29 April 2015

By Christian Ketels, TCI President

Strategy has become a highly popular term among regional policy makers, especially in Europe where so-called ‘smart specialization strategies’ have even become a formal requirement for regions to be eligible for financial support from the EU’s structural funds. But what exactly policy makers mean when they talk about ‘strategies’ is often surprisingly vague. This short piece aims to lay out some of the key issues.


What is a regional strategy? At a basic level, strategy is about setting goals and identifying a list of actions that are intended to reach these goals. Many regions have produced strategy documents that include these two elements. Some are doing even better and include some more granularity on how these actions are going to be implemented, i.e. by whom and with what type of budget. So far, so good.


Business studies suggest that a strategy is more than goals and actions. Strategy is about choice, in particular about where and how to compete. And it is at this point that confusion and complexity often start to creep in. First, there is a failure to understand the relevant markets for locations. We are used to think about markets for products and services that companies compete in. But this is what companies do, not locations. Locations compete for economic activities and for the mobile factors of production that they require. This seems like a trivial distinction, but a good number of locations have fallen into the trap of defining product markets, technologies, or societal needs as their target rather than specific activities. Such targets are often ineffective; they purport to make choices that are ultimately taken at the firm level, and they are not sufficiently specific to signal which part of the relevant value chain a location is aiming for.


Second, there is a failure to link the where and how of competing. Some locations define an area in which they want to compete but fail to outline the qualities they want to bring to the table. This is similar to a car produces stating that her or she wants to compete in the car market, but keeping quiet about the value proposition that their car is going to offer to customers. Others offer some generic qualities – like a central location, attractive cost levels, or being ‘open for business’ – but fail to define how these qualities are valuable for specific activities. An effective strategy combines both elements: it states which activities a location aims to attract, and lays out which business environment qualities the location is offering to be an attractive base for these activities.  


Why is a regional strategy important? Some regions might have latched on to the idea of ‘strategy’ because it seems fashionable and the term carries an aura of importance. But there is clearly more to it. First, many regions have identified the need to better coordinate what they do for economic development. There is pressure to prioritize and coordinate activities, which are often carried out by different agencies. An effective strategy can help to identify what is critical (i.e. part of the core value that the location offers to target activities) and what less so. And a strategy can align the individual activities across government towards a common goal by clarifying where and how the location aims to compete.


Second, many regions have realized that a successful approach towards economic development depends on successfully mobilizing and communicating with others. There are regional stakeholders like research institutions and existing companies that through their behavior have a critical influence on the location’s competitiveness. Strategy can enable collective action in support of a specific value proposition. And there are potential investors or skilled workers that are ideally getting attracted by a location’s value proposition. All of these groups need to understand what a location’s strategy is. And they will be more easily convinced if there is a clear alignment between the location’s value promise and the policy actions that are being implemented.


Why is regional strategy difficult? While many regions are instinctively open to having a strategy (who would argue that having no plan is better than having one?), many also find designing and implementing a strategy that meets the criteria laid out above difficult. First, it turns out that strategy requires a type of experience and technical expertise that is as a discipline often established in regional government. They have many specialists in specific policy areas. But strategy is different – it requires a view across policy areas that few people in regional government are comfortable with. This is, by the way, not different from companies: strategy experts are different from experts in marketing or operations.


Second, strategy requires choices that are more difficult for a government than for a firm. A firm can choose not to do specific things, and there is a recognition that they need to constantly adjust choices made based on the feedback the market provides. Government is different: it is politically hard to not do certain things or work with specific parts of the economy. There is a large part of the economy that is local and where there is no ‘choice’ involved; government needs the general conditions that enable them to work productively. And it is politically hard to focus on specific activities when the ultimate outcome is both uncertain and depends on the independent choices made by companies and individuals.


There is still much to learn about regional strategy, and acknowledging that our understanding of effective strategy for locations is only emerging is an important first step.


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