Regional Governance, Institutions and Development

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Regional Governance, Institutions and Development

• From
• Michael Danson and Geoff Whittam(University of
  Paisley-Scotland)

2
Setting the Stage

• Regionalism and regional-based economic
  development initiatives are becoming increasingly
  important, particularly in Europe.
• These changes are affecting the role of
  governance, institutions, institution-building
  and institutional change in regional development
• These changes are interconnected with a number of
  characteristics which first came into the
  economics and geographic literature in the 1980s.

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characteristics which first came into the
economics and geographic literature in the 1980s

• institutional capacity,
• thickness,
• the invisible factors in regional development,
• networking, and
• industrial districts.

4
The Challenge

• How to adapt these new changes and address
• Innovative Economy how to succeed in the new
  economy and ensure everyone participates
• Livable Community how to create communities
  where people want to live
• Community-based Regionalism how to ensure
  inclusive and equitable communities
• Governance Reform How to reform government to
  make it more responsive

Collaborative Economics, Inc
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Institutions, networks and partnerships

• generally seen to be the answer to regional
  problems
• subject to policies and procedures established by
  governing authority
• This is the reason for our concentration on
  governances.

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Governance

• concerned with how regional economic development
  is affected by
• democracy,
• participation,
• regional self-determination,
• public-private partnerships and
• accountability.

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Decentralization, Devolution, or Democracy?

• Some institutions which were created in order to
  improve economic growth have started changing
  into organizations whose primary roles are now
  the coordination of economic development
  activities rather than being directly involved in
  development.
• The primary example used by your authors is the
  regional development authority or RDA which is
  used extensively many parts of the world,
  especially in Europe.
• Much of the change has been caused by what is
  called decentralization which is often
  characterized as an increase in democracy. In
  this sense some think of the central governing
  authority giving way to democracy and
  self-determination.
• The other side of regionalism is the trend toward
  the federal or central government relieving
  itself of responsibility for policy areas that
  have become a liability.

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three primary reasons for these changes

• 1) the federal or central government lacks the
  resources to manage them effectively,
• 2) because the economic burden can be off-loaded
  by passing them onto lower tiers of government,
  or
• 3) because the political burden of being
  responsible for unsuccessful policies is deemed
  to be high.

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Industrial Renewal

• Is a basic requirement for an economy to keep
  developing
• can refer to
• innovation and development within established
  industries,
• the attraction of new industries through such
  measures as direct foreign investment,
• the formation of new indigenous firms,
• or a combination of all three strategies

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problems associated with industrial renewal

• grown over the last two decades in what can be
  described as "mature" economies.
• is tied specifically to the decline of
  traditional manufacturing and extraction
  industries within these "mature" economies
• focus on governance structures,
• industrial districts,
• networks and
• partnerships.

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Mississippi as an Example
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With a little more perspective
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innovation

• The changing nature of innovation within
  industrial production can be cited as the
  principal cause of the accelerated need for
  policies to tackle the problems associated with
  industrial renewal

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The effect on mature economies

• the "Fordist" techniques of production and
  "Taylorist" methods of scientific management have
  been replaced with new production methods such as
  flexible specialization
• the increasing internationalization of business
  organization has led to the growth of mass
  production methods in low-cost countries or
  low-cost regions

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New Reality

• Globalization of business changes the meaning of
  place
• New technologies changes time and space
• Changing demographics changes the profile of
  leadership
• New reality The anonymity of civic leadership

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SME

• The development of new methods of production such
  as flexible specialization has coincided with a
  growth in the small medium enterprise (SME)
  sector in the "mature" economies

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SME is not just European or third world

• Americas 25 million SMEs employ 53 of the
  private work force, generating more than 50 of
  the nations GDP and most importantly 75 of the
  net new jobs added to the economy. SMEs in the
  US also represent 96 of all US exporters and
  account for 35 of federal contracts. (Source
  U.S. SBA (Small Business Administration).
• How does the SBA define a small business?
• A. SBA has established a size standard for most
  industries in the economy. The most common size
  standards are as follow
• 500 employees for most manufacturing and mining
  industries
• 100 employees for all wholesale trade industries
• 6 million for most retail and service industries
  
• 28.5 million for most general heavy
  construction industries
• 12 million for all special trade contractors
• 0.75 million for most agricultural industries
• About one-fourth of industries have a size
  standard that is different from these levels.
  They vary from 0.75 million to 28.5 million for
  size standards based on average annual revenues
  and from 100 to 1500 employees for size standards
  based on number of employees. Several SBA
  programs have either alternative or unique size
  standards, such as the Small Business Investment
  Company Program.

