Facing to these changes of the international economy, the response of small and medium size firms is different from that of large firms, which is based on re-engineering and the adoption of the well known modern paradigms of managerial economics.

Empirical analysis indicates that a tight inverse correlation exists between the share of SMEs and the unemployment rate at the regional level. Various new industrialized regions, where industrial employment was particularly high at the beginning of the ‘80ties, have even indicated an increase of industrial employment: a trend which sharply contrasts with the decline of industrial employment in most old industrialized regions of Europe. Moreover new industrialized regions indicate an high share of exports on total turnover, both in large and in small firms, and this share has continuously increased during the ‘90ties.

It can be demonstrated that these phenomena are tightly related among themselves and they can be interpreted according to a model of industrial development which is sharply different in the case of regions characterized by SMEs from the development model of areas where the large firms prevail.

First of all, the process of creation and adoption of technological innovation in small and medium size firms follows patterns and trajectories of evolution, which are different from those in the case of large firms. The technological and organization know-how develops through an heuristic type process of "learning by doing" or through a tight integration between research, manufacturing and marketing activities. In particular, the competitiveness of SMEs is often related to the capability to originally combine, mainly in the production of specialized machinery or components, various techniques which belong to different technological paradigms. That requires an highly skilled labor force, which has been trained either in other firms of the same specialized production sector or in other complementary sectors.

This model of the innovation process clearly differs with respect to the rationalistic model which prevails in the case of large firms or in the research institutions, where the adoption of innovation follows the explicit planning of research investments. In fact, SMEs often are not capable to follow the complex and formal procedures which are required in order to apply to research grants offered by national institutions, as these procedures have been designed according to the characteristics of the innovation process in large firms and do not take into account the less formalized or heuristic process of innovation occurring in small firms.

Technological advance is based on the firm interaction rather than on in-house autonomous R&D investments. Innovation are adopted after observing other firms, rather than through formal learning and searching, as emulation of the other producers is enhanced by the competition mechanism. Thus, technological advance is based on the interaction between the various firms of the same sector and, in particular, it is the result of tight client-producer relationships, rather than of large in-house autonomous research investments.

Secondly, in the case of SMEs it seems that firms adopt a defensive rather than a proactive approach in the adoption of process innovation, which lead to the increase of the labor productivity. Entrepreneurs seems to identify the lack of a demand for their products as the main constraint to their success, rather than the limits of their technological capabilities. Only the pressure of the decreasing product prices or of the increasing labor costs and the risk of crisis lead the often reluctant entrepreneurs to adopt new production technologies. This approach sharply contrasts with that of large firms, where technological change and "restructuring" or "re-engineering" is a strategy which is pro-actively pursued.

On the contrary, product innovation or product customization are actively pursued by SMEs, as they represent the condition which insure the capability to respond to the needs of new customers and insure the growth of the firm into new markets (Stigler, 1951).

All firms, both large and small, are highly specialized and believe that an increasing competitivity requires a greater focus on those productions on which the individual firm has a competitive advantage and the parallel outsourcing of any other function, which could be better performed by specialized suppliers.

The firms while aiming to the decentralization of non strategic phases, which could be performed with lower costs and higher quality by specialized producers, still perceive the need to control through agreements with other firms all the "filiere" or the chain of value added creation. In fact, the relationships between medium size firms and small firms are much less conflictive in the case of regions, such as the Three-Veneto region in Italy, where medium size firms are important, than the case of regions where large firms dominate, such as in the case of regions specialized in automobile production.

In fact, the relationships with the suppliers are based on the model of "co-makership", according to which each individual supplier has an increasing autonomy and it is required to insure an original contribution to the quality of the final product or service.

Although firms aim to decentralize non strategic phases, they are aware of the fact that their competitivity highly relies on their capability to control through various formal and informal agreements with the other local firms all the phases of the production and distribution cycle. This leads to a new process of indirect vertical integration through "the creation of "constellations" of subcontractors and specialized suppliers around a "leader" firm, as this allows to maintain a tight coordination of the various stages in the chain of the value added creation.

Moreover, the subcontracting relationships induce SMEs to develop new relationships with more than one main contractor and the stimulus of the specific needs of the new clients induce the firms to reconvert to new productions, which are tightly linked with the know-how accumulated during various decades of experience in the original field of production. Thus, subcontracting relationships plays an important role in promoting product innovation within the firms and among the firms in the areas where SMEs prevail.

The process of the diversification of the local economy toward new productions is stimulated by the fact that new productions and new production techniques mainly emerge first as the result of a learning process and the response to the internal need of the existing firms, which need new specialized intermediate products or services, and as the result of the development toward new production areas of the actual technological capabilities existing in the local firms. Later on, the growth of the new productions may induce the spin-off of new firms, often owned by the same entrepreneurial family, and these new firms can develop in an autonomous way with respect to the original firm.

In fact, the organization strategy of SMEs in local production systems is based on the concept of decentralization. Entrepreneurs prefer the creation of a new firm, rather than to enlarge the size of the original firm. This approach emphasizes the responsibility of the individual family members which are assigned as managers to the new firms and allows the division of the investment risk of the overall entrepreneurial family.

