A new step towards the development the local nodes of Regional Innovation System in the Basque Country? A case study1
Mari Jose Aranguren ESTE-University of Deusto and Basque Competitiveness Institute Paseo de Mundaiz, 50, 20.002 San Sebastián, Gipuzkoa (Spain) Phone number: 943326600 Fax number: 943851681 Email address: [email protected]
Mario Davide Parrilli, University of Birmingham University of Birmingham Edgbastob, Birmingham B15 2TT, UK Phone number: 44 (0) 121 4143344 Fax number: 44 (0) 1214147151 Email address: [email protected]
Miren Larrea, University of Deusto ESTE-University of Deusto Paseo de Mundaiz, 50, 20.002 San Sebastián, Gipuzkoa (Spain) Phone number: 943326600 Fax number: 943851681 Email address: [email protected]
Abstract
The goal of this paper is to illustrate, trough a case study, the role that learning processes play in the innovation capacity of SMEs and, consequently, in the competitiveness of firms and the development of the area where they are localized. Dynamic processes are expected where learning processes generate knowledge that makes it possible to spur innovations that are needed by the local production system to maintain its competitiveness in global markets. To achieve such goal two intermediate objectives have been established. The first one is to present a conceptual model where learning processes, together with innovation systems and clusters & networks of a region are the main pillars of the innovation capacity of SMEs. Following such conceptual model, the second objective is to analyse the situation in a county of the Basque Autonomous Community. At this point, it will be argued that learning processes are frequently localised and socially embedded; for instance, „counties‟ (geographical units formed by several municipalities but smaller than provinces) can play a relevant role in the application of such policies. Concluding remarks will be derived from the case study that point to two challenges that local agents involved in the system of knowledge generation and of innovation policies will face in the future.
1 This paper has been financed for the Innovation and Knowledge Society Department of Gipuzkoa Deputation and is co financed by the European Union.
1. Introduction
From the late 1980s, the current intensification of global competition has compelled any countries and regions to assume a proactive approach to innovation taken in its broadest sense that is as upgrading of products, processes, organization and markets (Schumpeter, 1934; Pyke and Sengenberger, 1992). In many cases the innovation effort focuses on large firms (e.g. „national champions‟) as they have sufficient resources to devote to activities that generate innovations, such as research and development (R&D), market explorations and surveys, among others (Schumpeter, 1934). These efforts are more hardly practicable by local production systems based on small and medium firms (SMEs) because of the lack of human and financial resources to devote to R&D and to other innovative practices. For this reason small firms often experience market failures as despite the (relative) demand for innovation that they face in their own countries and abroad they are not able to provide it (Stiglitz, 1998).
These difficulties motivate us to undertake the following analysis on small firms and innovation in SME-based local economies. Within this paper we first undertake a theoretical analysis of the components that may promote innovation generation within these kinds of economies; on this basis we propose a theoretical framework for innovation that can help a systematization of research and policy-making within these contexts. In particular, we show the importance of discussing the development of SME- based economies on the basis of the „critical mass‟ of enterprises that is capable to develop economies of scale and scope at the territorial level. We also emphasise the importance of „innovation system‟, taken at different levels (including the local level); finally we associate the innovation generation to the „processes of learning‟ that represent the „software‟ that can make the innovation systems (the „hardware‟) work effectively for the promotion of innovation at the local level.
Afterwards, we undertake an analysis that helps us apply these concepts and theoretical structure to a specific case study; the Urola Medio county in the Basque Countries, Spain. This region (CAPV) counts with a notable innovation system; however, it shows the difficulty to transform knowledge generated through R&D in universities and technology centres into real innovations used by firms. Overcoming this obstacle represents one of the main objectives for the public administration in the CAPV. One of the main ways that are currently proposed envisages an important role for the „counties‟, their development agencies and the learning processes raised at this level as a means to promote a more effective working of the national/regional innovation systems for the benefit of the local production system. This hypothesis is based on the conviction that collective learning processes may be catalised more efficiently at the local level than at higher administrative levels alone (e.g. the region).
In Section 2 we discuss three concepts that are relevant to promote innovation across small firms. In Section 3 we formulate a theoretical approach to innovation „in‟ and „through‟ small firms that pulls together different streams of the literature on small firms and knowledge acquisition. In Section 4 we propose the application of the Urola Medio county in the Basque Countries. We then draw a final section that includes some suggestions for analysis and policy-making in contexts of SME-based local systems.
2. A Few Relevant Concepts
Significant strands of the literature stress that innovation is not just an issue of formal and codified knowledge production and transfer (based on R&D expenditure) but involves a wider range of experiential knowledge passing across actors, firms and localities in a tacit form and on the basis of regular, informal interactions and learning-by-doing processes. This second way to innovate is complementary to the first, and this way offers new opportunities for innovation promotion in SME-based economies (Maskell, 1998; 2004; Johannisson et al., 2002; Dei Ottati, 1994.
