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Leadership and Institutions in Regional

Endogenous Development

Series Editor: Philip McCann, Professor of Economics, University of Waikato,

New Zealand and Professor of Urban and Regional Economics, University of
Reading, UK

Regional science analyses important issues surrounding the growth and

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Edited by Charlie Karlsson, Brje Johansson and Roger R. Stough

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Leadership and Institutions in Regional Endogenous Development

Robert Stimson and Roger R. Stough with Maria Salazar
Leadership and
Institutions in
Regional Endogenous

Robert Stimson
The University of Queensland, Australia

Roger R. Stough
George Mason University, USA

Maria Salazar
Fundacion Rafael Preciado Hernandez, A.C., Mexico City,


Edward Elgar
Cheltenham, UK Northampton, MA, USA
Robert Stimson, Roger R. Stough and Maria Salazar 2009

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List of figures vi
Preface vii
Acknowledgements ix

1. A new perspective on regional endogenous development 1



2. A new conceptual framework for regional endogenous

development 19
3. Resource endowments and market fit 25
4. Leadership 32
5. Institutions and institutional factors 43
6. Entrepreneurship 64



7. Case studies from the United States 75

8. Case studies from Europe 90
9. Case studies from the Pacific Rim 112
10. Modeling endogenous regional economic development:
measurement, operational issues and conclusions 122

References 133
Index 147

1.1 The HarrodDomar and the Solow production functions 5
1.2 The neoclassical production function 6
1.3 Production function and increasing returns to scale 9
2.1 The virtuous circle for sustainable regional development 20
2.2 The regional competitiveness performance cube (RCPC) 21
2.3 A new model framework for regional endogenous development 23

Increasingly leadership and institutional factors are being seen as playing
important roles in the process in regional endogenous growth and develop-
ment. The so-called new growth theory emphasizes endogenous processes
and while some of the literature does refer to leadership and institutional
factors, including entrepreneurship, there has been little analysis of the explicit
roles that leadership and institutional factors play in the growth and develop-
ment of cities and regions, and in particular there seems to be no published
material that attempts to model and measure the impacts of leadership on
regional growth and development and limited work that considers such a role
for institutions.
In this book we set out to give explicit attention to the role of leadership
and institutional factors in the growth and development of cities and regions.
Our objective is to provide a detailed rationale for the study of leadership and
institutional factors, including entrepreneurship, in the growth and develop-
ment of cities and regions, and to demonstrate why leadership, institutions and
entrepreneurship can and indeed do play a crucial enhancing role as key
elements in the process of regional endogenous growth.
The book is organized into ten chapters and two parts. The introductory
chapter provides a brief overview of the evolution of the new growth theory in
regional economic development in which the emphasis is on endogenous
factors. We discuss leadership and institutional factors in that context.
Part I of the book contains five chapters in which we focus attention on
endogenous processes. In Chapter 2 we discuss a framework for regional
endogenous development which incorporates a virtuous circle for the
sustainable development of a region. The chapter proposes what we call a
regional competitiveness performance cube (RCPC) as a conceptual model
in which the interplay between regional resource endowments and market fit,
on the one hand, and leadership and institutional factors, incorporating entre-
preneurship, on the other hand, may interact to propel a region on a path of
enhanced growth and development. A new model framework for regional
endogenous growth and development is proposed, which explicitly incorpo-
rates these factors as mediating variables in the model.
In Chapters 3, 4, 5 and 6 we focus the discussion in turn on resource
endowments and market fit, leadership, institutional factors and entrepre-
neurship. The chapters provide a discussion of the nature of those factors and

viii Leadership and institutions in regional endogenous development

how they affect and/or enhance the process of regional growth and develop-
ment. Those chapters incorporate reference to some of the key literature on
those topics.
Part II of the book contains three chapters of case studies of cities and
regions from around the world in which we highlight how leadership and insti-
tutional factors have enhanced the regional development process. Chapter 7
has case studies on places in the US, while Chapter 8 has case studies from
Europe and Chapter 9 has case studies from the Pacific Rim region. The case
studies reviewed in these chapters are from already published works, and are
chosen to explicitly demonstrate how leadership and institutional factors have
played crucial roles in the development of the particular city or region in ques-
tion and how those factors have played crucial roles in the endogenous growth
and development process, especially as catalytic factors in helping turn around
regions that were in decline.
The final chapter proposes a new operational model framework of endoge-
nous growth and development which incorporates proxy measures of leader-
ship, institutional factors and entrepreneurship as variables that mediate the
impacts of resource endowments and market fit on regional growth, placing
emphasis on the effects those endogenous factors may have on the develop-
ment of cities and regions. There is a discussion on how to operationalize the
This book represents work in progress, and much remains to be done in
empirically testing the new model frameworks of endogenous regional growth
and development that are proposed. As we discuss in Chapter 10, that presents
considerable challenges because of the lack of readily available information
and data bases to generate the variables on leadership and institutional factors
that are required to operationalize the new model framework discussed.
However, we trust that this book does demonstrate the potential signifi-
cance of leadership and institutional factors, including entrepreneurship, as
key intervening or mediating factors in the process of regional endogenous
growth and development. We believe it fills a notable gap in the regional
science literature that focuses on endogenous growth within the context of the
new growth theory.

Robert Stimson and Roger Stough

October 2007
There are a number of people who have provided invaluable assistance to the
authors in the preparation of this book. First and foremost is Dr Maria Salazar,
who was a graduate student at George Mason University working with Roger
Stough. She collaborated with the authors as a research assistant and prepared
much of the material for the case studies in the chapters in Part II of this book.
She also co-authored several papers that were written by the authors while
undertaking the research which led to the development of the new theoretical
framework for conceptualizing regional endogenous growth and development
on which the chapters in Part I are based. Alistair Robson, a former graduate
student at the University of Queensland who worked with Robert Stimson,
also contributed to the research on which the chapters in Part I draw. Secondly,
we wish to thank Ginta Palubinskas in the School of Public Policy at George
Mason University who drafted the initial version of the case study on
Tampera, Finland and Tracey Johnstone in the UQ Social Research Center at
the University of Queensland who worked with the authors to help prepare the
text and diagrams for publication.
The authors wish to acknowledge the financial support of the Australian
Research Council Linkage International Scheme (grant #LX0346785) and the
George Mason University Foundation for a research project on Regional
Economic Development and Performance: Roles of leadership and
Institutional Factors in Endogenous Growth which forms the basis of this

1. A new perspective on regional
endogenous development


This book is about the role that leadership and institutions play in regional
economic development. A major, if not the most important, long-term objec-
tive of regional economic development is to internalize a process that ensures
sustainable development. Such a process begs for and enables a proactive
strategic approach to development, as against a reactive approach, to manag-
ing risk in adjusting to changing circumstances.
We propose that leadership and institutions, along with entrepreneurship,
play crucial roles in maintaining and enhancing regional economic perfor-
mance and achieving sustainable development. Of course a regions resource
endowments, and the regional economys fit with respect to market condi-
tions, are also crucial factors affecting regional economic performance. But
our argument is that leadership (including entrepreneurship) and institutional
factors may serve to enhance or detract from the effectiveness and efficiency
with which those resource endowments are used and how markets are
Our view is that strong leadership means a city or a region will be proac-
tive in initiating regional economic development strategy to:

set a vision for the future development of the region

implement plans and processes that facilitate institutional change
monitor regional performance and adjust strategies and plans.

This, in turn, will enhance the capacity and capability of the region to posi-
tively adjust to changing circumstances, attain a good fit with market condi-
tions, and harness its resource endowments in order to maintain and improve
its performance and to achieve sustainable development as a learning region
and to be one that is competitive.
In this book we outline a new framework to conceptualize regional
economic development that explicitly encompasses this perspective. Theories

2 Leadership and institutions in regional endogenous development

and approaches to endogenous regional growth and development that have

been emerging particularly over the last 20 years or so (and even longer into
the past) tend to neglect or at best underplay the role of leadership, and the
way institutional factors are considered is usually simplistic. Our approach,
which builds on the contributions of many writers who have addressed
endogenous processes in regional growth and development, is an integrative
approach in which we propose a model of regional endogenous development
that puts leadership and institutional factors, along with entrepreneurship, as
explicit and key mediating variables between the traditional focus on resource
endowments and market factors as independent variables impacting regional
growth and development.
Regional economic development seems to defy precise definition. For
example, Blakely (1994) proposes that local or regional economic develop-
ment is a function of a wide range of factors. He says it is:

a process in which local governments or community based organizations are

engaged to stimulate or maintain business activity and/or employment. The princi-
pal goal of local economic development is to stimulate employment opportunities
in sectors that improve the community, using existing human, natural and institu-
tional resources. (p. xv)

Blakely gives this definition of regional economic development (RED):

RED = f (natural resources; labour; capital; investment; entrepreneurship; transport;

communication; industrial composition; technology; size; export market; interna-
tional economic situation; local institutional capacity; national, local and state
government spending; development schemes). (p. 53)

Such an array of factors encompasses both exogenous and endogenous

variables. These concepts are encapsulated in Maleckis (1991) definition of
regional economic development, which he defines as:

a combination of qualitative and quantitative features of a regions economy, which

the qualitative or structural [are] the most meaningful The qualitative attributes
include the types of jobs not only their number and long-term and structural
characteristics, such as the ability to bring about new economic activity and the
capacity to maximize the benefits which remains within the region. (p. 7)

And he goes on to say:

the standard theory of economic growth and development has concentrated on

quantitative changes, despite an increasing awareness that regional growth depends,
often critically, on aspects that are understood only in comparison with other
regions or nations. The facts of regional development suggest that it is not enough
to rely on the concepts of growth without an equivalent concern for the forces which
A new perspective on regional endogenous development 3

commit growth to take place, or prevented it from occurring. These are the concerns
of regional development, whether examined at the national, sub-national or local
scale. (p. 7)

Regional economic development might thus be viewed as:

being a multi-dimensional phenomenon

involving a wide array of factors
representing a complex process.

It needs to be seen as:

being both a product and a process

incorporating both qualitative and quantitative characteristics
incorporating a policy dimension
being influenced by strategy and the implementation of plans and mech-
anisms to facilitate regional change
being dynamic.

Regional economic development is quantitative with respect to the measured

benefits it creates through increasing wealth and income levels, the availabil-
ity of goods and services, improving financial security, and so on. It is quali-
tative in creating greater social/financial equity, in achieving sustainable
development, and in creating a spread in the range of employment and gain-
ing improvements in the quality of life in a region. Regional economic devel-
opment might no longer be viewed as something that is concerned primarily
with the manipulation of capital, labor and technology to maximize production
in response to prices and markets; rather, there are fundamentally new value
systems and factors that are beginning to underpin economic systems, many of
which we do not yet fully understand.
The multi-dimensional aspect of economic development led Stimson et al.
(2002) to propose the following definition:

Regional economic development is the application of economic processes and

resources available to a region that results in the sustainable development of, and
desired economic outcomes for a region and that meet the values and expectations
of business, of residents and of visitors. (p. 7)

While that definition is far from perfect, it does reflect a shift in economic
product and process thinking. Stimson et al. (2002) say this:

A balance between the qualitative and quantitative goals of economic development

presents a challenge to traditional neoclassical economists and to the emerging
4 Leadership and institutions in regional endogenous development

breed of economists who recognize that regional economic development can occur
on a more sustainable basis. This is not to suggest that neoclassical theory ideas
should be dismissed far from it. Rather, they need to evolve to accommodate those
changing values that society holds on expected gains from economic development.


Over time, various approaches to theory about economic growth and develop-
ment have evolved, and much of that theory has been formulated in a non-
spatial context. Traditional neoclassical economic growth theory, based
largely on the famous Solow (1956) model, has been replaced by a suite of
models and arguments that are known as new growth theory (Romer, 1986,
1990; Barro, 1990; Grossman and Helpman, 1991; Rebelo, 1991; Arthur,
1994) and evolutionary economics (Nelson and Winters, 1982).

1.2.1 Neoclassical Theory and Production Functions

Most models of economic growth focus primarily on the basic factors of

production: the capital stock and the labor force. Natural resource endowments
are sometimes incorporated as a third factor but most often are subsumed as
part of the capital stock. Standard growth models have at their core one or a
series of production functions. Production functions measure the value of
output, given the value of the factors of production (that is, capital and labor).
In the basic growth model, economic growth (Y) occurs by either increasing
the capital stock (K) through new investment in factories, machinery, equip-
ment, roads and other infrastructure, and through increasing the size of the
labor force (L), or both. Thus,

Y= f (K, L) (1.1)

This production function is at the heart of every model of economic growth.

It can take many different forms, depending on what we believe is the true
relationship between the factors of production and output. Recent work by
Audretsch and Keilbach (2005) that adds the notion of entrepreneurship capi-
tal to the mix of inputs illustrates this point. The relationship being modeled
by the production function approach depends (among other things) on the rela-
tive abundance of each factor, how efficiently each is used, and the mix of
economic activities. Much of the debate in the academic literature on
economic growth seems to be about how to best represent the aggregate
A new perspective on regional endogenous development 5

production process. Audretsch and Keilbach (2005) and others are driving the
debate in new directions.
The HarrodDomar (HD) growth model in the 1940s assumed that K and
L are used in constant ratios and always used in fixed proportions to produce
different levels of output. Over short periods and in the absence of severe
economic shocks the model predicts growth pretty well. However, that model
is very rigid since it requires that the capitallabor ratio must always grow at
the same rate.
In the mid 1950s, Robert Solow (1956, 2000) recognized the problems that
arose from the rigid production function in the HD model, which did not
allow for substitution between factors of production. Solows answer was to
drop the fixed coefficients production approach and replace it with a neoclas-
sical production function that allows for more flexibility and substitution. The
difference is illustrated in Figure 1.1.
Two influential studies by Abramovitz (1956) and Solow (1956) presented
a major challenge to the then conventional view that capital and labor are the
main engines of economic growth. While examining different time periods
and using different methods, those studies reached the important conclusion
that no more than 15 pe cent of the measured growth in US output in the late
19th century and the first half of the 20th century could be accounted for by
the growth in measured inputs of capital and labor. A prime candidate account-
ing for the residual was technological change (T), although the residual
captured or served as a measure of all the growth in input that could not be
attributed to growth in measured inputs of capital and labor.

Y (HarrodDomar)

Y (Solow)

Source: Adapted from Bretschger (1999: 26).

Figure 1.1 The HarrodDomar and the Solow production functions

6 Leadership and institutions in regional endogenous development

The neoclassical production function, which allows substitution between

capital and labor in its general form, is thus augmented to:

Y= F (K, L, T) (1.2)

However, a limitation in this neoclassical growth model is that T is not a

production factor like K or L. Neoclassical theory credits the bulk of economic
growth to an exogenous or completely independent process of technological
progress. That is, to obtain unceasing growth, one must consider an external
factor that increases the productivity of inputs over time (Freeman, 1997: 325;
Hayami, 2001: 171). Though intuitively plausible, that approach had at least
two drawbacks. First, using the neoclassical framework, it is impossible to
analyse the determinants of technological advance because it is completely
independent of the decisions of economic agents. Second, the theory fails to
explain large differences in residuals across countries with similar technolo-
gies. The neoclassical production function is illustrated in Figure 1.2.

1.2.2 Comparative Advantage

A fundamental principle in regional economic development is that of spatial

interaction through the movement of goods, services and people. International
trade theory has held as a central tenet the notion of comparative advantage
and disadvantage in the factor mix between regions which renders a region
advantageous or disadvantageous vis--vis another region as a result of those
differentials in cost and resource endowments. Thus trade occurs and regional
specialization emerges.

Technical Progress

Source: Adapted from Bretschger (1999: 31).

Figure 1.2 The neoclassical production function

A new perspective on regional endogenous development 7

Export-based theories of regional development have placed emphasis on

foreign investment and/or outside exploitation, the income raised from exports
being the impetus for growth, with regional specialization emerging as a
consequence of the play out of these factors. For example, Rostows (1960)
model of sequentially staged economic development provides this perspective
of internal growth, export base and economies of scale, attributing economic
development to changes occurring within a region through processes such as
the application of technology to a local resource and/or the rise of purchasing
power. Rostow introduced into this analysis the notion of a leading sector in
the process of regional development. However, an important consideration in
the notion of export-led growth driving internal growth is that as trade devel-
ops, involving larger numbers and a larger scale of production, then certain
competitive advantages emerge through scale and scope economies.
Counter-arguments to neoclassical theories of growth that emerged from
the 1950s included polarization theory, as represented by Perroux (1950),
Myrdal (1957) and Hirschman (1958), and more recently work on industrial
districts and business clusters (Feser, 1998). Advocates of polarization theory
argued that production factors are non-homogeneous, that markets are impor-
tant, and that the price mechanism is disturbed by externalities and economies
of scale. Deviations from equilibrium are not corrected by counter effects;
rather, they set off a circular or cumulative process of growth or decline, with
a complex set of positive and negative feedback loops contributing to a growth
process the direction of which is fundamentally undetermined. In the spatial
context of regions, these feedback effects generate spread and backward
effects, transferring impulses from one region to another. Spatial structure can
be an important element in this process of growth, generating leading and
lagging regions that are interdependent. It is argued that it is not only
economic, but also social, cultural and institutional factors that explain why
some regions prosper while others do not.

1.2.3 New Growth Theory and the Competitiveness of Regions

Increasingly, with the transformation from an economy based on physical

production to one based on knowledge-intensive production, there was ques-
tioning of the traditional neoclassical models of economic growth, and by the
late 1980s and early 1990s endogenous growth became a new model focus for
regional growth and development. For example, in a study of the US, Japan,
France, Germany and the UK, Denison (1979) found that capital investment
growth in those countries accounted for less than half of their economic growth.
That is, increases in output were not as heavily attributable to capital invest-
ments as thought but more to improvements in human capital (the quality of
labor, education, training and experience) (Malecki, 1991). The influence of
8 Leadership and institutions in regional endogenous development

that type of empirical study, and the attempt to incorporate those mechanisms
into theory led to the emergence of what is called the new growth theory.
Work in new growth theory does separate endogenous and exogenous
factors for analytical purposes. However, the importance of endogenous
factors through which growth is a product of factors within the region is
viewed as being fundamental, arising from the knowledge base of a region and
how it is enhanced through learning to become a continuous process (as
proposed early on by Arrow, 1962) and an internally created source of compet-
itive advantage (Romer, 1986, 1990; Lucas, 1988). The driving force of
regional economic development is the endogenous capability of a region to
learn and innovate (Saxenian, 1994; Jin and Stough, 1996). While somewhat
eclectic in nature and still evolving, the new growth theory represents the
contemporary thrust in development theory (Todaro, 1994: 889).
Advocates of new growth theory seek to explain technical progress as it
generates economic development as an endogenous effect rather than accept-
ing the neoclassical view of long-term growth being due to exogenous factors.
In new growth theory, models of regional economic development allow for
either agglomeration effects or market imperfections. And they also allow for
both convergence and divergence through the development process.
In this new approach those cumulative processes which self-reinforce
continuous growth or decline in a region assume a new significance through
the explicit recognition of additional endogenous change processes, including
entrepreneurship, learning, education, acquiring institutional capacity, the
adoption of new technologies, as well as recognizing exogenous processes,
such as the migration of firms and households (Karlsson et al., 2001: 4).
Thus, the production function is expanded to include research and devel-
opment (R) and human capital (H) development through education:

Y= f (K, L, T, R, H) (1.3)

These variables are seen as endogenous growth conditions, and are supposed
to generate spillovers and externalities, including economies of scale
(Malecki, 1998a: 434). The term endogenous implies that economic growth
is influenced by the use of investment resources generated by the economy
itself, in contradiction to the reference made to exogenous factors in the Solow
model (Johansson et al., 2001: 3).
Models of endogenous growth bear some structural resemblance to their
neoclassical counterparts but they differ considerably in their underlying
assumptions and the conclusions drawn (Todaro, 1994: 89). The most signifi-
cant difference is that these models assume that the national economy is
subject to increasing returns to scale; that is, a doubling of capital, labor and
A new perspective on regional endogenous development 9

y Production function of the new growth theory

Neoclassical production function

Source: Bretschger (1999: 180).

Figure 1.3 Production function and increasing returns to scale

other factors of production leads to more than a doubling of output. For exam-
ple, investment in research or education not only will have a positive effect on
the firm or the individual making the investment but also may have a positive
spillover effect on others in the economy. This beneficial effect on others
called a positive externality results in a larger impact from the investment on
the entire economy. This interaction constitutes the externality. Since growth
can perpetuate in these models without relying on assumptions of exogenous
technological change they often are referred to as endogenous growth models.
The production function may be represented as illustrated in Figure 1.3.
What is significant about endogenous growth theory is that it places empha-
sis on the importance of local factors in creating and maintaining sustained
development as opposed to ones external to the region. That is, models of
endogenous growth suggest an active role for public policy and domestic
actors in promoting economic development (Stimson et al., 2002: 277;
Johansson and Karlsson, 2001: 3).

1.2.4 Explicit Considerations in the New Growth Theory

A considerable focus in the new growth theory literature has been on the
notion that:

research and development (R&D)

innovation and new technologies
the development of an innovative milieu

have been fundamental in explaining the rapid growth of some regions, and in
10 Leadership and institutions in regional endogenous development

particular in accounting for the emergence of technology-intensive regions

such as the Silicon Valley in the US (Saxenian, 1994).
But that does link back to the importance of agglomeration and localization
economies that lead to the development of new industrial spaces (Scott, 1988;
Porter 1990; Krugman, 1991). In addition, some writers such as Fukuyama
(1995) suggest that not just economic but also cultural factors are important
in the rise of those new technology regions, supporting the innovative milieu
thesis (Castells and Hall, 1994) and giving weight as well to the roles of entre-
preneurship and leadership as key factors in regional growth (Rees, 2001).
Modern production systems are centered on skills, information and inter-
personal contacts. For example, evidence from Japan and from the newly
industrialized countries (NICs) showed that the success derived from bringing
these factors into play in an economy will determine the success or failure of
nations in achieving sustainable development. The NICs have emphasized
development of human resources through education, an emphasis on R&D,
and technological learning. At the same time, these factors have been linked to
both local networks of suppliers and to external markets (Malecki, 1991:
R&D generally serves two functions learning and the pursuit of techno-
logical innovation which provide industries with the tools to absorb new
technology and create new products. As Malecki (1991: 53) says: New prod-
uct innovations are the primary route of entry on new firms and new indus-
tries, and thus the greatest source of new jobs in an economy. In most
developed countries, R&D is highly linked to production, and as a result R&D
is mostly performed by private sector industries. However, linkages between
universities, government research institutions and industries are common and
even more such linkage is promoted by government policies since evidence
shows that market mechanisms alone might be insufficient (Malecki, 1991).
Silicon Valley in California and Route 128 in Boston in the US are examples
of this phenomenon.
Skills are crucial to R&D and for the creation of new products. As Malecki
(1991) says:

Skills make possible the accepting and interpretation of information, for improve-
ment and enhancing technology, and for generating new knowledge. They ulti-
mately determine economic outcomes. (p. 320)

Evidence from developed countries show that skilled people are the key
element in the networks that tie a place to other places and keep innovative-
ness alive (Malecki, 1991: 272). The contrary is also true, with the lack of an
adequate base of skills preventing or complicating technology transfer and
making it more difficult for learning capabilities to take place (ibid.: 275).
A new perspective on regional endogenous development 11

There is plenty of evidence to show that the proliferation of technology is

increasingly driving economies into knowledge-based, capital-intensive
production rather than labor-intensive production. Writing in the 1990s,
(Porter, 1990: 77; Malecki, 1991: 319) indicated that in the proximate future,
few high paying jobs would exist for the unskilled and low skill jobs (such as
laborers) and that those jobs were expected to decrease by more than 50
Linkages between economic and education units create spillovers not only
because of the development and diffusion of new technologies, but also
because of the process of learning and innovation that is created through the
interaction between researchers, producers and suppliers (Malecki, 1991:
173). Moreover, networks of firms and the existence of an active R&D envi-
ronment complement and allow firms to gain access to the links and assets
necessary to succeed in the new or knowledge-intensive economy (ibid.: 190).
University research is shown to greatly influence the location of high techno-
logical clusters and high technology employment (Anselin et al., 2000). An
analysis by Malecki (1998a) of seven high-tech areas (such as Silicon Valley,
Greater Boston, Research Triangle and Western Crescent in the US,
Cambridge in the UK, Munich in Germany and Kyushu in Japan) found that
the linkages between R&D units, the education infrastructure, and the size of
the city are: the most significant factors behind the success of these high-tech
areas (Malecki, 1998a: 264).
In the development of endogenous growth conditions organizational and
institutional structures seem to play important roles. For example, the three
main actors in the development of human resources are:

governmental agencies
education institutions
innovative firms and entrepreneurs.

The role of government with the influence of diverse stakeholders establishes

many of the institutional norms and makes decisions regarding educational
actions. The role of higher education institutions is to provide education and
R&D services, employ personnel and R&D activities according to their
specific requirements for production; and the competencies that originate and
devolve from the educational system. This general realization has led several
authors to expand the theory of endogenous growth to include a broader array
of variables into models of regional economic development. For example,
some models now do attempt to provide a way to see how community and
institutional and non-traditional economic variables influence economic
development (Johansson and Karlsson, 2001: 3). Some examples of institu-
tional and non-traditional economic variables might be leadership and the
12 Leadership and institutions in regional endogenous development

cooperation of local leadership groups in influencing regional economic

performance, entrepreneurship and the associated spontaneity which may alter
the economic orientation of the region, and social capital which may
contribute to increasing returns to a regional economy by reducing transaction
costs (Johansson and Karlsson, 2001; Stimson et al., 2002).


The concept of a learning region has evolved, based on the premise that the
agility and/or response capability of a region is dependent on its learning infra-
structure (Simmie, 1997; OECD, 2000) and the way it uses knowledge and
ideas to maintain a competitive advantage through the learning process
(Maillat and Kibir, 2001: 255). Florida (1995) says learning regions:

function as incubators and repositories of knowledge and ideas, and provide an

underlying environment of infrastructure which facilitates the flow of knowledge,
ideas and learning. Learning regions are increasingly important sources of innova-
tion and economic growth, and are vehicles for globalization. (p. 520)

Knowledge creation through learning has thus become a central proposition of

the endogenous growth theory formulation (Stimson et al., 2002: 276).
Through learning it is not possible to envisage how a closed regional
economic system could survive, develop and maintain itself.
However, exogenous factors such as trade, labor mobility and migration,
knowledge and innovation diffusion, foreign exchange, business cycles, capi-
tal mobility, monetary and fiscal policies imposed by higher levels of govern-
ment, and the decisions made in headquarters of firms affecting operations
locally all remain important to a regions economic performance and its
development over time. Those factors are not substantially under the control
of local decision-makers.
The increasing importance being placed on the role of endogenous forces
in regional economic development does raise significant issues for the role of
policy and strategy and their meaning. Karlsson et al. (2001: 56) pose these

What is the role for national policy and for regional policy?
Are top-down policies appropriate, desirable and effective?
Are bottom-up policies capable of impacting locations beyond the region
and in what ways?
What should be the combinations of top-down and bottom-up policies?
A new perspective on regional endogenous development 13

What are the roles of culture and values, and how do they vary from place
to place?
Can policies be created and implemented that will effectively and effi-
ciently induce self-organizing adjustment processes?

Not surprisingly, contemporary thinking is diverse on how to plan for a

process to facilitate regional economic development in an environment of
global competition, rapid change and a concern over sustainability (Stimson et
al., 2002: 8). Imbroscio (1995) advocates strategies for greater self-reliance;
McGee (1995), Park (1995) and Ohmae (1995) advocate regional economic
development strategies based on strategic alliances and inter- and intra-
regional network structures, including digital networks (Tapscott 1996); and
Sternburg (1991), Hall (1995), Henton (1995), Stough (1995), Waites (1995)
advocate the need to base regional economic development on the growth of
clusters of industries. But as Stimson et al. (2002) point out, there remains:
no universal model or framework guaranteeing success for regional economic
development (p. 38).
It can be argued that the focus on endogenous growth processes in policy
terms is related to the philosophies of both liberalism and neoliberalism:

Liberalism embraces the belief that unencumbered individual decision-

making and individual action are the appropriate and beneficial basis for
the socio-political and economic organization of society.
Neoliberalism, while embracing that view, additionally asserts that the
best outcomes for society will be achieved when the state retreats from
intervention in such matters.

The latter is seen in much of the current policy dogma in local or commu-
nity development (see, for example, Ife, 2002), which argues that enhanced
self-reliance amongst an empowered local population has the potential to bode
positive social and economic change, with local integration into national and
international economies occurring through local regions exploiting their
competitive advantage and fostering economic diversification (OECD, 1993),
aided and abetted by free market, enhanced competition, efficiency and effec-
tiveness policies (DArcy and Giussani, 1996; Stillwell, 2000). Herbert-
Cheshire and Lawrence (2001) draw attention to the link in these arguments to
entrepreneurship and the role of the entrepreneur as an innovator (Kurato and
Hodgetts, 1998), an issue to which we return later.
Stimson et al. (2002: 277) state that:

what is significant about endogenous growth theory is that it emphasizes the impor-
tance of local factors in creating and maintaining sustained development as opposed
14 Leadership and institutions in regional endogenous development

to ones external to the region [it] provides a way to see a broad array of
community and institutional and non-traditional economic variables including
learning, leadership and social capital as major inputs to a successful regional
economic development process Endogenous growth theory embodies the notion
that it is possible for regional economic growth and development to be sustained by
local internal forces.

Stimson et al. (2002) refer to the importance of the following in that process:

learning and learning agents

institutions and institutional structure
infrastructure (and especially smart infrastructure)
human capital
networks and alliances.

There have been criticisms of the new growth theory. For example:

It can be argued that it is extremely difficult to identify anything approx-

imating a knowledge-producing sector in real economies.
Significant problems do remain over how human capital should be
measured in empirical work; for example, whether stocks of, or
increases in, education best reflect human capital.
There is no agreed mathematical model that can capture properly the
effects of factors such as leadership, institutional arrangements, social
capital, or values.

Thus, while new growth theory has made important contributions to our
understanding principal sources of endogenous growth, it has not as yet
provided a specific model for measuring their impact. And nor has it
developed an operational procedure demonstrating how to incorporate
those endogenous factors and processes into models of growth and
But what endogenous growth theory does do is to make it abundantly clear
that, in addition to factor costs or price differentials, factors such as those
discussed in this chapter are important in regional economic development.
Regional economic development thus cannot be reduced to a narrow set of
economic factors; rather it will be influenced by a range of social and cultural
factors as well. That includes leadership and institutional factors. The ability
of a region to effectively address these endogenous factors will significantly
A new perspective on regional endogenous development 15

determine its agility and rapid response capability in responding to changing

circumstances and will affect its capacity to ride shocks.
Thus, the new framework we propose in this book to conceptualize the
economic development and competitive performance of a region is firmly
embedded in endogenous growth theory.

