STIMULATING INTRAREGIONAL RELOCATION. Tomasz Brodzicki* with cooperation from. Anders Elmgren Tomasz Grubiszewski Magdalena Romanowska

Transcription

1 COMPETITIVE POSITION OF THE BALTIC SEA REGION THE ROLE OF REGIONAL CLUSTERS POTENTIAL FOR REGIONAL COOPERATION AND COMPETITIVENESS- STIMULATING INTRAREGIONAL RELOCATION Tomasz Brodzicki* with cooperation from Anders Elmgren Tomasz Grubiszewski Magdalena Romanowska Report financed within the framework of Polish Lisbon Strategy Forum Gdansk, November 2005 *GIME and University of Gdansk, Department of European Integration Economics; holder of a scholarship of the Polish Science Fund(FNP)

2 INTRODUCTION Located in peripheries of the European Union the Baltic Sea Region (BSR) has a tremendous endogenous potential to become one of the key regions of the enlarged European Union capable of facing up to challenges of the globalizing economy. Furthermore, the BSR could be considered as a leader with reaching the goals of the modified Lisbon Strategy. This great endogenous potential characterized by high degree of internal heterogeneity is however not utilized to acceptable extent. The degree of internal heterogeneity is in fact a major impediment to establishment of cooperative linkages. A common Baltic identity is actually missing despite frequent statements of national and regional leaders and a lot of time will pass till it actually develops. It will develop through actions and not blunt words however. The diversity of the BSR is beneficial despite significant difficulties in cooperation. It is beneficial because it creates significant opportunities for reaping actual benefits related to higher degree of specialization, better allocation of resources (improved division of labor), higher productivity and knowledge generation. Regional cooperation could be beneficial from the perspective of both national and regional authorities as well as of particular sectors or even individual profit-seeking entrepreneurs if it can enhance the competitive position of the region on a global arena. In order to do so national and regional authorities should facilitate establishment of cooperative linkages among business communities or even within the triple helix setting. This should apply in particular to sectors of strategic importance to regional economy. It is worth to note that the Baltic Sea Region taken as a whole could be said to have relevant competencies to successfully compete with other European as well as global regions in a number of industrial and services sectors. Due to their strategic importance to the overall prosperity of the region the economic performance of the sectors should be constantly monitored and appropriate steps but only if economically viable should be made. However, these key prosperity drivers should be identified. The aim of the present repot is to give objective opinion on the key drivers of competitive position of the BSR. In order to so we will analyze the regional economy (regional manufacturing industry) from both a traditional sectoral perspective as well as the relatively novel cluster-perspective. It is worth to note that the recent report by Ketels and Solvell ( State of the Region Report) adopted cluster-approach to analysis of the regional economy as 2

3 well. It is to us the step in the right direction 1. The main conclusion of the Report is that the Region has a strong cluster base with a rich portfolio of regional clusters and overlaps in cluster-export specialization. As to policy recommendations the authors suggested: more cooperation between related clusters, benchmarking of cluster policies as well as creation of consistent data on clusters and clusters across the region. Despite its obvious merits, the analysis by Ketels and Solvell (2005) in the area of clusters is unsatisfactory was unsatisfactory. A lot more could and should be done in order to better inform the policy-making process. Our report despite its obvious drawbacks goes one step further. From this perspective the present study is both complimentary and supplementary to the analysis by Ketels and Solvell (2005). We would like to note, furthermore, that several reports have recently identified major shifts in location of manufacturing industries as well as services within the European Union. These trends seem to extend to or encompass the Baltic Sea Region. Moreover, accession of the Baltic States and Poland to the European Union has created a unique opportunity for reallocation of manufacturing industry as well as services sectors to occur within the region itself. All the economies of the BSR with an exception of two Russian oblasts constitute a part of the internal market were the freedom of movement of goods, services, labor and capital are guaranteed (with an exception of temporary transition periods provided by accession treaties). This could bring important benefits to the region taken as a whole allowing for more efficient and productive specialization to occur thus strengthening or allowing to retain competitive advantage over other European or even global subregions (a policy target stressed in the recent State of the Region Report). Furthermore, apart from reallocation this constitutes an opportunity for establishing globally competitive value added chains within the Baltic Sea Region. The secondary objective of the present study is to investigate the potential for reallocation of industry and services within the Baltic Sea Region. The cluster-perspective seems to be beneficial as well. 1 It is worth to note that to our knowledge apart form the State of the Region Report (2005) there were no cluster studies performed at the BSR level. Finland and Denmark performed a meta-cluster study. Sweden had a national cluster-mapping project. The study in Poland was carried out by GIME applying a modified DTI methodology (TBR). 3

4 Setting the other stage our definition of the Baltic Sea Region It seems that the definition of the BSR in many policy documents relating to the BSR including the recent State of the Region Reports is not well funded 2. If Norway or even Island are taken to Baltic economies than the definition for Poland should not be limited only to three northern NUTS-2 regions (zachodniopomorskie, pomorskie, warmińsko-mazurskie) situated directly on its shores 3. We could argue that at least 3 more regions that is lubuskie, wielkopolskie, kujawsko-pomorskie should be taken into account as they are situated no more than 200 kilometers from the sea shore itself. Data availability is a major bottleneck in particular if the scope of research adopts subnational regions and goes deep into analyzing individual 3-digit sectors. This is the problem that we had to deal with. In this report we adopted the following approach: we adopt 3 digit NACE as the level of analysis but we compromise on the regional dataset. Future extensions (editions) of the present report, in particular if the national governments implement policy recommendations presented in the final part of report, will be more precise in this element. The BSR in the report is comprised of three Nordic states that is Denmark, Finland and Sweden as well as Poland (all 16 NUTS2 regions). There were no data available for 3 Baltic States (that is Estonia, Latvia and Lithuania) as well as Norway (an EEA economy) and two Russian oblasts. Furthermore, as we were unable to disentangle information on the northeastern regions of Germany we decided to eliminate the country from the study. Inclusion of whole Germany would cause more bias then exclusion of it. We have to acknowledge that this approach biases our results to a certain extent. Data sources and methodological issues We utilize two data sources: EUROSTAT and GUS and three different data bases: COMEXT database on internal and external trade of the European Union, NEW CRONOS database 2 This biases the results significantly and could even impact policy recommendations. 3 There is a curious situation created in the report 3 northern regions are said to be part of the BSR while 5 southern regions to be part of the Central Europe peer region. The authors seem to forget that there are another 8 regions in-between which are for some reason left out from their analysis? Are they Baltic or Central European? It seems that more rational definition of the region should be prepared and adopted in order to create a sound platform for future benchmarking exercises of the BSR to competing regions. 4

5 on industrial activities within the EU and database on Polish industry provided by GUS on enterprises with employment of 10 and above based. The period under analysis is 1995 to 2000 for employment and turnover and 1995 to 2001 for trade flows. The level of analysis is set to 3-digit NACE rev 1. Data on trade flows have been adjusted from 8-digit combined nomenclature to 4-digit CPA and than to 3-digit NACE in order to allow for direct comparability. Several secondary data sources are utilized in the second part of the report. All the analysis is carried out on a two levels: on the level of individual 3-digit NACE sectors as mentioned above and on the level of clusters understood as multisectoral groups of 3-digit NACE groups. Particular clusters groups of sectors are taken from a study carried out by GIME within the cluster mapping exercise in Poland. This approach creates a possibility to compare the results of the proposed study with earlier detailed studies on Poland (thus make it possible to pin point particular locations within northern NUTS-2 regions of Poland which could become or have already become places of potential reallocation of production from the Nordic States as well as northern Germany 4 ). Structure of the report The report is divided into two distinct sections. In the first one we will try to identify sectors with strategic importance to the economy of the Baltic Sea Region in both absolute as well as relative terms. We will also focus on analyzing potential evidence of reallocation of manufacturing industry on intra-regional and inter-regional level. In the second part we will adopt a cluster-approach to analysis of the economy of the region. We will present information on major Baltic (meta-) clusters. In particular we will try to find out whether clusters in the northern Polish regions could or do constitute an interesting target for intra-regional reallocation of manufacturing industry. The final section concludes and provides general policy recommendations based on the research results of the previous sections. 4 A good example is the case of IKEA which established its furniture production plants within a north-western region of Poland which in the GIME study has been identified as one showing features of a potential cluster in furniture manufacturing. 5