For this set of reasons we start a search for an appropriate framework and for adequate concepts that may help us understand the issues of innovation and may help formulate a theoretical framework that hinges on a dynamic creation of innovations and innovative practices among local production systems in developing economies.
2.1 The Critical Mass of Firms
From the 1980s the literature on small firms observed that the development of the local and national economies is likely to be weak if it is analyzed on the basis of individual, isolated firms taken independently from their capacity to generate scale and scope economies on the basis of agglomeration and networking with other firms (Brusco, 1982; Piore and Sabel, 1984; Becattini, 1990; Schmitz, 1995; Johannisson and Monsted, 1997). As a matter of fact, this variegated literature identified industrial districts and clusters, among others, as effective systems that small firms may exploit to build up competitive collective strength and to compete in international markets.
Clusters and districts represent similar systems of collective competitiveness based upon the geographical proximity of firms, which operate within a specific sector. This proximity favors the development of joint actions (e.g. credit consortia) and the reaping of external economies, e.g. free flow of innovations (Schmitz, 1995). In the case of industrial districts some specific features need to be added, which reflect the „institutional thickness‟ created by several proactive local institutions coordinating business development services and representing small firms before the political authorities (Amin and Thrift, 1994), insofar as a homogeneous social fabric that promoted trust and cooperation among firms for decades (Brusco, 1982; Becattini, 1990). Both of these latter factors contribute significantly to the formation of the „industrial district‟ model and make this quite distinct from the more open definition of clusters, which are based on geographical and sector proximity only (Schmitz, 1995).
In both cases, however, important experiences show the extreme success of this kind of collective actor. The successful cases of hundreds Italian industrial districts (e.g. Prato and Carpi in textiles, Brianza and Matera in furniture, Bologna and Modena in the motor industry, Sassuolo in tiles) is complemented by that of many clusters in both industrialized economies (e.g. Silicon valley and Route 128 in the US, Baden- Wurttenberg in Germany, South-west Flanders in Belgium, West Jutland in Denmark: Schmitz and Musick, 1994) and developing countries (e.g. Sinos Valley in Brazil, Agra in India, Sialkot in Pakistan, Gamarra in Peru, Leon and Guadalajara in Mexico, Rafaela in Argentina: Nadvi and Schmitz, 1999). In all these clusters and countries is extremely evident the collective strength developed by a critical mass of local enterprises capable to develop joint actions (e.g. export consortia, common purchase of inputs) and to reap a number of important external economies (e.g. flow of information and skilled labour); as an effect local firms have acquired the capacity to stay in national and international markets very competitively.
The concepts of clusters/districts discussed through the evolution of the literature on small firm development, help defining the issue of innovation promotion in localities where rarely large competitive/innovative firms operate and the majority of small firms follow obsolete routines in both production and commercialization. The subject of innovation insofar as the subject of economic growth in this localities cannot be the individual small firm, but it needs to be „collective‟: the cluster of a critical mass of enterprises and institutions.
2.2. Innovation Systems
2.2.1 National and Regional Innovation Systems
Small firms are often unable to produce radical innovations because of their limited size and resources that lead them to fail in creating relevant markets; e.g. for innovation, credit (Stiglitz, 1998); they lack resources to invest in R&D and they lack human capital (not necessarily in terms of quality, but for the small number of workers) to devote to activities that are likely to generate innovations within the firm (e.g. process, organization) and in its relationship with the market (e.g. new distribution channels). For these reasons, small firms may rather benefit from being part of an innovation system where public and private institutions cooperate among themselves and with firms in order to promote innovations via collective efforts (Cooke, 1996). This is why a specific concept developed within the literature on innovation is important here, the „innovation systems‟. This concept has been developed along the lines of „national innovation systems‟ (Lundvall, 1992; Nelson, 1993) and „regional innovation systems‟ (Cooke et al., 2004; Morgan, 1996). Both of these approaches show the importance of constituting networks of institutional and socioeconomic actors that contribute to innovation within their regional or national territories. Public policy may target universities, private and public labs, business incubators, science parks, technical schools and venture capital providers to build up a system that generates new ideas about product, process, organization and markets.
Innovation systems can be built up in both advanced and traditional sectors (Asheim and Coenen, 2006). Innovations are not exclusive outcomes of firms involved in high technology sectors (e.g. pharmaceuticals, biotechnology, telecommunications), which are certainly enmeshed in processes of continuous upgrading at a speed which is uncommon for any other sector; traditional sectors as well are capable to produce innovations, such as in the well-known case of the Italian and French fashion industry.