Developing a new conceptual model framework

for endogenous regional economic growth and
development: Incorporating resource
endowments and market fit, leadership,
institutional factors and entrepreneurship
2. A new conceptual framework for
regional endogenous development


The idea of sustainable development paying explicit attention in regional
development to what is being called the triple bottom line may be concep-
tualized as a virtuous circle as set out in Figure 2.1. We suggest that that circle
is maintained by effective leadership as it is used to change and adjust institu-
tions in order to adopt the structure, processes and infrastructure of a regional
economy to meet and anticipate changing circumstances, and to facilitate the
optimal use of its resource endowments and to assist industries to tap their full
market potential and achieve market fit.
As outlined at the beginning of Chapter 1, our view is that strong leadership
means a city or a region needs to be proactive in initiating regional economic
development strategy to monitor regional performance. It needs to set a vision for
the future development of the region, and implement plans and processes that will
facilitate institutional change and encourage and facilitate entrepreneurship. This,
in turn, will likely have the effect of enhancing the capacity and capability of the
city or region to positively adjust to changing circumstances helping it to attain a
good and/or improved fit with market conditions, and for it to more effectively
harness its resource endowments in order for it to maintain and improve regional
performance and for it to achieve a sustainable development path as a learning
region, and for it to be one that is competitive and entrepreneurial.
We are advocating this process; and we are also arguing that this is the
process that, while often used, is all too often used in a less than thoughtful
manner and not in a pre-planned way. Our argument is derived from the notion
that the presence of leadership in regions that are performing well, or which have
been re-engineered and turned around from performing poorly to perform better,
has been crucial in providing the right policies and creating and facilitating the
right environment. The Silicon Valley region in the US, for example, has chan-
neled resource endowments into efficient allocations (Leipziger, 1997). In such
places, leaders have initiated crucial institutional reforms, policies, projects and
environments that benefited citizens in general (Rowen, 1998).

20 Leadership and institutions in regional endogenous development

Source: The authors.

Figure 2.1 The virtuous circle for sustainable regional development


A three-dimensional conceptual model has been proposed (Stimson, Stough
and Salazar, 2003) to illustrate how a city or regions economy might move
from a sub-optimal to an optimal position within what we have called the
regional competitiveness performance cube (RCPC). This is represented in
Figure 2.2. The dimensions of the cube are:

strong vs. weak leadership (L)

effective vs. ineffective institutions (I)
good vs. poor resource endowments and market fit (REM)

The REM dimension may be split into (a) resource endowments, and (b)
market fit, to produce a four-dimensional RCPC hyper cube. However, for
simplicity we use the three-dimensional representation as our focus in this
book is more on the L and I dimensions of the cube.
At any point in time a citys or a regions economy will locate somewhere
within the sphere of the RCPC. Regions will vary greatly on the REM dimen-
sion, particularly concerning the magnitude, quality and mix of their resource
A new conceptual framework for regional endogenous development 21

I The most
desired or


position for
a region

Leadership (L)

M et s
Fi d M wm e
RE rk nt
an ndo urc
t( a e
E eso





The least
desired or
sub-optimal Ineffective Institutions (I) Effective
position for
a region
Source: The authors.

Figure 2.2 The regional competitiveness performance cube (RCPC)

endowments, and also with respect to the prevailing market circumstances, the
competitiveness of their industries and the effectiveness of their institutions in
seeking to achieve a fit with prevailing market conditions. Those in turn
affect the capacity of a region to tap into market opportunities and facilitate
entrepreneurship. Our proposition is that the performance of a region on these
three dimensions L, I and REM in the RCPC will condition a regions posi-
tion at a given point in time within the RCPC and its path or trajectory over
time through the RCPC.
Few, if any, cities or regions will have a perfect fit because markets and
market demand are dynamic due to the changing circumstances of both
endogenous and exogenous factors. Our proposition is that at all times a
regional economy needs to be trying to adjust its institutions and productive
organizations so as to maintain and enhance market fit by efficiently and effec-
tively harnessing its resource endowments to be competitive, and thus to
sustain itself. Some regions do this better than others; and how well a regional
does it can change dramatically over time, for better or for worse.
Thus, the trajectory over time of a city or region through the performance
space represented by the RCPC will be dependent on the evolving interactions
between the efficiency and effectiveness with which L and I provide catalytic
22 Leadership and institutions in regional endogenous development

processes and create situations conducive to the harnessing of its REM. We

would argue that regional economic development strategy needs to be formu-
lated, and that appropriate plans need to be developed and mechanisms imple-
mented that are geared towards shifting the position of a region within the RCPC
towards the top right-hand corner of the cube in order to achieve a position that
reflects performance optimality for a sustainable development outcome.


Using the three dimensions defining the axes of the RCPC in Figure 2.2, and
in addition giving explicit consideration to the importance of entrepreneurship
(E), Stimson et al. (2003), Stimson, Stough and Salazar (2003) and Stimson
and Stough (2004 and 2005) have proposed a new model framework for
regional endogenous growth and development that is depicted in Figure 2.3.
That model may be represented as follows where REM is resource endow-
ments and market fit:

RED = f [REM mediated by (L, I, E) (2.1)

In the model the outcome of the regional economic development process

(RED) is the degree to which a region has achieved a competitive perfor-
mance, displays entrepreneurship, and has achieved sustainable development.
Those outcome states are defined as the dependent variables in the model.
That outcome state is conceptualized as being dependent on a set of quasi-
independent variables relating to a city or regions resource endowments and
its fit with market conditions (the REM axis in the RCPC in Figure 2.2), that
being mediated through the interaction of sets of intervening variables that
encompass factors defined as leadership and institutions (the L and I axes in
the RCPC in Figure 2.2) which may interact to facilitate, encourage or
suppress entrepreneurship (E). Importantly, the new model framework repre-
sented in Figure 2.3 is seen to incorporate both direct and indirect effects in
the interactions between REM (the quasi-independent variable) and L, I and E
(the intervening variables). Also, the interactions between the intervening vari-
ables L, I and E may be both direct and indirect.
It is suggested in Figure 2.3 that these dynamic interrelationships and how
they evolve and operate over time will shape the nature of the development
and performance of a region, which may be measured and evaluated and
benchmarked using well-developed and tried tools of regional economic
analysis, including, for example, shiftshare analysis (Stimson et al., 2006)
and in particular through a focus on the regional shift component.
Quasi-Independent Variables Intervening Variables Dependent Variables

The dynamic interrelationships that act to

create the catalysis for regional
development OUTCOME
A Region that is:
Resource Competitive
(I) Institutions Entrepreneurial
Endowments and
Market Conditions Sustainable
(E) Entrepreneurship

(L) Leadership

Measure and evaluation

change over time.
Benchmark performance
(e.g. regional shift
component in shiftshare
Direct Effects
Indirect Effects

Source: The authors.

Figure 2.3 A new model framework for regional endogenous development
24 Leadership and institutions in regional endogenous development

The crucial dynamic depicted in Figure 2.3 is how the intervening variables
(L, I and E) interact to create catalysts for more effective and efficient utiliza-
tion of a city or regions resource endowments and how effectively it captures
market opportunities. In other words, the interaction of L, I and E become the
crucial catalytic factors in shaping not only the performance of a region
especially in influencing how effectively the REM factors are utilized and
tapped but also in enhancing the capacity and capability of a city or region
to efficiently, effectively and successfully address the challenges and contin-
gencies it faces over time in dealing with uncertainty and risk and in coping
with change.

Our proposition is that regions inevitably are influenced by their institutions,
leadership, social composition, economic structure and the degree of entrepre-
neurial activity all of which interact and evolve in a unique manner over time
and display a unique set of circumstances and a particular outcome state at
specific times. The conceptual model framework developed above stresses the
dynamic uncertainty of reality that confronts regions in the contemporary
world. Regional economic development over time is the outcome state of
those independent and mediating factors and processes that affect regional
economic development. In the model in Figure 2.3, RED may be measured and
evaluated through performance indicators which relate to:

the competitive performance of a city or region vis--vis other places

the degree of entrepreneurial activity occurring
the degree to which it has attained sustainable development vis--vis
triple-bottom-line economic growth and performance, social equity,
and environmental quality indicators.

A way to conceptualize that outcome state for a city or region at any point
in time, and its progress in economic development and its performance
through time, is to envisage its path through the regional competitiveness
performance cube (RCPC) as proposed in Figure 2.2.
In the four chapters that follow we elaborate on the components of the
model framework that represent the independent and mediating variables
REM, L, I and E and explain why they are such crucial interrelated factors
shaping the competitive performance of a region (RED), the dependent vari-
able in the model.
3. Resource endowments and market fit

This chapter considers the REM dimension in the model discussed in Chapter
2, namely resource endowment and market fit.
It is widely recognized that economic growth and performance are related
or tied to the resource endowments of a region and also to market conditions
and the markets a region serves and which it potentially might tap what we
refer to as market fit. Thus, as stated by Stough et al. (2001: 178): The better
endowed a region is in terms of resources the better it should perform ceteris
The capacity of local leaders to act and the capacity of institutions to be
effective will be considerably dependent on the resources available to them;
but conversely the effectiveness and efficiency of leadership and of institu-
tions in a region can act to enhance its resource endowments and its capacity
to tap markets.


3.2.1 Factors of Production and Other Considerations

In the context of local economic development planning, Blakely (1994: 144)

refers to the 5Ms that represent resources crucial to the economic develop-
ment process and which need to be evaluated as part of strategy formulation.
These are:


They are similar to those resource endowments traditionally considered in

economics as factors of production, namely: natural resources, land, labor,
capital and entrepreneurship.

26 Leadership and institutions in regional endogenous development

The resource endowments of regions are diverse and differ markedly from
place to place. They include:

the area size of the region

natural resources, such as climate, land, topography, materials
regional locational and environmental assets
historical economic base and industry structure and diversity
investment capital
competitive position
population and human capital
technological and other infrastructure
access to markets; agglomeration economies
and so on (Fainstein, 1983: 32; Judd and Parkinson, 1990: 21).

3.2.2 Enhancing Resource Endowments

Traditionally resource endowments of a city or region were seen to bestow

either a comparative advantage or disadvantage on a place. However, a well
endowed city or region might succeed even if it has few or relatively poor
resource endowments or if there are few opportunities for economic expansion
(Jessop, 1998: 96), and this may be achieved through strong leadership and
effective institutions acting as the catalysts and facilitating entrepreneurial
activity to stretch and leverage those resource endowments that exist and to
enhance market capture. Conversely, poor leadership and inadequate, inap-
propriate or ineffective institutions often means those resource endowments
are not being used effectively and that market opportunities are not effectively
pursued and tapped. In that way a city or region might experience a competi-
tive advantage or disadvantage.
De Santis and Stough (1999) have linked the notions of leadership and
resource endowments to develop an operational model to test the interaction
of those dimensions with regional economic performance in a study of 35
metropolitan areas in the US. Their proposition is that once exogenous factors
are controlled for, then regional economic performance depends on leadership
and resources, with leadership modeled as a variable that amplifies the inde-
pendent effect of resources. Their study is interesting because it links institu-
tional factors to measures of resource endowments, focusing on corporate
strength and human capital, as well as the presence of financial institutions, as
aspects of resource endowment. Leadership variables are drawn from the
notion of slack institutional resources, which Cyert and Marsh (1963: 36)
define in the context of the firm as the difference between the resources made
available to a firm and the total necessary for it to be maintained. De Santis
Resource endowments and market fit 27

and Stough (1999) propose that slack exists at varying levels and at various
times in all organizations, representing excess resources that may be mani-
fest as sources of voluntary contributions to civic activities, or locally-based
and focused community efforts by public, private and non-profit organizations
and foundations. Such allocation of excess resources to those types of organi-
zations and activities may be seen as enhancing both the leadership potential
and the institutional capacity of a region. The De Santis and Stough (1999)
study demonstrates that local regional leadership factors do enhance the
resource base and are critical in explaining the strength of regional economic
Special importance is now also being placed in those resources that the
public, private sector and non-profit sectors (NGOs) can direct towards
community economic development or community problem-solving (Stough et
al., 2001). The degree to which such actors and decision-makers commit
resources into the community as well as the availability of resources for
economic development will determine the scope and scale of local action, thus
potentially enhancing the resource endowments of a region.


In the conceptual model framework outlined in Chapter 2 we specifically
incorporate the notion of market conditions/market fit within the REM compo-
nent of the model of regional endogenous growth and development, because
the ability of enterprises in a region to engage in trade with other regions to
capture market share outside as well as inside the region is crucial. For a long
time economic base theory has told us this.

3.3.1 Comparative Advantage

Trade theory in economics tells us that the resource endowments of a region

may bestow either a comparative advantage or disadvantage on a place. But
more recently as Johansson and Karlsson (2001) emphasize the role of the
functional region vis--vis its location, trade and industry specialization is
being viewed in a different light. Location specialization and regional growth
are more dependent on technology and scale effects together with influences
from durable regional characteristics.
Until the 1980s, comparative advantages were mainly seen as being derived
from resource-based models, but since that time economic specialization has,
to a large extent, increasingly been viewed as dependent on increasing returns,
with differences in resources (factor initiatives) explaining only parts of trade
flows and the location of production (this argument follows Krugman, 1981,
28 Leadership and institutions in regional endogenous development

1991). With increasing returns as a basic explanation, trade was seen as devel-
oping because there are advantages in specialization among regions with simi-
lar resource endowments; thus specialization and trade are driven by scale
rather than by comparative advantage, with the gains from trade arising
because production costs fall as the scale of output increases. Johansson and
Karlsson (2001) also show how the internal market potential of a functional
region is the prime home market which, together with increasing returns to
scale, may give rise to processes of endogenous growth (or decline).

3.3.2 Scale Effects and Agglomeration

Of course scale factors relating to the size and to the industrial diversity of a
city or region and the market opportunities it represents, as well as its external
markets and their size and scope, will also affect a regions potential and the
feasibility of it to tap markets and that will be of considerable importance in
impacting the nature and rate of economic development and growth that might
be achieved in a city or region.
Maier (2001: 132) points out that new growth theory places increased
emphasis on agglomeration effects. Patten (1991) argues that re-agglomera-
tion of economic activity is occurring with the shift towards more flexible
production modes. The scale effects of agglomeration do suggest that larger
places particularly large metropolitan cities are likely to have a combina-
tion of resource endowments, market fit and other factors that provide them
with an important advantage vis--vis smaller places. It is evident also that
industry diversification is associated with urban scale, and that the role of new
technologies such as ICTs is acting to enhance those effects (Duranton and
Puga, 2000).
Thus, we are not underestimating the effects of scale and agglomeration in
our model of regional endogenous growth and development outlined in
Chapter 2. Indeed, as seen in much of the recent work in theories of endoge-
nous growth, local externalities (Scott, 1988; Feser, 2001) are key factors in
the regional economic development process.

3.3.3 Competitive Advantage

Johansson and Karlsson (2001) propose a simple model that emphasizes the
role of the functional region vis--vis:

industry specialization
Resource endowments and market fit 29

They see location, specialization and regional growth as dependent on tech-

nology and scale effects together with influences from durable regional char-
acteristics. Johansson and Karlsson point out that up until the 1980s
comparative advantages are mainly derived from resource-based models, but
that since then economic specialization is, to a large extent, dependent on
increasing returns and that differences in resources (factor initiatives)
explain only parts of trade flow and the location of production (this argu-
ment follows Krugman 1981, 1991). With increasing returns as a basic
explanation, trade develops because there are advantages to specialization
among regions with similar resource endowments; thus specialization and
trade tend to be driven by scale rather than by comparative advantage, with
the gains from trade arising because production costs fall as the scale of
output increases.
Johansson and Karlsson (2001) also show how the internal market poten-
tial of a functional region is the prime home market which, together with
increasing returns to scale, can give rise to processes of endogenous growth
(or decline). Thus, resource-based and scale-based mechanisms combine.
Regional market size is important as it extends market potential. When a
region has both, its competitive advantage increases, and there will be an
increased possibility of the region growing a wide range of industry sectors,
many of which may be exported to other regions.
Porter (1990: 1) notes how:

competitiveness has become one of the central preoccupations of governments and

industry in every nation [yet] there is no accepted definition of competitiveness.
(p. xii)

However, it is now certainly regarded as a key element of regional economic

development and it is a central thrust in many regional development strategies
and plans.
Stimson et al. (2002) state:

if regional development is primarily concerned with the competitiveness of factor

costs of production and the maximization of profits to establish a favorable envi-
ronment for investment or to compete for trade, [then] this may lead [regional]
economies along unsustainable development paths, with undesirable social and
economic outcomes. We need, therefore, to rethink the relationship between
competitiveness and sustainable economic development. (p. 29)

Moore (1996) links competitiveness to collaborative arrangements, which

include strategic alliances, partnerships and resource sharing, which we have
discussed as endogenous factors in the context of institutions and institutional
30 Leadership and institutions in regional endogenous development


While the issues discussed above relate predominantly to factors that are
endogenous to a region, in the context of contemporary globalization and the
associated rapid growth in trade, increasingly some factors may be exoge-
nous as well. This is seen, for example, in the internationalization of capital
flows and the interregional movement of labour. Physical resources in
particular are often playing less important roles as a result of the ability of
regions to readily substitute between endogenously and exogenously
sourced factor inputs. Thus, it is not necessarily the magnitude of volume of
endogenous resource endowments that is crucial in the regional economic
development process; rather, it is the capacity and capability of a regions
institutions and its leadership to capture those exogenous factors needed to
enhance endogenous deficiencies and as well to create new endogenous
capacity and capability. Doing so may be greatly enhanced through the
effectiveness of the other two dimensions in the RCPC in Chapter 2 the L
and I dimensions which we have already discussed at length. It is the
combination of the way the L and I dimensions interact to enhance the REM
dimension that is crucial, particularly in the context of the shift in focus from
the comparative advantage to the competitive advantage of a region as being
key in the development process to ensure a regions industries and its
supporting infrastructure to achieve a fit with market opportunities in the
broadest sense.
Global and national processes of economic and political restructuring
increasingly are imposing new challenges and opportunities to cities and
regions. For example, deep-seated sectoral shifts have redefined the economic
base of advanced capitalist economies. In places such as North America,
Western Europe and Australia, these shifts have manifest themselves in the
stagnation and decline in many mass production labor-intensive activities such
as textiles and heavy manufactures. As a result, many cities and regions have
experienced unfamiliar uncertainty as they could no longer rely on past prac-
tices but had to search for new economic activities and development strategies.
For example, in the US, steel jobs in the city of Pittsburgh practically disap-
peared as firms closed and residents left before its reemergence as a center for
information technology-based activities and producer services (Sheppard and
Leitner, 1998: 2867). The revolution in information and communication tech-
nologies (ICTs) and the accelerating pace of technology change, along with
the mobility of capital, exacerbate that uncertainty and the rate and scope of
the transformation that may occur in a city or region (Sheppard and Leitner,
1998: 287).
Resource endowments and market fit 31

From the foregoing discussion it is evident that resource-based and scale-
based mechanisms combine to impact regional development. Regional market
size is also important as it extends market potential. When a region has both,
its competitive advantage increases, and there will be an increased possibility
of a region growing a wide range of industry sectors, many of which may be
exported to other regions. The recently popular concept of industry clusters is
largely based on such premises.
The challenges of globalization and other exogenous forces means that
cities and regions or even locations within them need to create a favorable
set of conditions among the intervening variables in our model. Those regions
that do offer a favorable set of conditions derived not only from their resource
endowments but also through enlightened leadership and effective institutions
and which encourage and facilitate entrepreneurship will be more likely to
become places with a competitive advantage (McGuirk et al., 1998: 110).
4. Leadership

This chapter focuses on the L dimension in the model discussed in Chapter 2.
As we will see in the discussion that follows, leadership is a complex issue. It
can occur in many ways and it can assume many different forms. It can have
a profound effect on institutions. Also it can exhibit aspects of entrepreneur-
ship. However, leadership warrants special attention because of the catalytic
effect it can have as an explicit factor in the regional endogenous development


Leadership has been given many definitions. It is not a straightforward
concept, particularly in the context of regional economic development, and
there has not been a lot of published research that has systematically analysed
the nature of leadership and its role in regional economic development.
Nonetheless, it is important to try to define it so that it can be articulated with
respect to the goals of this book.
While it is common for leadership to be defined in terms of a great person,
in the context of regional development it might be more appropriately seen as
an expression or result of collective action. Thus, in regional economic
development, leadership has been given not a starring role but has been
viewed as a collaborative action (Fairholm, 1994; Heenan and Bennis, 1999).
Referring to regional economic development, Parkinson (1990) defines lead-
ership as:

the capacity to create stable and durable mechanisms and alliances that promote
economic regeneration and identifies a range of micro-level skills and macro-level
resources that can generate that capacity. (p. 241)

And Stough et al. (2001) suggest that leadership might be thought of as:

the tendency of the community to collaborate across sectors in a sustained, purpose-

Leadership 33

ful manner to enhance the economic performance or economic environment of its

region. (p. 177)

4.2.1 Definitions of Leadership

Despite our attempt above to bind the concept with a definition we think fits
the context of regional economic development, it is important to review the
range of definitions that have been used in other contexts. By way of illustra-
tion, we take a number of definitions of leadership that reflect the diversity
of approaches and focuses that researchers from a variety of disciplinary
perspectives have taken.
Burns (1978) defines leadership as:

[the act] of persons with certain motives and purposes to mobilize, in competition
or conflict with others, institutional, political, psychological, and other resources so
as to arouse, engage, and satisfy the motives of followers. (p. 19)

Gardner (1990) sees leadership as the:

process of persuasion or example by which an individual (or group) induces a group

to pursue objectives held by the leader or shared by the leader and his followers.
(p. 1)

Bennis and Nanus (1991) treat leadership as that which:

invents and creates institutions that can empower [individuals] to satisfy their
needs, chosen purpose and visions that are based on key values of the work force
and creates a joint architecture that supports them, and, finally moves followers to
higher degrees of consciousness. (p. 218)

Rost (1991) defines leadership as:

an influence relationship between leader and followers who intend real changes that
reflect their mutual purposes. (p. 102)

4.2.2 Why Leadership is Crucial

Heenan and Bennis (1999) point out that, in the new economy of increasing
interdependence and technological change, collaboration is not just desirable;
it is crucial.
In a previous era, influence, power and decision-making often depended on
single individuals or very small groups and leadership was based on a tradi-
tional hierarchical authority relationship between a leader figure(s) and
followers. But in todays world, power, influence and decision-making are
34 Leadership and institutions in regional endogenous development

more dispersed among power stakeholders working together towards a

common goal (Judd and Parkinson, 1990; De Santis and Stough, 1999;
Heenan and Bennis, 1999). It is through collaboration and collective processes
that regions possess or acquire sufficient flexibility and knowledge to adjust to
shocks and continuous changing conditions (Saxenian, 1994; Stough et al.,
2001) hence the connection between leadership and institutions. In this sense
Stimson et al. (2002) say that:

leadership for regional economic development will not be based on traditional hier-
archy relationships; rather, it will be a collaborative relationship between institu-
tional actors encompassing the public, private and community sectors and it will
be based on mutual trust and cooperation. (p. 279)

It will be about:

shared power

in order to energize a city or region to meet its competitive challenges and

adapt its environment to the needed challenges (Porter, 1990).
In this sense, Stough et al. (2001) see leadership as the vehicle that steers
that adjustment process, operating by targeting and guiding adjustment in
institutions (social rule structures) that enable a region to change in ways that
help to sustain regional economic development and that involves the capacity
to engage in risky behavior (Doig and Hargrove, 1987; Hofstede, 1997).
It is in this context of risk that there is an obvious link between leadership
and entrepreneurial activity, and this has been a focus of attention from both a
management and a business development perspective in studies of the firm as
well as in regional economic development. With respect to the former, the
entrepreneurial role of a leader is to:

innovate and develop products or services to market

effectively compete with or out-compete competitor firms.

In the latter context, community leadership for regional development may

contain many individual entrepreneurs; however, their desire to collaborate
to work together to create positive externalities beyond their own self-inter-
est or profit is what generates and/or enhances effective leadership in a collec-
tive context for regional economic development. This is illustrated by
Saxenians (1994) proposition that leadership will be characterized by hori-
zontal structures rather than by vertical structures.
Leadership 35

It is evident also that there is interdependency between leadership and insti-

tutional considerations. Collaboration, trust, power distance and entrepre-
neurialism are products or outcomes of the interactions between those two
dimensions in the regional competitive performance cube (RCPC) discussed
in Chapter 2, and it thus becomes a moot point as to whether the key compo-
nents referred to above belong to one or the other or both of the L and I dimen-
In regional economic development, it is the dynamic, or more precisely the
catalytic effect of leaders and of leadership that is crucial.


It is useful to consider in more detail a number of perspectives on leadership
in order to more fully understand the context in which it is being used in
regional economic development.

4.3.1 Social Psychology Perspectives

Vaughan and Hogg (2002: 23141) provide the following perspectives on

leadership from the point of view of social psychology.

1. One perspective is the great person theory, which attributes effective

leadership to innate or acquired individual characteristics, where the focus
is on personality attributes.
2. Explanations that emphasize the functional requirements of tasks or situ-
ations, where the focus is on explaining the actions of collectivities rather
than individuals or on attributing to the leader an important role in group
achievement, but where leadership is not seen as an invariant property of
individual personality.
3. Behavioral perspectives on leaders (after Lippitt and White, 1943) have
made the distinction between three leadership styles: autocratic leader-
ship based on giving orders to followers; democratic leadership based on
consultation and obtaining agreement and consent from followers; and
laissez-faire leadership based on disinterest in followers.
4. Interactionist perspectives of the leadership effectiveness of particular
leadership styles emphasize contingency or situational factors and task
factors (Fiedler, 1995). The distinction is made between socio-emotional
leaders, who are concerned with group member feelings and relationships
rather than with group tasks, and task-oriented leaders, who are
concerned with group tasks rather than with relationships among group
members. The effectiveness of either style of leadership is contingent on
36 Leadership and institutions in regional endogenous development

situational control, which is influenced by leadermember relations, task

structure and positional power.
5. Another perspective suggests that without followers there can be no
leader, with the role of the leader being conferred on an individual by
members of the group. This perspective is one of leadership as a growth
process, there being a dynamic transaction between leaders and their
followers (Hollander, 1958; Bass, 1990), with leadership defined as a
process of social influence through which an individual enlists and mobi-
lizes the aid of others in the attainment of a collective goal (Vaughan and
Hogg, 2002: 238).
One basis of this process may be interpersonal equity transaction,
where the leadermember exchange theory of leadership suggests that
effective leadership rests on the ability of the leader to develop hierar-
chical exchange relationships with individual members of the group;
and the group value model takes the view that procedural justice
within groups makes members feel valued, and thus leads to enhanced
commitment to and identification with the group (Tyler and Lind,
A second basis of this process is that leaders are group members (Lord,
1985) and that they are either (more or less) prototypical or schematic
members of leader categories or are able to embody the ideal norms of
the group based on self-categorization theory (Turner et al., 1987).
A third basis of the process is that, paradoxically, on the one hand lead-
ers epitomize and represent the group while on the other hand they are
agents of change within the group (and are thus simultaneously
conformist and deviant), which is represented by the notion of idio-
syncrasy credit.
Hollanders (1958) transactionalist theory proposed that followers reward
leaders for achieving group goals by allowing them to be relatively idio-
syncratic, and thus display tranformational leadership (Bass, 1990) char-
acterized by charisma, inspirational motivation, intellectual stimulation
and individualized consideration, which motivate followers to work for
group goals that transcend individual self-interest.

The orientation in social psychology is thus on leaders as individuals in a vari-

ety of group contexts teams, committees, organizations, friendship groups,
groups with leaders being people with great ideas that group members
agree upon, and who people follow. As Vaughan and Hogg (2002) say: lead-
ers enable groups to function as productive and coordinated wholes (p. 231).
A considerable focus in the social psychology literature on leadership has been
on measurement of the key characteristics of leaders, as seen in the pioneering
work of Fiedler (1995), who developed two different but related measures.
Leadership 37

These are often used interchangeably, and involve leaders perspectives of

their co-workers to measure leadermember relations. Recent developments
of this contingency approach to leadership may be seen in Fiedlers (1995)
cognitive resources theory. It attempts to search for the qualities that would
predict success among leaders. As pointed out by Oskamp and Schultz (1998:
89), an exciting offshoot of this work is a leader training program that:
attempts to improve organizational effectiveness by manipulating levels of
situational control and leadership styles (p. 89).

4.3.2 Management Perspectives

The social psychology perspectives on leadership have, to a considerable

degree, been incorporated within an organizational context and adopted and
adapted into management perspectives on leadership. Here the focus is on
leaders and leadership in business organizations, and in particular within the
The management literature abounds with books on leadership, but there is
evident an era shift in focus on style and substance. The 1980s and 1990s
tended to glamorize the leader at the top (such as Lee Iococca and Jack
Welch) and draw lessons from historys great leaders (for example Gandhi,
Churchill and Lincoln). Abramson (2002) reviews a shift to new perspectives
on leadership evident in a number of recent books which emphasize leadership

hard work performer by people who are presented with opportunities to lead every
day in their organization. It is not just the leader at the top who leads, but also indi-
viduals at all levels throughout organizations who are presented daily with oppor-
tunities to make a difference. (p. 37)

Heifetz and Linsky (2002) place importance on the need for leaders to
consciously build effective personal relationships, find partners, keep close to
their opposition, accept responsibility and acknowledge losses when neces-
sary. Leaders need to orchestrate conflicts by controlling the temperature,
holding steady and pacing when new work needs to be done. Of course
there are always situations where leaders may need to take exception with the
general view of colleagues or followers in order to move a process along.
Badaracco (2002) focuses on the ordinary as opposed to the heroic
leader, who moves quietly, patiently and incrementally. He calls them the
quiet leaders, exercising modesty and restraint, focusing on solving big prob-
lems through a long series of small efforts, which, he claims, often turn out to
be the best and quickest way to make an organization a better place. Badaracco
provides a tool kit of approaches for quiet leaders busy time, drill down
to uncover new information and seek compromises, not total victories!
38 Leadership and institutions in regional endogenous development

Kotter and Cohen (2002) emphasize eight steps for successful change.
These are:

increase urgency
build the guiding team
get the vision right
communicate for buy-in
empower action
create short-term wins
dont let up
make change stick.

They propose that leaders move from an analysisthinkchange approach to

a seefeelchange approach. They say people do not change because of
persuasive analytical argument; rather, they change because they have been
emotionally reached by dramatic visualizations of problems or solutions. The
message is that change leaders make their point in ways that are emotionally
engaging and compelling as possible supply valid ideas that go deeper
than the conscious and analytic part of our brainsideas with emotional
That emotional side of leadership is taken up by Goleman et al. (2002) who
describe six leadership styles:


The first four styles tend to build a positive emotional environment within
organizations, while the last two frequently create a negative environment.