Thus, the dynamics of employment is basically connected with the change in the number of firms rather than with the increase of the size of the individual firms. On the contrary the average employment size of firms has been decreasing during the last decades.

The different capabilities of SMEs with respect to process and product innovation indicates that public policy should aim to stimulate the demand of technology by SMEs rather than to intervene in order to expand the supply of technological, both public and private, services, which is often adequate in many intermediate regions. On the contrary, in order to accelerate the adoption of product innovation, for which there is an high demand by SMEs, it seems necessary to stimulate the research activity both internal and external to the SMEs through the development of cooperative research projects. For this purpose it may be useful to create adequate interface organizations between the SMEs and the existing local research institutions.

A further difference with respect to large firms is the fact these latter explicitly follow a strategy of decrease of production costs and choose the regions or countries where they are the lowest. This menace help them in resisting to the wage increases in the areas where they are localized and this keep the wage level down in these areas.

In the case of SMEs the cost of labor seems not to be a constraint, but rather a stimulus leading to an increase of the overall productivity of the firm. In fact, SMEs can not choose locations very distant from that which is the origin of their entrepreneur and they can not react to wage increases by relocating in different regions or countries.

When productivity growth decreases the labor requirement of SMEs for given production levels, SMEs can not fire their workers, as they belong to the same entrepreneurial family or they are endowed with a specific and not easily replaceable know-now. In fact, firms fear that these workers may move to the competing firms in the same local production system, transferring the specialized know-how acquired after various years off work in the firm, and this induce the firms to pay higher (i.e. "efficiency") wages than those required by the official sectoral contracts. Moreover, the limited absolute number of employees, often lower than 10 units, makes unfeasible the decrease even of few employees without disrupting the overall organization of a SME.

Thus, the response of SMEs is a continuous effort to expand their production levels by identifying new market outlets for their traditional products or alternative uses for their existing know-how through the development of new products and the diversification of the sectors of activity, in order to be capable to insure a full utilization of their labor resources.

These external and internal constraints oblige SMEs both to increase productivity and to the continuous adoption of product innovation, rather than aiming to the minimization of wage costs trough explicit strategies of international relocation, as it occurs in large firms.

In particular, this process of reconversion can be interpreted as an endogenous growth model, where the material and immaterial resources, such as the labor capabilities of the entrepreneurial family, the local highly trained labor force, the local organizational capabilities, the local technical know-how, the production capital, etc. , which are made idle by the technological process innovations, are smoothly reinvested into new products and new firms (Cappellin, 1983b).

It is clear that this process is tightly related to the prevalence of small firms coupled with low barriers to entry, the family character of entrepreneurship and the high social cohesion in the relationships between the management and the labor. These factors insure a strong embeddedness of firms in the regional community and promote the responsibility of firms in insuring the full employment of regional resources.

3. LABOR MARKET FLEXIBILITY AND INCREASING WAGE LEVELS

The model of the local production systems may also indicate important prospects for labor market policies. In fact, while flexibility of the local labor markets has been recently pinpointed as the most important policy priority for the labor markets in the European countries, this flexibility has been since long time a structural characteristic of the areas where SMEs prevail.

The economic success of the regions characterized by SMEs seems to indicate that the decrease of wages is not a factor of development, but rather the effect of the failure of the development strategy in those region, which have not been not capable to stimulate the growth of SMEs. In fact, the most dynamic areas are those where the wage growth rates are higher, while the areas in deep crisis see the inevitable decrease of the incomes and of the standard of living.

The key factor in the growth and creation of new work places is the increase of competitiveness of firms, the capability to increase productivity and then the innovation and the diversification into new products and new markets. Clearly, a faster productivity dynamic allows to increase the wage levels and it is the only instrument which can allow to stay competitive notwithstanding the inevitable increase of the wage levels. On the contrary, the decrease of wage costs, through various fiscal incentives, has a transitory effect, which is due to disappear in a period of one or two years, since the wage increases are inevitably homogenous within the same country and the temporary advantage of some regions will be soon reabsorbed. Moreover, also the productivity level of the firms tends to adjust to the level of wages and a wage differential in favor of some regions will induce the firms of these regions to be always less efficient of those of the other regions.

In fact, local production systems are usually characterized by cooperative behaviors in labor relationships. In particular, the success of all firms specialized in a particular field of production highly depends on the special skills of the local labor force and this leads the firms to limit the turnover of the labor force by paying higher wages to the most qualified workers. Moreover, they often help these latter in creating a new firm, which becomes a subcontractor or a specialized supplier of the original firm.

Within local production systems, the high turnover of the firms, due to the high birth and death rates of SMEs, automatically determines an high mobility of workers, who are often obliged to find a new occupation. Thus, the high turnover of firms is compensating the apparent rigidity determined by the labor market regulations. In particular, the flexibility of the labor market in the areas where SMEs prevail is underlined by the fact that the frequent crisis of many firms, coupled with the existence of entrepreneurship capability of the local labor force in exploiting new business opportunities, determines that many workers change from the status of self-employed to that of employees and viceversa various times in their life.

