Regional Governance, Institutions and Development
Michael Danson and Geoff Whittam
(University of Paisley-Scotland)


8.1 Introduction

In this section we look at two case studies that highlight several of the main points raised in previous sections. The first case study focuses on the industry districts of Emilia Romagna in northeast Italy. These spatially specific production systems have been widely researched and are identified as "the model" of contemporary Marshallian industrial districts. The operation of these districts identifies the productive system beyond a narrow interpretation of the productive system concept, as definitions in section 2 made clear. The governance structure of these districts is regarded as being based on trust and cooperation, so an examination of the districts will help demonstrate a system in which these concepts are significant.

8.2 Third Italy

Of all the regional economies in which industrial districts have been "discovered," the districts of northcentral Italy are the most widely cited. These districts are commonly known as the "Third Italy" to distinguish them from the established industrial districts of northern Italy and the relatively under-industrialized southern Italy. It is to a review of the literature that describes the establishment of the districts of the Third Italy that we now turn (See Bergman and Feser, "Industrial and Regional Clusters: Concepts and Comparative Applications" in the Regional Science Web Book for further information).

SeeFigure 8.1: Pattern of light industrialization local systems: the Third Italy and Figure 8.2: Marshallian industrial districts within the pattern of light industrialisation local systems 1981.

Brusco (1982) argues that the historic development of the districts can be found in viewing the specific industrial development within the region. In particular, Brusco identifies two developments that gave rise to the dominance of small medium enterprises (SMEs) in the region. The first was the growth of the traditional artisan sector; the second was deconcentration and the rise of subcontracting. This rise in deconcentration was due to two factors. The first was the rise of a strong trade union movement in the 1960s within the then dominant large firm sector. To counteract the organized labor force the large firms followed a strategy of contracting out to the SME sector. The second factor was the changing nature of consumer demand away from standardized mass consumption goods and toward high value-added, differentiated goods and services. This switch in demand gave rise to different types of techniques of production, such as flexible specialization, which gave SMEs a competitive edge.

Within the industrial districts of the Third Italy, however, there were also policy initiatives which encouraged SMEs generally and artisan firms in particular. Artisan firms, or artigiano, refers in the Italian context to craftsmen and craftswomen who not only work as skilled workers but also engage in the organization and the running of businesses (Best 1990). The legal position of an artisan firm, according to legislation passed in 1986, states that the owner of the firm must be a working manager and that at least one other member of the firm must be from the same family. Incentives exist to encourage firms to register as artisan firms as opposed to industrial firms.

In analyzing how the artisan firms became established in spatially specific industrial locations, that is, industrial districts, Brusco makes a distinction between two stages of development. The first stage was characterized by public bodies' encouragement of the artisan firms in a manner that lacked an overall policy framework. What this stage witnessed, though, was increased cooperation between the artisan firms and policymakers and enforcers. The second stage saw the establishment of specific agencies such as Real Service Centres, which led to the development of networking between the artisan firms and the policy agents.

This second stage involved a more proactive industrial policy on behalf of policymakers. This policy, for example, led to the establishment of artisan parks on land purchased at favorable prices from the large landowners. This activity involved the local authorities working with the artisan associations, the banking sector and landowners (Brusco 1989).

Alongside proactive policies such as the acquisition of land at favorable prices, the artisan firms themselves formed organizations such as Artisan Associations to promote policies and institutional frameworks that would help them to be successful. The local Artisan Associations are affiliated with the Confederation Nazionale Dell’Artizianato (CNA). The Associations, both nationally and locally, are organized through a democratically elected management committee, the majority of whose members must themselves be artisans. This has led to the artisan firms being able to reap internal and external economies of scale and to develop a degree of cooperation that has been essential for the success of the proactive industrial policy pursued in the region.

In analyzing the activities of the CNA, Best (1990) found that it was the largest of four national confederations of artisan firms. Within the province of Modena, the local CNA branch has 14,000 member firms (representing 39,000 workers), and sixty locations within the province for supplying administrative services to artisan firms, such as accountancy, financial and marketing services. The provision of such services by agencies inspired by the CNA has been likened to small firms having the headquarters of a large firm, enabling the members of the CNA to accrue both internal and external economies of scale. Indeed, it has been argued, "scale economies at the level of the firm are hypothesized to have become less important, altogether, replaced by the achievement of such efficiencies at the level of the district (or network) as a whole" (Harrison 1990, 5). A survey of small firms by the Small Business Research Centre (1992) demonstrated a link between the amount of external advice taken and the rate of growth of small firms. The provision of services provided by CNA-inspired institutions, then, would appear to be fundamental to the growth and development of small firms.