4.3.3 Entrepreneurial Perspectives

There is an obvious link between leadership and entrepreneurial activity, and

this has been a focus of attention from both a management and business devel-
opment perspective in studies of the firm as well as in regional economic
development. With respect to the former the entrepreneurial role of a leader is
to innovate and develop products or services to market and to effectively
compete with or out-compete competitor firms. In the latter context,
community leadership for regional development may contain many individual
Leadership 39

entrepreneurs; however, their desire to collaborate to create positive externali-

ties beyond their own self-interest or profit is what generates and/or enhances
effective leadership in a collective context for regional economic development.
The role that entrepreneurs play in economic development dates to the
work of Schumpeter (1934) and his theory of economic development where
the entrepreneur is seen as a risk-bearer [as] a person who has character-
istics such as: initiative, authority or foresight. For Schumpeter, entrepreneurs
are the prime movers of economic development:

the agents who initiate new combinations of means of production [and] who
supplied the will and the action necessary to disrupt the position of production and
establish the new. (Schumpeter, 1934; High, 2002).

Kurato and Hodgetts (1998) refer to the entrepreneur as an innovator who:

recognizes and seizes opportunities; conveys those opportunities into

workable/marketable ideas; adds value through time, effort, money or skills;
assumes the risk of the competitive market place to implement those ideas; and real-
izes the rewards from these efforts. (p. 30)

In terms of local communities or regions, Herbert-Cheshire and Lawrence

(2001) suggest that an entrepreneurship model will:

become dependent on the ability of motivated individuals to find their place in the
global economy by becoming more inventive, business-like and risk-taking in creat-
ing new opportunities for value-adding and niche marketing. (p. 4)

While the entrepreneurial effect on economic development is widely

accepted and proven (Kirzner, 1973; Malecki, 1991; High, 2002), Schumpeter
(1934), as well as many other authors (Hirschman, 1958; Doig and Hargrove,
1987; Weiss, 1988), often treat leaders and entrepreneurs as synonymous.
Although it is true that both share such characteristics as initiative, risk bear-
ing, vision, determination, and so on, they cannot be seen as being equivalents;
that would make sense only if one sees the effect of individuals alone. Acting
by themselves entrepreneurs can advance products and industries and be lead-
ers within their range. However, as the world becomes more integrated and
interdependencies assume increasing importance, a separation of leadership
and entrepreneurs becomes more apparent, especially when we are talking
about carrying or taking individual economic success (at a business level) to
the more complex level of the development of a region as a whole.
To illustrate, as seen commonly through the world, such as in Latin
America, individual entrepreneurs have created successful companies and
instituted innovative combinations of factors of evolution, but economic
development for the region has not only been less than desirable, but also
40 Leadership and institutions in regional endogenous development

highly unequal in its impact. In some contexts, however, such as we see in part
of East and Southeast Asia, the existence of entrepreneurs could not have
created the externalities their actions led to without the right or supportive
policies and the right environment. In that case leadership at a collective
(community) level, rather than individual entrepreneurs, has steered or guided
power stakeholders to organize themselves for development (Leipeizeger,
1997; Rowen, 1998). Community leadership, rather than individual entrepre-
neurs, has forged horizontal and collaborative relationships which have been
crucial to the innovative milieu and the technological advantage of places such
as the Silicon Valley in the US (Saxenian, 1994).
Take Australia as an example. Over the last couple of decades the efficacy
of entrepreneurship has become a feature of government policy, particularly as
it relates to research and regional development (Beeson and Firth, 1998;
Kenny, 1999) as seen, for example, in the views and policy recommendations
encompassed in a series of federal government reports, including: the Hilmer
Inquiry of 1993 into national competition policy; the 1995 Karpin Report into
industry, leadership and management skills; and the 1994 McKinsey and
Company report into how to unlock the growth potential of regions. Those
reports advocate improvements in economic performance through the
improved performance of firms and institutions (Hilmer Inquiry) and the
adoption of more appropriate attitudes and behaviors more widely across soci-
ety (Karpin and McKinsey Reports). Wright (1998) discussed how entrepre-
neurship now involves a whole range of enterprising qualities associated with
self-reliance, autonomy and accountability; it involves active citizenship
(Cruickshank 1994; Kearns 1995), whereby individuals are expected to
become entrepreneurs of themselves, acting in a responsible and self-reliant
manner to improve the conditions of their own existence (Rose 1989, 1993).
And according to Day (1998) it involves the fostering among local populations
of a new cultural trust through changes in attitudes and behavior to: free the
spirit of competition, initiative, self-reliance, risk-taking and so on (p. 92).
In the context of rural and regional development in Australia, Herbert-
Cheshire and Lawrence (2001) state that the emphasis on competition, self-
interest and personal advancement is: inherently individualistic and lies at
odds with the rhetoric of community spirit and social capital that characterizes
the bottom-up approach to local development (p. 5). But the implicit assump-
tion seems to be that the entrepreneurs motivation is no longer self-interest
but the facilitation of community initiatives and the empowerment of others
through what Herlau and Tetzschner (1996) refer to as the provision of lead-
ership, motivation, passion and vision (p. 116).
In the UK, Boyett and Findlay (1997) refer to these as community entre-
preneurs, while in the US Henton et al. (1997) refer to them as civic entre-
preneurs. In this work there is a focus on capacity building of skills for
Leadership 41

development, leadership and collaboration to help create a competitive



Leadership for regional economic development that is community-based
and/or region-wide in its impact will not be based on traditional hierarchy rela-
tionships; rather it will be a collaborative relationship between local institu-
tional actors encompassing the public, private and community sectors and
it will be based on mutual trust and cooperation (Bower, 1983; Osborne, 1988;
Gray, 1989; Judd and Parkinson, 1990; Bryson and Crosby, 1992; Fosler,
1992; Stimson et al., 2002). This proposition is supported by a comparative
case study of leadership in regional economic development in ten metropoli-
tan regions in the US sponsored by the W.K. Kellogg Foundation and
published in 1997 by the Academy of Leadership at the University of
No single individual or organization has the authority or power to undertake
fully effective region-wide economic development; consequently, to be effec-
tive regional leadership is a collective responsibility, and it involves local lead-
ers who need to inspire and motivate followers through persuasion, example,
data-informed arguments and empowerment (Burns, 1978; Bunch 1987;
Kouzes and Posner 1987; Neustadt and May, 1990). Bryson and Crosby (1992)
perceive an environment in which no single organization is in charge nor has
the legitimacy, power, authority and the knowledge required to tackle any
major public issue, so that institutions must join forces in a shared-power
world of intermediate institutions. Stimson et al. (2002) say that these are the
basic elements of local leadership for economic development (p. 280).
The following might, then, be proposed as key components of, or even
preconditions for, effective regional leadership to enhance the economic
development process in a city or region:

1. Collaboration, as leadership is about an expression of vision and the

implementation of processes for the collective good and for the whole
community of a region (Fairholm, 1994).
2. Trust is essential for effective collaboration. Leaders and followers must
have mutual trust to risk participation in collective action (Fairholm,
1994). If trust is lacking, leaders will find it difficult to have their views
3. Shared power, which is characterized by low power distance and decen-
tralized leadership power. The power distance concept is defined by
42 Leadership and institutions in regional endogenous development

Hofstede (1997) as the degree of inequality in power between a less

powerful individual and a more powerful individual, the existence of
which engenders mistrust and makes cooperation and collaborative diffi-
cult. Power and responsibilities need to be dispersed while power bases
are independent.
4. Flexibility, which is necessary for innovation and creative thinking and
which rigidity in control mechanisms hinders (Bentley, 2002: 33).
5. Entrepreneurialism, where community leadership shows entrepreneurial
characteristics, believes in change, and initiates it to energize a region to
meet its competitive challenges and adapt its environment to the needed
challenges (Porter, 1990), and this involves the capacity and willingness
to engage in risky behavior (Doig and Hargrove, 1987; Hofstede, 1997).

From the foregoing discussion and examples it is evident that leadership

encompasses the notion of:

shared vision or purpose

creating change.

Heenan and Bennis (1999) claim that in the new economy of increasing inter-
dependence and technological change, collaboration is not simply desirable. It
is crucial.
In earlier times, leadership tended to be based on traditional hierarchical
authority relationships between leader and follower, with influence, power and
decision-making dependent more on individuals. But today the more common
view is that these are shared among stakeholders working together towards a
common goal. It is through collaboration and collective processes that a region
will have the sufficient flexibility and knowledge to adjust to shocks and
continuous changing conditions (Saxenian, 1994; Stough, 2001). In this sense,
leadership might be seen as the vehicle that steers that adjustment process
(Stough et al., 2001), operating by targeting and guiding adjustment in institu-
tions (social rule structures) that enable a region to change in ways that help
to sustain regional economic development.
5. Institutions and institutional factors

This chapter focuses on the I dimension in the model discussed in Chapter 2.
Institutions and institutional factors have for a long time been seen as playing
crucial roles in the process of regional endogenous growth and development,
and have been widely discussed in the regional economic development litera-
ture as well as in the general literature on economic development. Institutional
factors cover a wide range of issues concerning governance and government,
and may refer not only to the role of the public sector but also to private sector
and NGO and community actors and structures, and as well to the contempo-
rary notion of publicprivatecommunity partnerships. And they encompass
notions of social capital, and networks and alliances of collaborative arrange-
The discussion of institutions and institutional factors that follows provides
a comprehensive overview of their nature and roles with respect to regional
development and indicates why they can be important enhancing or detracting
forces influencing the growth and development of cities and regions and how
they affect regional competitiveness. It will be evident that leadership in
particular, and also entrepreneurship are interrelated to institutions, and some
scholars do not draw the explicit distinctions which we choose to do in this
book. However, institutions and institutional factors warrant specific and
detailed consideration.


Institutions are of vital importance in any society. They provide the rule struc-
tures and the organizations within a society for it to operate. The nature of
institutions and the institutional structures in a society can have a profound
influence on how effective and efficiently a society operates and on the
competitiveness of a national economy and on regional economies. They
represent both endogenous and exogenous forces depending on the level of
scale and the nature and structure of governance and government as it pertains
to a nation and the regions within a nation. What might be an endogenous

44 Leadership and institutions in regional endogenous development

factor at one level of spatial scale (such as the nation or a state or province)
becomes an exogenous process at another level of scale (such as a local area
or city).
Rule structures are about the:


within which a society and economy operate and actors function. They are the
structures and processes which govern or inform:

what may or may not be done,

what the consequences are if violated,
(and thus) how things may be done.

It is important to distinguish between government and governance:

1. Government is the system by which a nation, state or region is governed,

through a body of persons elected or appointed to govern or conduct the
policies and affairs of an organization.
2. Governance is the act or manner or process of governing and the office or
function of governing.

In the context of regional economic development, the terms institutions or

institutional arrangements are used in a broad way to refer not only to these
structural and process issues, but also to those things that are provided or influ-
enced by those structures and processes, such as:

the provision and cost of infrastructure and services and facilities

fiscal and monetary mechanisms
the redistribution of resources and benefits for purposes of equity and
social justice information
the regulation of land and development
the organization of territory.

These may facilitate or influence the interactions between the public and
private sectors and the community in either a positive or a negative way. It is
self-evident, thus, that there will be a symbiotic relationship between institu-
tions and leadership.
Blakely (1994) refers to the necessity of having appropriate institutional
Institutions and institutional factors 45

arrangements to manage and fund the regional economic development strategy

process, and to ensure the implementation of plans and actions. Assessing the
capacity and capability of local organizations to initiate, undertake and carry
through local regional economic development strategy planning is a funda-
mental component of the tasks of that process. Institutional capacity building
is often part of the implementation of plans and actions that come out of a local
or regional economic development strategy planning process. In that context,
institutional capacity and capability is a crucial issue that can have an enhanc-
ing and/or catalytic effect or which can have a detrimental or stultifying effect
on the growth and development path of a city or region. That is now being
discussed as well in the context of the creation of learning infrastructure and
the learning region (Simmie, 1997; OECD, 2000).


5.3.1 Constraints

In economics, one of the most significant contributors to the debate on the role
of institutions and institutional change and its impact on economic perfor-
mance is Douglas North (1990), who defines institutions as the rules of the
game, stating that they: define and limit the set of choices of individuals.
They are the humanly devised constraints that shape human interaction (pp.
36). Those constraints can be formal (designed and enforced by political
authority) or informal (evolved as a result of custom or tradition as codes of
conduct). According to North (1990): The major role of institutions is to
reduce uncertainty by establishing a stable (but not necessarily efficient) struc-
ture to human interaction (p. 4).
A distinction is made between institutions and organizations.
Organizations, while being similar to institutions, are seen by North as:
groups of individuals that have a common purpose, let it be economic, polit-
ical or social (p. 4). He says that what organizations come into existence and
how they evolve will be: fundamentally influenced by the institutional frame-
work, that is, organizations are the players, and institutions are the rules
(p. 4). North goes on to say that:

Institutions, together with the standard constraints of economic theory, determine

the opportunities of a society. Organizations are created to take advantage of those
opportunities, and as organizations evolve, they alter the institutions. Therefore,
institutions and organizations are mutually related and share a symbiotic relation-
ship. (p. 7)
46 Leadership and institutions in regional endogenous development

It is accepted that economic performance over time is fundamentally influ-

enced by the way institutions evolve, how they decrease uncertainty through
making predictable the rules of the game and the behavior of players, how they
allow individuals to have access to proper information about the decision-
making process, and how they decrease market imperfections that in turn
decrease transaction costs. As stated by Clingermayer and Feiock (2001):
Institutions can provide the stability in collective choices that otherwise
would be chaotic (p. 3). Institutions will affect the performance of an econ-
omy through their effect on exchange and production (North, 1990).
According to Clingermayer and Feiock (2001), institutions matter because
they affect the behavior of policymakers, they provide incentives for political
exchange and affect political and policy outcomes, and they impact upon not
only policy adoption but also administration and implementation of policies.
Those authors say:

Policy choices derived from institutional constraints at one point in time may result
in path dependent development. Once a particular path is taken, it might be costly,
if not impossible, to move local government policies in a dramatically different
direction. Local government institutions may constitute self-reinforcing mecha-
nisms in that they bolster the power of key interests advantaged by the existing set
of institutions. (p. 126)

5.3.2 How Institutions may Enhance Capital Accumulation

Vazquez-Barquero (2002: 12) emphasizes how institutions can condition the

capital accumulation process and as a result the economic development of
cities and regions. That is because their behavior can:

reduce transformational and production costs

increase trust among economic and social actors
improve entrepreneurial capacity
increase learning and relational mechanisms
reinforce networks and cooperation among actors.

It is thus widely argued that securing economic growth at the local level
cannot be reduced to a set of narrow economic factors, with institutions
along with social and cultural factors being of great importance.
Amin and Thrift (1995: 10) refer to what they call institutional thickness,
which is a combination of features including the following:

the presence of many institutions

inter-institutional interaction
a culture of collective representation
Institutions and institutional factors 47

identification with a common industrial purpose

shared norms and values.

All these serve to constitute the social atmosphere of a particular locality. Thus,
broadly conceived, institutions include not only formal organizations but also
informal conventions, habits and routines which are sustained over time. Amin
and Thrift (1995) say that the notion of thickness is conceived to: stress the
strong presence of both institutions and institutionalizing process, combining to
constitute a framework of collective support for individual agents (p. 10).
While institutional thickness is a strong indicator of their ability to offset
transaction costs, too much thickness will increase time involved in meeting
them and thus transaction costs. Thus, it is more appropriate to think of the
relationship between transaction costs and institutional thickness as a U-
shaped relationship rather than as a monotonically decreasing one.
In a study of total factor productivity growth and economic performance in
East and Southeast Asia, Rodrick (1998) says: differences in the quality of
government agencies are a plausible source of the variation in economic
performance in the region (p. 79). He concludes that: the quality of govern-
mental institutions matters for growth (ibid.). He found that the association
between institutions and growth is remarkably close:

Taiwan, Japan and Singapore have the best institutions, and the highest growth
rates; the Philippines and Indonesia have the worst institutions and the lowest
growth rates; and Thailand, Korea and Malaysia are intermediate. (p. 32)

Rodrick finds the key factors concerning governance to be:

quality of the bureaucracy, especially autonomy from political pressure,

expertise and efficiency in the provision of government services and
superior modes of recruitment and training;
rule of law, particularly sound political institutions, strong courts and
orderly succession of political power;
risk of expropriation, particularly relating to the possibility of confisca-
tion and forced nationalization;
repudiation of contracts by government, including postponement, scal-
ing down due to budget cuts, and changes in government priorities.

5.3.3 Local Governance

Thus, along with economic resources, important factors that create competi-
tive advantage are the existence of local mechanisms and alliances, or what is
generally called local governance.
48 Leadership and institutions in regional endogenous development

As discussed by McGuirk et al. (1998), local governance incorporates the

range of interests, both private and public and community based, that are
involved in managing, servicing and regulating the local urban region (p.
111). For example, the strength, structure and stability of the private and
public sectors in a city or region, and the character of the political relations
between them, the degree of social division, and the existence or not of favor-
able legislation, will all affect the capacity of a place to respond to external
threats or opportunities. Political antagonisms within a city, for example,
might be so great that no coherent response, negotiation or agreement among
a broad range of political and social groups is possible (Parkinson, 1990:
212). Jewson and MacGregor (1997: 14) suggest that, in the local context,
politics matter. That is, changing forms of governance present opportunities
for resistance, innovation and participation, along with attempts at more effec-
tive social discipline.
The effectiveness of local governance is also intricately linked to attributes
of leadership, and in particular to the uncertainty that may derive from leader-
ship turnover, weak or ineffectual leadership and incoherence or inconsisten-
cies in the interrelationships between the elected politicians and officials and
the bureaucracy. Furthermore, uncertainty can also be created by the lack of
clear political goals and unclear divisions of tasks between actors and stake-
holders, which is often the case where the public policy process is character-
ized by reactive as against proactive action and initiatives. These triggers of
uncertainty, and the typically short-term perspectives that accompany them,
may result in increased transaction costs reducing the competitive standing of
a city or region.
Local governance, then, becomes part of the competitive advantage of
cities. Some examples of city governance include (McGuirk et al., 1998: 111):

central government initiatives, often with statutory authority, instituted

in a local context, for example Newcastles Honeysuckle Development
Corporation (HDC);
local public or quasi-public development agencies, often with statutory
powers, carrying out local economic development activity, for example
the Hunter Economic Development Council (HEDC);
newly formed organizations or alliances of local business elites that may
or may not coordinate their activities with the local authority, e.g.
Newcastles City Centre Committee.

McGuirk et al. (1998) have this to say:

The combined task of these institutions of local governance is to create investment-

ready production sites equipped with all the requisite social and physical infra-
structure, and favorable business climate. (p. 111)
Institutions and institutional factors 49

5.3.4 CentralLocal Relations

As most cities or regions are a part of a larges de jure entity it is inevitable that
they will be influenced by the decisions of higher levels of government. Thus,
centrallocal relations have important implications for the responsibilities of
sub-national or sub-state governments on how regional development is
managed (Bentley, 2002: 33). Rigid controls hinder the flexibility necessary
for innovation and creative thinking (Brooklyn et al., 2002). Decentralization
of power can enable community leaders to make their own decisions accord-
ing to the specific needs of a city or region. That is, they have wide-ranging
authority or are part of the key decision-making group (Fainstein, 1983: 44).
According to Jessop (1998), it can be said that the extent of local action and
access to funds will depend on the amount of institutional decentralization
existing within a nations urban system (p. 2292). Thus the focus needs to be
on the degree to which the city or region has a wide-ranging authority to make


We now turn to consider some of the specific ways in which institutional
arrangements may shape policy outcomes and the implications for regional
economic development. These considerations include:

the political institutional environment

the nature of executive government
uncertainty and leadership turnover
external constraints on local policy choices
inter-institutional collaboration and network interaction
trust as a governance device
institutional decentralization
organizational culture
culture of governance

5.4.1 Political Institutional Environment

Policy stakeholder relationships tend to influence the nature of leadership in

government. Mouritzen and Svara (2002) say that relationships that are gener-
ally characterized by interaction, interdependency, reciprocal influence,
dynamic tension and mutual respect between policy stakeholders makes a
difference in leadership characteristics and performance. A less fragmented
50 Leadership and institutions in regional endogenous development

political system provides greater opportunities for executive leadership to

implement policies and enables considerable continuity and stability to be
achieved in public management (Clingermayer and Feiock, 2001; Pollitt and
Bouckaert, 2002).
Because such local policies involve making deals (for example, coalitions,
contracts, bond issues, intergovernmental agreements and publicprivate part-
nerships), having the support of strategic groups in the community is neces-
sary to negotiate and carry out complex deals. Successful negotiations or
coalitions will depend on the level of intimacy and the effectiveness with
which actors in the business community and in the various levels of govern-
ment work.
Therefore, the nature of a local community or regions political environ-
ment will determine particular kinds of behavior and encourage particular
kinds of people to participate in local politics and local policy-making. As
stated by Clingermayer and Feiock (2001):

The ability of elected officials to achieve their preferred goals depends substantially
on their ability to control line departments [and on] their ability to influence strate-
gic stakeholders. (p. 13)

Hambleton (1994: 62) cites the example of Chicago where the former Mayor
Daley used the party and informal networks to build up enormous power in the
mayors office.

5.4.2 The Nature of Executive Government

Mouritzen and Svara (2002) argue that:

the form of local government structures defines the rules concerning how political
power is obtained, maintained, exercised and shared. Institutions set up how politi-
cal power is constituted. (p. 79)

Thus, incumbent mayors, for example, will fill that office in different ways
depending on their personal characteristics and political forces and other
conditions within specific cities (ibid.). Mouritzen and Svara (2002) say that
mayors can provide leadership in three areas. They can be:

policy leaders who shape the context of progress and projects;

public leaders who help determine the direction that citizens want their
city to take;
political party leaders who promote the interests of their political orga-
Institutions and institutional factors 51

In addition, mayors can differ in their style of leadership, some reacting to

circumstances as they arise, others positively anticipating and helping to shape
change (p. 80).
Hambleton (1994) refers to the two dominant forms of local government in
the US:

1. The mayorcouncil form of government where there may be a strong

mayor, who serves as a strong and directly elected chief executive and is
highly visible, or a weak mayor, where there is fragmentation of authority
and the mayor has limited powers and authority.
2. The councilmanager form of government where the city manager resem-
bles the managing director of a private company, which can create a lead-
ership gap but where the mayor acts as a facilitated coordinator and guide
rather than an executive.

Clingermayer and Feiock (2001: 32) note that the form of local government
can also determine the ability of officials to deal effectively with external
actors and provide the local executive with the ability to speak for the city
and act as an entrepreneur for economic development in dealing with private
sector elites. In the US, case studies have shown the importance of a politi-
cally powerful mayor for economic development efforts, citing the examples
of Mayor Lawrence in Pittsburgh, Mayor Daley in Chicago and Mayor
Schaeffer in Baltimore as strong mayors who exercised internal control over
city agencies and dealt effectively with external actors in the business commu-
nity and in the state or federal government (Fosler et al., 1982; Clingermayer
and Feiock, 2001: 15; Mouritzen and Svara, 2002: 2889). It is argued that
city managers cannot provide political leadership as they are not elected.
The form of government and system of representation a city chooses will
influence its ability to pursue certain kinds of policy options, and institutional
factors that strengthen the executive may enhance the grantsmanship of a city
government (Clingermayer and Feiock, 2001: 19, 33; Pollitt and Bouckaert,
2002: 50).

5.4.3 Uncertainty and Leadership Turnover

Clingermayer and Feiock (2001) claim that:

local leadership turnover affects transaction costs and policy choices involving
long-term objectives and future commitments [and that the resulting uncertainty]
affects the ability of the municipality to negotiate contracts, make credible commit-
ments to suppliers, and faithfully uphold and enforce contacts once they are in
force. (p. 73)
52 Leadership and institutions in regional endogenous development

They go on to say that communities entertaining substantial personnel change

within the local bureaucracy, among chief administrative officers, or within
the city council can create political uncertainty that may reduce time horizons
of long-term commitments with vendors, investors and contractors (p. 76).
The result is often less consistent organizational outcomes.
Uncertainty can also be created by the lack of clear political goals and
unclear division of tasks between the key stakeholders; that is the related
effects on the bureaucracy (Mouritzen and Svara, 2002: 89). In addition the
implementation of reactive rather than proactive policy initiatives creates a
lack of direction that naturally would leave community stakeholders wonder-
ing what their goals are and how tasks will be accomplished (p. 90), that can
result in low trust in institutions.

5.4.4 External Constraints on Policy Choices

As discussed by Clingermayer and Feiock (2001) constraints imposed by

higher levels of government establish the basic rules of governance since
they explicate the boundaries of legitimate local government activities and
delineate procedures for making choices (pp. 11415). Constitutional level
institutions may increase or decrease the costs associated with pursuing partic-
ular policy goals, and they may, therefore, induce certain outcomes by deter-
mining what policies are in the interests of local citizens and public officials
(ibid.). Moreover, external constraints may directly affect the incentives of
local actors and their ability to pursue their interests successfully, as seen, for
example, in the limited tax advantages of certain municipal bonds as a conse-
quence of the US Federal Tax Reform Act of 1986 (ibid., 93).

5.4.5 Inter-institutional Collaboration and Network Interaction

Fairholm (1994) says that leadership is not so much a function of the individ-
ual leader as it is a function of collective action, of association and coopera-
tion it is an expression of community. Thus, according to Amin and Thrift
(1995), the involvement of key community institutions (for example, local
chambers of commerce, development agencies, trade associations, financial
institutions, firms, political parties, government agencies, business service
organizations, and so on) in the local area provides a basis for the growth of
particular local practices and collective representations of social networks (p.
102). Those institutions need to be actively engaged with and conscious of
each other, displaying high levels of contact, cooperation and information
interchange that may lead, in time, to a degree of mutual isomorphism (ibid.).
Such high levels of interaction should lead to the development of what Amin
and Thrift (1995) refer to as:
Institutions and institutional factors 53

sharply defined structures of domination and/or patterns of coalition resulting in

both the collective representation of what are normally sectional and individual
interests, and the socialization of costs. (p. 102)

Those interactions can also generate mutual awareness of involvement in a

common good enterprise in which the interdependency between actors is
understood and appreciated (Conti and Giaccaria, 2001: 119). Amin and
Thrift, (1995: 103) refer to this as the process of institution institutionaliza-
Mouritzen and Svara (2002) argue that passiveness is manifested by isola-
tion of key stakeholders who operate with relatively weak connections and
few partners. Where participation is achieved from a diversity of key sources
in policy advice, then the scope of accountability and its perceived legitimacy
will be greater through it being home grown and owned (Mouritzen and
Svara, 2001: 1013; Pollitt and Bouckaert, 2002: 55).

5.4.6 Trust as a Governance Device

Fairholm (1994: 3) emphasizes how local or community leadership takes place

in situations or cultures where leaders and followers need to trust each other
enough to accept the risk, vulnerability and uncertainty of being involved in
collaborative action.
Storper and Scott (1992) discuss how differing levels of trust in a region
may explain the degree of cooperation and the establishment of alliances and
partnerships among actors. The less the level of trust the greater will be the
accumulating efforts of exchange. This is the other side of the coin from the
institutional thickness concept in that places that lack institutional thickness
will tend to be places that have low levels of trust. Pollitt and Bouckaert
(2002) put it this way: trust is a governance device in the sense that it
contributes to prosperity by reducing transaction costs. It does so by enabling
much shorter contracts and radically reducing monitoring costs (p. 7).

5.4.7 Institutional Decentralization

The decentralization of power is claimed to enable community leaders to make

their own decisions according to the specific needs of the region. According to
Weiss (1988) it is seen as a key ingredient for close working between govern-
ment and local and regional businesses to materialize entrepreneurial ideas
(p. 89). Decentralization entails a significant degree of vertical dispersion of
authority, with community leaders having wide-ranging authority and/or being
part of key decision-making groups (Pollitt and Bouckaert, 2002: 41).
Fainstein (1983: 44) states that the extent of local action and the access to
54 Leadership and institutions in regional endogenous development

funds depends on the amount of institutional decentralization existing within

a nations urban system, and notes the difference between the US and the UK
systems. In the former there is widespread acceptance of home rule, while in
the latter the presence of a highly centralized system prevents local councils
from having more active local action to foster growth.
It is also claimed that decentralization entails that power does not reside in
a single person or entity; rather, power and responsibilities are dispersed.
Nations with high power-distance relations are characterized by centralization
and expect the upper echelons of the hierarchy to give directions and exercise
control (Hofstede, 1997; Mouritzen and Svara, 2002). Pollitt and Bouckaert
(2002) claim that those extra layers increase the distance of the governments
top to its bottom and hinder the always difficult job of translating broad goals
into specific goals and manageable objectives (p. 52). Further, they suggest
that: centralized states lead towards narrower focus on service specific
outputs and results while decentralization leads towards a more strategic
concern with policy and impacts (p. 43).

5.4.8 Organizational Culture

The culture of an organization affects leadership as does leadership affect

organizational culture. Wallach (1983) says organizational culture includes:

bureaucratic dimensions relating to hierarchal, procedural and structural

aspects of culture;
innovative dimensions relating to levels of freedom for creativity and a
challenging work environment;
supportive dimensions relating to teamwork and encouraging a trusting
working environment.

Fairholm (1994) notes the presence of such dimensions in public sector

organizational culture accounts greatly for government performance and
how things are done. Osborne and Gaebler (1963: 1112) point out that
governments that are rigid, narrowly focused and preoccupied with rules and
regulations do not function well in the contemporary rapidly changing,
information rich, knowledge intensive society and economy. A regime with
a flexible, fast moving, performance-oriented form of organization is the
type of administrative culture that can better respond to the new global
requirements (Pollitt and Bouckaert, 2002: 5960). Highly structural
bureaucratic organizations are slow to respond to the individual needs of
either internal or external stakeholders, focusing more on process and proce-
dures than on responsiveness to the needs of their various stakeholders
(Fairholm, 1994: 138).
Institutions and institutional factors 55

5.4.9 Culture of Governance

Pollitt and Boukaert (2002) propose three models to describe administrative


1. The Rechtsstart model, where the state is a central integrating force with
a focal concern on the enforcement of laws. Here the instinctive bureau-
cratic stance is one of rule-following and precedent, and the actions of
both individual public servants and citizens is set in that context of
correctness and legal control. France and Germany are cited examples of
this model.
2. The public interest model, where the state has a less extensive and domi-
nant role within society, with government being regarded as something of
a necessary evil and where ministers and officials must constantly be held
to account. While law is an essential component of governance, its partic-
ular perspectives and procedures are not as dominant, and the process of
government is seen as one of seeking to obtain public consent (or at best
acquiescence for measures devised in the public (general, national) inter-
est. It is recognized that different interest groups will compete with one
another with government playing referee. Fairness and independence are
key values, with pragmatism and flexibility as qualities prized above tech-
nical expertise. The US is cited as an example of this model.
3. A complex mixture of the above two models exists in societies such as the
Netherlands, Finland and Sweden, where the administrative culture is
mixed, with a communal approach and open attitude that brings a range
of experts and groups into the policy-making process. It is interesting that
the examples of this are mostly for countries that are relatively small. So
scale may be an important variable in building and maintaining a success-
ful complex mixture model.

