Industrial evolution and competitiveness in the Basque Country: insights from a comparison with Baden-Württemberg

BACHELOR´S DEGREE FINAL PROJECT Industrial Evolution and Competitiveness in the Basque Country: Insights from a comparison with Baden-Württemberg Degree in Economics Course 2024/2025 Author: Andrés Echeverria Castro Professor: Jesús M. Valdaliso Gago INDEX 1. Introduction 2 1.1. Background and Problem Statement: Industrial Evolution and Competitiveness in Regional Contexts 2 1.2. Significance of the Study and Justification for the Comparative Analysis: 3 1.3. Objectives of the Research 4 2. Theoretical Framework 4 2.1. Defining and Conceptualizing Regional Competitiveness: Evolution and Key Approaches 4 2.2. Regional Benchmarking: Foundations, Types and Limitations 7 2.3. The Regional Competitiveness Index (RCI) as an Analytical Framework: Structure and Evolution 9 3. Methodology 13 3.1. Selection of Regions: Justification for the comparison between the Basque Country and Baden-Württemberg 13 3.2. Unit of Territorial Analysis: Considerations for NUTS 1 vs. NUTS 2 Levels 14 3.3. Data Sources and Variables: Analysis of the Regional Competitiveness Index (RCI 2.0) 2016, 2019, and 2022 14 3.4. Complementary Qualitative Data and Analysis 15 3.5. Methodological Limitations and Challenges 16 4. Comparative Analysis of Regional Competitiveness 16 4.1. Overview of Economic Development Trajectories and Current Position of the Basque Country and Baden-Württemberg 16 4.2. Evolution and Comparison of the Overall RCI Scores: Basque Country and Baden-Württemberg (2016-2022) 18 4.3. Comparative Analysis of the 11 RCI Sub-indices: Identifying Strengths and Weaknesses 20 5. Industrial Context and Overall Policy Analysis 25 5.1. Industrial Evolution in the Basque Country: Key Trends, Transformations, and Challenges in Recent Decades 25 5.2. Industrial Evolution in Baden-Württemberg: Key Trends, Transformations, and Success Factors 29 5.3. Identification of Potential Lessons for the Basque Country from the Baden-Württemberg Experience 31 6. Conclusions 32 6.1. Summary of Key Findings from the Comparative Analysis 32 6.2. Implications and Considerations for the Basque Context 33 6.3. Limitations of the Study and Future Research Directions 34 7. Bibliography 35 2 FIGURES INDEX Figure 1. Determinants of competitiveness at different levels. 6 Figure 2. RCI 2.0 framework structure 11 Figure 3. Evolution of regional GDP pc 17 Figure 4. Share of Industry and Mining in Total Employment. 18 Figure 5. EU Regional Competitiveness Index 2.0 -2022 edition for BW and PV Scores (2016–2022) 20 Figure 6. EU regional Competitiveness Index 2.0 Scores 2022. 25 Figure 7. Summary of Basque Regional Strategy 2008-2020. 29 TABLES INDEX Table 1. Weighting scheme for the three RCI sub-indices, differentiated by development stage. 12 Table 2. Evolution of RCI 2.0 11 pillars score (2016–2022) 21 3 Abstract This study explores the industrial evolution and regional competitiveness of the Basque Country through a comparative perspective with Baden-Württemberg. Using the Regional Competitiveness Index (RCI) 2.0 as the main analytical tool, alongside complementary qualitative analysis, the research assesses the development trajectories of both regions during the last decades. The aim is to better understand the factors that have influenced their respective performances and to reflect on possible areas of improvement for the Basque context. While Baden-Württemberg generally maintains stronger competitiveness indicators, the Basque Country shows notable progress in specific dimensions. Rather than prescribing concrete solutions, the study seeks to contribute to a broader discussion on regional development strategies and to highlight elements that could inform future policy considerations. Keywords Regional competitiveness; industrial policy; Basque Country; Baden-Württemberg; benchmarking; innovation systems; RCI 2.0; regional development; comparative analysis; territorial strategy. 4 1. Introduction 1.1. Background and Problem Statement: Industrial Evolution and Competitiveness in Regional Contexts The study of industry, regional competitiveness, and economic development has been a central focus of my academic training, motivating this research project. This interest to understand why certain regions (within and across national borders) experience different developmental paths was, in fact, a key reason behind my decision to pursue a degree in economics. The dynamics of how some regions manage to excel in terms of competitiveness, innovation, and overall quality of life represent a core area within economic and territorial analysis. In this context, the Basque Country holds a particularly compelling significance for me, not only as my home region with its distinct history of regional autonomy but also due to its sustained strong economic and social indicators in comparison to neighbouring areas. This has fostered a deep interest in researching the factors and causes for this noteworthy performance. Moreover, to gain deeper insights into how the Basque Country might further enhance its competitive edge, the study of successful models in other European contexts offers a valuable path. Specifically, Baden-Württemberg with its well-established industrial strength and high levels of competitiveness, stands out as a particularly relevant case for comparison. Consequently, this research undertakes a comparative analysis between the Basque Country and Baden-Württemberg to examine their industrial development and competitiveness trajectories, aiming to extract insights relevant to current and future regional challenges. 1.2. Significance of the Study and Justification for the Comparative Analysis: In today's world, understanding what makes some regions more competitive than others is increasingly crucial. For regions like the Basque Country, with its industrial history and aspirations for continued economic and social progress, thoroughly analysing the factors that drive their competitiveness is key for making informed decisions and planning for the future. This study is relevant as it contributes to a deeper understanding of these aspects within the specific context of the Basque Country, a region with its own unique characteristics and a history of relatively strong economic performance. In an era marked by rapid technological change, the urgency of ecological transition, and the ongoing transformation of industrial sectors, knowing how to enhance regional competitiveness is fundamental for sustained prosperity. To learn how the Basque Country could become even more competitive, this study adopts a comparative approach by selecting another successful European region as a point of reference. Baden-Württemberg, in Germany, has been chosen due to its strong industrial base, commitment to innovation, dense network of small and medium-sized enterprises (the 5 renowned 'Mittelstand'), and effective collaboration between universities, businesses, and public institutions. Additionally, it is important to note how previous research already identifies Baden-Württemberg as a valuable comparison for the Basque Country. For instance, in a work by Navarro Arancegui and others (2011), it is explained how Baden-Württemberg is a region that is close in many ways to the Basque Country, making it useful for comparison. Furthermore, in the reports that Orkestra produces on the competitiveness of the Basque Country (Orkestra, 2020; Orkestra, 2021; Orkestra, 2022 Orkestra, 2023), Baden-Württemberg—alongside Upper Austria—is also used as a reference, because they share similarities and perform great economically and socially. Needless to say, both the Basque Country and Baden-Württemberg share a strong industrial tradition and the idea that innovation is key to growth. Therefore, analysing which strategies and factors have led Baden-Württemberg to be so competitive can give us valuable ideas and lessons for the Basque Country to continue strengthening its economy and its future. 