Additionally, the CNA is involved in Loan Guarantee Schemes such as the Financial Consortia operated in Modena. The scheme is based on cooperation between small firms and local and national government and is operated by a board representing member firms and the CNA. The loan guarantee fund consists of moneys from local, regional and national government plus firms’ membership fees. Any member firm requiring a loan obtains a report from the local CNA which, if approved by the local CNA and the Financial Consortia, is sent to a bank with a loan guarantee (Best 1990). There is a twofold enforcement mechanism designed to ensure that firms do not abuse the scheme. First, "self-policing" ensures as far as possible that only potentially winning ideas are promoted for finance, and second, firms that default can be barred from applying again. The success of the scheme can be gauged by the low level of bad debts; according to Best (1990) less than 0.2% of borrowers default on their loans. As Brusco comments, "the person who receives a loan from the co-operative will stay up at night thinking of ways of repaying his loan; whereas the person who receives a bank loan will stay up at night thinking of ways of not repaying his loan" (Brusco 1985).

A further initiative was launched in the mid-1970s and 1980s, that of the Real Service Centres, coinciding with a more proactive policy stance from the state agencies. ERVET (Regional Board for Economic Development) was set up in 1974 by the regional government of Emilia Romagna "to foster economic development and upgrading in Emilia Romagna" (ERVET 1991). In an attempt to achieve this objective ERVET "provides real services either supplied directly by the corporation or through ERVET System’s network" (ERVET 1991). Real Services have been defined by Bellini as a set of service activities that "generate structural rather than temporary changes in the organisation of production within a company" (Bellini 1990, 173). Hence, the collective service sector is directly involved in activities related to the circulation of information, training, working out of plans, research activity and the circulation of innovation, each of which focuses on three main areas, sectoral projects, horizontal projects and territorial projects (Cooke and Morgan 1991). Furthermore, ERVET seeks to operate with a public-private mix along with "credit and financial institutions, entrepreneurial associations and Chambers of Commerce" (ERVET 1991), thus developing networking practices. The structure and policy development of ERVET reflects the economic, social and political structure of Emilia Romagna.

It is important to distinguish the role and function of ERVET from the typical regional enterprise agency. ERVET, in particular, does not seek to encourage direct foreign investment or give direct grants; instead, it provides real services for which firms pay a fee. The objective is that service centers such as ERVET provide the kind of services that large firms frequently conduct in-house (such as R&D, promotion of new technology, marketing) to the small firm sector. The advantage to firms that use ERVET is that they gain access to business services at a price below that which they would have to pay if they used the private consultancy sector. ERVET provides structural services that are consistent with its overriding aim of facilitating the long-term economic development of firms and networks within the region. In short, ERVET enhances the survival prospects of artisan firms by allowing small firms to compete on more even terms with large firms.

For example, ERVET promotes new technology activity by playing a coordinating role between small firms in specific industries and interindustry agencies such as ASTER (Agency for Technological Development of Emilia-Romagna). These alliances aim to ensure that the small firm sector has access to the latest computer technology and does not suffer a cost disadvantage. This type of activity tends to be sector specific: for example, CERAL (the Emilia-Romagna Centre for the shoe industry) provides technological information so that firms in the shoe industry remain competitive in the market. At a broader level, the service center provides a vast array of activities such as export promotion, access to European Community R&D programs and projects aimed at environmental issues, such as industrial dereliction and pollution.

Additional service provisions are supplied by other service centers, again operating on two levels, the sector and regional. At the sector level these centers cater to firms within their specific sector; at the regional level they are concerned with issues such as technology transfer and export promotion. The economic rationale can be seen to be arising out of market failure: "First of all, the initial investment required to put together the kind of knowledge necessary to carry out this type of activity is quite high. The market itself is also fairly small ... these kind of activities are specific to certain sub-sectors which include only a limited number of firms ... the centres are not an invasion of the field occupied by private industry, but rather an initiative to combat the insufficiency and incapacity of the market itself" (Brusco 1989, 417). Public financing of the centers has a limited duration (a period of about five years). The idea is that the public authorities should shoulder an important part of the initial investment, and then the centers should become self-financing.

