| Dynamic Determining Factors |
|Factors (parameters) determining the dynamics of rural regions in the Baltic Sea area|
|Although the rural regions in the Baltic Sea area have much in common they differ very much in economic and social development, which presumably is due to the fact that the development of a given region is determined by a multitude of parameters (factors). Some of these are nature given and static, some are regulated by the EU Commission and some by the national state. |
In reality, local authorities only have influence on few of the determining factors, and the key to success for a given region is to make optimal use of the positive non-changeable (by the local authorities) factors and to eliminate or reduce the effect of the negative factors through introduction of carefully selected region-specific incentives.
|Nature given factors|
Natural water resources
Common agricultural Policy and environmental policy
|Variable factors (parameters)|
R&D and technological development
Consumer preferences – market structure
Change in relative prices
Availability and cost of capital
Availability and cost of labour
Quality of life
Access to medical care
Cost of living
|Nature given factors|
The Baltic Sea regions cover a vast area, and some of the regions are very remote. The climate varies considerably; from arctic climate in the north to temperate climate in the south. As illustration: The growth period (number of days with an average temperature above +5 C) varies within Sweden alone from 160 days in Ôvre Norrlands coast areas to 230 days in Skåne in the south of Sweden. The climate puts natural limitations on the variety of crops that can be grown.
(Energiskog, Statens Energiverk, 1985.9)
The circumpolar areas hold about 50 % of the land in Sweden and Finland, but only approximately 15 % of the population and a very limited area of agricultural land. The climate in these areas is severe and the weather unpredictable making farming difficult.
On the other hand agriculture in the Northern part of the Baltic Sea/Botnia Bay has a few advantages such as good light conditions and an extremely long ”daylight” during the summer period. Furthermore, plant diseases and pests are rare, and thus the need for pesticides is modest.
The slow growth might favour the formation of secondary plant metabolites indicating that this climate might be suited for production of speciality crops containing biological active materials (e.g. molecular farming page xx). It is well known that e.g. the aromatic quality of fruits and berries from these areas is superior to those from warmer climates.
In the other parts of the Baltic Sea area the weather is more ideal for agricultural production, and most of the common crops in Europe can be grown in these regions. (see pagexx)
Many of the regions in the Baltic Sea area are far from big cities and markets, which often is one of the major barriers for economic performance in a given region (see page xx).There thus seems to be a fairly straightforward relationship between economic performance and accessibility to transport infrastructure – motorways, railways and airports.
However the new information and communication technologies can make a decisive contribution to reducing the relative disadvantage arising from the physical distance from the important markets and more populated areas. ( examples: The Baltic States, Bornholm,page x.x and x).
Both Sweden and Finland have shown that the establishment of research centres and universities in remote regions can have a considerable positive effect on the economic development of these regions (Gotland page. x, Umeå, page y and Oulu page z) .
Half of the countries represented in Basan are members of The European Union, and the other half will most likely join the EU within a short period of time. It is therefore relevant to analyse the potential impact of the EU policies on the rural development in the Baltic Sea area.
The Common Agricultural Policy
The Agricultural Council is currently in the process of a revision of the Common Agricultural Policy. The new priority given to rural policy (the second pillar of CAP) means giving higher priority to the demands of citizens and society for market orientation with specific focus on food safety and quality.
The orientation of the agricultural production towards higher quality standards as demanded by consumers that are more and more concerned with animal welfare, environmental standards etc. will force farmers and rural based industries in the Baltic Sea area to adapt their activities. This may include new products of increased value added (page xx), more efficient techniques and also diversification of activities. This adaptation may lead to a further specialisation of rural economies. In certain “marginal regions” in the Baltic Sea region it might entail the risk of abandoning economic activities if no action is taken. In chapter x recommendations for actions to be initiated in such regions are given.
With its initiative “Innovation in a knowledge driven economy” the Commission laid down the framework for a series of actions and put forward recommendations to Member States. These initiatives are general and no distinction is made between the individual sectors of industry. These general conditions for innovation are naturally also of significance for the agricultural and food sectors.
EU Structural Funds
It is expected that major changes of the Structural Funds will come into effect after 2006. The impact on the rural regions in the Baltic Sea area will be important for the development of the area.
The European Social Fund(one of the three Structural Funds) supports and complements the efforts of member states to combat unemployment, develop labour markets and human resources. The Fund offers educational opportunities to the unemployed.
These Funds are of great significance for regional development. They are, however, complementary and require co-operation with governments and regional authorities.