1.3. Objectives of the Research The central aim of this research is to conduct a comparative assessment of the industrial evolution and competitiveness of the Basque Country and Baden-Württemberg. The ultimate goal is to to identify relevant insights that could inform and potentially support the economic development of the Basque Country. This study will systematically address this aim through a regional benchmarking methodology, guided by the following main aims: First, to establish a foundation for comparison, the study will undertake a quantitative assessment of competitiveness levels in both regions, primarily utilizing regional data such as GDP per cápita and Regional competitiveness in the last decades. Later, the analysis will focus on the Regional Competitiveness Index (RCI) 2.0 indicator over a shorter and more recent time frame. This initial analysis will identify key performance differences and trends, informed by established theories of regional competitiveness and benchmarking. Second, the research will explore the underlying factors that have shaped the economic performance of the Basque Country and Baden-Württemberg. This will involve examining both quantifiable data and qualitative aspects, such as industrial policies, innovation systems, and the roles of key institutions in each region. Third, the study aims to identify specific, effective strategies and policies implemented in Baden-Württemberg that have contributed to its competitiveness. A critical evaluation will be made regarding the potential for adapting and applying these lessons to the Basque context. Finally, the research will synthesize the findings from the comparative analysis to understand the fundamental drivers of performance variations. This will culminate in the development of conclusions and potential policy recommendations for the Basque Country, drawing valuable insights from the experience of Baden-Württemberg. 6 2. Theoretical Framework 2.1. Defining and Conceptualizing Regional Competitiveness: Evolution and Key Approaches Competitiveness stands as a cornerstone concept within both economics and the field of regional development studies, even though its initial roots lie in strategic management at the firm level and in broader trade theory. When considering the national scale, a widely accepted definition, as articulated by the World Economic Forum (WEF), defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country” (Schwab, 2012; Schwab & Porter, 2007). This more traditional perspective predominantly emphasizes economic output and efficiency, with productivity identified as the primary engine of growth (Porter & Ketels, 2003; Krugman, 1996). This productivity focus of competitiveness, is mainly due to a general consensus that a nation’s capacity to enhance living standards is intrinsically linked to the efficient utilization of its resources, encompassing human, capital, and natural assets. In spite of this, we must also mention how Paul Krugman (1994) famously acknowledged the direct differences between national and firm-level competitiveness, arguing that nations or countries, unlike firms, do not typically cease to exist due to competitive pressures and “go out of business”. Nevertheless, the concept of competitiveness gains layers of complexity and becomes inherently multidimensional when the analytical lens shifts from the national to the regional level. Regional competitiveness operates distinctly from a simple firm-level aggregation (microeconomic) and a scaled down country-level (macroeconomic) competitiveness (Gardiner et al., 2004), establishing itself as a significant intermediate, or meso-economic, layer. A frequently cited definition for regional competitiveness was the one developed by Meyer-Stamer (2008), which describes systemic competitiveness as “the ability of a locality or region to generate high and rising incomes and improve the livelihoods of the people living there”. This definition places regional prosperity extremely close to competitiveness, thus broadening its scope beyond mere productivity taking into account other crucial aspects such as “sustainable growth” and its capacity to “enhance overall standards of living” (Bristow, 2005; Huggins, 2003). To visualize the multifaceted nature of competitiveness across different levels, Figure 1 (from Meyer-Stamer, 2008, p. 3) illustrates the diverse concepts it encompasses. 7 Figure 1. Determinants of competitiveness at different levels. [Source: Meyer-Stamer, 2008] Given that this study focuses on European regions, the definition developed by Dijkstra et al. (2011) provides a particularly relevant framework. They define regional competitiveness as “the ability of a region to offer an attractive and sustainable environment for firms and residents to live and work.” This definition highlights the key role of both economic and social factors, encompassing quality of life, institutional robustness, and long-term sustainability, while moving beyond the simple focus on a region’s economic performance. On the one hand, this definition aligns with the increasing criticism that the traditional approach to competitiveness has faced. For instance, Aiginger (2006) proposed an alternative model where competitiveness could actively contribute to social welfare, incorporating positive externalities like quality of life and social cohesion. In subsequent work, Aiginger & Vogel (2015) reinforced this integrated perspective, arguing that competitiveness should not be a goal but a means to obtain goals of inclusive and sustainable growth, ultimately enhancing the well-being of citizens. On the other hand, this more comprehensive view is also increasingly reflected in European Union policy documents and various regional studies. As an example, Camagni (2002) introduced the concept of “territorial competitiveness”, emphasizing the significant role of factors such as innovation networks, local governance structures, and spatial quality. Similarly, Annoni & Dijkstra (2019) have recently demonstrated the substantial impact of non-economic dimensions (including education levels, infrastructure development, and even digital accessibility) on regional performance across Europe. All in all, these evolving definitions collectively highlight a growing consensus during the last decades: competitiveness is not solely about maximizing production or accelerating output, but rather about achieving these goals in ways that are socially inclusive, 8 environmentally responsible, and held up by stable institutional frameworks. A truly competitive region is one where businesses can flourish, but equally importantly, where individuals are attracted to live, work, and invest in their future. The competitiveness concept adopted for the sake of this research falls within this broad, integrated approach. It differs from the procedures and definitions examining regions as small countries or collective enterprises competing solely on costs, export data or brute productivity. It adheres to an agenda whereby innovation, sustainability, and long-term territorial growth are considered to be the essential foundations for regional prosperity and competitiveness. Such a holistic definition is particularly relevant in comparing regions such as the Basque Country and Baden-Württemberg, which have both pursued competitiveness strategies that go beyond traditional economic metrics. 