How Smart Specialisation Strategies can impact the EU economy after Covid-19

The severe health crisis generated by Covid-19 will likely have an impact on economic inequalities, among EU Member States as well as among different regions within the states themselves. Differences in the possibility of fiscal response to the post-lockdown economies and previous histories of public finance management from EU regions are central points in the current policy debate in Europe, as those are the main factors contributing to widen or close the gap. Amid the political bargaining on a common Recovery Fund and while most sectors are being massively bailed-out with public money as a response to the immediate aftermath of the coronavirus crisis, the EU has mobilised unused funding from its massive architecture of Cohesion Policy directed, indeed, at addressing the economic gap among regions in the Union. With a look to the future of the economies, Cohesion Policy and European Structural and Investment Funds (ESIF) may be a key element in the EU response to Covid-19, since they are endowed with several market- driven and market-oriented mechanisms that can help policymakers match the policy response to the effective needs of their economies. In light of these considerations, an even more central role will likely be played by Research & Innovation (R&I) and Research & Development (R&D) policies: not only in with medicine, research and innovation are the primary engines for growth, competitiveness and prosperity in modern economies. In this regard, a tool that may and shall gain momentum is the Smart Specialisation Strategy (S3).

Smart Specialisation

As provided by the Regulation (EU) No 1303/2013 of the European Parliament and of the Council, known as Common Provision Regulation (CPR), a Smart Specialisation Strategy is defined as “the national or regional innovation strategies which set priorities in order to build competitive advantage by developing and matching research and innovation own strengths to business needs in order to address emerging opportunities and market developments in a coherent manner, while avoiding duplication and fragmentation of efforts; a S3 may take the form of, or be included in, a national or regional research and innovation (R&I) strategic policy framework”. S3 usually translates into practical policy tools in the hands of public administrators, namely the Research and Innovation Strategies for Smart Specialisation (RIS3).

Accordingly, the ‘Guide to Research and Innovation Strategies for Smart Specialisation’ (Foray et al., 2012), structures the concept of RIS3 as an integrated, place-based economic transformation agenda, with 5 main objectives:

1. To focus policy support and investments on key priorities, challenges and needs for knowledge-based development;

2. To exploit each region’s and country’s strength, competitive advantages, potential for excellence;

3. To support technological and practice-based innovation as well as to stimulate private sector investments;

4. To get stakeholders involved;

5. To be evidence-based and thus to include monitoring and evaluation systems.

Smart Specialisation is thus a key pillar in the architecture of the ESIF and in particular of the Cohesion Policy. In many ways, S3 endows the Union with a proper industrial policy (Radosevic, 2017) by tracing the strengths of the industrial framework, and by creating tools, governance set-ups and assets to enhance them.

As most of the literature on innovation policies shows, sector-neutral or horizontal policies, widely adopted in Europe before S3, have the advantage of improving the macro-components of a regional system while minimising the risks for the policymaker: diversification, networking and mobility of people can serve as processes to stimulate structural changes in a region (Boschma & Frenken, 2011). Nevertheless, in the case of European regions, with a high degree of heterogeneity of economic and industrial frameworks, so- called ‘horizontal innovation policies’ may reveal to be inefficient especially in transition- and less advanced-regions. Veugelers (2010), points out how horizontal policies in the European regional context failed to fill the knowledge gap between more and less developed regions, especially when innovation is a component of the public sector with very little guidance on private sector innovation. This policy failure is the main rationale behind S3: to offer guidelines and principles for local governments to re-engage in specific policies (Foray, 2017). Research and Innovation Strategies for Smart Specialisation (RIS3) are indeed non-neutral and vertical – as opposed to horizontal policies like R&D tax credit.

RIS3 and Cohesion Policy

Smart Specialisation is set as an Ex-ante Conditionality (Ex-aC) within the European Regional Development Fund (ERDF), as it applies specifically for Thematic Objectives 1 ‘Strengthening research, technological development and innovation’ (R&D target), and 2 ‘Enhancing access to, and use and quality of, information and communication technologies (ICT)’, namely ICT Broadband target (Reg. 1303/2013, Annex XI, Part 1).

Ex-ACs are crucial to Cohesion Policy, as they were introduced in 2014-2020 “to ensure that the necessary conditions for the effective and efficient use of ESI Funds are in place” (European Commission, 2020a). These conditions, of which 7 are general and 29 thematic and sector specific – like, indeed, Smart Specialisation – provide for action plans to be executed in the Operational Programmes (OP) of the Member States, when not fulfilled upon implementation.

With regard to S3, as set out in the CPR, all the investment priorities under Thematic Objective 1 of the ERDF, are subject to the Ex-aC 1.1 on R&I: “The existence of a national or regional smart specialisation strategy in line with the National Reform Programme, to leverage private research and innovation expenditure, which complies with the features of well-performing national or regional R&I systems”. Consistently with the Guide to RIS3 (Foray et al., 2012), the criteria for the fulfilment of the Ex-aC 1.1 are:

a. The put in place of a regional or national S3 that is based on a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis to concentrate resources on limited set of R&I priorities, that defines measures to stimulate RTD investments and that provides a monitoring mechanism;

b. The design of a framework outlining available budget resources for R&I.

