Benchmarking Regional Competitiveness

in the European Cluster Observatory

Proposed Conceptual Framework and Data Collection Approach

The work underlying this position paper has been developed by a team of researchers at
Orkestra, the Basque Institute of Competitiveness (ORK) and the Centre for Strategy and
Competitiveness at the Stockholm School of Economics (CSC):

Mari Jose Aranguren (ORK), Susana Franco (ORK), Christian Ketels (CSC), Asier Murciego
(ORK), Mikel Navarro (ORK) and James Wilson (ORK), April 2010.

Contact:

Dr. James Wilson

Orkestra, Basque Institute of Competitiveness, University of Deusto, Mundaiz 50, San
Sebastian, 20012, SPAIN, Email: jwilson@orkestra.deusto.es
1 INTRODUCTION

Phase I of the European Cluster Observatory (ECO-I) undertook the first systematic
mapping of European clusters. This work has contributed to a better understanding
of the positive impact of geographic specialisation, in particular on broad economic
outcomes like GDP per capita. Related research in this field, both in Europe and
elsewhere, comes to similar conclusions of a positive relationship between cluster
presence and economic performance. 1 At this junction, two key new questions
emerge:
• How is geographic specialisation related to other factors that might have an
impact on economic outcomes?
• What are appropriate policy responses to affect the existing geographic
specialisation patterns and these other factors in ways that enable better
economic outcomes?

Work package 2 (WP2) of the second phase of the European Cluster Observatory
project (ECO-II) will provide data and analysis that aims to address these two
questions. At its heart it contains the collection of data on regional business
environments across Europe to match the data on specialisation already available
and to be further updated under ECO-II. We will provide ECO users with core
secondary data on the competitive environment of European regions, corresponding
largely to the NUTS-2 classification. We will also collect and analyse more detailed
primary data for a selected sub-group of regions.

The data from ECO-I have been most relevant to policy makers at the EU and national
levels, highlighting the need to increase the awareness of specialisation in economic
diagnosis and policy design. An overall aim of ECO-II is to provide additional data
more relevant to decision makers at the regional and cluster levels. This requires a
different breadth and depth of data in two broad categories:
• Data about regional business environments, both general and cluster-specific
(the focus of WP2)

1
See, for example: Porter (2003).

2
 • Data about cluster initiatives (the focus of the new collaboration platform in
ECO-II)

The data on regional business environments that we collect in WP2 will firstly enable
us to separate the relative roles of business environment quality and specialisation
on different types of economic outcomes. Past research indicates that specialisation
is an important but not the only important factor explaining outcomes. The strong
positive relationship between specialisation (cluster presence) and economic
outcomes was found to hold for countries at broadly similar stages of economic
development, i.e. the old EU-15 member countries or the new EU-10 countries. Yet it
did not hold across the much more heterogeneous group of all EU member and
candidate countries. The new data set will help us distinguish the relative forces
more clearly. For policy interventions, this data will provide crucial information on
how to evaluate a location’s relative position on these two key dimensions. Such
information enables better choices on where to focus policy attention.

Secondly, our analysis of the data will help us to better understand the interactions
between business environment quality and specialisation. Past research has treated
specialisation as a given, subject to significant path dependency processes within
and across clusters. But there is an implicit understanding that business environment
conditions, too, have a significant impact on how clusters emerge and develop over
time. For policy interventions this is crucial – depending on the strength of these
forces, it will suggest a focus on business environment conditions rather than on
direct efforts to change specialisation patterns. The new data will help to provide a
more robust framework in which to understand these relationships and inform the
related policy choices.

In terms of the framework itself, a key challenge is to organise and present the data
to maximise policy relevance and facilitate ease of interpretation for policy makers.
The data itself will be organised in the Observatory so as to provide an innovative
and valuable benchmarking tool for regional policy-makers and other stakeholders.
Alongside accessing analysis papers, policy-makers will be able to flexibly access a
series of important variables and composite indices that capture the business
environment and economic performance of their regions in comparison with others.

3
This position paper aims to stimulate discussion among a group of experts invited to
the workshop Tomorrow’s Innovative Industries: Regional and National Specialisation
Patterns and the Role of the Regional Business Environment, to be held in Brussels in
May 2010. 2 The proposed ideas will be developed after the workshop into a detailed
methodology plan that will guide the collection, organisation and analysis of data
within WP2.

The paper first proposes a conceptual framework for organising and analysing data
on regional competitiveness environments within the ECO (Section 2). It then sets
out initial ideas regarding the implementation of this framework (Section 3). This is
built around an audit of relevant secondary data sources, a brief reflection on some
methodological issues in organising secondary data, and a proposal for primary-data
collection to be conducted among a sub-group of co-operating regions to deepen
analysis in areas where secondary data is currently weak.

Finally the paper raises a series of potential extensions, related to maximising the
policy relevance of the data in terms of its presentation and analysis (Section 4). Here
the focus is threefold: (i) the complex issue of the relevance of different business
environment indicators for different geographic levels of policy-making; (ii) the
potential application of the framework to a more specific analysis of the importance
of different business environment factors for different clusters, or for different stages
in the innovation process; (iii) the question of the most relevant regions against
which policy-makers should seek to benchmark their business environments, given
the large variation of fundamental structural characteristics.

2
The paper is a summary analysis of more detailed work set out in a series of ongoing background
papers. These papers will be published, with input from the workshop, at the end of May 2010.

4
2 PROPOSED FRAMEWORK

2.1 Context

Competitiveness remains a term that is widely debated and used differently by

different researchers and practitioners. 3 What is much less under discussion is the
need to understand the fundamental drivers of prosperity, productivity, and
innovation across locations. The aim of the framework presented here is to provide a
robust framework to assess these drivers at the level of regional economies.