6 PART I SECTORS OF STRATEGIC SIGNIFICANCE TO THE BALTIC SEA REGION 6

7 Introduction In this part of the report we will try to identify sectors with strategic importance to the economy and competitive position of the Baltic Sea Region. This could seem at first to be a relatively easy task. We have to note, however, that a wide range of competing indicators could be applied thus generating different results probably conflicting. Majority of economists would probably agree that the most important indicators should be related to production taking place (value added, total turnover) as well as employment both in absolute levels as well as their growth ratios. Off course more elaborated measures could be employed, for instance different measures of total factor productivity (TFP). Trade-rated indicators are interesting as their analysis could lead to identification of sectors with particularly evident revealed comparative advantage. Moreover, the identification could be based on more elaborate methodology combing several different indictors at the same time. Furthermore, the analysis should compare the results against a reference or a benchmark group in order to depict particular specialization of the region under analysis. In the present study, mainly due to data limitations, we have decided to adopt EU15 and Poland (EU16 henceforth) as a benchmark for the region. The subsequent sections will follow the philosophy of analysis as has been outlined above. Top branches in terms of employment levels If we stick to the definition of the Baltic Sea Region presented above the BSR had in 2000 an approx per cent in total manufacturing employment of the EU16 (EU15 and Poland). As could be expected majority of the regional manufacturing employment was generated in Poland (52 per cent), 22 per cent in Sweden, 13 per cent in Finland and 12 per cent in Denmark. The population of Poland in absolute and relative terms has a heavy impact on the regional economy. In 2000 only eight 3-digit NACE manufacturing sectors had employment levels within the BSR exceeding a threshold. The first three were: manufacture of furniture ( ), manufacture of other food products ( ) and production, processing, preserving of meat, meat products ( ). These are traditional labor-intensive industries. 7

8 Table 1 Top 8 employers within the BSR in 2000 sectors with employment exceeding employees NACE Name DNK FIN SWE POL BSR 361 Manufacture of furniture Manufacture of other food products Production, processing, preserving of meat, meat products Manufacture of other special purpose machinery Manufacture of other wearing apparel and accessories Manufacture of plastic products Publishing Manufacture of other general purpose machinery Top branches in the BSR relative share in the employment of the benchmark group The following table presents ten BSR sectors with highest shares in the total employment of the benchmark group (they are presented in declining order). Traditional industries dominate once again. The only real exception being the manufacture of television and radio transmitters a high-technology ICT sector with particular significance to the development of the region. Table 2 Top 10 BCR groups in terms of their share in total employment of EU16 (in 2000) NACE Name Total share of the BSR 211 Manufacture of pulp, paper and paperboard Saw milling and planing of wood, impregnation of wood Manufacture of accumulators, primary cells and primary batteries Building and repairing of ships and boats Manufacture of railway, tramway locomotives, rolling stock Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of dairy products Manufacture of cement, lime and plaster Processing and preserving of fruit and vegetables 19.1 Top branches in terms of turnover levels As could be expected data on turnover bring a rather different picture as the data on employment where the impact of Poland is truly significant. In terms of absolute turnover levels manufacture of television and radio transmitters is a regional leader (43 billion euro). 8

9 Followed by traditional resourced-based manufacture of pulp, paper and paperboard (28.5 billion euro) and automotive industry manufacture of motor vehicles (25 billion euro). In contrast to previous tables the present one is dominated by medium-high and high-technology sectors though the traditional sectors are present as well. Table 3 Top 10 groups in terms of turnover within the BSR in 2000 (exceeding 10 billion EURO) NACE Name DNK FIN SWE POL BSR 322 Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of pulp, paper and paperboard Manufacture of motor vehicles Production, processing, preserving of meat, meat products Manufacture of other food products Manufacture of basic chemicals Manufacture of other special purpose machinery Manufacture of other general purpose machinery Publishing Manufacture of pharmaceuticals, medicinal chemicals and botanical products Top branches in the BSR relative share in the turnover of the benchmark group The list of top branches as measured by falling shares in total turnover of the benchmark group brings a rather unexpected result as to the overall leader. The BSR generates 95 per cent of total turnover of the EU16 group in manufacture of coke oven products. In fact this is due to a particularly strong position of Poland in this declining sector with no importance at all to the Polish not mentioning the BSR economy. The true regional leader is manufacture of pulp and paper. Table 4 Top 10 groups in terms of their share in total turnover of EU16 NACE Name Total share of BSR 231 Manufacture of coke oven products Manufacture of pulp, paper and paperboard Saw milling and planing of wood, impregnation of wood Manufacture of accumulators, primary cells and primary batteries Building and repairing of ships and boats Manufacture of railway, tramway locomotives, rolling stock Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of dairy products Manufacture of cement, lime and plaster

10 Regional specialization (concentration) patterns vis a vis the benchmark group The shares of the region in total employment and turnover of the benchmark group point to certain areas of particular relevance. It is worth, however, to go even further and to calculate the so called location quotients (LQs). These are calculated as ratios of shares of given sectors in a given region to shares of the same sectors in the benchmark group. LQs can be thus considered as measures of relative concentration within a region or as indicators of relative specialization of a given region. For obvious reasons they are particularly appealing to us as well. It is worthwhile to calculate LQs for each of the analyzed economies separately and the whole BSR region taken a whole 5. At first we will focus on employment. The following table presents sectors for each of the states with LQs at 1.25 and above. In other words these are the sectors in the case of which specialization is higher than by 25 per cent above the EU16 average. In the majority of studies this is considered as the lowest threshold level indicative of significant specialization within a particular branch. When we look at location quotients for each of the analyzed four Baltic States a certain interesting pattern of specialization emerges. In the majority of 3-digit NACE groups on the list we find high LQs at least in the case of two out of four analyzed BSR states. It seems that despite enormous heterogeneity of the Baltic Sea Region in certain sectors the whole region is specialized. Nonetheless it seems that in terms of location quotients for employment (or in other words in specialization pattern) Denmark is most similar to Poland and Finland is most similar to Sweden. In all four countries the mix of sectors is balanced with both traditional as well as non-traditional (high-tech branches) present. The composition off course differs an reflects national characteristics. It is worth to note that in only one branch all four nations have an LQ for employment above EU16 average. This is in the case of manufacture of other special purpose machinery (NACE 295). It is also likely to be the case in manufacture of dairy products (NACE 155), however, we miss here data for Denmark. In 15 out of 103 NACE groups at least three out of four analyzed countries seem to be specialized. What does it mean for cooperation among Baltic enterprises? Some outcomes could be envisaged. First of all, the companies could be 5 We miss data for employment for 26 sectors for Denmark, 15 sectors for Finland, 14 sectors for Sweden and only two for Poland. 10

