Following this approach, Member States have been encouraged to define smart specialization policies with the goal of increasing the knowledge content and value added of existing production in industries where comparative advantages exist.
Smart specialization policies should follow a knowledge-driven approach to economic growth that: builds on existing comparative advantages; helps develop new activities in places where a strong comparative advantage might arise; and promotes a larger contribution of the knowledge factor to economic growth(1).
Smart specialization in Romania
As the cornerstone of all EU policies and programmes, the Europe 2020 Strategy is intended to act as an organizing framework under which all EU policies will operate over the coming decade and aims to tackle both the structural weaknesses in Europe’s economy exposed by the crisis, as well as long term challenges, such as globalization, pressure on natural resources and an ageing population.
To render Europe 2020 objectives more tangible, five key targets have been set for the Member States to be achieved by the end of the decade, covering: employment, education, research and innovation, social inclusion and poverty reduction, and climate/energy. Each EU country has adopted its own national targets in each of these areas. The concrete actions at EU and national level that can help ignite new engines of growth and jobs are envisioned under seven ‘flagship initiatives’: ‘Innovation Union’, ‘Youth on the move’, ‘A digital agenda for Europe’ (smart growth), ‘Resource-efficient Europe’, ‘An industrial policy for the globalization era’ (sustainable growth), ‘An agenda for new skills and jobs’, ‘European platform against poverty’ (inclusive growth).
Romanian targets for 2020 are presented in Figure 1. As the national authorities did not establish regional contributions to the national targets according to regional disparities, each region can decide to fulfill the same level of the indicators. Nevertheless, more advanced regions such as Bucharest- Ilfov or the West region could reach these indicators more easily than others. In order to support the national commitment it is desirable that regions with high development potential and stronger higher education structures and R&D bodies take the necessary measures to surpass the national targets, at least those related to employment, R&D, and emissions and energy.
In Romania, the authorities have decided to promote a National Smart Specialization Strategy, as part of the National Strategy for Research, Development and Innovation. The methodology of this exercise is built on the EU Guidelines for smart specialization strategies. The Strategy will define a policy mix focusing on a limited number of priorities starting from the analysis of the research and innovation based growth potential, taking into account the existing sectorial strategies (e.g. Health National Strategy or National Digital Agenda), and using modern forecasting methods. The research and innovation vision for 2020 proposes a focus on competitiveness, by placing innovation at the center of the research and development policy, as well as a commitment to global standards of excellence. Based on a strong partnership between businesses, public entities and knowledge institutions, the national smart specialization strategy will contain a mechanism for monitoring and evaluation.
The decision to have a national approach for the development of a smart specialization strategy is primarily based on the fact that there are no administrative structures at regional level and consequently, no dedicated financial means at regional level for implementing this type of strategy, under the current administrative organization. In addition, the research and innovation policy is designed and implemented at national level. However, some regions that have had a good experience in drafting and implementing strategies for research and innovation, as is the case of the West Region, are opting to develop regional strategies for smart specialization.
These regional strategies can be used to advance local needs and priorities at the national level, and to support discussions with decision makers at county level and with potential investors.
Sector case studies and identification of key policy areas
Based on consultations with the Agency for Regional Development for the West Region of Romania, six clusters were selected for indepth analysis, not because they are seen as ‘winning’ activities per se, but because of their relevance and potential in the West Region’s economy; they are: automotive, textiles, agro-food, ICT, construction, and tourism(2). As smart specialization policies ought to focus on increasing the knowledge content and value added of existing production in industries where comparative advantages exist, and on facilitating the development of new economic activities through measures which support entrepreneurship and experimentation, the current analysis proposes areas for policy action both on a horizontal level (common to all sectors), as well as on a targeted, sector-specific level.
Horizontal policy areas that impact West Region economy
The identification of the main horizontal policy areas results from the combination of a consultative process with private sector representatives - drawing primarily on interviews with sample firms in the target sectors – and analytical results provided by the previous analytical reports under this project. As a consequence, this section highlights the perception of the private sector on the main bottlenecks for conomic growth. Horizontal policy areas (outlined below) represent obstacles to economic development which have a significant impact on growth at the regional level and across sectors.