Overall, the analysis and discussion of innovation systems add relevant aspects in the search for a systemic approach to innovation for small firms in local contexts in developing economies. These aspects in fact complement the findings of the literature on clusters. This strand of the literature (innovation systems) reaffirms the importance to have a significant number of public and private institutions that operate in the field of innovation generation and in its application to the (local and national) production system. This may add greater heterogeneity and richness of institutional and socioeconomic actors that create the fertile ground to promote innovation in contexts populated by a dense fabric of traditional (and a few medium to high-tech small firms) in developing economies. As a matter of fact, also the concept of innovation systems stresses the relevance of collective action for the promotion of innovation and development within systems of small firms in developing economies.
2.2.2 Local Nodes within the National/Regional Innovation Systems
A last issue refers to the boundaries of the innovation system. It is true that national and regional innovation systems are important because firms, clusters and districts actively involve with actors generating innovation outside their narrow municipal borders (Cooke, 1996; 2004); however, it is also true that clusters and districts operate within specific sectors and exploit joint actions and externalities generated by their proximity to similar firms in the same sector. For this reason, it may be appropriate to couple the idea of national and regional innovation systems with that of „local innovation system‟, or at least of local „nodes‟ within the regional innovation system that may provide at the local level those inputs that are essential in the process of innovation promotion. The creation of a local innovation system, or of local nodes, complementary to the regional innovation system, but more focused on the specific needs of local sectoral firms and on their complementarities and possible joint actions oriented to generate sectoral innovations that are suited to local use. This means that a critical mass of actors working for the promotion of innovation may (should) also be operating at the local level. In this sense, this localities do not represent maybe a local innovation system themselves; but represent key „nodes‟ working together with other regional institutions for innovation promotion.
This argument is in line with what Morgan (1996) refers about the need to delegate centralised power to local departments, provinces, counties that are in better position to establish long-lasting and interactive relationships with the firms and their associations. Again, the most successful experiences have normally been activated in geographical concentrations of SMEs (e.g. industrial districts in Italy, Denmark, Belgium, Spain, amongst others).
This discussion on innovation systems is particularly relevant in the context of economies based on SMEs operating in traditional sectors where (radical) innovation capacities are lacking from the cluster/district, but frequently also from the institutional system. Within the above-mentioned approach, policy-makers have the opportunity to implement several vertical policies (Lall and Teubal, 1998) that may help build a system of proactive institutions that promote innovation at the national and regional level. For example, in the case of clusters of furniture firms it may mean introducing one or a few among the following: technical schools for carpentry, centres for design of new furniture, labs for testing materials and colors that may be adopted and improved for use in the furniture industry, centres for strategic management and international trade fairs that may help introducing new ideas also about management, organization, products and techniques that may be adopted in other systems.
2.3 The Learning Processes
Another theoretical aspect which is extremely relevant in the context of SME innovation in developing countries refers to the „learning processes‟ within local, regional and national production systems. This concept introduces the aspect of the indispensable dynamism in the innovation process; this is not a simple output of specific inputs; it is not a direct effect of setting up several support institutions and service providers, but the product of a complex interaction that needs to be driven and sustained over a long time span. Systemic innovation is hardly possible if the system is not prepared to undertake efforts over the long-run; in fact the generation of knowledge and innovation is based on processes of accumulation of human and social capital, and these need time to materialize (Guerrieri and Pietrobelli, 2004; Cohen and Levinthal, 1990). This feature is an essential aspect of any substantial innovation process that involves a number of actors in a dynamic creation of new products, processes, organization systems and market channels at the level of both the firm and the cluster/innovation system.
In this respect, we may say that the innovation systems constitute the „hardware‟ for the generation of innovation, it represents the machine, the device; however, this device may be static and unproductive if it is not operated through specific „software‟, programs that are fine-tuned to the capacity of the machine and to the needs of the operator; these software permit the operator (the „subject of innovation‟, i.e. the people, the firms, the clusters and the chains) to materialize ideas, designs and projects that make a change with respect to the past. In practice, labs, universities and technical schools may be run inefficiently if they are not matched by dynamic capabilities extended throughout the economically active population, which undertakes a learning process that allow it to incorporate the codified information/knowledge elaborated within those specialized institutions and make it productive and useful within the routines and interactions that take place daily within the local production system (Lall, 2001). Lundvall (1992) identifies the „innovation system‟ with the interactive process that takes place across the social and economic agents of the „hardware‟; in this sense we prefer maintaining the separation because the existence of an innovation system does not necessarily imply the efficient and effective working of the whole. This is particularly evident in developing economies where the creation of public institutions does not imply active interactions with the private sector and their strategic success in the promotion of innovations across the economic fabric of the locality (Romjin, 2002; Parrilli, 2002). The literature on learning processes (Cohen and Levinthal, 1989; Langlois, 2003; Parrilli and Sacchetti, 2006) shows that these take place through two complementary actions: 1) adaptation of the external knowledge input to the local environment and, 2) modification of the local system so as to respond to the operating requirements of the knowledge input. The processes of assimilation and adaptation of external knowledge are essential to incorporate new competitive advantages into the local system, which needs to be flexible enough within and across firms as a way to acquire codified and tacit knowledge. Relevant empirical studies show that this process is supported by the presence of specific elements that help the local/national production system to identify the key knowledge inputs and the ways to adapt it to local and national demands; the most important is said to be investment in R&D, e.g. labs (Cohen and Levinthal, 1989).
