HRVATSKI GEOGRAFSKI GLASNIK 73/1, 39 – 49 (2011.)
Original scientific paper
Izvorni znanstveni članak
UDK 330.4:711.4](497.4)
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The Institutional Approach in Economic
Geography: an Applicative View
Simon Kušar
The institutional approach in economic geography developed as part of a broader
cultural shift in economic geography in the 1990s. It highlights the importance of formal
and informal institutions, technology, institutional embeddedness, and historical lock-in
for understanding how development takes place in regions. Although these institutional
theoretical concepts have been used primarily for explaining interregional differences
in economic development, they soon became interesting as a theoretical basis for the
development of innovative concepts in regional planning and policy. This article presents
the applicative value of the institutional approach in economic geography in the field of
regional planning and development. Further on, practical lessons are presented from a
case study of the location of a greenfield investment by Carthago in Odranci near Murska
Sobota, Slovenia. Finally, selected limitations of the institutional approach in regional
planning are discussed.
Key words: economic geography, institutionalism, regional planning, regional
development, Slovenia
Institucionalni pristup u ekonomskoj geografiji: aplikativni pristup
Institucionalni se pristup javio u ekonomskoj geografiji kao dio većeg kulturnog
pomaka u ekonomskoj geografiji tijekom 1990-ih. Naglašava važnost formalnih i neformalnih institucija, tehnologije, ukorijenjenosti institucija te povijesne povezanosti u
razumijevanju regionalnog razvoja. Iako se svi ti institucionalni teorijski koncepti rabe
prvenstveno u objašnjavanju međuregionalnih razlika u ekonomskom razvoju, postali su
zanimljivi i kao teorijski temelj za razvoj inovativnih koncepata regionalnog planiranja
i politika. Ovaj članak bavi se mogućnostima primjene institucionalnog pristupa u ekonomskoj geografiji na polju regionalnog planiranja i razvoja. Predstavljena su i praktična
saznanja iz studije slučaja greenfield ulaganja tvrtke Carthago u Odrancima kraj Murske
Sobote u Sloveniji. Naposljetku, sagledavaju se i određena ograničenja institucionalnog
pristupa u regionalnom planiranju.
Ključne riječi: ekonomska geografija, institucionalizam, regionalno planiranje,
regionalni razvoj, Slovenija
Please cite this article as: Kušar, S., 2011: The Institutional Approach in
Economic Geography: an Applicative View, Hrvatski geografski
glasnik 73(1), 39–49
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Hrvatski geografski glasnik 73/1 (2011.)
INTRODUCTION
Post-modern development of economic geography brought not only a parallel use of
traditional theoretical approaches but also many new ones. Following a cultural shift, new
approaches often emphasise the social and cultural dimensions of the economy (Cumbers at
al., 2003). One of the elements of this cultural shift was also an institutional shift (Martin,
2005) highlighting the institutional dimension of the economy. Economic geography also
experienced the development of an institutional approach.
Although the institutional approach in economic geography is often criticised for
depending too much on theoretical concepts from economic sociology, institutional and
evolutionary economics (Martin, 2005), for neglecting spatial categories (Kušar, 2008), for
focusing too much on the regional level (Cumbers at al., 2003), and for lacking evidence
from the field (Rodrigues-Pose, 1998), Barnes and his colleagues (2004) are convinced
that the institutional approach in economic geography can serve as a strong theoretical
and methodological background for studying the geographical dimensions of economic
activities. Even more, they see the institutional approach in economic geography as the
most appropriate contemporary economic-geographical approach by stating that ”to practice
institutionalism is to practice economic geography” (Barnes et al., 2004, 16).
The article explores the possible range of the institutional approach in economic
geography for regional planning. But first, basic characteristics of the institutional approach in economic geography are highlighted, including key theoretical concepts. Later, its
application in regional planning and policy is explained.