Skills (1) The link between tertiary education and the workforce and lifelong learning
Despite education and skills often being perceived as a source of comparative advantage for the region, in fact the region faces important shortcomings at all levels of training and skills development. The findings of the World Bank report ‘Territorial Assessment: Profile, Performance, and Drivers of Growth’ shed some light on two important challenges for the improvement of skilled level.
The link between tertiary education and the workforce must be reinforced. The region must do a better job of leveraging its significant tertiary education infrastructure, especially to the insertion of university graduates into the labor force, avoiding common problems of mismatch between educational supply and labor demand and overeducation. This will require investments to improve the links between universities (as well as vocational training facilities) and employers. It may also pay to make strategic investments in promoting disciplines and skills that are likely to be the cornerstones of the region’s future economy.
Lifelong learning is another important area for policy action. Lack of investment in lifelong learning makes the region’s labor force unable to adapt to changing skills requirements resulting from shifts in industry structure and technology. The result is high levels of structural unemployment (and low participation rates) and skills mismatches at all levels of the labor force. Putting in place incentivesfor individuals to invest in lifelong learning, and ensuring that the infrastructure and services (public and private) are there to support it, will be an important priority for the region.
Skills (2) Vocational school system for industry-relevant training
Consultations with businesses revealed that the limited attractiveness of technical schools in the region (and in the country) constrains the ability of firms to increase productivity or to expand. Though TVET program is in place for years, recent numbers suggest the region is lagging behind at least in terms of enrollment.
In addition, consultations with private sector firms in the region reveal that the number of technicians who can operate advanced machinery and equipment is decreasing rapidly and their average age is increasing. This problem affects all the sectors that were evaluated during this study, including textiles, agro-food, automotive, or construction, although to a lesser extent ICT (particularly software development, which is primarily a highskill sector). Moreover, a number of companies complain that many of the training programs offered by human resource service providers and sponsored by EU funds have not been of poor quality and not relevant for the market.
In order to support a sustainable industrial development in Romania for the medium and long term, it is critical that policy makers focus on this type of learning institutions in the near future. The curriculum for vocational schools should be developed based on consultations with the private sector at a national and regional level. In addition, this type of training should be appropriately funded and students should have access to modern machinery in order to be able to obtain industry-relevant knowledge. This approach will ensure that new graduates acquire a skills set that meets the demands of the market and that they are successful in finding employment.
Skills (3) Entrepreneurial and business management skills
A concern highlighted in interviews with R&D stakeholders as well as with the private sector, was the lack of entrepreneurial and business management know-how. For example, in many cases engineers or researchers do not have the ability to translate innovative ideas into commercially viable projects. Similarly, existing small firms or local producers which aim to become suppliers for multinationals are not successful in presenting their products in an attractive manner or creating a brand. Business development and management training programs are essential in preparing firms and entrepreneurs to compete on a national and global level. This type of training should be offered through the university curricula (including a focus on presentation skills), as part of incubator services, or be provided to entrepreneurs through specialized programs at the local level.
Local infrastructure: road and rail transport
Interviews with firms in all the target sectors have confirmed the need to improve infrastructure connectivity. The poor quality of the local road infrastructure affects firms in all sectors.
Companies which use their own vehicles for transportation of products or supplies mention the increased wear and tear of the trucks and delays in delivery, leading to increased costs and loss of competitiveness. In addition, transportation of workers is problematic for large scale manufacturing activities. A large proportion of blue collar or low skilled workers commute to the production plant from surrounding areas and often there are no public transportation options available to them. Large companies provide transportation for employees using company buses but this leads to increased production expenses and traffic congestion.
In this context, local authorities could begin by enhancing the quality of the roads in rural and remote areas. This would not only improve the access of the population in these locations to urban centers but could facilitate the expansion of manufacturing activities to more impoverished areas of the West Region. The new infrastructure could also support the development of ecotourism activities in natural and national parks. In addition, constructing a ring road for the city of Timisoara and extending the connection with the highway would reduce transportation time and costs. Moreover, extending the network of public transportation to better serve the needs of the companies in the region and of their employees would make the region more attractive to potential investors. In addition, enhancing regional mobility by connecting secondary and tertiary nodes to TENT- infrastructure is also important and a key issue for EU services.
