-down in the global economy (Young et al. 1994) and the emergence of new attractions for FDI, most notably in China and India (Chen 1996). Despite the emergence of these low cost competitors it is observed that wage rate versus skills level remains an issue, working in favour of the relatively better skilled workforces of developed nations (Wei et al. 1999). Furthermore another factor which also hampers future growth for the region is an aging population, which though not a unique regional challenge, does feature worse than for the country as a whole (EU 2005).

These challenges meant the problems of the new millennium would not be fixed by the same solution of solely attracting foreign investment by cheap labour and access to markets used at the end of the last century.

Rationale

At the end of the twentieth Century much of the Welsh economy was significantly trailing behind, such that GDP was only 73% of the European average (WEFO 2004) meaning that parts Wales qualified for ‘Objective One’ assistance (Figure 12). This level of assistance represented the highest level of aid provided by the EU and was targeted at regions with GDP below 75% of the EU average (Figure 13).

Figure 12: Objective One Areas in Wales (EU 2004).
Figure 12 (graphics10.jpg)
Figure 13: Objective One Areas in the EU (EU 2004a).
Figure 13 (graphics11.jpg)

The fact that not all of Wales qualifies for such assistance reflects the variation in prosperity across the country. This is highlighted by the fact that disposable incomes in the Vale of Glamorgan are as high as those in the more affluent parts of Bath and Bristol across the bridge, while the mining communities of the Valleys just a few miles from the other side of the M4 remain as impoverished as the most deprived parts of Inner London (Lovering 1999).

The reasons for this poor relative performance were structural dependence upon low value added activities, low productivity in certain sectors and high levels of unemployment within an overall low level of economic participation. Objective One funding came about thanks to the creation of a new statistical region ‘West Wales and the Valleys’ that presented and highlighted the economic woes of this part of Wales (Cameron et al. 2002). The value of this assistance totalled some £1.2bn in grant aid – to be match funded from other sources.

While much effort has been made to address the economic weaknesses of much of Wales, including through use of European Objective 1 funding, the performance of parts of the Welsh economy remains significantly behind that of Europe as a whole. This is highlighted by the fact that much of Wales still qualifies for the highest level of assistance from the EU, now termed ‘Convergence Funding’.

As previously described in this section WAG outlines its strategy for economic development in ‘Wales: A Vibrant Economy’ (WAG 2005b). This strategy builds upon the vision of integrating national and regional policy with the vision of the European Union and the ‘Lisbon Agenda’ of social and economic regeneration. To achieve this Wales has the support of Convergence Funding worth £1.3bn for the West Wales and Valleys region while other areas of Wales qualify for support worth around £120m from the ‘Competitiveness Fund’, which was previously called Objectives 2 and 3. Most of the funding available (65%) is set for ‘Lisbon related investments’ (WEFO 2006) and has been earmarked in line with 9 European Regional Development Fund (ERDF) and European Social Fund (ESF) priorities (WEFO 2006);

ERDF
  • Building the knowledge based economy.
  • Improving business competitiveness.
  • Developing strategic infrastructure.
  • Creating an attractive business environment.
  • Building sustainable communities.
ESF
  • Supplying young people with the skills needed for employment
  • Increasing employment and tackling economic inactivity
  • Improving skill levels and improving the adaptability of the workforce
  • Making the connections – modernising our public services

While much effort has been made to address the economic weaknesses of much of Wales, including through use of European Objective 1 funding, the performance of parts of the Welsh economy remains significantly behind that of Europe as a whole. This is highlighted by the fact that much of Wales still qualifies for the highest level of assistance from the EU, now termed ‘Convergence Funding’.

With the close of “Objective 1” funding in 2006, the West and the Valleys region of Wales were awarded the highest level of support from the European Union for the Structural Funds programming round 2007–2013 (Convergence).

Convergence, the successor to the Objective 1 programme 2000-2006, covers 15 local authority areas in the West Wales and the Valleys region (Figure 14).

Figure 14: Convergence Region of Wales.
Figure 14 (Picture 14.png)

The Convergence programmes for West Wales and the Valleys comprises of funding from two separate European Structural Funds: the European Regional Development Fund (ERDF) and the European Social Fund (ESF). Around £1 billion of ERDF funds has been allocated to help progress the region’s transformation into a sustainable and competitive economy by investing in the knowledge economy and helping new and existing businesses to grow.  It is focused on regenerating Wales’ most deprived communities, tackling climate change and improving transport. Over £690 million from the ESF has been slotted to be used to tackle economic inactivity, increase skills and employment. The aim is that together, with match funding, Convergence will drive a total investment of £3.5 billion in West Wales and the Valleys (WEFO 2009).

The Emerging BRICs

Europe, Japan and the USA have dominated the ‘knowledge economy landscape’ for a generation. However the world is changing and economies known as the BRICs (Brazil, Russia, India and China) are becoming significant players. Other countries are following close on their coat tails for example Mexico and Vietnam, which is now the fastest growing economy in the world (Milken Conference 2010). This is not to mention established actors in the knowledge economy drama such as Singapore that has made a conscious effort to identify the key sectors and invest to attract the best. The Biopolis project in Singapore is an example of a sovereign state deliberately and strategically seeking to build a cluster using the immense resource at its disposal to seek sustainable competitive advantage.

Note:

Located in Singapore in close proximity to the National University of, National University Hospital and the Singapore Science Parks, Biopolis aims to be a world-class biomedical science R&D hub in Asia. Biopolis is dedicated to biomedical R&D activities fostering a collaborative culture among the private and public research communities. (http://www.one-north.sg/hubs_biopolis.aspx).

Taking China as an example, for a generation or more China has sent its best young talent overseas to receive the best education in the universities of the UK, Europe, the US, Canada and Australia. The Chinese government has focussed this strategy largely on the STEM subjects and a large percentage of UK STEM postgraduates are students form China and India. The time has now come for China to reverse this trend, it is now has the economic wealth to create opportunity for this knowledge based human capital back home in China. Couple with this the fact that China is no longer seen, by global corporate executives, as an IP risk, indeed the opposite. Chris Viehbacher CEO of the pharmaceutical giant Sonofi-Aventis recently said that ‘I no longer worry about IP; I will take my research to the region which offers me the best talent and best service. China now plays by the rules’ (Milken Global Conference 2010).

The Financial Crisis of 2008-2010

The issues of the participation of emerging nations in the global knowledge economy are made the more real and pertinent by the recent global financial crisis. The 2008-2010 crisis is different form others in recent history, this time it is emerging economies that leading the world out of recession. China has led the way followed by others of the ‘BRIC’ category. The US’ emergence from recession followed some two quarters later and Europe lagged significantly further behind. The crisis in Greece has made it harder for Europe to regain economic momentum and as of Q2 2010 fears remain for the Spanish, Irish, Portuguese and even British economies. At this critical time therefore China and others BRICs are able to invest in the emerging knowledge economies and in particular in the human capital. These nations are climbing rapidly up the league tables. Their scientific citations are improving and the rate of generation of new IP is surpassing that of the established dominant players.

The US and the UK are now faced with a new competitive landscape in the context of the knowledge-based economy. What this means for a relatively small and relatively peripheral region like Wales is truly significant. Getting the strategy right is critical and every possible opportunity for seeking advantage must be taken.

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