Each of these models affects the process of administration, with its own
pattern of values and assumptions. The Rechtsstart system would be charac-
terized by stickiness and slowness when reform or implementation of new
ideas comes into play. Pollitt and Bouckaert (2002) say:

This is because change would always require changes in the law, and culturally,
because senior civil servants highly trained in administrative law may find it more
difficult to shift to a managerial or performance-oriented perspective. (pp. 534)

At the same time, the public interest model may also face impediments to
adjustment depending on multiple stakeholder or interest group negotiation
and collaboration.
56 Leadership and institutions in regional endogenous development


Increasingly the private sector is composed not only of businesses but also of
non-profit organizations and other social and or political organizations that
have a stake in the community.
In the contemporary world of ever-increasing complexity, uncertainty and
change, those who occupy the upper levels of organizations or government
often become increasingly unable to understand what is really happening
within the organizations or within the community. Command and control
models of decision-making will often lead to the solving of the wrong prob-
lems and might generate conflict and confrontation within the community
(Jewson and MacGregor, 1997: 89). Partnerships or collaboration among
stakeholders may allow governments to decrease their financial constraints
and to diffuse responsibility for success or failure (Stimson et al., 2002: 279).
There seems to be a tendency today among local stakeholders (public, private,
immediate and individuals) to participate in collaborative approaches to local
problem-solving in a city or a region (McGuirk et al., 1998: 109).

5.5.1 Smart Infrastructure

A fundamental aspect of institutions and institutional arrangements for

regional economic development is the way infrastructure is provided and the
degree to which it is ensured that the appropriate type of infrastructure provi-
sion is facilitated. Infrastructure is often seen as underpinning the business
attractiveness of a region or locality (Florida, 2002), and as an incentive for
firm attention. However, the concept of what constitutes infrastructure has
changed dramatically as governments and organizations in regions contem-
plate the requirements of the contemporary knowledge-based economy. That
requires a consideration of:

what constitutes smart infrastructure

the facilitation of networks and alliances

to engender collaborative advantage, and the provision of a learning infra-

structure through strategy that will provide the strategic infrastructure for a
region to be competitive.
The notion of smart infrastructure has been developed by Smilor and
Wakelin (1990) to refer to the milieu of hard and soft infrastructure services
needed to support value-adding activity, enhance creativity and innovation,
mobilize resources and provide quality lifestyles. In addition to the more tradi-
tional infrastructures including airports, seaports, telecommunications,
Institutions and institutional factors 57

education and R&D facilities, and cultural facilities and services smart infra-
structure is seen to comprise:

talent for innovation and role models

technology for innovation and R&D
climate for business support, finance and technology venturing
know-how for business and technology support and development.

Public policy is influential in determining how these factors are harnessed

in promoting innovation and value added production. Smilor and Wakelin
(1990) see organizations and the institutions that support them public,
private and intermediate as being a component of the crucial smart infra-
structure for facilitating an innovative milieu. These include, for example,
business angles, networks, venture capital pools, consortia and professional
support organizations. Regulatory and government support environments need
to facilitate:

enlightened but quality-oriented planning and development controls

business incubators
technical support programs
competitive taxation arrangements
intellectual property protection
maintenance of quality indicators
advanced transportation and telecommunications systems access.

5.5.2 Networks and Alliances

Increasingly networks and alliances are being seen as part of the infrastructure
not only for business operations but also for regions enabling them to success-
fully compete. For example, the Silicon Valley Joint Venture Network
(SVJVN) in California in the US is a strategic partnership initiative created in
1995 to help develop new enterprises. And Cooke and Morgan (1998) tell how
the development of networks in the UK and Europe are important instruments
of economic infrastructure for regional and local development, with networks
of association involving learning, and enhancing capacity building to improve
knowledge, production and industry development.
Networks and alliances involve collaborative effort, and are seen by Jarillo
(1988) as providing the strategic infrastructure for supporting regional devel-
opment, creating a catalytic effect in technology-based development, as seen
in Italys Tuscany region (Bianchi 1996). What we are seeing is the notion of
collaborative advantage (Huxam, 1996) emerging as an attribute for a region
to attain in addition to it possessing competitive advantage. Stimson et al.
58 Leadership and institutions in regional endogenous development

(2002) note that: it is this new thrust toward collaborative advantage and how
to achieve it that will be a focus of new methods in regional economic devel-
opment strategy formulation, planning and implementation (p. 12).
Addressing networks and network infrastructure is particularly important in
fostering innovation. Thus, Tijssen (1998) proposes a network as an:

evolving mutual dependency system based on resource relationships in which their

systemic character is the outcome of interactions, processes, procedures and insti-
tutionalization. Activities within such a network involve the creation, combination,
exchange, transformation, absorption and exploitation of resources within a wide
range of formal and informal relationships. (p. 792)

Discussing networks and systems of networks in regional development,

Fischer (2002) has this to say:

The interactions between the organizations and institutions should be facilitated by

means of policy if they are not functioning sufficiently well. In periods of structural
change, regions might have to redesign many of its (sic) organizations and institu-
tions as well as the interface between them this widens traditional supply-side
diffusion measures towards policies that recognize innovation and diffusion as
interdependent processes. This translates into a greater role for demand-driven
programs, network-building initiatives, measures to upgrade the technology diffu-
sion infrastructure and improve its relevance for and accessibility by smaller firms.
In order to achieve maximum leverage technology diffusion policies have to build
on existing interrelationships in regional innovation systems, especially networks
within which firms collaborate and exchange tacit forms of knowledge. (p. 27)

The objective of all of this in the context of regional economic development

strategy formulation and planning may be seen as being about how to facili-
tate or create the development learning infrastructure for a learning region
(Simmie, 1997; OECD, 2000), with the provision of technology and knowl-
edge infrastructure, information and telecommunications (ICT) infrastructure,
transport infrastructure and linkage infrastructure between the government,
business and research sectors. Stimson et al. (2002: 294) identify the follow-
ing examples of regional learning infrastructure:

1. Transportation infrastructure, including intelligent transportation systems,

which increase the accessibility and mobility of people and goods in a region.
2. Communications and information infrastructure, including agglomerated
competencies and capabilities, which provide complementary and core
competitiveness and capabilities for the effective co-evolution of techno-
logical innovations.
3. Dense business networks and a high trust business environment that
makes possible organizationally effective and quick knowledge creation,
transformation, synthesis and diffusion.
Institutions and institutional factors 59

4. Institutional infrastructure including business networks, public/private

partnerships, businessgovernmentuniversity linkage that provides
effective organizational linkage and institutional trust to reduce transac-
tion costs of doing business and enhancing learning capability of institu-
tions and individuals.
5. Effective information infrastructure for the exchange of information and
knowledge and for monitoring changes in regional structure, regional
competencies and capabilities, and regional development.
6. Existence of agile regional governments so that essential decisions and
coordinated actions can be made to improve and strengthen the learning
infrastructure of a region.
7. Existence of agile communities and associations including effective
cooperation among stakeholders in knowledge creation, transformation,
synthesis and diffusion and the cooperative provision of training and
education to enhance the knowledge and skills stocks in a region.


Bolton (1992) discusses the notion of a sense of place in referring to: the
complex of intangible characteristics of place that make it attractive to actual
and potential residents and influence their behavior in observable ways (p.
193). He suggests that sense of place is a form of social capital, a location-
specific asset that has some of the characteristics of capital.
De Santis and Stough (1999) link leadership and social capital to resource
endowments, proposing the notion organizational slack which exists at vary-
ing levels at different times as voluntary contributions to civic activities and
which may help create what Bolton (1992) describes as place surplus.
A city or region needs to have the institutional fabric that is, a culture
or tradition of political coalitions and collaboration among stakeholders to
work and create a broad constituency for change that has the breadth and the
integrity to push beyond the parochial interest of certain groups, whether it
be private or public (Fairholm, 1994). Social capital has emerged over the
last decade or so as a new way of thinking about the role of the more intan-
gible factors in local community performance and development. It is a
concept that is rather imprecisely defined and is difficult to measure.
Basically it is about factors such as institutions, networks and trust relation-
ships. Coleman (1988) sees it as that which infers the structure of relations
between actors and among actors. Fukuyama (1995) sees it as the 20
percent solution, it being able to reduce considerable friction in market
transactions in regional systems. Malecki (1998b: 11) notes that such fric-
tion is reduced in three ways by:
60 Leadership and institutions in regional endogenous development

creating a system of generalized reciprocity;

establishing information channels and providing sorted and evaluated
information and knowledge;
simplifying market transactions through instituting norms and sanctions
by which economic exchanges can occur, bypassing costly and legalis-
tic institutional arrangements associated with market transactions.

In the context of regional economic development, social capital contributes

to increasing returns across the board by reducing transaction costs. Embedded
in social capital and often supported by institutional thickness is the notion of
trust (Granovetter, 1985; Fukuyama 1995), which makes it possible for non-
routine transactions to take place with a minimum of friction. Some innova-
tive regions, such as Emilia Romana (the third Italy), are said to have high
levels of trust among firms and to possess the institutions upon which compet-
itively and collaboratively productive activities rest, including the provision of
finance. Stimson et al. (2002: 278) note that usually high levels of trust and
social capital in a region are indicative of effective leadership.
However, relating social capital to local or regional economic development
is not well developed. Bolton (1999) draws attention to Hirschmans (1970)
distinction between exit and voice, saying that a reasonable interpretation
of Hirschmans analysis is that peoples perspectives of the quality of the
social network shape their choice between exit and voice a choice people
may feel compelled to make as a response to a decline in quality of life in their
community. According to Bolton (1999): Exit is out-migration; voice is
persistence and participation in public discussion (p. 13).
Thus local government will need to work to facilitate voice, and to invent
new initiatives that increase the effectiveness of voice. While Hirschman
(1970: 4950) notes that people with the most consumer surplus are most
likely to exercise the most voice, because they have most to lose by acquies-
cence or a quick exit, they will continue to speak up and delay exit as long as
their surplus is still intact. In an analogy, Bolton (1999) refers to place
surplus, which is attributed to the combination of goods the consumer buys in
a place and also to the unpaid goods consumed that are provided or are avail-
able at the place. Full consideration of place surplus should also take account
of producer surplus, from the participation of labor and the provision of capi-
tal. Bolton suggests a goal of local planning should be to operate a network
that generates large place surplus for many citizens, thus creating an incentive
for voice and delaying exit. Hirschman (1970: 79) also discusses loyalty as
a spatial attachment. Bolton (1999) suggests that loyalty can reinforce place
surplus as a force promoting voice rather than exit, and that it might actually
be a substitute for place surplus. For Bolton the critical issue is how social
networks build loyalty.
Institutions and institutional factors 61

The analogy discussed by Bolton (1999) thus leads him to the proposition
that there will be a positive correlation between the level of place surplus, and
thus the propensity to use voice, and the quality of a sense of place defined
by tangibles and intangibles that incorporate attributes such as good neighbor-
hoods and school districts, low crime rates, clean streets, civic amenity, and so
on. Loyalty is achieved through fostering of tolerance, trust and reciprocity.
Boltons attempt to analyse social capital within the traditional concept of
consumer surplus being extended to aggregate surplus or place surplus is a
promising step to better link the notion of social capital to institutions in the
context of local economic development and enhancing community perfor-
mance. Thus Bolton, in his various writings, stresses how policymakers need
to take account of the distribution of place surplus, of the costs of creating and
monitoring it, and to encourage voice.
Governments make investments through place-based policies and programs
that have the intentions of building community and attracting investment. This
might be thought of as network-augmenting capital, ranging from community
facilities to ceremonial occasions to institutions that improve the political
process. Governments develop pricing and subsidy schemes to attract firms to
expand the tax base load, increase employment opportunities and maintain and
grow population. Often that is done in selective and targeted ways, with
governments acting as entrepreneurs and taking risks, internalizing externali-
ties with the objective of enhancing place prosperity. This is just the same as
private groups (business or community) developing and augmenting networks
to achieve benefits (economic and otherwise) external to each member of the
group, with those benefits also becoming internal to the group, taking advan-
tage of what are known as the adoption externalities of networks which
Liebowitz and Margolis (1994: 1416) refer to as the tragedy of the commons
turned on its head.
Strategies for social capital development will involve support for continu-
ous life-long learning, initiatives to improve community awareness important
to social and economic well-being, encouraging the development of commu-
nity and professional organizations and building trust amongst different
groups that comprise a local community (Stimson et al., 2002: 349).

Institutions do have a powerful influence on how organizations and regions
adjust to change and stressors. They can be powerful positive or negative
endogenous influences on how the impacts of exogenous forces are managed.
It is not the nature and structure of institutions per se that is necessarily impor-
tant, but rather the capacity of institutions to be fast and flexible to adjust
62 Leadership and institutions in regional endogenous development

appropriately to change and to anticipate change and manage risk in an

increasingly uncertain and competitive world. Here the link between institu-
tions and leadership is evident.
The question is: what does all this mean for institutions and policy?
Clearly with the shift in emphasis in regional economic development strategy
towards how to build, maintain and enhance regional competitive advantage,
this has put the focus on value factors, including efficiencies, performance
and intangibles such as quality of life, human capital and social capital
(Putnam, 1993; Fukuyama, 1995). But Stimson et al. (2002: 1112) note that
it is still common for governments to promote comparative difference and
provide incentives to attract industries to regions. These include public
policy mechanisms such as:

business attraction efforts, including strategies to pick winners;

business retention efforts, such as propping up declining industries;
business creation approaches, including attempts to grow new enter-
import substitution by expanding local production to combat an
imported good or service;
incentives, such as tax relief, infrastructure augmentation, marketing
and training assistance, and subsidies to firms.

Porter (1990) is highly critical of such incentive and subsidy approaches

because they encourage governments and regions to bid against each other and
create negative externalities. Rather, Porter advocates that:

by investing in specialized training, building cluster-specific infrastructure, and

improving the business climate with streamlined regulations, states can attract
investment and upgrade the national economy. (p. 89)

Blakely (1994: 58) points to a change in emphasis that is occurring from firm
attraction policies and mechanisms in local economic development strategy to
attracting and generating entrepreneurial people and skills, and in improving
and promoting amenity and other quality of life attributes of communities. It
is now about building institutional capacity and capability, enhancing network
development and facilitating publicprivate community partnerships. It is
about the way place prosperity can be enhanced through flexible innovative
institutional development and through strong and effective leadership to
generate an improved resource endowment of a region.
Furthermore, enhancing network development is crucial as today, accord-
ing to Powell (1990), increasingly in a network mode of resource allocation,
transactions occur neither through discrete exchanges nor by administrative
fiat but through networks of individuals or institutions, engaged in reciprocal,
Institutions and institutional factors 63

preferential and supportive actions. In addition, in the contemporary era of

globalization, Florida (1995) says:

the shift to knowledge-intensive capitalism goes beyond the particular business and
management strategies of individual firms. It involves the development of new
interests and a broader infrastructure of the regional level on which individual firms
and production complexes of firms can draw. The nature of this economic transfor-
mation makes regions key economic units in the global economy. (p. 531)

That represents a major challenge for both the institution of government and
for leadership in ensuring that appropriate infrastructure is provided and avail-
able within a region and for the region to link into in terms of national and
international networks (physical, electronic and knowledge).
In an overview of successful regional development initiatives, Stough
(1995) identifies five attributes that communities that have successfully under-
taken regional economic development have and the implications for institu-
tional arrangements:

local initiative is crucial for initiating and sustaining regional economic

local initiative is consistently undertaken by non-government or inter-
mediate regional/community organizations;
such intermediate organizations are effective economic development
planning organizations;
economic development plans are a basis for cross-sector collaboration;
successful regions have access to or create access to a broad range of
local and extra-local resources.

In their later work, De Santis and Stough (1999) note that local economic
development effectiveness is related to:

the degree of political jurisdictional fragmentation;

the degree of cooperation among local stakeholders (public, private,
intermediate and individuals);
the tendency for a region to participate in local problem-solving;
the availability of resources locally for economic development.

These findings represent useful pointers to the institutional considerations that

should be addressed in regional economic development strategy formulation.
6. Entrepreneurship


Entrepreneurship in leadership-driven regional economic development is
different from the concept as applied in the private sector where the motiva-
tion for entrepreneurial discovery and innovation is deeper than the direct
profit motive. Sometimes this form of leadership is referred to as civic leader-
ship and involves private and public entrepreneurs.
Where traditionally the entrepreneur is motivated by the promise of pure
profits that is, above and beyond the normal level expected from the pursuit
of venture formation and development the private or public entrepreneur in
the regional development process is differently motivated. Those involved in
leadership-led development are often motivated by what we call here love of
region that stems from longer term, often intergenerational ties to their place
through legacy effects related to their family and/or their business history. They
see redirecting the economy as a way to reduce the effects of economic
decline/threat and thus maintenance of their family position and business
viability at that place. While they may also be motivated by responsibility to
their region and the improvement of the social or community milieu it is
personal benefit of their family and business that is often at the core of their
motivation to help implement change that will enhance economic sustainabil-
ity of their region. Thus, entrepreneurship in regional economic development is
not directly, at least, a response to the lure for pure profits but rather to the lure
of maintenance and sustainability of ones family and business and position.
But what more specifically is entrepreneurship in this development context?
The behavior is similar to private sector entrepreneurship in that it is the seek-
ing and recognition of opportunities and new ways of achieving goals and
objectives that underlie regional development strategy. Examples might be:

finding and developing new industrial sectors to bridge the economy to

emerging opportunities, such as technology clusters
finding and obtaining new resources to implement development strat-
egy, such as obtaining funds from higher levels of government to create
new infrastructure that underpins development strategy.

Entrepreneurship 65

In this context, entrepreneurs are from diverse backgrounds including govern-

ment, community organizations, bankers, CEOs who head up committees to
solve bottlenecks in development strategy implementation, and so on. They may
also include elected officials and bureaucrats who act in an entrepreneurial way,
often in conjunction with business and community leaders. What is important
here is that as leadership broadens to include multiple stakeholders from busi-
ness, the public sector and non-government organizations in the future devel-
opment of the region, those stakeholders need to become increasingly
entrepreneurial (aware, creative and opportunistic) in their quest to implement
the strategy. This is the form entrepreneurship takes in successful leadership in
initiating, fostering and implementing regional economic development strategy.
Beyond the above discussion, the concept of entrepreneurship in the
leadership-driven regional economic development context needs clarification
in that leadership and entrepreneurship are not mutually exclusive concepts or
Effective leadership must convey and convince participants in a devel-
opment process that both new and creative approaches and actions are
Successful entrepreneurship needs to be executed in a way that support-
ing actors contribute to if not follow the path or vision the entrepreneur
has on where greater profit and/or community benefits can be achieved.
So while the two concepts overlap and are related in significant ways they are
also different.
A major purpose of this chapter is to clarify this relationship and make clear
how the two are similar and how they are different, and how this symbiosis
operates in the context of leadership executed in the economic development
process. The chapter first examines the nature of entrepreneurship and leader-
ship and then explores their relationship in an effort to explain how the two
operate in the regional economic development process on the one hand, and
the nature of their complementarity on the other. It then lays out examples of
how regions have behaved entrepreneurially in pursuit of leadership-driven
economic development strategy. It concludes with a discussion of the attrib-
utes of entrepreneurial behavior in pursuit of economic development strategy.


6.2.1 Classical Economic Theory

The formalization of entrepreneurship and related theory stemmed from the

66 Leadership and institutions in regional endogenous development

work of Schumpeter (1934). Classical economic theory was erected on the

premise that supply determined demand and that as supply changed a new
equilibrium would be achieved as demand sopped up that supply that is, the
demand curve moved up to meet the new supply curve. In short, supply deter-
mined all and economic systems were seen as in or moving toward equilib-
rium in the long run as with the classical economic model.
However, the behavior or performance of economic systems witnessed
major disequilibrium episodes that persisted over relatively long periods
throughout the 19th and much of the 20th centuries (for example, the Great
Depression of the 1930s). Consequently, despite the possibility, or not, that
such systems moved toward equilibrium and/or achieved it in the long run,
these systems were often not in an equilibrium state for extended periods if
at all thereby creating huge disruptions in the maintenance of jobs and wealth,
and their creation. Attempting to understand this was the focus of the work of
many economists including such luminaries as John Maynard Keynes who
turned the basis of the classical perspective on its head arguing that the prob-
lem was that demand determined the performance of economic systems, not
supply. Thus, the solution could be achieved by increasing demand which
would in turn increase employment, and wealth creation, and thus drive the
system toward equilibrium. This of course has since been replaced with a series
of adjustments in the theory erected on the expectation behavior of economic
agents (Lucas, 1998) which in turn meant that government policies designed to
increase demand mostly through government spending failed to work, at least
in the long run. This was emphatically demonstrated when the behavior of the
economy contradicted the prediction of the Philips Curve relationship which
argued that interest rates were negatively related to unemployment.
The point of this discussion is to illustrate that large-scale economic
systems are difficult to keep in equilibrium or even to keep moving toward
equilibrium. Schumpeters thinking on entrepreneurship is important in this
context in that he argues that the nature of large-scale systems is to be essen-
tially in a state of disturbance and thus while they may be viewed as moving
toward equilibrium are thrown out of equilibrium before they reach it. The
entrepreneur is the agent that creates such disequilibrating behavior that is,
the agent that drives Schumpeters creative destruction.
In Schumpeters view, entrepreneurs are driven to create new goods and
services or alternative ways to produce existing ones because the entrepreneur
sees opportunities to achieve pure profits that is, profits above those that
would be expected under prevailing conditions. Of course there are inherent
risks to such first movers. This is where the notion of entrepreneurs as risk
takers comes from. By taking the risk of creating a new product or service the
entrepreneur is banking on her ability to see beyond existing conditions to a
future where the envisioned product or service will be wanted and in so doing
Entrepreneurship 67

receive profits above those that would be achieved if she entered into the
production of known items or adopted known processes.
Later, Kirzner (1973) stood Schumpeters argument, at least in part, on its
head. He argued that economic systems by their nature experienced disequili-
brating effects due to cyclical forces, and natural and man-made disasters. In
this view the entrepreneur perceives opportunities in the market place to create
new goods and services that would help drive the disequilibrated system
toward equilibrium. In short, Kirzners entrepreneur was an equilibrating force
in contrast to Schumpeters entrepreneur.
In many ways Schumpeter and Kirzner agreed in that they both see the
entrepreneur as discovering and acting upon opportunities in the market place
and being motivated to this end by the anticipation of pure profits. And they
both argue that economic systems are not by their nature stable and thus, at
best, are moving toward and/or away from equilibrium conditions. They differ,
however, in their view of the effect of the entrepreneurs behavior:
Schumpeter seeing the effect as disequilibrating, and Kirzner as it being equi-

6.2.2 A Regional Development Context

This discussion is of interest because it lays out the basic foundations of entre-
preneurship as it evolved in a profit-making context and how it may relate to
the behavior of large-scale economic systems. As such, it provides a platform
on which to erect a view of the entrepreneur in non-market situations.
Entrepreneurial behavior on the part of a region is only partly analogous. The
entrepreneur in this context is a fuzzier construct and raises questions such as:
Is the entrepreneur a government economic development organization or is it
a non-profit or community development corporation or some ad hoc group?
While it might be argued that such groups perceive the opportunity for the
region to improve economic performance with increased job and wealth
creation in aggregate, it is seemingly clear that the motivation on the part of
such group agents is not just for the pursuit of pure profits. In fact, the pursuit
may be for improvement in the aggregate social welfare of the region. So
where does the motivation for this come from? To answer this question it is
necessary to expand the notion of individual and group motivation or goal-
driven behavior to a broader frame that goes beyond the pursuit of exceptional
individual gain. At the same time, however, communally or group-directed
entrepreneurial behavior may be viewed as:

either contributing to creative destruction and disequilibrating forces

in the economy (after Schumpeter); or
contributing to equilibration (after Kirzner).
68 Leadership and institutions in regional endogenous development

The motivation for this broader view of entrepreneurship is embedded in

potential but relatively vague individual or corporate gain on the one hand and
possibly for social welfare benefit on the other.

1. It is possible to see individual and/or corporate economic gain occurring

from enhanced regional economic culture or context (business climate).
This can occur from strategy implementation that enhances the physical
and institutional infrastructure of a region. Most often such benefits
accrue initially to older business owners who have family, personal and
corporate history in the region (and thus may be viewed as possessing
love of region) in that their historical relationship or role acts to preserve
legacy effects and social position.
2. Social welfare gain and community benefit can occur from the spillover
effect of improved physical and institutional infrastructure on job and
wealth creation for a broader set of actors. Here, the literature on social
and non-profit entrepreneurship is informative in that it argues that moti-
vation for entrepreneurial behavior in the other than profit sectors comes
from the fact that humans are social agents and thus may achieve personal
returns (profits or psychic benefits) from helping to achieve specific
outcomes that are perceived to be good for society. This argument or sets
of arguments span the range of non-profit entrepreneurship from social to
public sector entrepreneurship.

6.2.3 Contingency Theory

Before finalizing the above line of thought it is important to return to the leader-
ship construct. As noted in Chapter 4, there are a number of theories of leader-
ship. Further, elements of these have been reviewed and assessed. Here, however,
the focus is on the contingency theory of leadership because it provides a strong
basis for exploiting and deepening our understanding of the link between leader-
ship and entrepreneurship. Contingency theory argues that leadership is evoked
by an event, occurrence or perceived opportunity that threatens an actual or
perceived status quo or in the above referenced terminology, equilibrium. Such
contingencies or events may be natural (earthquakes, tsunamis, hurricanes,
droughts, famines) or man-made (economic cycles, wars, new technology, new
social theories, large-scale theft, misguided public policies). While this theory
may be applied to explain incremental acts of leadership motivated by minor
opportunities or threats, our concern here is with regard to major leadership
processes where whole regional systems are directed in a new or modified direc-
tion due to a major disequilibrating event (physical or man-made).
Contingency theory may be used to bridge, explicate and define the rela-
tionship between leadership and entrepreneurship:
Entrepreneurship 69

major contingencies evoke or beg for change and breaking with old
traditions and processes
such contingencies may be viewed as the catalyst or pre-conditions for
the emergence of significant new leadership
that leadership must be energized by a different vision of how the
regional economy can evolve and offset the conditions causing poor
performance such as job loss and wealth stagnation or degeneration
in discovering or creating a new model for economic growth and devel-
opment, that leadership is entrepreneurial
however, implementing such a model also requires discovery of new
techniques, methods, products, industrial sectors, finance, and so on
this is where entrepreneurship is fundamentally important in the leader-
ship-driven adjustment process of regional economic development.

Contingencies are thus seen as the primary catalyst evoking the leadership that
guides the redevelopment process and in turn evokes entrepreneurial
responses to implementing that process. In our view, leadership is the critical
mover that may play a catalytic role in redevelopment initiatives, and entre-
preneurship is the critical process for discovering and creating the methods,
processes and products/services that propel the movement of the old economy
to the new.

6.2.4 Contingencies: Roles and Examples

Contingency theory posits destabilizing events or occurrences that serve as the

catalyst that evokes leadership needed to move systems toward equilibrium. In
this regard it is consistent with Kirzners (1973) view of the relationship
between entrepreneurship and the operation or direction of economic systems.
As noted above, this view may serve to explain responses to incremental or
less than system-wide impact events. Certainly leadership occurs in sub-units
of organizations and sub-parts of economic systems and thus may be viewed
as incremental in nature. Such cases of leadership are ongoing and likely exist
quite broadly even in near equilibrium conditions. However, broad system-
wide impacting leadership rarely occurs unless existing conditions are
severely threatened or are exposed to an unanticipated or misunderstood and
thus not well predicted system disequilibrating event.
As noted earlier there are many different sources of such events as the
world is exposed to considerable uncertainty. Consequently, natural disasters
and man-created shocks (often not intended to create destabilizing events)
most usually are the sources of such events. At the same time they are not
always the source as it is conceivable that perceived opportunity if properly
marketed to stakeholder groups could be a catalyst of leadership that drives a
70 Leadership and institutions in regional endogenous development

system toward a different outcome or equilibrium. For example, one might

argue that the development strategy of Hyderabad to become a second center
of the IT services industry in India is a case of opportunity-driven rather than
threat-driven leadership. Another similar case is the rise of Austin in Texas as
a technology center. However, the cases of opportunity-driven systems
impacting leadership are rare compared to threat-event-driven ones.
Most of the cases that are discussed and assessed in Part II of this book are
threat-event-driven ones. For example, many of the North America cases
(Chapter 7) deal with leadership that arose or failed to arise to the threat of
deindustrialization. Some of the cases in Europe also are such examples.
Others such as Freiburg (Chapter 8), Hong Kong, Singapore, and Chihuahua
in Mexico (Chapter 7) were driven by political change. Further, there are many
cases of regions that have experienced leadership-driven redevelopment in
response to natural disasters (and there are many where leadership failed or is
still in question despite the transfer of significant amounts of resources from
higher levels of government, as seen recently in New Orleans and the dysfunc-
tional responses to the hurricane Katrina disaster).
Contingencies appear to be at the heart of the forces that evoke systemic
impacting leadership. Further, most of these seem to be threatening contin-
gencies. Although there are cases that appear to be driven primarily by discov-
ery or opportunity, and by the successful marketing of such approaches to
capitalize on the opportunity, these seem to be rare or at least much less
frequent than threat-driven contingencies.


Regional leadership needs to show entrepreneurial characteristics. Derived
from Schumpeters (1934) and Kirzners (1973) ideas of entrepreneurialism, a
region may be thought of as being entrepreneurial if such leadership shows the
following characteristics:

It believes in change and initiative to energize it to meet competitive

challenges and to keep progressing. In short, leadership needs to exhibit
discovery, opportunistic and innovative behavior.
It possesses insights to enable it to identify opportunities and pursue
innovative ideas to improve or adapt a regions environment to meet the
needed challenges facing it through new combinations or innovation
in institutional arrangements (Jessop, 1998: 845; McGuirk et al., 1998;
Jessop and Sum, 2000: 2290).
Entrepreneurship 71

Those entrepreneurial characteristics can be seen if attention and effort is

focused on the following actions (Jessop, 1998: 85):

1. Using new methods to create location-specific advantages for producing

goods/services or other urban activities to shift the economic base of the
city. Examples include technopoles, agglomeration economies, and so on.
2. Introduction of new types of urban place or space for producing, servic-
ing, working, consuming, living, and so on. Examples can include gate-
ways, intelligent cities, multicultural cities, creative cities, and so on.
3. Refiguring or redefining the urban hierarchy and/or altering the position
of a given city within it. Examples include the development of a regional
gateway, hubs, and so on.
4. Finding new sources of supply to enhance competitive advantage.
Examples include attracting inward investment or reskilling the work
force. Therefore, the focus on this factor will be on the tendency shown
by the community to undertake entrepreneurial local initiatives.
5. Opening new markets, whether by place-marketing specific cities in new
areas and/or modifying the spatial division of consumption through
enhancing the quality of life for residents, commuters or visitors.
6. Finding new sources of supply to enhance competitive advantages.
Examples include changing the cultural mix of the cities, finding new
sources of funding, or re-skilling the workforce.

