The role of demand in regional industrial path development – examples from the Swedish periphery

ABSTRACT

This paper deals with the role that demand can play in regional industrial transformation, focusing on new industry formation in peripheral regions. As we argue in this paper, demand can be an important driver for industrial transformation, yet often underscored in the literature on regional development. Demand includes aspects related to general consumption patterns, to co-development between users and producers, to public procurement, or to norms and values among consumers. Theory building departs from accounts on new path development, were peripheral regions are typically seen as providing unfavourable conditions for industrial transformation, due to a weak organizational and institutional endowment. The empirical analysis focusses on two cases of new regional industrial path development in Värmland, a peripheral region in Sweden, namely locally processed dairy products, as well as microbreweries. The analysis is based on in interviews with regional entrepreneurs and industry stakeholders. We highlight the multiple roles that demand has played in the renewal and creation these two new regional industrial growth paths in the Swedish periphery.

KEYWORDS:

• Regional transformation
• peripheral regions
• new path development
• dairy industry
• brewery industry
• Sweden

1. Introduction – new path development and the unexplored role of demand

During the past decade, the literature on regional development has devoted increasing attention to the question how industries emerge and evolve over time. Initial and agenda-setting contributions emphasized endogenously triggered branching processes and related variety as driver for regional path development (Boschma and Frenken 2011; Neffke, Henning, and Boschma 2011). Soon after, institutional and political perspectives were adding to the debate (Tödtling and Trippl 2013; Dawley 2014; Morgan 2013; MacKinnon, Dawley, and Pike 2019). Research on regional innovation systems has gained particular attention in this regard (Hassink, Isaksen, and Trippl 2019; Isaksen, Martin, and Trippl 2018), discussing different forms of path development in different types of regions (Grillitsch, Asheim, and Trippl 2018; Isaksen 2015; Isaksen and Trippl 2016). In this body of literature, the development of new and the recombination of existing knowledge is treated as the main mechanism for regional industrial path development. For a long time overlooked, however, is the question how path development might be shaped by changes in demand. While some recent contributions take up the importance of demand for regional development (Uyarra and Flanagan 2022; Uyarra, Flanagan, and Magro 2017; Martin, Martin, and Zukauskaite 2019), the various roles that demand can play in regional development remain understudied.

This paper deals with the role of demand for new path development in regions. We focus on peripheral regions, which, due to organizational thinness and limited industrial diversification, are mostly associated with disadvantages to develop new paths (Isaksen 2015; Isaksen and Trippl 2017). We aim at advancing our understanding on how demand can influence new path development in peripheral regions.

The theoretical discussion draws on the literature on regional innovation systems and new regional industrial path development (Isaksen, Martin, and Trippl 2018; Asheim, Isaksen, and Trippl 2019), providing a framework for taking into account regional pre-conditions such as industrial structures, policy processes and knowledge dynamics. Further, we apply the framework by Martin, Martin, and Zukauskaite (2019), who discuss various roles that demand can play in regional development and differentiate between anonymous consumer, sophisticated buyer, active co-developer, public procurer, and norm and value setter.

Empirically, we study different path trajectories within the food industry in Värmland, Sweden. Värmland is a typical example of a thin RIS, located in a peripheral area and reliant on traditional industries such as forestry, paper and pulp and steel (Grundel and Dahlström 2016). The regional food industry consists of around 50 companies serving mostly the Swedish market. Due to a lack of regional industrial variety and local institutional support, the region can be associated with unfavourable conditions for new path development. However, local consumers have over time changed preferences and increasingly request locally produced foodstuff. This has not only influenced the development trajectory of the industry; it has also given momentum to the development of two new sub-sectors, notably dairy production, and microbreweries. The mechanisms behind the emergence of these two sub-sectors will be analysed in this paper. We pose the following two research questions:

• Which roles can demand play in new regional industrial path development in peripheral regions?

• Which factors led to the emergence of the dairy industry and the brewery industry in Värmland?

The analysis is based on a qualitative approach with interviews with food producers, policy makers and industry experts in Värmland between years 2018 and 2020. We conducted 16 semi structures interviews with food companies and 9 in-depth interviews with our case companies as well as with industry experts, local decision makers and authorities.

The paper is structured as follows: In section 2, we review the literature on new regional industrial path development, focusing on peripheral regions, and develop a conceptual framework on different roles that demand can play. In section 3, we present method and data and provide an overview of our empirical context. Following from here, section 4 analyses the two case studies considering the different roles of demand proposed in the conceptual framework. Finally, section 5 concludes and discusses implications for research and policy.

