Review of OECD study visit to Rostock:  Preliminary Observations

16th November 2009

Dr. Rebecca Harding

Overview

This document is a short summary of the key observations from an OECD study visit to Rostock. The purpose of the visit was to examine policy and infrastructures to support the development of entrepreneurship in the City and immediate surrounding area with a view to identifying specific strengths and weaknesses on which further policy interventions could be built. 
The observations in this document are the result of a three day study visit and half day workshop. As such, they should be interpreted as impressions rather than as the outcome of a long and rigorous piece of research.  They should also be read alongside the observations and comments of two other experts who were also part of the OECD team and the accompanying interim report/workshop presentation of the OECD.

Background
Since the re-unification of Germany in 1990, large amounts of public money from the Federal Government and from the regional governments of the New German States (Neue Bundesländer – NBL) have been transferred from the old German States (Alte Bundesländer – ABL) for reconstruction and development purposes.  These have been used variously to build or re-build physical infrastructures (including transport infrastructures, housing, schools and hospitals and telecommunications) and to invest in long term drivers of competitiveness and productivity, such as research institutes, universities, science parks and technology centres and business incubators.
Estimates vary, but generally it is believed that some 95% of industry in the NBL was closed down during the early 1990s creating high levels of structural unemployment.  Unemployment in the NBL remains high, although there are “best practice” regions and Cities (Thüringen and Leipzig-Dresden) that have performed exceptionally well by adapting rapidly and effectively to the new market regime, seismic shifts in technology and the process of globalisation.
The successful NBL have, however, had one advantage that Rostock does not have: the existence of large, globally competitive and innovative businesses that survived both the post-war Communist regime and the process of re-unification.  In Jena, for example, Carl Zeiss continued to provide lenses for telescopes and cameras based on leading edge research and development that was unbroken during the post-war era.  The links between university and industry are embedded in the region, centre around the production of optical devices and spawned Jenoptik: the fibre optics company which also reached global markets before reunification.  Some 65% of young people in the region are trained as engineers and scientists in the region (albeit a reduction from the 85% during the Communist era) and the clustering of spinouts in the area of fibre-optics, electronic engineering, biomedical and optical devices is testimony to how well the technology transfer system functions.