In each regard, entrepreneurialism in the context of a region contains the

element of uncertainty that many see as the very essence of entrepreneurial
activity. In this sense, it is speculative in design and therefore dogged by all
the difficulties and dangers which attach to speculative as opposed to ratio-
nally planned and coordinated development (Jessop, 1998: 845).

This chapter has shown the relationship between leadership and entrepreneur-
ship and has laid out the nature of entrepreneurship in the context of leader-
ship-driven regional economic development. It used contingency leadership
theory to further elaborate on the nature of regional economic development
leadership and to draw an analogy between such leadership and both
Schumpeterian and Kirznerian theories of entrepreneurship. This served to
illustrate that the concepts of leadership and entrepreneurship are related so to
speak at the hip but are different in that leadership is most often catalyzed by
disequilibrating contingencies and entrepreneurship (taking here the
Kirznerian view) is driven by discovery and opportunities in response to such
72 Leadership and institutions in regional endogenous development

contingencies. It was also recognized that raw opportunities sometimes serve

the role of threat contingencies but not often.
Entrepreneurship in the context of leadership-driven economic develop-
ment takes on a number of characteristics such as new methods, new industry
targets, new institutions, new methods of finance, provision of new and differ-
ent physical and institutional infrastructure and new actors. The next two
chapters illustrate these characteristics through a variety of case studies taken
from North America and other parts of the world.

Examples of regional development initiatives

involving leadership and institutional factors:
Case studies from North America, Europe and
the Pacific Rim
7. Case studies from the United States

In this chapter we present five case studies from the US. These are for:
Pittsburgh, Pennsylvania, Houston, Texas, Austin, Texas, the State of
Colorado and Indianapolis, Indiana


7.1.1 Background: An Industrial Collapse

The collapse of the steel industry in the early 1980s hit Pittsburgh so forcefully
that, in the period from 1979 to 1988, the region suffered a decline of 44
percent in manufacturing jobs (Clark, 1989: 41; Sbragia, 1990: 534). Such a
decline caused the region to lead the nation in population loss during those
years. However, by the late 1980s, Pittsburgh was rising from the debris of a
collapsed steel industry, towards a city of standing in cultural offerings, with
one of the best public education systems in the country, and very livable neigh-
borhoods. Such an urban renaissance was not only due to the fact that
Pittsburgh possessed potential sources of new employment and therefore was
able to develop new exports, but also because it was the result of private and
public leaders concerned with the regions economic development (Sbragia,
1990: 534).
In Pittsburgh, there has been a long history of cooperation. The culture of
cooperation between the public and private sectors has been so sustained that
it has given Pittsburgh policymaking a distinctive character. The recent
prominent involvement of the non-profit sector in the citys economic devel-
opment strategy has also been noteworthy. The politics of consensus
describes Pittsburgh politics more accurately than it does that of many other
eastern and mid-western cities in the US (Sbragia, 1990: 589). In the back-
ground has been strong leadership on the part of the many Fortune 1000
companies in Pittsburgh through the Allegheny Conference organization.
This organization played an important role in Pittsburghs regeneration and in
building the culture of cooperation that has resulted in Pittsburghs economic

76 Leadership and institutions in regional endogenous development

7.1.2 The Process of Regeneration

The process of regeneration in Pittsburgh may be divided into phases. The first
two phases, Renaissance I and Renaissance II, describe the strategies intro-
duced by private and public leaders who were concerned about the regions
future. In both phases, public and private leaders implemented projects that
were directed towards the regeneration and the renewal of the city.

1. Renaissance I was built on a relationship between a strong Mayor, David

Lawrence, and a strong businessman, Richard King Melon. This partner-
ship, mainly led by the private sector and with the public sector playing a
facilitating role, was based on a series of environmental, physical and
institutional changes (Sbragia, 1990: 60).
2. Renaissance II coincided with the collapse of the steel industry in the
region and was designed to redevelop real estate and help the city cope
with the economic problems of the 1980s. During this period, first Mayor
Peter Flaherty and then Mayor Caliguiri made neighborhood revitaliza-
tion a priority. The public sector took the leading role in the partnership.
In that context, those mayors and neighborhood groups became important
elements of the citys political and policy equation, and their incorpora-
tion into the citys policymaking laid the basis for the strikingly consen-
sual nature of redevelopment in Pittsburgh in the 1980s (Sbragia, 1990:
5960). Sbragia (1990) and Judd and Parkinson (1990) point out that both
of these periods of high development generated important lessons: the
importance of commitment from the top in the face of changing political
leadership; subordination of personal or business interests; a bond of trust
being present between the private and public executives and organiza-
tions; and both the public and private sectors being active in initiating and
implementing development strategies.
3. Renaissance III sought to address the problems of the citys economic
base. With the realization that the steel industry would not be able to
generate enough jobs, both the University of Pittsburgh and Carnegie
Mellon University adopted a strategy that sought to change Pittsburghs
economic base. Developing advanced technology firms was seen as the
appropriate strategy to follow (Clark, 1989; Sbragia, 1990). Named
Strategy 21, it was characterized by the consensual-style policymaking
rooted in Renaissance I and II. However, Renaissance III differed from the
past in that it was characterized by the interdependence between the
public and the non-profit sectors (universities and science centers).
According to Sbragia (1990: 62), this strategy involved bargaining that
forced actors to listen and cooperate with each other.
Case studies from the United States 77

7.1.3 The Success

Despite the fact that traditional industries were unable to remain competitive,
Renaissances I, II and III all helped the city address unemployment by diver-
sifying its economy. Pittsburghs subsequent economic growth derived mainly
from the educational and advanced technology industry sectors. While it is
true that the economy did not recuperate entirely from the 1980s crisis
particularly when compared with neighboring counties it is clear that local
leadership was the crucial variable in determining how the city responded and
readapted to economic changes (Sbragia, 1990: 53; Judd and Parkinson,
1990b: 298). The involvement of the private, public and non-profit sectors in
Pittsburghs economic development made the city better off than if no such
effort had been made. The absence of such partnerships would have exagger-
ated and exacerbated the economic decline.


7.2.1 Background: Free-wheeling Capitalism

Between the late 1930s and early 1980s, the city of Houston was known for its
remarkable record of economic progress. Urban Reaganomics and urban
entrepreneurialism were concepts pioneered in Houston long before they
were given those names (Parker and Feagin, 1990: 216). Houston was charac-
terized as having a modern weak government and being an unplanned and free
enterprise city (Parker and Feagin, 1990: 21718). Houstons economic
success was rooted in its oil industry, the value of trade through its port, its
federally subsidized space-defense complex, and its evolution into a national
medical center. The combination of such diverse economic resources allowed
Houston to become known as the city that never knew the Great Depression
(Parker and Feagin, 1990: 221).

7.2.2 A Recession

Nevertheless, by the mid-1980s, the oil recession, along with many bank fail-
ures and considerable out-migration, generated more hardship in the city than
was the case in the nation at large. In the face of growing economic downturns
and despite the obvious need for action Houstons elites were slow to respond
to economic decline and they were slower to recognize the full range of its
causes (Parker and Feagin, 1990: 221).
In 1982, Houston was spending 11 cents per capita on economic develop-
ment while states such as Louisiana or Arizona were spending 94 and 68 cents
respectively (Parker and Feagin, 1990: 221). Parker and Feagin argue that the
78 Leadership and institutions in regional endogenous development

reason for such a relaxed approach was that prior to the 1980s Houstons
economic development seemed to take care of itself, and thus business elites
concentrated on creating and perpetuating a good business climate (ibid.).

7.2.3 An Entrepreneurial Approach

As was the case with many cities in the sunbelt areas of the US, Houston has
been characterized by its aggressive entrepreneurial elites. Houstons business
elites have been particularly successful in creating private-public partnerships
in which the governments are little more than sycophants and servants of busi-
ness interests. Since Houstons founding, the power structure of the city has
been dominated by a succession of leaders from the business community and
more specifically high-level corporate executives. Entrepreneurial groups
such as the Suite 8F Crowd or The Greater Houston Chamber of Commerce
were deeply involved in Houstons development. Virtually without interrup-
tion, the local business elites have been able to exercise dominance over
governmental decisions, use public expenditure to support business goals, and
limit the scope of government regulation (Parker and Feagin, 1990: 2279).
This is partly due to a weak civic tradition and limited involvement of other
non-business stakeholder organizations such as unions, voluntary groups, and
so on. Thus, in Houston: business leadership towers over almost everyone
else (Savitch and Kantor 2002: 77).
In 1984, the leaders of the Houston Chamber of Commerce established the
Houston Economic Development Corporation (HEDC) in an attempt to help
Houstons economy diversify. However, few of the nine pivotal areas regard-
ing diversification and economic development had firm roots in the Houston
economy. Besides such diversification attempts, the HEDC tried to maintain
Houstons reputation as a city with a favorable business climate in order to
bring money into the city. Ironically, some argue that such an advantage is at
the root of Houstons downturn since the tax giveaways led to minimal impact
and a general lack of local and state services, and thus the impoverishment of
many (Parker and Feagin, 1990: 229). In fact, according to Savitch and
Kantor (2002: 86) the civic gospel in Houston is that the city government
should be managed like a business corporation and thus, limit public expendi-
tures and maximize personal revenues.

7.2.4 Lack of Leadership and Institutional Capacity

Parker and Feagin (1990) argue that Houstons incapacity to exercise alterna-
tive options for economic development is rooted in the fact that there is no
active arena for political debate through an organized opposition to contest and
challenge the status quo. Therefore:
Case studies from the United States 79

Houstons leaders operate in a reactive mood, trying to hold off the worst effects of
economic downturns. Much of the HEDC focus has been on narrowly drawn busi-
ness concerns. (p. 229)

According to Savitch and Kantor (2002: 77), politics in Houston are

nonpartisan. Rather than parties, private interest groups (chamber of
commerce, realtors, and so on) select political candidates, diminishing
competitive politics and emphasizing personality over programs.
The Houston economy became shaped by the entrepreneurial efforts of
business elites; however, the policy responses of a favorable business
climate have not resulted in collective benefits. The main causes of this seem
to be the lack of community leadership that promotes the economic develop-
ment of the region as a whole rather than for the benefit of a single group and
related institutional infrastructure. This is despite the presence of an entrepre-
neurial and strong business community group that has dominated the politics
of the city, but this has not resulted in an attempt to create a more inclusive
style of politics. The focus on making Houston a city with a good business
climate has created economic benefits only for some (Parker and Feagin,
1990; Parkinson, 1990: 305).


7.3.1 Background: Technology-induced Growth

Austin represents a unique case for having launched spectacular technologi-

cally induced growth in the 1980s and 1990s, despite the fact that it had previ-
ously been a relatively limited regional economy, albeit a state capital
dominated one. Formerly known as a sleepy college town of 200,000 resi-
dents, whose principal employers were the state government and the
University of Texas, it is now a region that has transformed itself into one of
the most vibrant technology-intensive regions in the US, with a population of
almost one million (Miller, 1999: 1). Austins economy is now based on
technology-intensive industries such as software development, semiconductor
R&D, computer system integration, software consulting, data processing and
Internet-related services. Over the period 199498, employment grew 4.7
percent per annum. Technology-related industries comprise Austins largest
employment sector (European Commission, 1999: 5).

7.3.2 The Turning Points

According to Miller (1999), the Austin success was the result of several actors
working together to create a new economic base; that is, Austins high-tech
80 Leadership and institutions in regional endogenous development

transformation was driven by a vision and a plan that was aggressively

pursued by a group comprised of businesses, academics, and government lead-
ership and partnership (Miller, 1999: 1). Universities and other centers of
learning have also played a key role in educating and training the workforce,
conducting research and transferring technology to the market place. Access
to capital, a friendly business environment, and the quality of life that the city
offers, were also behind the Austin economic development success (European
Commission, 1999: 5).
However, it is important to note that while state and local government
played a crucial role, the driving force behind this vision sprang from the
private sector through the Greater Austin Chamber of Commerce and a vision-
ary, Dr George Kozmetsky (Miller, 1999: 1). Kozmetsky was one of the co-
founders of Teledyne in Silicon Valley, who came to Austin in 1966 to become
the Dean of the UT-Austin College of Business and Administration. By the
1980s, he had helped to create numerous high-tech entrepreneurial organiza-
tions and promoted the development of a technology-based city (Miller, 1999:
The turning point in Austins high-tech development occurred in 1983
when the city won the nationwide competition for hosting the
Microelectronics and Computer Technology Corporation (MCC). MCC chose
Austin over 57 cities across 27 states. Determined to win the competition,
Governor Mark Whites office, the University of Texas and the business
community, led by the Austin Chamber of Commerce, put together a package
of incentives totaling US$20 million. The establishment of MCC served as the
trigger point for Austins development as a future technology center (Miller,
1999: 4). The successful recruitment of MCC became the focal point for local
leaders to develop the next phase of Austins economic development. In
198485, the Austin Chamber of Commerce started to look for new ways to
update the last plan that dated to 1957. The Chamber requested SRI
International to design a plan for Austins development over the next 1020
years. The resulting plan entitled Creating an Opportunity Economy
proposed that the future of Austin should be molded in terms of a 5-sector
economy, with three sectors being science and technology-related, and the
other two being government and support services. The focus was on research
and development; technology manufacturing and technology-based informa-
tion (Miller, 1999: 4). Miller (1999) tells how the Austin regions leaders took
the recommendations to heart and created a plan to implement them (p. 5).
The next major event that helped build the reputation of Austin as a high-
tech, R&D and manufacturing center came in 1988, when the semiconductor
research and development consortium Sematech was attracted to and located
in Austin. Sematech is a publicprivate partnership created between the
Federal Government and the domestic semiconductor industry originally to
Case studies from the United States 81

face the competition that Japan posed to the domestic US sector. Sematech is
regarded as responsible for the revival of the US semiconductor industry. The
experience that Austin gained with the establishment of MCC made the job of
recruiting Sematech much easier. Recruiting Sematech involved virtually the
same cast of players with the addition of US Representative J.J. Pickle, who
represented Austin in Congress. Using his influence, Congressman Pickle,
along with the aid of the rest of the Texas congressional delegation, ensured
that Sematech would receive sufficient government funding to exist. UT
provided the site to create the facility and build a 92-acre university research
park around it (Miller, 1999: 5).
During the period 199398, technology-based industries added almost
130,000 to the regional employment base, representing a growth rate of 4.7
percent per annum over this period (Miller 1999: 1). In 1998, the economy of
Austin grew at a rate of 4.6 percent and created 26,200 jobs, the highest
growth rate in 1998 for any metro area in Texas. The unemployment rate in
1999 for Austin was the lowest (2.2 percent) when compared to 4.6 percent for
the state of Texas, and 4 percent for the US. Per capita GDP also grew from
about US$9,000 in 1980 to about US$18,000 in 1996 (Miller, 1999: 1).

7.3.3 The Success Factors

There are several factors that led to Austins development as a technology-

intense economy. These are:

1. Entrepreneurial spirit: Technology entrepreneurship in Austin has had a

long history and it played a key role in the development of the regions
high tech economy. A good example can be seen in Michel Dell, founder
of Dell Computer Corp. Dell is the second largest manufacturer of
computers in the world and the world leading direct computer systems
company. Started in Dells dorm room at UT, Dell Computer is now the
largest private sector employer in the Austin region (Miller, 1999: 5).
2. Publicprivate partnerships: According to a study carried out by the
European Commission (1999), Austins economic boom was built
entirely on publicprivate partnerships (p. 13).

As mentioned above, winning the nationwide competition to host MCC

was the result of an all-out recruitment effort involving Austins Governor
Mark Whites office, the University of Texas and the business community led
by the Austin Chamber of Commerce. Later on, recruiting Sematech involved
cooperation among virtually the same cast of characters that had landed MCC
(European Commission, 1999: 13). Thus, Austin had benefited from the abil-
ity of these three groups to work together in support of a common plan in
82 Leadership and institutions in regional endogenous development

transforming Austin into a center for technology-intensive employment. The

Greater Austin Chamber of Commerce took the lead (among the other players)
and had a notable tracked record in aggressively recruiting high-tech firms to
Austin. The UT-Austin had the resources (financial and talent) to offer signif-
icant incentives to prospective arrivals. Furthermore, the governance arrange-
ments were appropriate to ensure the provision of financial incentives and to
attract businesses when necessary, as well as to provide the necessary sales-
manship by the governor and the mayor (Miller, 1999: 6).

1. Economic resources and positive business climate: States can foster and
attract economic activity by offering a business friendly regulatory and
tax environment. For example, the state of Texas has no income, business
or property tax and the regulatory burden is considered low (European
Commission, 1999: 8). The state of Texas also offers a number of incen-
tive programs designed to make capital more available for business
expansion and relocation. These incentive programs, along with the
adequate supply of venture capital, have fueled technology growth in the
Austin region. For example, Austin Venture is the largest venture capital
firm in Texas and one of the largest in the US. More than 40 percent of the
firm funds are invested in Austin and typically on activities related to
information technology (Miller, 1999: 9).
2. Educated workforce/training: The Austin area is well known for its high
level of education, which is a result of a solid primary and secondary
education system, strong community colleges, and an accomplished
research university (UT-Austin).

Although Austin has become a technopolis and a knowledge-intensive

economy, renowned for its high technology and high economic growth rates,
civic leaders started to look ahead in preparing Austins economy for the 21st
century. Consequently, the Greater Austin Chamber of Commerce and many
civic leaders commissioned a new economic development strategy report, that
put emphasis on developing emerging industry clusters of the future such as
multimedia, logistics/distribution, telecommunications, transactions services,
biotechnology, and so on (Miller, 1999: 11).


7.4.1 Background: Resource Dependence and Boom and Bust

In the State of Colorado, the traditional emphasis on mining, oil and gas, and
agricultural industries has been replaced by an emphasis on greater industrial
Case studies from the United States 83

diversity, from aerospace, communications and computing, to the environ-

mental industries, biotechnology and biomedical industries (Snow, 1999: 1;
European Commission, 1999: 4). A trend toward niche manufacturing
sectors such as high-tech mountain bikes and skiing equipment is also
evident (European Commission, 1999: 4). Since the 1980s, Colorado emerged
as a favored location in the United States for job growth in technology-
intensive industries:

A strong Federal presence, good research universities, a highly educated and well
trained workforce, a State government focused on fostering a positive business
climate, an exceptional environment, a superior quality of life, and the opening of
Denver International Airport, all contribute to attract venture capital to Colorado.
(Snow, 1999:1)

However, this level of success did not always exist. In fact Colorado was
characterized by a boom and bust economy with its dependence on tradi-
tional sectors, such as agriculture, mining, and oil and gas. In the mid 1980s,
as the state was in the midst of a severe depression and Denver was seemingly
becoming an economic ghost town, the new Governor, Roy Romer, took
seriously the urgent need to diversify Colorados economy:

His administration focused on creating an environment favorable to the develop-

ment of business, particularly small business, through the use of tools such as
enterprise zone tax credits, customized job training programs, financial assistance,
and small business development centers. (Snow, 1999: 1)

By 1998, the Development Report Card for the State an economic bench-
marking report prepared annually by the non-profit Corporation for Enterprise
Development rated Colorado highly among all states in the US (Snow, 1999:
1). It was rated:
2nd place for business vitality, measured by the number of new busi-
nesses formed each year, and the competitiveness of existing businesses
3rd in the nation for development capacity, measured by the quality of
its human technology, financial and infrastructure resources
4th for economic performance, as measured by employment growth,
earnings and job quality, equity, social and health conditions.

7.4.2 The Actors and the Factors Involved in Promoting Regional


The actors involved in promoting the regional development of Colorado are

numerous. However, these actors can be placed into several broad groups,
including: business, individual entrepreneurs and other leaders; local, state and
84 Leadership and institutions in regional endogenous development

federal governments; and universities. According to the European

Commission (1999) It is often difficult to separate the role of each; their
contribution to regional economic development, are [sic] often the result of
cooperation encouraged by public-private partnerships (p. 6). The central
factors in the success seem to have been the following:

1. PublicPrivate Partnerships: Through publicprivate partnerships and

other arrangements, business has played a key role in promoting condi-
tions that led to the creation of new enterprises (European Commission,
1999: 6). One example is the Boulder Technology Incubator (BTI), a non-
profit corporation that assisted many firms in developing technology-
based business by providing management resources, capital access, train-
ing, and promotion of technology transfers and joint ventures. It is esti-
mated that BTI has added nearly 800 jobs and $200 million in the
economy (European Commission, 1999: 6).
2. Venture Capital and Entrepreneurial Spirit: Venture capital and entrepre-
neurial spirit has fueled the application of market technology and enabled
committed individuals to bring good ideas to the market (European
Commission, 1999: 6). According to Snow (1999), in Colorado individ-
uals are willing to take risks, work very hard for many years in order to
bring an idea to fruition and in the process gain material rewards.
Promising individuals may find angel investors, mentors and business
advisors willing to help (p. 7). One example is the Colorado Capital
Alliance Inc., a non-profit angel capital network formed in 1996 by busi-
ness leaders around the state of Colorado. This non-profit network has
helped many entrepreneurs find mentors to support their needs (European
Commission, 1999: 6).
3. State and Local Government: State governments can influence the pace of
innovation and economic growth in a region (European Commission 1999:
8). In fact in Colorado, state governors, mayors and other local leaders have
often provided personal leadership and the vision needed to rebuild the state
economy. They have done this by catalyzing and coordinating activities to
promote economic growth, by facilitating flexible regulatory and favorable
tax policies, by supporting research and university activities related to tech-
nology transfer, by improving transportation and communications infra-
structures and by fostering an overall good quality of life to attract and
retain investment (European Commission, 1999: 8). There are many exam-
ples that show Colorado leaders commitment to the states economic
growth. One such instance was when: in the midst of a severe economic
downturn, former Colorado Governor, Roy Romer, declared his state Open
for Business. This set the tone for an economic turnaround based on the
promotion of small business (European Commission, 1999: 8).
Case studies from the United States 85

4. Universities and community colleges: Educational institutions have

tailored the skills of the workforce to the needs of the industry, and have
been crucial to research and development and technology transfer in the
region (European Commission, 1999: 6); that is, at the request of individ-
ual companies, or the state government, they have developed curricula
geared to specific company needs. For example, the Colorado Bio-
processing Center on the Colorado State University Campus helped
Synergen Inc. of Boulder to obtain trained process personnel for their
manufacturing plan (Snow, 1999: 5).

Coalitions among government, business and research communities have

thus allowed Colorado to achieve economic growth based on an agreed plan
(European Commission, 1999: 6). The State government has created a good
business climate. The availability of angel and venture capital has been an
essential factor in the development of new business, bringing many entrepre-
neurial ideas into reality. Universities and community colleges have also
played a key role in educating, training and carrying out joint applied research
with industry. Finally, Colorados geography and its exceptional environment
have also mattered in the location decisions of businesses (Snow, 1999: 15).


7.5.1 Economic Collapse

Indianapolis is located in the State of Indiana in the heart of the Mid West of
the US. It was part of the US Manufacturing Belt that extended from Chicago,
Illinois and Milwaukee, Wisconsin eastward to New York and Boston. In the
1960s and 1970s this was the heartland of US manufacturing producing nearly
two-thirds of US value added in the 1950s, much as the Golden Triangle in
Europe that extends from the Midlands in Great Britain across the English
Channel through Paris to Turin and Milan in Italy and then northward to the
North Rhine-Westphalia region (lower Rhine river valley) and the Randstad in
the Netherlands. Indianapolis was a mid-level center of the Manufacturing
Belt with an urban region population of less than one million. Its primary
economic activities ranged from pharmaceuticals (headquarters of Lilly
Pharmaceuticals, Inc., one of two or three of the largest companies in that
sector in the world), a variety of automotive-related plants, for example
Allison Diesel, Inc. (engines and transmissions) and the state capital of
As Japanese production methods gained acceptance and demonstrated that
such methods could produce superior products, both more efficiently and with
86 Leadership and institutions in regional endogenous development

lower cost labor, the whole US economy became increasingly threatened. By

the mid-1960s job growth in Indianapolis stagnated, and plants began to relo-
cate to lower wage areas mostly in the South and Southeast of the US as the
nascent rise of economic centers in the so-called Sunbelt in the US began to
occur. In short, the Indianapolis economy was under serious threat as the
foreign competition utilizing new production processes and in some cases
technology, and with lower wages, increasingly demonstrated superior output.
Indianapolis had been pushed out of the comfortable equilibrium it had
enjoyed with few exceptions (for example, during the Great Depression) since
the beginning of the industrial revolution. A more detailed description of the
forces impacting competitiveness in Indianapolis in the 1950s and thereafter
appears in City of Indianapolis (2007).

7.5.2 Developing a Strategy

At this time in the mid-1960s senior business and community leaders, facing
the growing reality of economic decline, began to understand the threat and to
discuss how to address it. One of the first acts was to form the Greater
Indianapolis Progress Committee (GIPC pronounced gipsy). GIPC was
composed of CEOs of major corporations such as Lilly (the Lilly Foundation;
at that time one of the largest if not the largest foundation in the US), various
auto components-related firms and the Indianapolis Water Company (an old
organization that had for over 100 years been led by senior community lead-
ers). There were several reasons why the membership of this club was only
CEOs. First, these were the heads of organizations that were historically
rooted in Indianapolis. Second, CEOs usually play a minor or no role in such
broad-based private sector organizations as Chambers of Commerce.
Consequently, the broader and more diverse and thus representative organiza-
tions did not have the senior leadership needed to drive the development of a
new and different economic strategy. Third, these were heads of organizations
that provided a major portion of regional employment. Fourth, CEOs more
than any other persons controlled the slack resources (Cyert and Marsh,
1963) of their companies. This was important because any initiative to counter
the economic competitiveness would require resources and many of these
would have to come from outside government. CEOs were the persons who
controlled the slack. Slack resources are those that are available to be used
at the discretion of senior leadership and historically have been deployed for
community and philanthropic purposes deemed important by such leaders.
The size of slack tends to vary with level of performance. Fifth, persons who
head established corporations in a region most likely have their lives and
livelihood, their families and associates embedded in the region and thus will
have, for lack of a better term, love and thus commitment to the health of
Case studies from the United States 87

their region. In short, they will care a great deal about the maintenance of the
region as the home of their family, employees, associates, friends and
company and thus will have a high level of motivation to find a solution to
GIPC, with the services of a major think tank, developed a strategy to
stabilize and regenerate the economy. The heart of the strategy was targeted to
the service sector. Under this strategy Indianapolis would initially become the
amateur sports capital of the United States and then the primary center for
association headquarters in the middle part of America. It is important to note
here that the leadership for the Indianapolis response to the extreme competi-
tiveness threat came primarily from the private sector in the form of CEO lead-
ers. For sure then mayor Richard Lugar was soon to join in and back the effort,
but the prime movers came from non-government sources (see City of
Indianapolis, 2007; Hudnut, 1995 for more background on the development of
a strategy).

7.5.3 Implementation and Outcomes

As the strategy was formed and implementation began it was necessary to

create the infrastructure to support the amateur sports capital theme. This
included the construction of a wide variety of sports infrastructure elements
such as pro-quality stadiums, a natatorium that would support national and
international sports events, a veladrome, and so on. Neither the State of
Indiana nor the City of Indianapolis had the resources to fuel the construction
of these facilities on its own. Only when the Lilly Foundation agreed to redi-
rect its yield (amounting eventually to several hundreds of millions of dollars)
to the infrastructure development objective was it possible to create a resource
pool large enough to support the construction part of the strategy. It is impor-
tant to note that one part of the strategy was the construction itself as many
jobs were created and maintained over a ten-year or so period in this way.
Another element at the core of the strategy was the attraction of amateur
sports associations to Indianapolis. As construction of the infrastructure began
to unfold the region was able to attract the American Athletic Union (AAU)
headquarters to the region. This was a centerpiece organization and thus began
to convey that the Indianapolis strategy was serious and that it could work if
the plan implementation continued. As more associations were attracted to the
region, infrastructure in the form of conference facilities and spaces for
accommodating meetings were needed. For sure, as national associations were
attracted they in turn attracted others for exchange of information, planning,
program development and other meetings, thus creating a need for hotel, meet-
ing and conference infrastructure. In short, by the early 1980s the implemen-
tation of the strategy was gaining notoriety nationally and internationally. For
88 Leadership and institutions in regional endogenous development

example, by the mid-1980s Indianapolis had been selected as the site for the
1987 Pan American Games (one of the pre-competitive events leading up to
the Olympics), had attracted a premier team from the National Football
League (The Baltimore Colts), and other professional sports teams as well as
an increasingly wide diversity of associations of all kinds. This part of the case
study draws on works by the City of Indianapolis (2007) and Hudnut (1995,

7.5.4 A Model Success Story and Lessons

By the late 1980s the economic development strategy created in the late 1960s
had achieved success and was recognized as a model for the redevelopment of
other city regions in the US and abroad. Its mayor, William Hudnut, who
followed Richard Lugar in the early 1970s and remained in office for more
than 15 years, became one of the most sought after city mayors in the US for
speaking engagements with requests to explain how Indianapolis achieved
such extraordinary revival. While much of the success was due to continued
and focused leadership on the part of Mayor Hudnut, it is important to recog-
nize that initially the leadership came from the private sector and resources for
the major investments that were needed to make the vision a reality came from
the private sector as well as the public sector at the state and local level. In
short, the private sector played an initial major leadership role and provided
critical resources that could not have been amassed otherwise. Also, it is
important to recognize that significant stakeholder involvement occurred with
the State of Indiana, Indianapolis and private sector organizations like the
Lilly Foundation partnering to create success. Further, it is not difficult for
organizations like GIPC to create strategies for their region; what is difficult
is to build broad stakeholder participation of those who were not members of
the organization. It may be claimed that GIPC was and is an elite organization
and that is true. However, it worked carefully to market the strategy concept
and to attract diverse stakeholders into the strategy development process. So
while it was elite in nature it also used its leadership to attract other partners
and to incentivize their commitment and participation. This of course was
easier once senior public sector leadership committed to the strategy. This
discussion on achievements and outcomes draws again on such works as the
City of Indianapolis (2007), Hudnut (1995, 1998) and Stough (2007).
It is important to recognize pattern elements that appear to be characteris-
tic of leadership in the US that evolve out of the US case studies. First, there
are more than a few cases where private sector leadership provided catalytic
leadership for a redevelopment strategy and its implementation. The role of
the Allegheny Conference in Pittsburgh (see above) is a case in point. Another
case that supports this claim, not reported here, is that of Baltimore, Maryland.
Case studies from the United States 89

Baltimore experienced industrial and port decline in the 1960s due mostly to
the same competitiveness forces that so negatively impacted the economies of
places like Indianapolis and Pittsburgh, namely de-industrialization. Baltimore
formed the Greater Baltimore Committee (GBC) with a membership of 100
CEOs from the region and adopted a strategy to rebuild Baltimore from its
harbor outward. This was the same model Baltimore had used to rebuild the
region and its economy following a conflagration that destroyed most of the
city in the 19th century. The strategy was implemented with great success and
Baltimore became another model of urban region regeneration in the face of
de-industrialization-driven competitive forces. The Baltimore case represents
another pattern related to success and that is that regions that have achieved
successful regeneration in the past often adopt anew the strategy used at an
earlier time(s). Some of the European cases presented in the next chapter illus-
trate this thesis, for example, Rennes, France and Birmingham in Great
8. Case studies from Europe

In this chapter we present seven case studies from Europe: Birmingham, UK;
Liverpool, UK; Rennes, France; Lille, France; Freiberg, Germany; Tampere,
Finland; and Rotterdam, the Netherlands.