2. Theoretical framework – peripheral regions and the role of demand for new regional industrial path development

2.1 New regional industrial path development and peripheral regions

The literature on economic geography is increasingly concerned with the issue of how industries in regions emerge and evolve over time. Combining evolutionary with institutional theories, this debate often takes place using the term (new) regional industrial path development (Isaksen and Trippl 2016; Hassink, Isaksen, and Trippl 2019). In this context, five main forms of path development can be distinguished, namely path creation, related and unrelated path diversification, path importation, path upgrading (sometimes also referred to as path modernization), and path extension. A failure to ensure path extension can lead to a sixth form of path development, which is path exhaustion (Asheim, Isaksen, and Trippl 2019; Hassink, Isaksen, and Trippl 2019; Blažek et al. 2020).

The underlying mechanisms that explains different forms of path development are primarily related to knowledge dynamics, that is, the capacity of entrepreneurs, firms and other actors to create, source, exchange, and combine knowledge for innovation, and thereby induce regional economic change. Innovation is seen a systemic process involving various actors and agents within and outside of the region and it’s growth paths (Asheim, Isaksen, and Trippl 2019). Knowledge is understood in a broad way, including analytical, synthetic and symbolic knowledge (Pina and Tether 2016; Martin and Trippl 2017), and as embedded in various firm and system level assets (Chen 2022; Rypestøl, Kyllingstad, and Martin 2022; Isaksen, Langemyr Eriksen, and Rypestøl 2020). The prosperity of regions to develop new growth paths is also continent on the presence and capacity of change agents (Uyarra and Flanagan 2022). Agency can there be situated at the system level or the firm level (Isaksen, Jakobsen, and Njøs 2019) and can drive regional industrial transformation, but can also reproduce existing structures and functions and thereby impede change (Bækkelund 2021; Grillitsch and Sotarauta 2020). Change agents can be pioneering individuals such as entrepreneurs but also universities, companies and/or governments that change regional economic development by purposive action (Uyarra and Flanagan 2022). The importance of active policy intervention consisting of concerted and long-term efforts is often stressed, which requires particular policy capacities for new path development (Asheim, Boschma, and Cooke 2011; Martin and Martin 2017).

The preconditions for new path development differ between regions, as the RIS concept implies (Asheim, Isaksen, and Trippl 2019; Hassink, Isaksen, and Trippl 2019). Core regions are often characterized by organizationally thick and diversified RIS that are well-endowed with innovative firms and a critical mass of knowledge generation and support organizations (Asheim, Isaksen, and Trippl 2019; Hassink, Isaksen, and Trippl 2019). These characteristics provide a favourable setting for intense knowledge exchange in the local milieu, as well as for knowledge sourcing on a global scale, and thereby the optimal conditions for new path development. Organizationally thick and specialized RIS, often to be found in second-tier regions, are endowed with strong firms, which operate in a limited number of industries, typically backed by knowledge generation and support organizations that are well-aligned with the region’s industrial specialization. In addition to the capacity of firms to network locally, they are often well-embedded in global production networks (Henderson, Dicken, and Hess 2002; Coe et al. 2004; Chaminade and Vang 2008). That implies that firms have a high capacity to establish and generate value from global connections within the same area of specialization, which supports incremental innovations in terms of improving products and processes. However, due to a risk for cognitive myopia and different forms of lock-in (Hassink 2010; Grabher 1993), actors in such regions are less capable of identifying, absorbing and attracting knowledge in unrelated fields, which makes them prone to path extension (Blažek and Květoň 2022).

Peripheral regions are typically characterized by organizationally thin RIS (Tödtling and Trippl 2005; Isaksen 2015) and are seen as least capable of developing new growth path. They are home to few innovative companies and a low number of knowledge generation and support organizations. The lack of breadth and depth of local knowledge bases implies that firms depend on extra-regional knowledge sources to a high degree. This suggests a strong need for global knowledge sourcing on the one hand, but limited possibilities to reach out to global knowledge sources on the other hand (Grillitsch and Nilsson 2015; Chaminade and Plechero 2015). Further, peripheral regions tend to be less diversified in their local knowledge base, often with a dominance of synthetic and a lack of analytical and symbolic knowledge bases, which impedes the possibilities for combinatorial knowledge dynamics on the local level (Květoň and Kadlec 2018; Martin 2012). Due to their lack of variety in industries and innovative firms, they are particularly vulnerable to exogenous shocks and less resilient than core regions (Bristow and Healy 2018). Further, local agents in peripheral regions tend to reproduce exiting structures rather than drive change, which again undermines the capacity of peripheral regions to develop new growth paths. Thus, thin RIS have a high risk of tapping into path extension and path exhaustion (Isaksen 2015; Blažek et al. 2020).

