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Economic competitiveness

[ Summary ]

 

Chapter 2:
Analysing an area’s economic competitiveness

 



2.3 Businesses

 

Human resources and vocational skills on the one hand, and financial resources on the other, constitute the two key factors of economic competitiveness.

How are such resources transformed into businesses (in the broad sense, i.e. self-employed craftsmen and micro-businesses, large enterprises and farms, etc.)? What is the creation and failure rate of such businesses?

Businesses that are well established in the area and are actually controlled by local players are central to an area’s economic competitiveness. To what extent, therefore, do players from outside the area with interests other than local development control such businesses? Have there been any sudden, unforeseen departures, which represent considerable losses for the area and are likely to cause destabilisation (unemployment, loss of key skills, etc.)?

How is it possible to find out more about the area’s businesses and to gauge their performance in order to ensure long-term economic competitiveness? This requires answers to a number of questions:

  • How are such businesses distributed in terms of size, geographic situation, etc.?
  • How do they operate?
  • How can one evaluate their support structures and the institutional and legal environment in which they are evolving?
  • What are the values underpinning the behaviour of local entrepreneurs towards the area?


a) Existing assets

    How can the businesses operating in the area be characterised? How is it possible to gauge the density of the business fabric, the relative importance of the different sectors, the number of small businesses compared with large enterprises, etc.?

    Statistical data provide an initial source of key information and certain indicators can provide a number of avenues to guide the analysis. For instance:

    • the business creation and failure rate indicates the degree of business stability. The aim will therefore be to identify, in line with the age of businesses, which are the sectors with stable businesses that are controlled by local players;

    • the distribution of businesses according to size (not only in terms of the number of workers, but also their capital, turnover, etc.) is also a key indicator;

    • the area can be characterised by comparing the number of businesses with the number of employees: ratio between large enterprises and SMEs, density of the business fabric, etc.;

    • the breakdown of employees by sector is a good indicator of the relative importance of each sector. What, for instance, is the relative importance of farms and agri-food processing firms compared with craft, industrial and service firms? Such a breakdown could be compared with the distribution of gross product or turnover between sectors, if such data is available;

    • a breakdown by the sex, age and origin of entrepreneurs is also an important variable that should be taken into account. Have any businesses been developed by women? In which sectors? What proportion are young entrepreneurs? Have any businesses been created by people returning to their home area after having moved away? The age of entrepreneurs (how many are aged 55 and over?) and their succession problems are also a key indicator of the probable future development of local businesses in terms of their continuity or relinquishment.

    It is well worth cross-tabulating these various indicators in order to ascertain which are the most dynamic sectors in terms of business creation and stability, what the distribution is by size in each sector, etc.

    This allows the area to be generally characterised in economic terms and then compared with the typology presented at the start of this publication. In order to position the area more accurately, this initial “spadework” can be supplemented by more detailed statistical analyses or a few well-targeted surveys. For example, in the agricultural sector, the number of workers compared with the surface area under cultivation may provide a good indicator as to how intensive or extensive local farming is.

    What is the level of specialisation or diversification in the local economy? What is (are) the sector(s) that are likely to foster economic competitiveness in the future? Is a revival being seen in these sectors, in technology, quality or product presentation terms? Is any process of restructuring under way? What are the characteristics of new entrepreneurs (especially young people) and what are their needs in terms of training, advisory services, etc.?

    Lastly, further considerations about the location of businesses make it possible to analyse the territorial distribution of businesses and see whether they are concentrated in clearly defined areas. Do the level of facilities, the siting of infrastructure and the means of communication have an impact on business location? What other factors help to explain any differences between the different sites in the area in terms of business creation rates?


b) How businesses operate

    The way businesses operate is eminently complex and brings into play a large number of factors. Analysing an area’s economic competitiveness can be limited to a few key aspects, some relating to the external operation of businesses or between businesses (flows, links) and others to their internal operation (internal capabilities, internal policies).

    Flows include flows of raw materials, services, end products, etc. between the businesses in an area. This type of analysis makes it possible to identify forms of sub-contracting and trading, which businesses are linked directly to the market and which ones are situated further upstream. It also makes it possible to identify forms of dependency and the balance of power. For example, it is often the largest enterprises that control the markets and sub- contract part of their production to small businesses or even to individual self-employed workers.