11 functioning on regional and local markets and thus do not have to be direct competitors. Secondly, they could be competing on international markets, however, in different segments of the market in particular if opportunities for intra-industry specialization are significant. Finally they could be competing with each other directly. In all three cases mutual cooperation is possible. However its type and intensity will vary. Furthermore general efficiency stimulating reallocation could also occur within the Baltic Sea Rim which could increase competitive position of a region as a whole. Table 5 Relative specialization in employment in comparison to EU16 NACE Name LQ for employment Denmark 152 Processing and preserving of fish and fish products Publishing Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Manufacture of electric motors, generators and transformers Manufacture of machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines Manufacture of agricultural and forestry machinery Manufacture of prepared animal feeds Building and repairing of ships and boats Production, processing, preserving of meat, meat products Manufacture of articles of concrete, plaster, cement Manufacture of builders' carpentry and joinery Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Manufacture of pharmaceuticals, medicinal chemicals and botanical products Manufacture of furniture Dressing and dyeing of fur; manufacture of articles of fur Manufacture of other general purpose machinery Manufacture of other fabricated metal products Manufacture of optical instruments and photographic equipment Manufacture of medical and surgical equipment and orthopedic appliances Manufacture of other food products Finland 211 Manufacture of pulp, paper and paperboard Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Saw milling and planing of wood, impregnation of wood Building and repairing of ships and boats Manufacture of sports goods Manufacture of basic iron and steel and of ferro-alloys (ECSC) Manufacture of electric motors, generators and transformers Manufacture of other special purpose machinery Publishing Manufacture of builders' carpentry and joinery Manufacture of automatic control systems

12 NACE Name LQ for employment 342 Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Manufacture of agricultural and forestry machinery Manufacture of weapons and ammunition Manufacture of articles of concrete, plaster, cement Manufacture of leather clothes Manufacture of insulated wire and cable Manufacture of basic precious and non-ferrous metals Dressing and dyeing of fur; manufacture of articles of fur Poland 231 Manufacture of coke oven products Manufacture of railway, tramway locomotives, rolling stock Manufacture of refined petroleum products Manufacture of cement, lime and plaster Building and repairing of ships and boats Manufacture of dairy products Processing and preserving of fruit and vegetables Sawmilling and planing of wood, impregnation of wood Manufacture of basic iron and steel and of ferro-alloys (ECSC) Manufacture of bricks, tiles and construction products Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Manufacture of glass and glass products Manufacture of other wearing apparel and accessories Manufacture of man-made fibers Manufacture of insulated wire and cable Processing and preserving of fish and fish products Manufacture of beverages Production, processing, preserving of meat, meat products Manufacture of grain mill products, starches and starch products Textile weaving Manufacture of lighting equipment and electric lamps Preparation and spinning of textile fibers Casting of metals Recycling of metal waste and scrap Manufacture of non-refractory ceramic goods other than for construction purposes; manufacture of refractory ceramic products Manufacture of furniture Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Other first processing of iron and steel and production of non-ecsc ferro-alloys Manufacture of automatic control systems Manufacture of agricultural and forestry machinery Manufacture of vegetable and animal oils and fats Manufacture of knitted and crocheted articles Manufacture of soap, detergents, cleaning, polishing Manufacture of knitted and crocheted fabrics Sweden 314 Manufacture of accumulators, primary cells and primary batteries Manufacture of pulp, paper and paperboard Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Sawmilling and planing of wood, impregnation of wood

13 NACE Name LQ for employment 296 Manufacture of weapons and ammunition Other first processing of iron and steel and production of non-ecsc ferro-alloys Manufacture of motor vehicles Treatment and coating of metals; general mechanical engineering Manufacture of vegetable and animal oils and fats Publishing Manufacture of builders' carpentry and joinery Manufacture of insulated wire and cable Manufacture of railway, tramway locomotives, rolling stock Manufacture of pharmaceuticals, medicinal chemicals and botanical products Manufacture of other fabricated metal products Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Manufacture of machine-tools Manufacture of domestic appliances n.e.c Manufacture of sports goods Manufacture of other general purpose machinery Manufacture of parts, accessories for motor vehicles Manufacture of electric motors, generators and transformers We would like to look at significant concentrations in terms of employment from the regional (BSR) perspective. In order to do so we have calculated an LQ for each of the analyzed sectors within the BSR as a weighted average of LQs for each of the national economies (the weight set as the share of a given state in total employment level of a given sector within the BSR). The top scorers are (LQ>1.25) given in the following table. It comes at no surprise that the highest LQ is in manufacturing of pulp, paper and paperboard (NACE 211). The top scorers represent several significant industries (clusters). These are: wood, furniture and pulp and paper (forest), agro-food (food processing), maritime (shipbuilding, fishing and fish processing), ICT and related electrics, fashion. Table 6 Sectors with highest LQs in employment for the Baltic Sea Region NACE Name LQ 211 Manufacture of pulp, paper and paperboard Manufacture of accumulators, primary cells and primary batteries Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Sawmilling and planing of wood, impregnation of wood Building and repairing of ships and boats Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Processing and preserving of fish and fish products Processing and preserving of fruit and vegetables Publishing Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Manufacture of electric motors, generators and transformers Manufacture of other wearing apparel and accessories

14 NACE Name LQ 261 Manufacture of glass and glass products Manufacture of insulated wire and cable Manufacture of agricultural and forestry machinery Production, processing, preserving of meat, meat products Textile weaving Manufacture of builders' carpentry and joinery Manufacture of other special purpose machinery Manufacture of lighting equipment and electric lamps Manufacture of grain mill products, starches and starch products Manufacture of machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines Manufacture of automatic control systems Manufacture of furniture Treatment and coating of metals; general mechanical engineering Source: Own calculations based on NEW CRONOS and GUS. LQ for the BSR calculated as a weighted average from LQs in employment for individual states; weights shares in total employment of the BSR. Adopting a similar approach we focus now on turnover data just in order to check whether similar specialization pattern will emerge. At first we look at national high-points. In Denmark two sectors exceed the EU16 average more than four times (suggesting particularly high specialization). These are fish processing and manufacture of electric motors. In Finland this the case in 3 sectors: manufacture of pulp and paper, manufacture of television and radio transmitters as well as basic processing of wood. In Poland this is only the case in manufacturing of coke oven products (similarly to employment, the result of a decadent character of the sector in the EU). In Sweden it is only the case in basic wood processing. We have to note, however, that the other top scorers are the same as in Finland. It further proves the similarity between these two neighboring economies. Table 7 Sectors with LQ for turnover higher than 25 per cent above the EU-16 average NACE Name LQ for turnover Denmark 152 Processing and preserving of fish and fish products Manufacture of electric motors, generators and transformers Manufacture of optical instruments and photographic equipment Production, processing, preserving of meat, meat products Manufacture of prepared animal feeds Building and repairing of ships and boats Manufacture of builders' carpentry and joinery Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Manufacture of furniture Manufacture of machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines Manufacture of medical and surgical equipment and orthopedic appliances Manufacture of pharmaceuticals, medicinal chemicals and botanical products Manufacture of agricultural and forestry machinery

