Innovation and Spatial Development: Case of Bucharest Essay

Introduction

In the last century, innovation has proved to be one of the most disruptive forces in business. It involves the creation and improvement of products or services in the market using different tools that foster information exchange at market, technological and national levels (Podcameni et al., 2019). This process has contributed to the uneven distribution of resources across different regions because some places are more adapted to innovation than others (Li and Huang, 2019). For example, North America is home to most of the world’s most innovative companies in the tech industry, such as Google, iPhone, Microsoft and Amazon, while other parts of the world are catching up. As the pace of global commerce continues to increase, geographical differences in innovation capacity will continue to widen.

Variations in the ability to innovate across different geographical boundaries mean that the same disparities will be transferred into business ecosystems. Similarly, the effects of innovation are often felt at different levels of performance, including economic (employment rate and exports), industry (growth and survival), firm (profits and growth) and technological (patents) (Zizlavsky, 2015). Stemming from this ranking method, in this paper, the European Innovation Scoreboard of 2018 will be used to evaluate Bucharest’s innovation performance, relative to other cities in Romania. Its performance will be compared to that of the industry and its peers using the central place theory, which highlights the roles of cities as central hubs of innovation for other undeveloped parts of the country. From its use, Bucharest will be presented as Romania’s main innovation centre.

Literature Review

Effective Use of Capital

Innovation is an important contributor to organisational success because capital is scarce and sought by multiple prospective businesses. The Solow model examines the long-term growth of businesses through capital accumulation and analysis (Hendrik and Lewer, 2015). It traces its roots to the field of neoclassical economics, which positions business growth and development within two forces of supply and demand (Adams, 2019). Consequently, it relies on diminishing returns on capital as the main driver of business development and growth because the effective use of capital is an important requirement in the development of innovative ideas.

Considering people are motivated to make a profit on their capital, innovation allows them to maximise returns through high yields associated with the introduction and adoption of novel ideas in business. Similarly, innovation gives firms an opportunity to recoup their investments through research and development because it is difficult to sustain high levels of capital flows if a business consistently makes losses (Gustafsson, Snyder and Witell, 2020; Patrício, Gustafsson and Fisk, 2018). This statement explains why, regardless of a country’s economic performance, there is a common per capita position assumed by citizens. The uniformity is based on diminishing marginal returns on capital, which should be ideally be offset through innovation (Bogers et al., 2019; García Manjón, Mompó and Redoli, 2016). Therefore, the effective use of capital emerges as an important constituent of the innovation process.

Complexity of the Modern Economy

One of the main challenges affecting the adoption of creative innovation systems is the complexity of the modern economy. It affects innovation processes by linking thousands of autonomous entities in nurturing creative ideas (Banerjee, 2020). The process typically involves seeking private-public partnerships that foster information exchange across both sectors but the flow of value may also stretch further to encompass institutions, powerful individuals, administrations and foundations (Lewis, Ricard and Klijn, 2018; Bach et al., 2019). They all play a role in the creation of innovative ideas based on the complexity of the modern economy.

It is difficult to control innovation systems through a centralised command structure because some of the above-mentioned constituents of innovation processes have operational structures that do not necessarily conform to a common point of control. Furthermore, some of the roles and capabilities of the actors involved change too fast because they have to adapt to multiple environmental and market forces (Jenkins, 2019). Moreover, they are often forced to respond to new business challenges and opportunities – a process that could significantly change their perspective of innovation and its role in boosting global commerce (Lala and Sinha, 2019).

In this framework of analysis, the role of government in creating a good environment for innovation comes into focus. Building universities, institutions of higher learning, or developing research and development centres in different geographical regions in a country are only a few methods through which governments can support innovation (Mamidipudi and Frahm, 2020). From this analysis, there is increased sensitisation among policymakers about the need to improve the efficiency of innovation systems and cater to the needs of different actors who operate in today’s complex global commercial space.

Environment for Innovation

Innovation often occurs when there are right conditions for growth. Particularly, it needs to be nurtured and cared for in a supportive environment because research has shown that the most successful innovators thrive in a “healthy” environment (Lewis, Ricard and Klijn, 2018; Bach et al., 2019). From this line of reasoning, some researchers suggest that policymakers should stop treating innovation as a separate activity from the daily running of organisational affairs; instead, they should mainstream it into existing systems and support it as part of a country’s daily operations (Gustafsson, Snyder and Witell, 2020). Research also suggests that policymakers can either muffle or support innovation by formulating laws or nurturing attitudes that have this effect (Hendrik and Lewer, 2015). Therefore, the environment created within a given geographical region is responsible for the rate of innovation witnessed in the area. Nonetheless, multiple factors may undermine innovation in any given economic setting. Consequently, some researchers suggest that the best strategy to remedy the situation is to increase awareness about these factors and take appropriate action to control their effects (Patrício, Gustafsson and Fisk, 2018). The strategy has had mixed results.

