There is an increasing importance of knowledge in the production of goods and services. Thus, it is of critical importance that economic development strategies reflect this new reality.
The production, distribution and application of knowledge are the three components of the knowledge economy. The knowledge economy can also be described as an innovation system. Of which both terms can apply to the local economy. With the increasing importance that knowledge plays in the goods and services we produce, it is of critical importance that economic development strategies reflect this shift. This is of particular concern to those living peri-urban zones. A path to addressing these concerns and preparing the local knowledge economy (or local innovation system) for what lies ahead is found in the application of strategic foresight methods.
While the prospective shifts in the job market, due to increasing computerisation, having been much commented upon in recent times, what has largely been missing from this narrative is this. Our economy is always in transition.
This was well illustrated in a recent CEDA “Australia’s Future Workforce” report from (2015), and in particular the chart (Fig 1.) that Phil Ruthven used in his contribution. Where this chart, shown below, amply demonstrates the ongoing and dynamic nature of these workforce changes. Where in the 1960’s about 40% of our GDP came from primary and secondary industries (it is now around 30%), and where now about 60% of our GDP comes from the tertiary and quaternary sectors (it was about 50% in the 1960s’).
Figure 1. importance of industries 1800-2050 (shares of GDP by industry division)
To further underline the changing nature of our economy there are two interesting charts (Figs 2 & 3) from the ABS. In 2011 they released a “50 Years of Labour Force: Then and Now” report (ABS, 2011). From this analysis of the data you can see that less of us are involved in producing physical things. In fact, most of us get paid to produce intangible goods and services rather than tangible products. We’re more likely to be employed using our brain than our brawn!
Figure 2. Proportion of all people employed in the production and service industries – 1966-2011
Figure 3. Proportion of all people employed in blue and white collar occupations – 1966-2011
The question needs to be asked, will we always handle our economic transitions well?
While the shift from a national economy primarily based on agriculture and mining, all those years ago, to one with a large manufacturing base was largely handled well. It seems as though we may not be as fortunate with the shift away from manufacturing to what lies ahead for our service-based (knowledge) economy.
For what is different with this transition is the advances concerning the technology that handles information. That is, there are many technological innovations that are improving the creation, flow and use of information within and between all sectors of the economy. With all manner of impacts.
For example, we see an impact in our daily interactions through social media. Where through this internet based communication technology we can share and receive information with more people more efficiently. We see an impact in education where with video and software technology we no longer have to be in a class-room to hear a lecture or participate in a tutorial. We see the impact at the supermarket checkout where we can complete our transaction with a machine and not a person. And we see it with call centres for large businesses offering instantaneous web-based chat services over interminably long wait times to talk with a customer service rep.
And more broadly, we can see these impacts in the types of successful companies that we are now witnessing. For example, Uber is the world’s largest taxi company yet it owns no taxis, Facebook is the world’s largest media owner yet it produces no content of its own, and Airbnb owns no real estate yet is the world’s largest accommodation provider.
It seems as though the “software is eating the world” proclamation in 2011 by the Netscape founder Marc Andreesen (2011) is coming true. It seems as though there are increasing impacts of information technology upon our economy and that our success in handling this transition will determine our future prosperity.
And for me, this transition to these industries of the future, particularly as it plays out in peri-urban regions, is of immense interest. For my PhD research is centred on finding appropriate development strategies for peri-urban regions with respect to the knowledge economy.
The Knowledge Economy
In a 1996 general distribution paper the OECD noted that “knowledge is now recognised as the driver of productivity and economic growth, leading to a new focus on the role of information, technology and learning in economic performance” (OECD, 1996).
Where, the OECD argued, economic outcomes were increasingly linked to the production, distribution and application of knowledge. And where these outcomes were tied to not only “traditional” investments such as research and development efforts and education institutions, but also to areas such as management practices.
Another perspective on the knowledge economy is from a paper that John Houghton and Peter Sheehan (2000) produced for the National Innovation Summit 16 years ago. They wrote about the knowledge intensity of economic activities. Where knowledge intensity involves both the increasing intensity of knowledge to produce goods and services as well as the growing importance of these particular goods and services to the economy.
And as we look around to our own local economies do we fully apprehend how vital the production, distribution and application of knowledge is to it’s success?
Now, one of the ways to apprehend how well our local knowledge economy is performing is to view these three components (ie. production, distribution and application) through an “innovation system” lens.
Soete (2010) defines what an innovation system is in his paper for the Netherland Bureau of Economic Policy Analysis. This definition states that the components of such a system are and how each of these components interact to produce outcomes.
Therefore, through the interactions between the people and organisations that play their part in one or more components of the innovation system, we can see how the knowledge economy is built. We can see how the production, distribution and application of knowledge occurs.
And we can start to understand how well our local economy is going to perform in the production of knowledge intensive goods and services.
Place-based economic development
In order to lay a foundation for the rest of this article I need to draw a couple of threads together.
The first is this. An innovation system is a system. And with reference to systems theory (Meadows, 2008), every system exhibits unique behaviours. This is because there are multiple components within a system and they all interact with each other to a greater or lesser extent.
For example, let us imagine an urban community that has a progressive teaching hospital as its main employer. Not only would you expect to see allied health services in the vicinity of that campus, but you could also see entrepreneurs building firms using health technologies.
Therefore, the particular behaviour of this unique urban community system can be linked to the existence of these components, their individual size and the influence they have on one another. Change any of these components or the nature of their interaction, and you will observe a change in outcomes.