15 NACE Name LQ for turnover 266 Manufacture of articles of concrete, plaster, cement Publishing Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Manufacture of other general purpose machinery Manufacture of other fabricated metal products Dressing and dyeing of fur; manufacture of articles of fur Printing and service activities related to printing Manufacture of other food products Manufacture of made-up textile articles, except apparel Manufacture of knitted and crocheted articles Manufacture of lighting equipment and electric lamps Manufacture of structural metal products Manufacture of other special purpose machinery Manufacture of plastic products Manufacture of articles of paper and paperboard Manufacture of instruments and appliances for measuring, checking, testing, navigating and other purposes, except industrial process control equipment Finland 211 Manufacture of pulp, paper and paperboard Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Sawmilling and planing of wood, impregnation of wood Building and repairing of ships and boats Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Manufacture of electric motors, generators and transformers Manufacture of basic iron and steel and of ferro-alloys (ECSC) Manufacture of builders' carpentry and joinery Manufacture of steam generators, except central heating hot water boilers Manufacture of other special purpose machinery Manufacture of agricultural and forestry machinery Manufacture of sports goods Manufacture of basic precious and non-ferrous metals Manufacture of automatic control systems Manufacture of machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines Manufacture of medical and surgical equipment and orthopedic appliances Manufacture of articles of concrete, plaster, cement Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Dressing and dyeing of fur; manufacture of articles of fur Manufacture of insulated wire and cable Publishing Manufacture of other general purpose machinery Poland 231 Manufacture of coke oven products Building and repairing of ships and boats Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Manufacture of cement, lime and plaster Manufacture of refined petroleum products

16 NACE Name LQ for turnover 313 Manufacture of insulated wire and cable Manufacture of basic iron and steel and of ferro-alloys (ECSC) Processing and preserving of fruit and vegetables Manufacture of beverages Manufacture of bricks, tiles and construction products Manufacture of railway, tramway locomotives, rolling stock Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Recycling of metal waste and scrap Manufacture of lighting equipment and electric lamps Manufacture of soap, detergents, cleaning, polishing Manufacture of man-made fibres Manufacture of dairy products Production, processing, preserving of meat, meat products Other first processing of iron and steel and production of non-ecsc ferro-alloys Manufacture of pesticides and other agro-chemical products Manufacture of accumulators, primary cells and primary batteries Manufacture of non-refractory ceramic goods other than for construction purposes; manufacture of refractory ceramic products Manufacture of prepared animal feeds Manufacture of glass and glass products Manufacture of furniture Processing and preserving of fish and fish products Sawmilling and planing of wood, impregnation of wood Sweden 201 Sawmilling and planing of wood, impregnation of wood Manufacture of pulp, paper and paperboard Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of weapons and ammunition Manufacture of accumulators, primary cells and primary batteries Manufacture of builders' carpentry and joinery Other first processing of iron and steel and production of non-ecsc ferro-alloys Manufacture of railway, tramway locomotives, rolling stock Manufacture of insulated wire and cable Manufacture of medical and surgical equipment and orthopedic appliances Manufacture of machine-tools Treatment and coating of metals; general mechanical engineering Manufacture of automatic control systems Manufacture of other general purpose machinery Manufacture of other special purpose machinery Manufacture of motor vehicles Publishing Similarly to the procedure adopted above for analysis of location quotients for employment in the next step we move from national focus to a broader Baltic perspective. In order to do so we have calculated an LQ for each of the analyzed sectors within the BSR as a weighted average of LQs for each of the national economies (the weight set this time as the share of a given state in total employment level of a given sector within the BSR). In the following table 16

17 we present only those sectors with a weighted LQ above the 1.25 threshold (there are altogether 26 3-digit NACE sectors fulfilling that criteria). It is quite noticeable that the top sectors clearly reflect major contributors to regional turnover situated mainly in Sweden and Finland. These are: manufacturing of pulp, paper and paperboard (NACE 211), manufacture of television and radio transmitters and basic wood processing (NACE 201). It is worth to note as well fish processing (particularly important for Denmark and to a smaller extent to Poland). Once again we notice sectors representative for key regional clusters: wood, furniture and pulp and paper (forest), agro-food (food processing), maritime (shipbuilding, fishing and fish processing), ICT and related electrics. In comparison to data on employment we notice that fashion (textiles and apparel) is missing but the significance of biotechnology related branches (pharmaceuticals and cosmetics), manufacture of machinery and automatic control systems as well automotive cluster is more visible. Table 8 Sectors with highest LQs in turnover for the Baltic Sea Region NACE Name LQ 211 Manufacture of pulp, paper and paperboard Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Sawmilling and planing of wood, impregnation of wood Processing and preserving of fish and fish products Manufacture of electric motors, generators and transformers Building and repairing of ships and boats Manufacture of optical instruments and photographic equipment Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Manufacture of builders' carpentry and joinery Manufacture of accumulators, primary cells and primary batteries Manufacture of insulated wire and cable Production, processing, preserving of meat, meat products Manufacture of medical and surgical equipment and orthopedic appliances Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Processing and preserving of fruit and vegetables Manufacture of furniture Manufacture of machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines Manufacture of soap, detergents, cleaning, polishing Manufacture of other special purpose machinery Manufacture of agricultural and forestry machinery Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Manufacture of other general purpose machinery Manufacture of lighting equipment and electric lamps Manufacture of pharmaceuticals, medicinal chemicals and botanical products Publishing Manufacture of automatic control systems

18 Strategic drivers of regional economy The preceding analysis clearly points towards a number of manufacturing industry sectors as well as groups of sectors (clusters) with particular significance for employment and/or turnover in the case of individual national economies as well as at regional niveau. In attempt to correctly designate the key drivers of regional (the BSR) economy we have to take those two strategic factors into account simultaneously (employment and turnover). In the following section we will present results of two similar however methodologically different approaches and than compare the resulting outcomes. The first method size matters It is worth to note (and this is particularly the case in cluster analysis) that absolute or relative size matters. If we want to designated the key (strategic) drivers we have to take into account an absolute or relative size of the sectors itself. We have decided to use for this shares of the BSR in total employment and turnover of the whole EU16 (considered to constitute an appropriate reference group). To sum up the key sector should have an averaged LQ for turnover and employment at least 25 per cent higher than the reference group and respectable shares in the turnover and employment of the reference group. Out of all analyzed manufacturing industry 3-digit NACE sectors only 24 fulfilled the criteria that have been listed above. They are representing 10 different industrial branches both of traditional and non-traditional type. As could have been expected manufacturing of pulp, paper and paperboard is the most significant (and thus strategic) concentration within the BSR exceeding the EU16 average by 6.5 times and having an approximately 35 per cent share in total employment and turnover of the benchmark group. It is followed by an ICT sector production of television and radio transmitters and apparatus for line telephony and line telegraphy (4.3 times above the EU15 average), production of accumulators, primary cells and primary batteries as well as basic wood processing (both 3.1 times above the average). It is worth to note furthermore that we have at least three important concentrations in the agrofood business: processing of meat, fish and fruits and vegetables, 6 in the forest products cluster, 3 in production of specialized machinery manufacturing, 4 in electric appliances, 2 other in electronics, 3 in specialized equipment as well as in shipbuilding. To understand the 18

19 importance of these sectors for the regional economy we have to note that in 2000 within the BSR they generated altogether 1.34 million jobs, had a total turnover of billion euro and exported onto the EU16 market 42 billion euro of goods. In addition thirteen other sectors had the averaged LQ exceeding the EU16 average but lower than the threshold level of 1.25 we set beforehand (please refer to Table 10). These sectors generated an additional 0.64 million jobs, had a joint turnover of 77.7 billion euro and exported onto the EU16 market good in the value of 21.3 billion euro. The group includes among others sectors from the following branches: textiles, pharmaceuticals and cosmetics, machinery and automotive industry. The next table (please refer to Table 11) presents all residual sectors that had the averaged LQ below of the EU16 mean but still are worth noticing because of their significance in terms of the BSR share in turnover and employment of the benchmark group of countries (EU15 and Poland). We have to notice that some of them are related or supplementary to the strategic sectors constituting an integral part of a multisectoral clusters. For instance manufacture of wooden containers, manufacture of other products of wood; manufacture of articles of cork, straw and plaiting materials, manufacture of articles of paper and paperboard as well as printing and service activities related to printing are all integral parts of the forest products clusters (later on in the second part of the report we will divide it into two subclusters: wood and furniture and 3P clusters respectively). 19

