Part 3: the Innovation Ecosystem – Roles and Responsibilities

To drive an innovation-led approach to economic growth, it is essential to understand the roles of both the public and private sector, including academia; and how each can enhance to the ecosystem.

Innovation ecosystem: is the flow of technology and information among people, enterprises, and institutions central to an innovative process. It contains the interactions between the actors needed in order to turn an idea into a process, product, or service on the market (OECD, 1997).

PUBLIC SECTOR

The public sector has responsibility for creating an environment that ignites innovation and supports entrepreneurs. Yet, as Isenberg (2016), notes “there’s no exact formula for creating an entrepreneurial economy; there are only practical, if imperfect, road maps”.

However, it is generally acknowledged that government have various tools at hand. Governments can create ‘demand factors’ for innovation such as policy, regulation and innovation targets the cause the market to change direction (this is essential to enable economic structural change). While Innovation ‘supply factors,’ may include research and development (R&D) credits, academic partnerships and university graduates.

In Mazzucato’s book, The Entrepreneurial State (2014), she argues that government has a bigger role beyond tax credits and the enabling environment. That is, government can also invest in transformational R&D where there is a public good, the risk is high and long term investment is. Marzzucato suggests that such investment by government often leads to transformational change that can create entirely new sectors and markets. Examples of these types of investment include the nuclear energy, the internet and GPS. For government to take this approach it needs to have a long term agenda for technology change; and work with in partnership academia and the private sector so they too can seize the opportunity along the way to add new information to develop spinouts.

Workforce development is also directly linked to the future of businesses creation and economic growth.  Government set the policy, run many of the programs and fund many academic institutions that develop skilled workforce essential to the capability to develop innovation commercialise but to also enable economic transformation when required (Fetsch , 2016).

Fetsch (2016), Moretti (2012) and (Sandbu, 2017) all argue that government can also drive immigration policy that supports innovation policy through three main factors:

  1. importation of skilled workforce to compliment or build a competitive advantage;
  2. immigrants “play a disproportionate role founding companies that make a big economic impact” because they are naturally risk takers having immigrated in the first place; and
  3. Foreign Direct Investment (FDI) flows often through the expat community to enable innovation and business growth

Isenberg (2010) provides a localised perspective and suggests that many government efforts focus too narrowly on building ecosystem determinants. Instead he suggests that government should focus on the following nine principles to “turbocharge venture creation and growth”. Isenberg’s principles include:

  1. Stop emulating Silicon Valley. Rather you can develop your own culture and practices that underpin entrepreneurship and innovation. Also see the ‘rules’ described in the Hwang and Horowitt (2012) book the Rainforest: the secret to building the next silicon valley;
  2. Shape the ecosystem around local conditions. Home grown solutions that compliment “local entrepreneurship dimensions, style, and climate” (Isenberg, 2010);
  3. Engage the private sector from the start. Reach out and understand industry needs;
  4. Favour the high potentials. This is through focusing on gazelles (high growth firms) and applying economic gardening approaches, as noted in Part 2;
  5. Get a big win on the board. Celebrate successes as success can spur more innovation and entrepreneurship;
  6. Tackle cultural change head-on. Governments can help to promote the benefits of innovation, the opportunities entrepreneurship through setting values that celebrate innovation and entrepreneurship, encourage collaboration and by building a tolerance of failure;
  7. Stress the roots. Let the market determine value – be careful propping up ventures;
  8. Don’t over engineer clusters; help them grow organically. Clusters occur naturally when an opportunity exists and are an important element of an ecosystem. However, government shouldn’t be picking winners, just backing them; and
  9. Reform legal, bureaucratic, and regulatory frameworks. Over regulation at all levels can stifle innovation and entrepreneurship. Examining the institutions and incentives is essential to ensure an ecosystem is guided by positive regulation.

 

PRIVATE SECTOR

The private sector is the main agent of innovation and value creation. They are the ones that take the risks, commercialise the products and services, and create jobs. Yet private stakeholders are often multifaceted, holding many roles along the innovation pipeline.

Entrepreneurs are the people with the ideas and are risk takers. In his book, Worthless, Impossible and Stupid, Isenberg (2013) notes that entrepreneurship is defined by an individual’s ability to perceive, create and capture extraordinary value.