Access to finance
Discussions with the private sector in theWest Region indicate that many firms perceive the lending conditions and interest rates required by banks in Romania as a significant constrain to growth.
The amount of collateral necessary for EU co-financing can be prohibitive for smaller firms. As a result of these financing conditions, many companies opt to use internal funds to purchase new machinery and invest in technological upgrading. However, this approach does not allow most businesses to grow at a sustained pace and limits their capacity to expand operations and compete within a larger European or global market.
The private sector faces innumerous challenges to access financing. A significant proportion of the companies in the West Region interviewed as part of this evaluation mentioned that they had used European Structural Funds for the 2007 - 2013 programming period and expressed their intention to apply for this type of financing in the upcoming programming period. However, the consultations highlighted a number of challenges regarding to access to EU funds. Some firms consider this type of financing unaffordable because it requires significant co-financing39, which may be difficult to obtain from the banks (see above). The application procedures often lack transparency, and national or local authorities may impose additional requirements that can render the process lengthy and cumbersome. Additionally, the evaluation period for an application can be very long. Companies that apply for funds to invest in new equipment can wait more than a year for the decision, which in some industries can render a particular technology obsolete. In addition, other firms complained that reimbursements for investments pre-financed by the company may extend past the date specified in the contract.
In order to provide effective support to the private sector, non-reimbursable funds (including EU funds) should be made available according to clear and transparent guidelines, which take into account market dynamics and are applied in an efficient manner by officials with basic knowledge of the industry. The evaluation process should be streamlined so that funding decisions are communicated to applicants within a reasonable period of time. Reimbursement of funds should be processed in an expedite manner so as to avoid the potential negative impact which this type of delays can have on a firm’s cash flow and operations.
Improving the institutional framework supporting innovation
The current institutional framework which supports the regional innovation system encompasses both national and regional bodies. According to Law no. 315/2004, the regional institutional framework consists of the Regional Development Council (which includes the Presidents of the County Councils and the mayors of some localities from each county) and the Regional Development Agency, an executive body of the Regional Council, responsible for policy implementation. The activities of the Regional Development Agencies are coordinated at national level by the Ministry of Regional Development and Public Administration, which is also responsible for the coordination of the National Council for Regional Development.
This national Council, theoretically, is composed of the representatives of the regional councils and representatives of the Government and has the main responsibility of approving the national strategy for regional development. Nevertheless this committee has not been active for a long time. According to this Law, the main objective of the regional development policy is to correlate the sectorial policies and increase the competitiveness of Romania.
Cooperation between national and regional institutions is weak, which has had a negative impact on knowledge management in the region. In Romania, the majority of policies are designed at the central level, by ministries or national agencies, while services are provided at county level. However, there is insufficient cooperation between regional and national authorities. This lack of coordination has had a negative impact on knowledge management in the West Region.
The research undertaken at knowledge generating institutions, predominantly the RDIs, does not seem to be marketable, nor does it meet the demands of the private sector.
Authorities and policy makers should consider consolidating the existing RDI system and introducing measures to increase the quality of research at the remaining institutes. Privatizing some of the RDIs and channeling funds away rom basic research towards the ‘innovation’ side would be beneficial.
Finally, the Romanian Government could improve the specific legislative framework related to regional policy and innovation support if similar structures are set up in all the regions. In case the partnership structures such as those suggested in the report are set up across regions there is need to adapt specific legislative framework related to regional policy and innovation development in order to ensure an integrated institutional system. Specific objectives and responsibilities could be given in this context to both central and regional structures.
Sector specific smart policy areas in West Region
The cluster-level assessment highlights areas for policy action that can support the development potential of these activities. It is worth stressing that, whereas the firm-level data analysis points to high growth sectors as well as subsectors (NACE 4 digit) in the region, the specific areas for policy intervention focus primarily on actions that can enhance growth potential at the level of the cluster as a whole. As already emphasized, this is because interventions focused on subsectors at the NACE 4-digit level would inevitably benefit a very small number of firms. Moreover, the goal of a smart specialization strategy is to expand the role of knowledge and innovation in economic growth, rather than to try ‘outsmarting’ the market.