Simultaneously, „the modification of the environment‟ is also fundamental, for its capacity to transform the production system and to make local enterprises more competitive and capable to respond to consumer demand in global markets; this may mean creating a number of mechanisms that help responding to market failures and that constitute incentives to develop dynamic economic actions. It is the case, for example, of the creation of guarantee funds that permit small firms to access formal credit (Langlois, 2003).
Overall, these two capacities represent learning processes that local and national production systems need to undertake to increase their innovation capacities. The first capacity guarantees the ability of the system to incorporate new ideas and to make them work within the local system; the second represents itself the creation of new structures, which permit to strengthen the local specificities and to ease the insertion capacity of the local system in international markets.
In the learning processes there are important aspects of “codified” and “tacit knowledge” networks. These features of the learning process are relevant to discuss the appropriateness of the concepts of „clusters‟ or “district” for SME development. It is recognized that „codified knowledge‟ should be acquired from wherever it is; but the second component, „tacit knowledge‟, remains particularly important within clusters and districts, because proximity permits a closer interaction through which this kind of „experiential knowledge‟ passes across the local production network and increases its innovation capacity (Maskell, 1998; Audretsch, 1998; Maskell, 2004; Asheim and Coenen, 2006). In fact, „tacit knowledge‟ and the overall process of its construction, absorbs key aspects from its local roots due to the specific culture that can be found there, which changes from cluster to cluster and from locality to locality (Antonelli, 1999).
The issue of „learning‟ is particularly relevant in localities, where in its clusters the division and specialization of labour has not reached yet a significant depth because the processes of learning are very often based on tacit on-the-job learning, but very little on formal learning activities, which also need to be structured and developed and that, once in operation, are likely to reciprocally feed a more dynamic and strong acquisition of tacit knowledge. On this aspect we recoup the original contribution by Lundvall (1992) who assumes that learning is a predominantly interactive process, which is socially embedded since it can be deeply understood only by taking into account its institutional and cultural context. This means considering also the objectives of public institutions that refer to creating the conditions (in terms of both formal rules and informal norms of trust and mutuality that form the local social capital) to stimulate the auto-organised learning capacity within the local context, which involves firms, associations and public institutions (Sabel, 1994).
3. Linking the Three Streams in a Tripartite Framework: ‘Hardware’, ‘Software’ and the Subjects of Innovation
The afore-mentioned concepts may have relevance within the tripartite framework for innovation that we propose in the case of SME-based local production systems. In particular, we exploit the three selected elements and make them pillars of a triangular theoretical structure that helps systematize the relevant aspects of innovation for small firms in developing economies where the resources for more formal investment in knowledge production are limitedi. These three pillars are interdependent, as it is shown, for example by the above-mentioned mutual strengthening taking place between the concepts of „cluster/district‟ vs. „tacit knowledge‟. Figure 1: the Tripartite Framework for Innovation and SMEs
INNOVATION LEARNING SYSTEMS PROCESSES
CLUSTERS & NETWORKS
A scheme that takes into account these three concepts linked in an interdependent structure has the opportunity to generate a system of mutual relations among the „collective subject‟ of SME development (the cluster, the district, the chain, the network), their surrounding system of institutions, sectors and territories conforming the „hardware‟ of innovation processes, and the learning dynamics based on capabilities („the software‟ of innovation) and interactions that over a long time span help the „hardware‟ to absorb tacit and codified knowledge, to adapt external knowledge inputs and to modify the local environment. This tripartite scheme is thought to produce a mutually reinforcing development and innovation process. Firstly, without clusters, districts, chains, filieres and networks (the „subjects‟ of innovation) small firms would be too weak compared to larger enterprises in global markets (Schmitz, 1995); they would be less likely to spur regional and local authorities to set up regional and local innovation systems and to promote an effective interaction; they and their firms would operate on an individual basis, interpreting the context, but hardly modifying and innovating it. This is also likely to reduce the speed of their learning process. Secondly, without the creation of local and national systems of innovation, the effort of groups of enterprises (clusters, networks and value chains) would be too weak, since the financing of relevant activities (e.g. R&D, stages abroad for skilled human capital, qualified technical assistance) and institutions (e.g. R&D centers, universities) is too expensive to be financed by small firms only. The process of innovation would lack the „institutional thickness‟ that is necessary to make the system work efficiently and competitively (Amin and Thrift, 1994). It is