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