At the same time, the criterion set for the fulfilment of Ex-aC 2.1 ‘Digital growth’ under Thematic Objective 2 (ICT target), is the implementation of a strategic policy framework for digital growth within the national or regional S3. The importance of S3 in the framework of ESI Funds’ Ex-aCs is thus primarily linked to a better targeting of support from the EU funds, and to a proper notion of Smart Specialisation, notably prioritisation. As assessed by the European Commission (2017), a “better quality of national and regional policy and strategic frameworks (achieved, for example, through the entrepreneurial discovery process required for setting-up S3 under Ex-AC R&I…) contribute to smarter public spending”. Accordingly, the same positive spill-over effects from setting S3 as an Ex-aC can be found on administrative capacity improvements and public-private investment link.

S3 in the post-Covid-19 era

Although with different magnitude across Europe, the Covid-19 crisis has had the effect of a double-sided economic shock, impacting both demand (due to the reduction in disposable household income) and supply (due to inactivity of producers in the lockdown phase as well as to the slowdown of global value chains). Beside the responses coming from fiscal and monetary policy at the EU level, micro- or sub-level of economic policy reactions are required to address newly created weaknesses and structural imbalances in the long run. In this regard, RIS3, if properly implemented, can help rebuild regional economies around innovation, particularly by addressing and prioritising the markets’ demand side.

RIS3, as a proper policy tool, is intended to be designed and implemented in six steps by each recipient-region:

1. Analysis of the regional context and potential for innovation;

2. Set up of a sound and comprehensive governance;

3. Elaboration of an overall Vision for the future of the region;

4. Identification of a limited number of priorities;

5. Establishment of suitable policy mixes;

6. Integration of monitoring and evaluation systems.

The governance of RIS3 in particular, as required by step 2, relies on two fundamental tools to demand-side economic policy making, namely the Quadruple Helix model and the Entrepreneurial Discovery Process (EDP), with the latter representing the value-added of Smart Specialisation. Firstly, RIS3 uses the Quadruple Helix model rather than the Triple Helix Model as it needs the engagement of civil society and end-beneficiaries of innovation, in addition to governments, academia and the business world. This is done so in order to lay the foundations for diverse S3 (Carayannis & Rakhamatullin, 2014) and to promote collaborative leadership (Martinex & Palazuelos- Martinez, 2014). Secondly, the EDP can be described using the definition of Benner (2019) as a “systematic effort of public-private dialogue that draws on quantitative and qualitative evidence, that includes the pooling of knowledge either multilaterally (e.g. in conferences or focus groups) or bilaterally (e.g. in interviews), focuses on prioritisation and action planning, and is meant to codify an emerging regional consensus on cross-sectoral economic development in a RIS3”. However, the EDP is not a clearly schematised process, since it relies mostly on the different regional institutional and market contexts and must be adapted accordingly.

The process is thus about prioritising investments based on an inclusive and evidence-based process, driven by stakeholders’ engagement and attention to market dynamics (Gianelle et al., 2016). The EDP addresses two dimensions of a RIS3 policy, namely the possibility for firms to open and explore new niches and their market potential, and the mechanism generating information on the value of domains for policy makers. Actors’ engagement is granted via two different models: participatory ones, including working or focus groups, partnerships, public-private committees, websites tailored for citizen participation; and consultation and evidence- based practices, like SWOT analysis, studies on scientific, technological and economic trends, competence and actors’ mappings and stakeholders’ surveys.

With adequate administrative capacity to set-up the governance, the EDP makes RIS3 a self-driven policy: stakeholders’ preferences trigger a priority setting phase (required in step 4) from which a limited number of innovation priorities emerges on the basis of market demand and points of strength and weakness of the region, as well as a Vision for the future (step 3) that sets the outline and the broader objectives of the strategy.

With the current state of affairs, no clear indication has been given on if and eventually how RIS3 would be redesigned for the 2021-2027 programming period. However, the European Commission guided by Ursula von der Leyen has shaped some of the priorities that the policy action will pursue, even more so in the aftermath of the Covid-19 crisis: among the others, energy, climate and sustainability and ICT and digital will be on the top of the next EU agenda. The priority areas, although different from each other, are inherently linked to R&D and R&I, thus strategic thinking on how to intertwine the three sectors will be required.

Energy and Sustainability

The first major policy area in which the Commission is set to invest is that of energy, sustainability and climate. The Union’s policy effort finds ground in the recently unveiled initiatives that build around the European Green Deal (EGD), a shared roadmap towards a more sustainable and green EU. Energy has always been a primary policy issue for the EU given the strategic and geopolitical role it plays for Member States, and it will assume an even more central function in the next Multiannual Financial Framework (MFF) due to its link with climate and sustainability goals. Nevertheless, energy investments play a major role in ESIF, and RIS3, already for the programming period 2014-2020. Figure 1 below shows the frequency of actions to be financed in the OPs for 2014-2020 ESIF of the 28 Member States. Energy efficiency is the first prioritised area with 39596 actions financed with EU funds: among those, Poland has invested the most with 4553 energy efficiency-related actions, followed by Spain (3769), Greece (2919) and Italy (2611) (European Commission, 2020b). Examining further, actions related to energy efficiency in the construction sector (Energy efficiency in Buildings) account for the most, topping 13706, while financed actions for energy efficiency in industry only amounts to 1827 among all 28 EU States (Figure 2).

