The Heart of Regional Economic Growth

Entrepreneurs are at the heart of economic growth. Yet too often the literature on economic growth ignores this in favour of an analysis of local systems and institutions. Important as these are, the primary focus of policy should be on how entrepreneurs and investors act within complex landscapes.

Increasingly, regional economic development focuses on the systems for growth. Regions have both comparative and competitive advantages affecting growth. As Michael Porter argued almost 30 years ago, comparative advantages are conferred on firms in a region through their physical proximity to markets and other uncontrollable factors of geography affecting costs. Many of the regions concerned with growth lack growth or have poor growth rates, typically because of the comparative disadvantages they face. However, competitive advantages can be created, not inherited, based in part on the mobilisation of local assets and resources. Such views reflected in the Australian national Framework for Regional Economic Development, which describes a set of “key determinants of long-term regional economic growth”.

These concepts, and the growing body of evidence surrounding them generated over the last few decades, has improved our understanding of how regional economic growth can be stimulated. However, the pendulum may have swung too far when the determinants of growth are considered.

While institutions and systems play a critical role, individual agency cannot be overlooked. This is the claim made by Ácsa, Autio and Szerb in a 2014 paper in Research Policy who argue that much of the literature on innovation and competitiveness focus on the innovation ecosystem, rather than the actions of the entrepreneur.

This is supported by Audretsch and Belitski who in the forthcoming issue of Journal of Technology Transfer argue that entrepreneurs are “at the heart of an ecosystem” where individual perceptions about the local context influence decision-making and entrepreneurial activity. They discuss the European Union’s Regional Entrepreneurship and Development Index, which examines a range of regional indicators.

Boiled down, these authors, and others, are unveiling the influences on the decisions of key economic actors. Innovation, investment and industry development arises as a result of entrepreneurial attitudes, abilities and aspirations embedded within a “multifaceted” and “multi-level” institutional context. These institutions and structures are complex. They are located within international, national and subnational contexts and are influenced by government and market systems. Within this, individuals choose to act––or not––based on social, cultural and attitudinal forces, as well as their own capacities and ambitions. Thus, the interaction between entrepreneurs and systems has a marked influence on the regional prospects for growth.

These entrepreneurs are not simply captains of local industry. While the local industrial sector provides a basis on which new development can grow, it is a diverse mix of small and large business owners, well-established incumbents and clusters of SMEs, and emerging new start-ups along strategic value chains on which entrepreneurial and innovation-led growth will spring. They will be women and men, old and young, experienced and wise, ambitious and energetic, with a strong asset base or with no assets at all. This diverse community requires a policy and institutional framework that opens up opportunities, encourages risk taking and promotes strategic investments. Inclusive approaches recognise the complex nature of the entrepreneurial process and broaden the scope of engagement with regional economic actors. They go beyond regional planning and industry strategies to encompass entrepreneurship promotion and high-growth SME development, while intersecting with improvements to regional labour markets, vocational skills development, education and training, R&D, and social safety nets.

The pulse of the regional economy spreads out through investor and entrepreneurial actions as they respond to government and market systems, transforming the region’s capacity for growth. The results of these actions are measured in terms of growth, employment and quality of life. While they are not uniform or entirely predictable, they are shaped by the backgrounds, attitudes, ambitions, skills, and abilities of a diverse community. Successful regional economic growth is the result of constantly monitoring these multiple connections and adjusting where necessary so economic actors can act in ways that boost regional confidence, capacity and opportunity.