Evolving Economic Landscapes Institutions and localized economies in time and space Pernilla S. Rafiqui Evolving Economic Landscapes Institutions and localized economies in time and space EFI Mission EFI, the Economic Research Institute at the Stockholm School of Economics, is a scientific institution that works independently of economic, political and sectional interests. It conducts theoretical and empirical research in the management and economic sciences, including selected related disciplines. The Institute encourages and assists in the publication and distribution of its research findings and is also involved in the doctoral education at the Stockholm School of Economics. At EFI, the researchers select their projects based on the need for theoretical or practical development of a research domain, on their methodological interests, and on the generality of a problem. Research Organization The research activities at the Institute are organized into 20 Research Centres. 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EFI Research Centre: Centre Director: Management and Organization (A) Sven-Erik Sjöstrand Centre for Entrepreneurship and Business Creation (E) Carin Holmquist Public Management (F) Nils Brunsson Information Management (I) Mats Lundeberg Centre for People and Organization (PMO) Andreas Werr Centre for Innovation and Operations Management (T) Pär Åhlström Centre for Media and Economic Psychology (P) Richard Wahlund Centre for Consumer Marketing (CCM) Magnus Söderlund Centre for Information and Communication Research (CIC) Per Andersson Marketing, Distribution and Industry Dynamics (D) Björn Axelsson Centre for Strategy and Competitiveness (CSC) Örjan Sölvell Accounting and Managerial Finance (B) Johnny Lind Centre for Financial Analysis and Managerial Economics in Accounting (BFAC) Kenth Skogsvik Finance (FI) Clas Bergström Centre for Health Economics (CHE) Magnus Johannesson International Economics and Geography (IEG) Mats Lundahl Economics (S) Paul Segerstrom Economic Statistics (ES) Anders Westlund Centre for Business Law (RV) Erik Nerep Centre for Tax Law (SR) Bertil Wiman Chair of the Board: Professor Carin Holmquist Director: Associate Professor Filip Wijkström Address EFI, Box 6501, SE-113 83 Stockholm, Sweden • Website: www.hhs.se/efi/ Telephone: +46(0)8-736 90 00 • Fax: +46(0)8-31 62 70 • E-mail: [email protected] Evolving Economic Landscapes Institutions and localized economies in time and space Pernilla S. Rafiqui Dissertation for the Degree of Doctor of Philosophy, Ph.D, Stockholm School of Economics 2010. Keywords: economic geography, institutional theory, evolutionary geography, cluster evolution, new institutional economics, Swedish furniture, Tibro, Virserum. EVOLVING ECONOMIC LANDSCAPES Institutions and localized economies in time and space © EFI and the author, 2010 ISBN 978-91-7258-828-8 Printed and distributed by: EFI, The Economic Research Institute Stockholm School of Economics Box 6501, SE-113 83 Stockholm, Sweden www.hhs.se/efi To Sofia Preface This report is the result of a research project carried out in part at the Centre of International Economics and Geography at the Economic Research Institute and in part at the Department of Economics, both at the Stockholm School of Economics. The volume is submitted as a doctoral thesis at the Stockholm School of Economics. In line with common practice at the Economic Research Institute, the author has been free to conduct and present her research in her own way, as an expression of her own ideas. The Institute is grateful for the financial support that has allowed the undertaking and completion of the project. Filip Wijkström Mats Lundahl Director of the Economic Research Institute Director of the Centre of Stockholm School of Economics International Economics and Geography Stockholm School of Economics Author preface and acknowledgements ‘This, my dear ladies,’ said the entrepreneur my colleague and I was interviewing, ‘is how we protect our businesses interests and valuables in this country’ as he was pulling out a loaded rifle from the top drawer of the desk he was sitting behind. The location was the Republic of Moldova and the year 1996. Fresh out of my undergraduate studies at Stockholm School of Economics (SSE), I was conducting a pilot study for a UNDP program in this, at the time, newly independent nation, which for decades had been part of the Soviet Union. Our task was to survey the private sector in two districts and to give advice to the local authorities on their new supporting (as opposed to controlling) role vis-à-vis small and medium scale firms in their area. Not only was the private sector a new feature in the Moldovan economic landscape, but small scale enterprises had previously been looked upon with great suspicion – if allowed to exist at all. Needless to say, these were times of big changes for all parties involved. While conducting the study we came to learn that loaded guns, sometimes accompanied by high fences and large watchdogs, were not the only strategies used by local entrepreneurs to protect their interests. Considerable resources