A Start-ups is an early stage business that is beginning to scale rapidly. Angel investors “Incubators, accelerators, universities, and public agencies” typically provide the majority of help establishing the business in its early stages (Startup Europe India Network, N.D). Most start-ups die in their first two years in a period called the valley of death.

Valley of death: is a common term in the start-up world, referring to the difficulty of covering the negative cash flow in the early stages of a start-up, before their new product or service is bringing in revenue from real customers (Forbes, 2013)

While Small to Medium Enterprises (SMEs) are small businesses that have overcome the valley of death, tested the viability of their product of services, established a customer based and achieved growth that has allowed them to employ staff. Yet SMEs often lack the knowledge on how to scale-up and lack the resources to invest in innovation to fuel productivity and development (OECD, N.D). Once a business has gotten to this stage of its development, it has greatest potential to become a gazelle (see Part 2).

Investors are typically defined based on the capacity they can invest.  Most types of investors provide more than capital, also offering business support, networks and sometimes markets.

Typically early stage investors offer small amounts of capital and include business angels, incubators and accelerators[1], and some seed stage venture capital funds. As the start-up grows, it requires more investment to fund its expansion and will seek an investment from the venture capital investors who are considered growth-stage investors. Private equity investors and corporates are typically investors at a later stage business growth which may include business merges, stock market listing and buy-outs (Startup Europe India Network, N.D).

Hwang and Horowitt (2012) put forward a softer model in their analysis of the innovation ecosystem and identify:

  • Business leaders: who have a reputation of being innovative. What culture, process and strategy does individual business set to in place to innovate within their business to support innovation?
  • Keystones: individuals or businesses who serve as agents that connect people, ideas and investment to catalyse diverse action. Keystones can also exist in the private sector.
  • Stakeholders: anyone who is an entrepreneur, investor, support organisation or participates in the innovation ecosystem.
  • Role models – local entrepreneurs that are visibly successful in the community and offer examples of success and failure. They are people that promote a positive innovation and entrepreneurship culture. They challenge aspirations and values.
  • Community – the industry sectors, services providers and collective human capital that underpin an ecosystem.

 Industry: However ecosystems are also place-based, in that innovation, R&D and spill-overs are happen in a place, that is proximity is important for knowledge diffusion and is primary influenced by local innovation capacity (Rodríguez-Pose & Crescenzi; 2008). As a result a places industry base and industrial clusters become another important organising principle and stakeholder group for analysis.

Industrial cluster: “are geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition. They include, for example, suppliers of specialized inputs such as components, machinery, and services, and providers of specialized infrastructure (Porter, 1998)”.

Crescenzi & Iammarino (2016) note that “economic and innovation trajectories do not depend exclusively on localised productive and knowledge assets but need to combine ‘local buzz’ and ‘global pipelines’”. Thus looking at a places external linkages through the lens of FDI flows, global supply chains and multinational corporations offers the opportunity to extract information and opportunities to leverage innovation, build capability and establish new markets.

Finally, academia, which provides an institutional framework for developing workforce skills and values that support and drive innovation and enable agglomeration forces which drive productivity. Academia can even compensate for some businesses that are not as well-equipped to do under take R&D through the production of skilled workers; public-private partnerships; and the generation of patents that diffuse into the local innovation ecosystem (Cauce, 2016).

CONCLUSION

No matter how you analyse your ecosystem, fundamentally what drives success it is how we join up and collaborate to create value. Hwang and Horowitt (2012) note that ecosystems “thrive because of normative culture that accelerates the evolution of human organisation into ever-increasing patterns of efficiency and productivity”.  In other words, we need to create value systems and networks that enable collaborative and symbiotic behaviours across all actors if we are to achieve well-functioning innovation ecosystems. No single individual or stakeholder group can do it alone.

 

Book References

Isenburg, D (2013) Worthless, Impossible and Stupid. Harvard Business Review: Boston.

Hwang, V. and Horowitt, G. (2012) The Rainforest: the secret to building the next silicon valley.
Regenwald: California.

Mazzucato, M (2015) The Entrepreneurial State. PublicAffiars: New York.

Moretti, E (2012) The New Geography of Jobs.  Houghton Mifflin Harcourt Publishing: New York.

 

[1] private incubators and accelerators are often owned by investors who use the structure as a mechanism to identify investment opportunities.

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