Thus, in these areas the labor market flexibility seems to be the implicit result of the behavior of the labor supply, rather than of new policies of the firms, which are increasingly advocating the removal of rigid regulations in the hiring and firing of workers. On the contrary, SMEs are often deeply concerned with the unstoppable phenomenon of the frequent "zig-zag" movements from one firm to the others by the most experienced workers, which are subtracted by other firms through higher wages, after they have been trained for long years in the original firm. In that perspective, female workers are often preferred by the firms, as they insure a greater stability and that has certainly contributed to the high female activity rate in these areas.

A too high mobility of workers represents a critical factor not only for the smallest and less organized firms, but also for those firms which intend to increase their investments in labor training and would like to consolidate their internal organization in order to comply to the new requirements of higher quality and shorter production and distributions times.

On the other hand, the mobility of workers and the turnover of firms are factors that stimulate the diffusion among the local firms of technological and product innovation and may have a positive effect on the overall competitivity of the local production systems.

A further important change in the labor markets of the local production systems is represented by the rapid aging of the population, which is important in Europe and in particular in those areas which have rapidly industrialized during the ‘60ties and ‘70ties and had attracted important immigration flows by a young work force. This phenomenon is related to a gradual weakening of the effort traditionally devoted to the work, to the resistance by the younger and more educated workers in accepting the traditional long work shifts and even an occupation in traditional industrial activities. That has lead firms to attract increasing flows of immigrants from non European countries. On the other hand, these changes contribute in stimulating the firms to increase their technological level and productivity.

4. THE INTERNATIONALIZATION PROCESS OF SMEs

SMEs do not operate only in a national framework and they contribute substantially to national exports, as it is indicated by various recent studies on the territorial disaggregation of national exports (Cavalieri, 1997 ; Balloni et al., 1997 ; D’Antonio and Scarlato, 1997, Viesti, 1997).

Already in 1985 their share on the Italian national total was 53% and it has been increasing since then. Clearly not all SMEs export, but among the firms with less than 500 employees exporting firms represent 68% in 1996. When only exporting SMEs are considered, the average share of exports on turnover is 21%. This share increases in the case of some sectors and it was 45% in the case of the mechanical sector in 1994. In particular, for an high share of the exporting SMEs (21,5%) the share of export is larger than 50% (Cfr. Il Sole 24 Ore, 12.2.1995). Also the exposure of SMEs to international competition is high, as the 30% of SMEs consider that their major competitors are localized abroad (Cfr. Il Sole 24 Ore, 23.4.96).

In particular, handicraft firms (i.e. firms with less than 5 employees), which represent 12% of GDP (9,6% in Germany), obtain 19% of national exports in Italy (2% in Germany) (Cfr. Il Sole 24 Ore, 18.5.96). Moreover, among the handicraft firms 30% are capable to export between 11%-30% of turnover. (Cfr. Il Sole 24 Ore, 14.2.96).

On the other hand, the capability to export is lower among subcontractor and only 23% of the subcontractor firms are capable to export. In particular, subcontractor firms export on the average only 8.5% of turnover, but they certainly contribute indirectly to the exports through their sales to exporting SMEs and large firms (Cfr. Il Sole 24 Ore, 21.5.96).

The geographic orientation of SMEs exports indicates the predominance of the most near countries, such as the EU countries. However, SMEs are increasingly capable to export in distant non European markets, such as the Far East countries.

SMEs have created production and commercial units abroad or have developed strategic alliances with foreign firms in the production, technological and commercial field, thus strengthening their traditional presence on the international markets through the exports.

Recent investigations, which have considered only production plants and not commercial offices, have indicated that employment in foreign controlled firms by Italian firms, which are not among the largest 20 Italian multinational, had increased by 3,5 times in the period 1986-92. On the contrary, employment in foreign firms controlled by the first 20 Italian multinationals had increased only 2,1 times (Cominotti and Mariotti, 1994).

The same survey indicated that 324 firms, of the 450 Italian firms which have invested abroad in 1994, had less than 500 employees and only 6 firms had more than 10 thousand employees. (Cfr. Il Sole 24 Ore, 4.6.96). Various SMEs control abroad subsidiaries which have a larger number of employees than their own employment. In particular, 2% of SMEs (i.e. 1800 firms) have foreign subsidiaries; 4% of SMEs (i.e. 4000 firms) have technical-production agreements abroad and the 14% of SMEs (i.e. 9000 firms) have commercial agreements abroad (Cfr. Il Sole 24 Ore, 23.4.96).

In recent years, the increasing importance of technology and the process of internationalization of national and local economies are transforming the relationships between the firms, which have become more complex, risky and require to be redesigned in a long term perspective. This has compelled firms to device new organization forms and contractual arrangements which may be capable to manage these new and more complex relationships.

In a network model of organization, also SMEs may aim to perform a global role, by being tightly integrated with other SMEs in foreign countries. In fact, internationalization requires the capability by the firms to work in different environment and a greater decentralization of functions and the creation of flexible alliances with foreign firms. A decentralized structure is more efficient than a concentrated one and a small and medium size firm may be capable to manage a specific field of business at the worldwide scale when it is integrated with other SMEs in an international network.

Thus, the increasing integration of the international and European industrial system and its structural transformation create new challenges but also new opportunities for SMEs (Cappellin, 1991 and 1995a).