Assessing the fundamental drivers of competitiveness is challenging because of the

sheer number and variety of influences on national productivity. The high degree of
correlation among many of the indicators makes disentangling the impact of
individual indicators econometrically complex. It is precisely because of these
difficulties, as well as the tendency of many studies to highlight a subset of
influences rather than being inclusive, that the academic literature is nowhere near
achieving consensus on a broad model. Different datasets and different choices
about econometric approaches have also led to different and often conflicting claims
about the specific drivers of competitiveness.

Assessing competitiveness at the level of sub-national regions adds a further layer of

complexity, especially if done for the entire EU. In many ways, sub-national regions
are the most appropriate level to study drivers of competitiveness, because it is at
this level of geography that the influence of all drivers comes together to affect
economic activity. 4 But this multiplicity of relevant levels creates groups of drivers
that have to be treated differently for analytical as well as policy-advice purposes:
• Drivers that do not differ across regions and are set at the national or EU level;
i.e. tariff rates, most tax rates, and competition law;
• Drivers that differ across regions but are set at the national or EU level i.e.
most public R&D policy and national infrastructure projects;
3
See, for example: Krugman (1996); Lall (2001); Camagni (2002); Malecki (2004); Bristow (2005);
Aiginger (2006); Wilson (2008).
4
It can be argued that the regional unit of analysis is more important than the national level, given
that regions are in more direct competition with one another for mobile factors of production (capital,
labour) (Camagni, 2002; Malecki, 2004).

5
 • Drivers that differ across regions and are set at the regional; i.e. land planning
and the efficiency of local administrative services.
In Europe, the allocation of drivers to these groups even differs across countries,
depending on the country-specific level of centralisation.

Given the two key objectives of our work outlined at the outset of this paper, i.e.
analyzing the relative impact of cluster presence and business environment quality
on regional economic performance and providing actionable insights into policy
priorities to upgrade competitiveness across both dimensions at the regional level,
the framework needs to provide two types of information:
• A synthetic summary indicator of overall business environment quality at the
regional level; this is needed to test the relative impact of business quality
versus cluster presence on economic outcomes across regions;
• A nuanced profile of competitive strengths and weaknesses in business
environment quality and cluster presence for individual regions, based on a
comparison with their peers; this is needed to provide guidance for policy
makers on action priorities and information for companies and clusters that
are looking for appropriate sites or collaboration partners.

2.2 Existing assessments of competitiveness

Over the last few years, a significant body of work has assessed competitiveness
drivers across countries.

One group of studies provides regular comparative analyses of national

competitiveness. The Global Competitiveness Report (World Economic Forum, 2009)
and the competing World Competitiveness Yearbook (International Institute for
Management Development, 2009) are the most well known. There are also others,
like the Korean ITPS study. The strength of these reports is the wealth of country
specific information they provide on a large number of individual indicators.
Unfortunately, the organisation of these indicators into specific groups and levels is
usually not conducive to providing policy advice. Also much less convincing are the
conceptual models used to aggregate the performance of these individual indicators
into an overall index that has strong predictive power (see Porter et al., 2009). One-
off studies by academics like Fagerberg (2008) have made more headway in this

6
direction. The OECD’s work on fundamental growth drivers (OECD, 1992) also
provides interesting ideas.

A second group of studies also looks at the national level but then calculates
synthetic rankings on specific issue areas. Examples are the World Bank reports on
Doing Business, Logistical Performance, Governance, and the Knowledge Economy.
Similarly, the World Economic Forum has launched a series of reports on trade,
financial markets, gender issues and tourism. Economic freedom is also evaluated in
two competing reports, and there are a whole range of rankings provided by
different think-tanks and consultancies on the theme of innovative capacity. The
criticism of the broader studies above applies to an even larger degree to these
reports. Again, there are a few academic studies, such as Furman et al. (2002) for
innovative capacity, which provide more promising approaches but have not been
regularly updated.

The third, and for our purposes most relevant, group of studies focus on the regional
level. There are various recent studies applying different frameworks to compare the
regions of individual countries, including Croatia, Germany, Finland, India, Russia, the
UK and Vietnam. At the European level, Huggins and Davies (2006) have published a
European Competitiveness Index for NUTS-I regions, and the Association of European
Chambers of Commerce and Industry have conducted a partial study making a
selective ranking of NUTS-II regions (one from each country) on a narrow set of
indicators (Eurochambres, 2008). A joint project between DG Joint Research Centre
and DG Regional Policy is also currently developing a new EU Regional
Competitiveness Index using secondary data at NUTS-II level. At least the studies
published so far tend to share the weaknesses of the national competitiveness
assessments above.

2.3 A Proposed Framework for the ECO

In incorporating regional competitiveness analysis in the ECO we are primarily

concerned with two key issues. Firstly, we seek to understand the relative importance
of business environment factors and specialisation (clusters) in determining economic
outcomes and the relationships between them. Secondly, we aim to organise the
analysis in a way that is most useful for regional policy-makers in terms of
benchmarking and identifying key areas to work on in their specific contexts.

7
Specifically, we propose organising the many factors that measure and influence
economic activity in a number of layers, differentiated by their relation to the
ultimate objective of economic policy, and by the degree to which they can be
affected directly by economic policy. This framework is outlined in figure 1 and
explained in the following paragraphs.

Figure 1: Regional Competitiveness Analysis Conceptual Framework

Outcome Indicators

Intermediate 
Performance Indicators

Firms Specialization
(Behaviour) (Clusters)

Business 
Environment 
(Quality)

Path dependent

Deterministic Relationship
Fundamentals 
Inter‐dependent Relationship (Location, Natural resources, History)

Outcome indicators sit at the top of the framework. The ultimate goal of economic
policy is the standard of living that citizens in a particular territory can enjoy, most
often measured by GDP per capita. The limits of GDP per capita in reflecting
standards of living are widely recognised, as reflected for example in the recent
report by the Stiglitz Commission on the Measurement of Economic Performance
and Social Progress. However it remains a commonly understood, easily measured,
and easily comparable gauge of the general level of economic activity in a region. As
such it is highly relevant for policy-makers, yet not directly controlled by policy:

8
sustainable welfare is created in companies and not through policy. By outcome
indicators we therefore refer to indicators of ultimate performance; primarily to GDP
per capita, but also potentially to complementary variables that capture broader
aspects of standard of living.

