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Why Regional Development Needs a New Playbook: Knowledge, KIBS and the Ecosystem Question

Population has grown and infrastructure has been built, yet the productivity gap between Victoria and its regional cities has widened anyway. The economy regional cities now operate in runs on knowledge. And knowledge behaves differently.

By Dr Tony Irish, CA Business Valuation Specialist 26 August 2026 · 6 min

For most of the past forty years, Australian regional development has run on a familiar playbook: attract population, invest in infrastructure, subsidise a manufacturing plant, cut a ribbon on a new precinct, and hope gross regional product follows. It hasn’t. SED Advisory’s longitudinal analysis of Australia’s regional cities shows that over 1996–2021, Victoria’s average GRP per capita grew 2.6 times faster than its regional cities, and GRP per worker in those regional cities actually fell 3% while the state grew 20%. Population growth has been broadly similar. Infrastructure has been built. The productivity gap has widened anyway.

The old playbook was designed for a different economy: one where value came from land, capital and lower-skilled labour. The economy regional cities now operate in runs on something else: knowledge. And knowledge behaves differently.

The old paradigm, and why it is running out of road

The classic Australian toolkit assumed a mostly sectoral world. Governments picked industries (manufacturing, agriculture, mining, tourism) and directed subsidies, land and infrastructure at them. Where regions struggled, the response was compensatory: redistributive transfers, decentralisation of public-sector jobs, tax concessions. The OECD now describes the modern alternative as a shift “from traditional sectoral to place-based policies… from subsidies which thwart business innovation to territorial development policies that enhance competitiveness in global markets.”

Australia’s Productivity Commission has reached the same conclusion. Its Transitioning Regional Economies report found that place-based policies are likely to be more effective than subsidy-based policies, and that decentralisation of public-sector jobs has had only limited benefit historically. Institution-led approaches have fared little better; an Australian review argued the entity-driven model allowed regional initiative to ossify and become increasingly institutionally dependent.

Infrastructure and institutions still matter. But they are inputs, not the strategy. In a knowledge economy, the strategy must start with the resource that actually generates value.

Why knowledge is not just another input

Knowledge behaves nothing like the inputs regional policy has traditionally optimised for. It is non-rival: as Nobel laureate Paul Romer’s endogenous growth theory formalised, ideas are non-rival, so output per person depends on the overall stock of knowledge. It is cumulative; the stock is not depleted by use. And, critically for regional policy, it is sticky: patent-citation research shows knowledge spillovers are strongly localised, and that localisation has been growing, not shrinking, in the post-1980s era despite globalisation.

Joel Mokyr’s The Gifts of Athena, published just before he shared the 2025 Nobel in Economics, puts the institutional point sharply: “the driving force behind progress was not just that more was known, but also that institutions and culture collaborated to create better and cheaper access to the knowledge base.” Accumulating knowledge is not enough. Value comes from converting it into use. That conversion is what the old regional playbook does not address.

SED’s data on Australian regional cities makes this concrete. Between 2006 and 2021 their knowledge base grew from 40.3% to 50.3% of the workforce, now comparable to Australian capital cities. But the tradeable sector share of those same economies shrank from 22.2% to 18.5%. Only 1 in 10 new jobs was in the tradeable sector, while 5 in 10 came from government. Regional cities have built the knowledge stock. They have not built the mechanism to convert it into exportable value.

KIBS are the missing conversion mechanism

That mechanism has a name: Knowledge-Intensive Business Services. KIBS (engineering, ICT, management consulting, R&D services, legal, accounting, design, market research) are formally defined as intermediaries between the producers of knowledge and its users, combining external information with client-specific knowledge to produce applied services and new goods. European regional research characterises them as the engine of regional innovation systems and the new knowledge infrastructure.

The Regional Australia Institute has traced the same effect in Australian data, noting that regions with a strong KIBS presence have an innovative and skilled workforce able to cope with future changes to the nature of work. SED’s own analysis pinpoints the gap: KIBS show the strongest positive correlation with weekly income of any sector, yet KIBS employment in regional cities sits at just 8.8%, roughly half the 16.6% in capitals, and falling. That is the leverage point the old playbook is missing. Regions do not have the capability to leverage knowledge, which limits growth and innovation.

From single institutions to knowledge ecosystems

The other shift the old playbook missed is that knowledge value is not produced by any single institution, not a university, not a research centre, not a government agency. It is produced by the interaction between them. Phil Cooke’s Regional Innovation Systems framework describes this as systemic interaction between the regional production structure and its supportive infrastructure, taking its vantage point in localised learning processes and ‘sticky’ knowledge as a source of competitive advantage. Etzkowitz’s Triple Helix, and later Quadruple Helix formulations adding civil society, extend the point.

Australia’s own Statement of Principles for Innovation Precincts explicitly frames them as place-based innovation ecosystems defined by formal and informal networks and partnerships, and notes that business collaboration on innovation is associated with a 70% increase in the likelihood of new-to-world innovation. The OECD’s most recent regional-innovation guidance urges policy that adapts to the different capacity and innovation ecosystems in different regions.

The trap to avoid, well documented in evaluations of Europe’s Smart Specialisation Strategies, is designing ecosystems by copying the neighbours. LSE’s evaluation found S3 strategies are generally loosely connected with the intrinsic conditions of each region and mostly mimic what neighbouring areas are doing. Place-based only works when the place is genuinely mapped.

A knowledge-based regional development strategy: what it looks like in practice

  • Map the actual knowledge base: by discipline, by industry, by workforce composition. Not “we have a university” but which knowledge fields are concentrated here, which are adjacent, which are missing.
  • Diagnose the conversion gap: is the constraint knowledge stock, KIBS density, institutional connectivity, market access, or leadership?
  • Build the KIBS layer deliberately, through procurement preferences, anchor-tenant strategies, co-working, digital infrastructure, and skills pipelines that keep knowledge workers in the region.
  • Design the ecosystem, not the buildings: networks, governance, brokerage roles, university-industry-government-community links. Precincts are enablers, not outcomes.
  • Focus on knowledge reuse, not just discovery. Most regional-city value will come from applying existing knowledge across industries, not from generating new-to-world patents.
  • Take a decade view. Knowledge ecosystems are cumulative. Three-year funding cycles cannot build them; benefits registers and long-horizon evaluation can.

Where SED sits

SED Advisory is one of the few Australian consultancies that has done the quantitative work behind this framework rather than borrowing it from a textbook. Our proprietary shift-share and knowledge-mapping analysis of Australian regional cities produced the findings above. Our knowledge-base mapping process identifies where adjacent strengths can be leveraged and where genuine gaps can be filled. Founder Dr Tony Irish’s PhD research is directly focused on KIBS in regional locations, a research pedigree no other Australian regional consultancy holds.

If your region, council, RDA committee or precinct board is designing its next economic development strategy, and looking for something more rigorous than the old playbook, SED Advisory works on exactly this question. Get in touch with SED Advisory.

Sources cited

About the author

Dr Tony Irish is a director of SED Regional Advisory. He is a Chartered Accountant, holds a PhD in regional economic development, and is accredited as a CA Business Valuation Specialist by Chartered Accountants Australia and New Zealand.

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