What is LED?

The fundamental difference between LED and traditional one-dimensional approaches to economic development, such as national industrial policy, technology transfer or SME support initiatives, infrastructure upgrading, urban planning or skills development, is that it combines all of these frequently fragmented approaches and tools into a systemic and sustainable concept which cuts across many different portfolios.

At national level, such a holistic and multidisciplinary approach would produce enormous complexity with regard to issues and actors. In contrast to this, the focus that LED puts on the local and regional levels reduces this complexity and allows actors to pursue an integrated path of economic development. LED is thus a territorial concept and forms part of the broader local or regional development process with a specific focus on economic aspects.

LED is, of course, not a completely new concept. Before becoming popular in many developing countries since the 1990s, it had already been implemented for many years in various forms in industrialized countries.

In the early stages of LED, activities focused strongly on the marketing of locations to external investors, often linked with incentive systems such as tax breaks and/or reduced costs of public services (such as water and electricity) and infrastructure development.
In a second phase, attention shifted to indigenous economic potentials, striving to support the competitiveness of existing firms, promoting entrepreneurship and business start-ups. This was often done via entrepreneurship development and training programmes, business support and business linkage mechanisms, providing access to finance, skills development, rural development and sectoral development approaches. Since the late 1990s, a more holistic approach to LED has become prevalent.
This third and latest phase of local economic development enhances the individual business support and sectoral development approaches of the second development phase by making the entire business and community environment more conducive to economic development. The focus of the third phase is therefore on providing a competitive local business environment, encouraging and supporting networking and collaboration between businesses and public/private and community partnerships, facilitating workforce development and education, focusing inward investment to support cluster growth and supporting quality of life improvements. Throughout the evolution of LED, LED thinkers and practitioners have borrowed and combined elements from a variety of disciplines such as economic geography, urban planning, economic sociology, public administration and decentralisation, systems thinking and regional economics. This development reflects the fact that a local area's economy is more than a collection of individual firms and markets. It is a composition of networks and dynamic systems of interactions that shape individual decisions and actions.

In order to capture this complex system of influencing factors, the concept of "systemic competitiveness" has become very popular in LED thinking and practice. Systemic Competitiveness is an analytical framework to understand the determinants of successful industrial development. It has initially been developed with a look at national systems, but it has proved highly useful for the analysis of local and regional economies.The Systemic Competitiveness concept emphasises the importance of factors determining the evolution of economic systems which are not systematically addressed by conventional macro- and microeconomic approaches.

There are two elements which distinguish the concept of "systemic competitiveness" from other analytical frameworks concerning the factors that determine industrial competitiveness:

It entails four different levels of analysis (the meta-, macro-, meso- and micro levels). In addition to the micro level of firm activities and the macro level of national economic policy, the meta level addresses such factors as the capacity of a society for social integration and its ability to formulate and implement strategies. The meso level concerns the supporting structures, including sector-specific policies which encourage, supplement, and increase the efforts at the company level.
It brings together elements of industrial and innovation economics and industrial sociology with the discussion in political science on governance based on policy networks.

Distinguishing between four analytical levels, the micro-, meso-, macro- and meta level, and investigating the interrelationships between them does not only make sense at the level of national economies. It is also useful in understanding the evolution of local and regional economies, and it is even helpful to address supranational factors.

The micro level contains factors such as the individual firm's level of skills, capital and networks.
The meso level stands for the firm's environment in terms of support institutions and specific policies targeting firms, areas or sectors.
The macro level reflects the general policies and framework conditions that are relevant for economic development such as a country's trade regime
The meta level captures the general values, belief systems, etc. that form the social capital of a location.

The following graph depicts the model of systemic competitiveness in more detail and provides an overview of the different determinants of a location's competitiveness at the various levels:

What then, is LED about?

Depending upon from which angle you look LED can be about locational marketing; attraction of investors; real estate development; entrepreneurship development and business start-ups; skills development; improvement of infrastructure; strengthening of local businesses by providing access to business and financial services; cluster, value chain or sector development; creating a business friendly environment and efficient public sector; fostering business linkages; or improving aspects of the quality of life and therefore attracting businesses and skilled workers and professionals. Last but not least, LED may focus on meta-level issues such as the entrepreneurial attitudes and values, the social cohesion and collective action or the ability to formulate strategies necessary for developmental regions.

How can LED be best described?

There are of course numerous definitions for LED, most of which underline two important aspects: First, LED is an ongoing process and secondly, it is driven by local actors from different societal sectors, which implies collaboration, and even co-responsibility between the public and private sector for the economic development of a region or location.

With this understanding, international organisations define LED as the following:

" LED is an ongoing process by which key stakeholders and institutions from all spheres of society, the public and private sector as well as civil society, work jointly to create a unique advantage for the locality and its firms, tackle market failures, remove bureaucratic obstacles for local businesses and strengthen the competitiveness of local firms." (GTZ)
"The purpose of local economic development (LED) is to build up the economic capacity of a local area to improve its economic future and the quality of life for all. It is a process by which public, usiness and nongovernmental sector partners work collectively to create better conditions
for economic growth and employment generation." (World Bank)
"Local economic development (LED) is a participatory process which encourages social dialogue and public-private partnerships in a defined geographical area. LED enables local stakeholders to jointly design and implement a development strategy which fully exploits local resources and capacities, and makes best use of the area's comparative advantages." (The International Labour Organisation (ILO))
"Local economic development (LED) is a participatory process where local people from all sectors work together to stimulate local commercial activity, resulting in a resilient and sustainable economy. It is a tool to help create decent jobs and improve the quality of life for everyone, including the poor and marginalized. Local economic development encourages the public, private and civil society sectors to establish partnerships and collaboratively find local solutions to common economic challenges. The LED process seeks to empower local participants in order to effectively utilize business enterprise, labour, capital and other local resources to achieve local priorities (e.g., promote quality jobs, reduce poverty, stabilize the local economy generate municipal taxes to provide better services)." (UN-Habitat)