Below the standard of living outcomes is a set of intermediate performance

indicators. These variables such as patents, employment rates and growth in
numbers of firms are important diagnostic instruments to better understand the
process of transforming fundamental drivers of competitiveness into a high standard
of living. However, again they are not directly controlled by policy – high levels of
patenting, for example, can be ’bought’ by spending huge sums on science activities,
but the sustainable impact on prosperity will only arise if the root causes of
innovative activity are improved. Intermediate indicators are in effect ‘outputs’ of the
underlying interaction between the firms in a region and their business environment.
They serve an important role as an analytical tool, not as direct policy target.

The third level captures the set of competitiveness drivers. These sets of inter-related
drivers determine intermediate and ultimate measures of economic performance in a
more direct way and are controllable to different degrees by policy. They are
organised in three groups of indicators corresponding to specialisation (clusters),
firms (behaviour), and the business environment (quality).

Specialisation is related to the industrial structure of the territory, an element that

ECO I has explored in some detail with regards the impacts of regional specialisation
and cluster presence. This characteristic of regions exhibits significant degrees of
path dependency and changes only slowly over time, but policy plays a role in
affecting actual impact of these geographic factors as well as the speed and direction
of development.

The split between firms and the business environment is influenced by Porter et al.
(2008) and the business competitiveness index published in the past as part of the
Global Competitiveness Report. The rationale for splitting the microeconomic
determinants of competitiveness into ‘company operations and strategy’ and the
‘national business environment’ is that while certain factors characterise the
environment in which firms must operate, other factors are directly related to choices
that firms make in determining their own behaviour. In the first case we can think of

9
the environmental factors typically comprising the factors, demand, and context for
strategy and rivalry points of Porter’s (1990) diamond. In the second case we can
think of things such as firm behaviour related to R&D and training, for example.
Within these two groups, we plan to follow Porter et al. (2009) in a pyramid approach
of aggregating individual indicators into groups and higher level measures, although
the extent to which this is possible will depend on the final selection and availability
of indicators (see Section 3).

Figure 2: A Pyramid Approach to Aggregating Indicators (Porter et al, 2009)

Schematic Organization of Indicators

Level 1 Level 2 Level 3 Level 4 Level 5

Main Areas Broad Categories Subcategories Narrow Indicators
Subcategories

• Factor Conditions → • Logistical • Quality of

Quality of the
• Context for Strategy infrastructure → roads
National
Business and Rivalry • Communication • Quality of
Environment • Demand Conditions infrastructure railroad
• Supporting and • Administrative • Quality of
Microeconomic infrastructure ports
Related Industries
Competitiveness • Capital market • Quality of
Sophistication infrastructure airports
of Company • Innovation • Quality of
Operations and infrastructure electricity
Strategy supply
• Quality of
domestic
business
transport
network

Nested sequence of PCI analyses to

determine weights

15
Copyright © 2009, Ketels/Delgado/Porter/Stern

Finally, the fourth level of the framework identifies a group of fundamentals that are
externally a given for a location, at least in the medium term. These fundamentals,
the geographic profile and location, the endowment with natural resources, and the
size of the economy, create opportunities and challenges for prosperity generation.
Policy can influence the impacts that they have but not their presence per se. These
factors play an important role in the empirical growth literature that is looking at
exogenous factors explaining differences in prosperity and growth over extended
periods of time. They are also important to enable regions to compare themselves
with peers that exhibit similar fundamental conditions (an issue addressed in Section
4).

10
3 IMPLEMENTING THE FRAMEWORK: DATA AND
METHODOLOGY ISSUES

In the context of the proposed framework we aim to collect and organise three levels
of data:

1. Complete (or near-complete) secondary data for a set of indicators in each of

the boxes for all NUTS-2 regions included in the ECO. The focus will be on
indicators with variation across regions to supplement the data from sources
like the Global Competitiveness Report on factors that are constant within
countries. This additional regional data will enable us to analyse and test
relationships within the framework, and to develop a series of composite
indices to facilitate benchmarking.

2. Detailed primary data on a subset of regions designed to fill gaps in specific

areas where secondary data is weak (in particular ‘softer’ elements and some
more cluster specific elements).

3. Incomplete secondary data that may nevertheless be of interest for specific

clusters or issues, in line with point 2. For example data on specific classes of
university graduates, skills, infrastructure, university rankings, involvement in
framework programmes etc.

3.1 Secondary Data Availability for Potential Indicators

A list of potential indicators to fit within the proposed competitiveness framework is

presented in Appendix 1. Many of these can be constructed from secondary data
with reasonable coverage across European NUTS-2 regions (or in some cases NUTS-1
regions). For others, we are either exploring viable secondary data sources or will use
these proposals to guide the collection of primary data for a sub-set of regions where
a more complete analysis will be undertaken.

As is clear from the tables in Appendix 1, the primary source of information is the
publically-available datasets of EUROSTAT. The process of downloading this data has

11
been automated so that we can add any dataset or update at any time, and the
process used to acquire and process this data is illustrated in Appendix 2. 5 In addition
to EUROSTAT, there are a range of other sources that we have identified, and who’s
potential we are currently exploring.

The OECD collects and makes available several indicators for TL2 and TL3 regions
(which can be mapped to the NUTS-2 classification), but nearly all of the indicators
covered by the OECD are in the EUROSTAT datasets. However, the OECD Regional
Patent Statistics can be exploited to construct indicators to capture the behaviour of
firms regarding cooperation in innovation.