The applicative role of the institutional approach in economic geography in regional
and spatial planning is also examined through a case study that examined the location
of a greenfield foreign direct investment by Carthago from Germany in Odranci, in the
Pomurska development region of Slovenia. Finally, some limitations of institutional
theoretical concepts in regional planning are highlighted, together with lessons that were
learnt from the case study.
INSTITUTIONAL SHIFT AND THE INSTITUTIONAL APPROACH IN
ECONOMIC GEOGRAPHY
The institutional approach in economic geography developed after the institutional shift in the social sciences in the 1990s. The institutional shift rejected neoclassical
approaches that were regarded as unrealistic and one-sided, and focused too much on the
economic dimension of everyday life. Institutionalists are convinced that individuals are
not ”Homo economicus” – rational and narrowly self-interested actors following only
the goals of their material well-being. On the contrary, institutional approaches highlight
the importance of social institutions that influence and shape the economy. Although this
theory is very close to political economy, it differs from political-economic theories by
assessing the role of institutions in a specific direction. In institutionalism, institutions are
not just entities separate from the economy, but rather an integral part of the economy.
Even more: the economy is embedded in social relations and as such, it is part of wider
social processes (Martin, 2005). Hudson (2005) stated that institutions even enable the
operation of the economy.
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The Institutional Approach in Economic Geography: an Applicative View
The key theoretical concept in the institutional approach is the institution. Institutions
are the system of rules, conventions, values, norms, laws, beliefs, and thoughts (Helmke
and Levitsky, 2004) that shape interaction between people (North, 1990). Institutions are
both formal and informal. Formal institutions are legally defined rules, regulations, and
conventions (Pike at al., 2006). Informal institutions are values and norms that are part
of the culture. Usually, informal institutions are unwritten rules developed outside of the
formal system, but they enable everyday communication and relations between people
(North, 1990). Formal and informal institutions are linked. Formal institutions must be
deeply rooted in informal institutions, otherwise formal institutions lack legitimacy. If
formal institutions are changed, informal institutions change as well. But the process of
changing informal institutions is usually extremely slow (North, 1990). Differences in
the rate of change of formal and informal institutions can cause specific spatial problems,
often resulting in the formation of problem regions.
The institutional shift was strongly influenced by traditional institutional economics.
The original idea was developed by Veblen at the beginning of the 20th century. He was
convinced that institutions influence the development of human thoughts and actions, and
that they are developing under the influence of technology (Barnes, 1999). These ideas
have never been influential in mainstream economics as a discipline, but they have attracted
strong attention from other social sciences, especially after the second half of the 1980s.
Veblen’s institutionalism has strongly influenced the development of evolutionary
economics. Evolutionary economics highlights the developmental dimension of the
economy. For example, the theoretical concept of ”path dependence” describes the role
of past decisions regarding technology and institutions in contemporary state-of-the-art
of technology, enterprises and regions (Harrington at al., 1999). North (1990) thinks that
contemporary conditions in the society and the economy cannot be understood without
having knowledge about the past development of institutions. When technology and institutions are selected, they often lead to ”lock-in” into the selected trajectory of knowledge,
thoughts and development, making it impossible to follow new ideas and development
concepts (Hayter, 2004).
Economic sociology offered intellectual propositions for the development of an
institutional approach in economic geography as well. Economic sociology developed
the theoretical concept of ”embeddedness”. It is used for interpretation of the formation
of social relations between people. The economy is, as a part of wider social processes,
embedded in those social relations. Originally, embeddedness is not a spatial concept. It
is defined just through social, political and economic processes (Hayter, 2004).
The institutional shift is very important for the contemporary development of economic geography. However, Martin (2005) warns that talking about institutional economic
geography is too optimistic. He believes that, due to many theoretical difficulties and
unresolved issues regarding new theoretical and methodological elements, it is too early
to talk about institutional economic geography. Instead, he suggests using the expression
”the institutional approach in economic geography.”