20 Table 9 The top sectors of the Baltic Sea Region in comparison to the benchmark group* NACE Name LQw_emp LQw_tur LQw_av BSR share in EU16 BSR share in EU16 employment turnover 211 Manufacture of pulp, paper and paperboard Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of accumulators, primary cells and primary batteries Sawmilling and planing of wood, impregnation of wood Processing and preserving of fish and fish products Building and repairing of ships and boats Manufacture of electric motors, generators and transformers Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Processing and preserving of fruit and vegetables Manufacture of builders' carpentry and joinery Manufacture of insulated wire and cable Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Manufacture of optical instruments and photographic equipment Publishing Production, processing, preserving of meat, meat products Manufacture of agricultural and forestry machinery Manufacture of machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines Manufacture of furniture Manufacture of other special purpose machinery Manufacture of lighting equipment and electric lamps Manufacture of industrial process control equipment Manufacture of glass and glass products Manufacture of medical and surgical equipment and orthopedic appliances Treatment and casting of metals; general mechanical engineering *sectors with an average of weighted LQs for employment and turnover above the 25 per cent of EU16 average

21 Table 10 Sectors of the Baltic Sea Region* NACE Name LQw_emp LQw_tur LQw_av BSR share in EU16 BSR share in EU16 employment turnover 245 Manufacture of soap, detergents, cleaning, polishing Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Manufacture of pharmaceuticals, medicinal chemicals and botanical products Manufacture of other general purpose machinery Manufacture of motor vehicles Manufacture of articles of concrete, plaster, cement Manufacture of other fabricated metal products Manufacture of other wearing apparel and accessories Manufacture of machine-tools Manufacture of grain mill products, starches and starch products Manufacture of basic precious and non-ferrous metals Manufacture of knitted and crocheted articles Textile weaving *sectors with an average of weighted LQs for employment and turnover in the range from 1 to

22 Table 7 Residual group of NACE sectors with the average LQ below 1 but a relatively high share in EU16 turnover and employment NACE Name LQw_emp LQw_tur LQw_av BSR share in BSR share in EU16 employment EU16 turnover 204 Manufacture of wooden containers Manufacture of basic chemicals Manufacture of other products of wood; manufacture of articles of cork, straw and plaiting materials Manufacture of rubber products Miscellaneous manufacturing n.e.c Manufacture of plastic products Manufacture of parts, accessories for motor vehicles Manufacture of other textiles Manufacture of articles of paper and paperboard Manufacture of made-up textile articles, except apparel Manufacture of motorcycles and bicycles Manufacture of other food products Manufacture of structural metal products Dressing and dyeing of fur; manufacture of articles of fur Manufacture of leather clothes Manufacture of electrical equipment n.e.c Manufacture of instruments and appliances for measuring, checking, testing, navigating and other purposes, except industrial process control equipment Printing and service activities related to printing Manufacture of paints, varnishes and similar coatings, printing ink and mastics Manufacture of cutlery, tools and general hardware Manufacture of aircraft and spacecraft Manufacture of electronic valves and tubes and other electronic components Manufacture of electricity distribution and control apparatus Manufacture of musical instruments

23 The second method trade performance counts as well As we have noted already in our study we could follow as well another approach. As the subtitle above clearly suggest this time we will take into account trade performance in order to identify the key sectors within the Baltic Sea Region. In order to do so we have arbitrarily decided to set the following set of criteria remembering that each individual criterion must be fulfilled simultaneously. These are: a share of the BSR in the total turnover and employment of the reference group in 2000 exceeding 5 per cent, location quotient for employment and turnover of the BSR region calculated as a geometric average of LQs for four economies higher than 1 thus exceeding an average for the EU16 and last but not least a surplus in trade with the EU16 (calculated as a sum of trade balances of each of the states). What is the logic behind the choice of criteria? Simultaneous fulfillment of all of them means that a given sector could be said to be concentrated within the BSR, is significant in terms of employment and turnover and is able to generate trade surplus (in other words its ratio of exports to imports at the BSR level must be greater than one which is considered to be indicative of comparative advantage in trade (Brodzicki 2003). The criteria are simultaneously satisfied by only 20 sectors (pleas note that in the following table the sectors are presented in accordance with rising NACE codes). The sectors come from varied industrial branches both low as well as high-tech which clearly reflects the heterogeneity (diversity) of the regional economy. It is worth to note, that they present the most significant clusters of the region if we adopt a meat-cluster approach to analyzing structure of economy. The list includes among others: agro-food (meat and fruits and vegetables processing, dairy products), wood processing paper furniture (forest cluster as defined in Finland), ICT and maritime (shipbuilding and as well as fish processing). Overall analysis by both methods leads to very similar results. There is a similar repeating set of manufacturing industry sectors which seems to have strategic importance to the economy of the Baltic Sea Region. Furthermore, the cluster-focused approach could bring more fruits than analysis focused on disaggregated sectors. It will be therefore fully utilized in the second more focused part of the present report. If we have identified the sectors (as well as potential clusters) of strategic importance it seems important to ask whether they are growing or shrinking in particular in terms of employment. This could indicated their rising or falling importance to the economy of the region. An additional analysis of shifts in employment levels will be carried out in the subsequent section.

24 Table 11 Key drivers 20 NACE sectors fulfilling all five criteria* NACE Name Total share of BSR in employment (per cent) Geometric average of LQ employment Total share of BSR in turnover (per cent) Geometric average of LQ turnover BSR s trade balance (mill. of euro) 151 Production, processing, preserving of meat, meat products Processing and preserving of fish and fish products Processing and preserving of fruit and vegetables Manufacture of dairy products Saw milling and planing of wood, impregnation of wood Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards Manufacture of builders' carpentry and joinery Manufacture of pulp, paper and paperboard Manufacture of refined petroleum products Manufacture of cement, lime and plaster Manufacture of articles of concrete, plaster, cement Manufacture of basic iron and steel and of ferro-alloys (ECSC) Manufacture of electric motors, generators and transformers Manufacture of insulated wire and cable Manufacture of lighting equipment and electric lamps Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Building and repairing of ships and boats Manufacture of railway, tramway locomotives, rolling stock Manufacture of furniture * the sectors are presented in accordance with rising NACE codes 24

25 Employment sifts indication of intra-regional reallocation? From theoretical perspective location of manufacturing industry is determined through interplay of economic factors such as revealed comparative advantage, agglomeration economies and other externalities (for instance knowledge spillovers), absolute and relative endowments in factors of production, scale economies or intensity of backward and forward linkages as well as policy-related factors policy-instruments affecting location following discretionary policy-objectives of national and/or regional authorities 6. The policy can either enhance (encourage) or dampen the effects of economic factors. We have to note, that the mix of determinants of course varies considerably from sector to sector and clearly has a sectoral dimension. Furthermore, as economy is in constant process of dynamic adjustment (hypothesis of permanent transition) the determinants of location are likely to change within medium to long-run thus affecting location decisions of enterprises. We must stress that the process of economic integration (in global and regional terms in particular), both in its negative (liberalization) and positive (policy coordination, harmonization or unification) dimension, can affect location of manufacturing industry. Baldwin and Wyplosz (2004) suggest that at the aggregated level the European economic integration so far had a relatively modest impact on the location of industry with major shifts occurring within nations than among them. At the more disaggregated level certain facts (mainly related to composition of economic activity within each nation) point to some shifts of location. We have to take account of the fact that Europe is a highly centralized continent as far as economic activity is concerned. The Euro core clearly dominates with one-seventh of total area, one-third of population but half of economic activity in general (Baldwin and Wyplosz 2004). From geographical perspective the majority of the BSR is situation in the peripheral regions of Europe with an exception of Denmark, southern Sweden and north-eastern Germany considered to be in the so-called intermediate regions. All the shifts between the core and peripheral regions will thus directly affect the BSR. It is thus important to detect 6 Supranational policy could also effect location. This in particular applies to the European Union an the type of its structural policies. Certain evidence exists suggesting that structural spending does effect location of industries in particular high-skilled 25

