Intro
The first plenary session of the Summit was the traditional presentation and the official launch of the State of the Region Report 2006 (SoRR). This is only the third time the SoRR is produced, but it has already become an important source of knowledge and understanding of the trends and factors that determine where the BSR is heading. The report was prepared for the Baltic Development Forum (BDF) with the financial support of two dedicated partners of the BDF and the BSR, namely the Nordic Council of Ministers (NCM) and the Nordic Investment Bank (NIB).
Main Messages
• Even though the BSR remains one of the most competitive locations in the world economy, others are catching up and there are regions outside of Europe that need to be looked at for inspiration. (Christian Ketels)
• There are a lot of regional initiatives on improving competitiveness, but the BSR needs to make sure to become strategic and more integrated about what to do next and communicate these steps through open dialogue. (Christian Ketels)
• The BSR is in need of risk capital, and the broadening of markets for seed and venture capital is most essential to work on. Also, significantly more investments in physical as well as in social infrastructure are needed. (Nils E. Emilsson)
• The ranking of BSR universities in the global context is not satisfactory and therefore it is important to identify, create and develop new ways of achieving global leadership in knowledge creation. (Christian Ketels and Per Unckel)
• The overall assessment of the SoRR 2006 was that while the BSR is a prime beneficiary of globalization, the wind that was pushing it forward is not going to blow as strongly as it has in the past. (Christian Ketels)
Themes
The State of the Region Report and its role
In the past three years the SoRR has become the key information source in the BSR and earned a reputation as the main benchmarking tool in the Region. It is not only an essential instrument for developing strategic actions for the Region’s 11 countries, but it is increasingly becoming a useful tool to profile the BSR externally, stated Director of Baltic Development Forum, Ole Frijs-Madsen, in his opening speech. This is especially important when identifying reasons for investors to move into our Region, he added.
Secretary General of the Nordic Council of Ministers, Per Unckel, argued that the SoRR plays an even bigger role in defining what we are not good at in our Region, thereby guiding policy makers to focus on and improve the right areas.
NIB’s Executive Vice President, Nils E. Emilsson pointed out that one of the most important factors of financial character that the SoRR describes is the significant need for risk capital in the entire Region. Mr. Emilsson stated that the broadening of markets for seed and venture capital is most essential to work on. He emphasised that there is a general need for investment in infrastructure of physical as well as of social character, not to mention the increasing need of developing better energy infrastructure in the Region.
Context of competition
Author of the SoRR, Principal Associate of Harvard Business School, Christian Ketels, pointed out that there are a number of external factors the BSR needs to deal with when competing in the global economy. Location is one of the less beneficial factors for the Region. As the BSR is located in the periphery of Europe and is not a huge market, it is difficult to attract investors. In fact, according to Christian Ketels, the BSR needs to create reasons for the global economy to move into its areas. He stressed that the Region needs to become active to earn its place in the global economy.
Ketels highlighted that globalization has not only created challenges, but also a number of opportunities for the BSR. In fact, globalization has led to significantly larger markets, which can be served by regions like the BSR. It has also made the production of goods and services more efficient by allowing relocation where these processes are executed most effectively. To take advantage of these opportunities it is increasingly important for the BSR to develop and improve its unique profile of clusters as well as business conditions, Ketels explained.
This is especially crucial in the present global competition, which itself is changing. While in the past we competed in terms of our exports, today globalization has changed the nature of this competition. Regional economies are more and more exposed to the comparison with business environment conditions in other locations. “If you are not up to speed, you don’t only lose your exports but also your economic activities, as they might relocate to other parts of the world”, Ketels stressed. The new conditions mean that many regions are becoming more vulnerable. Ketels also pointed out that “at the same time, doing the right things means that you are really able to serve the growing global demand from your location, given that you have something unique.”
The SoRR argued that the BSR has been in an advantageous position, as it has some of the factors that are lacking in many other regions of the world, among others, a highly-skilled labour force and stable institutions. Furthermore, the BSR has many multinational companies that have established linkages to foreign markets and are becoming true beneficiaries of globalization.
Current Competitiveness of BSR
Ketels pointed out that the global position of the BSR is still good, but other countries are catching up. There have been strong global demands recently, especially from the U.S, but relying on that is risky. It is crucial for the BSR to prepare for less favorable conditions in case global demand patterns change, he explained.