The starting point for the institutional approach in economic geography is the notion that differences in economic development between regions are actually the result of
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interregional differences in institutions. Since formal and informal institutions (rules, laws,
conventions, norms and values) are place-specific characteristic of the society, they should
be of considerable interest to geographers as well. Therefore, the institutional approach
in economic geography tries to answer the question, ”to what extent and in what ways
are the processes of geographically uneven capitalist economic development shaped and
mediated by the institutional structures?” (Martin, 2005, 79).
Although many theoretical concepts in the institutional approach in economic geography were taken from traditional institutional economics, evolutionary economics and economic sociology, geographers also played an important role in developing institutionalism.
Geographers added a spatial dimension to institutional theoretical concepts; for example, they introduced the spatial dimension of embeddedness. Geographical embeddedness
is represented through the spatial proximity of enterprises. It enables regular formal and
informal contacts that stimulate trust, co-operation and knowledge transfer. Conceptions
of path dependence and lock-in have their spatial dimensions as well: institutions are
characterised by path dependence that is place-specific (Martin, 2005).
The institutional approach in economic geography has also expanded the notion of
institutions to institutions as organisations (Pike at al., 2006). Special attention is paid to
region-specific organisations, for example regional development agencies (Cumbers at
al., 2003).
Economic geographers developed new theoretical institutional concepts, like institutional space, institutional thickness and untraded interdependencies. ”Institutional space”
is a specific geographical area in which a specific organisation exercises its role. There
are many institutional spaces arranged at different spatial levels (Martin, 1995). The concept of ”institutional thickness” was developed by Amin and Thrift in 1995. The concept
includes four key elements. There must be a large number of institutions in a region with
a high level of mutual connectedness, but low level of conflict. These three elements are
the starting point for the formation of mutual consciousness that leads toward their cooperation on collective strategies and projects (Martin, 2005). In 1997, Storper (1997)
developed the concept of ”untraded interdependencies”. Enterprises and organisations
become in the course of time ”tied” to specific areas due to untraded interdependencies.
”Untraded interdependencies take the form of conventions, informal rules and habits that
coordinate economic actors under conditions of uncertainty. These relations constitute
region-specific assets in production” (Storper, 1997, 5).
Economic geographers gave proof of institutional theory from case studies that highlighted the role of regional culture, co-operation and trust among various organisations in
shaping economically successful regions. The most well-known are the studies on Silicon
Valley and its comparison to Route 128 near Boston conducted by Saxenian in 1994, on
the Third Italy (Poire and Sabel), on an area of machine and automobile manufacturing in
Baden-Württemberg (Gertler), and on the Ruhr area conducted by Grabher (Kušar, 2008).
All these practical experiences influenced the development of new innovative instruments
in regional planning.
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The Institutional Approach in Economic Geography: an Applicative View
APPLICATION OF THE INSTITUTIONAL APPROACH IN ECONOMIC
GEOGRAPHY: REGIONAL PLANNING AND DEVELOPMENT
The institutional approach in economic geography highlights the role of organisations,
geographical proximity, networking, embeddedness, development trajectories of regions,
institutions and technology. Although these institutional theoretical concepts had been
used primarily for explaining interregional differences in economic development (Pike
at al., 2006), they soon became interesting as a theoretical basis for the development of
new concepts in regional planning and policy. Planners are trying to imitate practical
experiences from economically successful regions described by geographers by fostering an institutional basis, region-specific organisations, networking, entrepreneurship,
development and diffusion of tacit knowledge, learning and technological innovations
(Cumbers at al., 2003).
This new regional planning and policy approach seems to be compatible with recent
developments in planning theory. For example, Friedmann’s social learning highlights the
role of development trajectories, and Healey’s collaborative planning shares its enthusiasm for the importance of building institutional capacity with the institutional approach in
economic geography as well (Wheeler, 2004).
The following paragraphs provide a brief analysis of theoretical concepts from the
institutional approach in economic geography that have been applied in regional planning
and policy.
1. Institutions. Institutions are a focal point of the institutional approach in economic
geography. The economy is strongly dependent on formal and informal institutions.