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The Evolving Economy

The first 100 years of our countrys history
were about who could build the biggest, most
efficient farm. The second 100 years were
about the race to build efficient factories.
The third 100 years are about ideas. -- Seth
Godin Fast Company, August 2000
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New Growth Theory and Innovation
Paul Romer says ideas are the primary source of
economic growth. Recipes (new ideas) combine
ingredients (resources) in new and different ways
to yield more valuable economic results. The
recipes come from the innovation process.
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How do Ideas Come About?

• We know 3 very pertinent things
• Ideas require intelligent seeding
• Ideas that sit on the shelf are worthless. Ideas
  have to move, grow, and touch lots of people and
  businesses to provide benefits.
• Universities/colleges, traditional sites of RD
  and smart people, are certainly part of the
  equation.

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Habitat for Innovation and Entrepreneurship
What distinguishes Silicon Valley is not its
scientific advances or technology
breakthroughs. Instead, its edge derives from a
habitat or environment that is tuned to turning
ideas into products and taking them rapidly to
market by creating new firms. The Silicon Valley
Edge
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We are heregt Industrial districts

• . Industrial districts, networks and partnerships
  are regarded as new methods of production
• Industrial districts were noted by Marshall in
  Principles of Economics in 1890. They have
  recently been "rediscovered" in many regions of
  mature economies.
• Industrial districts can now be analyzed as "new"
  types of industrial productive systems, because
  they very different than the traditional (new
  tradition) neo-classical notion of the firm.
• There is an increased awareness of institutional
  capacity, governance and institutional change in
  regional development

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definition of industrial districts

• "a socio-territorial entity which is
  characterized by
• the active presence of both a community of people
  and a population of firms
• in one naturally and historically bounded area.
• In the district, unlike in other environments,
  such as manufacturing towns, community and firms
  tend to merge. T
• he fact that the dominant activity is an
  industrial one differentiates the industrial
  district from a generic economic
  region.(Becattini (1990, 38))
• Becattini clearly identifies is the importance of
  
• socio-political factors,
• the links between suppliers and clients, and
• the impact of the community in enhancing the
  performance of firms within industrial districts.

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three broad approaches have been adopted to
analyze these "new" forms of industrial
productive systems

• the transactions costs approach, a neo-classical
  framework developed by Williamson through Coase
• The "embeddedness" school.
• critical of the neo-classicists
• Emphasize the essential dynamism of the districts
  
• Case approaches focusing on political and social
  aspects of individual case studies

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Industrial Districts and Marshall

• arose primarily out of his empirical studies of
  the steel and textile industries
• within these industries, the greater the
  opportunities that existed to split up the
  production process, the greater the chances were
  that specialist firms would develop.
• benefits of production accruing to the individual
  large firm were differentiated between internal
  economies of scale (dependent on the organization
  and efficiency of the management of the
  individual firms) and those arising to the
  industry as a whole, or external economies
  (dependent on the general development of the
  industry)

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According to Marshall

• external economies "can often be secured by the
  concentration of many small businesses of a
  similar character in particular localities or as
  is commonly said, by the localisation of
  industry" (Marshall 1916, 26).
• In effect this localization of industry can be an
  alternative to larger size for the individual
  enterprise
• And a hint to how SMEs can be particularly
  important

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Specialization and the small firm.