The second thread is this. Place-based economic development theory is “de rigueur” and is the preferred approach. In essence, as many reading this article would know, it is a “long-term development strategy whose objective is to reduce persistent inefficiency and inequality in specific places through place-tailored public goods and services” (Barca, 2009). (Another approach, which has fallen out of favour, is the space-blind approach. This is where the same set of strategies and activities happen across all jurisdictions).
Now, to draw these two threads together.
Your local economy is a system and your place-based economic development strategy influences this system. Your strategy, as we have seen, is aimed at reducing inefficiency and inequality by using the goods and services you have at your disposal. Where these goods and services interact with the components of this system which you know as your local economy.
The question is this. Is your economic development strategy influencing the components of your local economy which together comprise of local innovation system? Can you define these innovation system components in your local community, and are they interacting with each other in order to bring about the benefits that flow from being a knowledge economy?
For if you are championing local inventions, supporting local research, fostering technical change in your area, and helping to stimulate learning and innovation in your community then you are developing your local innovation system. You are improving the production, distribution and application of knowledge. You are cultivating your local knowledge economy.
Application of Strategic Foresight
Even as a local knowledge economy is built, one must keep an eye on the future. There needs to be an awareness of the risks and opportunities that emerging trends may well present. For the downside of a lack of this type of awareness is that the public goods and services used to influence the local innovation system may well produce outcomes that are not conducive to exploiting prospective opportunities.
This is where strategic foresight, also called strategic thinking, comes into play. Now, invariably, when strategies are developed all the work that goes into their production answer just two questions: “what will we do?” and “when will we do it?” Where available knowledge is used to answer the first question, and matters of scheduling and impact answer the second.
However, in order to have better inputs into these two questions, the methods of strategic foresight are used to explore a range possible futures. They are a guide to exploring the risks and opportunities of emerging trends. For these methods are designed to answer the following questions:
- What seems to be happening?
- What might we need to do?
Figure 4. Three horizons model
So, how can these two questions help in the preparation for place-based economic development strategies?
One way to answer these two “what is emerging” questions is through the use of the three horizon’s model (Curry, 2008) (Fig 4). Where the first horizon is the current time, the third horizon is the mid to long term future, and the second or middle horizon is the period of time between the two.
That is, the first horizon is “now”, the third horizon is “to be”, and the second horizon describes the journey from “now” to “to be”. This middle horizon describes how we will get to the future.
This “now” horizon is what we currently experience. It’s how we “do things”, and, with respect to what has been talked about above, it’s how our current innovation systems operate. That is, this first horizon is made up of all of the components of the innovation system and how they currently interact.
In other words, this first horizon describes your current local knowledge economy. The third horizon describes how your local knowledge economy will look like in the future. And the middle horizon describes the transition between the two.
But what is important to note from this “three horizons graph”, is that the beginnngs of how we will “do things” tomorrow are emerging today.
That is, the way your local innovation system will behave in 5 or more years is being established this year. The components of this system that you will have in the future, their interactions and the way they influence one another, are emerging now.
Where does all of this lead?
What is the relevance of the three horzions model to place-based economic development strategy? In particular, how does it relate to the local innovation system? How does all of this influence peri-urban prosperity in the knowledge economy?
The nub of this argument is what happens during the time of the middle horizon.
For it is during the transition from “now” to “what will be” that the legacy way of doing things gives way to the new way of doing things. It is in this messy middle horizon the various forces compete with each other to establish dominance in the third horizon. It’s in the short to medium term that current components of the local innovation system are replaced with new ones. Its during this transition period that the behaviour of the local innovation system changes.
And its where the tailoring of public goods and services, through place-based economic development thinking, can influence the future shape of the local knowledge economy.
To paraphrase Barca (2009), the aim must be to improve the underutilisation of local knowledge economy resources by targeting strategic activities towards the production, distribution and application of knowledge.
Specifically regarding your local innovation system. Either, what would you like it to look like, or what do you think it will look like, beyond 2020? What inventions is your region capable of? Can you shape the way research is undertaken? What technical changes are either likely to happen, or that you would like to happen, in local firms over the next couple of years? Is it possible for you to support new ways of learning? And what emerging best practices in creating innovation can you attract to your region?
For the level of influence you have over these medium-term transitions will determine the level of prosperity that flows from the knowledge economy.
ABS (2011), “Australian Social Trends December 2011. Fifty years of Labour Force: Now and Then”. Australian Bureau of Statistics, Canberra
Andreesen M (2011), “Why software is eating the world”. The Wall Street Journal, August 20, 2011. Available from
Barca F (2009). “An agenda for a reformed cohesion policy: a place-based approach to meeting European Union challenges and expectation”. Commissioner of Regional Policy, Italy
CEDA (2015), “Australia’s Future Workforce”. Committee for Economic Development of Australia, Melbourne.
Curry A, Hodgson A (2008), “Seeing in multiple horizons: Connecting Futures to Strategy”. Journal of Future Studies, Aug 2008, 13(1) pp1-20
Houghton J, Sheehan P (2000), “A Primer on the Knowledge Economy”. Working Paper #18, Centre for Strategic Economic Studies.
Meadows D (2008), “Thinking in systems: a primer”. Chelsea Green Publishing Company, White River Junction
OECD (1996), “The knowledge-based economy”. OCDE/GD(96)102, Organisation for economic cooperation and development, Paris
Soete L, Verspagen B, Ter Weel B (2010), “Systems of Innovation”. CPB Discussion Paper 138, CPB Netherland Bureau for Economic Policy Analysis, The Hague
For available resources and services to assist you with conversations and actions related to this article, please navigate to the "strategic foresight resources" page.
This article was published in the 2016 Spring Edition (Vol.9, No.3) of Economic Development Quarterly, the journal of Economic Development Australia