usually responsibility of the state, regional governments and combined public/private agencies to set up these organisations and to promote their own „institutional‟ learning (Lundvall, 1992; Cooke, 1996; Nelson and Sampat, 2001; Maskell, 2004; Asheim and Coenen, 2006). In fact, innovation systems create a number of spillovers that can be reaped by districts and clusters of firms more easily than by individual isolated firms; the critical mass of firms eases the absorption of knowledge spillovers from close institutions and other centres of knowledge creation via informal interaction that facilitates the flow of information across the local agents. Thirdly, without undertaking a complex learning process, e.g. the daily two-way interaction between local firms and institutions that proactively modify their own environment and the social mechanisms needed to guarantee the efficiency of firms and clusters (e.g. credit consortia), knowledge would be hardly built up and firms would hardly improve their traditional production modes. Knowledge is the result of an accumulation process that requires time and effort (Guerrieri and Pietrobelli, 2004), as well as an interactive process of a critical mass of enterprises and institutions (i.e. cluster, networks) that focus on their systemic innovation path and improve their overall performance through an experiential sequence of collective trials and errors (i.e. the learning process).
Key pieces of research have been published by Lundvall (1992) that recognize the dynamic interplay between learning processes and innovation systems, and by Asheim and Coenen (2006) and Cooke et al. (2004; 2006) that identify the strong interdependence between clusters/districts and regional innovation systems as complementary systems especially in the context of analytically-based research contexts. Drawing on these seminal contributions, we present the triangular structure as an analytical scheme that may deliver inputs to policy analysis in the context of developing economies and small enterprise-based economies, where market failures limit their capacity to upgrade their technological production system in its broadest sense.
3. Application to Urola Medio, Basque Country
Following the tripartite innovation framework for SMEs-based economies, we now analyse two of its three components (innovation systems and learning processes) in a Basque Country county, Urola medio. With these elements we argue that in the Basque Country counties could have an important role to increase the effectiveness of the Basque Innovation System effectiveness.
The county of Urola Medio, within the province of Gipuzkoa is localised within the area called Urola Costa (see Figure 2). It is an area with industrial specialisation that counts with a population of 25,000 inhabitants.
Figure 2. Counties in the Basque Country on the basis of their GDP contribution
Plentzia Mungia Bajo Bidasoa Gernika Bermeo Markina Gran Bilbao Donostialdea Ondarroa Bajo Encartaciones Deba Durangesado Urola Costa Tolosaldea Arratia Cantábrica Nervión Alavesa Alto Deba Goierri Menos del 2% del PIB Estribaciones Del Gorbea Entre el 2% y el 10% del PIB Más del 10% del PIB Llanada Alavesa Valles Alaveses
Montaña Alavesa
Rioja Alavesa
Within Urola Medio there are 1.858 firms that become 2016 if we include the subsidiaries of current firms (EUSTAT, 2007). These employ 10,192 people with an average of 5 workers per firm; 91.4% with less than 10 workers, 6% between 10 and 50, 1% between 50 and 249, and 0.2% with more than 250 workers (Instituto Vasco de Competitividad, 2007). 49.41% of total employment is generated by manufacturing whereas 38.1% are in services and 9.73% in construction. The manufacturing activity is developed within woodworking and furniture industries, steel and machinery production (Aranguren et al., 2007).
3.1 Innovation System
Considering the „regional innovation system‟ as the simple compound of public and private institutions (and firms), without considering the active interactions taking place among them, in the Basque Country innovation policies are created by the Basque Countries‟ Department of Industry, Commerce and Tourism, although the Department of Education is also important. In 1997 the Basque government approved the Plan of Science and Technology 1997-2000 that conceived the innovation process as a systemic model. One of the major efforts realized by the government was the creation of the Basque Network of Sciences and Technology (SARETEK) in 1997 with the objective to pull together all public and private entities that promote science, technology and innovation as a means to improve the competitiveness of the region. In the period 2001- 04 the Plan developed a more complex innovation model that keeps into account the international context and the society as a demanding agent for science, technology and innovation. In the current period, the Plan of Business Competitiveness and Social Innovation (2006-09) focuses on a new network, „Innovanet‟, created as a result of the public Forum for Competitiveness Euskadi 2015. This network is thought to strengthen the coordination within the Basque system of innovation through the integration of the Basque government, the Provincial Councils and the local development agencies in order to reach an optimal capillarity for the consolidation of the regional innovation policies and their reach to the local SMEs. This is supposed to create intermediate arenas for innovation through the creation of „territorial circles of innovation‟ that represent spaces and moments for multi-agents meeting and collective/mutual learning that favor the search for joint reflections and solutions on the local territory (Plan Gipuzkoa Berritzen, 2006).