2.2. Regional Benchmarking: Foundations, Types and Limitations Regional benchmarking, similar to the aforementioned idea of competitiveness, owes its origin to methods conceived in the business world. It is the systematic comparison between regions (similar to companies in business benchmarking) with the intention of acquiring good practices and to steer strategies towards enhancing regional performance (Lundvall & Tomlinson, 2001). Although there is no standard definition, regional benchmarking has been defined as a systematic comparative learning approach that enables policy formulation and regional development (Huggins, 2008). By quantifying their comparative position over important dimensions—such as innovation, productivity, institutional quality, or industrial development—regions are able to more fully understand their weaknesses and strengths (OECD, 2005) and use this information when planning future policies (Navarro et al., 2011). Essentially, the practice is underpinned by the assumption that other people's experience can be used to learn lessons, especially those that are doing better in matters of concern. As Papaioannou et al. (2006) emphasize, learning from others facilitates the realization of strategic gaps and formulating context-specific reactions. Importantly, benchmarking cannot be limited to numerical comparisons; it must take into account the institutional, policy, and socio-economic settings that support performance differences (Huggins et al., 2013). Among the most significant methodological foundations of successful benchmarking is the comparability principle. As argued by Papaioannou et al. (2006), comparison is most effective when it involves regions that share similar challenges or structural characteristics, in different dimensions whether it is industrial composition, institutional framework, economic scale or similar territories. That said, other scholars (Balzat, 2006) argue that under certain conditions, regions can also learn from those with contrasting characteristics, provided that the differences are well contextualised and interpreted carefully. Benchmarking is traditionally rooted in quantitative research, founded on indicators and rankings for relative performance comparison. For complex and multidimensional phenomena like regional competitiveness, however, this approach alone is not sufficient. Most specialists agree now that a healthy exercise in benchmarking must find a balance 9 3.2. Unit of Territorial Analysis: Considerations for NUTS 1 vs. NUTS 2 Levels A central methodological decision for this regional comparison is to choose the appropriate territorial unit for analysis. According to the European Union's standardized classification system (NUTS), established under Regulation (EC) No. 1059/2003, regions are typically analysed at the NUTS 2 level. In most European countries, this level corresponds to the administrative regions responsible for regional governance and policy. However, exceptions exist, notably in Germany, the United Kingdom, and Belgium, where regional policy competences are situated at the NUTS 1 level. In Germany’s case, the federal states (Länder) form the primary units of regional governance (Navarro et al., 2011). Consequently, following the methodological approach adopted in the “Indicadores de innovación y benchmarking” (Navarro et al., 2011) and the Regional Innovation Monitor (Walendowski et al., 2011), this study will use NUTS 2 for the Basque Country and NUTS 1 for Baden-Württemberg. This poses a methodological challenge, as the RCI 2.0 (Regional Competitiveness Index) provides data only at the NUTS 2 level. As a result, the analysis of Baden-Württemberg requires aggregating the data from its four constituent NUTS 2 regions: Stuttgart, Karlsruhe, Tübingen, and Freiburg. To establish a comparable benchmark with the Basque Country, we will calculate the arithmetic mean of these four subregions, which will offer a general overview of the region’s competitive performance. However, to account for potential internal variation and identify any divergent patterns, we will also examine the individual scores of each subregion. This complementary analysis will help determine whether the four subregions follow similar trends or if specific areas stand out in ways that could be analytically relevant. 3.3. Data Sources and Variables: Analysis of the Regional Competitiveness Index (RCI 2.0) 2016, 2019, and 2022 The quantitative data in this study will be derived from the most recent and fifth edition of the European Regional Competitiveness Index (RCI) (Dijkstra et al., 2023). This latest RCI report breaks down recent figures and recalculates numbers using the new RCI 2.0 indicator for the years 2016, 2019, and 2022. With the choice of these three points in time, the examination will provide a consistent and comparable method to analyze the Basque Country and Baden-Württemberg's competitive performance over recent years. Selection of such a time period is necessary due to the availability of harmonized and re-calibrated indicators, thus ensuring that cross-region comparisons are robust and reliable. In addition to the RCI 2.0 dataset, this project will also utilize two other quantitative data sources that will provide complementary evidence. First, the historical regional GDP and population data from Roses and Wolf (2020) will be used to briefly summarize the long term economic paths of the two regions for the 20th century based on their relative position. The GDP dataset will not only be used for this purpose, but we will also extract data specific to 16 sectoral employment—in particular, the percentage of employment in industry. This dataset will provide context to the weight and evolution of industrial activity within each region, while providing a robust evidence base to reinforce our interpretation of structural change processes over time. Innovation capacity will also be assessed using the Regional Innovation Scoreboard 2023, which provides updated indicators of regional innovation performance and classification within the European Union (latest available data). The additional datasets will be particularly relevant for the contextual overview in section 4.1, while also contributing to further support of our comparative analysis presented in the following sections. 