In this regard, how can S3 and RIS3 positively impact the post-Covid-19 energy sector in the EU? The suggestion is that of effectively integrating the EGD goals, in particular those related to energy efficiency, in the place- based innovation framework of S3. RIS3 – with about 7 years of full implementation by all the EU regions – offers a variety of local structured platforms for stakeholder engagement. If effectively linked to the use of S3 funds, such as by setting energy efficiency targets as criteria for the fulfilment of the Ex-Ac within Thematic Objective 1.1 of ERDF, local-led and bottom-up processes like the EDP can gather market actors’ attention around the development of new green technologies. This in turn would foster both competitiveness and possible know-how spill-overs among market makers, all directed towards green and sustainable innovation. With substantial evidence concerning an already existing and developed investment base in energy efficiency, an integrated solution with RIS3 policies would also help rebalance investments towards energy efficiency in industry, with a sizeable incentive for green transition to SMEs, representing the core of industrial sectors in less developed regions. Moreover, several econometric evidences show that green technologies tend to build on existing capabilities (Santoalha & Boschma, 2019): the critical mass needed by regional and local economies to develop a functional RIS3 may indeed represent the capability discussed by the literature.

This said, capabilities are not only market-related, but also administrative. Although some studies point to an increased level of local policy design and delivery in the last few years for less prosperous regions in Europe (McCann & Ortega-Argilés, 2016), reduced capacity building of local policy makers may negatively impact the process. It is eventually a task of national public administrations in the individual Member States to address the issue according to the respective constitutional frameworks. Previous experiences with RIS3 may have contributed in enhancing the ability of virtuous local administrations to set bottom-up governance processes (for example, the EDP) as they may have helped in building an “administrative critical mass”.

Another major implication of integrating EGD goals with S3 funds may be the possibility of a beneficial shift towards an effective urban dimension of climate and sustainability policies. Cities and communities, while substantially contributing to climate change because of factors like consumption patterns, can nevertheless serve as catalysts for green change if properly stimulated by policy. Indeed, large cities and especially capitals, are responsible for 70% of the global Greenhouse Gasses (GHG) emissions (Joint Research Centre, 2019); at the same time, being both economic hubs and clusters of innovation, cities may be active promoters for agenda setting and changing. An example in this sense is represented by the Innovate4Cities project (Global Covenant of Mayors for Climate & Energy, 2020), that have reunited 9261 cities (8800 of which are Europeans), to set a global coordinated agenda for research priorities in the field of sustainability.

RIS3, for its structure and purpose, is the only EU policy that can better target cities and to which to attribute an effective urban dimension. One of the underused features of RIS3 policy design is the implementation of pilot projects before the official launch of the strategy. Large cities and capitals may be a perfect place for targeted policy experimentation in green and sustainable innovation, provided that both the city and the respective region has the right incentives to develop pilot RIS3 projects.

Digital and ICT

The other major area on which the EU will most likely focus its policy efforts is the broader area of Information and Communications Technologies (ICT) and the Digital market. Because of its nature, ICT is inherently linked to R&D-I and thus can have a significant impact on RIS3 policies for 2021-2027. Like in the field of energy, the Commission defined an outline on which its digital policy action will focus, by unveiling the EU Digital Agenda in February 2020. Among the policy initiatives deployed by President von der Leyen, the EU Data Strategy stands out with an ambitious objective of achieving a data economy worth about €800 million by 2025 (European Commission, 2020d).

Artificial Intelligence (AI) will also play a fundamental role in the next digital agenda of the EU, “provided it is human-centric, ethical, sustainable and respects fundamental rights and values” (European Commission, 2020c), and so will other new predictive technologies like blockchain and supercomputing. With specific regard to RIS3, these technologies may be of crucial importance in addressing the issue of low-performing administrations in the policy design of their S3. Predictive AI-driven models can substitute and overcome classic SWOT analyses in step 1 of RIS3 design – the analysis of regional economic context – resulting in marked improvements in efficiency. Similarly, the development of AI or blockchain technologies in an integrated system involving RIS3 public governance and final beneficiaries, may provide a sound monitoring and evaluation (M&E) system for the use of S3 funds. A fast and reliable M&E system will help target shifts in demand for innovation due to eventual new virus outbreaks and consequent lockdowns, and thus support reshaping regional priorities for RIS3.

The field of ICT and new technologies is of course a particularly tricky one to deal with, considering the very diverse levels of digitalisation of Member States. Indeed, in this regard RIS3 in 2021-2027 can help generate demand for new technologies, fostering a bottom-up process of innovation in AI, blockchain and supercomputing that can level the digital gap among regions. A push towards the use of new technologies in RIS3 policy design and implementation, by providing a clear and sound regulatory framework for their use, seems a feasible objective for the new EU Digital Agenda.

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