Within the Urola Medio county there are few members of Saretek; these are the technology centre Cidemco, operating on research in materials (e.g. biotek-wood) and techniques of production in both construction and furniture, including the utilization of mechatronics and production engineering. The only business association is Enbor, for producers of furniture, parts and materials; there is also Urola Lanbide Heziketa, a training centre for this industry that displays modules for the construction of machinery and for mechanics assistants. Interactions between these agents centre in the production of furniture, but are quite limited in extent. In the county several municipalities and the local development agency formed a Forum for cooperating on issues of knowledge and innovation, „Ezagutza Gunea‟; however, the number of small firms (between 10 and 49 employees) that participate to some innovation projects within this network are currently few (Aranguren et al., 2007). Tabla 4. Relation with agents of the Basque system of innovation Nº interviewed % of Questions and criteria of assessment who selected this option surveyed people I know which are the No or little 30 61,2% agents of the Basque Enough or very much 19 38,8% system of innovation Total 49 100% I participated in at No or little 38 79,2% least one innovation Enough or very much 10 20,9% project with some agents of the Basque Total 48 100% innovation system Fuente: Aranguren et.al., 2007: …..
3.3 Learning processes in Urola Medio
Our main hypothesis is that effective innovation processes require not only a system of institutions devoted to knowledge generation, but also of dynamic learning processes that permit to transfer this knowledge to the economic arena; moreover, we propose that the county may play a significant „nodal‟ role in the assimilation and reproduction of knowledge generated by the national/regional innovation system when learning processes are activated by means of dense local economic, social, institutional and cultural interactions. Projects such as the network „Innovanet‟ show the interest of the Basque government and of Provincial Council to spur new opportunities for public-private cooperation at the local level.
The case of Ezagutza Gunea is illustrative. It is a forum for the management of training and knowledge that has been created in Urola Medio with the promotion of the local development agency, Iraurgi Lantzen. It is a meeting environment for firms, training centres, municipalities and the local agency whose mission targets four main areas: a) the development of processes of reflection and joint learning; b) the development and application of means for effective qualification of local people, i.e. workers and students; c) the adaptation of the training offer of education centers to the needs of the area; d) the implementation of policies and strategies that spur the creation of an innovative environment. To develop these areas the forum creates spaces for cooperation among agents both within Urola Medio and outside to work in a more entrepreneurial and practical way to promote local cohesion; the „hardware‟ component is organised around three “gunes” or working groups led by firms and their association (Enpresa Gunea)2, education centres (Prestakuntza Gunea) and the municipalities and the local development agency (Garapen Gunea). Each of these working groups leads some strategy and work with the support of the other agents. In the first area, the mission of the firms is to create processes of joint reflection and learning by means of auto-organised learning groups. This means that the group defines its own priorities and the search for experiences and consultants that may help to upgrade processes. For instance, the firms‟ personnel managers defined a line of work on “sharing experiences to reach practical objectives such as updating specialist knowledge in human resource management”. A new working group of general managers was formed and a third group has been formed by the production managers. This latter group, for example, defined its mission as follows: “This group wants to be a learning forum to share experiences and concerns in production
2 Azcue y Cía. S.A.; Biele S.A.; Corrugados Azpeitia S.L.u., Grupo Gallardo; GSB Acero S.A.; Ibarmia S.A.; Danona S. Coop.; Domusa S. Coop.; Grupo Glual; Grupo Grumal, Grupo Sarralle; Juaristi TSCO; Lan Mobel S. Coop. on the administration of continuous upgrading”. Their philosophy is “… to pursue our objective of learning from each other not only through formal training, but also through direct on-the-job training and technical assistance. Our desire is to create trustful relationships to develop cooperation networks among us”. Another group focuses on the difficulties faced by firms with less than 50 employees to get involved in the dynamics proposed by the other firms in the forum. They decided to realize an analysis of the competitiveness of their firms as a basis to find appropriate ways in which to integrate small firms in the network. More specific working groups are being defined within this category of firms, most of which are suppliers of the 12 largest firms.
In figure 3 we represent the local network that is being generated around dynamics of collective learning. The persons are the core of the learning process; this is why the „nodes‟ of the process are persons. The potential of these learning processes, which reflects on the innovation capacity of the firms, is based on personal attitudes and capabilities as well as on organization and business culture.
