Tag / Economic Development

by Katie Bawden

CREATING VIBRANT TOWN CENTERS AND MAIN STREETS – Part 1

Photo credit: News Corp Australia

Part 1 – Issues

Main streets and town centres play a big role in the social and economic development of places and in the lives of people who live there. They are places where people work, shop, eat, drink and live. Therefore they contribute significantly to the health, well being and living standards of a community.

In Western Australia (WA), natural amenity has always been WA’s strongest comparative advantage, with pristine beaches, ancient forests’ and mineral-rich, ruby landscapes. However, our town centers and main streets lack that same draw and today, they are struggling to be vibrant places that support community connectedness and quality of life. 

Poor planning, capital works, globalisation and technology change have eaten away at the centrality of WA’s town centres and main streets. Shopping centers have become de facto town centers based on mass consumption, global brands, and car access.  As a result, WA’s town centres have seen sustained shop closures, indistinguishable offerings, reduction in community uses and localised jobs. However, planners, governments and community are all interested in making these places more desirable, vibrant and livable. Town centres and main streets need urgently to adapt, transform and find a new approach in order to survive.

This report is delivered in two parts using a combination of literature and observations to examine the perceived issues (Part 1) and possible actions (Part 2). The report is not intended to be comprehensive, and there will likely be much more that can be said on the topic. It also does not discuss the interventions that governments and communities have already supported, such as extended retail hours, alcohol licensing, community events and the town team movement that has already built substantial community vibrancy.

ISSUES

1. Shopping centres and attraction precincts

Shopping centres and the emergence of multi-attraction precincts have become de-facto town centres, offering a mix of retail, dining, activities, and parking all in one convenient location. Often located outside of the town centre where land is cheaper, they have shifted activity from our main streets and town centres. However, these precincts, but are generally based on consumption and add very little to community connectedness and social outcomes.

 2. Online retail

Ecommerce is booming, changing the way people shop. It is anticipated that by 2021, Australians will spend $35.2 billion online each year, fast becoming a big threat to brick-and-mortar retailers (Australia Post, 2019).  Customers may undertake ‘showrooming’ to view an item and then buy the item online at a discount. The flipside of this is  webrooming, where customers search online before purchasing in person. While neither are new trends, eCommerce is rapidly growing and many small businesses have not adapted their business model. In reality, most retailers today require a multichannel strategy to reach different demographics and to allow customers to purchase on their own terms (Williams, 2019). 

3. Big brands 

The emergence of global and national retail and food chains have been used as an attraction ‘anchor’ for town centres and main streets by creating a signal regarding brand quality and certainty. However when town centres become dependent on global/national retail and food chains, they can crowd-out smaller businesses such as local boutiques and cafes for several reasons. For example, big brands may:

  1. their purchasing power to drive down the cost of their products to lower consumption costs which smaller businesses find hard to compete with; 
  2. typically afford larger rents and are thereby favoured by landlords and local authorities; and
  3. have a limited impact on local wages as profits are not held locally, and typically do not reinvest profits into the local economy.

Thus there to be more recognition of the dynamic relationship between small businesses that offer the vibrancy and uniqueness that attracts customers which then harness big brands.

4. Suburban landscapes

WA’s dependence on the low rise suburban lifestyle does not create the density required to enable the spark and liveliness seen in places such as European centres and global cities. Instead it creates significant urban sprawl that has a negative impact on both people and businesses. It also leads to longer commute times, higher carbon footprint,  traffic congestion, negative health impacts, and for businesses, overt peak and non-peak periods. 

Main streets and town centres require activation not just during standard business hours but also after work.  Stores, restaurants, gyms, and other businesses can only open if residents work in the centre and shop, access activities and restaurants after work. This also reduces commutes and makes more time available for exercise, community activities, and family time after work.

5. Landlords and fragmented ownership

Property owners and landlords are one of the most important as they control business entry and exits,  rents and the diversity of offering. However, their expectations can be out of kilter with the demand in the property market.  For example, landlords may favour bigger businesses or franchises that can pay higher rates, expect small businesses to match the higher of big businesses, and fail to adjust expectations after a dip in demand. If rents are out of kilter with the market, businesses may exit for cheaper rates elsewhere or indefinitely after experiencing financial hardship.

Disparate property ownership may also mean that main streets, town centres and shopping centres can be owned by a mix of individual landlords, property management firms, hedge funds and private equity. As a result, ‘fragmented ownership’ often creates a barrier to a coordinated response when challenges arise or when regeneration and revitalisation is required (Housing, Communities and Local Government Committee, 2019). 

6. Capital works

The upgrading of local infrastructure will always be required to support growing and evolving community needs. However, governments sometimes deliver lengthy capital works programs that can be destabilising for small business. Instead of upgrades facilitating vibrant community centres, capital works can have a large financial impact on local businesses as foot traffic falls along with profits and even leading to business closures.

