Economic Transformations of Regions: The Role of Banks
| DOI | http://doi.org/10.1002/jsc.2107 |
| Date | 01 January 2017 |
| Published date | 01 January 2017 |
| Author | Martin Gjelsvik |
RESEARCH ARTICLE
Strategic Change 26: 35–51 (2017)
Published online in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jsc.2107
Copyright © 2017 John Wiley & Sons, Ltd.
Strategic Change: Briengs in Entrepreneurial Finance
Strategic Change
DOI: 10.1002/jsc.2107
Economic Transformations of Regions:
The Role of Banks1
Martin Gjelsvik
International Research Institute of Stavanger, Norway
In their role to transform the economic development of regions, banks primarily
support rms and projects that extend, modernize, or upgrade the existing
development paths of regions and, to a lesser degree, a diversication of those paths.
Financial institutions are obviously a vital element in the regional innovation
ecology. However, they are mostly absent in accounts of regional innovation
systems. When nancial institutions are dealt with in this context, the focus is
generally conned to the role of venture capital. Surprisingly, the role of banks in
regional development is left out. is article addresses this gap by discussing the
role of a dierentiated set of banks.
e motivation of the article is furthermore to evaluate the social contribution
of banks. e value and benets of an industry are often measured by its so‐called
added value. However, this method is not straightforward in the nance sector.
A comparison with the auto industry demonstrates the point. e added value of
the auto industry is the dierence between the selling price of a car and the cost
of the various materials that go into it. is added value is in turn distributed to
the employees that build the cars, and as prots to the owners. Banks, however,
earn money in its simplest form from the dierence between the rates at which
they borrow money and the rates at which they lend money. Furthermore, the
prots of the nance sector are partly a return to risk, and the adjustments neces-
sary to reect a fair view are complex and hard to evaluate (Kay, 2015). Another
way to judge the economic value of the nancial sector to the domestic or regional
economy is to pose questions related to what the industry is doing for businesses
by facilitating payments, oering advice, allocating capital, and controlling risk.
More specically, I intend to assess the role of banks in ve dierent regional
trajectories: path extension, path modernization/upgrading, path diversication,
path importation, and new path creation. It is, of course, dicult to turn that
qualitative assessment into numbers, so I do not intend to compare the value of
the nancial industry to other industries.
1 JEL classication codes: D22, D81, G21, L84, O31, R11.
Banks may take roles in ve
different regional trajectories:
path extension, path
modernization/upgrading, path
diversication, path importation,
and new path creation.
Banks operate as a selection
device, both as a direct source of
nancial resources to more or less
risky endeavors in rms and
start‐ups and as a ‘disciplining’
inuence on management
behavior as nancial institutions
and their regulators spell out ‘the
rules of the game.’
Three elements seem to be
common in banks’ evaluation of
entrepreneurs: the business
concept, the person (experience,
no payment remarks), and gut
feeling.
36 Martin Gjelsvik
Copyright © 2017 John Wiley & Sons, Ltd. Strategic Change
DOI: 10.1002/jsc
e article proceeds as follows. e rst section out-
lines an evolutionary perspective on regional development
with a focus on path dependence. e second section
describes the research method, and the third section oers
a brief description of the banks located in the respective
regions. e fourth section contains the main results from
the study, and discusses the selection mechanisms that the
banks use in their evaluations of which projects and rms
to support. Path‐dependent mechanisms are discussed
next, and processes of learning and discovery. e nal
sections are the conclusion and policy implications.
Theory and conceptual framework
In general, evolutionary perspectives share at least two
characteristics. First, their purpose is to explain the move-
ment of something over a time period, or explain how it
got there at a moment in time. Second, an evolutionary
explanation includes both random elements which may
generate variation in the variables under study, and mech-
anisms that systematically select on extant variation
(Dosi and Nelson, 1994). Evolutionary models involve
processes of learning and discovery as well as selection
mechanisms. ese mechanisms dierentially select or
selectively eliminate certain types of variation. Some varia-
tions or ideas are more suitable than others in acquiring
resources — like nancial support — or legitimacy, and
are thus selected. Generally, selection criteria operate
through market forces, competitive pressures, the logic of
internal organizational structuring, and conformity to
institutionalized norms (Aldrich, 1999).
is article discusses various transformations of
regions. Regions represent the aggregate level; however, in
order to explain regional transformations, growth or
decline, I need an account of the actual behavior of agents.
e agents in this study are rms and representatives of
banks, most often their top managers. Regional dynamics
are the outcome of interactions among multiple individ-
ual behaviors in heterogeneous rms and a variety of
banks. I attempt to describe those behaviors as closely as
possible by the micro‐evidence made available through
in‐depth interviews with managers in a dierentiated set
of banks in four Norwegian regions.
e study builds on Schumpetarian theories of inno-
vation‐driven economic growth (Schumpeter, 1934). Not
only did Schumpeter introduce evolutionary economics,
he also underlined the necessity of nance: ‘in carrying out
new combinations, nancing as a special act is fundamentally
necessary, in practice as in theory’ (p. 70). With that point
of departure, it is natural to suggest that technologies or
innovations represent the natural unit of selection. Intui-
tively, technologies may be interpreted as loose equivalents
of genes in biology, and rms the phenotypes. To validate
this intuition, it may be argued that rms select technolo-
gies (products, services, business models, etc.) as the
outcome from their innovation processes. However, I
take one step up the hierarchy of micro‐foundations, and
argue that at the end of the day the selection mechanisms
work on rms and their behavior. e portfolio of tech-
nologies is incorporated within rms, whose relative com-
petitiveness (‘tness’ in evolutionary terms) is mediated
through their behavioral patterns; their strategies, decision
rules concerning investments, research and development
(R&D), diversication, attitudes toward risk, etc.
e market is the primary selection mechanism for
private rms and their technologies, products, and ser-
vices. Financial institutions constitute another salient
selection mechanism, and it emerges from our data that
their unit of selection is seldom merely the technology
itself, but rather the management, history, and present
situation of the rm. I have more to say later about
which characteristics of the rm and its history they evalu-
ate. In other words, rms operate in various selection
environments aecting their survival and growth paths,
rst of all the product markets and the market for nance
(Dosi and Nelson, 1994).
In evolutionary theory, history matters, which is
expressed through the concept of path dependence
(Arthur, 1994). Path dependence is a ubiquitous phenom-
enon, which pertains to rms and institutions, as well as
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