What is the rationale and the role of the smart specialization strategy (S3) in regional development? This entry summarizes and emphasizes key characteristics and challenges of S3 as a modern approach to regional economic development ^[1][2][1,2] with an increasing role in the context of the sustainable development agenda ^[3][4][3,4] in the European Union (EU).

Under modern conditions, management of economic processes aimed at mitigating unfavorable business cycles, improving weak competitiveness, or supporting sustainable stakeholders’ behavior is a forward-looking practice. Such policy approaches are based on proven and adjusted actions that are mostly common and driven by the objective characteristics of economic conditions. At the regional level, these interventions aim to maintain economic vitality, unlock competitive advantages, and narrow productivity and income gaps.

From a theoretical perspective, the economics of regional development focuses on economic growth and disparities [5]. For the regional economic development, a strategy that uses local resources to drive economic growth from within rather than relying on external influences [6] is highly relevant. The utilization of local resources to address issues of economic growth and disparities is a core principle of S3, announced in 2010 [7] and employed since the 2014–2020 programming period [8] in the EU. In essence, S3 is a place-based policy-making concept in the EU that focuses on building the competitive advantage of a region, considering research and innovation as tools for regional development [9]. S3 fosters knowledge-based growth in the EU’s regions and countries to achieve a smart, sustainable and inclusive Europe [9]. Specifically, the S3 approach was introduced as a response to the productivity gap between Europe and the United States to ensure more effective public spending and investments in knowledge domains [10].

Under modern conditions, economic growth calls not only for purely economic considerations but also for societal and environmental benefits [11], thereby emphasizing sustainable development. In essence, regional policy contributes to unlocking regional potential for sustainable development [12]. In this regard, both scientists and practitioners expand the term ‘smart specialization strategy (S3)’ to the ‘sustainable smart specialization strategy (S4)’ [13] or the ‘smart specialization sustainable strategy (S4+)’ [14], thereby indicating that sustainability lies at the very heart of S3. From this perspective, the S3 approach integrates a sustainability dimension, emphasizing ecological challenges and the European Green Deal as tools ^[13][14][13,14]. Although the acronym S4 is still not widely used, the approach of sustainable smart specialization is currently in the process of development for implementation across the EU Member States [15]. From the core concept of sustainable development, new terms such as sustainable economy, sustainable economic growth, and sustainable region appear, emphasizing a need to align economic goals and activities with sustainability principles. Sustainable development requires balancing economic growth, environmental protection, and social equity [16]. This, in turn, emphasizes the logic behind the transition from S3 to S4.

In essence, literature emphasizes that sustainable development is promoted through a combination of public policies [16]. For decades, the EU has implemented several policy initiatives that ensure commitment to the UN’s 2030 Agenda for Sustainable Development—“A Sustainable Europe for a Better World: A European Union Strategy for Sustainable Development” [17], ‘Strengthening Innovation in Europe’s Regions: Towards resilient, inclusive and sustainable growth at territorial level’ [18], “A Union that strives for more. My agenda for Europe: political guidelines for the next European Commission 2019–2024” [19], “A New Plan for Europe’s sustainable prosperity and competitiveness” within the 2026 Commission Work Programme. These initiatives offer a long-term vision for regional development, focusing on innovation, cohesion, and sustainability at all levels. For the current programming period for 2021–2027, the green dimension [13], emphasizing a complete sustainability approach to regional development, accompanies economic and social dimensions. In this context, S3 is an enabling condition for EU countries during the ongoing programming period [9]. This approach to innovative regional development has earned high recognition, and experts call for its mandatory status to be maintained for the next programming period, 2028–2034 ^[20][21][20,21]—although this question remains open during the ongoing debates.

In practice, EU Member States have to develop S3 strategies to access funding from the European Regional Development Fund (ERDF) [7] and, at the same time, integrate the SDGs into their strategic policies at national, regional, and local levels ^[22][23][22,23]. Given regional disparities in terms of development levels, available resources, and economic structures, a place-based approach to regional policy-making is of high importance [12]. At its core, the S3 approach to regional development offers place-based, creative, and forward-looking solutions for how regions can build their competitive advantage in line with sustainability principles through employing local capabilities. At the sectoral level, regions prioritize certain economic sectors to enhance their competitiveness and wellbeing (for S3 priorities in the EU regions see [24]. The selection of investment areas is determined by priorities based on key challenges, regional specialization of production systems, and productive sectors with high development potential (for example, see [25]. Based on the practical implementation of S3 strategies, it is possible to highlight several illustrative examples. One notable example relates to the exploitation of small- and medium-sized enterprises’ potential in innovative sustainable product development [23]. Another example highlights the role of digital technologies in developing smart villages [26]. An additional example emphasizes the transfer and commercialization of innovative sustainable solutions [27]. Overall, around seventy billion euros were invested in research and innovation during the implementation of S3 strategies for the 2014–2020 and 2021–2027 programming periods [7].

S3 strategies are understood as drivers for research and innovation in less-developed regions, as well as for the industrial transition [12]. S3 has broad financial support through the European Regional Development Fund (ERDF) (part of the Cohesion Policy), the Interregional Innovation Investment Instrument (I3), which makes this practice long-term oriented. Under modern conditions, investments have to be guided by the Sustainable Development Goals (SDGs), which require a shift in focus from purely economic growth and competitiveness to a sustainable, digital, and inclusive economy.

This entry outlines the essence of S3 in regional development and broadens its understanding in the context of the sustainability agenda. The entry also contributes to the clarification of terms used for the S3 approach, which is important in the context of the high diversity of regional, sectoral, and institutional stakeholders involved in the process. Given a large volume of academic and policy studies on S3, this entry contributes to a coherent body of knowledge that may serve regional actors from different domains. A concise and step-by-step explanation of S3 from terminological, theoretical, and policy-making perspectives provides easy-to-understand material also for non-experts in the field.

To achieve these aims, this entry employs a qualitative methodology based on desk research and conceptual analysis. It analyses academic literature and EU policy documents to outline the core essence of S3 and its transition to S4.

The first section introduces readers to the relevance and usefulness of the S3 approach in regional development. The second section answers the question of what S3 is by paying attention to the terminology, theoretical framework, policy-making approach, and result-oriented practice. The third section explains the essence of S4, paying attention to terms, reasons, features, and benefits of the transition from S3 to S4. The fourth section offers discussion and concluding remarks. In conclusion, the author also builds upon existing definitions to offer a refined definition of the term ‘smart specialization strategy’ in the context of the sustainability agenda.