The ESPON database provides fundamental regional information (NUTS 3, NUTS 2,

NUTS 1 and NUTS 0) from the finalised ESPON 2006, the EU Programme supporting
applied research and studies on territorial development and spatial planning to
facilitate policy development. However, the data is not updated and we have
considered that most of the available information is too outdated to be used. Only
the indicators for potential accessibility are being taken into consideration at
present.

ERAWATCH supplies several indicators on R&D and other technology indicators.

While some of them can also be obtained from EUROSTAT, data on publications
could be compiled from this source.

The Ernst & Young European Investment Monitor contains data on at least two
relevant variables: job creation by FDI and number of FDI projects. We are currently
investigating the possibility of converting the information to NUTS-2 level of
aggregation.

Finally, we are considering the use of various other diverse data that could prove
interesting in various dimensions. For example for each NUTS-2 region, the number
of institutions that appear in University performance rankings or in the ranking of the
top innovative European firms could be useful. The results of the latest wave of the
European Values Study are also forthcoming, and we are enquiring whether the
disaggregation at NUTS-2 level is possible.
5
Not all desired indicators can be constructed from the data that EUROSTAT makes publically
available. Some require access to micro-data, and we have started the procedure to access such data.

12
3.2 Aggregation of data

Once the specific indicators that fit into each part of the framework have been
decided upon, a key methodological issue concerns the approach chosen to
aggregate the individual indicators into a series of composite indices. There are
essentially two broad approaches that could be followed:

1. Using statistical methods, such as unobserved component models, factor

analysis or data envelopment analysis. This is the method used by the World
Knowledge Competitiveness Index 2008 and the European Competitiveness
Index.

2. Choosing arbitrary weights. Unless a reason exists to favour a particular

indicator, the most common approach is to use equal weights for all
indicators within a block and then equal weights for each block in order to
come up with a single figure for the composite index. This is the approach
followed by the Nordic Innovation Monitor 2009, UK Competitiveness Index
2010 and European Innovation Scoreboard 2009 and Regional Innovation
Scoreboard 2009. Fixed weights are also used in the IMD World
Competitiveness Yearbook 2009.

The Global Competitiveness Index 2009-2010 (World Economic Forum 2009), for
example, uses a combination of both approaches: while arbitrary weights are fixed
within blocks, the weights of the three main blocks that constitute the index are the
rounded econometric estimates obtained from maximum likelihood regression of
GDP per capita against each indicator for past years.

Porter et al. (2008) propose the use of principal factor analysis for the aggregation of
factors within a policy area and with high correlation among them. At higher levels, a
regression analysis can be used to calibrate weights that maximise the explanatory
power of the overall model in explaining GDP per capita.

We will explore each of these approaches in more detail once the data sets have
been constructed and we know precisely which indicators we can allocate to each
part of our proposed framework.

13
3.3 Missing data and Normalisation

Given that some of the variables considered are incomplete, there are important
methodological considerations regarding how to deal with missing data. While the
data could be presented with gaps, 6 this would mean that composite indices could
only be created for regions with no missing values. The alternative is to impute
values (OECD, 2008), taking into account the following characteristics of the datasets:

• For a given region, data unavailable for a given year might be available for
previous years. The European Innovation Scoreboard 2009 (European
Commission, 2010), for example, uses the latest available year. An alternative
would be to apply the same percentage increase that had taken place during
the previous period, or to fix a tendency line based on all previous values.

• For a given year, data unavailable at a NUTS-2 level might be available at a

superior level of aggregation. In this case it would be possible to impute the
value for the region, assuming that the growth of the variable for the NUTS-2
region has been the same as the growth of the superior region.

Another possibility is imputation with predicted values from a linear regression. For
the Regional Innovation Scoreboard 2009, for example, Hollanders et al (2009) first
impute data from linear regressions. This is not a complete procedure, however, as
regions might have missing values for both indicators used in the regression. They
therefore continue using a hierarchical procedure, which imputes missing values first
at national level and then at regional level. In a similar manner, rather than settling
for a single imputation method, we propose to use the decision diagram in Appendix
3 to determine the most appropriate method in each case.

Once missing data has been addressed, a final issue relates to normalisation of the
data to avoid the aggregation of variables that use different scales. There are a wide
variety of normalisation methods (OECD, 2008), the most commonly-used of which in
similar studies are standardisation and min-max approaches. Standardisation
involves converting indicators to a common scale with a mean of zero and standard

6
The Regional Competitiveness Atlas (Eurochambers, 2008), for example, does this.

14
deviation of one, 7 while min-max involves subtracting the minimum value and
dividing by the range of the indicator values. 8 As the min-max transformation could
be distorted by extreme values or outliers, at this stage we propose using the
standardisation method.

3.4 Primary Data Collection among a Sub Group of Regions

The lists of desirable indicators presented in Appendix 1 highlight important gaps in

available secondary data. Some of these gaps might be filled through a specifically
designed survey directed to companies. Several such surveys have already been
implemented (i.e. the Executive Opinion Survey of the World Economic Forum), but
they are usually representative at the national rather than the regional level. Hence, a
further stage of the analysis envisages the collection of primary data among a sub-
group of European regions.

A separate background paper that will review existing surveys for collecting data on
business/competitive environments will be prepared to investigate some
methodological issues of particular relevance in the next stage of the project. In
particular we highlight the following issues:
 
• Region and cluster specific purpose: how should the questions differ from those
used in national-level executive opinion surveys? Which issues should be left
out, and which additional issues should be explored? What differences are
required in the phrasing of questions to ensure that respondents’ answers
reflect their regional business environment rather than the national
environment? How should questions be tailored to capture both generally
relevant information and information of particular relevance to specific
clusters?