In fact, the new forms of industrial organization seem to indicate that large firms do not have any more an automatic advantage on small and intermediate firms. The firms, which are capable to survive in an increased competitive international market, are those which have been faster to innovate or to adapt to the specific tastes of local consumers: this seems a specific characteristic of small and medium size firms.

An interesting phenomenon is the increased activity of many small entrepreneurs originating from the same region in the same foreign countries, such as textile entrepreneurs of Veneto region in Romania. This phenomenon is the result of a bandwagon effect, which looks rather similar to the concentration of the emigration flows occurred during the 50ties from the same regions toward specific foreign countries and regions. Moreover, the firms of various local production systems in North Italy have recently undertaken tightly joint investments aiming to create artificially a sort of "industrial districts" in various less developed regions in South Italy and also in foreign countries.

A major characteristics of the internationalization process of SMEs is the fact that it is similar to a gradual "learning process" where the forms adopted by the individual firms vary continuously, trying to adapt pragmatically to the different environment of the various countries on the base of experience. Thus, the internationalization process of SMEs can be interpreted as the extension at an international framework of the same model of specialization and cooperation with other firms, which since long time exists within a regional framework.

In particular, SMEs adopt a very cautious approach in their internationalization strategy and they seem to be aware of new market opportunities abroad, although they do not exploit them, when this would require a too large investment of human resources and a too high risk.

The internationalization of SMEs through commercial agents or self-owned foreign commercial offices or subsidiaries is more important than that through foreign investment in production structures, although the development of international subcontracting agreements and the sale of licenses often represent a valid alternative to these productive investments.

As operative functions abroad and the alliances with foreign firms need to be monitored through a direct presence in the foreign country considered, the major obstacle to the internationalization of SMEs is internal to the firms themselves and it is represented by the lack of qualified human resources or by the frequent existence of a too parochial culture, which is too different from that in the foreign countries considered. Moreover, the lack within the SMEs of many qualified technical collaborators to the entrepreneur hinders that systematic effort, which would be required by the implementation of a medium term strategy.

In particular, the production capabilities of SMEs are largely incorporated in the qualification of the local labor force, in the local network of suppliers and in other factors characterizing the local environment, which may hardly be reproduced abroad.

Therefore, SMEs often prefer to maintain production concentrated and are reluctant to decentralize it in less developed European regions and countries. This is especially true in the case of products, the demand of which is unstable and for which time and quality is the crucial factor of competition, as it is typical for SMEs operating in very specific segments of the international market.

On the contrary, SMEs usually prefer to invest in marketing structures especially within the most developed countries, aiming to integrate the value added which is created in the phases, which are downhill with respect to the manufacturing phase. In fact, the problem of the control of the distribution chain of their own products has become a factor of similar importance as technological innovation and it often requires investments which are larger to those aiming to the increase of the production capacity abroad, as it is indicated by the high amount paid in order to control foreign firms having a well known trademark or a diffused network of retailers.

Various dynamic SMEs seem to be inspired by the example of firms which have recently become multinational or very large industrial groups (such as Benetton, Luxottica, Riva, Radici, etc.) capable to compete with the traditional Italian large industrial groups (such as Fiat, Pirelli, Montedison, etc.), but which during the '70ties were also a SME. In fact, since the ‘90ties, these SMEs have considered the opportunity to invest in the most developed countries, such as USA and Germany, not only in order to consolidate their market presence, but also in order to acquire access to specialized know-how and complementary technological competencies.

A further indicator of the internationalization of SMEs is the fact that, when they recognize the need to raise capital through the quotation in the stock exchange in order to sustain their growth process, they aim to be quoted in a foreign stock market, such as that of New York, rather than on the domestic stock market of Milan, thus exploiting the reputation which they enjoy in those countries where they have been exporters since many years.

These trends in the internationalization process of SMEs certainly do not deny the increasing importance of the process of outsourcing of some parts of productions through subcontracting agreement with firms of less developed countries, in the Far East, in East Europe or in North Africa countries. However, the firms which are interested in the creation of foreign production plants in a less developed country are mainly the firms, which have maintained their specialization in traditional productions, where the competitivity is mainly determined by costs. This may also lead to the closure of the domestic plant and to the emigration abroad of the entrepreneur.

The role of foreign multinationals in local production systems

An opposite phenomenon is represented by the increasing investment of foreign multinational firms in the local production systems of North Italy. In fact, highly specialized industrial districts, which have become world leaders in specific segments of production (for example: in the sector of white appliances or of sport shoes), are endowed with important external economies, in terms of specific know-how, well trained labor force and specialized suppliers. This has lead multinational groups to localize production plants in these areas or to acquire local SMEs and to concentrate within these firms similar productions, which were previously scattered around the world.

In fact, various SMEs have become the target of acquisition by foreign firms, especially when these firms are endowed by a good technological level and may make a quality jump through the transfer of external technology and especially through the access to a modern and worldwide marketing network.

Thus, these SMEs have benefited of a direct access to the large distribution organization of the multinational groups, to higher financial resources and to technological transfers and this has often determined an increase of employment in these firms or avoided their closure as the result of an internal crisis.