7. Shop closures and vacancies

Main streets and town centres are made up of businesses that sell primarily to the local economy, “which includes independent shops, chain stores, restaurants, hairdressers, and services like solicitors”(Centre for Cities, 2019). Thus the health of our main streets and town centres, need to be considered as an ecosystem. That is the health of a wide range of integrated local businesses. Shop closures and vacancies are not only a symptom of a struggling main street or town centre but they are also a cause. Empty shops can signal to the market that consumption or visitation is declining. As a result, a negative feedback loop is formed through reduced investment, availability of offering, and foot traffic and consumption that can reinforce a sense (and signal) of decline and neglect.

8. Business rates

Business rates are an important source of income for local authorities. In WA, rates  generate more than $2 billion each year (My Council,2020) . While there is now greater transparency on rate payments and the financial health of WA local governments, there is considerable flexibility in how local authorities set their rates. 

As the rate system encourages local authorities to grow their local economies and to be rewarded for doing so with extra revenue, it can skew local policy. This is because additional business rates can only be generated by constructing new buildings or increasing net floor space, and can have a  negative implication for town centres as efforts are directed into out-of-centre developments, shopping centres, and bigger businesses. In addition, business rates do not take into consideration technology changes with physical retailers paying more (Housing, Communities and Local Government Committee, 2019).

by Katie Bawden

Understanding Job Creation: Part 2 Industry

This literature review examines how jobs are created to identify consistent themes, dynamics and determinants that government can apply to develop meaningful policy and initiatives. You can read Part 1  here which examines how places create and destroy jobs. It finds that agglomeration is a driving force behind structural change, economies of scale and how places grow and create jobs.

Traded Jobs

Economic growth and job creation has been strongly linked to the traded sector – that is, firms that derive income from exporting (Mc Andrew, 1995). This is because investment and job creation in the traded sector is new money which flows through to increase demand for local services and goods, generating additional jobs. Bacchetta and Stolzenburg (2019) found that in most advanced nations, more than 50 per cent of jobs are underpinned by traded industries.

Traded sector refers to “businesses are those that sell their output in competition with businesses in other states or nations”.

Local sector refers to businesses that “sell their goods and services primarily or exclusively in a local market. By definition, local businesses tend to be sheltered from competition from other places” (e.g. local shops and restaurants) (Cortright, 2017).

Cortright (2017) finds that education and skills can be specifically attributed to “two-thirds of the variation in per capita income” of a city. While there are many well educated and skilled people employed in the local sector such as doctors and lawyers, those jobs are found in most locations and are proportional to the size of the population (Cortright, 2017; Delgado & Mills 2018). Therefore, the difference in income levels is derived specifically from the additional benefits gained from concentration of highly skilled – high paid jobs in the traded sector. This is because, traded industries typically agglomerate or cluster in one location due to the specific benefits that certain places offer. These include specific workforce specialisation, economies of scale and market access (Delgado & Mills, 2018; Florida, 2008; Hausmann et al, 2007; What Works Centre for Local Economic Growth, 2019). In addition it has recently been found that firms that cluster and network along the traded supply chain are more innovative and support significant job creation (Delgado & Mills, 2018).

Employment Multiplier

A healthy traded sector directly benefits the whole economy by creating well-paid jobs and indirectly creating additional jobs in the local sector (Cortright, 2017; Delgado and Mills 2018).This dynamic is known as the employment multiplier and there are three types, including:

  1. “in tradable sectors (that sell mostly outside the local economy);
  2. in tradable skilled and high-tech sectors, specifically; and
  3. in the public sector” (What Works Centre for Local Economic Growth, 2019).

The size of the multiplier is determined by the extent to which the new jobs add new value and supports a desirable economic restructuring. Research What Works Centre for Local Economic Growth, 2019; Cortright, 2017; Delgado and Mills, 2018; Mc Andrew, 1995; Moretti, 2012) has consistently found that the higher skilled a job is in the traded sector, the greater impact on job creation. Moretti (2011) found that high skilled, traded jobs in the US, such as a job in the technology giant, Apple, created five additional jobs in the local sector. Two of the jobs created by the multiplier effect would be professional jobs such as a doctor or lawyer—and the other three would be in non-professional occupations such as restaurant workers or retail. More explicitly, the What Works Centre for Local Economic Growth (2019) found on average that:

  • a traditional traded sector job create a job multiplier of 1.9 jobs in the local sector;
  • a higher skilled traded sector job created 2.5 jobs created in the local sector; and
  • a new government job created only 0.25 jobs on average in the private sector[1].