Since institutions are place-specific and difficult to diffuse, they can be understood as
an endogenous development factor responsible for the economic development or stagnation of regions. Therefore, appropriate institutional structure is of high importance
for the successful promotion of regional development. Regions with a high level of
trust are capable of developing innovations. They have better prospects for adapting to
new development challenges (Saxenien, 1994).
2. Embeddedness. This theoretical concept was taken originally from economic sociology,
but geographers introduced its spatial dimension. If the economy is embedded in social
relations, then trust, collaboration and conventions have a key role in promoting regional
development, while they enable exchange of knowledge and solving various challenges
(Martin, 2005; Saxenien, 1994). Regional policy needs to introduce platforms that stimulate co-operation between different stakeholders in a formal and informal way. The
latter might be difficult when regional planning is institutionally formalised, but there
are informal networks of entrepreneurs in every region that can be used for increasing
cohesion in the region. The geographical notion of spatial embeddedness also highlights
the importance of geographical proximity. Therefore, regional agglomerations seem to
be the right answer while planning spatial dimensions of regional development.
3. Geographical proximity. Geographical proximity stimulates formal and informal interaction between enterprises and other development stakeholders in a region (government
and its offices, local and regional administration, development agencies, universities,
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technological centres, financial organisations, economic chambers, trade unions, nongovernmental organisations) resulting in trust, co-operation and knowledge exchange.
Geographical proximity increases the efficiency of learning and developing innovations
(Cumbers at al., 2003) that are recognised as a key element for economic breakthrough.
4. Development of the economy – evolutionism. Institutionalists are convinced that the
economy is a social construct that is developing. For successful promotion of regional
development it is necessary to understand that the production system is a result of
historical processes. Therefore, it is difficult to change regional institutions (Saxenien,
1994).
5. Geographical diversity. There are important spatial differences in the characteristics of
institutions; therefore, the institutional context differs between different regions causing
differences in development dynamics (Pike at al., 2006). Regional policy instruments
exercised in a successful region cannot be universally applicable in other regions. Every
region needs to develop its own regional development approach.
6. Technology. According to institutional theory, technology stimulates institutional changes. Viewed from the regional planning and policy standpoint, innovations are necessary
when trying to achieve sustainable economic and regional development (Martin, 2005).
7. Networking. Co-operation between companies reduces risks. Therefore, production
networks are an organisational form that enables development (Storper, 1997). Regional
development strategies should pay special attention to complementing already existing
production networks or building new ones, for example, with foreign direct investment
that fits well into the existing production structure.
8. Institutional thickness. This is a theoretical concept developed by economic geographers.
It is defined through a number of organisations in a region with a high degree of mutual
connectedness. Institutional thickness stimulates mutual co-operation on different projects. A mutually connected regionally specific organisational structure is a prerequisite
for successful economic growth and regional development (Barnes, 1999).
If originating from institutional theoretical concepts, regional policy should
(Kušar, 2008):
1. develop appropriate institutional thickness at the regional level that serves as an institutional precondition for building trust among all stakeholders in the development process,
creating untraded interdependencies and stimulating technological development and
networking;
2. stimulate and coordinate collaboration between companies, between companies and
the public sector and between local authorities;
3. convert global-local dynamics in the appropriate land use pattern and activities that
would form the basis for the development of local production and consumption systems;
4. stimulate formation of informal networks that would enable the development of tacit
knowledge, increase trust between stakeholders and reduce uncertainties in the production process; and,
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The Institutional Approach in Economic Geography: an Applicative View
5. develop an institutional system that would define a clear conceptual framework in which
the regional economy operates.
Contemporary regional policy tries to increase the innovation capabilities of regions
and to strengthen co-operation between different stakeholders; therefore, it includes some
of the suggested concepts from the institutional approach in economic geography. To be
more illustrative about the strength and the role of theoretical concepts from the institutional approach in economic geography, a case study is presented in the next section that
tries to define which above mentioned elements have been noticed during the location
procedure of a foreign direct investment in the Pomurska development region in Slovenia.