New challenges for the internationalization of SMEs

There is a wide agreement that there is the need to consolidate the traditional export activity, which has characterized many SMEs in Italy since 20-30 years, through a direct presence in the various foreign countries. Thus, the revenues generated from the export have recently been invested in the creation of stable commercial and/or production activities in the same foreign markets, rather than in the expansion of the production plants at home.

However, many exporting SMEs are incapable to use abroad commercial distribution channels different from those used on the domestic market, where the traditional small scale retail distribution still prevails, and they are incapable to adapt to the existence in these market of a very limited number of very large operators, such as buying consortia and large retail distribution companies.

Cooperation in the exporting activity among SMEs operating in the same sector has been widely attempted with only limited success, although an organized export activity would require much larger investments than those which could be afforded by the individual SMEs.

Thus the development abroad of efficient logistic structures, of transport, warehousing, sorting, adapting products with special components, repairing and service to clients is becoming a crucial condition for the continuation of the high flows of exports by SMEs. This requires considerable investments abroad, which are different from production plants but may be a preliminary conditions for the creation of these latter

A valid alternative to the direct creation of autonomous commercial structures in foreign countries is that to establish stable contracts with the large distribution companies. However, a crucial constraint is the fact that small firms often lack that scale of production and reliability in terms of quality and time, which would be needed in order to work with the modern distribution companies.

In general, the development of international activities of SMEs points out the need for a tighter integration between manufacturing activities and service type activities and for higher investments in the improvement of the technological background and of the international culture of the local human resources.

The internationalization process of the local environment

In the past, the concept of globalization of markets indicated increasing international flows of products and services and the existence of a price determining mechanism operating at the international level and not at the national level, such as in the case of the markets of foreign currencies, bonds and stocks.

Nowadays, the concept of the internationalization indicates that also the behavior of the individual economic actors is changing and becoming transnational. This implies an overall international integration not only of the product markets, but also of the supply side of the national economies, which is made by the production organization of the firms and by other economic actors which have been usually assumed to be protected from international competition, such as the trade unions, the public institutions, the research organizations, etc. In fact, the internationalization process has a clear social and institutional dimension and it implies a change in the institutional and social mechanisms, which links the various economic and social actors not only in an international framework, but also within each national or regional economy.

The internationalization of economies is a broader process than that of the globalization of markets and it does not imply an increasing homogeneity within a "global village". Instead, it implies an increasing interdependence and the need for a policy of differentiation or of exploitation of the differences characterizing each actor and of the original role which he may perform.

These changes may also be defined as the shift of the industrial system of the advanced economies from an "international" structure to an "interregional" structure, as the economies of the various countries become integrated in similar way as those of the regional economies within the same country (Cappellin, 1993 and 1995b).

5. TERRITORIAL QUALITY AS FACTOR OF COMPETITIVENESS

The development of the capabilities to compete at the international scale is the crucial objective of a development strategy for regions which are tightly integrated in the European Union and in the international economy

The competitivity of the firms is increasingly affected not only by the adoption of technological innovation within the firm, but also by the competitivity of the overall regional economy in which the firms are localized and by the capability of this latter to adopt broad organizational and institutional changes which may provide a favorable local environment.

In particular, no European region can be really competitive just on labor costs with the various newly industrialized countries of the world. The development strategy of the local production systems in intermediate European regions should shift from a competitiveness based on costs and on low salaries or on various forms of public financial support, as it was in the earlier phases of development, toward a "market oriented" development strategy. Thus, competitiveness should be based on the growth of productivity, on product quality, on the fast adjustment to the continuously changing needs of the consumers and on the continuous adoption of product and process innovation.

Clearly, the competitivity of a region depends on the integration between the firms and their specialized suppliers, the modern logistic, distribution, communication and transportation services, the other business services and the research and education institutions (Cappellin and Nijkamp, 1990). In fact, the international competitivity of a SME is largely based on the spatial concentration of many small and medium size firms in the same region and on their relationships with their territory.

The factors of competitiveness of a modern industrial economy are not only "hard" factors, such as :

- the transport costs,

- the availability of non qualified labor,

- the cost of labor, the cost of raw materials,

- the cost of industrial sites,

- the size of the local market,

- the exploitation of internal economies of scale and

- the availability of public financial incentives.

On the contrary, the importance of new qualitative or "soft" location factors (Cappellin, 1997c), which may create a favorable environment for the development of the local firms, seems to increase, such as:

- the dynamism of the local economy,

- the increase of labor productivity,

- the exploitation of the industrial tradition or the technological know-how of the local economy, of the local entrepreneurial culture and capabilities,

- the availability of specialized suppliers,

- the forms of the bank-industry relations,

- the education opportunities for specialized workers,

- the forms of the labor-management relations,

- the existence of conflicts between local industry and local residents,

- the forms of social relations for the entrepreneurs,

- the quality of the local social environment,

- the capability to respond to the new residential preferences of the entrepreneurs and of the labor force,

- the cultural resources, the development of a regional identity and the sharing of a common development strategy,

- the quality of the organization of the territory and the effectiveness of the urban policies,

- the development of the local transportation networks and the availability of logistic services,

- the local administrative capabilities,

- the level of autonomy of local institutions,

- the international image of the area and the extent of international relations,

- the existence of an explicit local "foreign policy" of the regional and urban institutions.