Supply Chain Industries

A recent study by Delgado & Mills (2018) found that supply chain industries (i.e. business-to-business or business-to-government) are a very important segment of the economy and critical to both job creation and innovation. Delgado & Mills found that supply chain industries created over 53 million jobs or 43 per cent of the US employment in 2015 and had the highest percentage of science, technology, engineering and mathematics (STEM) jobs at 81 per cent. The highest value creators in the supply chain were not the businesses producing parts but providing “supply chain traded services, such as in engineering, computer programming, and design” (Blanding, 2019).

Supply chain refers to an interrelated group of “individual suppliers that feed companies with the goods and services necessary to create products for consumers and businesses” (Blanding, 2019).

Delgado and Mills (2018) attribute the benefits derived from supply chains to three main reasons. That is, supply chains:

  1. produce specialised inputs which generate new knowledge and leads to innovation;
  2. by nature have a large number of linkages to many different downstream industries responding to market directions and diffusing innovations more efficiently; and
  3. lead to co-location or clustering which supports innovation and growth of the industry as they share ideas, concentrate talent; attract capital and generate economies of scale.

Thus, the examination of traded industries and supply chains provide a new and important frame for industry development, innovation and job creation.

 

 [1] Gonzalez-Pampillon (2019) also noted that government jobs were found to have a crowing out effect in some cases and cautioned that the relocation of government jobs did not have a net job gain.

 

by Katie Bawden

Understanding Job Creation: Part 1 Place

Introduction

This four-part literature review examines how jobs are created to identify consistent themes, dynamics and determinants that government can apply to develop meaningful policy and initiatives. Part 1 which examines how places create and destroy jobs. It finds that agglomeration is a driving force behind structural change, economies of scale and how places grow and create jobs. Part 2 examines new research into the specific role of industry in job creation, noting that the traded industries bring wealth into an economy that flows through to increase local demand and create new jobs. This effect is known as the job multiplier and the more skilled a traded industry is, the higher the multiplier will be. Part 3 examines the age and size of different business segments to determine which firms have the greatest impact on job creation. It finds that small and young businesses, disproportionality create new jobs. Finally, Part 4 identifies the consistent themes emerging from literature and presents a framework to support government policy and initiatives.

Dynamics and determinants:

Dynamics and determinants (2)

 

PART 1: Place

Geography Matters

Geography matters for the future of job creation, as jobs are becoming increasingly concentrated in certain places (OECD, 2018). In particular, small and rural towns are distinctly shrinking as residents relocate to more prosperous areas such as cities.

As nations become more developed, the economy shifts from agricultural to industrial to service-oriented and to technology automation. With new ways of production focused on the generation of ideas (rather than goods) and economies of scale, fewer workers are required in rural areas where traditional production remained concentrated (World Bank, 2009; OECD 2018). This dynamic is known as structural change and it leads to structural unemployment – the worst type of unemployment. Over time, displaced workers typically shift to labour markets where there are more job opportunities, higher wages and access to retraining (Bivens, 2018). Places that are not able to adapt to changing technology and create new jobs, will begin to decline as they often lack the skill profile to transition their economy (OECD, 2018).

Structural unemployment is a “longer lasting form of unemployment that is caused by fundamental shifts” in an economy caused by factors such as technology, competition and government policy (Kenton, 2018). Due to this shift, workers lack the right skills demanded by their current employer or the local labour market and live too far from other regions where jobs are available (Bivens, 2018; Kenton, 2018).

However, structural change can also be desirable as it can enable an economy to transition from low skill to high-skilled, high-value production. Structural change can facilitate a wave of “creative destruction” which supports productivity improvements at the firm level and drives long-term economic growth and job creation at a macro level. However, early recognition of the opportunities and risks is required to develop a range of innovative initiatives that build economic capacity to respond and restructure (Henry & Medhurst, 2011). Foray (2015) suggests that it is important to look at the aggregation of production in a region to identify where industry and government can work together to shape new opportunities or support the restructuring of industry through new ‘entrepreneurial discoveries’.

Creative destruction “refers to the incessant product and process innovation mechanism by which new production units replace out-dated ones. This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets (Caballero, N.D)”.

Why Do People Move?

Larger and denser settlements such as cities offer more diverse and higher paid jobs; and talented people are more able to move to take up opportunities (Florida, 2008). The more educated you are the more able you are to move for work, with 1 in 4 university graduates doing so. While there are personal drawdowns from relocation such as family relationships, most people will earn higher wages, access new networks and other opportunities (Florida, 2008).