Tab. 1 Application of institutional theoretical concepts in regional planning and development
Tab. 1. Primjena institucionalnih teorijskih koncepata u regionalnom planiranju i razvoju
Theoretical concept
Context used for creation of innovative regional policy instruments
Institutions
Endogenous development factor responsible for the development or stagnation of regions: appropriate institutional structure is important for the promotion of regional development.
Embeddedness
Trust, collaboration and conventions have a key role in promoting regional development. Regional policy needs to introduce
platforms that stimulate co-operation among different stakeholders in formal and informal ways: regional agglomerations
are highly important.
Geographical proximity
Increases efficiency of learning and developing innovations.
Evolutionism
Production system is a result of historical processes: regional
institutions are difficult to change.
Geographical diversity
Institutional context differs between different regions. Every
region has to develop its own development approach.
Technology
Innovations are necessary for successful regional development.
Networking
Production networks are an organisational form that enables
development.
Institutional thickness
Mutually connected regional specific institutional structure is
a prerequisite for regional development.
Source: Adapted from Kušar, 2008.
CASE STUDY: CARTHAGO GREENFIELD INVESTMENT IN ODRANCI, IN
THE POMURSKA DEVELOPMENT REGION, SLOVENIA
This part of the article brings some evidence from the field about the importance of
the institutional approach in economic geography and its application in regional planning.
When conducting traditional economic geographical (neutrally-observed) research on the
location of a foreign direct greenfield investment by the Carthago company in Odranci,
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special attention was given to examining the role of planning organisations and institutions.
Findings were later interpreted using the framework of the institutional approach. The case
study is taken from Kušar (2008).
Carthago Reisemobilbau GmBH from Ravensburg (Germany) manufactures luxury
motor homes. Due to high labour costs and spatial limitations at current production sites,
the management of Carthago decided to relocate production facilities to another country.
Although the original intention was to relocate to the Czech Republic, in the end Odranci
in the Pomurje development region in the northeastern part of Slovenia was selected.
There were a number of reasons for this decision. Not only hard location factors,
but also policy instruments and other institutional dimensions played a significant role in
choosing Odranci as a place for the investment.
1.
2.
3.
4.
Location factors that favoured the Odranci site were:
Accessibility. Odranci is located near the Pomurska highway, which is part of the fifth
European corridor.
Labour. The Pomurje development region is the least developed region in Slovenia,
hence there are plenty of unemployed workers who are willing to work in a traditional
production sector.
Premises. The Municipality of Odranci offered an industrial zone that was fully equipped
with infrastructure at an affordable price.
Personal preferences. The investor did not want to locate his factory in a town in order
to avoid spatial limitations experienced at the original site in Germany. The investor
was also enthusiastic about the hospitality of locals and the mayor.
Fig. 1 Carthago plant in Odranci, Slovenia
Sl. 1. Tvornica Carthago u Odrancima, Slovenija
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The Institutional Approach in Economic Geography: an Applicative View
However, it is necessary to point out some institutional factors as to why Carthago
located in Odranci. The investment was successfully realised thanks in large part to
Slovenia’s national industrial policy: if the investor had not been given a direct financial
incentive of € 1.2 million (one fifth of the estimated investment costs), the investment
project would not have been realised in Slovenia at all. Instruments of the current national regional policy were used to equip the Kamenice industrial zone near Odranci with
infrastructure. The regional development agency helped with technical advice and with
coordination between the investor, the municipality and national planning organisations.
The Municipality of Odranci had an especially important role. Actually, it acted as
a key formal planning organisation. Namely, long before the Carthago story, Odranci
submitted a strategic decision to promote development of the manufacturing sector and
not tourism, unlike other municipalities in the area. Promotion of manufacturing included
ensuring spatial preconditions for the development of manufacturing activities and upgrading the infrastructure. After the locating procedure began, the mayor and the municipal
administration were in constant contact with the investor, helping him through various
stages of the formal planning system (obtaining the necessary permits, preparing planning
documents for the project, and applying for funding from national planning organisations).
