CIT and the Economic Competitiveness of Regions:

A Case Study of the Stuttgart Region
Guido Spars,
Franz Fürst

Institute of Urban and Regional Planning
Technical University of Berlin
Rohrdamm 20-22, D-13629 Berlin

This paper examines the impact of CIT on regional economic development and convergence of regions. CIT induce potential cost reductions and  networking    opportunities into the existing regional economic system . To materialize  the potential benefits in the region  it is crucial that inter-firm connectivity    is high both horizontally  and vertically. Consequently, regional policy has to address particularly connectivity and networking issues.


Since the mid-1990's, the regions and the regional level have been given  increasing scientific and political attention. (Storper, 1997; Krugman,  1995;   Benz 1998; Fürst, F. et al, 2000). This recent popularity  of considerations   beyond the boundaries of the neighborhood or city  the region is contributed to two reasons. The region has been identified as the adequate level for problem and phenomenon analysis such as economic disparities; environmental problems  and urban sprawl. Secondly, the region offers a more promising leverage for specific policies and instruments than the urban level in tackling these problems (BMWi,  1997; Klaphake, 2000; Fürst, D., 1994).

The dynamics of regional development   

The essential economic  issues are centered around competitiveness and the  economic convergence of regions. There exists a broad discussion whether  or not European regions  actually converge. One essential ingredient of regional   economic development  is technological change and spatial diffusion of innovations.   In this context,  the question arises what impact recent CIT have on regional   economic development  and the problem of convergence. One position holds  that patterns of spatial disparities such as the well-known   downtown-suburban  dichotomy is exacerbated by current processes, mainly through  an increased  interregional competition of locations and economic integration  on a European  and global scale. Following this line of argumentation, peripheral  and rural  regions are caught between prosperous agglomerations and low-wage  countries  in a type of "sandwich situation" which jeopardizes their development  potentials  and necessitates the swift enactment of efficient regional policies  counteracting  this potentially harmful process.
Contrary to this position, some regional scientists emphasize the importance   of multiple balancing forces in regional development. This position is based  particularly upon theoretical findings and empirical studies, which confirm   that there is indeed a spatial decentralization of economic activities. It appears that this is long-term process, which is, are relatively stable and  continuous,  even tough the evidence put forward by supporters of the polarizationhypothesis  suggests otherwise. Supporters of the convergence hypothesis expect  the large-scale de-concentration of economic activities to continue in the  future, which provides peripheral and rural regions with the chance to appropriate  'footloose' industries, thus entering a 'virtuous cycle' of economic prosperity. 
In more recent regional economic theory, economic development processes are typically explained   considering  the  two variables transport costs and the economies   of scale of a specific good. Low transportation costs and potentially large   economies of scale lead to geographic centralization of production. Conversely,  high transportation costs and low economies of scale result in a decentralized   production structure. The minimum condition for a regional industry to be   feasibly concentrated in a region is that the gains derived from increasing   returns to scale of a specific product outweigh the transportation costs  to the respective market. Adding a third variable -labor-, we find that once   the centralization process is started,  the  skilled  labor  force tends to migrate to the region that matches their specialization.  Typically, this migration process will lead to an increased demand for the   particular good or service produced in the region, thus creating a self-reinforcing   process of development via a demand linkage (Krugman, 1995; Fujita et al, 1999). The danger inherent in such a 'virtuous cycle', of increasing   specialization is, however, that the region becomes increasingly mono-structured, thus also increasing its vulnerability to a product or branch specific negative  demand shock.

Within the framework of classical location theory, CIT can be regarded  primarily  as a reduction in production and shipping  costs. To get a more comprehensive  picture of the spatial impact of CIT, however, it is important to note that  this cost reduction actually occurs in all stages of the production and sales  process and is achieved by a series of reductions of spatial impedance. As  outlined above, the propensity for a particular  industry to be concentrated  in one central location  increases with decreasing transportation costs  provided that economies of scale remain constant. At this point, the nature  of the underlying economies of scale under  the impact of CIT is a crucial  one. In recent empirical and theoretical work there are beginnings of evidence  that geographic economies of scale can indeed be substituted by 'virtual'  economies of scale which relaxes the need for spatial proximity in order to realize increasing returns to scale for a specific firm or branch. These simplified  theoretical considerations can be illustrated by an empirical example, the Stuttgart region in Germany.