Impressions of Rostock
The extent to which the success story of Jena is replicable in Rostock is open to debate since Rostock:
• has always been a comparatively poor region of Germany. Unemployment was estimated to be 17.4% in 2007 and the population has been decreasing at a rate of 4% per annum, accounted for largely by an outward migration of young people.  Although some interviewees suggested that the population had stabilised recently, they did still argue that the population was aging substantially with young people tending to move away in particular.
• lacks a dominant large firm (or large firms) to act as a fulcrum for intrapreneurship, knowledge transfer, university research and commercialisation activities. 
The sectoral priorities of the region, the rural economy, marine technology and tourism are beginning to combine with a real strength in innovation (especially in biomedical related sectors), a strong pure and applied research base and the infrastructures to support knowledge transfer from higher education to industry in a way that will give the region a unique sectoral specialism over time.  This specialism is likely to develop around the healthcare sectors, including health tourism and should lead to long term sustainable development for the region that is neither seasonal nor “old” economy. 
However, the extent to which this development can create jobs or increase productivity in the short to medium term is open to question as the degree of transition is too substantial to be able to effect an immediate improvement.  Indeed, it is possible that the long term goals of the region, to be the “number one health region of Europe” may suffer from the decline of other sectors in the short and medium term and it is therefore imperative that the policy next steps take this into account. 
This is not least the case because entrepreneurs rely heavily on the ecosystem around them: the infrastructure, the networks, access to finance, access to professional advice and mentoring, the skills base and the research/knowledge base.  Equally importantly, however, entrepreneurial activity is positively associated with knowing other entrepreneurs and like-minded people – in other words, the vibrancy of a City of a region that attracts people in and keeps people there.  The drivers behind creating this vibrancy are interdependent but can be instigated by ambitious and visionary policy.
Entrepreneurs as Change agents: their role in economic development
According to a recent study by Delta Economics,  entrepreneurs are motivated predominantly by the desire to follow a dream, to have autonomy and to make money.  Interestingly though, some 50% of entrepreneurs are also motivated by the desire to make a difference, socially, environmentally or in terms of job creation.  In other words, entrepreneurs should not just be seen as drivers of innovation and science-based industries, but as the means by which economies develop. 
This requires a new approach to policy which takes a more inclusive approach to entrepreneurship, is more flexible in order to cater for the diverse nature of entrepreneurs and intrapreneurs and that has clear goals and measurable outcomes in the short, medium and long term.  Very often we talk about the 3Fs when we are talking about entrepreneurs and what helps them to access start-up finance and we are referring to friends, families and fools.  The policy 3Fs, however, are equally as important: the environment should be creative and Fun, the policy should be Flexible to cater for entrepreneurs of all types and the strategy should be Focused on short, medium and long term goals towards creating an entrepreneurial ecosystem.
Rostock’s strengths and challenges
The key strengths
The focus of entrepreneurial policy in Rostock thus far has been on stimulating hi-tech, hi-growth entrepreneurial start-ups out of the science base in the City and surrounding area.  Public sector resources have been dedicated to this task and as a result, the City and region has an impressive range of pure and applied research institutes, entrepreneurial networks and events, technology centres and incubators and university research capacity.  The research institutions, as intrinsic parts of the German science and innovation system, have sectoral specialisms that are relevant to the sectoral priorities of regional policy makers and have private sector links with large firms and leading edge research nationally and internationally that potentially can substitute for the lack of a large firm base within the Rostock area.  Path-breaking research in biomedical devices that has spun out a number of companies is testimony to how effectively this is working within the hi-tech base.
The challenges
Rostock has historically been a poor region of Germany and there is still a legacy of mistrust from the aftermath of the 2nd World War, of more than 40 years of Communist rule and of the economic and social policy misjudgements around re-unification.  Some of the issues are problems of economic development, therefore, and others are more specific to eastern Germany.  However, the fact that some eastern German regions have managed to adapt successfully suggests that many cultural problems could be overcome with a positively focused, integrated and outward looking strategy.
There are a number of challenges that the area faces:
• Inward focused: Rostock’s key players in business, policy and academia appear to be looking inwards and not outwards.  They are focused on City and regional growth without addressing issues of how Rostock appears to the globalised world outside.  Paradoxically, although the research and embryonic commercial base is internationally focused, the means by which it is creating spin-outs is embedded within a publicly funded support structure that is regionally oriented rather than growth oriented.
• Skills mismatch: Rostock’s businesses complain of a lack of skilled workers while policy makers and business support agencies and consultants complain of outward migration of highly qualified individuals.  The focus of policy is on the creation of long-term high value-added jobs as a means of attracting highly qualified individuals into the area.  However, jobs in the short, medium and even in the long run are more likely to be created in the more traditional sectors where there may be a closer skills match.
• Intrapreneurship: Rostock’s industrial base is predominantly in the small and medium sized business sectors supporting the marine/ship-building, agricultural and tourism sectors.  There was a feeling amongst interviewees in the technology transfer sector that the pace of innovation in the existing firm base, especially in marine technologies, had not kept pace with the speed of innovation in the sector globally or even with the hi-tech nature of existing wharf and dockland facilities in Rostock.  There appeared to be a suggestion that the small and medium-sized company base was both lacking in innovativeness and declining in importance because of a lack of investment in them in the past.  In turn, it was argued, the weak supply base would reduce the sustainability of the sector in the future.
• Grant dependency: Much of the support for entrepreneurial activity in “new economy” sectors and for intrapreneurial activity in the existing sectors is based on public sector grants and loans with preferential terms.  A substantial number of publicly funded consultancies providing advice on how to access public funds for technology transfer also exist. There is little in the way of private sector involvement although work is being done to develop this part of the entrepreneurial ecosystem.  Government funding at the start-up stage is essential and has been important in promoting technology-focused start-up activity.  However, an over-riding impression was that people were waiting for support and grants rather than themselves instigating their own activity.  This is a common issue where entrepreneurial activity is at the very earliest stages of development (pre-start and start-up).