• To Marshall, specialization allowed firms to
  operate at smaller levels because localization
  economies were usually more significant than
  internal scale economies
• It was the combination of localization and
  specialization that gave rise to the notion of
  industrial districts.
• Although Marshall noted that large firms
  frequently located in industrial districts, he
  also added that small firms benefit from external
  economies from being located in industrial
  districts by providing inputs and specialty
  finishing

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Marshall and Constructive Cooperation Trust and
cooperation

• Marshall coined the term "constructive
  cooperation" to identify a willingness to
  cooperate with similar firms in sharing
  information and efforts to obtain better markets,
  materials, and capital without become cartels
  that seek to control prices.
• Marshall saw constructive cooperation among
  competitors as a particularly British trait.
• This form of cooperation requires extensive trust
  and could not occur without out it.

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Organization and Cooperation

• Organization is the general rule which underpins
  Marshalls analysis of the entire production
  process.
• Cooperation in the sharing of knowledge (which
  leads to increased innovation) and the
  development of an industrial atmosphere (which
  results in the establishment of new organizations
  that facilitate production and trade, namely
  constructive cooperation) both derive from this
  general rule.
• Implicit in Marshall is an evolutionary approach
  to industrial organization that links between
  Marshalls original industrial districts and
  contemporary industrial districts.
• The connection is the development of trust and
  cooperation that we have identified within
  Marshalls original industrial districts.

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Evolving Relationships and Trust

• In Marshalls view, social institutions arise in
  industrial districts and trust evolves dependent
  upon
• tradition,
• custom,
• habit and
• legal restraint.
• The establishment of such social institutions
  help SMEs gain external economies of scale and
  get advantages from being close-knit
  geogragphically and economically.

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Gains from Trust and Cooperation

• product innovation,
• the sharing of knowledge, information, productive
  capital and even personnel
• an "industrial atmosphere" and the establishment
  of "constructive cooperation."
• constructive cooperation and trust being achieved
  without resort to formal enforcement mechanisms.

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Arrow on Trust and cooperation

• The achievement of a productive system based on
  cooperation and trust undoubtedly leads to
  economic efficiency and "is an important
  lubricant of a social system." (Arrow, K. (1974)
  The Limits of Organization. New York Norton.).
• "Collective undertakings of any kind, not merely
  governmental, become difficult or impossible not
  only because A may betray B but because even if A
  wants to trust B he knows that B is unlikely to
  trust him"(Arrow, K. (1974) The Limits of
  Organization. New York Norton.).

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Partnership and Regional Development

• In the 1970s and 80s, regional development
  usually involved one agency deciding the
  appropriate strategies and undertaking the
  necessary steps to implement such initiatives.
• Now, regional development bodies appear to be
  essentially networked organizations, achieving
  their objectives by working in partnership with
  other public and private actors.

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An example National Rural Development
Partnership

• The National Rural Development Partnership (NRDP)
  is a multi-faceted organization bringing together
  partners from all levels of government as well as
  private for profit and non-profit organizations
  to address the needs of rural America.

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NRDP Structure

• The NRDP brings together partners from local,
  state, tribal, and federal governments, as well
  as from the for-profit and nonprofit private
  sector. The NRDP has three main components

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The Partnership at the National Level

• National Rural Development Council
• Office of Community Development
• National Rural Development Coordinating
  Committee
• NRDP Task Forces
• Rural Policy Fellows Program
• National Federal Partners

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The Partnership at the State Level

• State Rural Development Councils (SRDCs) are
  composed of the agencies and organizations that
  play a part in developing the rural areas of that
  state. As a result, federal, regional, tribal,
  state, and local governments, along with the
  non-profit and for-profit sectors, all play an
  important role in the work of each State Council.
• The State Rural Development Councils define their
  own mission, structure, operating guidelines, and
  action plan. SRDCs rely upon time and resources
  volunteered by their partner members to address
  critical community concerns and to respond to
  fast-breaking opportunities. Currently, there are
  38 State Councils.