• Sampling: what sample size is required at regional level? What is the most
appropriate composition of the sample in terms of size of firms, ownership of
firms, location of HQs, the specific person within the firm targeted to respond,

7
It is used for example in the World Knowledge Competitiveness Index 2008 (Huggins et al, 2008) and the
European Competitiveness Index 2006-07 (Huggins and Davies, 2006).
8
It is used for example in the Nordic Innovation Monitor 2009 (Nordic Council of Ministers 2009),
European Innovation Scoreboard 2009 and Regional Innovation Scoreboard 2009.

15
 etc.? How should issues of comparability of survey responses across different
regional samples be dealt with?

In addition to bridging clear limitations on secondary data at regional level, this

survey-based study among a sub-group of regions will enable the ECO to deepen
analysis of some of the ‘softer’ aspects of regional business environments (e.g. social
capital). These are particularly relevant for understanding the relationships between
business environment and clusters, one of the issues highlighted in the next Section.

16
4 EXTENSIONS

Having proposed a conceptual framework for organising data and analysis of

regional competitiveness and set out a series of considerations with regards
implementation, in this Section we raise a series of potential extensions for
discussion. These are proposed with the specific aim of ensuring that the resulting
framework maximises its usefulness for policy-makers. Rather than treating an
exhaustive set of issues, this is intended as a stimulus for discussion around what is
desirable from a policy perspective. We therefore highlight three groups of issues
that we consider particularly important in the context of the framework that has
been proposed.

4.1 Relevance of Variables at Different Policy Levels

To maximise the relevance of the framework for regional policy-makers, particular

concern should be given to understanding how policy levers relate to the different
indicators. As illustrated in Figure 3, ECO-II will provide diagnostics for European
regions in each of the six categories of indicators. The key points at which regional
policy can impact – the policy-levers - are specifically related to the competitiveness
drivers and their relationships with fundamentals and intermediate/final outcomes.

However, looking deeper at the policy levels, we encounter the complex issue of the
relevance of different business environment indicators for different scales of policy-
making. While some indicators exhibit considerable variation across regions in
Europe, for other variables the main variation is between countries. Similarly in terms
of policy control, some variables are controllable by regional policy-makers (or even
at the level of cities), others by national and European policy-makers. A specific
challenge is to present and analyse this complexity effectively.

17
Figure 3: Policy Levers

ECO II focuses particularly on data collection in those dimensions of the business

environment where regional differences are large even within a country. These
differences could be the result of different regional policies or of national policies
that have a highly differential impact across regions. Outcome indicators,
intermediate performance indicators, and indicators of fundamentals are collected at
the regional level. Competitiveness drivers, too, are collected at this level, but could
also be coded into three groups depending on their variation across regions and the
policy control regions exert over them. This is illustrated in Figure 4.

The group of indicators in the top right corner are controlled either at national or
European level and exhibit no variation across regions within a given country (or
within Europe in some cases). For regional policy-makers they are therefore external
factors, but nevertheless important controls within the framework given their

18
impacts on competitiveness at regional level. Examples include the competition
policy or IPR environment faced by firms. Moreover, while the framework proposed
in Section 2 is focussed on microeconomic competitiveness, there is a case for
considering the introduction of some key macroeconomic and institutional variables
controlled at national/European level.

Figure 4: Three Categories of Competitiveness Indicator

Types of Competitiveness Indicators

Controlled nationally or by EU

Example Example

Different across regions Same across regions

Not
Example
relevant

Controlled regionally
2
Copyright © 2009, Ketels/Delgado/Porter/Stern

The left hand side of the diagram contains indicators that exhibit considerable
variation across regions. The top left corner refers to those where the corresponding
policies tend to be national (or in some cases European); for example, infrastructure
spending or labour market policies. The bottom left corner contains the most
interesting set of indicators from a regional policy perspective because not only do
they vary across regions, but are in the control of regional policy-makers. For
example, indicators related to innovation policies or to certain types of investment or
human resources. The split on the left hand side is by no means straightforward,
however, given the vastly different policy competencies at regional level in different
countries. Differentiating these in a meaningful way is a key challenge.

19
4.2 Differential Relevance of Variables for Specific Clusters

A second area of potential extension refers to the application of the framework to a

more specific analysis of the importance of different business environment factors for
different clusters. Specific business environment conditions have a different impact
on different businesses. While some affect essentially all economic activity, others
have a much more narrow impact on specific clusters.

For example we could hypothesise that certain types of labour force skills will be
particularly important for the development of knowledge-intensive clusters in, for
instance, aeronautics or life sciences. More generally, we could argue that strong
universities are likely to be more important for clusters that are research-led, or that
connectivity/openness (to immigration, for example), ensuring cross-fertilisation of
ideas, are likely to be particularly important for clusters in creative industries.

ECO-II will for the general analysis focus mainly on the general business environment
quality across regions. Our point of departure for analysing cluster specialisation will
be the approach currently taken within the ECO (see Appendix 4), from which we will
work with the other WPs in ECO-2 to develop more robust measures for our analysis.
In seeking to provide policy support across many regions and clusters, we also aim to
provide more cluster-relevant business environment data as far as possible.

The primary data collection phase provides a specific opportunity to deepen this
analysis among a sub group of regions. A survey approach will facilitate the
development of indicators that can capture ‘softer’ aspects of the business
environment that are particularly relevant for the development of certain types of
cluster; for example elements of trust and social capital. Working with partner
institutions in this sub-group of regions may also facilitate the inclusion of more
specific secondary data, for example on specific types of university qualifications.

The framework also facilitates the possibility of considering the varying impact of
different business environment factors on other key economic processes. ECO-II has
also been initiated with a particular interest in innovation, for example. Innovation is
part of a sequence of steps from the invention via innovation to productivity and

20
lastly the level of economic activity in a region. Based on the existing research it is a
reasonable hypothesis that different factors in the business environment, firm
behaviour and the specialisation profile of regions will have different weights across
these steps (see figure 5). ECO-II will hence offer a framework and data to begin to
analyse these differential relationships in the European context.

