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Data in Action: Pointing to the Strengths and Weaknesses of six Model Demonstrator Regions Arna fhoilsiú an : 17/06/2014, Nuashonrú is déanaí: 23/06/2015

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This article presents the main findings from the European Service Innovation Scoreboard that underpin the challenges and features of six model demonstrator regions. The performances of the regions are highlighted in terms of how they relate to the average performance in the EU27, particularly when these performances really stand out from the EU average.

The Canary Islands - Increasing employment in knowledge intensive services

The insular character of the Canary Islands fragments the territory and its markets and this, in turn, produces extra costs for infrastructure and services. The business fabric mostly consists of SMEs with limited entrepreneurial and innovation cultures. An important bottleneck is represented by the high unemployment rate and income, as measured by per capita GDP, which stands at € 19,500 and is below the EU27 average of € 24,500.

ESIS shows that the Canary Islands has a below average performance in wider framework conditions (48.6% compared to 54.3% for the EU27) and, particularly, in infrastructure, labour market efficiency and business sophistication. These weaker framework conditions are threatening both the extent and impact of service innovation. The performance record for service innovation is mixed. Inputs are below average and this is mainly due to the below average rates of innovative companies that are collaborating with other companies (5.3% compared to 9.9% for the EU27) and to the low percentages of researchers (0.05% compared to 0.34% for the EU27) and R&D personnel in the business enterprise sector (0.1% compared to 0.64% for the EU27). To strengthen this performance, companies should be encouraged to invest more in R&D and to take advantage of the know-how and experience of other actors by encouraging collaboration between private and public partners. The region also has a below average score in throughputs, because of its relatively bad performance in ‘networking, connecting and brokerage services.’ In service innovation outputs, performance is close to average but this is expected to improve due to increasing employment in knowledge intensive services. Performance in outcomes of service innovation is just above average and the rapidly increasing employment in knowledge intensive services is becoming the main driver of structural change in the region. Overall, the region is not performing especially well in ser

vice innovation and more efforts are needed to strengthen this type of innovation.

The broader set of structural indicators highlights that entrepreneurial activities, which are important for translating ideas and inventions into marketable innovations, are well developed with an above average share of people embracing such change. However, weaknesses can be observed in innovation and business model generation because there are very few activities in medium to high and high-tech manufacturing.

Emilia-Romagna – Focusing on innovation and business model generation

Emilia-Romagna has a strong regional economy as its levels of per capita income at € 30,077 and disposable income at € 19,257 are well above the EU27 averages of € 24,500 and € 14,499, respectively. However, there is an obvious weakness in the quality of governmental policies and practices that appears to be hindering innovation in the region.

The region’s policy-makers aim to increase the competitiveness of the service sector and to turn Emilia-Romagna into a real leader of service innovation in Southern Europe and also into one of the main innovation actors at European level. Emilia-Romagna intends to reinforce the service sector and the proactive integration of services into the manufacturing sector and thus boost the region’s competitiveness and its capacity to face the societal challenges of the future.

ESIS shows that in the wider framework conditions, Emilia-Romagna performs below average on institutions (with an index of 14.0 compared to 43.5 for the EU27) and higher education (66.0 compared to 70.1 for the EU27) and above average on infrastructure (81.0 compared to 58.2 for the EU27), labour market efficiency (69.0 versus 55.0 for the EU27) and market size (70.0 compared to 50.3 for the EU27). The quality of institutions needs to be improved and more investment is required to upgrade the higher education system. Performance on the inputs into service innovation is below average (21.5 compared to 27.9 for the EU27). There are also other weaknesses in ‘innovation expenditures in KIBS’ and ‘networking, connecting and brokerage services,’ ‘co-operation in innovation’ and the share of people who have completed tertiary education. Support is needed to increase investment in innovation, as performance in throughputs is just above average (28.7 compared to 27.9 for the EU27) and this is largely the result of strong performance in the share of companies with a service innovation and the share of organisational innovators. But ESIS also shows that more efforts are needed to increase the share of product and process innovators. Also, performance in service innovation outputs is above average (34.0 compared to 33.5 for the EU27) with the share of turnover being due to new to market innovations, which are at the highest level of all the demonstrator regions. In outcomes, Emilia-Romagna is a weak performer, as it has below average shares in changes in employment ratios in KIBS and service innovation intensive industries. In addition, the region is lagging behind other regions in becoming more service innovation-oriented.

Emilia-Romagna is currently not providing the best possible environment for innovation, as it is performing at a below average level in four of the five dimensions of structural indicators. The only exception is in ‘innovation and business model generation’ within the region. In particular, its levels of high-tech patent applications and of innovators collaborating with others are very poor. However, in business R&D expenditure and employment in strong clusters, the region is performing very well.

Limburg – Supporting entrepreneurial activities and business model generation

Manufacturing is one of the most important sectors in Limburg. The region’s economic performance is strong, with per capita income at € 31,600 being above the EU27 average of € 24,500, and unemployment at 1.5% being below the EU27 average of 4.1%. The manufacturing industry is facing growing commoditisation and making good products is simply no longer enough. In order to maintain the competitiveness of its manufacturing industry, the region is committed to the development of industrial business services that can strengthen the added value of this industry in the long-term. A transformation of the regional economy is necessary and at the heart of this transformation will be added-value services based on advanced technology, smart products and cutting-edge ICT.

