What is the Smart Specialization Strategy?

The Smart Specialization Strategy (S3) was conceptualized within the framework of the reformed EU Cohesion Policy regarding the development aspects of regions in EU member states. S3 is a territorially-based approach characterized by the identification of strategic priority fields with a high competitive advantage for a region or a country, requiring intervention from both central and local governments. The strategy is based on an analysis of regional economic strengths and potential, or in the case of smaller countries, national potential (as in the case of Albania). However, it is also based on an inclusive process known as the Entrepreneurial Discovery Process (EDP), which involves all stakeholders from the Quadruple Helix, including 1) Government (central and local), 2) Business, 3) Academia, and 4) Civil Society.

S3 provides a comprehensive situational analysis with a focus on innovation, encompassing but not limited to technological trends and advancements.

The Key Elements of the Smart Specialization Strategy (S3)

S3 is based on the following key principles:

- A place-based approach that relies on the assets and resources available in specific regions or countries, addressing their specific socio-economic challenges to identify unique opportunities for development and economic growth.

- Having a strategy means making choices for investments. The state and regions should support only a limited number of well-identified priority areas or clusters for knowledge-based investments.

- Specialization means focusing on strengths that offer competitive advantages and real growth potentials, supported by a critical mass of entrepreneurial activities and resources.

- Prioritization should not be a top-down process that dictates winners. Instead, it should be an inclusive process involving all stakeholders focused on discovering these priorities through the Quadruple Helix actors, using a bottom-up approach. It is an interactive process in which market forces and the private sector discover, identify, and provide information about new activities, while the government evaluates the results and empowers the most capable actors to realize their potential.

- S3 should encompass a broad view of innovation, including technological and practical as well as social innovation. This allows each region and country to tailor their development policies to their unique socio-economic conditions.

- A well-designed Smart Specialization Strategy should include a robust monitoring and evaluation system, as well as a review mechanism for updating strategic choices.

These elements should be clearly reflected in S3 documents and explained comprehensively.

Additionally, the reason S3 became a prerequisite (ex-ante) for EU countries for European Regional Development Fund (ERDF) investments in research and innovation was to ensure that ERDF funds a) align with the EU's overall research and innovation policy ("Characteristics of well-performing national and regional research and innovation systems"), b) complement existing national or regional-level financing and measures that are part of these policies, and c) support effective measures that provide incentives for private investments in research and innovation.

Determining Priorities in a Smart Specialization Strategy

A Smart Specialization Strategy (S3) should prioritize fields, areas, and economic activities where specific regions or the country as a whole have a competitive advantage. These priorities should also have the potential to generate knowledge-driven economic growth and bring about the necessary economic transformation to address key and urgent challenges for society, nature, and the environment. The number and nature of these priorities may vary from region to region. However, when drafting a Smart Specialization Strategy, a core group of priorities should be identified, which can be adjusted or modified as new information/developments make it advisable.

Priorities in S3 can be defined in terms of fields or knowledge areas (not only those based on science but also social, cultural, and creative ones), sub-sectors within a sector, or by dividing economic sectors that correspond to specific market areas, groups, technologies, or aspects of technology application for specific social, environmental, or citizen health and safety challenges (e.g., ICT aspects for aiding the elderly, solutions to reduce traffic congestion, innovative materials for eco-construction, etc.). While some regions or countries may prioritize one or more key technologies, others will focus on the implementation of such technologies for specific purposes or designated areas.

Social, organizational, market, and service innovation or practice-based innovation play an equally important role in the Smart Specialization Strategy as technological innovation supported by scientific research. This is particularly crucial for regions where the technological and scientific aspects are relatively weaker.

S3 encompasses not only radical innovation but also the exploitation of specific aspects, bringing innovation to traditional fields through the development and application of new business or organizational models, as well as adapting/exploiting innovations derived from knowledge and experience in these fields.

More often, the selection of specific economic priorities in fields, sectors, or activities should be complemented with horizontal measures. These aim to create appropriate framework conditions for entrepreneurship, supporting the functioning of all types of companies in both local and international markets, as well as fostering cooperation among these companies, groups of the same companies, or companies in cross-border regions.