Regional and national disparities in political, economic and social development have also contributed to the creation of a conducive environment for innovation. For example, some Nordic countries, such as Norway, Denmark and Sweden, lead other nations in coming up with new products and services in various economic sectors (European Commission, 2020). Works of literature that support this statement have analysed novelty in developed and developing countries, as unique segments of the global market that require different policy solutions (Freire-Gibb and Gregson, 2019). For example, it is recommended that innovative practices in developing countries should be undertaken ethically because innovation is often adopted incrementally (Ajayi and Morton, 2015; Basant, 2018). Stated differently, most innovative activities first occur at an industry level and later at national or organisational levels. Many developing nations use this system of technological adoption because the risk of failure is usually too high for firms or economies to absorb (YuSheng and Ibrahim, 2020). Furthermore, due to resource limitations, developing nations choose to build on what others have done.

Comparatively, research and development activities undertaken in developed nations should have a broader analysis of their impact on health, economy, culture and community (Ajayi and Morton, 2015; Basant, 2018; YuSheng and Ibrahim, 2020; Régibeau and Rockett, 2019). These proposals share a close relationship with the works of other researchers, such as Banerjee, (2020), who note that innovation should be creative and pragmatic to the extent that it is relevant to the people or institutions that use it. Alternatively, some researchers have analysed innovation from an organisational perspective with its application limited to the development of competitive advantages for multinationals that operate in various markets around the world (Ajayi and Morton, 2015; Basant, 2018; YuSheng and Ibrahim, 2020; Bock et al., 2015). In this context, noveltyt thrives on a system of knowledge exchange where ideas are shared to solve organisational or market-related problems. For example, the works of Tsvetkova, Pugh and Schmutzler (2019) suggest that novelty is important to the development of the global economy because it offers companies multiple tools they can use to cement or improve their market positions.

Overall, most of the literature on innovation and geographies of the global economy are spread and far between. It can be deduced that researchers have explored innovation in a dichotomous format using the aforementioned examples of how developing and developed nations manage innovation. There are only a few notable mentions of how the two concepts relate with one another. Nonetheless, there is still a weak link between the concept and the geographical positioning of cities across countries. The adoption of the linear model of technological transfer, which analyses innovation in a quantitative lens, has compounded this problem and created an innovation gap in some cities and countries.

Analysis of Bucharest

As highlighted in this document, Bucharest is Romania’s innovation hub. As a member of the European Union (EU) Romania’s innovation performance can be evaluated using the European Innovation Scoreboard described below.

The model highlighted above suggests that innovation can be evaluated by assessing framework conditions, investments made, innovation activities undertaken and their impact on society. Based on these criteria, Romania and Bucharest, in particular, trail their EU counterparts in innovation. According to the European Commission (2020), Sweden is the leading innovation centre in the EU because it has the highest innovation score based on the criteria described above.

Despite making significant progress in creating a conducive environment for innovation, Bucharest still trails its EU counterparts in performance. For example, the latest ranking on the European Innovation Scoreboard is below the EU’s average (European Commission, 2020). Stated differently, it has a lower score than 50%. This performance categorises Bucharest in the lowest group of EU innovators – “modest innovators”. According to the European Commission, (2020), the other categories are “innovation leaders,” “strong innovators,” and “moderate innovators.” “Innovation leaders” include leading countries, such as Denmark and Finland, which have the highest EU ranking scores. Comparatively, “strong innovators” are countries, such as France and Germany, which have a strong tradition of innovation. Their performance is above or close to the EU average. Lastly, the category of “moderate innovators” is comprised of many eastern European countries, such as Estonia and Lithuania, which have an average performance on the EU score (European Commission, 2020). Therefore, Bucharest’s performance is lower than 50% but the best among other cities in Romania.

Bucharest’s decline in performance has happened gradually with the first indicator of troubling times emerging in 2012 and persisting until 2014. Since then, the city’s performance remained relatively stable until 2017 when it started a gradual increase until 2019 (European Commission, 2020). This enhanced performance emerged from an improved innovation environment in Romania. Increased broadband penetration and the production of high-tech products are the major drivers of change based on EU standards. Comparatively, human resource development and capital investments are the weakest areas of innovation development (European Commission, 2020). In-house innovation practices undertaken in Bucharest have also played a key role in reducing the city’s ranking according to EU standards.