In addition, people who move, such as immigrants tend to be more entrepreneurial and are natural risk takers, born out of either choice or need. They are more open to new opportunities, resilient and importantly, they bring their unique perspectives and experience – a winning combination for innovation and venture creation. Wines (2018) notes that “over 40 per cent of firms in the United States (US). Fortune 500 list were founded by immigrants or children of immigrants.” While a United Kingdom (UK) study found that “immigrants are twice as likely to be entrepreneurs” and that “one in five UK tech start-ups is founded by immigrants (Wines, 2018).”

Thus cities become a mixing pot of entrepreneurs, designers and creative people, engineers, financiers, industry professionals and academics – all highly skilled and motivated to share ideas (Florida, 2008). And it is these entrepreneurial people, who create jobs twice as fast as established firms (Wines, 2018).  In combination with the productive advantage that cities offer through production and distribution economies of scale, they are primed to become a “hub for innovation” and an “engine of prosperity” (Duranton, 2012; Moretti, 2012).

The Agglomeration of Jobs

Places that are able to build an economic advantage based on high-value industries become a hotbed for job creation because of the benefits gained from workforce capacity and industry co-location and proximity to markets. These benefits include concentrated and varied infrastructure, strong networks to support market access, increased venture creation, higher wages and an attractive lifestyle and culture through diversity of service offerings (Moretti, 2012). These dynamics form what is known as agglomeration and agglomeration is strongly linked to job growth, high productivity and innovation (Clarke & Xu, 2013; Goswami, Mevedev & Olafsen, 2018; Moretti, 2012).

Agglomeration is derived from the benefits that are gained from co-location and proximity and include:

  • localization – being near other producers of the same commodity or service;
  • urbanization –  being close to producers of a wide range of commodities and services; and
  • capacity – the size of the local market, the national market, access to international markets  (Clarke & Xu, 2013; Glaeser, 2010; World Bank, 2009).

The World Bank’s Comprehensive Worldwide Business Survey found that agglomeration forces were more important to job growth than the overall business environment (Clarke and Xu, 2013). This is not to dismiss the business environment, as elements such as labour regulation, access to finance and local skill levels were also found to be important to business expansion and employment.

Agglomeration is a reinforcing dynamic that generates ‘increasing returns’ through increased concentration of activity, skills and infrastructure. As workers and entrepreneurs are attracted to places because of job opportunities, higher wages, networks and market access, it builds the economic capacity of a place though diversity of skills, increased resources and services, knowledge spillovers and economies of scale (Duranton, 2012). These positive externalities lead to the economy as a whole becoming more productive, innovative and driving up wages. Thereby, continuing to attract more people and increase firm and job creation.

However, agglomeration does not happen automatically and jobs need to be continuously created to address creative destruction, import competition and compensate for the natural the turnover of firm entries and exits (Foray, 2015). Thus, the dynamics of firm and job creation is also shaped by places functionality (Duranton, 2012). According to Polèse (2009) there are seven determinants of agglomeration, these include:

  1. Economies of scale in production and production processes – concentration of production facilities and firms close to their workers and suppliers;
  2. Economies in scale for trade, transportation and distribution facilities – infrastructure that supports more accessible networks and lower unit costs;
  3. Proximity to markets and opportunities to access new market – to enable firm expansion and market growth;
  4. Industrial clusters – benefits that firms receive by being located close to other firms in similar or interconnected industries such as labour pools, specialisations, branding, spillovers;
  5. Diversity – to enable reliance, spillovers and spinoffs;
  6. Centrality – creating a centre and density for trade, collaboration and networking; and
  7. Creativity and culture – innovation and sense of place that draws people to each other.

Skills, Spillovers and Scrabble Theory

While agglomeration draws workers and entrepreneurs together to support productivity, innovation, and firm creation, workers need to have the essential skills and capabilities in the first place to respond to opportunities. Although this relationship has been well understood for a long time, there are many dynamics involved.

The more educated a city is, the more able it is to adapt to structural changes and identify new opportunities (Cortright, 2017). This is because the more educated workers are, the more productive, knowledgeable and adaptive they are. In addition, skilled workers are able to command a high wage premium as they are critical to a firm’s competitiveness. Thus at a place level, the more skilled jobs a place has, the larger the employment multipliers are (derived from high wages) and innovation spillovers (derived from knowledge and learning) that flow on to other industry sectors to support job creation (Gonzalez-Pampillon, 2019; Muro, 2012).

Hausmann et al (2007) have likened this dynamic to a game of scrabble. They note that a place’s economy is made up of different letters (skills) and the more letters you have the more words you can make (products). Some letters (skills) are also worth more (higher skilled) and therefore are more valuable as they help make more words (products) and more complex words (higher value products). As a result, the more diverse and higher skilled a place becomes, the more that place is able to drive innovation, job creation and offer high wages.

by Katie Bawden

Commodity Traps and Super-Cycles

For nations that heavily produce and export commodities such as food, oil and other minerals, those rents it receives are important source of national income. More importantly, if invested wisely, commodity rents can be a basis for future growth and prosperity.