On the research level the new 6th Framework Programme on Research, Technological Development and Demonstration 2000-2006 will give higher priority to cross-sectoral issues such as food safety research. Importance is also given to networking and formation of a European research area.
Impact of global environmental agreements.
The EU is part to the United Nations Framework Convention on Climate Change and it ratified the Kyoto Protocol on 31 may 2002. The EU committed itself to reduce emission of greenhouse gases by 8 % in the period of 2008-2012 relative to that of 1990.
One major contribution to the achievement of this goal would be to increase the use of both solid and liquid biofuels as substitutes for fossil fuels. In the Baltic Sea area an enormous reserve of land that might be used to produce large amounts of biomass for energy production. (see pages x and y) is available.
The EU is also contracting party to the United Nations convention on Biological diversity (CBD) and adopted in 1998 a EU biodiversity strategy with a specific action plan on agriculture with the objective of halting biodiversity decline by 2010.
This strategy involves a.o. a shift towards production of non-traditional crops (food and non-food), which also is one of the recommendations set up for the establishment of new activities in the Baltic Sea areas (page xx)
When investors are considering suitable sites for establishment of new productions, they will naturally take the infrastructure in a given region into consideration. Access to railroads, motorways, and airports are important, but also access to cheap energy (electricity and heat) and process water may play an important role. (see page x).
Innovation incentives- best practise
The experience from our work in the Basan network have revealed that although incentives may share similar aims and target similar activities, comparing separate measures, which are introduced in line with regional priorities has turned out to be an extremely difficult task.
Identifying one “best practise” scheme, applicable for all Baltic Sea regions, seems to be hard to achieve. The differences between the Baltic Sea regions are simply too large. An incentive that works well in one region may prove impossible or difficult to implement in another. It is possible, however, to identify some incentives applicable to all regions., especially fiscal and financial incentives. (page xx)
Tax incentives may be used to stimulate increased expenditure across a wide range of innovation activities – allowing companies to decide their priorities, whilst financial incentives are more likely to be concentrated on specific government identified priorities.
It is common praxis in most of the Baltic Countries to allow for a tax reduction on R&D expenditure. R&D is however only one link in the innovation chain, and tax incentive schemes for establishing of new activities would presumably be much more effective, if all links in the innovation chain are included.
Especially less favoured regions with no local access to know how (no local research centres or universities) a tax incentive on technology transfer (including tax credits on acquisition of patents) and acquisition of new technology (e.g. information technology) could be a very valuable incentive.
Equally important for those regions may be tax incentives on co-operation between companies and universities and research centres. Expenditures that arise in projects due to collaboration with research centres outside the region should be partially or totally reducible, including grants for university students.
Providing tax incentives for patent applications and protection may seem relatively insignificant compared to the total development cost for a given new process or product. On the other hand it is important that small companies have incentives to protect their ideas.
One main barrier for technological development in many of the regions seems to be the lack of skilled personnel. Therefore training of key personnel can be vital for the survival of new companies. Tax credit schemes that support both the training of personnel and allow for income tax reduction for foreign specialists with research experience are therefore important. Such schemes already exist in Sweden and Denmark.
A tax incentive tool used in some countries (e.g. USA; Illinois Institute for Rural Affairs, Rural Research Report vol.8, issue 9, 1997) is the designation of specific areas as enterprise or empowerment zones. Such zones can specifically encourage investment and create jobs in less favoured areas. The most frequently offered incentives in enterprise zones are income tax credits, property tax rebates and sales tax rebates. In the enterprise zones the community should also play a role in helping to improve the social and community services within the area.
Establishment of enterprise zones in the Baltic Sea area may be the incentive needed for growth also in the most remote and less favoured regions.
|A tax exemption or –reduction on biofuels could be very important instrument in boosting the activities in the remote Baltic Sea regions (see page xx). Most of these regions produce considerable quantities of biomass ( lignocellulosic) and they have the capacity to increase production of cereals and oilcrops.|
Such raw-materials may be used for production of liquid biofuels such as bioethanol and biodiesel. With the current fossil oil prices and a tax reduction on biofuels, these could become highly competitive, and the potential market is very large. Biofuel production units could thus become the “locomotives” that can trigger a dynamic development in rural areas lagging behind.
Likewise a tax reduction for biodegradable packaging materials that most often are made from biological raw materials (page xx), could be a decisive incentive for establishment of productions in rural areas with easy access to good-quality raw materials.
