Speech by Commissioner Elisa Ferreira at the 49th Annual Conference of the European International Business Academy
European International Business Academy - Annual Conference
Dear Lucia,
Dear Ana Teresa and Ari - thank you very much for joining me in this session today.
What a pleasure to be here today.
It has been many years now, more years than I dare to count. But I have the best memories of this EIBA community. Memories of our joint work and far-reaching discussions Memories of distinguished researchers: the late John Dunning, who was my PhD supervisor, Peter Buckley, Marc Casson, John Cantwell, Robert Read, and, in Portugal, the pioneer in the field, Vitor Corado Simoes, the dynamism of Ana Teresa Tavares, and so many others. Some of them here today, some of them present through our memories.
I think it was Isaac Newton who said: “If I have seen further, it is because I stood on the shoulders of giants”. Many of those names I just mentioned are the giants that enabled us to see further. I am delighted to see that you are still taking the discipline to new heights. And indeed, that new giants are emerging.
So, it is not just a pleasure to be here. It is above all an honour, to be surrounded by such distinguished academics and a deep honour to be made an honorary fellow. Thank you very much.
My life has circled back. These last years at the European level, I have returned to the fields that, both academically and professionally, occupied the first 15 years of my working life: questions of balanced regional growth and development, productive investment, European integration, and the goal of economic, social and territorial cohesion.
I am committed to the idea that every European, no matter where they live, should access similar opportunities. Such is the motto of the European Union's Cohesion Policy, which I m responsible for and for which I have the pleasure to lead: Leave no one, no region behind.
So, of course, I particularly welcome the increasing recognition by academia that we must combine the analysis of international business with that of regional development. Because investment is attracted and anchored by specific spatial characteristics, what we call regional resources and regional endowments. And because regional development, in turn, is substantially driven by the location decisions of businesses and the shape and distribution of national and international value chains.
Now, be reassured: my intention is not to present a piece of academic work. There are many in this room far more qualified than me. But I hope with my questions to stimulate further fruitful discussions, and – who knows? – eventually some research. Because policymakers, at every level, should be conscious of the need to mobilise the help of the academy to fill our knowledge gaps.
There is so much potential to massively improve the design both of our regional strategies, and of our industrial policies.
Filling knowledge gaps matters more than ever. Europe is at a critical juncture: successive crises, from Covid to war in our borders; long term challenges, from climate to an aging population; a fast-changing geopolitical environment; and the ambition to maintain Europe's technological edge, supported by the green and digital revolutions.
Plenty of challenges!
The success of the trajectories set now, and in the coming years, will determine the long-term direction of Europe.
So, the world is not flat after all. To paraphrase Mark Twain: rumours of the death of geography, have proven to be greatly exaggerated!
Economic geography has been a significant growth field, particularly from Krugman onwards. And there is a renewed understanding of the importance of place-sensitive policies.
This is not just a theoretical issue. In Europe, significant disparities still exist, in income and in productivity. Although somehow natural between Member States, given their different starting points, these disparities are all the more striking within Member States.
The 8th Cohesion Report, which the European Commission published in March last year, identified a wide number of territories that are stuck in regional development traps. These are less developed regions, but also some developed regions or regions that are at an intermediate level of development. And they are stuck; they are no longer growing or are growing well below the average in the European Union.
The Report identifies a number of potential causes. Regional development traps seem linked to innovation capacity, or, rather, the lack of it, and the business ecosystem. Public administration, and the managerial capacity of the public sector, seems also to be a constraint.
We have been following up on that research, and, in a new report published this year, “Harnessing Talent in Europe”, we identified an additional trap: a skills trap, where the lack of skills makes a region unattractive to high quality businesses, which in turn makes it difficult to retain skilled workers in the region.
There is obviously a considerable overlap between regions in skills traps and those in development traps. But this same research shows that an estimate 30% of the EU population live in regions that are “stuck” in such a skills trap. The disparities that result from all these traps are not only economically significant, but also politically significant.
From an economic view point, congestion in large cities quickly transforms the advantages of agglomeration into serious disadvantages. Ranging from house prices and real estate prices, to transport costs, crime, polluted air and dirty streets. At the same time, small towns and rural areas, with their potentially higher quality of life, suffer brain drain. And as the population diminishes and ages, public services become financial drains.
All this is obviously and seriously sub-optimal from an economic point of view. But it also correlates with rather toxic politics. Recent research into the so-called “geography of discontent” (Poelman et al, 2019; Rodriguez-Pose et al, 2023) makes a convincing case for the link to regional disparities. The link is mild in the short term, but becomes quite striking in the case of long-term regional stagnation or decline. Regions in these situations often experience social and political disengagement, or even revolt. Now, of course, as Tony Venables has rightly pointed out on various occasions (he came back to this topic this year), it is a crucial question whether such disparities tend to be self-correcting or not. The need for public policy hinges on this question.
Indeed, there are theoretical arguments in favour of self-correction. But these optimistic assumptions of self-correction and automatic convergence, fall at the first hurdle of the evidence. And at the second, and third hurdle too. Because the evidence is clear and quite consistent: in most cases, disparities are persistent, and often self-reinforcing. This is why we call them traps! Convergence either does not happen at all, or is very slow, lasting a generation or more, by which time, the economic and political damage is done, and the region has emptied out.
And of course, as it always does, the literature has caught up, identifying several reasons for the absence of these rebalancing forces. The basic assumptions underlying our expectation of “natural convergence”, do not withstand closer examination. We referring, among several other factors, rigidities in factor prices, combine with the actual determinants of company location decisions, to create quasi-permanent spirals of imbalanced growth. This being a market failure, we are talking about externalities and the provision of public goods. Because, as you know, location decisions are driven by perceived externalities, such as business networks and skills. Or by public goods, such as the innovation ecosystem, or the provision of public services.