3.4. Complementary Qualitative Data and Analysis In order to complement these quantitative findings, this research will incorporate a qualitative analysis based on a variety of sources, including academic literature, historical reports and policy documents that trace major developments and policy initiatives in both the Basque Country and Baden-Württemberg. This qualitative dimension will allow for a deeper understanding of the broader historical and structural dynamics that have shaped each region’s competitiveness over time. While the quantitative analysis will put greater focus on the period 2016–2022, the qualitative study will trace the evolution of industrial trends and policy environments over the past decades. This broader historical scope is required to account for long-term shifts and to put contemporary competitive positioning of each region into perspective. In particular, the analysis will consider the Basque Country's industrial change, emphasizing key trends, important transformations, and long-standing challenges that have characterized its economic trajectory. Similarly, a comparative analysis will be conducted for Baden-Württemberg, with particular emphasis on the drivers of success and adaptation mechanisms that have encouraged its sustained industrial competitiveness. Furthermore, the study will provide a comparative analysis of the structural, institutional, and socioeconomic factors that differentiate or liken the two regions, with a perspective to better understanding the contextual determinants of their comparative performances. This will be complemented by an overview of key policies and actions implemented in both regions to build industrial competitiveness, including policies to stimulate innovation, industrial modernization, and internationalization. On the whole, the qualitative analysis will attempt to extract potential policy lessons for the Basque Country from the experience of Baden-Württemberg. Rather than suggesting direct replication, the goal will be to identify strategic implications and best practices that could inform future regional development strategies, taking into account the specific characteristics and capacities of the Basque context. By combining this long-term qualitative perspective with recent quantitative analysis, the study seeks to offer a comprehensive understanding of regional competitiveness dynamics, bridging the historical roots of industrial transformation with contemporary performance outcomes. 17 3.5. Methodological Limitations and Challenges Like all comparative regional studies, this analysis is inevitably confronted with certain methodological limitations which must be acknowledged. Needless to say, it will not be feasible to treat all policies, organisational reforms, and competitiveness indicators for the Basque Country and Baden-Württemberg. Thus, the analysis shall contain some oversimplification by nature, including prominent trends and important policy steps but not attempting to perform an exhaustive analysis of all possible influences. Benchmarking exercises themselves are extremely complex, especially in the case of comparing regions that, though structurally very similar in many ways, remain dissimilar in significant respects. Though the Basque Country and Baden-Württemberg were chosen by accepted procedures for determining comparable regions (Navarro et al., 2011), economic size, institutional arrangements, and political circumstances inevitably shape both their experiences and the applicability of particular policy lessons. Such contextual variation ensures that findings have to be treated cautiously and subject to fairly subtle comparisons. The use of the Regional Competitiveness Index (RCI) 2.0 as the main quantitative tool also has some limitations. Although the RCI 2.0 offers a valuable, standardized tool for assessing regional competitiveness, its application of aggregated indicators may actually smooth over considerable internal disparities within regions. This is especially the case for Baden-Württemberg, where the analysis is based on the average of its four NUTS 2 regions—potentially masking differences in economic performance or policy impacts across different subregional regions. Also, while the quantitative data focus on the years 2016, 2019, and 2022, the qualitative analysis looks further afield to chronicle the longer-run industrial and institutional evolution of each region. This is an asymmetry in time horizons between the two methods that may provoke tension when synthesizing findings, but also deepens the analysis by providing a richer understanding of historical trajectories behind current competitiveness outcomes. On the whole, despite these constraints, integrating quantitative and qualitative methods provides a richer and more detailed picture than either could individually. Acknowledging the limits of this research permits a more conservative and critical reading of the results, while also allowing subsequent research to add to and refine the findings developed in this work. 4. Comparative Analysis of Regional Competitiveness 4.1. Overview of Economic Development Trajectories and Current Position of the Basque Country and Baden-Württemberg Before engaging in a comparative analysis of competitiveness strategies, it is useful to outline the broad economic trajectories of the Basque Country and Baden-Württemberg over the 20th century, as well as their current economic and innovation standing within the European landscape. 18 The long-term data compiled by Roses and Wolf (2020) on GDP, population and employment share of industry across European regions from 1900 to 2015 provides a useful perspective. Baden-Württemberg consistently stood among the most prosperous and industrialised regions in Europe throughout the 20th century. Its economy benefited early from Germany’s strong manufacturing base and integration into global markets. In contrast, the Basque Country, while also highly industrialised by Spanish standards, followed a more uneven path, marked by periods of stagnation and lower growth during Franco's dictatorship, and a faster growth after the 1990s. Figure 3. Evolution of regional GDP pc [Source: Roses-Wolf database, 2020] Looking at current indicators (Graph 1), both regions display robust economic profiles, albeit with notable differences. In terms of GDP per capita (adjusted for purchasing power), the Basque Country remained ahead of Baden-Württemberg until around 1937. From that point, Germany began to grow more rapidly, and after 1950 Baden-Württemberg experienced much faster economic expansion, maintaining a higher level than the Basque Country up to the present. This reflects its advanced industrial ecosystem and export-oriented model. 19 Figure 4. Share of Industry and Mining in Total Employment. [Source: Roses-Wolf database, 2020] Regarding the percentage of employment in industry (Graph 2), both regions show a similar trend, with a steady increase until 1980, followed by a significant decline over the subsequent decades. In terms of innovation capacity, the 2023 edition of the Regional Innovation Scoreboard classifies all four NUTS-2 regions of Baden-Württemberg as either "Leader" or "Strong +" innovators, with Karlsruhe achieving one of the highest scores in the EU (142.4, ranked 7th) (European Commission, 2023). The Basque Country, meanwhile, is categorised as a “Strong Innovator” with a score of 109.8, placing it in the upper half of EU regions (72nd). While this reflects a solid innovation infrastructure, it also highlights a competitive gap with the leading innovation regions in Southern and Central Europe (European Commission, 2023). Table 2. Key Economic and Innovation Indicators 2023 Unit Baden Wurtemberg Basque Country GDP pc EUR 54 339 39.547 Population 1000 11 339 2.196 Innovation Index RII Punctuation 131,1 109,8 R&D: Expense/GDP % GDP 5,6 2,16 [Source: Eustat, Ministry of Economic Affairs, Labour and Tourism of Baden-Württemberg, European Commission] As Table 2 clearly shows, Baden-Württemberg maintains a significant lead in GDP per capita, reflecting its highly productive and export-oriented economy, even with a much larger population. The region also demonstrates a considerably higher Innovation Index score and a 20 notably larger R&D expenditure as a percentage of GDP. This strong commitment to research and development underscores its position as a global innovation leader. While the Basque Country shows robust figures, particularly in its GDP per capita for its size, and a solid Innovation Index that places it as a "Strong Innovator," these current data points confirm the competitive gap with Baden-Württemberg, particularly in the intensity of its innovation ecosystem and its economic output per person. These disparities in both historical development and current performance are important to keep in mind when assessing the institutional frameworks, industrial policies, and innovation strategies of the two regions in the sections that follow. 