Typical of the sector specific centers is CITER (Centro Informazione Tessile Emilia-Romagna) which operates in the knitwear industry, centered in the province of Modena. CITER was established in 1980 by ERVET and key players in the region, notably an amalgam of artisan associations plus two other industrial associations. The idea of this particular sector specific service center arose out of a training project sponsored by ERVET.

The activities of CITER involved the development of a product called Citera, which is a computer aided workstation for the design of knitwear. Citera was developed in conjunction with ENEA (the Italian Commission for Nuclear and Alternative Energy Sources) and enables fashion designers to gain rapid recall of thousands of images and colors. This enables the knitwear industry within the region to maintain a competitive edge over low-cost imitators by speeding up the turnaround time from design to finished product. What is being achieved for the SMEs in the region is external economies of scale through cooperation. The cost of using this new technology would be out of the reach of the individual firm, but for a small fee firms can utilize these facilities through the service center. The application of new technology to knitwear design and fabrication constitutes a strategy that plays to the strengths of Italian fashion and stands in contrast to the approach adopted by much of the United Kingdom's textile industry, which relies exclusively on cost cutting. The use of such innovative techniques as Citera has drastically reduced the time taken from design to production of a finished product from months to days, and Citera has helped in the development of the concept of ready fashion.

CITER is but one example of the collective service centers developed in Emilia-Romagna. Similar centers have been established in other industries including agricultural machinery, footwear, construction, ceramics, metals and mechanical engineering (ERVET 1990).

See Figure 8.3 Marshallian industrial districts, according to dominant manufacturing industries, 1981.

The networking relationships developed within Emilia Romagna have led to the development of the phenomena now known as new industrial districts. The thrust of the policy is based on information and real service provision rather than grant aided assistance. Whether this concept can be applied to other regions is a debatable point. If industrial renewal is to be attempted through an industrial policy with SMEs playing a key role, the advantages of an industrial atmosphere should not be ignored. A networking approach promotes cooperation in the input markets by allowing SMEs to make use of economies of scale and developing the spirit of cooperation. Provision of real services has certainly been successful in encouraging growth and has had an important effect in moving districts towards new technology and toward upper segments of the market. But as Brusco (1988, 18) points out, "the problem which troubles many of us in Italy is whether these internal policy measures which are taken at a local level, could be used in the South of Italy to transform clusters of firms into industrial districts." Brusco’s view on this question is somewhat pessimistic: "there has been realised in Emilia a harmonious mixture of discordant elements, but one whose complexity makes it difficult to take as a model" (Brusco 1989, 183). While the exact experience of Emilia Romagna cannot be reproduced, understanding where the gains from production within an industrial district actually arise can assist policymakers as they attempt industrial renewal within geographically specific areas. Changing the culture of an economy has been attempted in the case of Scotland, as previous sections have outlined. Further evidence of the desire to change a way in which an establish economy operates is evidenced in "Our Competitive Future: Building the Knowledge-Driven Economy," the White Paper published in 1998 by the Department of Trade and Industry in the United Kingdom. It is to a study of this strategy that we now turn.

8.3 Our Competitive Future

The White Paper on competitiveness was published on 16 December 1998 by Peter Mandelson, who was then the trade and industry secretary. The aim of the White Paper is to reverse the long-term decline of the United Kingdom's economy. Along with the White Paper, the Department of Trade and Industry released a paper that provides the economic analysis for the proposals found in the White Paper. The main focus of the Analytical Report is the importance of knowledge and knowledge creation within modern industrial societies.

The Analytical Report informs us that while "knowledge has always been important, ...four mutually reinforcing processes are increasing its importance for prosperity." It goes on to identify the processes as "Information and Communications Technology (ICT)," "increased speed of scientific and technological advance," "global competition," and "changing demand" (Analytical Report, 3). The report cites the World Bank’s 1998 World Development Report and OECD to reinforce the significance of the role of knowledge and knowledge creation to modern industrial societies. The document is careful to differentiate between codified and tacit knowledge. Codified knowledge is so defined if it can be written down and transferred easily to others, tacit knowledge takes time to acquire and is difficult to transfer. Tacit knowledge has been identified as a source of competitive advantage. Much of the White Paper is devoted to explaining how the roles of institutions, organizations and individuals need to evolve to capture and develop knowledge, particularly of a tacit kind, to create a competitive successful economy. In essence tacit knowledge can be accumulated from within the firm, from its employees, for example, but it may have to be gathered through cooperation with other firms and institutions such as educational and research establishments. This has led to a spatial dimension to the analysis: "In some cases, the need for proximity to other firms or a pool of skilled and complementary labour has led firms to cluster together in specific locations" (Analytical Report 1988, 4).