Figure 5: Variation in the Impacts of Factors on Outcomes

Invention Innovation Productivity Activity

Factors

Specialization
(Clusters)

Firms
(Behaviour)

Here also bubbles of different size to 
indicate that the weight of specific factors 
differs depending on the type of output 
we look at
Business 
Environment 
(Quality)

4.3 Benchmarking Regions

A third extension that may be of interest to regional policy-makers relates to the

issue of benchmarking, and in particular who to benchmark against. Literature on
regional systems of innovation, for example, is clear that ‘one size doesn’t fit all’
(Tödtling y Trippl, 2005; Nauwelaers y Reid, 2002). In this sense regional policies
should respond to regionally-specific strategies: pursuing the development of
unique strengths in key factors of competitiveness (‘strategic positioning’); alongside
avoiding that other factors of competitiveness are too weak relative to competitor
regions (‘operative efficiency’) (Porter, 1998, 2003).

21
This is where benchmarking can play a key role in supporting policy, and there has
been an important evolution in benchmarking towards ‘intelligent’ or ‘systemic’
forms that consider context as central and emphasise policy learning (Nauwelaers et
al., 2003; Paasi, 2005; Pappaioannou et al., 2006; Huggins, 2008). While the ECO aims
to provide the data to benchmark competitiveness drivers and performance against
all other NUTS-2 regions, ECO-II could also provide a complementary tool that would
help policy-makers identify ‘structurally similar’ regions for comparison.

The selection of regions with which to benchmark could respond to different criteria:
neighbouring regions; regions with strong performance; regions with similar
fundamental characteristics; competitor regions; etc.. We propose a focus on regions
that are similar in terms of fundamental characteristics and therefore underlying
competitiveness challenges. In doing so we are seeking to avoid comparing, for
example, a capital region in the centre of Europe with a peripheral rural region. Table
2 summarises the types of fundamental characteristics other authors have used.

Table 3: Review of Literature on Selection of Benchmarking Groups

Author(s) Key Characteristics Identified

Akerblom et al. (2008)
Andersson y Mahroum (2008)
Arundel y Hollanders (2008)
Archibugi y Coco (2004)
Archibugi et al. (2009)
Atkinson y Andes (2008)
Balzat (2006)
Fagerberg et al. (2007)
Fagerberg y Srholec (2008)
Jon Adams Innovation Institute
(2009)
Lall (2001)
Nauwelaers et al. (2003)
OECD et al. (2004)
OECD (2005)
Paasi (2005)
World Economic Forum (2009)
Industrial structure
Economic structure; institutional framework
Relative innovation patterns
Geography; culture; economic factors
Size; income; infrastructures; human capital
Industrial structure
Social values; political objectives; economic development
Geography; demography; natural resources; history
Structure of clusters
Level of development
Economic specialisation; history; degree of openness;
economy size; firm size; culture; social capital
Institutional factors; industrial specialisation; size
Industrial structure; policy context; geography; culture
Economic structure and level; natural resources; size;
culture; history
Per capita income

22
Of the characteristics listed in Table 3, there are some for which it is extremely
difficult to obtain appropriate regional indicators (for example cultural, historical and
policy-related factors). On the other hand, indicators for fundamental aspects such as
size of economy (GDP, population), openness or accessibility, and demography
(population density) are possible to obtain at regional level (NUTS-II). These relate to
the fundamentals in our conceptual framework, and are the base around which we
propose a tool to identify structurally similar regions for benchmarking of other
aspects in the framework. As is clear from the above literature review, there is also
strong consensus on the need to include a measure of
industrial/economic/technological structure. This implies that we should include
both the ‘fundamentals’ and ‘specialisation’ boxes of our framework in a preliminary
identification of ‘closeness of regions’ (see Figure 4).

Figure 4: Identifying ‘Close’ Regions for Benchmarking in our Proposed Framework

Outcome Indicators

Intermediate 
Performance Indicators

Firms Specialization
(Behaviour) (Clusters)
Tool to 
Business 
identify 
Environment 
other 
(Quality)
regions that 
are 
structurally 
‘close’ to 
each region
Fundamentals 
(Location, Natural resources, History)

23
5 CONCLUDING COMMENTS

The aim of this position paper is to stimulate discussion during the workshop
Tomorrow’s Innovative Industries: Regional and National Specialisation Patterns and the
Role of the Regional Business Environment, to be held in Brussels in May 2010.

Specifically we seek feedback and discussion on the conceptual framework proposed

in Section 2, through which we plan to integrate data and analysis of regional
business environments into the European Cluster Observatory. Related to this
proposed framework we have also raised a series of specific data and methodology
issues in Section 3. Finally, in Section 4 we have highlighted three potential
extensions to the analysis that we suggest could be important for ensuring
maximum policy relevance of the analysis.

The feedback and discussion around this position paper during and following the
workshop will serve as inputs to the development (by August 2010) of a detailed
methodology and implementation plan that will guide the data collection and
analysis over the subsequent two years.

24
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26
APPENDIX 1: POTENTIAL INDICATORS TO FIT WITHIN THE PROPOSED FRAMEWORK

POTENTIAL OUTCOME INDICATORS

INDICATOR JUSTIFICATION AVAILABILITY SOURCE YEARS LEVEL
GDP per capita (PPP) Societal Aim: Standard of Living Already have EUROSTAT 1995 - 2006 NUTS2
(LEVEL and GROWTH) NUTS3
GDP per capita (€) Standard of Living (captures within country variation Already have EUROSTAT 1995 - 2006 NUTS2
(LEVEL and GROWTH) missed by PPP) NUTS3
Disposable income Standard of Living Already have EUROSTAT 1995 - 2006 NUTS2
(LEVEL and GROWTH) (alternative measure)
Age-adjusted mortality rate Societal Aim: Reflecting longevity and healthy life To be constructed EUROSTATa 1990 - 2008 NUTS2
(LEVEL and GROWTH)
Life satisfaction measure Societal Aim: Reflecting expressed life satisfaction Being explored European
Value Survey (?)
Poverty and/or inequality measure Societal Aim: Reflecting inequality and/or poverty Being explored
Environmental outcome measure Societal Aim: Reflecting health of the environment Being explored
a: Own calculation from source