In fact, a modern industrial organization, which aims to the quality of the products and of the processes should be based on a carefully designed but flexible organization of the relationships between the individual firms. Since the competitiveness is increasingly determined by the pace of response to the external shocks and by the acceleration of the production and distributions times and less by the only costs of production, this requires that the flows of products, factors and information are made as smooth as possible.

There is a tight relation between the objective of "total quality", to which modern "just in time" techniques aim, and the objective of a better environmental quality or of a better quality of the organization of the territory, since the first requires the existence of a better organized environment external to the firms and a careful territorial planning of the various local production and residential settlements.

In fact, modern logistics indicates that a decrease of the transport time for goods and people requires wider spaces devoted to the management of these flows, such as the areas of modal interchanges, parking and deposit. Similarly, a more efficient work organization requires wider working spaces and a more efficient lay-out of the plants.

On the contrary, the low quality in the organization of the territory may represent an obstacle to the economic development. In fact, the high congestion of the traditional road network, which can be hardly expanded due to the already high density of the settlement structure, is determining continuous queues of thousands of commercial and passengers vehicles both in the internal transports of many local production systems and in the linkages between the various urban centers of the same region. Quite often three hours are needed in order to do the less than 100 km on an highway between two cities. The circulation is often slower along secondary roads. This determines a situation of frustration in the local population, as the planned improvements after many years do not materialize. On the other hand, there are increasing tensions between the firms and the local institutions determined by the external diseconomies generated by the firms and by the new needs for a better environment of the local population. The environmental decay determined by the existing production activities may determine the hostility to the location of new production activities in these areas. Moreover, the inefficiencies within the external system of public services for the population may determine the claim for higher wage and an increase of the labor costs in the firms.

Territorial quality does not only consist in planning constraints aiming to the preservation of natural environment but more generally it includes an active effort aiming to an improvement of the standard of living of the citizen also through economic and social policies, such as lower unemployment or higher security against crime and corruption.

In particular, the decrease of working time and the increase of leisure time determine an increased demand of public services for sport and recreation in the smaller centers. On the other hand the ageing of population and the accelerating pace of industrial restructuring is leading local institutions to increase the financial resources devoted to the social programs for the many persons who are marginalized by an increasing competitive labor market.

Thus, while sometime economic development may have negative impact on territorial quality, it is also true that territorial quality may represent a strategic factor for the economic success of a local production system. The territory is not the simple object of the changes in the production levels and in the internal organization of the large firms and it performs a more active role in the case of the SMEs. as it represents the set of those external resources which to a large extent determine the long term development of the individual local firms.

The concept of quality may play a strategic role in the framework both of economic policies and of physical planning. The traditional approach in national regional policies, based on financial transfers, and the traditional approach of regional institutions, based on macro-sectoral economic planning, are incapable for their very nature to take into account the tight relations between the economic development of an area and the organization of its territory.

On the contrary, there is the need for horizontal policies capable to affect the local environment in which the firms operate and to insure a greater efficiency to the local system of public services. Thus, infrastructure networks and territorial and urban policies are going to represent a new key elements of the industrial policies in local production systems.

6. THE ROLE OF URBAN CENTERS IN A NETWORK MODEL

A regional economic development strategy based on the network model of organization has clear implication for regional industrial and territorial policies, as this model implies :

- an increasing importance of physical infrastructures both traditional and very innovative,

- an increasing importance of service activities, which may be considered as a sort of "soft infrastructures",

- an important role within a regional economy of cities and not only the large metropolitan areas but also the intermediate and even the minor urban centers.

A work model of industrial organization emphasizes the interdependence between economics and territory and the role of urban centers (Cappellin, 1988). In particular, an urban center may be considered as a pool of infrastructures or a center of "soft" location factors. Urban centers perform the role nodes of the transport and communication network or the gateways in the relationships of the regions with the outside world. Cities are the center of economies of agglomeration and allows a decrease of transaction costs between the various firms and stimulate their spatial concentration. Cities represent the centers of business and public services and have a power on their territory, as they exercise a sort of "leadership" and an incubation functions in the creation of new firms mainly in new service related activities, which allow the reconversion toward new sectors of the regional economy. Cities are cultural centers, the centers of the higher education institutions and of other qualified services to the population which determine the attractivity of an area towards foreign investors. Cities give an identity to the surrounding regions and play a leading role in defining the development strategies of a regional economy and in the creation of the consensus among the various local actors.

These different dimensions of the nature of a city indicate that urban policies have a specific regional and national dimension and do not necessarily coincide with the traditional field of "urbanism" or of physical planning. On the other hand, urban policies have also a distinct economic dimension, which is different from that of the traditional regional economic planning. In fact, a modern regional and urban policy should aim both to the objective of economic development and to the objective of territorial quality and it should be capable to integrate among themselves the spatial, economic, technological, social and environmental dimensions.