4.2. Evolution and Comparison of the Overall RCI Scores: Basque Country and Baden-Württemberg (2016-2022) The evolution of the Regional Competitiveness Index (RCI) scores between 2016 and 2022 offers valuable insights into the comparative dynamics between the Basque Country and Baden-Württemberg. Although both regions consistently demonstrate strong competitiveness within the European framework, their trajectories over the past years reveal meaningful patterns that merit detailed reflection. In 2016, Baden-Württemberg displayed an exceptional overall RCI score of 136.4, significantly surpassing the Basque Country's score of 102.7. This initial gap of over 33 points reflected the structural advantages of the German region, traditionally recognized for its strong industrial base, world-class innovation ecosystem, and highly developed infrastructure. Over the following years, however, an interesting trend unfolded. By 2019, Baden-Württemberg's overall score decreased slightly to 127.6, and then further to 120.0 in 2022. Meanwhile, the Basque Country exhibited a relatively steady upward progression: its RCI score decreased from 104.9 in 2016 to 102.7 in 2019, and ultimately rose to 107.0 in 2022. This dynamic is visually summarized in Figure 5 below, where we observe two key phenomena: a moderate decline in Baden-Württemberg's scores, and a gradual improvement in those of the Basque Country. 21 Figure 5. EU Regional Competitiveness Index 2.0 -2022 edition for BW and PV Scores (2016–2022) [Source: Own elaboration based on European Commission RCI 2022 Report] While the Basque Country’s absolute score remains lower in comparison, the trend toward convergence is clear. The gap between the two regions narrowed from 33.7 points in 2016 to just 13 points in 2022. Importantly, this convergence does not emerge from an extraordinary leap in Basque competitiveness, but rather from a combination of moderate Basque improvement and relative decline or stabilization at very high levels by Baden-Württemberg. Several factors may explain these developments. For Baden-Württemberg, structural saturation could partly account for the slight downturn. Being already one of Europe’s most competitive regions, marginal improvements become increasingly difficult ("diminishing returns" effect). Moreover, external shocks (such as the COVID-19 pandemic and disruptions in global supply chains) may have disproportionately impacted highly industrialized export-driven economies like Baden-Württemberg. Conversely, the Basque Country appears to have benefitted from steady, though modest, enhancements across key areas of competitiveness. Improvements in labour market efficiency, education, and innovation capacity, combined with a resilient industrial sector, likely contributed to this positive evolution. Additionally, targeted regional policies aligned with the Smart Specialisation Strategy (RIS3 Euskadi) may have gradually reinforced structural strengths over this period. 22 However, it is crucial to interpret these results carefully, to avoid drawing early conclusions. Despite the narrowing gap, Baden-Württemberg still maintains a clear competitive edge. Its score, although slightly lower than in previous years, remains substantially higher than the EU average and reflects profound structural advantages that are not easily eroded. The Basque Country's catching-up is encouraging, but it does not imply parity; significant differences remain in dimensions such as market size and innovation intensity, as will be analysed in subsequent sections. Thus, it can be concluded that from 2016 to 2022 we encounter a scenario of relative convergence, driven by the stabilization of a top performer and the gradual improvement of a mid-tier region. These different dynamics highlight the complexity of benchmarking exercises: it is not only the absolute scores that matter, but also the underlying trajectories, contexts, and structural realities shaping regional competitiveness over time. 4.3. Comparative Analysis of the 11 RCI Sub-indices: Identifying Strengths and Weaknesses To complement the analysis of the overall RCI scores, it is essential to examine the eleven sub-indices that decompose regional competitiveness in a more detailed and granular way. These dimensions allow us to better understand the specific areas where each region excels or encounters greater challenges. For this purpose, the following table summarizes the performance of Baden-Württemberg and the Basque Country in each sub-index for the years 2016, 2019, and 2022. Additionally, Figure 6 provides a visual comparison of the 2022 scores for each of the four NUTS-2 regions of Baden-Württemberg, the Basque Country, and the EU average, allowing for a more intuitive understanding of their relative positions. Table 3. Evolution of RCI 2.0 11 pillars score (2016–2022) Pilar Baden-Würt temberg 2022 País Vasco 2022 Baden-Würt temberg 2019 País Vasco 2019 Baden-W ürttember g 2016 País Vasco 2016 RCI 2.0 Overall 120.0 107.0 127.6 104.9 136.4 102.7 Basic Sub-index 118.7 103.4 126.1 98.6 133.1 92.8 Institutions Pillar 125.4 115.7 142.6 108.1 142.8 95.8 Macroeconomic Stability Pillar 136.7 78.1 143.7 71.9 147.5 66.8 Infrastructure Pillar 113.9 115.6 117.9 95.6 158.9 39.6 Health Pillar 110.4 117.2 111.6 118.2 114.6 119.5 23 Basic Education Pillar 110.4 92.5 117.2 95.1 121.6 108.0 Efficiency Sub-Index 124.7 105.6 127.4 104.6 135.3 117.5 Higher Education and LLL Pillar 104.3 126.9 110.4 123.8 116.4 149.0 Labour Market Efficiency Pillar 124.1 95.3 121.4 89.2 132.1 101.7 Market Size Pillar 162.6 89.4 164.5 102.3 166.0 103.5 Innovation Sub-Index 117.0 117.1 133.2 105.8 141.8 106.3 Technological Readiness Pillar 105.7 135.2 136.2 105.5 141.8 105.2 Business Sophistication Pillar 101.6 93.0 120.3 88.3 108.5 102.3 Innovation Pillar 148.0 118.8 142.0 123.4 180.1 112.9 Source: Own elaboration based on European Commission RCI 2022 Report. A detailed examination of the sub-index data from 2016 to 2022 reveals clear and persistent patterns between Baden-Württemberg and the Basque Country, as well as some interesting shifts over time. Looking into Institutions, Baden-Württemberg still leads, but its score has dropped significantly (from 142.8 in 2016 to 125.4 in 2022) suggesting growing governance challenges. In contrast, the Basque Country shows improvement, rising from 95.8 to 115.7, which may reflect