Figure 3. The network Ezagutza Gunea
Gerentes
Representantes de Empresa n ayuntamientos, agencia, centros formativos Responsables Personal
Responsables Producción Responsables empresas 10-50 empleados
Ezagutza Gunea is based on trustful relationships that have been generated through processes of collective learning developed by the agents. This makes the innovation „hardware‟ and „software‟ developing; the eventual impasse in these processes (software) may lead the material network (hardware) to disappear.
Taking into account that the network „Innovanet‟ is trying to incorporate these hardware components (the three „Gunes‟) to develop other different software processes, questions arise about the validity of these hardware components for software that are planned top- down by high administrative levels (e.g. the Basque government) and also about the possible co-existence between the current software components (bottom-up county projects) and the same hardware (the county network Ezagutza Gunea) with new software components (projects) proposed by higher level administrations. A preliminary response comes from two cases of collective learning processes. In this county, some firms compete amongst them within the same market; this is why it is not easy to raise cooperation within the local forum, in particular in the area of strategic knowledge. Within the furniture cluster, cooperation promotion succeeds in certain aspects only, such as training and management methods. However, some very strategic areas do not stem any cooperation, such as brand management, design and access to markets (MIK, 2006).
The first case refers to the education model defined within Ezagutza Gunea. The first phase of this process has been the creation of a common language and mechanisms to help target the kind of knowledge that local firms want to generate and transfer. The first step was the definition of professional roles and critical competences (technical and attitudinal) for each of the main sectors in the county (furniture et al.). These figures and competences were consensuated among the firms‟ personnel and production managers. The various sectoral groups started simultaneous learning processes; in some cases they prioritized technical learning to elicit specific competences. In these cases, the employees are involved in specialised operations such as the varnished of wooden furniture; in other cases, processes oriented to the improvement of management were chosen, e.g. „continuous improvement‟ for production managers. Enpresa Gunea has been active in other relevant sectors too. In steel production, the lack of technical education has been identified as a major problem. As a response, producers are working to elaborate an auto- didactic CD Rom that helps new employees to acquire basic knowledge on products and processes simultaneously to their incorporation to the firm. In the case of the firms with less than 50 workers, the projects focus on more strategic areas, e.g. internationalisation of firms and strategic planning.
The second case refers to the assimilation of new management models. The firms identified this as another area for cooperation. They shared the analysis of the firms and focused on the weaknesses in firm‟s organization, which limit their innovation capacity and their competitiveness. The forum identified and proposed a „participatory model of firm‟ as a target for all firms. Producers agreed on creating a space for facilitating exchange and interactions that may promote a cultural change within firms, thus making possible for some people in the network to have access to external experts. The hardware of Ezagutza Gunea helped to promote this cultural change through workshops and meetings for general, personnel and production managers in order to transfer knowledge and catalyse processes of change towards more participatory forms of management.
Although there is uniform recognition of the importance of competences to improve the competitiveness, no measurement system have been yet identified. However, a system to measure the improvement in competences of the people that participate in the actions of formation has been defined. Simultaneously, a new system has been set up to assess the cluster policies for the generation of social capital, applied to the furniture cluster (Iturrioz et. al., 2006; MIK, 2006).
Ezagutza Gunea is currently recognised as an environment that promotes local development, but not as an arena that may help firms to develop their own specific competences. In stark contrast, when asked about the impact of this network on strategic projects, 84% of the firm managers said that it has been „very low‟ or „none‟ whereas 67% of public agents working within the municipality or local development agencies perceive it as „high‟ or „very high‟. However, 100% of the interviewed confirmed to believe in cooperation as a means to improve their competitiveness; they also believe in Ezagutza Gunea as a means to strengthen local cooperation; 85% of the surveyed said that this network has been useful to raise common interests and synergies, and 77% valued „well‟ or „very well‟ the contacts promoted by the network. As a consequence, the Management Council of Ezagutza Gunea decided to reformulate the mission of the forum, modifying the former „improvement in the competitiveness of the firms‟ to the four lines formulated in the first stance. However, the incidence of the collective learning processes on the individual factors of competitiveness is considered as „very positive‟, however diffuse.