Economic rent “is an excess payment made to or for a factor of production over the amount required by the property owner to proceed with the deal (Investopedia; N.D.)”.

However, over dependence on the commodity sector and miss-use of commodity rents can lead to worse economic outcomes – this is known as the paradox of plenty.  This is because production capacity (capital, labour)  is diverted into the industry leading the growth cycle, while its associated rents are not reinvested in a way that strengthens the economy more broadly (Natural Resource Charter, ND).

Paradox of plenty “refers to the idea that resource-rich counties often have less economic growth compare with countries which have fewer natural resources (Natural Resource Charter, ND).

Collier (2007) even finds that commodity rents are also “particularly unsuited” to democratic situations with autocracies out performing their democratic counter parts. This is for several reasons including, that:

  1. democratic governments are pressured by election cycles leading to short sighted investments;
  2. democratic governments use rents as ‘slush funds’ to influence election outcomes; and
  3. tax payers appear to be less concerned with the way revenues are spent because they have not been ‘earned.’

That is, governments and tax payers treat the revenues more like the winnings from a night at the casino!

More specifically, Giugale (2014) notes that there are five main problems associated with commodity growth cycles and include:

  1. Dutch Disease – where non-commodity exports become less competitive as the all the majority of economic production becomes focused on the resource sector due to high income and revenue associated with the sector. As this happens, the resource sector sucks in workers and production capacity from other sectors driving up prices;
  2. price volatility – complicating investments decisions often leading to short-term outcomes;
  3. over borrowing – lenders are more likely to provide greater debt access to governments that are expect to raise large amounts of revenue;
  4. sustainability – the amount of natural wealth to preserve for future generations; and
  5. corruption – the larger the rent, the ‘greedier’ a government and business can become leading to immoral and poor decisions.

While Collier (2007) adds that in developing nations two other problems include:

  1. a reduction in the implementation of democratic institutions – as government want to hold on to their power and wealth; and
  2. an increase in the likelihood of conflict – as a combination of the other problems destabilises growth, the government and society more generally.

The paradox of plenty is relevant to both developed and developing nations.  Academics (Collier, 2007; Giugale, 2014) agree that resource rich societies must have good policies, institutions and governance to ensure strong economic outcomes. These include those that protect budgetary checks and balances, transparency of spending, and accountability mechanisms to ensure impacts that enhance citizen welfare (World Bank, 2016).  An example is Norway’s Sovereign Wealth Fund, the world’s largest equity fund, set up to provide an autonomous investment mechanism to reinvest the surplus wealth produced by petroleum sector to provide alternative revenue streams that can be reinvested diversify the economy (McCarthy, 2017).

While there must be the right mechanisms, it is also imperative that there is greater awareness of the traps and mindfulness regarding the need to reinvest rents in long term initiatives that build capability and future growth potential. Otherwise, the alternative is that commodity rents can actually lead to a reduction in growth and development.

Super-cycles

Until recently, the concept of commodity super-cycles had been widely discussed but never proven.  In 2012 the UN (2012) claimed to have found evidence of commodity super-cycles which has now lead to wider agreement on their existence (Guigale, 2014).

Commodity super-cycles are defined as “periods of about forty years when commodity prices steadily climb for a decade or two, only to fall slowly back to where they were” (Guigale, 2014).

Super-cycles differ from business-cycles which are typically short-run and typically have micro-economic impacts. Super-cycles differ due to two main features, being:

  1. the presence of a “long wave” of growth of at least 10-35 years and the whole cycle taking 20-70 years; and
  2. the impact can be observed in a number of commodities across the economy (UN; 2012).

The key driver of a super-cycle is the “sudden rise in demand, often caused by technological innovation” and can lead to periods of increases in urbanisation and population. Increased demand associated with these factors drives long periods of growth in both prices and output before tapering and returning to pre-growth levels. Super-cycles also suffer from “acute capacity constraints” despite increased in production output and technology development (Guigale, 2014; (DeRooij, 2014). Whilst, tapering off within a cycle is driven from a number of factors including diminishing returns from technology, or, urbanisation and population growth steadying and the economy readjusting as a result.

Evidence suggests that in the last 150 years  the world economy has experience at least three super-cycles, each over a period of four decades, each driving up commodity prices “20 and 40 percent” before returning to previous levels. Examples include Britain’s industrial revolution where prices for coal, cotton, sugar and tea increase as well as production (DeRooij, 2014).

From a government’s perspective, recognition of super-cycles is of “critical importance” to ensure the right decisions are made in regards to inflation, currency, balance of payments, and re-investment of rents. Businesses also need to identify super-cycles to ensure capital investments are used to fund long term production expansion and not be distracted by short-term price fluctuations (DeRooij, 2014).