These different dimensions of a city may be useful in interpreting the changing role of small and intermediate cities within the non metropolitan regions during the last decades (Cappellin, 1997c). In fact, cities have only played a passive role in the early phases of industrial development of the non metropolitan regions, as they have performed the role of simple supply centers of basic commercial and public services for the population of their respective hinterland, while the development of the industrial activities has mainly been scattered in the rural areas or concentrated in rather small country villages. Thus, the export base of the intermediate regions has for long time been in the rural areas rather than in the cities. Moreover, the industrial development based on small and medium size firms of these regions has had a clear anti-urban bias, as a reaction to the model of economic and social organization and of living characteristic of the large metropolitan areas, where in fact the large firms were concentrated.

Intermediate regions which during the early phases of their industrial development in the ’60ties and ‘70ties did not consider the importance of urban centers, now acknowledge the crucial role that various intermediate cities, such as their regional capital cities, may have in the actual process of transition of their industrial structure.

The traditional conflict between rural areas and cities is transforming into a more synergetic relationship, where the rural areas maintain their industrial specialization and are the origin of the manufacturing exports, while intermediate cities play a crucial role in the provision of strategic producer services, of fairs centers, of research and superior education centers and of important commercial transport and communication infrastructures.

Moreover, the increasing level of per-capita income and the decrease of the work time allow the development of new and more complex needs, than just the simple housing needs, by the local labor force and this stimulate the demand of a wider scope of services. Thus, the intermediate and small cities of local production systems are transforming from an undifferentiated concentration of housing for the regional labor force to new complexes of qualified private and public services.

Intermediate cities of non metropolitan regions have had a rather subordinate role with respect to large metropolitan cities and all of them have been rather similar or characterized by a rather undifferentiated economic structure in every region.

Transaction costs are lower when distance is lower and they may also explain why a diffused urban systems made by various intermediate and small cities may be more efficient than a centralized model, such as that of a large metropolis (Cappellin, 1988).

Intermediate cities indicate now an increasing importance of the interregional and international relationships with respect to the internal regional relationships and are transforming themselves into the gateways of their regions in the relations with the outside world. Intermediate cities are becoming interdependent between themselves and increasingly specialized in particular activities, which give them a particular identity. Thus, they may now compete at least in these specific activities with the large metropolitan areas.

Intermediate urban centers have also developed increasing extended international relations and are challenging the role of large metropolis in their role of gateways in the international transport and communication flows.

The recent European experience seems to indicate a decreasing power of the large metropolis and a "renaissance" or a substantial increase in the international standing of smaller urban centers and especially of intermediate cities, which are now linked between themselves in the framework of increasingly larger regional and interregional or transnational networks.

The capability of a smaller city to compete at the national and international level depends, first of all, on a greater specialization in specific activities and the capability to create a specific image which may make that city distinct with respect to the other.

Secondly, the creation of alliances with other cities of the same region or urban network allows to reach a critical mass necessary for supporting innovative activities and to have access to the resources and the specialized know-how which may be available in the other cities of the same network. This may allow to a small regional center to become a national or international actor.

The increasing complexity of technologies and process of internationalization has increased the scope of interregional and international relations, which do not only consists in ever increasing flows of exports, but also in the exchanges of commercial, financial and technological information.

That also leads to the fact that infrastructures become again a strategic factor or even a bottle-neck in economic development, as the need of new modern infrastructures is coupled with the increasing congestion of the traditional infrastructures.

A typical case is the increase of international connections which is occurring in the "third level" regional airports, which are not only the destination of tourist flows but are facilitating the international contacts of many SMEs which are active in the international markets.

In fact, since the last 40 years airports have determined the hierarchy of cities, by determining their accessibility from medium and long distance. Intermediate cities, which were only linked to the major airports of the large metropolitan areas through hub and spoke connections have developed in the last few years various transversal or non radial international and interregional connections with other intermediate cities. That has allowed to enlarge the action area of business and a better access to distant markets.

The new role of the urban centers as hub in the internationalization process is enhanced by the improvement of the international and interregional transports. The development of the Trans European Networks and especially the creation of the high speed trains may represent a threats for the intermediate regions since they facilitate the communications especially between the largest European metropolis. However, their effects seem to be compensated by the increasing importance of air transport and the expanding international connections of the regional airports. Moreover, a further technological innovation is represented in the case of freight transport by the revolution in the organization of the logistic chain from the raw material sourcing to the final product distribution, by the development of containers on sea-land transport and by the development of rail-road combined transport. Further important innovations may be represented by the cable connections to be developed in many intermediate cities and by the diffusion of the cellular phones which allow an increase of "tele-working" or by the use of underground infrastructures for road transport, in order to preserve residential or naturally protected areas in the densely populated rural areas around the intermediate urban centers.

A positive effect of these trends is the rediscovery of the importance of rail both for passengers and for freight transport. Thus many regions acknowledge the need to renew the regional rail networks, which was left to decay and sometime even dismissed, especially when that network may be used in the transversal relations between the various smaller centers of the same region, rather than only in the radial connections with the major urban center, as it was in the past.

An improvement of the transport infrastructure internal to the various regions may allow the various intermediate centers of that region to overcome a pure competitive strategy and aim to a greater integration in order to jointly compete with respect to the much larger metropolis.

All these new trends implies a change in the traditional approaches and methods of policy-making. The spatial perspective of traditional urban planning should be enlarged to the organization of larger areas encompassing entire provinces or the basins defined by various contiguous urban centers. This leads to develop modern approaches of inter-municipal planning and cooperation, in order to overcome the risk that the local public administrations will intervene each one for its own.