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A Specific Example

• The Mississippi State Rural Development Council
  hosted Regional Roundtable Discussions throughout
  Mississippi in 2000 that attracted local, state,
  and federal outreach groups interested in
  addressing issues of concern to the state's rural
  communities, including representatives from the
  Appalachian Regional Commission.
• MSRDC surveyed rural communities to determine
  their interest in the topic selection, identified
  speakers and partners, coordinated the time and
  location of meetings, and scheduled facilities.
• Tailored to address the concerns of the region
  where they were held, the roundtables allowed
  rural community leaders and citizens to network
  with government officials, talk with resource
  providers, and provide information about rural
  concerns and recommendations to address those
  concerns.
• Participants incorporated the information
  gathered through the roundtables into strategic
  plans. This is the Community Development Project
• Mississippi State Rural Development Council is
  also working with the Mississippi State
  University Extension Service, the Mississippi
  Planning and Development District, USDA-Rural
  Development, and the Tennessee Valley Authority
  to implement the Community Development Project.

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Another Partnership?

• The GREATER STARKVILLE DEVELOPMENT PARTNERSHIP is
  comprised of three member organizations which are
  committed to developing a prosperous economy and
  the highest quality of life in Starkville,
  Mississippi Oktibbeha County. Member
  organizations Starkville Area Chamber of
  Commerce Starkville Convention Visitors
  Bureau Oktibbeha County Economic Development
  Authority

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East of England Development Agency

• EEDA plays an active role in a number of
  successful initiatives with groups ranging from
  community based partnerships to large-scale
  projects like the Luton Vauxhall partnership

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Vauxhall Partnership

• When Vauxhall and its parent company GM Europe
  announced in December 2000 that it was to close
  its Luton Vectra production facility the East of
  England Development Agency (EEDA), set up a
  partnership group to tackle the impact of the
  closure on the local economy of Luton as well as
  on the employees at the plant who would lose
  their jobs. The partnership brings together a
  large number of organisations including Luton
  Borough Council, Vauxhall, government agencies
  and EEDA.

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Actions of the Vauxhall Partnership

• Retraining and Support Services The partnership
  decided that the immediate need was to identify
  the skills shortages in the local area, map the
  skills of the Luton workforce and then determine
  the retraining and re-skilling need for effective
  redeployment.
• Once this was completed the partnership moved
  quickly to secure funding to put a retraining
  program in place.
• Almost 1.5 million, drawn from various sources
  including the European Social Fund, EEDAs Skills
  Development Fund, Vauxhall and the Governments
  Rapid Response Fund, has been put into the
  programme. The Employment Service has also funded
  courses and altogether more than 1,000 employees
  have been retrained.

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Actions of the Vauxhall Partnership

• Counselling Services A help centre on site at
  the plant was set up to give workers access to
  welfare and financial advice and assess their
  retraining needs. A dedicated help desk for
  Vauxhall workers will now be provided at Luton
  town centres job centre. Employees have also
  been able to get advice and support on how to
  embark on new careers and preparing CVs. The
  partnership also assisted the provision of
  counselling services through a scheme run by the
  Luton Health Action Zone.

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Partnership Panacea?

• the experience of the Third Italy, where
  consensual networking appeared to be the secret
  behind a thriving regional economy, has been well
  publicized.
• It is easy to see why partnership is construed as
  the new panacea.
• The motives of a development agency for linking
  up with other public and private bodies may be a
  combination of push and pull factors
• on the one hand the search for functional
  advantages,
• on the other hand a constant quest for additional
  resources from other public and private actors.

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Two important aspects of partnership

• Motives and interests of the partners involved
• May differ between public and private actors and
  various tiers of government, and between
  divergent economic interests, different time
  perspectives, incompatible strategies, and
  territorial politics.
• Consequences for the participating organizations
• Who gets access to resources
• Who has most influence over the partnership

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links between networking and partnerships

• within the regional economic development
  structure of the late twentieth century, there
  arose a dominant partnership model approach that
  stressed the possibility of realizing synergies
  and capturing positive externalities through
  formal networking.