We can now see that we are in a super-cycle or perhaps, we have just hit tipping point. This cycle was largely driven by China and India’s appetite for commodities.  However, there may still be opportunities, as many people in South East Asia and other developing nations are still to transition to a more urbanised economy (DeRooij, 2014).

Thus, the question therefore is, are we to sit back and ride the wave out? Or do we ensure we maximise our future growth potential and extend the ride before through high impact re-investment?

Collier, P. (2007) The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About. Oxford University Press: New York.

Giugale, M. (2014) Economic Development: What Everyone Needs to Know. Oxford University Press: New York.

 

by Katie Bawden

Institutions and Incentives: A Guide for Policy Practitioners

Have you ever thought what stops some places from developing? Why is it hard for some places to implement progressive policy? What stops people from being more entrepreneurial? Well it can often be the institutions, the “legal and administrative organizations” that underpin society and they predict the ability of a place to prosper (World Economic Forum, 2015).

Institutions are a “consistent and organized pattern of behaviour or activities (established by law or custom) that is self-regulating in accordance with generally accepted norms” (Business Dictionary, ND).

Institutions “are the rules of the game in a society, […] the humanly devised constraints that shape human interaction. […] They structure incentives in human exchange, whether political, social or economic” (North, 1990, p. 4).

Why are institutions important?

Institutions are important because they form what is called the ‘enabling environment’ (World Economic Forum, 2015). Institutions move beyond the concept of an organisation to encompass social structures that guide “human interaction and activity” and include formal and informal rules. Institutions are important social structure as they “create stable expectations for the behaviour of others,” and create the incentives for economic and political development (Hodgson, 2006). Institutions therefore provide a framework for social cohesion and long term prosperity Bakir, 2009).

The four key sectors where institutions play the most effective role in promoting growth are “finance, education, justice, and public administration” and as a result, Institutions need to be a consideration for in policy and program design in both the developed and developing world (Paul, 2017).

In particular, strong institutions support economic development by:

  • reducing the costs of economic activity by lowering transaction costs such as search and information costs, bargaining and decision costs, policing and enforcement costs;
  • promoting a return on investment through common legal frameworks (e.g. contract terms and contract enforcement, commercial norms and rules);
  • reducing oppression, corruption and encouraging trust by providing policing and justice systems; and
  • Encouraging collaboration between public-private sectors to increase social capital (Bakir, 2009; Ferrini, 2012; World Economic Forum, 2015).

More specifically, institutions affect the level of production, adoption of new technologies, entrepreneurship and venture creation, environmental protection, ability to attract investment, property ownership, law enforcement, and levels of bureaucracy and red tape. Thus, institutions need to be a key consideration when designing policy and programs.

Depositphotos_9467051_original

Institutions and Policy

Often when transformational policy is required, consideration of the institutional framework is paramount. There are four different types of influences on institutions that practitioners should be aware, these include:

  1. Rational choice: where intuitions are influenced through ‘feedback’ that reinforces the decisions and actions to become norms. For example increasing returns on investments is a positive feedback that reinforces the norm;
  2. Organisational the adoption of common practices (i.e. imitation) and norm from other successful organisations and leaders;
  3. Discursive institutionalism is when self-interests and cognitive ideas are pushed until adopted as norms; and
  4. Historical institutionalism is a mix of the above three where logic and idea have amalgamated over time to become norms (Bakir, 2009).

Practitioners should examine the changes they wish to achieve against identifiable institutions.  Incentives or more specifically, pigouvian penalties can then be designed to help shift behaviours and actions in line policy positions.

Incentive: a moral, coercive or remunerative motive behind an individual’s particular course of action (Johnson, 2005). Incentives do not have to provide positive motivations.

 Pigouvian penalties: is a tax to deter or counterbalance market activities that generate negative externalities (the Economist, 1017).

 Examples:

  • Public transport: Policies to promote public or physical transport uptake may only become effective when society recognises that cars have a negative impact on the environment and are willing to change their behaviour to protect the environment. Policy practitioners may needs to consider the individual rational choice, self-interests and historic institutions that support people to drive cars. For example, if parking was increased in the CBD to support institutional change around driving, does it just push people in to suburban areas where driving is still more cost-efficient? Is advertising to change values and perspectives (self-interests) on driving required? Are additional services or upgrades required to change the efficiency of public transport in addition to car and parking taxes?
  • Welfare: Income welfare that supports disadvantaged people can be relatively ineffective in enabling long term dependents to transition into the mainstream economy when the alternative is low skilled and repetitive work. Thereby dis-incentivising people to transition to employment. Policy practitioners may need to consider if the community, formally or informally, agrees that welfare is a right? If individuals have intergenerational dependency and therefore share similar aspirations? And what are the real incentives that encourage employment and discourage unemployment? Otherwise actions that just consider capabilities will have limited impact.
  • Innovation and technology adoption: for societies wishing to promote innovation and technology adoption, it is also important to look at existing intuitions that may disincentive action. For example what are the red tape barriers (costs) to setting up a business and commercialising ideas? Are there any Government Trading Enterprises that crowd-out the private sector innovations? Are technology rebates and R&D subsidies promoted widely and easily accessed? Does the government have a consistent view and is their machinery (departments and agencies) progressive in their policies?