The RIS typology considers the density and degree of specialization in the organizational structure of a region as a central condition for new regional industrial path development, while also considering institutional characteristics such as the level or trusts between actors, the quality of the policy and governance system, as well as the presence of change agency (Isaksen, Martin, and Trippl 2018; Asheim, Isaksen, and Trippl 2019). Due to their characteristics, peripheral regions are seen as least likely to develop new growth path.

Nevertheless, and even they provide unfavourable conditions, new path development in peripheral regions is still possible. Nuur and Laestadius (2010), for example, describe two cases of new path development in peripheral Sweden, and stress the key role of policy in the process of regional industrial transformation. Dawley et al. (2015) analyse processes of new path creation in North East England and Scotland, and stress the roles of the state and regional policy interventions in mediating the creation of new growth paths. Carvalho and Vale (2018) study the evolution of the biotechnology industry in the Portuguese Centro Region and describe it as a process of bricolage, in which heterogeneous actors mobilize and anchor distributed resources and actively shape institutions with the purpose of creating a new growth path. Sotarauta, Kurikka, and Kolehmainen (2022) focus on the role of change agency in the emerge of the eco-industry in Eastern Lapland in Finland.

These studies point to the key role of exogenous development impulses such as the attraction of innovative companies from outside the region, that lead to an inflow of new knowledge to the region. New path development is also ascribed to efforts by regional or national policy to attract external investments (Sotarauta and Suvinen 2018; Isaksen and Trippl 2017), as well as to the role of entrepreneurs and other key agents of change (Carvalho and Vale 2018; Isaksen, Jakobsen, and Njøs 2019; Jolly, Grillitsch, and Hansen 2020).

2.2. New regional industrial path development and the neglected role of demand

The literature on new path development places a strong focus on the creation and recombination of knowledge and other local assets, or, put differently, on the supply side of innovation. What remains largely overlooked is the demand side of innovation, that is, how innovation and regional developed are shaped by changes in demand. In this article, we define demand as consumer needs and wants, that is, the desire or preference to acquire a product or service. It can be private or public and stem from end-users, businesses, or governments (Martin, Martin, and Zukauskaite 2019).

Studies dealing with the role of demand typically focus on demand in the public sector (Edler and Georghiou 2007; Morgan 2013; Uyarra, Flanagan, and Magro 2017). Public procurement for innovation is stressed as important policy tool to steer innovation and product development (Edquist and Zabala-Iturriagagoitia 2012; Martin and Coenen 2015). This suggests that policy can contribute to creating favourable demand conditions that drive new path development in regions. Only few studies touch upon the role of private demand in the context of regional development. Notably, Grabher, Ibert, and Flohr (2008) argue for an increased attention to customers in regional innovation models and stress co-development practices between producers and customers, pointing at the role of consumers as knowledge providers. Zukauskaite and Moodysson (2016) study the evolution of the Swedish food sector and point at the role of consumers. They argue that changing consumer attitudes are an important cause for new product development, but that consumption patterns are rooted in individual norms and habits and tend to change slowly.

Grounded on the literature on regional development, Martin, Martin, and Zukauskaite (2019) explore various roles that demand can play in new path development. They differentiate between five roles, notably the role as anonymous consumer, sophisticated buyer, active co-developer, public procurer, and norm and value setter. The first role implies that regional industrial growth paths are influenced by general market trends and the global interplay of supply and demand. For example, if global demand for pulp, paper, and other cellulose-based products increases, peripheral regions with forest-based economies will be positively affected. In this context, demand is treated as anonymous, without considering any functional connections between supply and demand in terms of user-producer feedback, interactive learning, or knowledge exchange. The second role, sophisticated buyer, takes a more interactive perspective and implies that geographical proximity to customers is beneficial for innovative firms (Baptista and Swann 1998; Porter 1998). For producers, in particular the co-location with sophisticated consumers and clients is important as these provide advanced knowledge of the market. This is clearly the case in many service industries such as finance or IT, where suppliers co-locate with multinationals in innovative regions to be part of the latest trends in their industry. This argument implies that demand-led transformations often originate in regions with high population density and strong business clusters, notably in urban areas and core regions, and less so in peripheral regions.