8.1.1 Background: Adjustment Through Entrepreneurship and Strong
Municipal Leadership

Birmingham is Britains second largest city Its history is dominated by two

themes its emergence as a great industrial city and a tradition of civic
achievement unequalled by any other British city. These themes continue to
dominate the city today (Loftman and Nevin, 1998: 130). Indeed,
Birmingham is regularly described as the most dynamic city in the world (p.
131). It is commonly known as a city which, over the years, has been able to
provide strong and active municipal leadership, entrepreneurship and political
pragmatism. That is, the city has a longstanding tradition of elected leaders,
chief officers and political parties working together in the interest of
Birmingham: The persistence of this climate of co-operation sets
Birmingham apart from other English major cities (ibid.).
This tradition of enterprise and civic leadership can be traced back to the
1870s when Joseph Chamberlain was the mayor. During that time:
Birmingham gained an international reputation as being the best governed
city in the world (ibid.: 1323). In more recent years, Birminghams civic
leaders have continued not only with the legacy of Chamberlain, but also with
the history of municipal activism and political pragmatism (ibid.).

8.1.2 Vulnerability

Throughout most of the nineteenth and twentieth centuries, the economy of the
city was based on manufacturing. However, that overdependence made the
city vulnerable to the structural changes in the national and global economy,
particularly during the recession of the 1980s. Within a decade, the West
Midlands region was transformed from being one of the nations most

Case studies from Europe 91

economically prosperous regions to a low-wage low-productivity economy

suffering chronic levels of unemployment (Loftman and Nevin, 1998: 133).

8.1.3 Consensus for Regeneration

The manufacturing base was particularly devastated, with the city losing 46
percent of total manufacturing employment between 1971 and 1987 (Loftman
and Nevin, 1998: 134).
Reflecting the City Councils tradition of pragmatic politics and cross-party
cooperation, a broad consensus emerged between the citys major players in
the 1980s to respond to the collapse of the citys manufacturing industry. The
Council sought to broaden the citys economic base through the promotion of
the service sector and the creation of a new image for the city (ibid.: 135). This
consensus emerged despite frequent changes in the political control of the
Council over that period. Birminghams political and business leaders were
able to adopt a non-ideological and pragmatic approach by working in close
collaboration with local political opponents and the private sector (ibid.: 134).
In the transformation of Birmingham, it is important to mention the success
of the city in attracting both private sector and European Community funds,
which were to be a key element in carrying out the pro-growth strategy. For
example, the Council established the Economic Development Committee in
the 1980s to focus on tackling the citys economic problems. Under the charis-
matic leadership of Sir Richard Knowles and the efforts of Councilor Albert
Bore, the power of this committee grew considerably, allowing Birmingham
to succeed in its application to central government Assisted Area status, gain-
ing access to essential European Community funds to support its economic
development activities (ibid: 139).
Another example was the Councils use of two quasi-public sector compa-
nies Hyatt Regency Birmingham Ltd and NEC Ltd to finance and raise
money to secure funds for the projects (ibid.: 139). In addition to securing
funds for carrying out the projects: the city council also sought to engage the
private sector in the formulation of policies aimed at re-imaging and promot-
ing Birminghams city centre (ibid.).
In 1988, a City Centre Challenge Symposium was held to debate the future
development of the city. The 1988 symposium resulted in the formulation of
the strategies for revitalizing the city (Beazley et al., 1997: 188). Some of the
projects in this strategy were:

the 180 million International Convention Centre (ICC)

the 60 million National Indoor Arena
the 31 million Hyatt Hotel built as part of the ICC development
(Beazley et al., 1997: 189; Loftman and Nevin, 1998: 143, 147).
92 Leadership and institutions in regional endogenous development

It has been argued in research on regional development, the media, and by

professional bodies that Birmingham City Councils 300 million investment
in its projects and strategies had generated considerable regional benefits by
diversifying the citys local economy, attracting private investment and plac-
ing the city in the international map (Loftman and Nevin, 1998: 147).
However, it is also noteworthy that many of the successes have resulted in the
diversion of scarce Council resources away from basic services, such as
public housing and education services (Beazley et al., 1997: 189).
Furthermore, it is argued that many of the jobs created by the redevelopment
programs are of low quality. For example, in 1991, 42 percent of the 275
permanent jobs at the ICC were jobs within cleaning, catering and security
occupation sectors (Beazley, et al., 1997: 190). An analysis by Beazley et al.
(1997) found that these huge socio-economic impacts are the results of limited
general public involvement or debate concerning the development of the city.

8.1.4 Community Reaction

Since 1993, increasing community resistance to regeneration proposals saw

the election of a new leadership in the Council which has implemented a back
to basics philosophy whereby local services, such as education and social
services, are receiving priority in council resources over prestige development
and civic boosterism activities (Beazley et al., 1997: 191). Therefore, it seems
that the sustainability of the citys development will depend on the ability of
this new Council to make development proposals more sensitive to commu-
nity needs (Loftman and Nevin, 1998: 147). However, those shifts in strategies
have not changed the way policymaking is done in Birmingham. The new
administration has continued to show political pragmatism, municipal
activism and political consensus around the citys strategies. But this time it is
being done with the participation of the general public (Beazley et al.,

8.2.1 Background: Industrial Decline and Lack of Capacity to

Liverpool provides a marked contrast to the Birmingham case study discussed

above. Parkinson (1990) describes Liverpool in these terms:

Liverpool provides a classic location to examine the role of leadership in urban

decline and regeneration. During the past two decades it has experienced a profound
Case studies from Europe 93

transformation under the impact of international economic restructuring, which has

set before it major social and political challenges. However, a crucial feature of the
city during this period is the way in which leaders reacted to the challenges it faced.
In many respects, the citys economic failure has been matched by a political fail-
ure that has exacerbated the costs of change. Ironically, the importance of leader-
ship in urban transformation is illustrated by its absence or incoherence in
Liverpool. (p. 241)

Leadership is seen by Parkinson (1990: 241) as the capacity to create stable

and durable mechanisms and alliances that help to promote economic regen-
eration and allows the identification of a range of micro-level skills and
macro-level resources that can generate that capacity. Liverpools leaders,
however, seem to have had a deficit in both these respects. Over the years, the
citys leaders have failed to demonstrate the necessary political skills to form
coalitions that are stable enough to promote economic regeneration. Moreover,
Liverpools leaders have also shown a lack of many of the resources that
underpin leadership capacity (ibid.). For example, the relationship between the
public and private sectors in the city is seen to be weak, and the controversial
relationship of the City Council with the central government has created little
national support towards the city (ibid.: 241, 244).
Adding to this lack of leadership, Liverpool has encountered problems in
its quest for economic growth as the city is highly dependent upon a single
industry, namely the port and warehousing (Savitch and Kantor, 2002: 567).
Liverpool lost much of its competitive advantage when trade shifted away
from Western Europe toward North America and when automation took place.
In 1950, the port generated 27 percent of Liverpools employment, however
by the 1990s that had declined to under 4 percent. Today, the port barely
employs 500 people, and Liverpool continues to lose jobs as new industries
have been established in other cities such as Manchester, which is only 50
miles away (Savitch and Kantor, 2002: 57). Also, the citys social structure is
characterized by a large working class, a relatively small middle class, and the
absence of a versatile capitalist class (Parkinson, 1990: 244; Savitch and
Kantor, 2002: 57).
These negative characteristics had created more than two decades of regime
instability in Liverpool. The citys highly volatile and partisan party politics, a
limited governmental capacity, a lack of powerful business leadership, and the
inability to construct coalitions between the public and private sectors has not
allowed the city to respond proactively to economic decline and build the
elements of a regeneration strategy (Parkinson, 1990: 242).
The period from 1973 to 1983 saw a dramatic escalation in the citys
economic problems, combined with a period of political paralysis because
none of the citys three political parties could achieve the necessary electoral
support to get a majority on the council and develop a coherent response to
94 Leadership and institutions in regional endogenous development

economic decline (Parkinson, 1990: 2456). While Liverpools economic

decline is intimately connected to the citys port, that decline began in the
1920s with the evolution of new technologies in transportation and communi-
cation which sent the port into a long-term decline, causing profound impact
on the economy, and in particular fostering long-term structural unemploy-
ment (ibid.: 242, 2457). Liverpool was, even at this early time, showing a
poor ability to respond to threat and economic decline.

8.2.2 Delayed Reaction and Intervention

Despite the need for urgent intervention, it was not until 1987 that a stream of
policy documents came from the City Council advocating the need to diver-
sify the economic base of the city and, in particular, the need to regenerate the
city center as the center of a regional market. Moreover:

the city commissioned a variety of consultancy studies to examine the tourist poten-
tial of the city, the problem of the citys image and city marketing, the economic
potential of the design industry, and most significantly, the merits of creating a part-
nership between the public and private sectors to guide economic development.
(Parkinson, 1990: 253)

Since the turn of the 21st century, things started to change and Liverpool
is now showing some signs of regeneration. The economic collapse of the
early 1980s has been arrested. Its docklands are going through some degree
of renaissance, and new housing and tourist attractions are being built.
Furthermore, there has been some growth taking place in modern sectors of
the economy that show potential. The political complexion of the city has
changed, and many of the internal divisions of the recent past seem to be
lessened. However, many old perceptions linger, and the city still bears the
reputation of riot city, with high levels of public employment, an under-
qualified and unskilled workforce, and a high rate of unemployment. As a
result, the city is still at a loss for investment, with much of its land being
vacant or derelict (Parkinson, 1990: 305; Savitch and Kantor, 2002: 57,


8.3.1 Background to a Transformation

Le Gales (1990: 85), writing on the French city of Rennes, describes it as a

dynamic city, which was able to pool its social and economic resources and
become a symbol of urban regeneration in the 1980s in France.
Case studies from Europe 95

The transformation of Rennes began after 1945 with the election of a

Christian Democrat, Y. Freville, as mayor. His vision marked a turning point
in the history of Rennes as he implemented innovative strategies to turn the
city into an international intellectual and cultural center (Le Gales, 1990: 71).
His program had four main elements aimed at:

controlling the expansion of the city

developing higher education
improving the citys infrastructure
attracting high-tech industries and developing research institutes and
universities (ibid.).

His time in office is recognized as one of the most innovative eras in the
citys history as he was able to bring together virtually all local actors (the
university, the Chamber of Commerce, trade unions, young entrepreneurs, and
so on) to be involved in the development of the city (ibid.: 72). Furthermore,
Freville was able to secure a close network of high-powered civil servants who
supported development projects. The Freville regime also gained strength by
building strong ties with various local agencies (public financial institutions,
developing agencies, and so on) that contributed the resources necessary to
facilitate the projects (ibid.: 79).

8.3.2 A New Crisis

Yet, by the end of the 1970s, an economic crisis hit Rennes. The negative
growth rates experienced in the traditional sectors of the economy and the
closure of a series of plants brought significant job losses to the city (Le Gales,
1990: 79). In 1981, the increased pressure from the population to revitalize the
economy brought a leftist government to power for the first time in 23 years.
This new government brought considerable change to Rennes that resembled
the years during Frevilles regime. Such changes turned the city again into one
of the most dynamic cities of France (ibid.).

8.3.3 Institutional Response

The new government strategy was characterized by the creation of a plan for
development where the consultation process was very broad. Eight working
groups headed by union leaders, business organizations, academics, public and
voluntary sectors were established to decide policies for each of the main
important economic areas of the city. The major theme of the policy was based
on the assumption that job creation in Rennes could be achieved by the mobi-
lization and development of scientific research capabilities (Le Gales 1990:
96 Leadership and institutions in regional endogenous development

789). Important institutional arrangements were in place to make it possible

for the government to implement such strategies. For example, the political
consensus and the broad participation of actors that was achieved allowed the
new Mayor to mobilize national financial support and the interest of the locals
for economic development (ibid.: 834). Important development and planning
agencies were developed in Rennes (for example, CODESPAR) which
allowed and thus enabled representatives of the business sector, the unions,
and local authorities to work together and create partnerships (Le Gales,
Rennes is thus a city characterized by having had emerge local high qual-
ity social capital conditions mayoral leadership, broad consensus, social and
economic resources that allowed it to develop and implement successful
strategies. Rennes emerged as a place characterized by high-order services,
new technology firms, a good quality of life, high levels of research, and a
good employment structure which allows it to remain a symbol of urban
regeneration (Judd and Parkinson, 1990: 28).


8.4.1 Background: Industrial Decline

By the end of the nineteenth century, the city of Lille in northern France was
the second largest textile region in the world after the ManchesterLancashire
region. Its growth was enhanced by canal access to the ports of Flanders,
Ghent and Antwerp. However, during World War I, the city suffered enormous
deprivation, and then like other cities during the 1920s, it experienced reces-
sion and unemployment (Fraser and Baert, 2003: 87).
Although some economic prosperity returned to Lille after World War II,
the lack of urgency to restructure or change old patterns of industrial manage-
ment further decreased investment. As a result, Lille started to experience
social and physical decay typical of many former prosperous industrial cities,
including those of the Nord regions (ibid.: 88). However, Lille was hit espe-
cially hard as the city area was considered peripheral and remote from the
countrys economic and cultural life. It is estimated that over the period
19451996, the Lille area lost approximately 294,000 jobs in its traditional
industries of textiles, agriculture, mining and related sectors. The coal indus-
try lost all its labor force (approximately 90,000), and there were important
losses in the chemicals, metalworking and service sectors. The economic
decay of Lille was evident by the abandoned and decaying factories through-
out the area (ibid.: 88).
Case studies from Europe 97

8.4.2 Planning Initiatives for Regeneration

The fist initiative to reverse the economic decay of Lille came from the central
government in the late 1960s with its strategy to divert growth away from
Paris to other regions in France. The strategy, called Metropoles dEquilibre
was designed to divert investment to provincial city regions (Fraser and Baert,
2003: 93). However, a major influence in the recovery of Lille was the high
quality of its political and technical leadership that led restructuring in the city
over the 25 years (ibid.). Of particular importance was the role played by the
Prime Minister, Pierre Mauroy. He was responsible for pushing and incen-
tivizing the construction of the Channel Tunnel, and later on as a Mayor of
Lille he pushed for the city to link up to the new European transport infra-
structure network and reap the associated benefits (ibid.: 91).
After hard lobbying by the authorities in Lille, it was agreed that the city
would be the link between London, Brussels and Paris. This link greatly
impacted the economic regeneration of Lille. The economic revival of the city
was further assisted by local forces which gathered together to form the
Comit Grande Lille, a body of some 300 people representing a cross-section
of Lilles society. That group still meets every two months to discuss issues
and problems of current importance (ibid.: 1023).

8.4.3 Major Projects

The economic revival of Lille may be seen in two major projects that signal
the process of the regeneration of the metropolitan area:

1. The first was Euralille. According to Fraser and Baert (2003), securing the
Eurostar link through Lille was the first step to drive the citys economy
forward into the post-industrial era. The link led to a reconstruction of a
vast area of the city including the creation of shopping centers, the station
that links the city of Lille and neighboring areas, office complexes, a park
area, and so on (ibid.: 102).
2. The second was the regeneration of Roubaix, the second city of the Lille
metro region that signaled the process of regeneration in the region. In the
1990s it was a city in decline, with unemployment rates of approximately
27 percent and declining services and shopping facilities. Furthermore, the
city was poorly connected to other parts of the metropolitan area (ibid.:
106). As with the city of Lille, it was a new mayor, M. Rene
Vandierendonck, who brought a remarkable change to the unpromising
situation of Roubaix. That change started in 1994 when the new mayor
attracted the private sector and other actors together and formed them into
an integrated team that in turn proposed a strategy based on the investment
in three major public assets:
98 Leadership and institutions in regional endogenous development

the first was the improvement of the city image by upgrading those
public facilities that had fallen into decay
the second was the improvement of the transportation links both
within the city and between the other centers of the metro region
the third was the physical redesign of the city.

As these three initiatives evolved, others were added that progressively

attracted the private sector to capitalize on the potential of other assets in the
Lille region (ibid.: 104). It is said the entire program has had an impact on
employment growth of 2,500 jobs attributed just to the enterprise zone.
However, it is not clear if those jobs are being taken by locals who suffer from
unemployment or by those who commute into Roubaix but live in other
suburbs (ibid.: 105). Most probably it is a mix of the two.

8.4.4 Revival and Altered Image

The dramatic economic revival of Lille has greatly altered the perception and
image of the region. For example, according to Fraser and Baert (2003: 102),
Euralille is hailed as one of the largest and most stimulating projects in
contemporary Western Europe. Furthermore, the regeneration of Roubaix
represents a flagship project for the metropolitan area. In the case of both Lille
and Roubaix, their respective mayors, backed by the Comit Grand Lille, had
a vision of how the metro area of Lille could reinvent itself. In both cities the
mayors and their staff had the necessary:

skills to negotiate, coordinate and assure [that the] finance [was available] to make
things possible, and not to have to wait on that initiative coming from somewhere
else. (Fraser and Baert, 2003: 106)


8.5.1 Background to Success: Capturing New Industrial Activity

The city of Freiberg in Saxony (in the former East Germany) has been
analysed by Musyck (2003) as an example of regional development based on
capturing new industry activity in the field of recycling and environmental
technologies and services. This case is viewed as a relatively successful
process of economic renewal resulting from a combination of endogenous
assets and exogenous impulses (p. 273), which helped the creation of new and
innovative firms.
It appears that there are three distinct but interlocking factors that under-
pinned success in the Freiberg case (ibid.: 271):
Case studies from Europe 99

long-term historical assets and localized capabilities

the restructuring of existing local research institutes
public policies in support of environmental protection and applied

8.5.2 Industrial and Political Transformation

Until the middle of the 19th century, the mining and metallurgical industries
dominated the economy of the Freiberg region through a sustained growth
supported by continuous efforts in science, education and technological devel-
opment. However, from then onwards, the mining industry entered a steady
decline, which led to the closure of many of the mines (Musyck, 2003: 277).
Thus, the need to restructure and diversify the economy of the region towards
other economic activities started in the middle of the 19th century. This
process was driven by the creation and expansion of indigenous small and
medium enterprises.
According to Musyck (2003), at the turn of the 21st century, about half of
the inhabitants of the city were engaged in other industrial activities for their
livelihood. Most of the newly created firms engaged in chemical, metallurgi-
cal, electrical, electronic, scientific instruments, and mechanical engineering
industries. The research potential of Freiberg was also significantly boosted
with the creation and expansion of several institutes of fundamental and
applied research. These institutes were seen as necessary complements to the
existing industrial activities (p. 277).
The demise of the communist system at the end of the 1980s brought to
East Germany significant economic problems that stemmed mainly from the
non-competitiveness of the regions firms. As a result, a large number of firms
disappeared, which translated into the collapse of production and massive
unemployment (ibid.: 273). However, the sudden dismantling of the German
Democratic Republic, while precipitating a deep crisis in the local labor
market, allowed, within a few months, large numbers of qualified scientists to
became available. This formidable body of immediately available expertise
allowed for the creation of the eco-sector in Freiberg (ibid.: 274).

8.5.3 The Process Underlying Successful Emergence of an Eco-sector

The emergence of the eco-sector is seen by Musyck (2003: 27484) as being

the result of three factors:

1. The first is the entrepreneurial capabilities that exist in Freiberg. There

were many individuals desperate to find a job where few existed. They
had the vision to make risky decisions and to capitalize on years of
100 Leadership and institutions in regional endogenous development

experience in the fields of science and applied research in a phrase, to

create their jobs.
2. The second factor was the existence of a large amount of capital that was
channeled from the local and central government to promote research and
technology activity to solve environmental problems. The institutional
support given to these entrepreneurs by the public sector allowed for the
development of SMEs in Freiberg. The combination of local actors, insti-
tutional support, and the new market conditions allowed for the passage
from the old structure to the new.
3. The third factor was the environment of trust and strong local identity that
existed in Freiberg. That provided a strong sense of solidarity and collab-
orative networks that were essential for the development of the eco-sector.

The development of small and medium-size businesses (SMEs) in Freiberg

cannot be fully understood without a discussion of the role played by public
contracts, subsidies and research grants. The government offered a whole
range of specific technology initiatives in addition to ten R&D infrastructure-
based measures in the advisory, information and technology transfer fields
(Musyck, 2003: 291). The Ministry of Economic Affairs and the Ministry of
Education each spent about DEM 2 billion between 1990 and 1996 in support-
ing technology initiatives and innovation programs. Most of that public inter-
vention came in the form of contract research rather than just subsidies; thus
firms had to compete for them and gradually earn their position in their home
market. Overall the picture that emerges in Freiberg is that subsidies may
have provided a once-and-for-all-catch-up for a certain time but that the
sector has and probably will not be dependent on public funding in the long
term (ibid.: 292).

8.5.4 Predisposing Attributes for Ability to Cope and Rejuvenate

The Freiberg case demonstrates how a range of historic, economic and socio-
cultural factors such as the accumulation of skills and the tradition of entre-
preneurship may predispose a region to embark on a process of industrial
transformation based on indigenous entrepreneurial potential of SMEs. Added
to these factors, the presence of a radical shock to the economy in the form of
the fall of communism, turned out to be a catalyst for a renewal of the regions
industrial structure. When radical shocks do occur, they might prompt local
actors to act and rediscover a common identity, appreciate the role of their
social networks and realize the extent of their collective experience and skills.
In the case of Freiberg, publicprivate co-operation and strong social capital
were fundamental factors in the initial success of the eco-sector (Musyck,
2003: 2812).
Case studies from Europe 101

The lack of data makes it difficult to document the size and development of
the eco-sector in Freiberg. However, different strands of data converge to
indicate that the sector has been growing steadily to become a substantial clus-
ter of activity in the region (Musyck 2003: 287). But overall, it is estimated
that the number of eco-sector firms in Freiberg in the year 2000 was around
106 firms. That figure represents a substantial increase from the 57 firms that
were identified in 1994. Furthermore, during the second half of the 1990s, the
eco-sector in the region was recognized as a center of excellence for recycling
and environmental technologies. This highly localized centre of excellence
for recycling is considered to be unique in Germany (ibid.).
As this case study by Musyck (2003) shows, the development of the eco-
sector in Freiberg, is the result of a combination of endogenous potential and
constructive policies (p. 293). It demonstrates how:

carefully balanced policy measures provided timely support to a number of highly

qualified professionals who found themselves suddenly plunged into a severe
economic distress in the early 1990s and were willing to build new (risky) ventures
on the basis of their own human capital. (p. 293)


8.6.1 Background to Success: Resource Endowment and an
Entrepreneurial Spirit

Tampere owes its economic success to a well-established entrepreneurial

spirit, an endowment of natural resources, as well as a long history of cooper-
ation between public and private leaders. All of these factors have contributed
to Tamperes development into Finlands industrial capital, as well as to its
ability to maintain economic competitiveness after experiencing a deep indus-
trial recession in the early 1990s.
Tampere was chartered in 1779 by King Gustav III of Sweden to nurture
the development of free enterprise in a traditionally agrarian society. Believing
the site to be conducive to the development of industry due to a natural power
supply from the Tammerkoski rapids, the King established Tampere as a free
town where trade and industrial enterprise were unrestricted and agricultural
activities common to existing towns of the time were completely forbidden
(Kostiainen and Sotarauta ND). The townspeople were directed or led to link
their livelihood with trade, factories or handicrafts and were given special
privileges, such as inexpensive loans, and exemptions from taxes and import
duties on raw materials, in order to speed the development of industry in
Tampere (Tuulasvaara-Kaleva, NDa). The expectation was that the politically
granted freedom of enterprise together with the natural power supply from the
102 Leadership and institutions in regional endogenous development

Tammerkoski rapids would enable Tampere to successfully develop into an

industrial town.
Within a few years, in 1783, Finlands first paper mill was established in
Tampere (City of Tampere, NDb). Later, in 1820, James Finlayson, a
Scotsman, founded a cotton mill in town, that was the first major industrial
establishment in Finland (City of Tampere, NDb: 1). Then, in 1861, an inland
water ship manufacturer and a broadcloth factory combined resources to form
Tampella, a company that manufactured grinders, water turbines, ships and
locomotives needed by Finish factories (City of Tampere, NDc: 12). Over
time, a number of other industries were established in Tampere, but the citys
textile, engineering and wood-processing industries formed the core of its
economic base.

8.6.2 Institutional Evolution

Shortly after Tampere was chartered, the towns administrative system began
to change. The existing administrative system, broadly used to govern the
countryside, was gradually transformed to a system for governing a town. In
1802, a steward was hired to manage Tampere and plans were made to build a
town hall (Tuulasvaara-Kaleva, NDb: 2). In 1809, Finland passed from
Swedish rule to Russian rule, but Tampere remained relatively undisturbed. In
the 1830s, the steward was replaced by a mayor and Tamperes wealthier
merchants were invited to city administrative court meetings to negotiate town
issues (Tuulasvaara-Kaleva, NDc: 1).
The families who controlled the early industrial institutions of Tampere were
central actors in the development of the town. They filled the roles of employ-
ers, as well as of town administrators (Tuulasvaara-Kaleva, NDc: 2; Kostiainen
and Sotarauta, ND: 1011). They were politically influential and obtained priv-
ileges for the town through personal connections with the Tsars court
(Tuulasvaara-Kaleva, NDc: 2; Kostiainen and Sotarauta, ND: 1011). In 1875,
a new municipal law was passed making an elected town council the new deci-
sion-making body of Tampere, but this did not diminish the industrialists influ-
ence over town affairs: votes were calculated based on the amount of taxes
individuals paid and people who worked for others were not allowed to vote
(Tuulasvaara-Kaleva, NDc: 2). Consequently, Tamperes factory owners and
wealthier merchants were those who elected the town council. The power to
vote a council member in or out afforded Tamperes leading families continued
authority over town affairs and influence in the towns development.
In the early years, the owners of Tamperes factories took care of their
workers basic needs through the provision of housing, schools, libraries and,
in the case of Finlayson, a church and a hospital as well (Kostiainen and
Sotarauta ND; Tuulasvaara-Kaleva NDd). The industrialists also cared for the
Case studies from Europe 103

towns needs, particularly with regard to education. In 1839, the Finlayson

factory founded a school which all of Tamperes children could attend free of
charge (Tuulasvaara-Kaleva NDe). Later, when students emerging from
Tamperes existing municipal schools could not apply to attend the university,
a private high school was established for boys to qualify them for entrance to
the university (Tuulasvaara-Kaleva NDe). Several years later, in 1886, an
industrial school was founded in Tampere to teach students the skills and
knowledge that could be demanded from masters and foremen in the different
fields of industry (Kostiainen and Sotarauta, ND: 10). At the turn of the
century, Tampere had a number of educational institutions including elemen-
tary schools, secondary schools, a technical school, an agricultural school, as
well as an institute where workers could receive education (Tuulasvaara-
Kaleva, NDe: 2).
During the course of the 19th century, Tampere was transformed from a
small, agrarian-based village into the most highly industrialized locality in
Finland (Lapintie et al., 2002: 67), where textile mills, paper mills and the
metal industry provided thousands of jobs. By the middle of the 19th century,
approximately 60 percent of Tamperes labor force was employed in industrial
production (City of Tampere, NDd: 1) and by 1870, 40.5 percent of Finlands
entire industrial workforce worked in Tampere (Kostiainen and Sotarauta, ND:
9). By the end of the 19th century, more than half of the citys labor force
worked in the textile industrys three largest factories (Tuulasvaara-Kaleva,
NDd). At that time, the labor-intensive textile industry dominated Tamperes
industrial structure, with the mechanical engineering industry holding second
place among the citys industries (Kostiainen and Sotarauta, ND: 9).
Tampere entered the 20th century as a thriving industrial center known for
its skilled workforce and motivated industrialists (Kostiainen and Sotarauta,
ND: 10) because its political, economic and institutional factors had comple-
mented each other throughout the 19th century, allowing Tampere to excel.
While institutional changes had occurred, they had not hampered the towns
industrial development: when Swedens rule of Finland ended and Russian
rule began, privileges granted under Swedish rule were continued by the Tsar;
when the privileges ceased in 1895, Tamperes excellent geographical loca-
tion, natural power supply and industrial heritage enabled it to continue to
develop as an industrial center (Kostiainen and Sotarauta, ND: 10).