The Meaning of the Concepts 'Niche' and 'Domain' in the Aspects of Smart Specialization Strategy

The expressions "niche" and "domain" in the context of smart specialization are closely related. In short, a niche product in a business environment is linked to a promising domain that is accompanied by knowledge and innovative ideas. This relationship is so close that both expressions are often used as synonyms.

In other words, the term "niche" (specific product) refers to the market, while "domain" refers to human knowledge (scientific, technological, practice-based, etc.). A niche product is a segment of the consumer market that is associated with specific products or services. It is usually defined by the profile of potential customers and their needs, and meeting these needs is the goal of the company to identify the corresponding niche product.

The word "niche" implicitly carries the connotation of a small part of the market where a company serving specific customer needs through targeted and differentiated products may be less exposed to global competition and has lower costs. Of course, like all markets, these niche products are subject to change and require continuous innovation and efforts from the companies operating in them.

A specialization domain is a field of scientific research, development, or innovation characterized by specific knowledge. It can be defined in terms of skills, technology, or product functionality. The existence of a specialization domain is often a prerequisite for having the capacity to develop innovative products or services for specific markets.

A smart specialization field/area relates to the ability to effectively match knowledge domains with market potentials, possibly in the context of a specific market. Knowledge alone does not necessarily generate economic value reflected in GDP. On the other hand, products that have entered the market thanks to their development from limited knowledge cannot maintain their position in the market for a long time. They lose the battle to competition that is for undifferentiated goods, which are not niche products but fall into the category of "homogeneous" goods or products. Therefore, fields or sectors of smart specialization are often found at the intersection of sectors, technologies, or knowledge.

The methodology for drafting the Smart Specialization Strategy (S3)

The prioritization of a region or country within the framework of S3 (Smart Specialization Strategy) should be based on two fundamental processes:

1. An objective analysis of the current situation of the region/country concerning economic, scientific research, and innovation aspects, called a quantitative and qualitative analysis. This analysis includes existing infrastructure of industrial structures (including sector clustering and their position in the value chain), the level of skills and human capital (academic and others), expectations and requirements at the public and societal levels, public and private budgets for research and innovation, and the framework conditions for the functioning of innovation ecosystems. The analysis should take into account the economic context of the country or region to which the strategy belongs. Additionally, the strategy should examine the gaps, barriers, and potentials for future economic development in a knowledge-intensive perspective, including potentials that may require collaboration with innovation actors in other countries or regions. This involves using tools and methodologies to show what types of activities, sectors, or economic subsectors are most likely to succeed in a specific region or country based on local resources and an analysis of advantages and comparatives with other European and global competitors.

2. The Entrepreneurial Discovery Process (EDP)
EDP utilizes the knowledge of the entrepreneurial sector that exists in a region or country. This includes all entrepreneurial approaches in terms of market opportunity analysis, differentiation from others, risk-taking (and management), and identification of alliances to optimize access and use of resources, be they human, financial, intellectual, market-related, etc. This means that policymakers need to involve all types of actors, following the quadruple helix approach: 1) government, 2) academia, 3) business, and 4) civil society. Simple surveys among these actors are not sufficient. The essence of the EDP process lies in its interactive nature, bringing different actors together in a participatory process to jointly create fields or areas of smart specialization and develop an appropriate mix of policies to implement this approach.

Above all, the identification of smart specialization priorities cannot be considered a direct, one-time process whose result can be decided once and for all. Prioritization requires a certain degree of experimentation with new policy tools, ideally through pilot projects during the preparation and updating of the Smart Specialization Strategy. This, in turn, requires a strong governance system with sufficient policy support to take risks and accept failures from which lessons can be learned.

A key feature of S3 is its reliance on multi-stakeholder collaboration. This means that no single institution (such as the World Bank or consultants alone) can write such a strategy. S3 is about partnership and should be developed with the active involvement of multiple actors, including business companies, academic sector, civil society organizations, as well as national, regional, and local authorities. The exact nature of this partnership varies according to national and regional institutional structures.

The inclusion of entrepreneurs, defined broadly, is particularly important for S3 development. This phase of the process is called the Entrepreneurial Discovery Process (EDP) because entrepreneurs have more information and knowledge about what is likely to work in a particular location and with whom collaboration could be beneficial. This institutional capacity building process cannot happen overnight and needs to be reinforced through strategy development and implementation. Also, EDP can be described as a never-ending "journey" as it has no definite beginning or end. This is why aspects of S3 management need continuous monitoring, evaluation, and modification when necessary.