institutional consolidation at the regional level. Macroeconomic Stability remains one of the most structural divisions between the two regions. Baden-Württemberg ranks extremely well in this dimension throughout, from 147.5 in 2016 to 136.7 in 2022, reflecting Germany's classic macroeconomic strength, fiscal conservatism, and credibility. In contrast, the Basque Country ranks significantly lower, under 80 in all three years—from 66.8 in 2016 to 78.1 in 2022. This gap does not, however, reflect underperformance at the regional level. The RCI calculates macroeconomic variables based on national data, therefore, the Basque Country "inherits" the overall macroeconomic instability of Spain, which has historically suffered from higher debt, higher budget deficits, and greater inflationary pressures. Baden-Württemberg, in contrast, benefits from the overall macroeconomic health of Germany. This indicates one of the inherent limitations of subnational benchmarking: certain pillars are subject to national influences that are not under the immediate control of subnational governments, which introduces distortions when competitiveness is read across at the subnational level. 24 The Infrastructure Pillar brings a surprising and interesting reversal between the two regions. While Baden-Württemberg enjoyed a broad margin in 2016, when it registered 158.9, its score has fallen steadily throughout the years to 113.9 in 2022. The Basque Country, on the other hand, has progressed steadily, from 39.6 in 2016 to 115.6 in 2022, and consequently surpassed its German competitor in the latest year. This trend can possibly reflect recent regional investment in priority infrastructure areas such as sustainable mobility, energy efficiency, and digital connectivity. It is also likely that EU cohesion funding and local development strategies (including "smart city" initiatives and the consolidation of rail and port networks) have had an impact in this regard. Conversely, Baden-Württemberg’s decline may be due to ageing infrastructure or insufficient reinvestment, therefore affecting regional logistics and long-term productivity. Regarding the Health Pillar, the Basque Country outperforms consistently, scoring above 117 in every year, while Baden-Württemberg remains stable but lower, around 110. This reflects the Basque region’s traditionally strong public health system and welfare orientation. For Basic Education, the trend is reversed. Baden-Württemberg has remained above 110 across all three years, while the Basque Country shows irregular performance—peaking at 108.0 in 2016 but falling again to 92.5 in 2022. The Efficiency Sub-index, combining Higher Education, Labour Market Efficiency, and Market Size, again shows Baden-Württemberg in the lead, though it declined from 135.3 in 2016 to 124.7 in 2022. The Basque Country's score dropped from 117.5 in 2016 to 105.6 in 2022, indicating increasing divergence. Within the Higher Education and Lifelong Learning Pillar, the Basque Country consistently beats Baden-Württemberg and stands as a European leader. With a remarkable peak of 149.0 in 2016 and still maintaining 126.9 in 2022, Euskadi clearly excels in human capital building. These results indicate a stable and well-organized vocational education and training (VET) system, consistency of support for lifelong learning, and active interaction between education providers and the local industry. The practicability of this approach has been strongly argued in research literature and by global institutions such as the OECD. Baden-Württemberg, while still doing fairly well (between 104 and 116), is lagging in this regard. This might seem paradoxical as the region demonstrates great competitiveness in other dimensions like industrial innovation. In this case, this shows that the Basque model of skills formation based on coordination and territorial strategy is showing real competitive payoffs. Labour Market Efficiency, however, tells a different story. Baden-Württemberg has maintained high performance (124.1 in 2022), while the Basque Country has struggled, dropping from 101.7 in 2016 to 95.3 in 2022. The temporary peak in 2016 may have been related to post-crisis employment recovery, but the latest figures suggest lingering rigidities or mismatches in the labour market. Market Size continues to be an ongoing structural constraint for the Basque Country. Over all three years, the region is below 105, falling from 103.5 in 2016 to 89.4 in 2022. 25 equity, environmental sustainability, and reciprocal prosperity (Gobierno Vasco, 2019). It installs a territorial development logic wherein the economic performance relies upon governance quality, learning institutions, and social involvement. This is the future that is built on the institutional pillars, evaluation quality, and cooperative ethos cultivated over the past decade. As the region transitions into an era of environmental change, technological upheaval, and demographic pressure, its ability to change will be as much a function of prudent policy as it will be of staying grounded in a common sense of purpose for co-creating a strong, inclusive, and innovation-driven future. 5.2. Industrial Evolution in Baden-Württemberg: Key Trends, Transformations, and Success Factors In contrast to the Basque Country’s experience of abrupt structural transformation during the late 20th century, Baden-Württemberg has followed a more stable and path-dependent trajectory since the post-World War II period. As one of Germany’s wealthiest and most industrialised regions, it benefited early on from the emergence of a dense network of small and medium-sized enterprises (SMEs)—the renowned Mittelstand—supported by strong vocational education systems and a historically close alignment between industry, public policy, and applied research institutions (Heidenreich, 2004). This production model has allowed the region to maintain global competitiveness through incremental innovation rather than disruptive overhauls (Heinze & Schmid, 1996). The economic structure of Baden-Württemberg continues to rely heavily on a highly diversified and export-oriented manufacturing base, characterised by technological sophistication, deep sectoral specialisation, and embeddedness in global value chains (Cooke, 2001; Ehrhardt & Nowak, 2011). Major industrial players such as Daimler, Bosch, and SAP coexist with thousands of highly specialised SMEs, many of which dominate global niche markets and prioritise long-term strategy, product quality, and continuous innovation (Germany Works, 2023). These firms operate within dense regional ecosystems, where collaboration with universities, research centres, and public agencies is both routine and institutionalised—a distinctive feature of what scholars have termed the region’s “innovation regime” (Heidenreich, 2004). This collaborative fabric is further reinforced by the state’s longstanding commitment to cluster policies. Since the early 2000s, Baden-Württemberg has actively promoted the development of strategic clusters in fields such as mobility, medical technology, microelectronics, and environmental innovation. These initiatives are not just sectoral concentrations but platforms of coordinated action between firms, research institutions, and public actors (Baden-Württemberg Ministry of Economic Affairs, 2024). The RegioClusterAgentur exemplifies this coordinated approach, acting as an intermediary to strengthen innovation potential, foster cross-sectoral learning, and ensure the strategic coherence of regional efforts (Interreg Europe, 2024). 