The third role, active co-developer, refers to the idea that consumers can actively contribute to regional transformation by providing feedback to producers, participating in firms’ innovation processes, or generating own products and services. Close interactions between producers and clients are crucial amongst others in engineering-based industries such as mechanical or civil engineering, and oftentimes supported by permanent or temporary co-location of firms. For many industries that draw upon experience-based innovation modes, interaction and close collaboration between users and producers is seen as critical (Zukauskaite and Moodysson 2016). Customers provide feedback and demand products and services with certain functionalities, or they actively co-develop innovations by suggesting improvements to existing products and services or by collaborating in the search for solutions to practical problems.

The fourth role, public procurer, refers to the public sector that can act as customer and steer product development and eventually regional development through procurement decisions. Scholarly work on regional governance (Macleod and Goodwin 1999) maintains that the state can play an active role in influencing regional development, among other via public procurement, understood as the acquisition of goods and services by a public authority (Uyarra and Flanagan 2010). Morgan (2013), for example, discusses the important role of the state in shaping new path development in old industrial regions, emphasizing ‘its roles as producer, regulator, animateur and purchaser’ (Morgan 2013, 337). Martin and Martin (2017) describe that regional policy actors stimulated the emergence of two new industrial growth paths in southern Sweden, through a mix of public procurement and regulation setting activities.

Finally, consumers can play the role of norm and value setter. According to Jeannerat and Kebir (2016), consumers do not necessarily have to act as co-developers in order to play an active role in innovation. Firms coordinate their innovation efforts to respond to market signals provided by consumers. Current and future consumer needs and wants are communicated via intermediaries (e.g. consumer organizations; interest groups, social media), which influences producers. For example, environmental concerns among consumers are widely communicated in society and media and have led many companies to modify their products and, for example, use recyclable and reusable packaging materials. Thus, changing norms and values among consumers can steer innovation, product development and eventually also regional industrial path development.

In line with the discussion above, changing demand can play different roles in new path development. Demand conditions vary in different locations due to consumer norms and values, but also due to activities by policy makers that might promote or hinder the demand for certain producers or services. Consumers might perform different roles as enablers, opponents, or co-developers of innovations, driving new regional industrial path development and industrial renewal.

3. Data and method – two case studies from Värmland

This paper sheds light on new path development process in the food industry in Värmland. Core attention is put on two subsectors of the food industry, namely dairy and beer, and the entrepreneurial activities around these two cases. We ask the questions which factors led to the emergence of the two subsectors, by focussing on the various roles of demand outlined in the conceptual framework.

The analysis is based on qualitative research methods and data. Personal interviews with actors working in, respectively giving support to, the food industry constitutes the main data source. We conducted 16 semi-structures interviews with food processing firms as well as 9 in-depth interviews with our case firms, industry experts, local decision makers and authorities. Field trips were organized to visit the companies on-site. The interviews were conducted between years 2018 and 2020 in Swedish language. They lasted between 75 and 120 min, were transcribed and analysed, and important quotes translated to English. The interviews were based on a theoretically informed and thematically structured interview guide, which contained pre-formulated questions about the evolution and transformation of the food industry, focussing on mechanisms that drive or hinder regional industrial transformation. The guide was adapted for each interview partner. In addition to the interview material, document studies were carried out on publicly available policy reports, company reports and media outlets.

Värmland is one of Sweden’s 21 provinces and situated in the western part of the country, bordering Norway. The region has around 280.000 inhabitants and a population density of 16 inhabitants/km2, which is among the lowest in Sweden. The main agglomeration is the regional capital city Karlstad, with 87.000 inhabitants, hosting the region’s only university. Värmland can be considered as peripheral region and organisationally thin RIS, with few innovative companies and a low number of knowledge generation and support organizations. Despite its structural disadvantages, the region benefits from a strong local identity as well as an effective regional governance system (Andersson and Grundel 2021; Grundel and Dahlström 2016; RegionVärmland 2021; Sæther 2010).

Regarding its industry specialization, the region has traditional strongholds in forest, paper, pulp and steel, which is well documented in the literature (Andersson and Grundel 2021; Grundel and Dahlström 2016; Kempton 2015). A less well recognized sector is the food industry (Sæther 2010). Today, the region hosts around 50 small and medium-sized food processing firms, mostly serving the Swedish market (e.g. Löfbergs, OLW). The industry has a local branch organization that organizes amongst others an annual food festival to gather local food producers (NIFA, 2022). Also, the region markets itself as a national destination for experience tourism around food.

4. Empirical analysis – traces of new path development in the Swedish periphery

1.	Path renewal in the dairy industry

The first case of new path development is milk processing and revolves around the local diary company Wermlands Mejeri. The company was founded in year 2015 by a group of local famers and entrepreneurs and marked the emergence of a new path around locally processed dairy products.