Risk, success, and failure in the context of Smart Specialization Strategy (S3)

The risk of failure is inherent to innovation, and this is fully acknowledged by the European Commission. However, how risk is managed can impact the success of S3. Before defining what is meant by success or failure, it is helpful to distinguish between the innovative activities of companies and the innovative measures of support providers, including public institutions. Business innovation, by definition, carries a higher risk than non-innovative activities, but when successful, it is likely to bring higher returns on investment, jobs, and growth. The use of innovative support measures also involves a certain level of risk, but it also has the potential to achieve better results.

Both types of innovation should be accompanied by appropriate risk mitigation or management. For example, concerning the possible failure of business innovation projects, the European Commission recommends coherent policy mix, such as combining advisory services with networking and clustering, as well as direct financial support. The European Commission also promotes the increased use of financial instruments that increase risk-sharing. Regarding reducing the risk of failure of public support mechanisms, the European Commission encourages experimentation and piloting. This may include pilot interventions that can later be discontinued or modified; this approach is valuable not only for innovative actions for sustainable urban development but for all innovation-related investments.

To determine whether there is success or not at the activity level, it is crucial to establish meaningful indicators, including a realistic time perspective. For instance, job growth due to business innovation may not materialize within the programmed period, and the use of this indicator may not be valid.

On the other hand, the development and testing of a prototype, new forms of value chain cooperation, or increased collaboration with research institutes may materialize over time and, for this reason, special indicators may be used. Setting and quantifying indicators should also take into account the level of risk and how innovative the measures to be supported by the proposed investment are.

The inclusion of activities or policies not related to EU funds in a Smart Specialization Strategy (S3)

This is anticipated in most cases. For example, the regulatory and administrative environment, including university funding, fiscal incentives, and supporting structures for research and innovation, as well as general government agreements or state institutions, can be crucial for the success of S3. However, these supplementary measures depend on the specific policies and institutional context of each country.

The appropriate administrative/geographic level for a Smart Specialization Strategy (S3) can vary depending on the national or regional context

This depends on the institutional and territorial architecture of each state, as well as the administrative level responsible for competencies in the field of research, technological development, and innovation. It is up to the states to decide what suits them best in light of their governance structures. Regarding an S3 at the national level, it is linked to the national strategy for research and innovation.

At the EU level, it is strongly recommended that authorities at the highest territorial level (NUTS I, II, or III) in terms of decision-making processes, such as the development of the S3, and the management of EU structural funds, register as members of the Smart Specialization Strategy Platform - the S3 Platform, which is managed by the Joint Research Centre (JRC) of the European Commission, based in Seville, Spain.

The role of science and business parks in the Smart Specialization Strategy (S3)

The guidelines of the European Commission emphasize the crucial role that all innovation actors should play in the process of shaping and implementing S3. Science and technology parks, as well as businesses, are essential actors to be included in the S3 management framework, and their contribution to the prioritization phase should be considered a key element in the process.

Furthermore, these parks contribute to other dimensions of S3: their management structures have experience in stimulating and managing knowledge and information flows among companies, universities, and entrepreneurs. They provide an environment that fosters a culture of innovation, creativity, and quality. They facilitate the creation of start-ups through incubation and spin-off mechanisms, accelerate the growth of small and medium-sized enterprises, and operate in a global network that brings together thousands of innovative companies and research institutions worldwide, facilitating the internationalization of local companies.

Moreover, companies located in science and business parks specialize in very specific activities in various sectors. This is why many times, when these companies collaborate with others, new products, services, or technologies are created through the combination of different activities and sectors. This process of intertwining activities and sectors (related diversification) is also one of the daily activities on the agenda of the management structures of these parks, and they can provide many examples of how they develop.

The Implementation of the Smart Specialization Strategy (S3): The Need for Information on Policy Coherence

A Smart Specialization Strategy (S3) should describe the coherence of policies (financed by the EU and other actors) that will be used for its implementation. Simple political visions and objectives are not sufficient. The measures described, in particular, should be appropriate to stimulate private investments in research and innovation. This means that the involvement of entrepreneurs in the development of individual support mechanisms and in the concept of the overall innovation support system is recommended. This system should include not only direct financial support for specific research and innovation projects but also collaboration platforms, support services, infrastructure, etc.