These findings suggest that there is a need for a sectoral analysis of Bucharest’s innovation performance to identify strong and weak areas of its operations that influence performance. By doing so, it would be easy to identify areas that need improvement or correction through policy suggestions. Similarly, this plan would help to identify structural changes within the city’s current innovation systems that would need to be re-examined by redesigning some of its fundamental operations and eliminating others.

The differences between Bucharest’s performance and its EU counterparts partly expose social and economic divisions within regions and cities in Europe. These comparisons are partly explained by the convergence theory, which presupposes that high income tends to cluster within certain areas, thereby supporting innovation in only those zones closest to them (Papantoniou and Vionis, 2019). It is also worth noting that there are structural differences between Romania and other EU states, which could explain its poor performance in the aforementioned rankings.

The broader analysis of EU countries, compared to other nations around the world, suggest that most European countries are ahead of the United States (US), Brazil, South Africa, China and India, in terms of innovation support. However, from a Romanian standpoint, the innovation happening in Bucharest is reminiscent of Christaller’s central place theory, which explains the geographical and spatial distribution of cities as centres for providing goods and services to surrounding regions. Using its key tenets, the innovation happening in Bucharest can be assumed to be useful to regions bordering the city and beyond. Therefore, the city acts as an incubation centre for innovation and new technologies in Romania. The advances made are later disseminated to companies operating within and around it.

The basic premise of the central place theory to this analysis is that settlements are located in relation to one another. Therefore, the functions of one city may be felt across its borders. However, it is worth noting that the basic assumption of this theory is that people are evenly geographically dispersed and that they have the same purchasing power, which is not always the case. New geography models also explain how knowledge is diffused from one geographical location to another (Pinfield and Middleton, 2016). They complement the idea that economic integration increases spatial agglomeration.

Bucharest, being the financial and innovation capital in Romania, has become a testing ground for businesspeople seeking a “big challenge” in their personal and professional careers. For example, in an article authored by Rudolph (2019), it was established that Bucharest was home to most of the country’s start-ups, including mobility-based companies that are developing new ways to ease traffic congestion in the city. Before these applications are adopted in other metropolitan areas within Romania, they have to be tested in Bucharest. Consequently, after obtaining proof of concept and market success in this region, the benefits are spread to other geographical locations.

The example above demonstrates the power of the central place theory in predicting the origin and trend of innovation adoption in Bucharest. It shares a close relationship with the endogenous growth theory, which explains why cities like Bucharest are pioneers in their geographical regions. The central place theory suggests that such capitals are centres of service delivery because they have a high concentration of professionals and skilled labourers (Morley, 2015). This statement taps into regional differences in productivity across Romania because Bucharest tends to have a higher concentration of resources and human skills than other metropolitan areas in the country.

Unbalanced levels of technological development and innovation that occur in Bucharest, relative to other major metropolitan areas in Romania, such as Cluj-Napoca and Timișoara, explain the “unfair advantage” it has compared to other Romanian cities. However, Bucharest’s financial and economic might does not mean that other cities are inferior; places like Cluj-Napoca are known for harbouring other special attributes of Romania, such as its rich historical and cultural significance (EXIMTUR, 2020). The different types of characterises in Romanian cities explains why there is an influx of people across different metropolitan areas. They exchange value with one another through economic and cultural interactions. The central place theory explains why such relationships exist because value flows from one geographical location to another based on place differentials.

Bucharest’s significance to the economy and prosperity of Romania is further highlighted by its dominance in productivity across political and economic circles, relative to other cities in the country. For example, several knowledge-producing industries are located in the city relative to others in the country (Romania Journal, 2018). This dominance is rooted in the bigger knowledge base Bucharest has compared to other cities in the country. For example, more than 12% of the city’s population works in knowledge-sharing industries (Romania Journal, 2018). Vesta is the only city that comes close to Bucharest because 3% of its working population is involved in the knowledge-based economy (Romania Journal, 2018). These statistics reveal that Bucharest is more developed than other regions of Romania.

Suitable Policy Measures

Each city or country has its institutional history and policy characteristics that dictate how innovation is nurtured and disseminated. At the beginning of the 19^th century, just like many European countries, Romania implemented a range of policies that would encourage innovation and research by supporting developments in science and technology (Grobbelaar and Uriona-Maldonado, 2019). For more than 30 years after the introduction of these policies, the country has made significant progress in elevating its profile as one of the most innovative nations on the continent (Grünwald, 2015). Consequently, a new culture of innovation is permeating society.