27
 POTENTIAL INTERMEDIATE PERFORMANCE INDICATORS
INDICATOR JUSTIFICATION AVAILABILITY SOURCE YEAR LEVEL
Patents Innovation performance Already have EUROSTAT 2005 NUTS2

High-tech patents Innovation performance in high-technology Already have EUROSTAT 2005 NUTS2

Productivity Efficiency performance Already have EUROSTATa 1995 - 2006 NUTS2

Local unit / plant net growth rate Performance in generating new economic activity Already have EUROSTAT 1997-2007 NUTS2

Employment rate by gender Employment performance Already have EUROSTAT 1999-2008 NUTS2
(level and growth)
High and medium-high technology Employment performance in higher added-value Already have EUROSTAT 1999-2008 NUTS2
manufacturing employment activities I
(% of total employment)
Knowledge intensive services employment Employment performance in higher added-value Already have EUROSTAT 1999-2008 NUTS2
(% of total employment) activities II
Unit Labour Costs Labour: Captures the general cost of labour faced Already have EUROSTAT 2004 NUTS1
by firms
Number of EU top-1000 innovative firms Captures the existence of ‘exemplar’ firms that are To be EU Industrial R&D 2008 NUTS2
leaders in innovation constructed Investment
Scoreboard and
AMADEUSa
% of firms with environmental quality Environmental performance at firm level Being explored
management certificates (ISO)
Trademarks Product development performance Being explored

a: Own calculation from source

28
 POTENTIAL BUSINESS ENVIRONMENT (QUALITY) INDICATORS
INDICATOR JUSTIFICATION AVAILABILITY SOURCE YEAR LEVEL
FACTORS
Human resources in Science and Labour: Proxy for current human resource capacity in Already have EUROSTAT 1994-2008 NUTS2
Technology innovation-related activities
Hourly / Person Labour Costs Labour: Captures the general cost of labour faced by firms Already have EUROSTAT 2004 NUTS1
Household broadband access Connectivity: Captures the basic infrastructure for internet Already have EUROSTAT 2006-2009 NUTS2
connectivity
Internet use Connectivity: Captures the basic up-take of internet Already have EUROSTAT 2006-2009 NUTS2
connectivity
Multimodal Potential Accessibility Connectivity: A measure of physical accessibility to other Already have ESPON 2006 NUTS3
parts of Europe
Public R&D spending Innovation: Captures public sector input into innovation Already have EUROSTAT 1994-2008 NUTS2
infrastructure
Public R&D personnel Innovation: Captures public sector input into innovation Already have EUROSTAT 1994-2008 NUTS2
infrastructure
Net Inter-regional migration Labour: Captures flows in and out of the territory: Already have EUROSTATa 2000-2007 NUTS2
attractiveness of the territory for people
Upper-secondary and tertiary attainment Labour: Captures the general skills levels of working age Already have EUROSTATa 1999-2008 NUTS2
level (25-64 years) population
Enrolment rate at levels 5 and 6 (degree Labour: Captures the new generation of general skills Already have EUROSTATa 1998-2006 NUTS2
and post-graduate) among the youth
Number of Scientific Publications Captures the existence of high quality research in the Already have ERA Watch 2003-2005 NUTS2
region
Number of Top-Ranked Universities Captures the existence of high quality training and Being University
research in the region explored ranking
exercise

29
Skilled Migrants Labour: Stock of skilled migrants, reflective of the capacity Being EUROSTAT
of the territory to capture such people. explored LFS microdata
(?)
DEMAND
Internet trade A measure of the sophistication of demand Already have EUROSTAT 2008/2009 NUTS2
% population in 15-35 age range A measure of the sophistication of demand Already have EUROSTAT 1990/2008 NUTS2
Rate
CONTEXT OF FIRM STRATEGY AND RIVALRY
Lifelong learning A measure of the sophistication of firms’ human resources Already have EUROSTAT 1999-2008 NUTS2
policies
Public sector employment Captures the weight of the public sector influencing the Already have EUROSTAT 1999-2008 NUTS2
regional business context
Part-time employment Captures the flexibility of the employment context Already have EUROSTAT 1999-2008 NUTS2
Gross Fixed Capital Formation over GDP (3 Captures the behaviour of firms with regards levels of Already have EUROSTAT 1995-2005 NUTS0
year average)1 investment NUTS2
Average usual weekly hours in main job Captures the flexibility of the employment context Already have EUROSTAT 1999-2008 NUTS2
Share of professionals A measure of the sophistication of the firms’ organisation Already have EUROSTAT 1999-2008 NUTS2
% of patents in collaboration with others Captures the behaviour of firms with regards cooperation To be OECD Regional 2000-2007 NUTS2
in innovation constructed Patent
Statistics
% of patents in collaboration with foreign Captures the behaviour of firms with regards cooperation To be OECD Regional 2000-2007 NUTS2
partners in innovation constructed Patent
Statistics
Number of PLCs Captures the existence of large, publically traded firms in Being AMADEUS? NUTS2
the region explored
a: Own calculation from source
1: Significant gaps in data at NUTS1 and NUTS2 level, but data available at country level.