26 long-term trends in location of business activity in the core-periphery setting within the European Union in general. Furthermore, the accession of new countries significantly increased the area of peripheral regions of Europe (this applies in particular to the BSR) a fact which could further intensify shifts in location of both manufacturing industry and services in the medium to long run. Amiti (1999) provides empirical evidence for increasing specialization in the European Union following deepening of the process mainly due to gradual elimination of trade barriers and barriers to freedom of movement of factors of production. Amiti expects that further deepening and consecutive enlargements will result in increasing geographical concentration of industries within the core or peripheral regions (depending on the specific character of the sector) resulting in better allocation of resources and greater effectiveness. If this is the case we should expect regional specialization to occur within the peripheral BSR as well it will be however easy to be recognized only from an ex post point of view and long-term perspective (of at least 10 to 15 years). The long-term perspective could however blur the whole picture as other effects not related to enlargement or deepening will gradually set in. An interesting study by Brulhart and Traeger (2003) using entropy indices and associated bootstrap tests provides further evidence for concentration of manufacturing industry in the European Union in the period An interesting point is made, however, that locational bias towards central (or core) regions has become weaker and within-country concentration trends were strengthened. Integration thus leads to gradual polarization within the EU and within individual countries. From competitive point of view it becomes a prime concern to know which manufacturing sectors (as well as services) are likely to and will locate in the region of our interest. Furthermore, it becomes crucial whether economic policy can affect the process or whether it is outside of scope of national (regional) authorities. The shifts of location within the European Union are significant according to an excellent study carried out for the EC by Midelfart-Knarvik et al. (2000), however, they are not present in all manufacturing sectors. The trend towards increasing specialization commenced from the beginning of 1980s and is still significant. The core-periphery setting is still important but the dominance of the core is gradually decreasing consecutive enlargements are partially responsible as they are increasing area of periheral regions. The most significant change in the location of industries in Europe is the rise of high-technology high-tech sectors in the BSR (in particular in Finland) as well as in the fast-growing Ireland. Shifts in patterns of location 26

27 changes have a strong sectoral dimension. It is worth while to present the major points raised by the authors as the implications for the BSR are considerable. First of all there are traditionally concentrated industries that remained concentrated (location shifts are relatively low). The group includes: automotive (both vehicles and motorcycles), aircraft, electrical apparatus n.e.c, as well as resource-based petroleum and coal products. Automotive sector as well as petroleum and coal products became relatively more concentrated while the rest became a bit more dispersed. We have to note, however, that the locus of the automotive industry in the EU is gradually shifting towards the more competitive CEEs (in particular in recent 4-5 years). In the production of aircraft traditionally relatively strong position of Sweden is gradually deteriorating (the sectors seems to move outside of the region, the same occurs in Poland). Secondly, the authors identified a a group of industries that were initially very concentrated, but which became more dispersed over time. This group comprised ICT sectors (office and computing machinery,, radio-tv and communication equipment), machinery and equipment as well as professional instruments, and traditional agro-food beverages and tobacco. The position of Sweden and Finland (in particular) improved in high-technology and medium-high technology sectors. Thirdly, sectors such as textiles, wearing apparel, leather and products, furniture and transport equipment were relatively dispersed and got more concentrated. In general apart from transport equipment the industries in the group tended to locate in peripheral regions (mainly in the southern states). The fourth group consists of traditionally dispersed industries such as: food products, wood products, paper and paper products, printing and publishing, non-metallic minerals n.e.c., metal products, and shipbuilding. The stability of dispertion could be related to indureance of national differences in tastes (food), culture, no tariff barriers (food), as well as national industrial policies (for instance shipbuilding). The accession of the CEECs as well as globalization are likely to affect these sectors relatively quickly. Midelfart-Knarvik et al. (2000) note while interpreting results of their study on location shitfs that the location pattern is mainly 27

28 As has been already noted above some evidence into the potential location effects can be provided through detailed analysis of adjustments in the composition of economic activity over a relatively long period of time (in particular in terms of employment). A major bottleneck, as usual, is the availability and quality of data in particular at sub-national level. Furthermore, we would like to know whether general adjustment trends in location of industry between the core and peripheral regions of the EU15 described above extend into the BSR. It seems plausible that extension of the single market onto new Member States can further intensify the process. If this is actually the case the long-term consequences for the BSR could be really substantial. In particular we would like to know whether reallocation of production takes place in the region. We would like further to identify its character (intraregional vs. interregional) and intensity in particular sectors of strategic importance to the region. In order to do so in this edition of the report we have chosen a rather simple analysis in order to asses whether reallocation of employment takes place within the BSR. On the basis of data on employment levels for each of the four states taken into account we have calculated an absolute change in employment between 1995 and 2000 for each of the 3-digit manufacturing industry sector taken into account. For simplicity we have calculated a joint shift for the three Nordic states and separate one for Poland (please refer to Table 12). Furthermore, we have calculated a joint net change for the whole Baltic Se Region. This has allowed us to divide all the manufacturing sectors into 4 categories depending on the direction of the change. The first group consist of NACE sectors in which employment contracted both in the Nordic states and Poland (with a negative change overall for the whole BSR). The jobs in this group either moved outside of the region (to other globally competitive locations such as China or India) or they simply disappeared due to the obsolescence of the sectors. We have to note that restructuring of industrial employment in Poland could be said to be a deciding factor in the overall picture. The majority of sectors in the group are traditional, labor-intensive or declining industries from a number of industrial branches: textiles and apparel, leather, steel and steel products as well as agro-food. It is important to note the fall in employment levels in manufacturing of pulp and paper as well as in production of veneer sheets, plywood, and fiber boards (traditionally the core of the regional manufacturing). There are, however, some exceptions. The same processes occurred in high-tech aerospace industry (major contraction in Poland) or manufacturing of other general purpose machinery. The second group is particularly interesting. The group includes sectors in which employment decreased in the Nordic states while it increased in Poland (thus potential intraregional 28