8.6.3 Decline and Transformation

Tamperes development proceeded relatively smoothly until World War I,

which not only shook the region to the core but unleashed events that all but
dismantled Tamperes economy. Shortly after the soviets seized power in
Russia in October 1917, Finland took advantage of the opportunity and
104 Leadership and institutions in regional endogenous development

reestablished its independence on December 6, 1917. But, even as Finland

distanced itself from Russia, it could not steer clear of the suffering emanating
from the Bolshevik Revolution. In 1918, Finland, too, sustained a short, albeit
heavy clash between landowners (the Whites) and workers (the Reds). This
conflict pushed Tampere to the brink of disaster. Heavily populated by work-
ers, Tampere became the main base of the Reds (Sylvelin, 2004: 3), and this
brought the fight directly into the town. Shortly before the end of the war, a
decisive battle was fought in Tampere and major portions of the town were
destroyed (Tuulasvaara-Kaleva, NDf: 1).
Tampere was left in physical, community and psychological ruins: a deep
rift remained between those who had supported the Reds and those who had
supported the Whites during the war (Tuulasvaara-Kaleva, NDf). Though the
tug and pull between competing political forces continued after the war, the
1919 municipal elections showed that Tampere remained a Red town when the
Social Democrats won a majority in Tamperes town administration
(Tuulasvaara-Kaleva, NDf). Having arrived at a modus vivendi, the townspeo-
ple came together to rebuild their town and to restore their industries:
Tamperes population had suffered a severe political break during the war, but
the towns entrepreneurial spirit had survived.
Following World War I, Tamperes previously dominant textile industry
began losing ground to the metal and mechanical engineering industries. The
gap closed substantially in 1931 when Finlands State Airplane Factory was
transferred to Tampere, expanding the need for Tamperes engineering indus-
try (Kostiainen and Sotarauta, ND: 11). The engineering industry gained a
further boost when an airport was established in Tampere. In the five year
period from 1931 to 1936, more than 12 percent of Tamperes total workforce
came to be employed in the metal and mechanical industry (Kostiainen and
Sotarauta, ND: 11). Employment in the metal industry surged again with the
outbreak of World War II when Tampere began manufacturing weapons and
munitions. In 1943, the metal industry became the largest industrial sector in
Tampere, employing nearly 27 percent of the towns workforce (Kostiainen
and Sotarauta, ND: 11; Martinez-Vela and Viljamaa, 2004: 9).
Following World War II, Tampere became the production center of metal
products and machines to be sent to the Soviet Union as part of the war repa-
rations that Finland was forced to pay to the Soviet Union. This kept
Tamperes metal and engineering industries strong after the war, much as
manufacturing weapons, munitions and vehicles had done during the war
(Martinez-Vela and Viljamaa, 2004: 9). The end of war reparation payments in
1952 did not cause a drop in the number of industrial jobs. In fact, the number
of industrial workers in Tampere continued to grow until 1956, peaking at
31,878 (Kostiainen and Sotarauta, ND: 12). Thereafter, the numbers began to
fall as machines increasingly replaced workers.
Case studies from Europe 105

8.6.4 Institutional Responses

As the overall number of industrial jobs in Tampere began to decline, the citys
leaders realized that they had to develop a means of offering more local educa-
tional opportunities to young people in order to stave off a brain drain
(Kostiainen and Sotarauta, ND: 15). In 1960, while more than half of
Tamperes population still relied on industry for its livelihood (Martinez-Vela
and Viljamaa, 2004: 9), city leaders succeeded in having the School of Social
Sciences transferred from Helsinki to Tampere. The School of Social Sciences
suited Tampere, because it had been developed to offer educational possibil-
ities to people with limited means who had not graduated from high school
(Kostiainen and Sotarauta, ND: 14). The institution opened new possibilities
both for Tamperes residents, as well as for the city itself. By attracting the
School of Social Sciences, Tampere expanded its institutional base and
became more than simply an old industrial center it became a city that could
provide young people with a higher education. Tampere prized the School of
Social Sciences, financed it, and nurtured its growth. In 1966, the school was
renamed the University of Tampere (Kostiainen and Sotarauta, ND: 15). The
citys postindustrial image began to evolve.
Just as King Gustav had sensed the potential of the Tammerkoski rapids in
developing an industrial center, so did the leaders of Tampere sense the poten-
tial of bringing institutions of higher education to Tampere as its industries
declined, so much so that even as they were developing the University of
Tampere, city leaders were already working to bring a second university to
town. The second university would be oriented toward technology. In 1965,
city leaders persuaded the Helsinki University of Technology to open a branch
in Tampere (Tuulasvaara-Kaleva, NDe), and then, without delay, they concen-
trated their efforts on separating the branch from its parent university in order
to form an independent university of technology in Tampere (Kostiainen and
Sotarauta, ND: 15). Tamperes efforts succeeded; in 1972, the branch broke
off, and began operating as the Tampere University of Technology (Kostiainen
and Sotarauta, ND: 15). Within the span of twelve years, Tampere had gained
two local universities and changed its own destiny. Instead of accepting the
inevitable fate of an industrial town brought about by industrial decline,
Tamperes leaders had identified and assembled resources that would both
increase the productivity of its existing resources and would position Tampere
for success in the future.
Tamperes University of Technology emphasis on cooperation with indus-
try and its dedication to transferring expertise to companies rapidly established
it as a pioneer in research services in Finland (Kostiainen and Sotarauta, ND:
1516). This allowed the town to push forth quickly onto the cutting edge of
innovation and to gain respect as a research center. As respect for Tampere
106 Leadership and institutions in regional endogenous development

grew within the research community, the town became a magnet for knowl-
edge workers. Sensing this, the Technical Research Centre of Finland (VTT)
established its own laboratories of medical and occupational safety and health,
as well as a textile laboratory in Tampere (Kostiainen and Sotarauta, ND: 16),
expanding the towns institutional base. By the mid-1970s, ten years after the
transfer of the School of Social Sciences from Helsinki, Tampere was no
longer known only for its industrial capacity, but for its academic and research
prowess as well (ibid.). Its post-industrial image was gaining strength.
Industrial job losses in Tampere continued to accelerate from the mid-
1970s until 1995, leaving Tamperes industrial employment reduced from
more than 35,000 to 20,000 workers (Kostiainen and Sotarauta, ND: 13;
Martinez-Vela and Viljamaa, 2004: 910). Job loss numbers increased signif-
icantly in the early 1990s, when all of Finland experienced a major recession
due, in part, to the collapse of trade with the former Soviet Union (Kostiainen
and Sotarauta, ND; Rice and Shadur, ND; Rantala, 2001). At that time, many
of Tamperes industries which had been dependent on exports to the Soviet
Union collapsed, unable to offset their losses in the export market through
domestic sales since all of Finland was in an economic slide. During the
course of 199093, Finland suffered a 10 percent drop in its GDP and overall
unemployment rose to almost 20 percent (Kautonen et al., 2002; Rantala,
2001: 64; Rice and Shadur, ND: 8).
The recession devastated Tamperes existing economy. Its weaker indus-
tries disintegrated, surviving industries downsized, and unemployment
skyrocketed. As the recession subsided, Tamperes mechanical engineering
industry emerged as the citys strongest surviving industrial sector (Kostiainen
and Sotarauta, ND: 14; Martinez-Vela and Viljamaa, 2004: 10). Tamperes city
leaders resolved to put an end to the citys unemployment problem through
education and a new kind of entrepreneurship (Tuulasvaara-Kaleva, NDf).
They decided to reinvent Tamperes waning industrial economy as a knowl-
edge economy. This proved possible due to the long history of cooperation
between public and private leaders, as well as the educational resources that
Tampere had developed over the years; Tamperes business, educational and
public sectors worked together to bring about the desired change.
In the years following the recession, knowledge transfers from Tamperes
universities strengthened the citys mechanical engineering industry and auto-
motive innovations fortified what remained of the manufacturing sector.
However, overall, the citys industrial base continued to decline and Tamperes
workforce was increasingly employed in services. By 1999, only 28 percent of
the citys workforce remained in secondary production, while 70 percent of its
workforce was employed in services (Lapintie et al.: 71).
As many of Tamperes traditional industries became obsolete, Tamperes
leaders developed a strategy to restructure the empty industrial floor space
Case studies from Europe 107

which opened up in the city center. Complementary zoning, preservation of

old structures, an expansion of the district heating network to include new
construction, and a steady cooperation between the University of Technology,
Technology Centre, Technical Research Centre of Finland, local businesses
and the municipality were vital factors in helping the city implement its revi-
talization plan (City of Tampere, NDd). As vacated factories were turned into
homes and offices, small and medium-sized business took root and Tampere
began to prosper again.

8.6.5 A Strategic Approach

By 2001, city leaders had developed a vision for Tamperes future and had
determined that, among other things, Tampere would become a citizens infor-
mation society and a center of expertise growing in a sustainable manner by
2012 (Tampere, ND). At that time, Tamperes leaders envisioned a society in
which the research and education community would have close relations with
the local business community and more educated people would be moving in,
rather than moving out of the city (ibid.). Instead of seeking to draw industries
into town as King Gustav III of Sweden had done in an effort to develop
Tamperes industrial economy, the citys leaders in the 21st century sought to
draw and retain educated minds that would concentrate on generating research
of global value through academic and industrial networking and make
Tampere a leading center of the knowledge economy. Interestingly, both the
strategists of the 18th century and those of the 21st century made use, in part,
of the same natural resource to attract the entrepreneurs they sought the
Tammerkoski rapids. Touted as a free source of power to the industrialists of
the bygone era, they are now used to generate inexpensive electricity for
Tampere, keeping both the cost of business and the cost of living in Tampere
down and making it an attractive place to work and live.
Today, two-thirds of all Finns live within a 200-kilometer radius of
Tampere, 34,000 students attend Tamperes two universities and polytechnics,
and cooperation between companies and universities has expanded the
competitiveness of Tamperes industry (Tampere International Business
Office, 2005). Tampere currently boasts several innovative development
programs including: BioneXt Tampere a development and investment
program which focuses on research, product development, clinical application
and international commercialization of biotechnology; eTampere a program
which seeks to make Tampere the worlds leading information society; and the
Region Centre of Expertise Programme which concentrates on helping exist-
ing companies to expand and new businesses to emerge. Tamperes selected
fields of expertise are: mechanical engineering and automation, information
and communication technology, and health technology (Tampere International
108 Leadership and institutions in regional endogenous development

Business Office, 2005). The universityindustry networking that Tampere city

leaders envisioned in 2001 has become a reality and resulted in close cooper-
ation between local companies, local research organizations and local univer-
sities. It has become one of Tamperes competitive strengths, drawing global
market leaders into the region to take advantage of the adequate supply of
competent researchers and the internationally competitive research environ-
ment that Tampere has built.
The decision to transform Tamperes industrial economy to a knowledge
economy did not represent a sudden, radical shift away from production since
Tamperes business structure had already been moving away from industry
toward services during the 20 years that had preceded the recession. Nor was
it a decision made outside the normal parameters of Finnish society. Rather,
the decision was a well-calculated move on the part of city leaders in a time
of crisis, made to ensure Tamperes economic competitiveness under changing
market conditions in accordance with Finlands national economic develop-
ment policy; it was a manifestation of the belief that the citys economic
success no longer rested on its manufacturing capabilities, but rather on its
ability to create, absorb and trade in new knowledge. Today, 228 years after
being ordered to develop as an industrial economy, all indications are that
Tampere will continue to grow and prosper as a knowledge economy, led by a
City Council that continuously reassesses and adjusts the citys competitive
stance in a global environment.


8.7.1 Background: A Commitment to Partnerships

According to Jacobs (2000: 140), Rotterdam provides an illustration of how

local political commitments influenced partnership building and policy
implementation. In Rotterdam, active publicprivate partnerships have
adopted regional policy innovations that have allowed the city to respond to
changes (Harding et al., 1994: 23). Furthermore, the presence of active politi-
cal leaders has allowed Rotterdam to be in a better position with respect to
both the central government of the Netherlands and the European Union. For
example, with the appointment in 1996 of Mayor Bram Peper, Rotterdam
gained strategic importance thanks to his involvement and networking through
the Euro-cities. That provided Rotterdam with an influential voice within the
European Union, and it subsequently made the city eligible for much needed
economic resources.
The city of Rotterdam is the summer apex of the wealthy Randstad (Ring
City) of the Netherlands, and it plays a vital role in the Dutch national econ-
Case studies from Europe 109

omy. It has a population of over a million (including the city and its immedi-
ate surrounding municipalities), it is one of the worlds largest ports, and it is
a major center for petrochemicals, commerce and corporate services.
However, more than any other city in the Netherlands, Rotterdam directly
experiences the ups and downs in the international economy (Harding et al.,
1994: 23). The reason for this is due to the fact that Rotterdam relies heavily
on some sectors which are failing or being restructured. For example, the
collapse of the ship-building industry, and the restructuring of the oil and
petrochemical sector along with port technology development has led to
important job losses (Hajer, 1993: 61; Jacobs, 2000). This uncertainty and
risky environment has forced the city planners to act in an: entrepreneurial
fashion and to work hard to protect its position as the worlds biggest port
(Harding et al., 1994: 41). Recently, as world trade has been revived, it is
expected that strong trade through the port will pick up. However, there is also
the belief that for the port to have bigger local effects, it needs to develop
greater added value, and it needs to remain competitive, especially when other
competitors (such as the port of Antwerp) are performing better (Jacobs, 2000:

8.7.2 Constant Adaptation: The Leadership Role of Policymakers

Thus, it has been necessary for the city to constantly adapt itself to remain
competitive and capture new markets (Jacobs, 2000: 657). In order to achieve
this, policymakers in Rotterdam have developed and demonstrated the follow-
ing characteristics:

1. Innovation and flexibility: With the increase in global competition the city
of Rotterdam needs to remain competitive. In order to do this, policy-
makers have supported the development of local labor skills and the
connection of the local community to expanding regional economies.
Furthermore, the Rotterdam City Development Corporation (OBR) has
implemented changes to put greater stress on publicprivate partnerships
and new flexible roles and structures for public institutions (Hajer, 1993:
2. Publicprivate partnerships: According to Hajer (1993), publicprivate
partnerships are not new in the city of Rotterdam. Jacobs (2000) tells how:
In order to protect its position as the worlds biggest port, [the city] has
always had to work hand in hand with business (p. 19). However, since
the beginning of the 1990s Rotterdam has been strongly promoting
publicprivate partnerships as a way to improve competitiveness,
economic development and urban regeneration. These networks and part-
nerships have produced shared visions that bring corporate and
110 Leadership and institutions in regional endogenous development

community interests together in a variety of programs (Jacobs, 2000: 13).

For example, the Rotterdam Port Promotion Council promoted the port
through a publicprivate partnership between the Municipal Port
Management and companies in the greater Rotterdam Region. Due to the
fact that the promotion of the port is crucial for the economic development
of Rotterdam, this cooperative approach seemed essential and necessary
(Jacobs, 2000: 151).
3. Consensual politics: Jacobs (2000) points out that municipal sectoral
directors, company directors, city aldermen, and economic elites all have
influenced and contributed to direct the agenda towards growth and
investments in Rotterdams port. For example: the local chamber of
commerce provided an important link between the political and economic
elites driving growth, and individual business influenced the city council
through personal networks, the Mayor and public officials (Hajer, 1993:
61). Jacobs (2000) and Hajer (1993) attribute the presence of consensus to
specific values and institutions that can be found in the local culture of
Rotterdam (Hajer 1993: 61; Jacobs 2000: 13). Policies in Rotterdam are
characterized by being accommodative and consensual, providing the city
with a historical record of orderliness in politics, institutions and
economic affairs. The incorporation of political parties, different subcul-
tures and minority interests into the political system has allowed the city
to reduce conflicts and cleavages (Jacobs, 2000: 17).
4. Leadership: From 1996 to 1997, Mayor Bram Peper and a multiparty
group of Aldermen represented by the Labor Party, Greens, Liberals,
Democrats and Christian Democrats governed Rotterdam. According to
Jacobs (2000), the Mayor: performed an active role promoting the city
and contributing to policy debates along with the political parties, busi-
ness and communities (Jacobs, 2000: 18). During his tenure as Mayor of
Rotterdam (198298), Mayor Peper attended to maintaining the high
profile of the city through influential networks such as Euro-cities (Hajer,
1993: 60).

According to the author, Mayor Peper and the Aldermen recognized that
Rotterdam and its port were facing intense competition in the world market
and that a consensual approach to policy was needed. Thus, the city developed
a range of policy initiatives that involved extensive consultation with commu-
nity and business groups (Jacobs, 2000: 149). Other cases of leadership in
Rotterdam were also present. Such is the case of the director of Rotterdam
City Council, Riek Bakker, whose regeneration plans and dramatic change of
institutional norms allowed the council to be a key player in the process of
revitalizing the city (Couch, 2003: 118).
Case studies from Europe 111

8.7.3 Major Projects

The characteristics mentioned above could be seen in the Kop van Zuid
Project (South End) in Rotterdam. This project was intended to improve the
economic base and marketability of Rotterdams port (Fraser and Baert,
2003: 867). The Kop van Zuid area lies on the south part of the city, known
as the old south. By the 1970s, that part of the port was redundant, with
docks, adjoining warehousing and transshipment areas vacant and derelict.
However, in 1987, the city council began a master plan for the area that
consisted in creating a metro station, a public galleria, retailing, tax offices,
customs offices, the court of justice and further office space for commercial
letting (Couch, 2003: 120). The project also contained some social housing
and private housing, supermarkets and other facilities that serve local need
(ibid.: 124). This redevelopment project is credited with bringing great
economic resources to the city. It is said that the project yields property tax
revenue equal to about 5 percent of the citys total property tax income
(Couch, 2003: 124).
Furthermore, the Kop van Zuid project has been important in promoting the
city as a leading hub for foreign investment and for its emphasis in creating
market and business opportunities for the city (Jacobs, 2000: 163).

8.7.4 Collaboration and Innovation

The case of Rotterdam highlights the ability of the city planners to engage in
collaborative and innovative projects. Rotterdam is also a case where impor-
tant efforts have been made to adapt the city to a changing environment. Not
only has Rotterdam showed its capacity for extensive consultation, but also it
has engaged in positive administrative changes and reforms (Jacobs, 2000:
147, 174).
9. Case studies from the Pacific Rim

This chapter presents case studies from the Pacific Rim. They are: Newcastle,
Australia, Hong Kong, Singapore and Chihuahua, Mexico.


9.1.1 Background: An Inner-city Redevelopment Project in an
Industrial City in Transformation

Newcastle is a former iron and steel heavy manufacturing city located on

Australias east coast to the north of Sydney. It is the regional capital of the
Hunter Valley region. In this case, the redevelopment of the inner-city 45
hectares Honeysuckle site under the auspices of a development corporation
imposed by the state government of New South Wales is examined. The
Honeysuckle site stretches along a continuous 3 km strip of Newcastles
harbor. At that site, the Honeysuckle Development Corporation (HDC) has
been implementing a strategy that intends to guide redevelopment over the
next 20 years, presenting what McGuirk et al. (1998: 107) have described as:
one of the greatest opportunities for urban renewal and revitalization in
The Newcastle and Hunter region has had a traditional reliance on heavy
industry: Coal, steel, textiles and shipbuilding have been its industrial back-
bone and have had a profound impact on the economy, landscape and external
perception of the region (McGuirk et al., 1998: 112). By the late 1980s,
however, the city faced severe crisis as its industrial base started to undergo
massive contraction. This change, partly caused by the integration of Australia
into the global economy, left the locality struggling to respond to the local and
regional impacts of global economic change. The economic crisis in
Newcastle was reflected by the decline in manufacturing employment from
24.6 percent in 1976 to 13.8 percent in 1991 (McGuirk et al., 1998). The most
affected areas of Newcastle have been the urban areas surrounding the
Honeysuckle site: Most of its industrial infrastructure had become obsolete,
the urban landscape derelict and polluted, and the image of the industrial city
had become negative rather than powerful and positive (p. 112).

Case studies from the Pacific Rim 113

9.1.2 A Collaborative Government Initiative

The wide-ranging problems of Newcastle prompted the response of a wide

range of actors, including the federal, state and local government along with
the private sector. These actors took an entrepreneurial approach that sought to
create development opportunities to cope with the crisis and rescue the city
centre (McGuirk et al., 1998). In 1986, the Newcastle City Council (NCC)
sponsored a series of Partners in Progress workshops to find out how the city
could be revitalized. Together, the council and local business interests identi-
fied the unused Honeysuckle goods yard as the single most important devel-
opment site in the city. It was visualized as a potential catalyst to trigger a
broader rejuvenation of the whole central city area while addressing the prob-
lematic industrial image in Newcastle (ibid.: 11314).
According to McGuirk et al. (1998), more than $50.4 million has been
spent in the HDC area. As a result, existing industry and port activity is being
consolidated, while abandoned sites are being cleared and groomed for rede-
velopment, setting the stage for private investment. This regeneration has been
accompanied by a marketing campaign presenting Newcastle as a forward-
looking city with a go-ahead attitude and plentiful opportunity for profitable,
trouble free investment (p. 117). It is estimated that A$120 million has been
generated in the regional economy as a result of the multiplier effect of HDC
Despite these results, the redevelopment program has been subject to criti-
cism, especially because many have questioned how much such redevelop-
ment has been focused on the local needs of the region. No attention has been
paid to the local skills base and employment needs and how they might be
adapted to suit the employment generated by the Honeysuckle redevelopment.
Current experiences suggest that the jobs created are jobs that serve a new
workforce rather than dealing with the sizeable remnant workforce of
Newcastles industrial economy (McGuirk et al., 1998). Therefore, in the
likely absence of an expanding productive base in the region it is questionable
whether the Honeysuckle redevelopment can sustain employment expansion
in the services and retail sectors (p. 123).
If the entire community does not reap the benefits of the program it is likely
that conflicts will arise. Conflict over the course and outcomes of the redevel-
opment program can threaten the image so promoted by the locality as a
competitive business environment. As a result, investment might fail to arrive
into the region and thus, raise questions on the sustainability of the program
(McGuirk et al., 1998: 1267).
114 Leadership and institutions in regional endogenous development


9.2.1 Background: An Entrepreneurial City-state

Despite the fact that Hong Kong is a city-state with very few natural resources,
it has emerged as one of the richest economies in Asia (Chuen-Chau, 1997:
41). Hong Kongs phenomenal growth can be related to its unique character-
istics that have been man-made. Such characteristics derived from a sound
macroeconomic environment, a good policy mix and the presence of local
institutions, all of which were conducive to a commerce-based development.
For example, Hong Kong is considered as a place where one can find:

political stability, no exchange controls, a stable currency fully backed by interna-

tional reserve assets, a well-defined and well administered system, a non-interven-
tionist government with low taxation, and a geographic location between New York
and London. (Chuen-Chau, 1997: 57)

Those unique characteristics have attracted outside capital to the region, which
was a key factor for the citys economic development.
According to Jessop and Sum (2000), Hong Kong is also a city that
embraces the practice of entrepreneurial strategies and political alliances
based on publicprivate partnerships that have allowed it to successfully
adapt itself to such radically changing circumstances as its incorporation into
China. More specifically, Hong Kongs success can be attributed in great part
to two important factors:

1. Entrepreneurship: Chuen-Chau (1997) notes how entrepreneurialism has

characterized Hong Kong since its founding. Hong Kong has maintained
an entrepreneurial mentality, where the exploration of new markets and
the searching out of new products or sources of supplies have been the
norms: Producers in Hong Kong are known for their flexibility,
resilience, adaptiveness and focus on short-run profits (p. 69).
2. The role of government and institutions: According to Chuen-Chau
(1997): enterprise does not function in a vacuum. It depends on the exis-
tence of accommodating institutions, supporting infrastructures, a healthy
and educated labor force, and certain rules, many of which only the
government can provide (p. 69). Hong Kongs government provided
such necessary institutional frameworks.

From the 1970s, the presence of these two factors could be seen as crucial
institutional catalysts for growth. Chuen-Chau (1997: 70) argues that the
government of Hong Kong provided an environment conducive to private
enterprise including respect for property rights, low taxes, free and equal
Case studies from the Pacific Rim 115

access to all markets, accessible information, credit availability, good infra-

structure, and so on which were central for the development and attraction
of business. The government in Hong Kong is also characterized by bringing
predictability and continuity to the economic environment and by providing
institutional support (Jessop and Sum, 2000: 2297).

9.2.2 Impact of Chinas Open Door Policy and Reunification in 1997

However, the open door policy of China, and the later transfer in 1997 of Hong
Kong from British rule to absorption in China, opened many questions and
concerns about the economic and institutional future of Hong Kong. This is
especially true since China had the advantage over Hong Kong in low labor
and land costs, putting the Hong Kong manufacturing base at danger.

9.2.3 Response: Leadership, Institutional Factors and


In response to this challenge the government as well as private economic

actors proposed that the best strategy for Hong Kong would be to shift manu-
facturing northwards (Chuen-Chau, 1997: 59). Therefore, by the mid-1990s,
almost 25,000 factories mostly labor-intensive industries were being real-
located to the rapidly growing nearby regions of Guandong and Fujian in
China. This resulted in the so-called hollowing out of Hong Kong as a manu-
facturing center, and the beginning of its specialization in front office opera-
tions marketing, finance, design, packaging and quality control
(Chuen-Chau, 1997: 59). Jessop and Sum (2000) point out that the shifting of
manufacturing northwards was also the result of the coalescence of the strate-
gies pursued by various actors private and public, economic and political
in the Hong Kong region.
With the changing global economy and its effect on Hong Kong, two
consultancy reports were sponsored by different factions of capital and
public organizations (for example, the Trade Development Council) and the
government departments (for example, the Trade and Industry Department)
to outline strategies to restructure the city. Such reports represented public
debates of what constituted the most advantageous mode of inserting Hong
Kong into the changing global economy. For example, the first report, called
The Hong Kong Advantage, sought to portray the city as a new type of urban
economic space that would establish a beyond the gateway image, or more
specifically, to offer new combinations of functions for a knowledge- and
information-based economy with access to mainland China (Jessop and
Sum, 2000):
116 Leadership and institutions in regional endogenous development

These new horizons of action show certain features of Hong Kongs entrepreneur-
ial and/or governance capacities that are socially embedded on the interpersonal,
institutional and societal levels. (p. 2302)

According to Jessop and Sum (2000), one way to understand the success-
ful implementation of entrepreneurial strategies in Hong Kong is to look
beyond city dignitaries. Despite the fact that strong leadership roles are seen
in many dignitaries (for example, the Chief Executive of Hong Kong, Tung
Chee-Hwa), it is argued that besides city dignitaries there was a wide range of
factors and institutional actors that helped to consolidate the strategies that
were pursued (Jessop and Sum, 2000: 2291). For example, the strategic
alliances among actors in the region were consolidated not only by their
linguistic affinities and kinship ties, but also through the socio-cultural prac-
tices of guanxi (relationship) (ibid.: 2308). In the strategy to base Hong Kong
as a gateway city, the guanxi helped to build the mutual relationships needed
to establish subcontracting partnerships and joint ventures. That is the ability
to consolidate in collective action allowed economic actors to share risks and
cope with uncertainty through dense social and institutional networks (Jessop
and Sum, 2000: 2308).
Ultimately, one can see in Hong Kong strategies that: envisage complex
array of privatepublic partnerships and networks co-operating under Hong-
Kongs leadership to promote the overall competitiveness of an emerging
multi-centered city-region, not only in economic terms but also in cultural and
community matters (Jessop and Sum, 2000: 2308).

9.3.1 Background: Ingredients for Success

In November 1990, Lee Kuan Yew handed over the prime ministership of
Singapore to Goh Chok Tong. In the three decades following self-rule in 1959,
the first-generation leaders as epitomized by Lee Kuan Yew, Goh Keng Swee
and S. Rajaratnam had transformed the island-state from a basket economy
into one of Asias four newly industrializing mini-dragon economies. As
outlined by Soon and Tan (1997: 213), between 1959 and 1990, the second
prime minister set out an agenda that placed human resource development at
the center of the development effort. Also, he outlined a science, technology
and R&D-based strategy to transform Singapore into a developed nation.
These two ingredients have been crucial to Singapores economic performance
(ibid.: 21819).
In the 1960s, Singapore was characterized by the absence of an agricultural
Case studies from the Pacific Rim 117

sector, natural resources, and industrial tradition and entrepreneurship.

Normally those factors would have been considered a great handicap. But
Singapores policymakers turned them into an advantage by transforming
Singapore into a competitive base for multinationals (ibid.: 21819). At the
same time, the government also recognized the need for a competent bureau-
cracy to help implement its policies. It also understood the vital importance of
industrial peace, which helped the government to have the support of workers
when the government shifted to export-oriented industrialization (ibid.).

9.3.2 Strategic Planning Policies Implemented

Although government intervention does not always lead to the desired results,
in the case of Singapore they were designed so effectively that they created the
preconditions for success (Soon and Suan Tan, 1997: 221). Among some of the
reasons for this successful intervention were the following:

1. The government always took a flexible approach to planning; one that did
not depend on a rigid time frame (Soon and Suan Tan, 1997: 226, 229).
Policy initiatives were always under continued change and revision
according to the necessities of the country (ibid: 223). It was recognized
by the government of Singapore that policies are unlikely to be effective
without good governance and appropriate institutional frameworks.
Therefore, strong institutions were established at an early stage, including
the two statutory boards, the Economic Development Board (EDB) and
the Housing and Development Board (HDB). Such boards had ample
funds and strong powers to promote industrial activities and grant loans
and incentives (ibid.: 221, 233). Institutions in Singapore have been
recognized for being efficient and dedicated. As Rodrik (1998) points out:
the quality of governmental institutions matters for growth Taiwan,
Japan and Singapore have the best institutions and the highest growth
rates (p. 97).
2. A key element in Singapores public policies is that they were built around
consensus. The government usually ensured that any major modifications
to its development strategy were thoroughly explained, well examined
and coordinated among government, industry, businessmen and labor
stakeholders (Soon and Suan Tan, 1997: 246).
3. The influence of Singapores leaders: According to Soon and Suan Tan

Throughout three decades of rapid economic growth, one fundamental factor

has been political continuity. This continuity has been reinforced by the
personal characteristics of Singapore leaders. They were intellectually curious,
118 Leadership and institutions in regional endogenous development

pragmatic, hard-working, with an understanding of global trends, and with

personal and professional integrity [thus] the policies adopted in Singapore
cannot be analyzed and understood apart form the people who were driving
them. (p. 223)

These key elements are clearly seen in Singapores Strategic Economic

Plan (1991). That plan was drawn up based on work by eight subcommittees
comprising representatives from both government and the business sector.
Also, the plan signaled strategies to place Singapore as a global city and
emphasized attracting high-tech, knowledge-intensive industries (Soon and
Suan Tan, 1997): Singapores success shows that even the most unpromising
starting point need not stop a country from development. What matters is a
growth-oriented leadership with a realistic strategy and intelligent policies (p.
Specifically, Singapores successful experience shows four basic elements:
a government with a vision of long-term development; a stable environment
conductive to economic growth; a public policy that emphasizes investment;
and the capacity for sustained accumulation of human and physical capital
(Soon and Suan Tan, 1997).


9.4.1 Background: A Maquiladora Region Faces Decline

Chihuahua is a state located in the north of Mexico, which has a tradition of

primary sector employment. The state of Chihuahua is a major producer of
minerals, both metallic and non-metallic. It is Mexicos largest state (242,000
sq. kilometers) and has a population of 2.9 million. The income per capita is
about US$5,801 annually. In 1998, the state generated 4.3 percent of the
national GDP (US$17.1 billion) (Friedman, 1966: 2565).
In the 1970s and 1980s, the economic development of Chihuahua was
primarily driven by the Maquiladora (in-bond) model. Taking advantage of
being geographically located on the border with the US, and the fact that
Mexico had lower wages and land costs, the State of Chihuahua implemented
policies to attract foreign firms seeking to reduce costs. Over time, the
Maquiladora industry model transformed Chihuahua into the largest
Maquiladora region in the world (Avila, 1998: 2), creating great economic
growth in the area. For example, it is argued that from 1970 to 1985, the
Maquila model in Chihuahua generated the equivalent of 5 percent of
Mexicos GDP (Ruiz Duran, 2000: 5).
Over time, however, the huge success of the Maquiladora model also
created dependency. By the late 1980s, there was a notorious rate of decrease
Case studies from the Pacific Rim 119

in the number of Maquiladoras established in the state. Some of the reasons

for this were that countries with lower labor costs than Mexico were also
promoting the siting of foreign industries in their localities (for example,
China and Central America).The economic decline of Chihuahua was so large
that, according to official data, by 1992 the State was able to create only 154
new jobs out of the 28,000 needed every year to meet the new labor force
supply. Unemployment and underemployment combined reached levels of 22
percent (Avila, 1998: 3).

