The Red Dragon and the Three Pacing Black Lions

In an increasingly globalised world, economies are confronted with a plethora of issues. In the past, the economic growth and the competitiveness of nations was based on the quantity and quality of the traditional factors of production such as land, labour and capital. In the Western world, however, land is becoming ever more scarce. Furthermore, labour is comparatively more expensive in the West than in the rest of the world, and the Western population is increasingly becoming older. In addition, capital is no longer bound geographically as a result of liberal financial markets, leading to the free flow of capital. The economies of the Western world would have to rely on something else than purely the three traditional factors of production in order for their economies to grow and stay competitive. Thus, it has been proposed to extend the original three factors of production by what Austrian American economist Joseph Schumpeter calls ‘technological advancements’, which are essentially innovations. These innovations secure economic growth, prosperity and economic success.

When we compared Wales’s and Baden-Württemberg’s economic success i.e. economic performance on the basis of  conventional economic indicators such as unemployment rate, activity rate, gross domestic product per capita, net migration and health, it became apparent that Baden-Württemberg has a significantly better economic performance than Wales. We further established that Baden-Württemberg is the more innovative region, bearing out Schumpeter’s prognosis. This poses the question: why is Wales less innovative?

The nature of the innovation process has changed, as the process itself has evolved over time. In the past, sole individuals drove innovations. Their inventions were products of chance or luck and did not follow a systematic manner. Nowadays, however, as the most lucrative innovations are based on tacit knowledge, the innovation process has become increasingly more complex, as the exploitation of tacit knowledge requires collaborations.

In our research both theory and empirical data came to the conclusion that due to a lack of ‘institutional thickness’, Wales possesses an ‘institutional’ innovation system, whilst Baden-Württemberg possesses an ‘entrepreneurial’ innovation system that possesses an ‘Associational Economy’ due to an abundance of ‘institutional thickness’. We went on to consider the question of whether Wales can develop an ‘entrepreneurial’ innovation system akin to the one of  Baden-Württemberg.

According to the data collected, the reason for the lack of an ‘institutional thickness’ is the fact that contrary to Baden-Württemberg, Wales’s industry seems to face a mountain of obstacles.

In the period spanning from the mid-19th century to the post-war era, the main industries in Wales revolved around coal, iron and steel. In the mid-1970s, however, the Welsh economy went through major changes, leading to the demise of these industries. During the period between the 1980s and 1990s policymakers tried to strengthen the Welsh industrial base by attracting inward investment on a large scale. However, this exogenous economic development approach did not yield the desired results.

From the mid-1990s onwards, the devolved government then tried to boost the Welsh industrial base by opting for a more endogenous economic development approach, which purpose was to foster local entrepreneurship and indigenous SMEs. As things stand today, this approach has not been significantly more successful, as Wales’s industrial base remains relatively weak. What our research has brought to light is that politics mainly is to blame for this state of affairs.

There is unanimity from all – the public sector, academia and the Welsh government – that the Welsh Government’s decision to subsume the Welsh Development Agency was both ill-thought as well as ill-timed. It has been contended that the existing policy infrastructure in Wales that had existed within the Welsh Development Agency disappeared, leading to a ‘policy flux’. This implies that the policy-making process in Wales therefore started to be inconsistent.

In this context, it has been argued that due to electoral politics most politicians in the Welsh  Government pursue vested interests by promoting populist policies. In addition, a further shortcoming has been pointed out, namely that Welsh research institutions and the Welsh industry are too often excluded from the policy-making process with regard to innovation. This has led to a situation where numerous subjective policies are continuously implemented, which are not entirely consistent with each other. This in turn has been detrimental to the establishment of the required ‘institutional thickness’, as long-term and sustainable policies that would actually try to achieve ‘institutional thickness’ are not pursued.

It should be mentioned that our research has established two promising long-term and sustainable policies that might be able to strengthen the industrial base in Wales, fostering the development of ‘institutional thickness’. These are the ‘High-Impact Entrepreneurs’ policy and the ‘Linkage’ policy.

The ‘High-Impact Entrepreneurs’ policy would consider ‘soft landing zones’ that would reduce the bureaucracy for entrepreneurs coming into Wales. In addition, the policy would aim at establishing a vibrant creative culture in Wales, one that would be able to attract the technical, IT and science-focused individuals that are most likely to establish knowledge intensive and high growth SMEs.

The ‘Linkage’ policy on the other hand would focus on building cross-regional bridges. Through these, Wales would be able to tap into the growth field knowledge of other regions. This would have two significant advantages. First, Wales’s traditionally strong sectors would be able be commercialise this new knowledge in order to stay competitive. Second, the new knowledge gained could be used to establish new sectors and new types of activities thus increasing the overall competitiveness of Wales.

However, as outlined above, the development of ‘institutional thickness’ required for an ‘Associational Economy’ is hampered by a political impasse. It follows that it would be an uphill battle to develop an ‘entrepreneurial’ innovation system akin to the one of Baden-Würrtemberg in Wales. As long as economic development in Wales is a held hostage to Welsh politics, the establishment of such an innovation system in Wales will be what we call breuddwyd gwrach – Wishful thinking.