5. Conclusions and challenges for the future 5.1 Synthesis of the Results
This paper had two main objectives; the first is to suggest a systemic approach to innovation in SME-based local economies and to analyse the main factors affecting innovation in those contexts. The second objective is applying this model to a local area (county), in order to show that this local level (and its „nodal‟ institutions) may positively influence the innovation capacity of SMEs. The tripartite innovation framework shows the interdependence among three variables that may reinforce each other; innovation promotion needs to consider firms „in critical masses‟, thus in clusters, districts, networks, because this is the level that may permit these firms achieve economies of scale and scope that would not be realized on an individual level. This critical mass is more likely to create the conditions for public intervention in the field of building up institutions that may support the innovation process at the regional and local level (i.e the innovation system); without a significant lobby of firms public authorities are unlikely to intervene and to create these institutions that constitute the hardware for innovation. Simultaneously, the „critical mass‟ of firms needs the „innovation system‟ because small firms are unlikely to find on their own the resources (e.g. investment in R&D centres and labs, in qualified personnel, in market explorations, among others) that are necessary to spur innovation processes within their firms and in the local system as a whole. But also the „innovation system‟ needs software that make it operate effectively and efficiently; governments tend to think in terms of financial resources and institutions (hardware); however they stress less the software component that may raise the efficiency of these institutions; a focus on this aspect (i.e. learning processes) is required to avoid the separation between these two worlds (the innovation system and the cluster of firms) and to promote an efficient and effective coordination between the two. In this sense, our idea of promoting the creation of „local nodes‟ within national and regional innovation systems may be important because it may support the process of creating intermediate contexts where interaction may take place and spur the afore-mentioned learning and innovation processes.
5.2 Challenges ahead for SME-based local production systems
On these bases and on the basis of the case study of Urola Medio we highlighted that the existence of a regional innovation system does not imply its effectiveness in promoting innovations at the firms‟ level; interactions and collective learning processes are needed and, in this specific case, are currently targeted as the means that may create this thicker connection between „hardware‟ (the institutions) and „software‟ of innovation (the learning processes); the efforts put in place within Ezagutza Gunea represent very well these efforts. On these bases, a number of challenges may be identified that face this and other local production systems based on SMEs and that point to the need to strengthen the three identified variables of the triangular theoretical framework and their overall interdependence. The first challenge points at the need to identify „critical masses‟ of firms and make them the „subjects of innovation and development‟; this means identifying the main clusters in the specific territories (counties) of the Basque Countries; applied research together workshops with producers and relevant institutions may help define a clearer universe of the development opportunities of these critical masses of firms in the region; in this sense the work of the recently born Basque Institute for Competitiveness may be strategic. Of course, also general and specific infrastructures may help this process by means of both horizontal and vertical policies (Lall and Teubal, 1998). Overall, the identification of these actors (clusters and networks) is more likely to justify the involvement of public policy for structuring more adequate and responsive regional and local innovation systems. A second challenge focuses on the strengthening of the „innovation system‟ that is needed to introduce knowledge and innovations in the afore-mentioned critical masses of local firms; in particular this points to the need for creating „local nodes‟ that may have „multiplier effects‟. Local county agents are expected to build up a common development project to favor the „capillarity‟ in learning and innovation processes; capillarity should ease the benefiting from initiatives organised at higher administrative levels (Garapen, 2005). This may permit each local agent to be involved in bottom-up dynamics that reinforces top-down policies and programs planned by governments for the territory. As an effect, coordination between the real needs of firms and the public policies planned at higher administrative levels (e.g. the region) may be quicker and more effective. Simultaneously, the creation of „local nodes‟ may create a „multiplier effect‟ on policies. If county agents offer network capillarity the learning process may have a multiplier effect because a learning process is activated and spread over a wide universe of more or less dispersed firms; this happens when some resources are shared within this network. For instance, technicians of the local agency may successively transfer knowledge to firms in the network. At the same time, collective learning processes permit that good practices pass from one firm to others by means of spillovers (e.g. imitation). A further challenge accompanies the former from the „software‟ point of view, that is what may permit the „hardware‟ (institutions) to effectively promote learning processes and innovation. This challenge refers to reaching consensus on the concept of „capillarity‟. This discussion recalls two contrasting aspects: first, public institutions may want local agents to transfer their own view and programs to the firms; however, this is not necessarily favoring effective learning processes at the local level. Secondly, the capillarity is important for county agents that want to get involved with these networks to promote effective learning and innovation processes. This dual nature of „capillarity‟ makes it never „neutral‟. As a matter of fact, capillarity refers to relations of trust among agents as these grow out of shared projects. If higher public administrative levels do not take into account locally shared county projects and their capillarity, the coordination between these different levels (and the public/private sector) may be difficult and ineffective. In fact, the network may not adapt to its new intermediary function and may prove inefficient to provide capillarity to higher-level administrative proposals; in contrast, if the network adapts to accomplish this function it may lose capacity to pull together firms and agents around a joint project. Optimizing these processes of coordination and mutual adjustment requires the search for common spaces that promote coordination between top-down projects (that may help county firms) and bottom-up projects thought by firms and local agents that may coincide with one another; this is the basis to permit each local production system (e.g. county) to pursue its specific development strategy.
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