The organizations required to create and transfer knowledge are not necessarily new, and researchers and practitioners within regional science will be familiar with many of the concepts found in the report. The Analytical Report, underpinning the emphasis on networking and clusters found in the White Paper, highlights findings from endogenous growth theory; namely the importance of intangible assets such as human capital, R&D, brands, contacts and know-how (Analytical Report 1998, 17). However, due to the immobility of factors such as labor and due to the tacit nature of many aspects of knowledge, there is a spatial aspect to the establishment of a knowledge driven economy. It is through cooperation between the key players that firms, regions and ultimately the United Kingdom's economy is going to be competitive. In terms of science and technology, for example, the Analytical Report explains: "To gain access to technology they (firms) must network with suppliers, customers, competitors and other users of similar technologies. ...Firms are also increasingly developing direct links with the academic science and engineering base" (7). The objective is to then create governance structures similar to those that have been observed throughout this section, namely partnerships, networks, clusters and spatially specific industrial districts.

The report argues that there are two processes at work that are leading to the necessity of greater collaboration. First, while the importance of tacit knowledge has already been identified as the source of a firm’s competitive edge, once it becomes codified it is more difficult to control than other assets of the firm. However, once it does become codified it opens up the possibility for the firm to contract out. Second, due to the high sunk costs of knowledge creation through R&D, it becomes more imperative to seek collaborators. The latter point leads to advantages of both scale and scope (Analytical Report, 20).

Utilizing the established literature on clustering such as Porter (1988a and 1988b) and with reference to both Smith (1776) and Marshall (1890), the Analytical Report highlights the benefits in terms of economies of scope "drawing upon companies with complementary skills to bid for large pieces of work which each of the individual firms would have been unable to complete" (22). Similarly, clustering can result in savings for individual firms by bulk purchases and joint marketing strategies. Further reference is made to external economies which accrue to firms organized in a spatially specific cluster such as the establishment of specialist support services. The utilization of knowledge, particularly tacit knowledge, is further enhanced with the repeated interaction of firms that are close to each other.

The implications of the Analytical Report could have particular consequences for regional policy. Of the seventy-five policy commitments in the report, the following are of specific interest to regional scientists:

  • Funding for up to 10 proposals from industrial sectors to improve supply chains following a successful program developed by the Society of Motor Manufacturers and Traders
  • Refocusing regional selective assistance grants on skills, providing £39 million for a skills survey and £10 million for spending on competitiveness by RDAs
  • Ministerial and regional encouragement for business clusters and networks, including a review of the planning system

Clusters that are perceived to be of national significance will receive help coordinating across government and with business. As a first step, a team led by Lord Sainsbury will promote industrial clusters in biotechnology. The planning system will be examined jointly with the Department of the Environment, Transport and the Regions (DETR) to make sure that it encourages enterprise and promotes the needs of industrial clusters.

To further encourage innovation, technology access and partnership between industry in the United Kingdom and science and technology, further proposals in the White Paper include the following:

  • Doubling Department of Trade and Industry funding for "technology champions" to support the transfer of technology and knowledge between the science and engineering base and businesses
  • Creating a network of partnerships to bring researchers together with businesses both large and small to share ideas and commercialize research
  • Awards to support high quality research partnerships between business and universities in technology priority areas
  • Measures to promote the commercialization of university research, including a new "Reach-Out" fund to encourage universities to work more effectively with business; and a £25 million Science Enterprise Challenge to create up to eight enterprise centers at universities in the United Kingdom
  • A look at the working practices of public sector research establishments to ensure that they make the most of the commercial potential of their research

This case study is important because it relates much of the theory that lies behind the vast literature on governance structures to an attempt to implement policy. Within the United Kingdom, the White Paper and the Analytical Report are also better understood in the political context of the New Labour government and the so-called third way. In the White Paper's foreword Tony Blair explains that "Old-fashioned state intervention did not and cannot work. But neither does naive reliance on markets" (1).

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