The BSR is especially strong in terms of prosperity and prosperity generation, and it continues to be the strongest region in Europe and in the world in this context. However, the Region is performing weakly in terms of investment levels and investment attraction as well as in terms of export position, Ketels stressed. Despite these shortcomings, figures in the SoRR show that there is no other region in the world that is both richer and growing faster than the BSR.
Ketels also emphasised that the prosperity of the BSR countries is either driven by productivity or employment. There are only two regions that outperform the BSR on these two dimensions; the NAFTA and Oceania regions. Based on these facts “we are not on top of the world, but the top of Europe on these dimensions” he said.
The SoRR showed that in the past years the BSR’s world market share has hardly changed. It has had strong growth in exports, but the position has not been strengthened over time.
In terms of FDI inflows, the Region is not performing satisfactorily. During 2000 the BSR out-competed all other regions of the world, but since then it has moved into a negative zone. This must be taken up on the regional agenda, Ketels stressed.
In terms of knowledge-creation, the BSR is one of the world’s best performers. Although patenting rates have been moving backwards, the BSR is still well-placed in the world economy. If we look at the absolute number of the Region’s universities among the top ranked universities of the world, the BSR is in a decent position, Ketels said. However, the highest number in the rankings is 45, which is far from enough if the Region aims at competing as a knowledge centre. Therefore, “we must look at ways of how we can achieve global leadership in knowledge creation” Ketels emphasised.
In terms of overall competitiveness, the Region has a stable and strong position globally, and, according to the SoRR, there is a fairly strong base to build on. Dynamism (the ability of improving competitiveness over time), however, is not as positive as expected, Ketels stated. This is a factor that must be upgraded in order to move forward in the global competition.
Furthermore, some rules and regulation seem to hinder investors to move into BSR markets, such as lack of protection of investors, or the high taxes in Nordic countries etc. Improving rules and regulations is not a time-consuming process, but can only occur with political will and support.
The BSR has one of the highest innovative capacity levels of the world. However, policies about entrepreneurship and innovation are not quite as strong as in other parts of the world and need therefore be developed, Ketels advised.
In terms of the Lisbon strategy, we are still the leading regions in Europe, although one shortcoming in this respect is the lack of regional perspective in the national Lisbon agenda strategy papers, which Ketels suggested to work more actively on in the future.
Current Policies in the BSR
“What are we actually doing in this region to make sure that we are staying competitive today and in the future?” Ketels asked. There are a lot of initiatives in place and the SoRR proved that there is a clear indication that the Region has made the move to the next stage of BSR integration. General business environment upgrading is essential in the Region and already many efforts have been seen to set up public equity funds and seed fund instruments. “This is what we have to continue doing in order to get more entrepreneurship”, Ketels stressed. Another important issue is to create new platforms for open dialogue between the private and public sectors about competitiveness upgrading and how to organize it. The Danish example of the Globalization Council has showed how to move dialogue outside of political circles and have initiated a public debate about how globalization has changed the way economies are competing in the world, Ketels pointed out. In terms of innovation, there are positive developments, especially as Poland and the Baltic countries have had a remarkable shift in trying to improve their innovative capacity. In the area of cluster policies a lot is happening in the BSR. The EU is getting fully behind cluster initiatives and hopefully the BSR can play a role in moving this forward, Ketels said. The branding initiatives in the BSR must continue as creating an identity for our location is increasingly important in the global economy. The BSR needs to send a clear message and cannot afford to be passive any longer. The SoRR states that Russia continues to be a great opportunity for the BSR. However, Russia’s political system is complex and from looking at the Russian economy, there is a need for massive restructuring of the way companies look like, stressed Ketels. It is clear that the major political dialogues will be on EU-Moscow level, but the BSR should continue to cooperate on smaller projects that already exist, thereby further developing the integration of Russia into the BSR. Companies from the Region should think of what they can do for long term prosperity of the Russian region they are operating in, besides pure profit-earning objectives, suggested Ketels.
Based on Christian Ketels’ overall assessment, it is clear that despite all the challenges the BSR is facing, the Region has already come a long way. He stressed that “we are prime beneficiaries of globalization, but the wind that was pushing us forward is not going to blow as strongly as it did in the past.”