Finally, strong institutions may not ensure robust growth in the short term but in the long term, a society cannot expect to prosper without them. Thus the policy practitioners need to consider institutional environment when designing interventions.

North, D. C., 1990. Institutions, Institutional Change and Economic Performance, New York, Cambridge University Press.

by Katie Bawden

Part 3: the Innovation Ecosystem – Roles and Responsibilities

To drive an innovation-led approach to economic growth, it is essential to understand the roles of both the public and private sector, including academia; and how each can enhance to the ecosystem.

Innovation ecosystem: is the flow of technology and information among people, enterprises, and institutions central to an innovative process. It contains the interactions between the actors needed in order to turn an idea into a process, product, or service on the market (OECD, 1997).

PUBLIC SECTOR

The public sector has responsibility for creating an environment that ignites innovation and supports entrepreneurs. Yet, as Isenberg (2016), notes “there’s no exact formula for creating an entrepreneurial economy; there are only practical, if imperfect, road maps”.

However, it is generally acknowledged that government have various tools at hand. Governments can create ‘demand factors’ for innovation such as policy, regulation and innovation targets the cause the market to change direction (this is essential to enable economic structural change). While Innovation ‘supply factors,’ may include research and development (R&D) credits, academic partnerships and university graduates.

In Mazzucato’s book, The Entrepreneurial State (2014), she argues that government has a bigger role beyond tax credits and the enabling environment. That is, government can also invest in transformational R&D where there is a public good, the risk is high and long term investment is. Marzzucato suggests that such investment by government often leads to transformational change that can create entirely new sectors and markets. Examples of these types of investment include the nuclear energy, the internet and GPS. For government to take this approach it needs to have a long term agenda for technology change; and work with in partnership academia and the private sector so they too can seize the opportunity along the way to add new information to develop spinouts.

Workforce development is also directly linked to the future of businesses creation and economic growth.  Government set the policy, run many of the programs and fund many academic institutions that develop skilled workforce essential to the capability to develop innovation commercialise but to also enable economic transformation when required (Fetsch , 2016).

Fetsch (2016), Moretti (2012) and (Sandbu, 2017) all argue that government can also drive immigration policy that supports innovation policy through three main factors:

  1. importation of skilled workforce to compliment or build a competitive advantage;
  2. immigrants “play a disproportionate role founding companies that make a big economic impact” because they are naturally risk takers having immigrated in the first place; and
  3. Foreign Direct Investment (FDI) flows often through the expat community to enable innovation and business growth

Isenberg (2010) provides a localised perspective and suggests that many government efforts focus too narrowly on building ecosystem determinants. Instead he suggests that government should focus on the following nine principles to “turbocharge venture creation and growth”. Isenberg’s principles include:

  1. Stop emulating Silicon Valley. Rather you can develop your own culture and practices that underpin entrepreneurship and innovation. Also see the ‘rules’ described in the Hwang and Horowitt (2012) book the Rainforest: the secret to building the next silicon valley;
  2. Shape the ecosystem around local conditions. Home grown solutions that compliment “local entrepreneurship dimensions, style, and climate” (Isenberg, 2010);
  3. Engage the private sector from the start. Reach out and understand industry needs;
  4. Favour the high potentials. This is through focusing on gazelles (high growth firms) and applying economic gardening approaches, as noted in Part 2;
  5. Get a big win on the board. Celebrate successes as success can spur more innovation and entrepreneurship;
  6. Tackle cultural change head-on. Governments can help to promote the benefits of innovation, the opportunities entrepreneurship through setting values that celebrate innovation and entrepreneurship, encourage collaboration and by building a tolerance of failure;
  7. Stress the roots. Let the market determine value – be careful propping up ventures;
  8. Don’t over engineer clusters; help them grow organically. Clusters occur naturally when an opportunity exists and are an important element of an ecosystem. However, government shouldn’t be picking winners, just backing them; and
  9. Reform legal, bureaucratic, and regulatory frameworks. Over regulation at all levels can stifle innovation and entrepreneurship. Examining the institutions and incentives is essential to ensure an ecosystem is guided by positive regulation.