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advantages of partnership

• Increasingly innovative policies and better
  operational decisions
• Increased continuity and consistency in policy
• Better Resolution of conflict and disagreement
• Coordination and integration of disparate actions
  
• Aggregation of separate budgets
• High level of strategic planning and decision
  making

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Actions of the Vauxhall Partnership

• Support for Suppliers In December last year the
  Regional Supply Network East launched an
  excellence club to promote good performance and
  working practices for East of England automotive
  suppliers. To qualify for the 400 Club,
  businesses have to score 400 or more in the
  European Foundation for Quality Management
  Excellence Model, which sets standards for
  production processes, management techniques,
  performance measurement and customer service.

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NETWORKING AND INDUSTRIAL DISTRICTS NEW TYPES OF
INDUSTRIAL ORGANIZATION
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Networking through Industrial Districts

• Policy strategies of RDAs are increasingly aimed
  at developing organizations of small and medium
  enterprises (SMEs) through "networking"
  structures.
• Such arrangements are often referred to as
  industrial districts.

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The exact nature of these industrial districts
depend on

• Regional Governance
• Decentralization / regionalization of the country
  
• Local partnership
• Financial means
• Political debate. What type of support for
  endogenous development?

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There are lots of claims being made

• About being part of a cluster
• About being part of a network
• About being part of an industrial district

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Question

• What conditions are necessary for the
  establishment of formal organizational structures
  that will lead to firms cooperating within the
  process of production and therefore real
  networking?

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Scottish Enterprise

• The principal agency with the task for economic
  management of the Scottish economy, Scottish
  Enterprise (SE), has recently identified
  networking arrangements among SMEs as a way to
  achieve growth and hence job creation among them.
  
• acknowledges that there are problems with
  existing networking agencies within the Scottish
  economy
• Seeks ways to encourage the effectiveness of both
  formal and informal networking arrangements

60
Two major problems

• Why does Scotland generate so few new ventures,
  and
• Why do those ventures that are created seldom
  grow into substantial companies?

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Growth Rates

• low rates of enterprise creation , but
• growth of surviving enterprises was at least as
  good in Scotland as elsewhere.
• Conclusion problem was the overall birth rate,
  with the policy implication being that measures
  to expand the pool were more appropriate than
  "picking winners."

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The Role of Networking

• to achieve the desired objective of new firm
  formation is to be successful, an understanding
  of the essential components of successful
  networking is needed

63
A key question

• whether new firms are conducive to the creation
  of networking and industrial districts.
• based on the best practice models identified in
  regional economic regeneration strategies
  elsewhere in Europe and in North America, these
  strategies rely on trust and cooperation.

64
Exchange requires some cooperation

• wherever exchange takes place, either on the
  market or through firms, a degree of cooperation
  takes place.
• The division of labor, so crucial toThe Wealth of
  Nations, is dependent on cooperation between the
  parties involved

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cooperation and competition

• "Trading partners, derive mutual benefits from
  cooperation in production from which their
  incomes are ultimately derived, but they compete
  over the proceeds of production because what one
  gets the others cannot have. Every business
  relationship is therefore by its nature both
  rivalrous and cooperative" (Burchell and
  Wilkinson 1997, 219).

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Opportunism

• Important issue is how to keep Opportunism out of
  cooperative relationships
• The costs of using the market mechanism can be
  reduced by organizing production within the
  structure of the firm (Coase, 1937).
• Contracting arrangements can act as a means of
  reducing the costs of coordination, but there are
  costs involved in establishing and monitoring
  contracts (Williamson 1993).

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Alternatives to Contracts

• Two norms are widely accepted.
• (1) Commitments are to be honoured in almost all
  situations one does not welsh on a deal.
• (2) One ought to produce a good product and stand
  behind it" (Macaulay 1963, 63).

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Developing Trust

• Trust can evolve from cooperation
• Gambetta defines trust as "a particular level of
  the subjective probability with which an agent
  assesses that another agent or group of agents
  will perform a particular action, both before he
  can monitor such action (or independently of his
  capacity ever to be able to monitor it) and in a
  context in which it affects his own action"
  (217).