Financial incentives concerning new business activities are available in most countries in the form of grants, subsidies, low interest loans etc.
Financial innovation incentives may be more popular than tax incentives by governments and regional authorities, as they are easier to control – in term of expenditure – and may be focused on sectors the authorities consider to be priority sectors.
It seems, however, that the authorities in the Baltic Sea region do not put agriculture and food and agro-industral innovation projects high on their priority list. It seems much easier to achieve funds for the biotech and the information technology area (and in some regions tourism), as these in all Baltic countries are perceived as high growth areas.
The discussions at the regional meetings have indicated that a general lack of access to finance is a major constraint for the establishment of agro-industrial SME’s (both food and non-food). Especially seed capital and start up capital are needed.
Direct equity investment, as is used in the USA with great success (page xx) would also be very valuable.
Furthermore indirect financial support such as loans and equity guarantees have proved to be useful instruments, however again it seems difficult to obtain such support in the agro-industrial area. (page xx).
R&D and technological development
How do the Baltic Sea farmers and agro-industries get access to the Worlds flow of new agricultural technology?
Know how transfer via private companies
Often discussion about technical change in agriculture and agro-industries is focused on public research and extension services. However a number of studies have shown that private input companies (both local companies and equipment suppliers) can also be important channels for the introduction of technology in the agricultural sector.(page xx). Regulatory reforms reducing obstacles to the introduction of new agricultural technology stimulate technology transfer and have a significant net positive effect on productivity and income.
Research centres and universities
The major supply of knowledge on new technologies will come from local research centres and universities, and numerous studies have shown that access to knowledge centres is of considerable importance for the dynamics of a region ( page xx). The knowledge centres do not only create new knowledge, they also have the capacity to absorb new knowledge from other parts of the World and in co-operation with local entrepreneurs make use of this knowledge to create new business opportunities.
Unfortunately many of the remote regions of the Baltic Sea area are situated far from knowledge centres, and lack of access to new knowledge is one of the major obstacles for a dynamic development.
Networks – also involving investors, professional intermediates and others – are needed to establish the complex connections by which knowledge is efficiently transferred from the rest of the World to the Baltic Sea area and from research to industry.
It might thus be feasible to establish a Baltic Sea scout unit (page xx) and a Baltic Sea virtual R& D Centre (page xx) eventually with a joint secretariat.
The prevailing farm structure in a given region has impact on the potentials for new activities. Farms in the Baltic Sea area vary considerably both in size and in the level of technological development. In the Baltic Sea area both highly mechanised farms and farms with no access to modern equipment exist. And some farms, e.g. in Germany and Poland are very large while other farms, e.g. in the Baltic countries and in Poland, are extremely small.(see country reports and page xx). Thus the farm size varies from up to 1000 ha to less than 2 ha. (Country reports) in the Baltic Sea regions.
It is thus obvious that it is not possible to establish one common innovation policy for all rural areas. We have come to the conclusion that it is necessary to distinguish between at least two dimensions in future rural innovation and development activities: (page x).
Agri-production: A rational and sustainable agri-production and agro-industrial production that is viable with a minimum of subvention.
Agri-culture: A multifaceted very diversified small-scale production of region- specific products.
The two dimensions are different in nature and they have different incentive requirements and innovation demands.(page x)
|Market structures- consumer preferences|
Many of the Baltic Sea farmers have for many years been relying on local markets, and their survival has been dependant on these markets. However the ongoing globalisation of the food supply system may affect these markets considerably with increasing competition from imported food products.(see country reports)
While the more prosperous agricultural areas are likely to respond positively to increasing market orientation and international competition, peripheral rural areas ( like many of the Baltic Sea areas) continue to face problems like unfavourable farm structures, low income, an ageing population, out-migration and relative isolation from major centres of economic activity, unless proper actions are taken. High levels of subsidy and traditional rural development programmes will presumably not be enough to change the stagnation or even negative development (see page x). New actions made to measure the problems in the individual regions must be taken.