Response
The next policy steps will be key in ensuring that the City and Region can move from the pre-start/start-up phase of development to the growth phase:
Fun:  Policy must focus on creating an exciting and dynamic environment both in the teaching and development of entrepreneurs and in the broader societal context, or ecosystem, that surrounds entrepreneurs.  In broad terms, this is making the process of economic development and the challenges it entails a pleasure rather than a duty!  More specifically it involves taking a more flexible and inclusive approach to supporting all types of entrepreneurial activity in the Rostock community.
Flexible: Policy is currently focused on hi-tech/high growth companies.  This excludes many job creating activities such as intrapreneurship, social entrepreneurship and rural entrepreneurship but also excludes many people who may create jobs in more traditional or creative sectors and potentially also excludes women and migrant entrepreneurs who are an important part of the entrepreneurial landscape.
Focused: The superficial impression of strategy in Rostock is that it is uncoordinated and potentially duplicating a large number of programmes.  There were several goals and over-arching targets that we heard of during our visit, but they did not appear “joined up” into one clear, goal-oriented vision for the region that had objectives for the short, medium and long term.
The following are reflections on what we observed:
• Learning: Creating a sustainable entrepreneurial ecosystem means that people have to become self-sufficient.  This means weaning people off grant dependency, but also ensuring that even when one goal has been achieved, individuals are encouraged to improve on their own initiative and to network independently.  Key organisational infrastructures that might facilitate this include learning networks (at present many network events are focused around ideas rather than experiences); mentoring between entrepreneurs and public or private support agencies, cafes and open spaces in technology centres to create “buzz” and informal networking, websites that have forum spaces for people to “chat” about their entrepreneurial experiences and ideas and, of course, enterprise courses in schools and higher education institutes that centre around the idea that entrepreneurs are change agents in any setting rather than money-makers through start-ups. 
• Youth and Creativity: Entrepreneurs are dynamic, networked and motivated people who are highly risk-tolerant.  Entrepreneurial support is not just about buildings and infrastructures.  In Rostock there are structures to network students to the global industrial and research base through the institutions of the German science and innovation (such as Fraunhofer, Leibnitz, Max Planck and, of course, the Universities).  More shared café and bar space creates an “invisible college” where people share ideas and experiences informally creating a dynamic feel to the environment.  Making young people aware of the potential for personnel exchange in existing science structures is both an effective and cheap way of exposing them to the dynamics of the global economy.
• Risk culture: Entrepreneurs are risk takers and the public sector should reflect this.  There are motivated and supportive organisations acting as consultants to the emerging entrepreneurial sector but many of them only have links to public resources and are not incentivised to improve the management of the entrepreneurial companies they support.  There is little in the way of a private sector mentoring or business angel structure. By facilitating the process by which mentors can take equity stakes in the companies they support and by allowing public support agencies to take equity stakes in the firms they provide advice to, a risk culture is built into the system on a low cost basis.  Equally, growth finance should not just be in the form of debt and grants, it should also incorporate some risk for the entrepreneur and, of course, for the investor.  Public guarantees of private investments are mechanisms that exist in Germany and other countries to promote investments and, over time, to diminish dependence on grants.  The Merseyside Special Investment Fund would be one example of how a publicly funded investment structure has become commercial without losing its focus on job creation over time while the Small Firms Loan Guarantee Scheme in the UK promotes lending by banks to entrepreneurs without track record or assets. 

rebeccaharding@deltaeconomics.com