Automotive
The establishment of research institutes and testing laboratories can help the automotive sector to grow in the medium term and remain globally competitive, and can support firms in the West Region to increase levels of value added through the incorporation of more knowledge and technology in production. Although there are many foreign MNCs in the region, the transfer of technology and knowledge to local firms is insufficient, mostly due to the nature of the tasks undertaken by local firms. The establishment of research institutes and labs will incentivize local firms to prepare prototypes, test their new designs, products and processes and help them to become included in the global supply chain of MNCs. Once a firm becomes part of a supply chain, learning and spillovers are likely to be accelerated. The labs will also provide opportunities to conduct ore frequent quality tests which will increase reliability of local producers.
Increasing awareness regarding the activities of the auto cluster initiatives in the region is also relevant. Expanding and increasing the awareness of the auto clusters initiatives (like the Automotivest) would stimulate exchange of ideas, sharing of experiences and would help local producers become better and more connected with the large players.
Textiles
Closing the gap on financing for the acquisition of productive investments in new technology and machinery plays a key role for the textile sector. In order to increase the value added generated by the sector, and to be able to enter new export markets, textile firms in the West Region should expand their production to include more knowledge and technology-intensive activities that will allow them to generate new designs and products.
These activities will require the use of advanced technology and equipment that can be prohibitively expensive for many local companies, which have difficulties in accessing external finance. To close this gap on financing, the government can provide tax incentives, subsidies, or better financing terms on productive investments, especially on acquisitions of new technology and machinery.
Agro food
The authorities should develop targeted initiatives for SMEs to help develop sector specific support infrastructure for improving quality, health and safety standards, SMEs financing initiatives, marketing initiatives such as the development of a regional brand, or training in marketing or sales. These measures will help build capacity in the sector and could be very helpful in enhancing the competitiveness of West Region food producers. In addition, measures to support the association of small scale farmers could greatly improve access to finance, production sustainability for food processors, lower food processing costs and help to provide more robust employment in rural areas.
Public policy should also strengthen basic and applied research. The largest share of innovation and value added in the agro food sector is generated by suppliers through the provision of new machinery, new seeds, new chemicals and fertilizers, and more recently by the application of ICT to agriculture. Therefore, public policy should support innovation in the industry, especially as food engineering, agriculture, and veterinary sciences are areas of strength of the West Region universities.
ICT
The services offered by incubators and business accelerators should be expanded. While there is agreement regarding the usefulness of incubators and business accelerators, it was highlighted during discussions that in order to be useful these infrastructures also need to provide other services, such as information about the sector and the clients, assistance in drafting business plans, and advice regarding financing options.
Mentorship programs should be structured more efficiently, and the incentives for mentors have to be clear. These incentives can take the form of shareholding, or the right to subsequently participate in the ownership and management of intellectual property. Mentors also facilitate the firms’ access to investors. There are different successful models for this type of activity, some of them (such as Endeavor) which operate in different countries and could be franchised to Timisoara.
Angel investors could also accelerate the development of new creative companies. In Timisoara there are several potential investors (i.e. angel investors) who are experienced, skilled and well-connected individuals that could provide hands-on support to entrepreneurs. There is space for public action to research the market and connect investors to new creative companies in need of funding.
The development of links with global customers and with downstream user sectors is also important. Match-making mechanisms and more efforts to market the West Region ICT sector to downstream users and global customers would also be necessary.
Construction
Policies to support the regional construction and energy cluster (ROSENC) are essential for the development of the construction sector. The West Region cluster ROSENC can play a key role in promoting collaboration between state authorities, academia, and the private sector in order to encourage knowledge-exchange and support commercially sustainable projects to expand the production of energy efficient construction materials in the region, which could help reduce the cost of such inputs and increase their use in local infrastructure. Thus, increasing awareness regarding ROSENC’s initiatives could help local firms increase competitiveness.
Expanding the award criteria for government infrastructure tenders to include the use of energy-efficient materials is also a key factor to increase economic sustainability. The authorities should encourage the use of energy-efficient materials in government infrastructure projects and should support the transition to nearly zero energy buildings. These measures would promote the use of energy efficient materials while helping sustain long term economic development.
Finally, while the construction sector was classified as having unclear comparative advantage, creating an enabling environment for efficient market selection emerges as an additional useful measure. This implies combining measures that promote firm entry and encourage startups (potential high growth firms) – and allowing firm exit.