At that time, there was no dairy company in the region. The last dairy cooperative had closed many years ago, after a long period of unprofitability and due to increasing competitive pressures on a globalizing food market. Subsequently, all milk produced by local farmers was bought up by the Danish-Swedish multinational Arla Foods, the largest dairy producer in Scandinavia. The milk was transported to Stockholm, where it was processed, packaged, and eventually sold to consumers in Sweden and abroad.

In the early years 2010, however, prices on the global milk market were falling drastically, affecting the Swedish milk farmers. Its dominant market position in Scandinavia allowed Arla Foods to push the price of a litre of milk payed to the farmers down to historically low levels. In year 2015, farmers were payed only just 2,30 Swedish krona per litre, falling below the costs of production. High dependence on global markets and low milk prices put local farmers under considerable economic pressure:

‘It was based on the ongoing national milk crisis, when we all understood that things were turning bad for our milk farmers. We started to realize that there were no cows grazing in the countryside anymore.’ (branch association)

‘Many of these farmers have been running their farms for the fourth generation, or longer.’ (wholesaler)

In late 2014, a group of eight local farmers and one entrepreneur who previously worked in the dairy industry, got together to develop a plan on how to become less depended on Arla Foods and global milk price fluctuations. They sensed a growing interest among consumers for locally produced foodstuff, particularly in a region with a strong local identity such as Värmland. They decided to join forces and to start their own dairy cooperative under the name Wermlands Mejeri.

‘What the customers said after the milk crisis was that ‘I am prepared to pay more for the milk. If the milk costs one krona more, it doesn't matter for my household budget, but I understand that it makes a huge difference for the farmers.’’ (branch association)

‘Wermlands Mejeri. It is a good name. It is locally produced. And it is a rebellion against the large, nasty company Arla.’ (wholesaler)

The idea was to regionalize the entire value chain, including farming, packaging, distributing and retailing. This required several actors and companies to work together on this mission. In early 2015, the farmers bought an old and outdated dairy plant and invested into the renovation of the building and machineries. A pasteurizer and tanks were already in place and could be repaired and reused, and a used packaging machine was bought from a neighbouring region, as the idea was to also package the milk. Packaging material should be purchased from the local pulp and paper industry, using local raw materials. Due to the unclear prospects and limited financial resources, the entrepreneurial starting phase was characterized by improvisation and bricolage (Garud and Karnøe 2003). Investment costs were kept as low as possible. The regional government, notably the county administrative board of Värmland (Swedish: länsstyrelse), supported the initiative with start-up funding.

Two factors were given additional momentum to the emergence of the new path. Firstly, in a time when Arla Foods was expanding rapidly into global markets, the company created negative publicity connected to irregularities in travel expenses among their managers. Additionally, the company was accused by Swedish competition authorities for misusing their market power. This led to a series of negative media reports and an increasingly critical attitude of consumers towards the brand name Arla. Secondly, when the farmers took a first contact with grocery stores in the region, the largest grocery store chains (Coop and ICA) were supportive to the idea of a local dairy and expressed clear interest in adding the local milk to their shelves. Since the grocery stores play a key role in mediating between producers and consumers, the expression of interests was an important motivation for the farmers.

‘When we said that we are a little bit afraid that consumers won't buy this, they said: This will work out! The stores were more enthusiastic than we were. And then yes, it became very successful.’ (dairy company)

‘Coop Värmland has been a major player, not least through its stores. A major enabler.’ (branch association)

After this, the group needed to create a new brand. After initial and unsuccessful attempts to create a packaging design on their own, the farmers acknowledged that they needed external competence and got in contact with a local advertising company. The advertising company convinced the farmers of the importance of a comprehensive marketing strategy and began to design a new brand, with a modern and original packaging and a creative advertisement campaign. The strategy portrays the farmers and their cows as local heroes that work hard to supply the people of Värmland with local milk, and thereby speaks to the sense of regional identity and solidarity of consumers. The advertisement strategy became very successful, won several design prices, and contributed to making Wermlands Mejeri a strong and well-known brand:

‘This brand is very strong in Värmland. In three years, we have built a very well-known brand. I think that already after a year, it was very, very well known.’ (dairy company)

Once design and branding were settled, the farmers approached the local grocery stores and asked if they would sell their milk. The grocery stores where very supportive. Coop signed an agreement and guaranteed to sell at least 2.5 million litres of milk per year in their stores (Kallin Thander, 2016). Rather than testing the new product on a small scale, as it is common practice, Coop and ICA suggested a full market launch in 90 stores all over the region. By initiative of the store managers, product launching events were organized in the largest stores. The milk was placed prominently in the shelves, so that consumers would immediately notice the new brand.