9.4.2 An Entrepreneurial Initiative

At this time and in response to this perilous state of economic decline a group
of businessmen (called Grupo Chihuahua) met in the late 1980s to plan a strat-
egy that would lead Chihuahua out of the crisis. The intervention of the private
sector in Chihuahua was clearly ignited and supported by Francisco Barrio, the
new Governor of Chihuahua, who believed strongly that the involvement of
the private sector was the key to economic development offering the initiative
and much needed governmental support (Avila, 1998; Ruiz Duran, 2000).
Those factors gave rise to the creation of publicprivate partnerships,
which up to this point were a rare occurrence in Mexico. Chihuahua Siglo XXI
(Chihuahua 21st Century) was an entrepreneurial initiative launched in 1990,
first in the city of Chihuahua in Mexico, and later on throughout the entire
State of Chihuahua. This initiative had the purpose of redesigning Chihuahuas
economy to make it highly competitive as it entered the 21st century (Ruiz
Duran, 2000). Also, the strategy sought to elevate the quality of life of the
population, attract foreign direct investment and generate more and higher
quality jobs (Ruiz Duran, 2000; INEGI, 2003).
The idea for the private sector was to find a strategy that would help the
capital city of Chihuahua develop those economic sectors for which there was
a comparative advantage. Therefore, the private sector along with state author-
ities started a process to explore possibilities to redesign Chihuahuas econ-
omy. From this partnership it was agreed to form the Economic Development
Association. This agency (formed by a group of businessmen, the government
and the two main universities of the city) was in charge of creating
Chihuahuas economic strategy (Avila, 1998; Ruiz Duran, 2000).

9.4.3 Objectives

The main objective of the strategy was to promote the integration and the
creation of industrial clusters to increase linkages, learning and competitive
advantages in the locality. Following the identification of the strategic sectors,
the Development Economic Association formulated several strategies to
120 Leadership and institutions in regional endogenous development

promote and augment the comparative advantages of the region. Two require-
ments were put in place:

1. The first was that the strategies should aim for the increase in investment
in the region; that is, strategies should look for ways of making the region
more attractive to foreign and national investors.
2. The second was that the strategies should aim for the improvement in the
competitive position of the main sectors of Chihuahua (Avila, 1998).

In 1998 elections took place in Chihuahua. Here, a candidate from the tradi-
tional party (PRI) won the elections. As a result and very unfortunately, the
initiative has been almost stopped by this winning candidate (from the oppo-
sition political party) who considered the initiative as inheritances from past
administrations. Today, Chihuahua Siglo XXI has continued operations
(although at a very small scale) since the new government came to power, by
demands from the different actors that have participated in the process (Avila,
1998: 9). However, some of the initiatives were able to survive, hidden in the
working plans and programs of some state agencies (that is, the technology
development program, which was aimed at strengthening the economic infra-
structure of the main clusters). Moreover, there is an initiative (the Economic
Promotion Law) in front of Congress, which attempts to deny the right of new
administrations to stop further development of the implemented programs.

9.4.4 Lessons Learned

There are some lessons that can be learned from this strategy analysis:

1. The importance of entrepreneurship: The experience of Chihuahua shows

us how an entrepreneurial private sector is needed for some initiatives to
get started. The state cannot be everywhere. It acts with imperfect knowl-
edge and limited resources (Friedman, 1966: 25, 65). The Chihuahua
Siglo XXI initiative demonstrates that an entrepreneurial private sector has
the potential to contribute immensely to local planning. However, the
Chihuahua case shows that initiatives can also die if they do not have a
strong participation of the government.
2. The role of different actors: In todays world, the choice is to adapt
successfully or fail. Furthermore, in making these changes the role of
local leadership is vital (Friedman, 1966: 25, 65). In the case of
Chihuahua, we see leadership characteristics in the presence of private
businessmen who took the initiative, and in the Governor of Chihuahua,
Francisco Barrio, who embraced the initiative and increased the reliance
on local action to get things done.
Case studies from the Pacific Rim 121

3. Develop clusters: After six years of intervention, some of the economic

sectors showed the initial signs of clustering: some companies were work-
ing together by making strategic alliances and were cooperatively funding
economic infrastructure initiatives (Ruiz Duran, 2000).
4. Implement strategy plans: Perhaps the biggest legacy of Chihuahua Siglo
XXI is how notorious is its absence. There seems to be a clear awareness
among economic actors of the state that currently there is a lack of a
comprehensive regional development strategy (Avila, 1998; Ruiz Duran,
10. Modeling endogenous regional
economic development: measurement,
operational issues and conclusions

In this book it has been our proposition that regions inevitably are influenced
by their institutions, leadership, and the degree of entrepreneurial activity as
mediating or intervening variables that may enhance or detract from their
capacity and capability to maximize the effectiveness and efficiency with
which they utilize their resource endowments and achieve market fit. All of
these factors interact and evolve over time in a manner specific to a city or a
region, for the city or region to display a unique set of circumstances and to
have achieved a particular outcome state at any point in time and to influence
the changing competitive performance of a region over time.
The conceptual model framework depicted in Figure 2.3 in Chapter 2
stressed the dynamic uncertainty of reality that confronts regions in the
contemporary world. Regional economic development (RED) over time, and
the outcome state of those factors and processes that affect RED, might be
measured and evaluated through performance indicators relating to:

the competitive performance of a city or region vis--vis other places;

the degree of entrepreneurial activity occurring;
the degree to which it has attained sustainable development vis--vis the
triple-bottom-line of growth and performance; namely, economic
growth and wealth creation, achieving social equity, and achieving
favorable environmental quality outcomes.

A way to conceptualize that outcome for a city or region at any point in

time, and the progression of its economic development and performance
through time, is to envisage its path through the regional competitiveness
performance cube (RCPC) as proposed in Figure 2.2 in Chapter 2.
Returning to the RCPC, and to the model framework of regional endoge-
nous development set out in Figure 2.3 in Chapter 2, our proposition is that
while resource endowments and market fit (REM) is a crucial dimension in

Modeling endogenous regional economic development 123

differentiating regional economic performance, the interplay of that dimension

with the dimensions of leadership (L), institutions (I) and entrepreneurship
(E), is increasingly crucial in enhancing the capacity and capability of a region
to harness its resource endowments, overcome deficiencies in them, and to
achieve market fit for its industries. The interaction between these dimensions
will influence how, over time, a regions relative competitive performance can
change vis--vis other regions, and how its position within the RCPC can
change over time. While a region might have good and plentiful resource
endowments, and be strong on the REM dimension, poor institutions and lack
of leadership can create sub-optimal performance; and while a region might
have some deficiencies in terms of the REM dimensions, if its attributes on the
L, I and E dimensions are strong and effective, then the regions performance
can be lifted. The implication of this proposition for a region and its economic
development strategy formulation and implementation is for its leadership and
institutions to give due and full consideration to the wide range of attributes
relating to the REM, L, I and E dimensions, and for the intent of the strategy
being to shift the position of a region towards the top right-hand corner of the
RCPC cube (as shown in Figure 2.2). That requires a region to develop a strat-
egy process that addresses the virtuous circle for sustainable development (as
shown in Figure 2.1 in Chapter 2).
That raises the issues of both analysis and strategy: first, how to analyse,
measure and evaluate the performance of a region on the REM, L, I and E
dimensions of the regional endogenous development model; and second, how
to identify and implement the process and tasks involved in strategy develop-
It is towards these ends that we now turn in this chapter.


Before proposing the development of an operational model of regional
endogenous development, first an aside to discuss a number of basic consid-
erations that may help guide that process.
The multi-sectoral analysis (MSA) methodology, developed by Roberts
and Stimson (1998), and applied by Stimson et al. (2002: 23574), does
provide a potential analytical framework to systematically collect information
on, and to measure regional performance with respect to aspects of the L, I and
REM dimensions of the RCPC. In particular, that methodology can be useful
in helping to create regional strategic architecture by identifying:

What core competencies does a region need to build or maintain?

What sector markets should a region develop or maintain?
124 Leadership and institutions in regional endogenous development

What strategic infrastructure does a region need to develop?

What resource endowments should a region conserve and maintain?
What approach should a region take to developing marketing intelli-

Stimson et al. (2002: 345) have argued that a regional economic develop-
ment strategy needs to have three important functions, these being to:

identify the fundamental elements of capacity building to support

economic development what, when taken together, are termed strate-
gic architecture;
define strategic intent in terms of direction, destiny and discovery
opportunities for economic development;
define the main thrusts of strategies for achieving strategic intent for
managing economic development processes and for capacity building
setting a future path.

The interaction of leadership and institutions will need to be effective to

deliver a planning process that will provide the details of initiatives, actions,
resources, management, timing the delivery of resources, infrastructure,
competencies and other supporting structures to execute strategy (Stimson et
al., 2002: 345). This approach draws on the work of Hamel and Prahalad
(1994: 118), who emphasize the importance of what they call strategic archi-
tecture. The strategic economic development architecture of a region may be
conceptualized as providing the capacity for it to compete in the future. Such
architecture is a design or a high level blueprint for the development of new
capabilities, the acquisition of new core competencies or the enhancement of
existing ones, and the reconfiguring of the interface with customers. It
describes the process or recipe for developing and utilizing core competencies,
mobilizing resources, developing markets and achieving desired endings in
realizing strategic intent for the future development of a region. It includes
continuous monitoring and building to leverage and stretch core competencies
within a region to create markets and service customer requirements. Central
to the development of the strategic architecture for a region is the identifica-
tion of the existing core competencies the bundle of resources, skills, tech-
nologies, applications and management that give the region its competitive
advantage which develop over time as part of the learning process of orga-
nizations and the region. Stimson et al. (2002: 1757; 25773) demonstrate
the adoption of the Hamel and Prahalad model to a regional development
context in the CairnsFar North Queensland Region in Australia and in a
modified form to the Northern Virginia region in the Washington Metropolitan
area of the US.
Modeling endogenous regional economic development 125

Stimson et al. (2002) also note the importance of identifying and describ-
ing those change agents who are anticipated to influence both the develop-
ment and future management of regions. These include considering
processes of change relating to economic, technological, societal, environ-
mental, legislative and governance considerations (p. 347). A regions lead-
ership and institutional capacity building needs to be of a nature appropriate
for agile responses to managing regional risk factors, both exogenous and


The crucial dynamic depicted in the regional endogenous growth model
Figure 2.3 in Chapter 2 is how the intervening variables measuring the L, I and
E mediating components interact to create catalysts for more effective and
efficient utilization of a regions resource endowments and how effectively it
captures market opportunities (the independent variables measuring the REM
component). In other words, the interaction of L, I and E become the crucial
catalytic factors in shaping not only the performance of a city or region espe-
cially in influencing how effectively the REM factors are utilized and tapped
but also in enhancing the capacity and capability of a city or region to effi-
ciently, effectively and successfully address the challenges and contingencies
it faces over time in dealing with uncertainty and risk and in coping with

10.3.1 Difficulties

A major impediment to developing such an operational model is the difficulty

that arises as a result of not having specifically defined and agreed on variables
that might measure the REM, L, I and E components of the model framework
for RED. That problem is exacerbated in not having a precise definition of
regional economic development and competitiveness performance. There is a
considerable degree of what might be described as a nebulous quality about
the precise meaning of, let alone measurability of the components of the model
framework. Furthermore, because the intent is to be able to track over time
the path of a region through the space in the RCPC, as represented in Figure
2.2 in Chapter 2, a dynamic measure of RED is needed.
Even if we are able to propose and agree upon a set of operational variables
that might measure the components of the model framework, then there is the
further issue concerning the availability of secondary data suitable for provid-
ing a data base for regions across a state, province or nation.
126 Leadership and institutions in regional endogenous development

10.3.2 An Endogenous Growth Measurement Approach

One feasible approach to measuring RED performance across the regions of a

state or a nation is to take a simple surrogate measure of endogenous growth,
namely the regional or differential shift component derived from a shiftshare
analysis of regional employment or revenue/income change over time.
Secondary data tends to be readily available to do that in most countries and
typically may be achieved using census data for industry employment in
regions. That regional shift component is a reasonable surrogate measure of
the degree to which employment growth or decline in a region is due to
endogenous or within-region processes and factors against changes due to
national and industry-mix shift effects. The regional shift component measure
is thus proposed as the dependent variable and as a surrogate for RED in the
model framework, and it is designated EG in the operational model proposed

10.3.3 Proposing Variables for an Operational Model of RED

In what follows we suggest sets of variables that might be appropriate to

contemplate as measures of the independent and the mediating factors in the
model framework for endogenous economic development.
Regional economic development and growth over time is represented as

RED = f [(RE, M) mediated by (I, L, E)] (10.1)

In that model the elements might be measured by combinations of variables

such as those proposed below:

RED = endogenous growth in region, measured as:

the aggregate regional differential shift component value in a
shiftshare analysis using employment or revenue/income as the
an employment-based location quotient measuring change over time
(but this might not explicitly capture just the effect of endogenous
RE = resource endowments, measured by a set of variables such as:
area size of the region
agglomeration of industry key sectors (measured by Location
Quotients for employment in industry sectors)
Modeling endogenous regional economic development 127

population size and rate of growth/decline

education levels (a derived index of human capital) and literacy
per capita income, income distribution, and income distribution
change over time
housing ownership
investment in industrial and commercial construction, benchmarked
the regions national share vis--vis its national share of population
infrastructure investment (per capita), such as on roads, schools,
hospitals, and so on
industrial structure and change in industrial structure (measured by
an industrial diversity index)
regional organizational slack
M = market fit, measured by a set of variables such as:
basic economic activity in major industry sectors (measured by
Location Quotients for employment in industry sectors)
airline connections with other regions/cities
road freight in/out movements
volume and value of exports in core competitive locally produced
commodities and services.

It would also be useful to use variables that measure the degree to which the
regions products fit with changing demand and related markets, to ascertain
the degree to which supply fits the local market, and to evaluate the extent to
which the local infrastructure provides the necessary linkages to export

L = leadership, measured by a set of variables such as:

the degree of change/stability in local political leadership
expert assessment of leadership quality
corporate headquarters located in the region
density of business and community organizations per 10,000 popula-
I = institutions, measured by a set of variables such as:
institutional thickness (corporate and community organizations per
10,000 population)
layers of government/government fragmentation
formal institutions of governance, measured by number of public
agencies per 10,000 population
number of headquarters of major corporations (for example Fortune
1000 firms)
value foundation capitalization per 10,000 population
128 Leadership and institutions in regional endogenous development

government fragmentation
level of regional organizations (number and budget level)
index of social capital
E = entrepreneurship, measured by sets of variables such as:
churn rate or business start-up rate
number of small firms as a proportion of all firms
venture capital activity
corporate venturing activity
patents issued per 10,000 workers
Location Quotient of employment in symbolic analyst occupations.

We would argue that RED is positively related to RE, M, L, I and E, but that
there are likely to be lead and lag effects in the short to intermediate run, and
perhaps cyclical effects in the longer run. Thus,

REDt = REt1 + Mt1 + (It1 to It10/10) + Lt2 + Et2 + e (10.2)

We have added lags to the independent variables of 1 and 2 years and have
taken a ten-year average for the institutional variable. For sure these lags do
exist but further research and sensitivity analysis is needed to determine the
proper lag periods. For example, there is some literature which suggest that the
appropriate lag for E is at least 5 years.
The challenge remains as to how best to test such a model of endogenous
growth and development, and to develop appropriate data sets for a number of
regions and/or nations in order to do so.


Two attempts have been made to undertake preliminary modeling of
endogenous regional economic development. This work began with the
authors using the regional shift component from shift-share analysis as a
measure of regional endogenous growth. This seemed to make sense given
that it is that component of the shiftshare model that purportedly
measures local effort of contribution. The main concern lies with the fact
that it is a residual that results from extracting the national and industry
effects from actual economic change (employment, income/earnings or
wealth). In this sense it is not a direct measure of endogenous contribution
but it is difficult to envision how one might directly measure endogenous
regional growth.
Modeling endogenous regional economic development 129

10.4.1 Modeling Endogenous Growth Across Regions in Australia

The first attempt was a study by Stimson, Robson and Shyy (2004) that was
exploratory in nature (not theory driven) in that measures of a wide variety of
variables (including both stock and flow measures) were used in a backward
removal stepwise regression analysis of the endogenous regional growth of
local government areas of the major states of Australia. The regional shift
component from shiftshare analysis was the dependent variable. The study
period was 19912001. The analysis was run on data for non-metropolitan
Local Government Areas in each of the five mainland states of Australia sepa-
rately, thus fitting a model for each state and then for the aggregate of all
The results of these analyses may be summarized as follows, first for the
state level models:

all models had high R2 values

explanatory variables differ across states
population growth had a strong positive effect in all states
population size had a strong effect in most states
industry specialization and change was positive in all but one state
structural change, income and unemployment variables significant in
only one or two states
concentration of jobs in broad industry sectors showed mixed direc-
tional effects
university and technical qualifications strong in two states but less so in
others; change in qualifications positive across all states
occupational categories had mixed effects
coastal location variables were generally not significant and negative
where they were.

The findings from the Australian study produced some findings that relate
to existing theoretical perspectives on economic development, however, the
study as much as anything underscores some of the huge measurement issues
involved in empirical work in regional endogenous growth research.

10.4.2 Modeling Endogenous Growth in US Metropolitan Cities

The metropolitan regions of the US are the units of analysis used in a North
American study of regional endogenous growth conducted by Stough et al.
(2007). This study, while employing the same methodology as the
Australian study, was driven by the theoretical framework that has been
evolved in this book. In short, variables (often very crude) that depict the
130 Leadership and institutions in regional endogenous development

dimensions of the framework are operationalized and measures were

obtained. The dependent variable was the same as in the Australian study.
The results of this second study are summarized below. First, we report the
results from the general model the model when all metropolitan regions
are included and then the three models created when the data are partialed
on city size.
First, the findings for the aggregate model:

Educational attainment has a positive effect on endogenous growth.

Government plays an important role: relative strength of industry pres-
ence; employment change is very important.
Routine personal service workers positive; routine production workers
negative; symbolic workers no effect.
Entrepreneurship capital positive effect.
Population size matters in the kinds of variables that are important.

Results from the fitting of the specific models are:

1. Large regions:
Population change positive
Income and unemployment negative
Location quotients manufacturing and government negative
Local government size and change positive
Social capital positive
Entrepreneurship capital negative [enterprises employing 59
2. Medium regions:
Population change positive
Bachelor education level negative; doctoral positive
Personal services positive
Local government employment strong positive
Entrepreneurship capital negative [self employed and enterprises
employing 14 workers]
3. Small regions:
Population size negative!
Bachelor degrees negative; doctoral positive
Location quotient manufacturing negative
Personal services negative
Change in local government employment positive
Entrepreneurship capital positive [enterprises employing 14 work-
ers]; change in [enterprises employing 59 workers] positive.
Modeling endogenous regional economic development 131

10.4.2 Implications

While the US study application discussed above provides findings that are
more specific with respect to the theoretical framework developed in this
book, it does leave more questions than it answers. The largest one is that the
operationalization of the variables is questionable in a number of cases and
thus substantive conclusions at this time are little more than working hypothe-
ses. At the same time, the Australian and the US study applications, while
different in a number of ways, are also quite similar in that they use spatial
units of analysis, the same methodology and the same dependent variable. So
it is useful to ask what if any similarities there are in the two studies and what
the differences are.
The similarities include:

Methodologies are the same

Endogenous growth measure is the same
There is a relatively small number of independent variables
Statistically significant variables include: population size; population
change; human capital level; industrial structure; occupation (and entre-
preneurship in the US study)
Explanatory power of the significant variables varies between the two
studies and among the disaggregation levels (states in Australia: metro
size categories in the US study).

The differences are:

Different units of analysis scale issues

Australian study exploratory in nature; US study theory driven
Some of the institutional and entrepreneurship variables in the US study
are significant correlates of endogenous growth
Spatial autocorrelation was tested in the Australian case and found to be
modest; not in the US study as the spatial units are not contiguous
US study used a three-year time span for calculations but some insti-
tutional and entrepreneurship variables are likely to have long lag
effects, not ones that are likely to be detected over three or four years.

This book has outlined a new approach to examine the processes of endoge-
nous growth and how regional development may be influenced by, and facili-
tated through, leadership, institutional factors and entrepreneurship as
132 Leadership and institutions in regional endogenous development

intervening variables which, it is hypothesized, may have a catalytic effect on

the endogenous growth processes, but which also account for local resource
endowments and factors relating to the market fit of a region. A new model
framework was proposed to conceptualize the interaction of those endogenous
In the chapters in Part II, a range of case studies of cities and regions from
around the world the US, Europe and the Pacific Rim were examined to
ascertain the nature and significance of leadership, institutional factors and
entrepreneurship in the way those places have responded to the challenges
they faced which had, in most cases, severely and negatively impacted the
performance of once successful regions. Those case studies demonstrated the
importance of those endogenous factors as having had a catalytic effect on
regional growth and development and the rejuvenation of some of those cities
and regions, but where those endogenous forces were lacking or inappropriate,
then the outcome for the city or region was less than desirable and certainly
In this chapter we have shown how an operational model to measure
endogenous regional growth and development might be formulated, with the
suggestion of potential variables that might be used for the independent and
intervening components that might explain differences in the level of perfor-
mance of a city or region or of the dependent endogenous growth outcome
variable. Further, we summarized some results from initial attempts in
Australia and the US to operationalize this model of endogenous regional
growth. While the results are encouraging there still remain significant
measurement issues, especially of the leadership and institutional variables.
Significant and extended research will be required to develop this approach to
the level where it can be fully operationalized and in a way that evokes legit-
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collaborative approaches 56
Acs, Z. 11 Colorado 82, 85
adoption externalities 61 command and control models 56
agglomeration 28 Committee Grand Lille 978
agglomeration economies 26 community 104
agility 15 leadership 34, 53
Allegheny conference 75, 88 leadership, lack of 79
alliances 53, 57 comparative advantages 27
American Athletic Union (AAU) 87 competitive advantages 57, 71
Antwerp 109 of cities 48
Arrow, K. 8 competitive challenges 34
Arthur, B. 4 competitive performance 15
Audretsch, D. 4 competitive politics 79
Austin 79, 82 competitive position 26
Austin Venture 82 competitiveness arrangements 29
autocratic leadership 35 consensual politics 110
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Barro, R.J. 4 Constant Adaptation 109
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Bolton, R. 5960 councilmanager form of government 51
bond of trust 76 cross-party cooperation 91
bureaucracy 52 cross-sector collaboration 63
business environment 58 culture of cooperation 75
cyclical effects 128
capital accumulation 46 Cyert, R.M. 26, 86
capital stock 4
Carnegie Mellon University 76 De Santis, M. 26, 34
Castells, M. 10 decentralization of power 49, 53
catalytic 32 decision-making groups 53
catalyzed 71 democratic leadership 35
change agents 125 Development Report Card for the State
Channel Tunnel 97 83
Chihuahua 11819 disequilibrating contingencies 71
Chihuahua Siglo XXI 11920 dynamic interrelationships 22
civic leadership 64
clusters 121 East Germany 99
collaboration 33, 41, 56 economic development 39
collaborative action 32 economic development strategy 65

148 Leadership and institutions in regional endogenous development

economic environment 115 German Democratic Republic 99

economic growth 4, 46 globalization 3031
economic performance 47 governance 44, 523
Economic Promotion Law 120 government 44
economic revival 97 Granovetter, M. 60
economic specialization 27 Great Depression 77
economic structure 24 great person theory 35
economic sustainability 64 Greater Baltimore Committee (GBC) 89
economic systems 66 Greater Indianapolis Progress Committee
educational institutions 103 (GIPC) 868
effective institutions 31 group value model 36
efficiently 21 Guandong 115
elites 77
endogenous assets 98 Hall, P. 10
endogenous deficiencies 30 HarrodDomar (HD) growth model 5
endogenous factors 29, 43 heroic leader 37
endogenous growth 126 hierarchical authority 42
endogenous growth conditions 8 High, J. 39
endogenous growth theory 14 Hirschman, A. 7, 60
endogenous regional growth 129, 132 history of cooperation 75
endogenous resource endowments 30 Hofstede, G. 34, 42, 54
entrepreneurial 65 home rule 54
activity 24 Honeysuckle redevelopment 113
characteristics 70 Hong Kong 11415
effect 39 Houston 778
spirit 81 Houston Economic Development
entrepreneurialism 42 Corporation 78
entrepreneurs 39 Houstons economic development 78
entrepreneurship 1, 2, 212, 256, 65, Hudnut, W. 88
68, 71, 114, 120, 128 human capital 14, 26
environmental protection 99 Hunter region 112
environmental quality 24 Hyatt Hotel 91
environmental technologies 98
equilibrium 7, 66 ICTs 30
European Commission 84 implement strategy plans 121
European Union 108 Indiana 85
exogenous forces 31, 61 industrial image 113
industrialists 107
factors of production 25 ineffective institutions 26
Finland 101 information infrastructure 59
Finlands State Airplane Factory 104 infrastructure 14, 568
Finlayson 102 innovation and flexibility 109
Florida, R. 12 institutional arrangements 70
Freeman, C. 6 institutional capacity 45
Freiberg 98100 institutional change 1
Freville, Y. 95 institutional considerations 63
Fujian 115 institutional decentralization 49
Fukuyama, F. 60, 62 institutional infrastructure 59, 68
institutional norms 11
generalized reciprocity 60 institutional thickness 467, 53
Index 149

institutions 14, 24, 43, 45, 127 mini-dragon economies 116

intelligent transportation systems 58 mini-sectoral analysis 123
intergovernmental agreements 50 modern weak government 77
internalizing externalities 61 mutual awareness 53
internationalization of capital 30 Myrdal, G. 7

Johansson, B. 8, 11, 278 natural resources 25

jurisdictional fragmentation 63 Nelson, R.R. 4
neoclassical production function 6
Karlsson, C. 8, 1112, 278 Netherlands 108
Kirzner, I.M. 67, 69 network-augmenting capital 61
knowledge-based 11 networks 578
Kop van Zuid project 111 networks and alliances 14
Kozmetsky, G. 80 new economy 33
Krugman, P. 10, 27, 29 new growth theory 14
new model framework for regional
laissez-faire leadership 35 endogenous development 23
leadermember exchange theory 36 New South Wales 112
leadership 1, 14, 19, 24, 26, 65, 69, 110, Newcastle 112
127 newly industrialized countries 10
definitions 33 NGOs 27
enlightened 31 niche manufacturing 83
leadership-driven economic nonpartisan 79
development 72 nonprofit sector 756
learning agents 14 North Rhine-Westphalia 85
learning infrastructure 45, 56, 59 North, D. 45
Lille 96, 98
Lilly foundation 86 Ohmae, K., 13
Liverpool 92, 94 oil recession 77
city council 93 open door policy 115
local business elites 48 opportunity economy 80
local governance 48 organizational culture 54
Local Government Areas 129
Location Quotients 127 Pacific Rim 132
location-specific advantages 71 partnerships 53, 56
loyalty 6061 Perroux, F. 7
Lucas, R.E. 66 Philips Curve 66
Lugar, R. 88 Pittsburgh 75
place prosperity 61
Malecki, E. 2 place surplus 5961
Maquiladora 118 place-based policies 61
market conditions 1, 21, 25 place-marketing 71
market fit 20, 122, 127 policy 13
market opportunities 21 political complexion 94
Marsh 26, 86 political leadership 76
mayorcouncil form of government 51 political restructuring 30
mediated 126 politics of consensus 75
Metropoles dEquilibre 97 polytechnics 107
Mexico 118 Porter, M. 10, 29, 62
Mid West 85 pragmatic politics 91
150 Leadership and institutions in regional endogenous development

pre-conditions 69 rule structures 44

primary catalyst 69 rules of the game 45
production functions 4
public and private sectors 76 Salazar, M. 20
public entrepreneur 64 Saxenian, A. 8, 34, 40, 42
public interest model 55 scale issues 131
public policy 57 scale-based 31
publicprivate partnerships 50, 81, 84, Schumpeter, J.A. 39, 66
109 scientific research capabilities 95
Putnam, R. 62 sector markets 123
self-categorization theory 36
qualitative 3 Sematech 81
quantitative 3 sense of place 61
shared power 41
R&D 10, 11 shiftshare analysis 22, 126, 128
Randstad 85, 108 significant variables 131
Rechtsstart model 55 Silicon Valley 11
reconstruction 97 Singapore 116
Rees, J. 10 slack institutional resources 26
regeneration 76, 97 smart infrastructure 56
regional competitiveness performance SMEs 100
cube (RCPC) 212, 30, 35, social atmosphere 47
1223, 125 social capital 59
RCPC hyper cube 20 social capital development 61
regional development strategies 29 social composition 24
regional economic development 2, social equity 24
63 social networks 52, 60
regional economic development strategy socio-emotional leaders 35
58 Solow production function 5
regional economic development strategy Solow, R. 5
planning 45 Soviet Union 104
regional gateway 71 spatial attachment 60
regional leadership 70 spatial scale 44
regional market size 31 spatial structure 7
regional performance 19 stakeholders 524, 56, 65
REM 20 steel industry 75
Renaissance I 76 stepwise regression analysis 129
Renaissance II 76 Stimson, R. 3, 9, 1214, 20, 22, 29, 41,
Renaissance III 76 57, 60, 62, 129
Rennes 94, 96 Stough, R. 8, 13, 20, 22, 257, 34, 42,
Research Triangle 11 59, 63, 88, 129
resource endowments 1, 20, 256, 31, strategic approach 1
122, 124, 126 strategic architecture 124
resource-based 31 strategic infrastructure 124
resources 27 strategic intent 124
response capability 15 strategic planning policies 117
reunification 115 sunbelt 78
role of institutions 45 sustainable development 19
Romer, P.M. 4, 8
Rotterdam 108, 110 Tampere 1013, 108
Index 151

task-oriented leaders 35 triple-bottom-line economic growth 24

technical progress 6 trust 41, 53, 61
Technical Research Centre of Finland Tsar 103
technological change 5 University of Pittsburgh 76
technological infrastructure 26 University of Technology, Tampere
technologically induced growth 79 105
technology 11
technology firms 76 values 55
technology-based city 80 Venture Capital and Entrepreneurial
The Hong Kong Advantage 115 Spirit 84
threat contingencies 72 virtuous circle 19
total factor productivity 47 voice 60, 61
tragedy of the commons 61
transaction costs 47, 53 Winters, S.G. 4
transactionalist theory 36 World War I 103