So the location of companies tends to be “sticky”, both in the sense that individual companies cannot change the equilibrium, and in that the result is that companies tend to cluster together. Although this leads to certain economies of scale, linked to infra-structure or supply networks, there are also massive diseconomies of scale, due to congestion reflected in higher factor costs, especially real estate, higher levels of insecurity, lower environmental quality and lower quality of life in general.
Similar considerations apply to skilled workers in search of high-quality opportunities, and careers. Whether in the private or public sector, they tend to move to congested areas, however frustrating they find housing costs, long commutes, or quality of life more generally. The result of all these individual decisions, is that some places and regions end up trapped, in a long term low-level equilibrium or even a declining path.
The collective cost of this situation, not just the economic costs, but the social and political costs, calls for public policy measures. This is what “regional development” or “cohesion” policy is trying to do, involving, by necessity, many “moving parts”: many sectors, many stakeholders, and multiple levels of government.
But, behind all this complexity, at the core of regional development policy there is a simple, crucial question: “What must we do to correct the imbalances in the location decisions of firms?” Because this is how we attract the jobs, the innovations, the managerial techniques, and the economic dynamism. And this is how we break development traps.
In fact, there are two key dimensions to this issue, represented by two key words in the literature: attractiveness and anchoring. Historically, and conventionally, regional and cohesion policies have generally focussed on “attracting”. This is based on the classic tools of infrastructure provision, incentives, and workforce skills. Indeed, as your own work has proven, these tools can be effective for attracting businesses. And such tools are still incredibly relevant in many places in Europe. However, the changing landscape of the modern economy, including the digital revolution, means that the basic needs are evolving. So further research would be appreciated on how regions can stay attractive in this changing landscape.
Moreover, over the years, there has been a shift. A recognition that attraction is not enough. Policy practitioners have noticed this. And so have researchers, including so many of you. It is increasingly clear to everyone that we must go beyond simple attraction: we must also anchor business in the region. Creating spillovers and deep links for the benefit of companies, for their suppliers and partners, and, indeed, for the benefit of the whole region.
This requires new thinking. And a new approach, which takes account of the detailed characteristics, and the complexities, of both regions and firms. In other words, regional policy is now a matchmaker, looking for affinities between firm and region, with the goal of increasing the quality of the match, in view of a long and productive relationship.
This symbiosis between regions and firms is confirmed in a recent study supported by the European Commission (Casadei et al., 2022). The study shows that in the EU, FDI in three key value chains, i.e. automotive, textiles/clothing, and electronics, is highly regionalised, with a marked concentration in highly specialised regions. These places often have a long tradition of production. They usually have a high concentration, and dynamism, of industrial activities. So we see clearly that the geography of internationalisation is in fact, a geography of regional industrial specialisation.
And of course, you will already be thinking of John Dunning and his insightful OLI paradigm. We are discussing here, the capacity of a company to internalise the benefits arising from a key location advantage, tapping into specific regional strengths and links. This combines with a very specific key ownership advantage, which is the ability to seek out such regional capabilities. So the goal of all our policy funds and policy instruments, should be to create self-reinforcing, organic links between businesses and places.
You can see this clearly, in the European Union's Cohesion Policy's emphasis on what we have called smart specialisation strategies. This is a clear attempt to match regions and companies, including FDI. Since 2010, Cohesion investment support, must be preceded by a national or regional smart specialization strategy involving the relevant stakeholders across the innovation ecosystem. More than ten years after the launch of this policy, 185 Smart Specialisation Strategies are in place across Europe. In preparing the plans, stakeholders are encouraged to reflect the complexity of the regional economy: from green and transport infrastructure, to the provision of public services, and the quality of institutions.
In other words, it is not just a question of finding good matches, but of adapting the regions to the needs of the businesses they want attract – and anchor! Less developed regions in particular may lack a sufficient launch pad for change. They often lack administrative capacity, or an established business ecosystem. So capacity building is needed, to build the profile of the region.
But, in fact, developing a good strategy is not a trivial exercise. Among other contributors, Crescenzi & Harman (2023) start from the understanding that every global value chain is different, to develop the argument that regions need to develop the right institutional and informational bridges. It's about connectivity, it's about linkages to maximise the value of that bridge, and thus to share in the value created around the world
But managing this kind of complexity requires a broad and sophisticated bottom-up process. Bringing together all the stakeholders: industry, education and research institutions, public administrations and civil society. This partnership is needed not just to establish a local diagnosis of assets and needs, but also to set a strategic view for the future, including in this view the attraction of productive investment, national and foreign.
But there are still so many gaps in our knowledge! Regions and policy makers need guidance. They need a roadmap to each sector, and to each value chain. As well as what Crescenzi and Harmon (2023) describe as the “crucial institutional and informational linkages, necessary in each place to connect to the specific sectors and value chains”.
This information is complex and would benefit from extensive research. And you are the ones ideally placed to provide that roadmap. You are the giants in this field of knowledge, and we are asking you to lend us your shoulders. Every day, regions across Europe take policy decisions which would be better informed with your insights.
So my appeal is for your contribution. Helping to build a framework in which companies win and regions win, and thus create a win for Europe as a whole. Fewer and smaller regional disparities is better for our economies, for the well-being of our people, and for democracy. Your work has helped us, and will continue helping us, in achieving this goal.
So, thank you for this honour of being a keynote speaker today and of becoming an honorary fellow of the European International Business Academy. I am sincerely, deeply touched. I feel privileged that I have had this wonderful opportunity to work with so many of you. And that, after all these years, there is still so much we can do blazing new sails, and charting new territories.
Congratulations to the EIBA, now close to its 50th birthday! May many more follow!
Thank you so, so much ever again.
Obrigada.