ESIS shows that Limburg performs well in the wider framework conditions, creating a favourable environment for companies to innovate. The performance record for service innovation is not that strong (27.4 compared to 27.9 for the EU27) due, in particular, to below average innovation expenditures in knowledge-intensive business services. Companies need to invest more in developing innovations and this, in turn, requires more government support.

Limburg scores just above average in throughputs (30.9 compared to 27.9 for the EU27) because of its relatively poor performance in ‘networking, connecting and brokerage services.’ Service innovation outputs performance is below average (22.9 compared to 33.5 for the EU27) and this is largely due to a below average employment share in service innovation intensive industries and also in sales from innovative goods or services. This confirms the fact that not only innovating companies, but also companies that currently do not innovate, need to become more innovative. Performance in outcomes of service innovation is around the average (56.8 compared to 57.4 for the EU27) but it is worrying to see that the employment share in service innovation intensive industries has decreased. Overall, the region is not performing well in service innovation and more efforts are needed to strengthen this type of innovation.

The broader set of structural indicators highlights that entrepreneurial activities and innovation and business model generation are well developed. However, weaknesses can be observed in knowledge development due, in particular, to a low share of researchers and collaboration and networking activities. This all indicates a lack of innovation activities with companies operating in relative isolation without seeking the benefits of learning from others by collaborating more intensely.

Luxembourg – Offering strong framework conditions and innovation collaboration

The Grand Duchy of Luxembourg is one of the smallest, as well as one of the most prosperous, regions in Europe. Regional per capita GDP is € 78,600 and is more than three times higher than the EU27 average of € 24,500. The Luxembourgish economy has benefited from a strong steel industry in the past and from financial services in banking and insurance today. However, financial services are in danger of losing their competitive advantage due to the opening up of the bank secrecy laws. Therefore, Luxembourg needs to reduce its dependence on this single sector of financing and diversify the economy into knowledge-based services. Luxembourg is investing in personalised medicine in an effort to systematically change the nation’s healthcare system. The focus is on the prevention and early treatment of life-style related chronic diseases that are considered to be an ever increasing burden on Luxembourg’s healthcare system.

In ESIS, Luxembourg acquires above-average scores in the wider framework conditions (76.1 compared to 54.3 for the EU27), and the same applies to its scores in relation to the other demonstrator regions. This is a clear indication that the Luxembourgish economy can be seen as a very positive and supportive ‘eco-system’ for the development of innovation. Equally, Luxembourg displays strong above-average results on the service innovation input dimension (48.2 compared to 27.9 for the EU27) because of high scores on innovation cooperation and expenditures. In other words, companies – in particular service companies – tend to activate external sources of knowledge when it comes to innovation processes and this can be interpreted as representing a clear propensity to innovate, as well as being a sign of potential success. The same observation can be made for throughputs, as the share of companies that have introduced service innovation is large and there are strong figures related to the innovation

propensity of KIBs and also of 'utilities and infrastructure services'. To put it differently, the actual capacity of Luxembourgish service firms to innovate is significantly higher than the EU average.

When it comes to service innovation outputs or the economic consequences and the impacts of the innovations, Luxembourg is below the EU27 average (18.5 compared to 33.5 for the EU27). The indicator ‘share of turnover of newly introduced innovation new to the firm’ is surprisingly low in the region. However, it should be noted that Luxembourg is a very service-oriented economy dominated by financial services and this may introduce a bias into this observation. Scores in outcomes are again higher than those of the EU as a whole (58.5 compared to 57.4 for the EU27), which is coherent with the different observations outlined above.

As for the systemic functions of Luxembourg’s innovation system, the structural indicators mainly show slightly above-average results, apart from the striking exception of entrepreneurial activities that are at a much lower level than the EU27 average. All in all, Luxembourg meets the main conditions required for the existence of a favourable environment that promotes innovation within companies.

Northern Ireland – Providing an efficient labour market and higher education opportunities

Northern Ireland’s economy remains dependent on traditional industries such as food, construction and engineering. However, in the last 10-15 years, the regional economy has made significant progress in exploiting strengths within emerging sectors including software, business services and financial services. As such, the profile of the Northern Ireland economy is increasingly based on a balance of traditional industries complemented by emerging industries.

The most significant sectors in terms of employment and number of business establishments are wholesale and retail, real estate, construction and hotels and restaurants. The most dynamic sectors during the period 2003-2009, measured by employment growth and increased number of business establishments, were traditional manufacturing sectors including: fabricated metal products; furniture; medical, precision and optical instruments; and electrical and optical equipment.

The findings from ESIS show that Northern Ireland performs above the EU27 average in terms of the wider framework conditions for service innovation (58.1 compared to 54.3 for the EU27), particularly in the areas of labour market efficiency, higher education and training. However, this is not being reflected in productivity, with the region exhibiting a weaker growth in productivity, resulting in a GDP per capita of € 21,200, which is 13% below the EU27 average of € 24,500.

This pattern of change may reflect the structure of the employment sectors. The region has lower shares in employment, in medium-tech and high-tech manufacturing and in service innovation intensive industries. However, while the employment share in knowledge intensive services of 35.6% is marginally above the EU average of 35.3%, the data does not give a picture of the types of occupations involved and it is possible that many might represent lower value added jobs in these sectors.

The evidence of the potential for service innovation indicates that the region faces challenges. The region has a lower share of overall employment in business enterprise sectors and, specifically, a lower share of R&D-focused employment than the EU average. A significant weakness of the region can be seen in a below average performance across all dimensions of service innovation throughput. The weaker performances are more pronounced within knowledge intensive businesses, where there are greater variances from the average in process, marketing and organisational innovation.