Case study: the  Stuttgart region

The Stuttgart Region is among the most powerful regions of Germany in terms  of economic performance. There live approximately 2.5 million inhabitants   in the region, representing a quarter of the total population of the Land of Baden-Württemberg. The Stuttgart Region forms a coherent economic   area with its own administrative structure and its own regional parliament.  Almost one third of all goods and services in Baden-Württemberg and around 35% of exports are generated on 10% of the land area. The performance of  the regional economy depends heavily on the manufacturing sector, with a particular emphasis on automotive industry, mechanical engineering and communication  technologies  (WRS, 2001)  

Underneath the surface  of an impressively vibrant and healthy economy, as illustrated above, there  lurk,  however, signs of an at least temporal economic slowdown in the  region. When analyzing time series of GDP growth-rates it becomes apparent  that the growth rates of industry- (approx. +6%)  and service employment  (+27%) from 1977-1989 are much higher than in 1989-1998 (–19%   and +12% respectively). For knowledge intensive industries and business services,  for which CIT are of particular relevance, the growth rate of employment changes from +22% (1977-1989) to -5% in 1989-1998. (Dathe, Schmid, 2000).  

Interestingly enough, regions in the  northern German 'rust  belt' - commonly identified with chronic structural problems and    high unemployment rates  – now  experience disproportionately high growth rates and recently even managed to outpace the "European Hi-Tech Capital "  in terms of  growth rates  in  knowledge intensive  industries and businesses. The figures for the region of Bremen, for instance,  are +27,5% (1977-1989)  a nd +3% (1989-1998)  employment growth in knowledge-intensive branches  (Dathe, Schmid, 2000)   Isolating the impact  of CIT from the mixed empirical evidence is a rather difficult task. It  is safe to assume, however, that CIT have not played a  prominent role in  neither of the regions in the first period (1977-1989).  To be sure, the  overall volume of CIT usage and knowledge-intensive activities  is much higher in the Stuttgart region than the Bremen type regions of northern  Germany. It is possible, however, that Bremen's larger growth rates are due to the fact that we find a rather special constellation of knowledge intensive  industries in Bremen, all of them having recently experienced a boost of productivity because of the application of CIT (aerospace industry, bio technology etc.).

Implications for regional policy

Regional economic theory suggests that individual firms as well as regional economies can benefit from the application of CIT across all branches and  regions albeit to a different extent. If and how the potential benefits can be materialized in a particular region depends on a number of factors  in practice. A critical point in this context seems to be that there pre-exist  tightly knit communication networks in the region that are enhanced by CI  technologies. If these networks are not available as a basis for a particular   industry and region then the potential for amplification of current network  activities through CIT remains, of course, very low. Dathe and Schmid (2000)  find that the degree of network efficiency is increasing exponentially with   the number of participants in an informal network. A strong localized network of firms has been envisaged as a successful model for the new flexible economy   (Malecki, Toedtling, 1995). The competitive advantages in such high-tech districts are achieved through high quality, expertise, flexibility, knowledge spillovers, scale economies and subsequent cost reduction. The inter-firm network supports the innovation process by spreading risks, combining resources and sharing expertise and experience.   

Regarding regional policy and planning issues, considerable development potentials can be realized through synergies of specialized and interwoven regional structures which manifest themselves as innovation advantages via external effects of R&D mechanisms (Beise et al 1998). Ideally, regions are characterized by flexible decision structures facilitated by their commonly low degree of institutionalization and their ability to enhance "capacity building" networking processes (Arndt/Gawron/Jahnke, 2000, Herrschel/Newman 2000). Core tasks for regional and municipal governments in this context include establishing networks, linking potential cooperation projects through specific agencies and providing infrastructural facilities. Besides supporting established activities, it is also essential to ease market entry for newcomers and start-up businesses by providing them with necessary information and directing them to appropriate existing firms for cooperation purposes.

In Stuttgart, a regional internet community of about 100 internet-firms as a "good practice" is currently being established by the Business Development Agency. The region has built up the so-called PUSH! network for the support of new businesses, especially New Technology Based Firms (NTBF). During the last two years, more than 150 start-ups from universities and research institutes were formed under the auspices of this network. New Projects have been launched by strengthening the ties between different branches with the help of CIT, e.g. traditional printing/publishing firms with educational and research institutions (WRS, 2001). Thus, opportunities for private investments can be facilitated. Additionally, studies of successful regions suggest that municipal and regional governments not only promote the networking and connectivity of their local industries but also play a pro-active role in interfacing public and private activities (PPP, city and regional marketing etc).


Hypotheses for further discussion

Regions with a strong high-tech manufacturing component in the economic structure are generally more prone to benefit from CIT because these industries offer more leverage for specialized CIT applications to enhance productivity. The potential for productivity gains is also proportionate with the complexity of the production process of manufactured good.

The pre-existing economic base determines CIT activity and development paths (Stuttgart region).

Despite the universal absolute benefits of CITechnologies in the regions, relative differences might eventually lead to increased economic interregional polarization in the wake of cost advantages of regions applying CIT in the production of highly specialized and highly centralized goods.

Successful regional policy should determine traditional strengths of the regional economy in a regional conference. Besides a streamlining of the production process of existing industries, it is crucial to determine strategies how industry-specific know-how can be combined with CIT know-how to develop innovative applications.

Regional economic policy has to balance the need for specialization with the need to minimize the socio-economic risks inherent in spezialization.


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