Tourism
A tourism cluster can support cooperation between tourist stakeholders and between the tourism sector and different innovation actors. Through its capacity to stimulate public and private infrastructure development according to integrated and multi-sectorial area-based local development strategies, it can become a driving force for the development of related innovative associations and companies.
The tourism cluster can act as a platform during the 2014-2020 programming period that can implement the smart specialization objectives by using policy tools to guide the European funds towards tourism integrated and sustainable projects with major externalities.
Spa and wellness tourism
The West Region could position itself as a pilot region in the field of anti-aging treatments. This can be done through the specialization of town and spa resort treatment facilities towards prevention and anti-ageing therapy that will target seniors. Ana Aslan and Gerovital can constitute a starting base in the area of medical tourism. This offer can be completed by general medical check-ups, aesthetic light surgery, anti-smoking program, anti-alcohol cure, weight-loss program, etc.
Regional spas should be promoted as cross-border medical tourism destinations. The tourism cluster could manage the design of customized products for specific markets and could provide information and support to regional spa and medical treatment centers for their certification and accreditation process.
Ecoturism and active tourism
The West Region can become the first Romanian region to develop ecotourism destinations, as its natural heritage potential is one the most important of the country. Ecotourism brings together rural tourism with active and adventure activities and fits with the recent evolutions on the demand side (especially on the European travel market).
This form of tourism is based on a bottom-up development approach, providing not only sustainable development and the protection of natural and cultural heritage, but also a maximized local retention of economic benefits.
Urban and MICE Tourism
The organization of meetings and professional events is also an option to attract visitors. Successful metropolitan areas have placed the tourism industry and events’ management at the center of their tourism strategy or have invested in leisure tourism, meetings and professional events as part of a broader strategy.
The cultural and event strategy can become a key element of the West Region tourism strategy. Having an event agenda that is balanced and includes events in each season is an important aspect for an urban destination. Events constitute occasions to discover the traditional heritage of the city presented in a different manner. In addition, the organization of major events outside of the main touristic season can represent a good way to increase tourism flows during the low season.
CONCLUSION
Overall, the suggested policies and recommendations presented here aim to tackle the main challenges that prevent the West Region from catching up with its more developed peers over the next programming period (2014-2020).
The region has a dynamic economy, and stands out among the other regions of Romania as result of a high level of economic development, solid export growth rate, relatively skilled human resources, a large diversity of natural resources, and a favorable geographical location. In the 2014-2020 period, the West Region has the opportunity period to use its specific human, natural, and financial resources to ensure a consistent and sustainable development path and a gradual convergence with Bucharest and the highly developed regions of Europe. It has to exploit to the maximum assets and the available financing and seek synergies between the EU Funds and other financial sources in a strategic and integrated approach in order to face the tremendous development challenges and reach the strategic EU 2020 targets.
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1) According to European Commission, smart specialization means identifying the unique characteristics and assets of each country and region, highlighting each region’s competitive advantages, and rallying regional stakeholders and resources around an excellence-driven vision of their future. It also means strengthening regional innovation systems, maximizing knowledge flows and spreading the benefits of innovation throughout the entire regional economy (http://ec.europa.eu/ regional_policy/sources/docgener/informat/2014/smart_specialisation_en.pdf).
2) In this assessment, the term “cluster” refers to a precise set of NACE sectors, as defined by the ADR-Vest.
3) The data refers to 2011 indicators
4) Economic activity rate (2011); Source: Eurostat
5) Data for 2010; Source: Eurostat
6) Persons aged 25-64 with tertiary education attainment (%); Source: Eurostat
The article is a synthesis of the analysis undertaken as part of the project ‘Competitiveness Enhancement and Smart Specialization Policies for Romania’s West Region’, prepared by the World Bank for and in collaboration with the Regional Development Agency for the West Region of Romania (ADR Vest). The opinions expressed by the authors are personal and do not reflect the official position of the institutions mentioned above.
A group of more than seventeen experts contributed to the assessment. The World Bank coordination team included Mariana Iootty (Economist), Donato de Rosa (Senior Economist), Arabela Aprahamian (Senior