‘It is very important for new products that the stores also help and promote it. If you put it up in a corner on the shelf, it won't work. But here, they made space for it, so the consumers couldn't help but see it. They saw it right away. I think that this made a lot.’ (dairy company)

In the coming months, the demand for the new milk was far above expectations. The demand was so high that the famers had problems packaging enough milk to supply the stores. The first 2 200 litres were sold within a few hours, and the company increased their production from anticipated 9 000 litres per day to 19 000 litres per day after the first week. After a few months, the production reached a level of 26 000 litres per day (Kallin Thander, 2016). Today, the milk is sold in around 110 grocery stores and 10 petrol stations in the region. 15 farmers are connected to the cooperative and they have a market share of 70% of all milk sold in the stores Värmland.

‘The market share that Wermlands Mejeri has taken from other players in the dairy industry is completely unprecedented. They came from nowhere, and today they have a major share of the market.’ (branch association)

‘People in Värmland do it with patriotism, to support the local [farmers]. It feels good to buy that package. They have really succeeded. It almost does not matter whom you talk to.’ (regional government)

The public sector, which is responsible for public procurement for schools, kindergartens, retirement homes, and hospitals, would be willing to purchase locally produced milk. However, they have specific requirements on distribution channels and packaging, which cannot be fulfilled by Wermlands Mejeri. Therefore, the public sector is not among their customers.

2.	New path creation in the brewery industry

The second case of new path development analysed in this paper is the brewery industry. It concentrates around the company Wermlands Brygghus, the first brewery in Värmland in recent history and today one among several actors in a vibrant local brewery ecosystem.

The Swedish brewery industry has historically been characterized by numerous small firms serving local markets. From the early twentieth century onwards, however, technological development and new consumption behaviours led to a wave of economic consolidation and a concentration on few but large breweries (Box 2017, Sveriges Bryggerier, 2022). In the 1950s, most small breweries in Sweden had closed. The peak of economic consolidation was reached in 1964, when the two largest breweries, Stockholms Bryggerier and Gothenburg-based Pripp & Lyckholm, merged and formed Pripps, which became the single dominant actor in the industry. At that time, the brewery industry in Värmland had entirely disappeared and it would take several decades until a new brewery industry would emerge.

The creation of a new regional industrial path around breweries can be pinpointed to the year 2012, when the first brewery of the region, Wermlands Brygghus, was founded in Kristinehamn, a small municipality with around 18 Tsd inhabitants (NIFA, 2022). The founder of the company previously worked in the IT industry in Stockholm, as a salesperson, personnel manager and CEO. Triggered by the wish to return to the region where he grew up, he eventually quit his position in Stockholm and moved with his family to Kristinehamn, where they started a small hotel and restaurant under the lead of his wife. In their restaurant, they were cooking as much as possible with local ingredients. Locally produced beverages were often demanded by customers, but were scarce:

‘At the time there were very few locally produced beverages in Värmland. There were musteries that made apple must, but there was no brewery.’ (brewery)

When still in Stockholm, he observed a growing trend towards microbreweries, which produce handcrafted beers that are often sold in small quantities to local consumers. This trend had previously become popular in the US and was already visible in many urban areas in Europe, but had not yet reached the Swedish periphery (Gatrell, Reid, and Steiger 2018; Schnell and Reese 2003; Skoglund 2019). Even though the entrepreneur did not have professional knowledge on brewing, he had a personal interest in beer and had experimented with home brewed beer. He sensed that there was demand for beer from the region, in particular from the hospitality industry that wants to offer local and artisanal beers to tourists and local guests. Sensing this business opportunity, the entrepreneur decided to start a brewery.

Once the decision was made and the company Wermlands Brygghus was established in 2012, work began on finding a suitable premise and to prepare for production. An old factory was acquired and renovated, and used machines were bought from a closed-down brewery in southern Germany. The entrepreneur received support from friends, who contributed with know-how and practical help in transporting and setting up the machinery. During the start-up phase, the company faced several institutional hinders, mostly related to the strict alcohol regulations in Sweden. The production facilities and production process needed approval from local authorities. As beer production was new to the region, local authorities did not have the knowledge on the specific rules and regulations, and needed to build up new expertise:

‘In order to have a brewery, approval is required from the environment and health authorities in Kristinehamn. When it was time for their inspection, it turned out that this was completely new to them. They have never worked with a brewery before and didn’t know how to handle this. It ended with us working out together what is required and how to proceed […]. Now, there is an authority in Värmland that knows how to do it and can work with issues like this in the future.’ (brewery)