It is our suggestion that such actions should follow two directions:
Encourage the development of geographical dispersed clusters of small- scale local “agri-culture” oriented value added productions and services based on local traditions.(page x). Central know how accumulation and marketing of the products internationally
Encourage the establishment of large “agri-production” oriented “agro-industrial “locomotives with a positive impact on the entire region.(page x)
Agri-culture oriented quality products and services
Local value added production is normally associated with local input, local labour and local distributors. The size of the local market determines the production size, which may be a serious constraint to a dynamic development. Therefore the small-scale producers could benefit from the development of close synergy with each other; groups of producers would then be better able to develop their own networks, thus helping to bypass expensive intermediaries and retain more of the economic benefit in the local community. The networks might set up a centralised marketing function, and, not least important, establish its own quality control unit or establish co-operation with an established and renowned quality control institute. The quality control part is becoming increasingly important considering the many food quality problems that Europe has been faced with during recent years. The EU Commission is constantly issuing new food quality regulations and standards, and it is becoming more and more difficult and costly for small SME’s to remain up to date and to respond to the new standards.
The return to traditional local marketing channels such as producer markets and high-quality specialist shops at the expense of large scale at-a-distance selling would certainly also help to encourage endogenous rural development.(page xx)
The local “locomotives” will obviously have to compete on an international market. In section x suggestions for potential “locomotive” productions particularly suited for the Baltic Sea area are given, while section x gives an overview over the many potentials for large scale food and non-food productions.
Roughly there might in the future be three main types of consumers (page x).
Naturalness oriented consumers – the agri-culture scenario
Health oriented consumers – the agro-industry scenario
Tight spending” consumers – the agro-industry scenario
|Change in relative prices|
The globalisation of the food supply system and the still larger and more dominating international retail chains will make competition very tough especially on standard food products.
However, there will also in the future be room for higher priced speciality foods. Some consumers regard factors such as naturalness and freshness or health promoting abilities to be so important that they are willing to pay a premium price for such products.
Non-food bio-based products will often have to compete with- sometimes cheaper - petro-derived products. However also in this sector a segment of customers are willing to pay a premium price for environmentally friendly products. (page x)
Availability and cost of capital
The questionnaires and discussions with local stakeholders have clearly shown that one of the main bottlenecks in most regions is the lack of risk capital. A wide gulf seems to exist between the concerns of local entrepreneurs in the agro-industrial area and those of both public funding authorities and bank officials. (page x).
Banks and investment companies are very reluctant to invest in start-up of new agro-industrial companies, especially SME’s, as they perceive the area as a low-profit area with few chances for success.
Public funding schemes also for agro-industries do exist, however regional policy and schemes still appear to be oriented largely to the concern and needs of already existing (often large scale) companies. The establishment of new agro-based SME’s will therefore require the set-up of local public funding schemes specifically geared to invest in such companies
Availability and cost of labour
Labour costs vary considerably between the Baltic Sea regions. Some regions have very cheap labour, which of course is an important incentive for establishing of new activities in those regions. On the other hand low labour costs are often accompanied by lack of expertise. Skill (and language) shortage constitutes a real barrier. Specifically there is often a lack of persons with expertise in communication, project management and basic business skills, however also lack of more general administrative and technological skills are often a problem..
Therefore not only workforce availability and cost of labour are of importance for new businesses, also the availability of facilities for workforce training is of great significance. In this context it is very important that the local authorities are aware of changes in labour demands by industrial firms and of specific demands from firms planning to establish new business activities.
A supportive infrastructure and economic incentives to provide the motivation to initiate new ventures are important factors, but certainly not enough to secure the creation of new activities and new jobs (page xx and page yy). An adequate pool of entrepreneurially oriented individuals must also be available.
Unfortunately, as the country reports unanimously show, the entrepreneurial spirit is very low in the rural regions in the Baltic Sea area. The lack of entrepreneurial spirit is perhaps the most severe barrier in the less dynamic regions.
There might be at least two ways to solve this serious problem.
1)Establishment of regional training centres or a Baltic Sea virtual campus (page xx) and
2) Encourage entrepreneurs from other areas to set up activities in the regions.
According to Mueller and Thomas (Culture and entrepreneurial potential. Journal of Business Venturing:16, 1) 51-75, January 2001) entrepreneurship might be taught. But some persons are predisposed for entrepreneurship, and their chances for success as entrepreneurs are considerably higher than persons without entrepreneurial values.
It is presumably relatively easier to find potential entrepreneurs and to set up training programmes in regions with access to universities and research centres than in regions lagging access to higher education centres.
Often the remote regions can offer a number of intangible advantages such as: untouched nature, quality of life, low cost of living, low crime rate etc. etc., that might persuade entrepreneurs to establish new businesses in their region.
|What can be done in practical terms?|
The discussions at the regional meetings and the steering group meetings together with inspiration from literature and reports and papers received from co-ordinators of relevant EU projects have led the Basan network to suggest the following activities that in our view all will have a positive impact on the development of the rural regions around the Baltic Sea.