The industrial zone of Kamenice was further expanded. The mayor also used his (political)
influence to overcome obstacles set by other organisations.
There were also informal institutions: norms, values and habits of the local population,
their knowledge, skills and tradecraft tradition that stimulated this development.
Today, Carthago in Odranci owns an 8,000-square metre production facility. In 2008,
35 workers were employed, but this number had increased to 170 by the end of 2010. The
production capacity is 18-24 luxury motor homes per week. A new production building
is being built and there are plans to double the production in 2011. The Carthago branch
plant is responsible for the production, while development and sales are still located at
the main site in Ravensburg. There are plans to move the design of the new generation of
motor homes to Odranci as well.
APPLICATION OF THE INSTITUTIONAL APPROACH IN ECONOMIC
GEOGRAPHY: LESSONS TO BE LEARNT
The application of institutional theoretical concepts for planning purposes encounters
many difficulties. For example, stimulating institutional thickness just by setting up new
local and regional organisations is not a sufficient precondition for the successful development of regions, for two reasons. Firstly, the concept includes not just the number of
organisations but most importantly, their formal and informal connections. Secondly, it is
questionable whether regions with high institutional thickness are successful due only to
the presence of many organisations. Furthermore, emphasising geographical proximity is
also questionable if this approach is oriented too much towards the stimulation of already
developed economic centres to the detriment of the peripheral parts of regions. There are
concerns that research on the role of institutional factors in stimulating regional development is too abstract. The application of the institutional approach in economic geography
in regional planning and policy rests mainly on the cases of successful regions, but there
is a deficit of case studies explaining the role of institutions in less developed regions.
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As is evident from the Carthago case study, institutional thickness at the regional
level can play an important role in implementing regional development projects, but the
institutional approach should examine the role of the state at stimulating regional development in more detail as well. The importance of the evolutionary concept is evident from
the development strategy of Odranci, which emphasised the development of manufacturing
instead of tourism. Informal institutions and their spatial variations were important, as
well, since the values, social norms and customs of the locals acted as a catalyst for the
development impulse that was studied. Local entrepreneurs will collaborate with Carthago;
therefore, new production networks will be formed that will facilitate further development
of manufacturing in the municipality.
It was not possible to study all the possible applicative dimensions of the institutional
approach in economic geography through the case study. However, following suggestions
for application of institutional theoretical concepts in regional policy, it was observed that
in the case of Carthago:
1. appropriate institutional thickness at the regional level was important to fulfil expectations of the investor and enabled successful realisation of the investment;
2. trust and collaboration between the regional development agency, municipality, national
planning offices and the investor offered the platform for exchange of knowledge and
finding solutions to various challenges during the formal planning procedures;
3. appropriate land use planning on the municipal level offered new dimension to the
development of local production and consumption systems;
4. informal networks between the mayor, municipal administration, regional planning
officials, public servants and local residents increased trust between stakeholders and
reduced uncertainties in the planning process;
5. unfortunately, the unclearly defined regional and national institutional system caused
additional uncertainties in the locating procedure; therefore, further organisational
improvements on the regional and national level need to be made.
Since traditional location factors still play important role in regional development and
since institutional theoretical concepts are still experiencing many difficulties, regional
planning should not be restricted only to tools that are theoretically based on the institutional
approach in economic geography. Regional policy instruments with institutional dimensions
are needed, but they should be used in coordination with traditional instruments of the
regional policy, such as allocation of funds to problem regions, tax-revenues, subsidies to
various economic sectors and infrastructure investments.
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The Institutional Approach in Economic Geography: an Applicative View
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Received (Primljeno): 2010 – 12 – 28
Accepted (Prihvaćeno): 2011 – 03 – 18
Simon Kušar
Department of Geography
Faculty of Arts
University of Ljubljana
SI-1000 Ljubljana, Aškerčeva 2
simon.kusar@ff.uni-lj.si
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