Romania’s legal environment has complemented this progress by harbouring supportive policies for innovation. However, some of them need to be updated to reflect current changes to the business environment. Indeed, organisations and services that characterise a city’s innovation systems are dependent on the quality of communication and systems that link their different attributes (Lewis, Ricard and Klijn, 2018). This statement does not only draw attention to the need to understand the role of different actors in the system or their influence in it but also comprehend how people could adapt to a region’s norms and values.

According to the comparative analysis of Bucharest and other cities undertaken in this study, the capital still trails its EU counterparts on the innovation index. Its poor performance means that the effectiveness of existing regulations largely depends on how well businesses adapt to the changing economic landscape and prepare their stakeholders to integrate innovative solutions in their lives. This statement aligns with the literature review findings highlighted in this document, which highlight the important role of the policy environment in nurturing innovation within a specific geographical setting. Therefore, a key step in promoting innovation is to create the right policy environment that would encourage growth, as opposed to stifling it.

Based on the aforementioned statement, there needs to be a heightened level of policy support to power the next phase of innovation in Bucharest. The goal of this policy proposal is to strengthen existing systems of innovation by creating new subsystems of economic integration across multiple cities. Alternatively, the next phase of policy development should bridge existing gaps in innovation and align them with evolving structures of development. These goals are formulated with the acknowledgement that there is no existing awareness of an innovation system in Bucharest. The Romanian government also needs to create new policies that will enhance the exchange of ideas across various firms in Bucharest and within different cities in the country. Particularly, their efforts should be geared towards promoting technological transfer between Bucharest and other cities in Romania. Additionally, it is also important for policymakers to lessen the burden of failure associated with the adoption of new and innovative systems by lowering interest rates for business people seeking financing.

Overall, the policy suggestions highlighted in this document are incremental, as opposed to new, because the goal is to build on the progress made in Bucharest and not erode the gains that have already been realised. Therefore, these policy suggestions should improve the connection between different nodes of information exchange within the wider system of innovation flow in the capital. The proposals will help to activate aspects of the city’s innovative culture that have otherwise been neglected because of the lack of a conducive legal environment to understand the linkages needed to improve the pace of innovation in the city. The European Commission (2020) suggests that such policy proposals need to be adapted to a nation’s systems to create a coherent framework for creating new solutions to perennial business and economic problems. Consequently, there is a need to revitalise existing innovation systems by improving the links and functions of every stakeholder involved.

These goals can be achieved by deliberately creating a conducive policy environment to enhance people’s understanding of systemic thinking and how the same concept can be adopted to spread the benefits of innovation across different geographical spaces. Overall, these policy proposals are designed to address innovation gaps in Bucharest and are intended to create more awareness about them, including how they could be corrected and improved. They are relevant to policymakers who want to assess the strengths and weaknesses of existing innovation systems in Bucharest because they will help in identifying priority areas that require more attention.

Conclusion and Discussion

The insights highlighted in this document show that the growth of the global economy is not devoid of geographical considerations of growth and change. The central place theory plays a pivotal role in explaining the role of cities in enhancing a nation’s economic growth. Consequently, it is applied in this paper to demonstrate Bucharest’s place as the main innovation centre of Romania. Its centrality to the innovation system of the country highlights the importance of understanding geographical factors in predicting economic outcomes because the city acts as a centre for the growth and development of specialised labour that powers innovation across all sectors of the economy. This study has also shown that geography plays a pivotal role in determining the economic outcome of a country. Their relationship stems from contextual factors affecting economic operations in any given location. This statement explains the “human” aspect of innovation, which is responsible for Bucharest’s innovation dominance in Romania and not the technical aspect of its economic performance, which accounts for its low score in the EU rankings.

The implications of these regional differences across the city and region suggest that low technology cities have to depend on high technology cities for their sustenance. This relationship is based on the geographical dispersion of technology and resources. Therefore, there is a possibility that the more skilled people move to cities, regional differences between Bucharest and other metropolitan areas will persist. Overall, spatial differences across geographical regions mean that these variations in performance will continue to shape the externalities of business in the future. By extension, they will also be key sources of competitive advantage as people move to bridge the gap between Bucharest and other cities. This process may be supported through several techniques, such as knowledge spillovers and the spread of specialist suppliers who traverse from one city to another. These insights are important in explaining how cities function, economies prosper and global systems communicate with each other. The findings of this study demonstrate that even as the world experiences a rapid rate of economic development in almost all continents, location matters.

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