    An analysis of the relationship of interdependency between businesses (internal product flows: raw materials, semi-finished products and services) makes it possible to ascertain the importance of the links between businesses within the area itself and to identify, for example, the local leaders in a sector, any complementarities between large enterprises and SMEs, etc.

    This will determine the choice of strategic support, as demonstrated by the following example.


      Example

      The production of traditional cakes (“polvorones”, “alfajores”, etc.) is the chief processing business in the Sierra Sur de Sevilla LEADER area (Andalusia, Spain). The largest firm in the sector produces around 40% to 50% of the total volume and has a growth- generating effect on all the area’s other producers. What is the best course of action in this case: should support be given to the large enterprise (e.g. for the introduction of digital controls throughout the production chain) or, on the contrary, should support be given to the gradual technological revitalisation of the small firms? Under LEADER I, the LAG preferred to concentrate a large proportion of its support on the large enterprise, so as to create a stronger emulation impact on the sector as a whole, rather than “scattering” its support among the smaller businesses.

    Flows are themselves the expression of the various links that entrepreneurs have developed over time: links with other businesses, sources of information, suppliers, institutions, marketing channels, etc. A key role is played by the links with universities and research centres or design offices. Are there any laboratories, test centres, quality control centres, etc., either in the area or near at hand? To what extent do they work with local businesses? What is the relationship between them?

    In general business creators are aware how important such networks are to the success of their initiative and seek to associate with a number of key players. It is common, for example, for rural businesses to include among their associates a “well-known” person, who is based in a city or even abroad, and serves as an anchor point for obtaining certain types of information, prospecting, representing the firm to certain customers, etc. This local ability to create links is an essential factor that must be taken into account. On what is it based? What networks of acquaintances and contacts exist? What are the limitations?

    Links and flows give businesses certain special abilities, such as:

    • The ability to adapt and to integrate standards, regulations and other external requirements into their activities. What capability do local businesses have to adapt to quality standards? Do they find it difficult, for example, to develop traditional products under current regulations?

    • The ability to introduce and disseminate innovation and links with technological support and research structures. How much informal exchanging of information takes place between local businesses? What are the formal means of cooperation between entrepreneurs? Are there, for example, any associations of entrepreneurs to collectively purchase and use new technologies?

    Relations between businesses (sub-contracting between small local businesses and large enterprises, for example) facilitate the transfer of know-how and technological innovation.

    Finally, in addition to this ability of businesses to link up with one another, it is also necessary to consider the internal policies of businesses. Do certain firms have a commercial policy of constantly renewing their product range, for example? If so, how is this supported locally? Are campaigns organised to promote new products? Are there any local rewards for innovation (prizes, etc.)?

    Do local entrepreneurs use services (consulting, technology services, etc.) to update their expertise?


c) Business support

    There are many different business support mechanisms, ranging from business incubators to information or technical support structures, innovation centres, etc. [2]

    What business support systems are there? Are there any forms of collective support? What deficits are there in this respect?

    How is quality control carried out?

    What institutional mechanisms are used to circulate information about credit facilities, technical assistance and other forms of support for rural businesses? How can the suitability and quality of the services provided be evaluated?

    Are there any business service organisations (public, private, mixed) capable of stepping in?


d) Values

    It is impossible to determine how businesses operate, their dynamism (or, on the contrary, a degree of latent inertia) or how much room there is for manoeuvre in this respect, without taking into account the values that underpin the actions of entrepreneurs and local players in general.

    The first question we might ask, for example, is what value is accorded to business in the local area? Is business creation a recognised value that is shared by local players? In certain rural areas, everyone in work ultimately plans to set up their own business after working for a few years as an employee, which can lead to excessive fragmentation of local businesses. On the contrary, in other areas the majority of the population is comprised of manual workers with no tradition of business creation; such areas generally suffer from a dearth of project promoters.

    Further questions relate to traditions of cooperation, common references regarding human resource management, labour/management relations, etc.

    The industrial clusters of northern Italy provide a good example of close collaboration between businesses, as well as of special social relations within businesses themselves. However, northern Italy’s industrial clusters have emerged from a specific cultural context inherited from the past, which is difficult to transfer wholesale elsewhere.

 


[2] In 1997, the LEADER European Observatory
published a methodological guide entitled “Support
for activities in rural areas“ which describes many
different forms of possible business support.



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