29 reallocation could have occurred). The flow of foreign direct investments from Nordic countries to Poland can further prove the point. The group is rather heterogeneous. The most prominent cases are: publishing, manufacture of soap and detergents, fish and meat processing, shipbuilding, weapons and ammunition as well as manufacture of tanks and boilers. We have to note that some of the sectors belong to the key meta-clusters of the region such as forest cluster, biocluster and maritime cluster. The third group consists of sectors in which we observe a fall in employment in Poland and a significant or limited increase in the three Nordic states with a varied net consequences for the whole region. In Poland the contraction was particularly evident in the case of manufacture of machinery, railway and rolling stock as well as textiles. While at the same time employment increased significantly in the Nordic countries in manufacture of machinery and in electric motors and generators. This group is interesting as well as it presents to a certain extent an intraregional reallocation in the opposite direction as has been the case in the second group. Still we have to note that the outcome could be mainly attributed to large-scale restructuring process in Polish manufacturing industry which was particularly intensive in the second half of the 1990s) The last group is an interesting case as well. It contains a large number of sectors in which employment levels increased in the Nordic economic and Poland giving a net increase for the Baltic Sea Region. The list thus includes sectors which are growing and/or in which the whole region (despite its internal heterogeneity) is attracting production (is internationally competitive). The list includes sectors from both traditional and non-traditional industrial branches. The most important among the traditional sectors are: automotive, electric appliances, wood and furniture as well as paper products, steal and metal products, rubber and plastics. In the non-traditional: electronics and pharmaceuticals are the most prominent cases which are considered as strictly as high-tech industries. Altogether we could notice a shift towards higher value-added, relatively more human-intensive sectors. These should be perceived as a good development with positive effects for the long run competitive potential and long-run growth. This applies in particular to Poland in which the overall production (turnover) rose while employment levels dropped showing a significant improvement in productivity levels. The convergence in productivity levels is likely to be further accelerated by accession to the internal market however it will be difficult to sustain the convergence rates typical for an outset of economic and political transformation. 29

30 Finally, we should note that a similar analysis should be carried out for each of strategic metaclusters of the region. It seems that in certain meat-cluster various intraregional adjustments are taking place which could be indicative of intra-cluster specialization within the BSR. Table 12Net changes in employment levels within the Baltic Sea Region between 2000 and 1995 NACE Group 1 NORDIC3 POL BSR 271 Manufacture of basic iron and steel and of ferro-alloys (ECSC) Manufacture of other wearing apparel and accessories Textile weaving Manufacture of footwear Preparation and spinning of textile fibers Manufacture of knitted and crocheted articles Manufacture of pulp, paper and paperboard Manufacture of man-made fibers Manufacture of dairy products Manufacture of cutlery, tools and general hardware Manufacture of domestic appliances n.e.c Manufacture of aircraft and spacecraft Manufacture of tubes Manufacture of basic precious and non-ferrous metals Manufacture of other general purpose machinery Manufacture of grain mill products, starches and starch products Manufacture of refined petroleum products Manufacture of other chemical products Tanning and dressing of leather Manufacture of non-refractory ceramic goods other than for construction purposes; manufacture of refractory ceramic products 264 Manufacture of bricks, tiles and construction products Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board, fiber board and other panels and boards 332 Manufacture of instruments and appliances for measuring, checking, testing, navigating and other purposes, except industrial process control equipment 192 Manufacture of luggage, handbags and the like, saddler Other first processing of iron and steel and production of non- ECSC ferro-alloys Manufacture of beverages NACE Group 2 NORDIC3 POL BSR 221 Publishing Manufacture of ceramic tiles and flags Manufacture of tanks, reservoirs and containers of metal; manufacture of central heating radiators and boilers Manufacture of weapons and ammunition Manufacture of soap, detergents, cleaning, polishing Processing and preserving of fish and fish products

31 242 Manufacture of pesticides and other agro-chemical products Manufacture of coke oven products Manufacture of games and toys Manufacture of other transport equipment n.e.c Production, processing, preserving of meat, meat products Building and repairing of ships and boats Manufacture of other non-metallic mineral products NACE Group 3 NORDIC3 POL BSR 295 Manufacture of other special purpose machinery Manufacture of agricultural and forestry machinery Manufacture of basic chemicals Manufacture of railway, tramway locomotives, rolling stock Manufacture of machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines Manufacture of other textiles Manufacture of machine-tools Manufacture of cement, lime and plaster Manufacture of other fabricated metal products Manufacture of automatic control systems Manufacture of electronic valves and tubes and other electronic components Manufacture of electric motors, generators and transformers Manufacture of steam generators, except central heating hot water boilers Miscellaneous manufacturing n.e.c Manufacture of knitted and crocheted fabrics Manufacture of made-up textile articles, except apparel Processing and preserving of fruit and vegetables Manufacture of leather clothes Manufacture of musical instruments Manufacture of vegetable and animal oils and fats Manufacture of electricity distribution and control apparatus Manufacture of watches and clocks NACE Group 4 NORDIC3 POL BSR 364 Manufacture of sports goods Dressing and dyeing of fur; manufacture of articles of fur Manufacture of paints, varnishes and similar coatings, printing ink and mastics Cutting, shaping and finishing of stone Manufacture of glass and glass products Manufacture of jewelry and related articles Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Recycling of metal waste and scrap Manufacture of motorcycles and bicycles Manufacture of optical instruments and photographic equipment

32 173 Finishing of textiles Sawmilling and planing of wood, impregnation of wood Manufacture of wooden containers Manufacture of medical and surgical equipment and orthopedic appliances Manufacture of prepared animal feeds Casting of metals Forging, pressing, stamping and roll forming of metal; powder metallurgy Manufacture of pharmaceuticals, medicinal chemicals and botanical products Manufacture of articles of concrete, plaster, cement Manufacture of other products of wood; manufacture of articles of cork, straw and plaiting materials Manufacture of lighting equipment and electric lamps Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Printing and service activities related to printing Manufacture of articles of paper and paperboard Manufacture of other food products Manufacture of insulated wire and cable Manufacture of accumulators, primary cells and primary batteries Manufacture of electrical equipment n.e.c Manufacture of rubber products Manufacture of motor vehicles Manufacture of builders' carpentry and joinery Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of structural metal products Manufacture of parts, accessories for motor vehicles Manufacture of furniture Manufacture of plastic products Treatment and coating of metals; general mechanical engineering

33 Inflow of Nordic FDI into Poland The previous section has given some evidence that intraregional relocation of production (reallocation of resources) is taking place. In order to be more specific we want to augment the analysis of shifts in the BSR employment levels by information on an inflow of Nordic foreign direct investment. The inflow of FDI could further prove the existence of the process as it shows intraregional capital flows. The list of Nordic investors in Poland is substantial (please refer to Appendix B at the end of the report). According to PAAIZ database at the end of 2004 there were 130 Nordic investors present in Poland (with investment above the 1 mill. USD threshold). Altogether they invested 6.4 billion USD into Polish economy. This gives them 7.6 per cent share in total capital inflow in the form of FDI into Poland within the period Swedish companies invested the most billion euro Sweden is the seventh largest foreign investor in Poland when we exclude multinational companies from the list. Denmark with billion holds the ninth place while Finland with is only a seventeenth investor in Poland. The proximity of home and host markets could be a deciding factor. If we limit the geographical scope only to three (or six) northern regions (voivodeships) of Poland the amount of FDI inflow from Nordic countries decreases significantly it is still however substantial. It seems that the inflow of FDI from Denmark, Finland and Sweden could increase substantially in the post accession phase. In general in 2004, the year of accession and full opening of the market we observed a rebound of FDI inflow into Poland. In future the investments will have in particular a greenfield character, however, in some sectors brownfield-type investments are still possible. The inflow of Nordic FDI into Poland (in particular into northern Poland) could be further intensified if appropriate policy decisions are taken both at the national and regional authorities level. The role of PAIIZ is substantial and certainly its promotional campaigns in the Nordic countries should be further intensified presenting both advantages of investment in Poland, presenting concrete location choices (within the northern regions in particular) as well as addressing the existing bottlenecks the Nordic investors encounter We have to note that these investments, in particular in the strategically important sectors (meta-clusters) for the BSR, should be beneficial to the whole region. More emphasis should 33