To develop an entrepreneur package to attract foreign entrepreneurs/investors
To develop an incentive package for local entrepreneurs
To organise regional producer groups
To establish a “Baltic Sea virtual campus”.
To establish “Enterprise zones”
In the effort to attract new companies (e.g. agro-industrial locomotives) or entrepreneurs to a given region a very efficient instrument may be to offer individual “entrepreneur packages” or “relocation packages” including e.g. land at low cost, worker retraining, tax incentives, infrastructure improvement, low interest loans etc.
However public incentives are not the main deciding factor, when a company considers establishing new production facilities. Also factors such as business climate, transportation, infrastructure, utilities, cost of labour, proximity to suppliers and customers, access to research and higher education facilities, quality of life etc. play a decisive role. Therefore also such information should also be included in the package
An entrepreneur package might offer:
1. General practical information on issues such as
cost of labour
access to skilled and unskilled labour
cost of capital and access to venture capital
access to public funding (EU, governmental, regional)
cost of living (housing, food, medical care etc.etc.)
2. Customised incentives concerning:
Loans, credits and subsidies for job creation
Tax abatements and tax credits for start up companies
Land at reduced cost
Access to customised workforce training
|Incentive package for local entrepreneurs|
Support to local enterprises and business initiatives in rural areas might be given as:
Incentives to investors (e.g. fiscal incentives)
Guaranties and securities for loans
Promotion of the countryside as an attractive place to invest in
Financial support and economic advise for business start ups (management, accountancy)
Loans, credits and subsidies for job creating business projects
Support for “self employment” in the form of very small loans and micro-loans
Workforce training – access to research and higher education
Not only workforce availability and cost of labour are of importance for new businesses, also the availability of facilities for workforce training is of great significance.
Regional producer groups (micro-clusters; page xx)
A regional producer group is aimed at offering local farmers a regional market for their produce as well as a regional identity and a source of individual stories of human interest to tell the consumer- one from each of the producers.
The aim is to meet modern consumers expectations concerning quality and traceability (page xx). The marketing should be as transparent as possible and the demand for traceability should be met by labelling each package of meat, honey, jam, etc. with a label identifying the producer and describing the farm
The products may be sold not only through retailers, but also via a mail order service as well as from an internet shop.
The producer group should be affiliated to a regional research centre, and the group members should be offered training courses, cheap inputs of fertilisers, feed etc., access to new technology and so on. The regional research centre could be part of the “ Baltic Sea Campus” described below.
(examples: Green Centre, page xx, Graig Farm Organics, page yy and The Orkney Marketing Scheme, page vv, Prophyta, Zostera Dämm ).
Baltic Sea virtual Campus
It would probably be of great benefit for the entrepreneurs in the Baltic Sea regions to have access to an entity, where they can have their ideas tested (both technology and market) and business plans controlled by experts, before they contact investment funds and banks.
The Basan network suggests to establish a virtual Baltic “campus“ including:
Existing Research and Development institutions,
A training centre for entrepreneurs (language skills, IT, “entrepreneurial spirit thinking” etc.),
A business and market study unit and
A technology observatory (scout function).
|The Baltic Campus will function as a focal point for the establishment of new SME’s in the Baltic Sea regions. Instead of spreading the activities in many different directions the Campus should have a visible profile and clear priorities and focus on specific directions of development. Potential Baltic Sea focus points might be: Bio-energy regions, C02 neutral regions, agro-technology nuclei, organic fibre technology, biorefineries etc. |
The campus will through the technology observatory (page xx) ensure that all relevant know how compiled throughout the years and currently generated in EU and national research programmes will be available for the Baltic Sea entrepreneurs.
The business and market study unit will help select the best business opportunities and be involved in generating the necessary funds for the preparatory work and at a later stage start up of the company.
The R&D centre will be involved in the necessary know how transfer and if necessary adapt the production process or product to the conditions prevailing in the Baltic Sea area. The pilot plant facilities, available at the institutions that form part of the centre, will be used to optimise the process and to produce samples for market studies.
The centre will together with the technology observatory follow the international scientific development closely and constantly look for new business opportunities for the SME’s in the Baltic Sea area. The centre should seek to establish alliances with international institutions that have developed new products or productions of interest for the Baltic Sea area
The training centre will help ensure that local entrepreneurs have the necessary skills required for the start-up of new innovative companies.