32 In recent years, the region has also positioned itself as a pioneer in the development of Industry 4.0. Through the “Wirtschaft 4.0 Baden-Württemberg” strategy and institutions such as Allianz Industrie 4.0, the state has provided dedicated support for SMEs to adopt digital technologies—offering consultancy services, funding, and training programmes (Industrie 4.0 BW, 2023). These policies reflect a systemic approach that integrates technology adoption with broader transformation in skills, organisational models, and inter-firm cooperation. A major pillar of this model is the research and talent infrastructure, which includes world-class universities, applied science institutions, and internationally recognised research organisations such as Fraunhofer, Max Planck, and Helmholtz. Their work is closely aligned with industry needs and strategically coordinated through platforms like the Innovationsallianz Baden-Württemberg (innBW, 2023). Flagship projects such as Cyber Valley—a globally leading AI research cluster—have further reinforced the region’s capacity to translate scientific excellence into industrial advantage. Underpinning all of this is a distinctive governance model that combines long-term strategic direction with strong local anchoring. The state government, while providing macro-level leadership, collaborates closely with local authorities, chambers of commerce, and industry associations in a form of meso-corporatist coordination (Heinze & Schmid, 1996). Innovation governance is thus distributed across public, private, and academic sectors, enabling flexible and responsive policymaking capable of addressing structural challenges and external shocks—as demonstrated in responses to the COVID-19 pandemic and ongoing energy uncertainties. Ultimately, Baden-Württemberg’s industrial resilience is rooted in a combination of factors: a diversified SME base embedded in export markets; sustained investment in research and development consistently exceeding 5% of regional GDP according to Expänd (2025); dense innovation and educational networks; and a governance system that ensures policy continuity and inclusiveness. However, this model also faces mounting pressures. The region must now confront the challenge of decarbonising its industrial base, accelerating digitalisation in traditional sectors, and addressing a growing skills shortage—all within an increasingly volatile global environment. In response, Baden-Württemberg has begun to shift emphasis toward energy transition, lifelong learning, and sustainability-driven innovation, while reinforcing its collaborative and ecosystem-based approach to economic development (The LÄND, 2023). These evolving priorities reflect the region’s continued effort to remain competitive while navigating the complexities of industrial transformation. 5.3. Identification of Potential Lessons for the Basque Country from the Baden-Württemberg Experience While the Basque Country and Baden-Württemberg differ significantly in size, institutional context, and historical development, the comparative analysis carried out in this study finds a 33 number of policy principles and strategic approaches that can be useful lessons for the Basque region. These lessons are not meant to be accepted uncritically; rather, they are presented as potential points of reflection, on the basis of the structural convergences and shared industrial ambitions of both regions. Improving Knowledge Transfer and Applied Research One of the most defining aspects of Baden-Württemberg's success has been its ability to take scientific research and make it industrial innovation, notably via the Fraunhofer Society and the Steinbeis Foundation (Cooke, 2001). The organisations are masters at crossing the boundary between academic research and exploitation for profit, particularly for SMEs. While Basque Country does have an advanced infrastructure for applied research through institutions such as Tecnalia, IKERLAN, and IDEKO, there may be opportunities to pursue further the development of formalized, established units focused specifically on rapid technology transfer and innovation support services for SMEs, at least in less advanced markets or in peripheral regions. Expanding the Role of Dual Vocational Training Education Germany's dual VET system is widely regarded to be one of the primary drivers of its industrial might. It gives a reliable supply of technically qualified labor via an arrangement which combines classroom education with in-company training. The Basque Country has made significant progress in reforming its vocational training system and coordinating it with the demands of industry (Mujika & Intxausti, 2018). Yet the long-established, well-rooted VET system of Baden-Württemberg can also surely have useful lessons to impart on how to bring SMEs more fully into training networks and advance lifelong learning in the face of technological and demographic change. Enhancing SME Engagement in Green and Digital Transitions Baden-Württemberg has continuously demonstrated proactive efforts to encourage SMEs to adopt Industry 4.0 technology and move toward sustainability (such as with the "Wirtschaft 4.0" program). This approach has been a vital characteristic of its competitiveness strategy in the last few years. Given the Basque Country's robust industrial base and high share of SMEs, expanding current programs to support firms to digitalize operations, improve energy efficiency, and advance towards EU Green Deal goals might be an effective path. Lessons from Baden-Württemberg's targeted outreach, especially to small firms in legacy sectors, might inform policy design and delivery mechanisms in the Basque context. Prioritising Long-Term, Adaptive Policy Frameworks 34 Baden-Württemberg’s success in reconfiguring industrial policy without losing long-term strategic continuity is crucial, and emphasizes the need of adaptive policy frames conditioned by shared priorities and institutionally embedded trust. Indeed, the Basque Country's own changes in recent decades, as illustrated in RIS3 strategy and its more general model of inclusive competitiveness, followed similar principles. Yet in an ever more uncertain and dynamic world, there is a clear requirement to take forward more systematic methodologies for continuous learning, multi actor evaluations and anticipatory governance. Strengthening these dimensions could help safeguard the region’s competitiveness strategy, building on the kind of long-term resilience demonstrated by Baden-Württemberg (Aranguren et al., 2021; Morgan et al., 2020). All in all, although it is not appropriate to mechanically transfer Baden-Württemberg’s institutional and industrial set-up, its continued focus on long-term policy coordination, promotion of SMEs, development of the workforce and applied innovation provides useful inspiration. For the Basque Country, these lessons serve more as inspiration than as a model to copy: an inspiration to strengthen and amplify existing competences, to standardize the emerging ones and to integrate them in a more effective way into a territorial strategy directed towards the future. 