 

PRIVATE SECTOR

The private sector is the main agent of innovation and value creation. They are the ones that take the risks, commercialise the products and services, and create jobs. Yet private stakeholders are often multifaceted, holding many roles along the innovation pipeline.

Entrepreneurs are the people with the ideas and are risk takers. In his book, Worthless, Impossible and Stupid, Isenberg (2013) notes that entrepreneurship is defined by an individual’s ability to perceive, create and capture extraordinary value.

A Start-ups is an early stage business that is beginning to scale rapidly. Angel investors “Incubators, accelerators, universities, and public agencies” typically provide the majority of help establishing the business in its early stages (Startup Europe India Network, N.D). Most start-ups die in their first two years in a period called the valley of death.

Valley of death: is a common term in the start-up world, referring to the difficulty of covering the negative cash flow in the early stages of a start-up, before their new product or service is bringing in revenue from real customers (Forbes, 2013)

While Small to Medium Enterprises (SMEs) are small businesses that have overcome the valley of death, tested the viability of their product of services, established a customer based and achieved growth that has allowed them to employ staff. Yet SMEs often lack the knowledge on how to scale-up and lack the resources to invest in innovation to fuel productivity and development (OECD, N.D). Once a business has gotten to this stage of its development, it has greatest potential to become a gazelle (see Part 2).

Investors are typically defined based on the capacity they can invest.  Most types of investors provide more than capital, also offering business support, networks and sometimes markets.

Typically early stage investors offer small amounts of capital and include business angels, incubators and accelerators[1], and some seed stage venture capital funds. As the start-up grows, it requires more investment to fund its expansion and will seek an investment from the venture capital investors who are considered growth-stage investors. Private equity investors and corporates are typically investors at a later stage business growth which may include business merges, stock market listing and buy-outs (Startup Europe India Network, N.D).

Hwang and Horowitt (2012) put forward a softer model in their analysis of the innovation ecosystem and identify:

  • Business leaders: who have a reputation of being innovative. What culture, process and strategy does individual business set to in place to innovate within their business to support innovation?
  • Keystones: individuals or businesses who serve as agents that connect people, ideas and investment to catalyse diverse action. Keystones can also exist in the private sector.
  • Stakeholders: anyone who is an entrepreneur, investor, support organisation or participates in the innovation ecosystem.
  • Role models – local entrepreneurs that are visibly successful in the community and offer examples of success and failure. They are people that promote a positive innovation and entrepreneurship culture. They challenge aspirations and values.
  • Community – the industry sectors, services providers and collective human capital that underpin an ecosystem.

 Industry: However ecosystems are also place-based, in that innovation, R&D and spill-overs are happen in a place, that is proximity is important for knowledge diffusion and is primary influenced by local innovation capacity (Rodríguez-Pose & Crescenzi; 2008). As a result a places industry base and industrial clusters become another important organising principle and stakeholder group for analysis.

Industrial cluster: “are geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition. They include, for example, suppliers of specialized inputs such as components, machinery, and services, and providers of specialized infrastructure (Porter, 1998)”.

Crescenzi & Iammarino (2016) note that “economic and innovation trajectories do not depend exclusively on localised productive and knowledge assets but need to combine ‘local buzz’ and ‘global pipelines’”. Thus looking at a places external linkages through the lens of FDI flows, global supply chains and multinational corporations offers the opportunity to extract information and opportunities to leverage innovation, build capability and establish new markets.

Finally, academia, which provides an institutional framework for developing workforce skills and values that support and drive innovation and enable agglomeration forces which drive productivity. Academia can even compensate for some businesses that are not as well-equipped to do under take R&D through the production of skilled workers; public-private partnerships; and the generation of patents that diffuse into the local innovation ecosystem (Cauce, 2016).

CONCLUSION

No matter how you analyse your ecosystem, fundamentally what drives success it is how we join up and collaborate to create value. Hwang and Horowitt (2012) note that ecosystems “thrive because of normative culture that accelerates the evolution of human organisation into ever-increasing patterns of efficiency and productivity”.  In other words, we need to create value systems and networks that enable collaborative and symbiotic behaviours across all actors if we are to achieve well-functioning innovation ecosystems. No single individual or stakeholder group can do it alone.

 

Book References

Isenburg, D (2013) Worthless, Impossible and Stupid. Harvard Business Review: Boston.

Hwang, V. and Horowitt, G. (2012) The Rainforest: the secret to building the next silicon valley.
Regenwald: California.

Mazzucato, M (2015) The Entrepreneurial State. PublicAffiars: New York.

Moretti, E (2012) The New Geography of Jobs.  Houghton Mifflin Harcourt Publishing: New York.

 

[1] private incubators and accelerators are often owned by investors who use the structure as a mechanism to identify investment opportunities.