To meet the local demand, the entrepreneur has been working closely with customers. Feedback from customers is gathered through different channels. In the early phase, the entrepreneur organized consultations with local chefs, to develop beers that would match specific dishes served in the restaurants. To receive feedback from a broad range of consumers, the entrepreneur built a pub in the premises of the brewery, which can be rented for social gatherings and in which beer-tasting events are organized. Furthermore, the entrepreneur established a contact network of food interested friends and professionals from the hospitality industry, who are consulted when new recipes are tested:

‘We have a small test brewery that we can brew about 20 litres, where we try out new recipes. And when we have produced something there that feels good, we have a number of people who we know have good taste that we test this against.’ (brewery)

Being the first brewery in Värmland, Wermlands Bryggeri was soon recognized by local restaurants and hotels. It became widely known to consumers when it first appeared in the shelves of Systembolaget, the government-owned chain of liquor stores in Sweden. Today, Wermlands Bryggeri is well represented in the liquor stores in Värmland, producing around 500.000 litres of beer annually.

While Wermlands Bryggeri was the pioneering firm, it did not take long until other local entrepreneurs ceased the opportunity and started microbreweries. Today, the brewery industry consists of around 16 microbreweries of different size, spread out over the region.

‘In 2011, which is not that long ago, it was still impossible to find anything locally produced. There was not any beer brewer in Värmland. Today we have 16 breweries.’ (wholesaler)

‘In Värmland today, we have most microbreweries [in Sweden] (…). It really is a branch of its own, and a few years ago there were not any.’ (branch association)

The founders are typically young men with local roots, many of them run pubs connected to their microbreweries. Though they are competing for market shares, they are cooperating based on a feeling of belonging the same regional industry. They are organized in an informal network, in which they meet regularly and exchange expertise and experiences. For the younger entrepreneurs, Wermlands Bryggeri served as a role model that paved the way for a new industrial path around microbreweries.

‘You could think that the beer producers are competitors, but they work a lot together. They help each other. Wermlands Bryggeri has helped many of the smaller start-ups here.’ (wholesaler)

3.	Discussion – differentiated role of demand in the emergence of the two new growth paths

Linking explicitly to various roles of demand discussed in the theory framework, we find that demand played an important role for both new development paths. Table 1 summarizes the results and links the various roles to the two paths.

Table 1. Differentiated roles of demand in the emergence of the dairy and brewery industries in Värmland.

Role of Demand	Explanation	Diary industry	Brewery industry
Anonymous demand	General market trends and global demand conditions influence local production systems	Global supply and demand determine milk prices and put local producers under pressure.	Growing global trend towards handcrafted and local beer forms new business opportunities.
Sophisticated buyer	Co-location with sophisticated buyers offers producers advanced knowledge of the market.	Grocery stores (ICA and COOP) play a key role in mediating between producers and consumers.	Demand from sophisticated local buyers, notably restaurants and hotels.
Active co-developer	Consumers contribute to innovation by providing feedback to producers, participating in innovation processes (DUI), or generating own products/services.	Active co-development with consumers did not play a role.	Local chefs give feedback and participate actively in product development. Regular feedback from local consumers (pubs and beer tasting)
Public procurer	Public procurement can steer innovation and product development, and potentially also regional development.	Public sector is willing to procure locally produced dairy products, but regulations are hindering.	State owned liquor stores promote locally produced beverages. Government regulates production process, market channels and product design (alcohol sales are highly regulated in Sweden).
Norm- and value-setter	Changing consumer norms, values and habits lead to emergence of new markets; interest groups act as mediators between producers and consumers	Consumers value locally produced dairy products. Advertisement strategy and branding is key to appeal to consumers.	Consumers value locally produced and artisanal beer.

Source: Own draft.

The start of the local dairy industry was marked by the willingness of local farmers to make themselves independent from global price fluctuations and global value chains, and instead to focus on local customers and to localize the value chain. In the brewery industry, the entrepreneurs observed a global trend towards artisanal and regional beers, which created business opportunities for new actors in the beer market.

When it comes to the role of sophisticated buyers, we find that actors in the dairy industry had limited direct interactions with end-consumers. However, they worked closely with grocery stores as mediating agents between producers and consumers. Actors in the brewery industry, in contrast, interacted frequently with sophisticated buyers in order to test, adapt and improve their recipes. Likewise, while co-development with consumers could not be observed in the dairy industry, the brewery industry relies on regular feedback from consumers and co-develops with local restaurants.