6. Conclusions 6.1. Summary of Key Findings from the Comparative Analysis This research has undertaken an extensive benchmarking analysis of the Basque Country and Baden-Württemberg to explore how two structurally similar European regions have addressed the challenge of sustaining industrial competitiveness in contrasting institutional and historical contexts. The study combined quantitative and qualitative approaches, anchored in the European Commission’s RCI 2.0 index, and examined contextual developments from the 1980s to the present day. The quantitative analysis encompassed GDP pc evolution and employment share of industry evolution over the last century, but mainly focused on the 2016, 2019, and 2022 RCI scores, including both overall competitiveness and its eleven sub-pillars. These enabled a multidimensional comparison across domains such as innovation, education and training, labour market efficiency, technological readiness, infrastructure, and institutional quality. Baden-Württemberg consistently outperformed the Basque Country in most indicators—particularly in innovation and technological domains—showing continuity and excellence in these areas. The Basque Country, while not matching these levels, demonstrated solid performance in areas such as health, technological readiness, and education, suggesting a model that is differentiated rather than inferior. The qualitative comparative analysis provided insights into the institutional, policy, and socioeconomic dynamics underpinning these scores. Baden-Württemberg represents a paradigmatic case of coordinated industrial governance, characterised by long-standing meso-corporatist institutions, a strong vocational education system, and highly effective 35 innovation intermediaries such as the Fraunhofer and Steinbeis networks. Its cluster policy is embedded in traditions of cooperation between industry, government, and academia. In contrast, the Basque Country underwent a more recent process of transformation following the industrial crisis of the early 1980s. Benefitting from regional autonomy after Franco's dictatorship period, the Basque Government led a long-term strategy that combined cluster development, industrial renewal, and institutional innovation. The adoption of the RIS3 approach further aligned research, entrepreneurship, and policy under a shared strategic framework. Overall, the comparative analysis shows that regional competitiveness emerges from locally grounded, path-dependent processes. The Basque model, despite its smaller scale and more peripheral position, demonstrates adaptive capacity and strategic coherence, particularly through inclusive governance and the ability to sustain long-term vision. The case of Baden-Württemberg highlights the importance of trust-based coordination, sustained investment in skills and innovation, and robust institutional infrastructure. Both cases reinforce the idea that competitiveness is not only about economic performance but also about institutional quality and governance. 6.2. Implications and Considerations for the Basque Context While this study does not seek to prescribe or evaluate specific policy interventions, the comparative perspective invites reflection on broader strategic themes relevant to regions like the Basque Country. One central lesson is that regional competitiveness is not driven by a singular model or imported best practices, but rather by a region’s capacity to design and maintain strategies that are consistent with its institutional context and development trajectory. Needless to say, Baden-Württemberg illustrates the long-term value of stable industrial cooperation networks, dual vocational education, and intermediary institutions that translate research into applied innovation. These systems are not the result of short-term policy but of decades of collaborative effort and institutional evolution. The Basque Country has followed its own distinct path, grounded in proactive industrial policy, strong public leadership, and deliberate institutional building. One of its key strengths lies in the existence of organisations that generate critical knowledge and enable evidence-based policymaking. A notable example is Orkestra (The Basque Institute of Competitiveness), which plays a vital role in monitoring competitiveness trends, assessing policy strategies, and facilitating dialogue among policymakers, academics, and private actors. Orkestra's work, embedded in the academic and policy landscape, contributes to a culture of reflection and accountability that strengthens the region’s strategic governance. This institutional capacity for critical assessment, rare in many regional contexts, suggests that the Basque Country is not only implementing strategies but actively learning from them. Rather than viewing Baden-Württemberg as a template to emulate, the comparison serves to 36 highlight alternative mechanisms for building trust, enhancing science-industry connections, or expanding vocational and technical pathways, which may inspire further adaptation in the Basque model. Ultimately, both cases illustrate that regional competitiveness is less about policy instruments per se and more about long-term commitment, stakeholder coordination, and the ability to align economic development with institutional capabilities. 6.3. Limitations of the Study and Future Research Directions Despite the depth of this comparative analysis, several limitations should be acknowledged. First, the use of the RCI 2.0 as a central benchmarking tool introduces a degree of abstraction. While it offers a rich, multidimensional view of competitiveness, it simplifies complex realities into composite indicators, potentially masking underlying socio-political dynamics. Additionally, in the case of Baden-Württemberg, which is assessed at the NUTS 1 level, the RCI score aggregates data from four NUTS 2 sub-regions. This averaging may overlook intra-regional variations, though in this case the sub-regions tend to follow a similar pattern. Second, while the qualitative analysis aimed to contextualise these data, the scope of the study necessarily imposed limits. Certain topics—for example sectoral specialisation, policy implementation practices, or regional innovation governance—deserve deeper investigation. Moreover, this study did not aim to measure the direct impact of specific policies, nor to make causal claims about outcomes. Finally, the comparison was restricted to two regions, both of which are relatively successful and institutionally capable. Expanding the analysis to include other European regions—such as Upper Austria, North Rhine-Westphalia, or Lombardy—could offer further insights, particularly in identifying divergent models or hybrid strategies. Future research could build on this foundation by integrating comparative benchmarking with fieldwork, such as interviews with key stakeholders or detailed policy analysis. Longitudinal studies that track the evolving impact of smart specialisation strategies, green transitions, or digitalisation policies could provide valuable input for both academic and policy communities. Rather than offering definitive answers, this study proposes a framework for learning and reflection. In a global landscape marked by volatility and transformation, the ability of regions to maintain institutional resilience, adapt strategies, and learn critically from others may prove to be the most enduring source of competitive advantage. 7. Bibliography Aiginger, K. (2006). 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