Significance over scale when selecting sectors


When promoting territorial economic development from an innovation systems perspective it is important to find ways of increasing the use of knowledge and innovation in the region. However, in mainstream economic development there is a tendency to target the private sector based on scale. This means that practitioners look at quantitative measures such as jobs, numbers of enterprises, numbers of beneficiaries, etc. when deciding where to do analysis and focus support. This is common practice in value chain promotion, sub sector selection, etc. Many development programmes do this as well prioritizing scale measures such as jobs, women, rural individuals, etc.

From my experience of assisting development organisations to strengthen the economic resilience of regional economies (which means more innovation, more experiments, more diversity, increased use of knowledge, more collaboration between different technological domains), I have found that the scale argument is distracting and too focused on the beneficiaries (whatever is counted) and not focused enough on those indirect public or private agents that are significant and that enable a whole variety of economic activities to take place. With significant I mean that there could even be only one stakeholder or entry point (so the direct scale measure is low) but by addressing an issue it enables a whole variety of economic activities to take place.

Of course, scale is very important when a local politicians need votes. It is also important when you have limited budget and must try to achieve wide spread benefit. For this reason scale is very important for social programmes.

However, when local institutions are trying to strengthen the local innovation system, in other words improve the diversity technological capability of a region, then scale becomes a second priority. The first priority then becomes identifying economic activity that enables diversity or that reduces the costs for enterprises to innovate, use knowledge more productively should be targeted. The reason why this does not happen naturally is that these activities are often much harder to detect. To make it worse, “significance” could also be a matter of opinion (which means you have to actually speak to enterprises and their supporting institutions) while crunching data and making graphs often feel safer and appear to be more rigorous.

My argument is that in regions, the long term evolution and growth of the economy is based on supporting diversification and the creation of options. These options are combined and recombined by entrepreneurs to create new economic value in the region, and in so doing they create more options for others. By focusing exclusively on scale, economic actors and their networks increasingly behave in a homogeneous way. Innovation becomes harder, economic diversity is not really increased. I would go as far as saying that success becomes a trap, because once a recipe is proven it is also harder to change. As the different actors becomes more interdependent and synchronized the system becomes path dependent. Some systems thinkers refer to this phenomena as tightly coupled, meaning a failure in one area quickly spills over into other areas. This explains why whole regions goes into decline when key industries are in decline, the economic system in the region became too tightly coupled.

But I must contradict myself just briefly. When interventions are more generic in nature, meaning they address market failures that affect many different industries and economic activities, then scale is of course important.

The experienced development practitioners manage to develop portfolios where there are some activities that are about scale (for instance, targeting a large number of informal traders) and then some activities that are about significance (for instance ensuring that local conformity testing labs are accessible to local manufacturers).

The real challenge is to figure out what the emergent significant economic activities are that improves the technological capability in the region. New emergent ideas are undermined by market failures and often struggle to gain traction. Many new activities requires a certain minimum economic scale before it can be sustained, but this is a different kind of scale than when practitioners use scale of impact as a selection criteria. Many small but significant economic activities cannot grow if they do not receive public support in the form of promotion, awareness raising or perhaps some carefully designed funding support.

There are a wide range of market failures such as high coordination costs with other actors, high search cost, adverse selection, information asymmetry and public good failures that undermines emergence in local economies. It is exactly for this reason that public sector support at a territorial level (meaning sub national) must be sensitive to these market failures and how they undermine the emergence of new ideas that could be significant to others. The challenge is that often local stakeholders such as local governments have limited influence over public institutions in the region that are funded from other spheres of public administration.

Let me wrap up. My argument is that scale is often the wrong place to start when trying to improve the innovation system in a region. Yes, there are instances where scale is important. But my argument is that some things that could be significant, like the emergence of variety and new ideas often get lost when interventions are selected based on outreach. Furthermore, the focus on large scale impact draws the attention to symptoms of problems and not the the institutional or technological institutions that are supposed to address market failures and support the emergence of novelty.

I will stop writing now, Marcus always complains that my posts are too long!

Let me know if I should expand on the kinds of market failures that prevent local economies from becoming technologically more capable.

 

 

One Response to “Significance over scale when selecting sectors”

  1. Goran Says:

    Dear Shawn,
    I am just reading your post . Again, interesting and well-written. I just wanted to share few thoughts on this.
    You are right, targeting the private sector based on scale is quite common in development initiatives. Reasons are mostly in the fact that when you prepare a project proposal one of things you have to include is data on target group and final beneficiaries, which kind of pushes one towards “the more, the better” logic (that is how proposed project looks better justified). It makes sense, to some extent. In fact, it depends on what you are trying to do. If you are trying to design an intervention that will impact high number of beneficiaries (which is often the case), then this may seem logical. However, when it comes to innovation, scale is consequence, not a cause (ok, in some cases quantity matters, e.g. quantity of whiskey consumed may have positive impact on innovativeness of a person). That is why it seems impossible to make sound conclusion on basis of data focused on scale. That speak about directions of events in the past, not about what caused them. And if you are trying to design an intervention, you have to, first, identify causes of processes, and then design intervention that would impact them, steering the process in desired direction, i.e. towards defined goals. In fact, projects, as we know them, implicitly contain assumption that designed intervention will impact processes in a desired way. Problem with innovation-focused initiatives is that causes are hard to detect, and history is usually of not much help (by history I mean research based exclusively on quantitative data on previous events – if it was so reliable, we wouldn’t see forecasts based on such data corrected so often). It is even an obstacle, because people are not so eager to change existing patterns (I call it grandpa argument (maybe other do, too, I don’t know), because you can often hear: “Why should we change this, my grandpa did thing in this was and it was perfectly fine.”) As you say, in innovations it is about identifying economic activity that enables diversity. In fact, exceptions are to be identified, and that is probably not the hardest part. Hard part would be to identify which one will work, i.e. that has potential to reach sector or area wide scale, so desired in projects. As you say recipe that is proven is really harder to change, but it seems that this recipe should be used by as many as possible to achieve its potential, i.e. to produce as much desired impact as possible (this seems to be logic behind stories about good and best practices). Once it is proven it works, of course.
    I agree, the real challenge is to figure out what the emergent activities are that improve the area. And when you reach the topic of public support, you hit the wall of administration, which in fact I can understand, because it is difficult to turn innovation processes into procedures that enable you to allocate funds in a transparent and procedurally acceptable way (it is easier to give scores to higher number of potential beneficiaries, than to estimate which innovation is worth supporting).
    So, to end this, I agree, scale is the wrong place to start when trying to improve the innovation system in a region, because innovations, at lease at the beginning, are exceptions, not a rule, i.e. they do not include many cases and therefore no scale can be used to identify them. And scale is often based on secondary, quantitative data, which proved to be quite unreliable in forecasting what would happen, what will work and what will not. Also, speaking about innovations, it is important to stimulate innovative thinking, that would provide basis for new ideas to choose from, and to develop tools for identifying promising ones, a tool that would be acceptable even for administration. That may lead to stronger support to operationalisation of innovations and consequently to scale / impact on high number of beneficiaries. How to do this? Well, I would really like to know. Looking forward to the next post.

    Liked by 1 person


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