34 be placed into embedding the investors into regional economy and creating co-operative ties through backward and forward linkages thought the region. It should not be done artificially, however. The policy-makers should always remember a trivial thing: all the actions should have business rational behind them. Profit-seeking entrepreneurs, the backbone of open market-economy, will not engage in endeavors not promising adequate profit within a certain time perspective. The business community should thus have a leading role and the authorities should rather create framework conditions and create certain incentives where market-failure occur. Conclusions The structure of economy of the Baltic Sea Region is diversified. However, certain overlaps is specialization exist among the BSR s states giving opportunity for intraregional cooperation. he analysis carried in the section clearly indicates that there are a number of manufacturing sectors which could be said strategic importance for the whole region. They are both in traditional resources based sectors (wood processing) as well as high-tech branches (ICT). Furthermore, there is some evidence for intraregional relocation of production which could be beneficial in mid to long run creating short to medium term adjustments costs. The enlargement of the European Union is likely to speed up the process itself if still existing barriers to freedom of movement of factors of production are finally abolished. We must remember that either we allow the business to relocate within the BSR in accordance with locational advantages (or the EU and its proximate neighbors) or it will move the Far East: China, India, Vietnam, etc. This off course applies only to certain sectors of manufacturing industry. Finally, on the basis of the first part of the report we could conclude that sectoral analysis does not allow for detailed analysis of actual structure of the regional economy as it does not take into account horizontal and vertical linkages between sectors. In order to do so the analysis has to move from sectoral to cluster-dimension. 34

35 PART II CLUSTERS WITHIN THE BALTIC SEA REGION 35

36 Introduction One of the main conclusions of the preceding chapter was that utilization of cluster-based approach to analysis of economy of the Baltic Sea Regions could be beneficial in terms of potential insights it can bring. The benefits will become clearly visible. For the time being, however, we have to explain our definition of a cluster. How do we define clusters? By clusters we understand geographic concentration of private and public enterprises and institutions connected by an elaborated network of both vertical and horizontal interactions of formal and informal character based on a common development trajectory (technological, organizational etc.) that at the same time compete and cooperate with each other. The definition takes into account many fundamental features of clusters widely agreed on among professionals which are present both in a path-braking publication by Michael Porter (1991) as well as a large number of definitions present in the literature. These fundamental features include: spatial concentration, simultaneous competition and cooperation among enterprises (frequently referred to as co-opetition), extensive web of linkages. 7 There is some amount of evidence that if certain pre-conditions are met innovative and efficiently functioning clusters can constitute a driving force of regional growth through an array of positive external effects related to functioning of a cluster. The definition points to regionally concentrated clusters within the identified meta-clusters. Inadequate data resources do not allow us to pin point directly all clusters at the regional level throughout the BSR. The approach we utilize is similar to Porter s empirical analysis of clusters and is rather of meta-cluster type. It was possible for us to go to preferred level of analysis disaggregation only in the case of Poland. Even here we find some possibilities for improvement. For the time being we will present results of research carried out for the State 7 It is frequently noted that clusters arise due to various externalities (among them agglomeration economies) that favor spatial proximity. This is present for instance in the definition of The Cluster Mapping Project: A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, including product producers, service providers, suppliers, universities, and trade associations. Clusters arise out of the linkages or externalities that span across industries in a particular location. 36

37 of The Region Report. In many ways the present report should be considered supplementary to it. Clusters in the BSR a Porterian approach It is important to note that some of the states in the BSR have carried out extensive clustermapping exercises similar to the one carried out by the DTI for the United Kingdom. The list includes: Finland, Sweden, Denmark and recently Poland (GIME 2004, 2005). The studies applied different methodologies at different levels of disaggregation thus their results were not easily comparable. It is worth to note that until recently there were no studies at all, however, that would span the whole region systematically analyzing all of the BSR states. This significant gap has been filled by Ketels and Solvell (2005) in a recent State of the Region Report. The results of the study (and the whole report as such) are very informative and should allow the policy makers to develop more coherent and more informed policy. Ketels and Solvell (2005) adopt usual Porterian methodology of identification of clusters (at an aggregated national level) based on export market shares and export specialization in other words pattern of exports. They look at first at exports of goods bundled together into representative clusters calculating their respective market shares and changes in market share plus additionally an index of revealed comparative index (a similar approach we will utilize later on) RCA. The index has been defined as a relation of world export share in a given good to total world export share (thus RCA exceeding 1 shows specialization in a given group). The analysis led the authors to identify 12 clusters with comparative advantage with mixed results in dynamic setting: some of them loosing ground while some gaining on in global significance. The methodology applied to Poland identified at the national level two particularly important clusters: coal and maritime equipment. Detailed analysis of Polish trade suggests that this simply isn t good enough. We agree with Ketels and Solvell that the export pattern alone can suggests opportunities for fruitful cooperation on the cross-national level. These in particular applies to clusters where overall the region or majority of states of the region have a good position and show revealed comparative advantage. It seems however that the WTO database the authors utilized is not as detailed as the COMEXT a principal database for internal and external trade of the European Union. This in turn could significantly bias final results. Furthermore, this approach identifies only sectors (there is more to a cluster than only good export position we have to concede however that this is one of its more important attributes) 37

38 The authors seem to omit another possibility. The case in which only one of states shows comparative advantage in trade. If we look at the region from regional and not national perspective thus taking the region as a whole (in particular after the enlargement of the European Union and thus extension of the single market onto the new acceded states), a strong cluster should be perceived as potential opportunity for cooperation and an asset to the whole region. The development of a cluster and its comparative advantage could be intensified through reallocation of specialized resources to the region of its location which could stimulate overall productivity growth with possible spillover effects. It seems the more internationally competitive clusters a given region has, the better for the region as a whole when intra-regional cooperative linkages are dense and effective. Ketels and Solvell continue there analysis by looking at the sub-national clusters or in other words regional clusters. The analysis is performed through rather mysterious translation of Porter s cluster codes and applying it to regional data set for the BSR. The study identifies the so-called STAR clusters in the Baltic Sea Region at NUTS-2 level. These are considered to be the top 16 regional clusters located in the region generating it total approx jobs (please refer to Table ). In order to obtain the 3 STAR status a given regional clusters should fulfill simultaneously 3 arbitrarily set criteria: should generate no less than jobs (absolute criterion) and be responsible for no less than 10 per cent of regional employment (relative criterion) and the specialization quotient SQ should be higher than two (share of regional employment higher at least by a factor of one in comparison to average share of employment within the BSR). The specialization quotient utilized is nothing different from location quotient utilized in majority of cluster mapping exercises all over the world. Table 13 3-STAR clusters in the Baltic Sea Region 38

39 Source: Ketels and Solvell (2005). Out of 16 top 3 STAR clusters within the BSR only two are located in northern Poland in the warminsko-mazurskie voivodeship. This are: processed food as well as building fixtures, equipment and services. This result is in deep contrast to the results of more detailed clustermapping studies for Poland that GIME carried out in recent years. This proves several general points: results of cluster mapping studies two a large extent depend on methodology applied results depend heavily on the level of disaggregation of data both in terms of sectors (2-digit vs. 3-digit NAVE) and regions (NUTS-1, 2 or 4) results depend heavily on data availability and reliability and finally result depend heavily on a definition of a cluster We agree with Ketels and Solvell that cluster-approach to analyzing the economy of a region is beneficial as it usually brings new and valuable insights. It seems however that the study of Ketels and Solvell on clusters overlooks certain aspects. Thus more parallel and supplementary studies should be carried out in the future. The present study is trying to do the exactly that. The scope of cluster analysis Upon initial analysis based on the results of the previous chapter we have finally decided to present information on the following seven industries (clusters) within the BSR which seem to 39