We find that the state did play an important role for both new growth paths, but less so in terms of public procurement, but more in terms of setting and enforcing rules and regulations (Martin and Martin 2017). The state was typically described as hindering by the interviewed entrepreneurs, due to the strict legislations which regulate the production of food. Nevertheless, the entrepreneurs received start-up funding and other types of indirect policy support, which had an enabling effect on new path development.

Finally, and probably most importantly, both growth paths have advanced from changing consumer norms, values, and habits. During the last decades, locally produced food has become an important consumer trend. The globalization of food production, the concentration of food processing on few multinational firms, as well as food scandals have led consumers worldwide to request greater transparency and knowledge on food origin. This gave rise to increasing demand for local food and the various quality attributes associated with local value chains (Darby et al. 2008). These changes in consumer norms and values have been an important enabler for new path development in both case studies.

Changing consumer norms and values have not only increased the demand for locally produced food as such. In both cases, growing consumer interest in local food has brought about an increased sense of local belonging between producers, consumers and supporting organizations. In the case of milk, new ties between farmers, the dairy producer and grocery stores have been created. In the case of beer, networks between the hospitality industry, end consumers and newly founded microbreweries have emerged. Thus, a multitude of actors are connected to each of the two paths.

5. Conclusions

In this paper, we studied various roles that demand can play in new regional industrial path development. Peripheral regions are due to organizational thinness and a lack of regional industrial variety often considered as disadvantaged (Isaksen 2015; Isaksen and Trippl 2017). Despite that peripheral regions have unfavourable preconditions as compared to core regions, many cases exist where peripheral regions successfully developed new industrial growth paths (Carvalho and Vale 2018; Dawley 2014; Isaksen 2015). Processes of new path development in peripheral regions are not necessary the result of related variety and local knowledge re-combinations, as it is often the case for core-regions. They can have different causes and underlying mechanisms. As the RIS literature suggests, they often result from inflows of knowledge, skills and other types of assets from outside the region (Isaksen 2016; Trippl, Grillitsch, and Isaksen 2018). Strong policy capacities and good governance can also be an enabler for new path development in peripheral regions (Dawley et al. 2015; Martin and Martin 2017). Further, new path development typically requires change agency, which can be situated at firm or system level, and which may well be present in peripheral regions (Carvalho and Vale 2018; Isaksen, Jakobsen, and Njøs 2019; Sotarauta, Kurikka, and Kolehmainen 2022). One factor that is underscored in the literature is the role of demand, which has been explored in this paper.

Demand and changes thereof have been important factors in explaining the emergence of the two new regional industrial growth paths. Consumers changed their preferences over time and increasingly requested locally produced foodstuff, which gave momentum to new path development. The two new paths may involve only few firms, as it is normal for peripheral regions, but are large enough to be publicly recognized as a valuable addition to the regional economy (RegionVärmland 2021). Consumers have contributed to the emergence of these two paths by changing their consumption patterns and directing their purchasing power toward local products, but also by contributing as active co-developers and knowledge providers and by providing feedback to the new firms. The various roles that demand can play are not mutually exclusive but co-exist and simultaneously influence one another.

The two new development paths are not the result of technological change or innovative breakthroughs, as it is often the case when new paths emerge in core regions (Grillitsch, Asheim, and Trippl 2018; Njøs, Sjøtun, and Jakobsen 2020). Instead, the entrepreneurs were using existing technologies to produce traditional products that were new to the region. Apparat from change agency and various socio-political factors that played a role, changes of demand have been important enablers for the emerge of two new paths and for creating new connections between local actors.

This also leads to implications for regional policy aiming at new path development in peripheral regions. Current regional policy approaches, notably smart specialization which is the dominating EU regional policy (Foray 2015; Torre 2022), place main emphasis on the transformation of regional economies based on a new combination of knowledge, capabilities and other assets accumulated in the past. Smart specialization has been largely informed by evolutionary economic geography and RIS theory and has a clear emphasis on the supply side of innovation. While innovation-based policy strategies are well suited for core regions, peripheral areas may need other types of policies, considering the limited potentials for related variety and innovation (Torre, Corsi, and Steiner 2020; Torre 2022). Focussing more on the demand side can lead to new policies, some of which may be better suited for peripheral regions. In the case of the food industry in Värmland, for example, regional policy makers do not intent to stimulate regional growth through technological innovations, but to attract consumers and thereby target demand. The current regional development strategy intends to link up the food industry with the tourism and hospitality industry and to promote the region as a destination for experience tourism around food (RegionVärmland 2021). The design and implementation of such demand-based policies is an interesting area for future research.

Acknowledgements

This research has been generously supported by The Swedish Research Council FORMAS [2016-00646].

Disclosure statement

No potential conflict of interest was reported by the author(s).