The need to solve the traffic problems created by the JIT underline the need to combine the creation of new transport infrastructures with a new planning policy aiming to bring a better order in the location of the various activities in the regional territory. The methods of environmental impact assessment or of the cost-benefits analysis of transport infrastructures may be integrated with other more complex type of analysis in the elaboration of "Area Plans", aiming to the management and the enhancement of the economic, social and territorial effects of transport infrastructure and designing the complex of accompanying measures which may tackle new opportunities and threats. These plans may be elaborated through the cooperation of many local public and private actors and the major transport operator concerned.

New policies and projects may favor the development of public-private partnerships, which may concentrate especially in the provision of new advanced services complementary to the new transport infrastructures, in the creation of major transport terminals both for passengers and freight, such as regional airports, old rail stations and new intermodal logistic nodes, and in the reconversion of large dismissed industrial and transport areas within the urban centers and the rural areas.

7. CONCLUSIONS

The wide literature on "industrial districts" has had the great merit to have clarified the existence of an industrialization pattern which is very different from that which has historically characterized the metropolitan regions. However, the results of these studies could be considered just interesting isolated cases, having a limited relevance in explaining the structure and performance of the overall European industrial system, unless an effort is made to extend this different industrialization model in order to encompass the more general case of the many intermediate regions which are characterized by the existence of various local production systems based on SMEs, but have an economic structure which is more diversified than in the traditional industrial districts.

In fact, since the ’70ties, many intermediate regions, where SMEs prevail within the industrial sector, have indicated a virtuous process of development, characterized by low unemployment rates, high increase of productivity and of per-capita income, high export propensity and a strong and sometime even increasing industrial specialization.

The importance of this new pattern of industrial development is indicated by the fact that the European territory is not only characterized by the case of few large metropolitan areas, but also by the high number of intermediate and small urban centers, which are by far more important in term of surface and also in term of population and employment than the metropolitan areas. Thus, to avoid to recognize the existence of the specific pattern of industrial development in local production systems implies to ignore the reality of a very large part of the European economy.

Moreover, the experience of these intermediate regions may be very useful for the development policies in the peripheral regions of Europe and it may have greater opportunity of success than a too ambitious attempt to create millions of jobs through the attraction of many plants of multinational firms or also to create ex novo many industrial districts in these regions.

However, the local production systems are very different from 20 years ago. In particular, the model of the monosectoral industrial districts has evolved, at least in the North Italian regions during the 90ties, toward the model of the multisectoral and outward oriented local production systems, characterized by network of horizontal and vertical relationships between the local SMEs. This paper has aimed to analyze three related aspects of the recent transformation of the local production systems.

First of all, the process of diversification and reconversion through the adoption of innovation and the exploitation of the production know-how into new productions is a peculiar characteristic of the local production systems. This process is tightly linked to the existence of networks of firms, to the outsourcing to subcontractors, the spin-off of new firms and to the high mobility of qualified workers between the firms. It is also the factor explaining the full use of the local human resources and the low unemployment rates in these areas. In the future a critical factor of the flexibility of the local production systems seems to be a more explicit effort in human capital investments and in a tighter linkage between education and R&D policies.

Then, the internationalization process is not only the result of the transformation in the organization of large firms in the large metropolitan areas, but also of an active role of SMEs within the local production systems of the intermediate regions. While the globalization process is often indicated as an external constraint and a risk for the survival of the local production systems, the increasing internationalization of these latter may be described as the gradual extension at the international level of the tight relationships of co-makership which have traditionally existed at the local level and then have expanded at the interregional level. In this respect, investments in the development of modern logistic and distribution services are a critical factor for a wider internationalization of SMEs.

Finally, the organization and quality of the territory seems to be a key factor in international competitiveness. This implies a new relationship between the urban centers and their rural hinterlands Moreover, the increasing internationalization of SMEs is accompanied by the increasing role of cities and regions in the international relations. Thus, an efficient territorial policy seems to require a new role of rail versus the road transport and municipal and regional government should develop a local "foreign policy" aiming to promote various forms of cooperation between urban centers or regions in the framework of interregional and international networks.

The economic success of the local production systems was largely determined by the almost spontaneous availability of a favorable environment. Explicit industrial public policies where largely absent, while an important role was played by an often informal but intense and effective activity of networking, which has allowed implicit forms of coordination of the various local actors, both public and private, in the framework of various institutions such as the chamber of commerce, the fairs and other local consortia, the industry associations, the trade unions, the local banks and the major political parties. Local and regional governments seem to have plaid a largely secondary role in this phase of development.

However, a major challenge to the continuation of the development process in local production systems is represented by the need of major decisions, in order to undertake large projects on the infrastructure network and on other modern collective services, which require new forms of explicit or formal coordination and a greater role of local institutions, such the municipalities and the regional government. The claim for larger political autonomy and of federalist reform (Cappellin, 1997a and 1997b), which has characterized the political debate in the regions of North Italy during the 90ties, seems to be based on the wide consensus that economic development will increasingly depend on the capability to solve problems, which are external to the individual firms and which could be tackled only through public policy measures taken by the local and regional institutions.

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