30
 POTENTIAL FIRM (BEHAVIOUR) INDICATORS
INDICATOR JUSTIFICATION AVAILABILITY SOURCE YEAR LEVEL
Business R&D spending Captures firm behaviour in R&D investment Already have EUROSTAT 1994-2008 NUTS2

Business R&D personnel Captures firm behaviour in R&D investment Already have EUROSTAT 1994-2008 NUTS2

In-firm vocational training Captures the firm behaviour in provision of vocational Already have EUROSTAT 2004 NUTS1
training
Average manufacturing establishment size Captures the type of firms within the region in terms of Already have EUROSTATa 1997-2007 NUTS2
their size and rivalry
Jobs created by FDI / total employment Captures the weight of foreign investment in the economy Being explored E

Jobs created by FDI / Number of FDI Captures the average size of foreign investors Being explored
projects
a: Own calculation from source

31
 POTENTIAL SPECIALISATION (CLUSTERS) INDICATORS (SHOULD ENSURE CONSISTENCY WITH CSC TEAM)
INDICATOR JUSTIFICATION AVAILABILITY SOURCE LEVEL
Specialisation index (calculated from General measure of the level of specialisation of the region To be ECO 2000-2006 NUTS2
employment data, compared with EU constructed
average)
Related variety index (calculated from General measure of the degree of related variety in the To be ECO 2000-2006 NUTS2
employment data) region’s activities constructed
Concentration of employment in the 5 Measure of the concentration of activity To be ECO 2000-2006 NUTS2
largest sectors (NACE 3 Digits) constructed
Weight of traded clusters (% Reflection of the weight of the economy in ‘traded To be ECO 2000-2006 NUTS2
manufacturing and business services clusters’ constructed
employment)
Typology of traded clusters based on Captures the type of traded clusters by typology of specific To be ECO 2000-2006 NUTS2
employment data specialisations constructed
% natural resources based employment Reflection of the weight of the economy in ‘natural To be ECO 2000-2006 NUTS2
(natural resource based clusters) resource-based clusters’ constructed
% other employment (local clusters) Reflection of the weight of the economy in ‘local clusters’ To be ECO 2000-2006 NUTS2
constructed
% employment in hotel and restaurant Reflection of the specialisation of the economy in ‘tourism’ To be ECO 2000-2006 NUTS2
sectors (tourism region) constructed

32
 POTENTIAL FUNDAMENTALS INDICATORS
INDICATOR JUSTIFICATION SOURCE YEAR LEVEL
Capital region or not Captures the presence of a national capital city Already have Own NUTS2
calculation
Size of region by GDP Measure of the economic size of the region Already have EUROSTAT 1995-2006 NUTS2
NUTS3
Size or region by population Measure of the demographic of the region Already have EUROSTAT 1990-2008 NUTS2
NUTS3
Size of region by surface area Measure of the geographic size of the region Already have EUROSTAT 1990-2008 NUTS2
Population density Simple measure of regional density Already have EUROSTAT 1990-2007 NUTS2
% of people living in urban/rural areas Balance of the population between urban and rural areas To be OECD NUTS2
calculated Regional data
or EUROSTATa
Size of largest city Critical mass measure, capturing presence of a large urban Being explored Urban Audit NUTS2
area data ?
Degree of policy autonomy at regional Captures the degree of devolution of policy decision- Being explored NUTS2
level making to regional level
Ecological vulnerability Vulnerability of the region to environmental change, Being explored
based on geography
Natural resources Measure of natural resource endowments Being explored
Cultural heritage Cultural typology of the region Being explored
Location: latitude and longitude Basic geographic position: how peripheral? Being explored

33
APPENDIX 2: PROCESSES FOR ACQUIRING EUROSTAT PUBLICALLY-
AVAILABLE DATASETS

EUROSTAT raw data download

1. Extract dimensions
raw data processing 2. Flatten data tables
3. Load into DBMS

ECOII
megabase

create variables
indicator+dimensions

ECOII
variables

missing data estimation

ECOII
clean

34
APPENDIX 3: DECISION DIAGRAM FOR MISSING DATA IMPUTATION

Data for NUTS2 from
previous years?

YES NO

Data for NUTS1 for same Data for NUTS1 for

year? same year?

YES NO YES NO

ESTIMATE VALUES FOR 
APPLY GROWTH RATE  Data for NUTS0  NUTS2, ACCORDING  Data for NUTS0 
FROM  NUTS1 TO  TO MOST RELEVANT 
NUTS2 for same year ? for same year?
VARIABLE

YES NO YES NO

APPLY GROWTH  ESTIMATE VALUES FOR 
APPLY LINEAR TIME  NUTS1, ACCORDING TO  APPLY LINEAR TIME 
RATE FROM   TREND TO NUTS0 MOST RELEVANT  TREND TO NUTS0
NUTS0 TO NUTS1
VARIABLE

35
APPENDIX 4: THE CURRENT ECO APPROACH TO MEASURING
SPECIALISATION

In ECO-I the cluster definitions used were based on those developed at the Institute
for Strategy and Competitiveness, Harvard Business School, from an analysis of the
geographic distribution of economic activity across 50 US states. 9 This approach
facilitates analysis focussed primarily on geographically concentrated, traded clusters
(Porter, 2003).

The ECO-I identified regional clusters taking into account three core factors: size,
specialisation and focus. The combination of these three factors reflect whether the
cluster has reached a ‘specialised critical mass’ to develop the positive spillovers
theoretically associated with clusters. In each case a threshold is identified, and a
regional cluster is awarded a ‘star’ for each criteria in which it meets the threshold.
See table 1.

Table 1: Identification of Clusters in the ECO-I

Criteria Specific Measure Threshold to be

awarded a ‘star’*
SIZE OF The absolute size of the cluster in terms of Top 10% of all
REGIONAL share of total European employment in that European clusters
CLUSTER cluster category by this measure

SPECIALISATION Specialisation index based on employment: Specialisation

OF REGIONAL % regional employment in the cluster quotient greater
ECONOMY category, relative to % European than 2.
employment in the cluster category.

FOCUS OF Share of regions overall employment in the Top 10% of all

REGIONAL cluster category European clusters
ECONOMY by this measure
*A cluster with less than 1000 employees is not awarded any ‘stars’.

9
See www.isc.hbs.edu and Porter (2003).

36