in terms of money and time were invested in networking and being on a good footing with representatives of the local authorities, who, after all, were the ones to grant the permits and licenses needed to run a businesses, as well as with the local mafia. And we soon came to realize that produced goods or artifacts were perhaps not the most important assets to be protected by these entrepreneurs – information was. As keen students of so-called “industrial districts” in the regions known as Third Italy, and influenced by the associated notions of flexible specialization and “coopetition”, this proved to be somewhat of a challenge to our thinking. The research we relied upon concerned geographical areas in which small firms within the same or connected industries competed successfully (at the national or international levels) by cooperating as well as competing among themselves locally (hence the expression “coopetition”). This was usually done by sharing knowledge and information – sometimes even valuable such – in a setting in which local authorities acted as something resembling brokers. Local authorities would set up organizations, networks or events that would help the flow of information among firms in the district, and also between the district and the outside world. Essentially they helped to alleviate the isolation of small firms, which was seen as their main problem (rather than size per se). The message was that supportive local authorities could help aspiring entrepreneurs and small firms out of this isolation trap, and the literature had ample examples to be motivated by. But what to do in a situation where information about products, investment and production capabilities was the last thing an entrepreneur would want to state to anyone, including the local authorities? Where the trust in the local authorities ability and willingness to support rather than to control their business was non-existing, and where the threats from organizations offering “protection” for a high fee was anything but imaginary? What to advise the local authorities then? We had to completely rethink our toolbox and aim of the study to adjust to a context that was far removed from any that we had encountered so far. Given that Moldova is still ranked as the poorest nation in Europe (in terms of human development and income), I can only reckon that our assessment of the complexity of the challenges facing the budding private sector was not too far off target. And that, unfortunately, our reports, although being enthusiastically received and discussed in Moldova at the time, had only limited, if any, impact on the economic development of the districts we visited. The fieldwork in Moldova did have at least one long lasting consequence, however, and that is my own interest in the social context within which economic transactions take place and economic decisions are made. This interest has only been deepened by work elsewhere that I have done since. Like their counterpart in other countries, Moldovan entrepreneurs took into account a whole set of considerations that on the first instance were not obvious to us. They even made decisions that on the surface would appear as irrational until more of the context in which they operated became illuminated. These simple observations gave birth to a multitude of questions of empirical, theoretical, and methodological nature that have beckoned me over the years. What are, for example, the analytical tools that are useful for assessing the context in which a development project is planted? What are the mechanisms that make certain programs work better in some locations than others? Why do some nations, or some areas or districts within the same national context, function differently? Why do some grow faster than others? Why are some countries or regions stuck? What are the concerns that people in different geographical, social and economic contexts take into account when making decisions? How to analytically filter out the constraints or guidelines that influence people’s actually behavior from those that do not? And whose concerns will take prominence – in other words, who will set the agenda of change? These questions are to a varying degree all reflected in this dissertation, even though they are too far reaching and broad to be properly answered in a single body of work like this. In fact they resemble a (perhaps life long) research theme rather than a well defined Ph.D. project. To that extent this dissertation is part of an ongoing intellectual process as much as a result of if. To get this point has been a long and winding road, the obstacles at times seemingly un- mountable. One fundamental challenge was the initial attempt to combine economics with economic geography in its more traditional form. On the surface this might not seem difficult. In reality it amounted to engaging with two scientific traditions with at times rather diverging views of what constitutes the essence of the scientific endeavor. Economists are skilled in pealing off the layers of a research question until only its core elements and mechanisms remains.