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Gambettas Assumptions

• If probabilities can be calculated then there
  must be some way to monitor behavior.
• If behavior cant be monitored, how is
  opportunism prevented?
• Gambettas answer institutions will develop
  which will ensure certain types of behavior

70
Not just transaction costs

• literature on industrial districts identifies
  trust and cooperation in a way that transcends
  the notion of simply reducing transaction costs
• "A carefully nurtured collective identity can
  potentially provide the social fabric which
  sustains cooperation in an industrial district as
  in a corporation" (Best, 1990, 237)
• This requires a relatively homogeneous system of
  values and views

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The example of Third Italy

• History of strife before World War II
• Selective history recall

72
Kinds of Trust

• Contractual trust is the trust that exists
  between trading partners and that results in the
  belief that goods will be delivered on time, be
  of the required specification and be of the
  agreed quantity and quality.
• Competence trust refers to the belief that a
  trading partner will fulfill a particular task.
• Goodwill trust occurs when initiatives are
  undertaken beyond the specific remit of a
  contract goodwill trust extends beyond existing
  relations and includes the transfer of new ideas
  and new technology.

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From contractual trust to goodwill trust.

• . Policy delivery can be utilized to promote a
  cultural change.
• Collective action needs to be developed to
  guarantee cooperation and trust within the
  productive system.
• Hodgsons example of seatbelts coercion plus
  education

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Potential problem of coercion

• Over-reliance on coercion, however, may well lead
  to distrust.
• Actors may well question the amount they are
  actually trusted if they have to be continually
  monitored.
• if one actor is able to exercise coercion over
  another this suggests an unequal distribution of
  power in the relationship. "It introduces an
  asymmetry which disposes of mutual trust and
  promotes instead power and resentment"

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A solution

• large organisations that are not able to make
  membership compulsory must also provide some
  noncollective goods in order to give potential
  members an incentive to join
• Group identity (dirty dozen example)

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Embeddedness

• Free rider problem
• Once established inter-firm relationships develop
  norms of behavior, custom and practice facilitate
  trust and cooperation, which can result in
  "embeddedness (Granovetter 1985).

77
The SEs Problem (sound familiar?)

• Scottish companies tend to be restricted to the
  peripheral, low value added areas of the sector,
  such as catering, supplies, labor-only contracts,
  and maintenance.
• Unable to integrate forward because of a lack of
  market strength and too low on the value chain to
  establish an export oriented sector of any note,
  such companies realize few opportunities by
  cooperating in an industrial cluster.

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Corporate venturing

• assistance to entrepreneurs or SMEs to exploit
  new ideas, corporate restructuring through staff
  creation of new independent businesses, and the
  development of new profit centers and
  subsidiaries to exploit new products, processes
  and markets.
• Major obstacles
• financing. Equity Gaps.
• the perception of entrepreneurs by the community

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What else reduced entrepreneurs?

• the very agencies established to promote business
  start-ups lacked trust and cooperation in the
  indigenous entrepreneurs under their charge.
• dependency culture in which it was believed that
  native Scots entrepreneurs could not be a dynamic
  part of the regeneration process
• AND

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Opposition to spin-offs and buy-outs

• There is evidence that RDAs and government
  departments have been opposing management
  spin-outs, effectively scuppering the opportunity
  for technology based developments by sanctioning
  the closure of RD laboratories in nationalized
  industries, and dampening enthusiasm and support
  for management/worker rescues of branch plant
  closures (Strathclyde Regional Council 1988
  Danson 1991).

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Hurdles

• Those who would have most difficulty establishing
  a business elsewhere - the young, women and the
  working class, appear to face higher hurdles in
  Scotland than in the southeast of England and
  beyond.
• Lack of security and of alternative employment in
  the event of failure, and the effects on family
  life of creating a new firm are the major
  concerns of potential entrepreneurs according to
  the SE report (1993, 24).

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Solutions?

• Mentoring
• Knowing an entrepreneur is an important rocket
  for changing someone from a potential to an
  actual business creator.
• Those who are most dissuaded from making the
  transition are least likely to have a set of
  relevant contacts

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The role of mulitnationals

• With an economy dominated by branch plants,
  however, it is unclear how multinational
  enterprises can be encouraged to adopt more
  cooperative strategies, and so to become more
  embedded into the Scottish economy.

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The Wheel of Local Development