Successful Innovation Systems: A Resource-oriented and Regional Perspective for Policy and Practice (Future of Business and Finance) 3030806383, 9783030806385

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Future of Business and Finance

Ludovit Garzik   Editor

Successful Innovation Systems A Resource-oriented and Regional Perspective for Policy and Practice

Future of Business and Finance

The Future of Business and Finance book series features professional works aimed at defining, describing and charting the future trends in these fields. The focus is mainly on strategic directions, technological advances, challenges and solutions which may affect the way we do business tomorrow, including the future of sustainability and governance practices. Mainly written by practitioners, consultants and academic thinkers, the books are intended to spark and inform further discussions and developments.

More information about this series at http://www.springer.com/series/16360

Ludovit Garzik Editor

Successful Innovation Systems A Resource-oriented and Regional Perspective for Policy and Practice

Editor Ludovit Garzik Innovationorbit Austrian Council for Research and Technology Development Vienna, Austria

ISSN 2662-2467 ISSN 2662-2475 (electronic) Future of Business and Finance ISBN 978-3-030-80638-5 ISBN 978-3-030-80639-2 (eBook) https://doi.org/10.1007/978-3-030-80639-2 # The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

For Jana and Theo

Foreword

This book is about innovation and the magic of cultural diversity, which is the fundament of global creativity. Humankind has developed a plethora of cultural characteristics. Our duty is to preserve and advance this heritage. This book will deepen your insight into the ties and bonds between cultural diversity, human capability, and innovation. Ludovit Garzik has done a remarkable job to combine this publication which presents a global perspective on innovation and the data economy which will fuel the twenty-first century. Today, we experience a global battle for digital supremacy between the USA and China. The USA has the globally leading data companies operating in a “business first” paradigm. China has some of the fastest growing data companies even though the country is operating from a “government first” paradigm. The open question remains if Europe and other world regions can retain their competitive edge with a “people and privacy first” paradigm. This book provides a remarkable wide analysis of successful innovation systems around the world. From Berlin to Bangalore and from Sofia to Shanghai, businesses, policy makers, and academics will find valuable lessons in driving innovation and digital transformation. The World Bank Washington, DC, USA

Wolfgang Fengler

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Preface

This book will close the gap between knowledge and innovation. The cultural characteristics of different global regions shape the nature and speed of innovation processes. The results are the preconditions of our future prosperity. We live in a world and time of growing tensions between global blocs and close neighbors. Some individual representatives of mankind think it would be a great idea to expand their own beliefs and systems to as many others as possible. Their intention is for all people to believe in the same religion or the same political system that they do. This is the biggest threat to diversity in every sense. The earth is the only planet we have to live on. After many years of experience in the space business, one must admit that there is no option for us to live on Mars or any other planet in the coming centuries—although we still salute the front-runners for their efforts to settle on Mars or the Moon. It took billions of years until mankind adapted to the living conditions on earth. As we have just that one single option, we must take care of our planet together. The same applies to our bodies. Every individual relies on their own body; it is the only place any of us can live. We must take care of our bodies, being careful what we shove in our mouths and to which external influences we expose ourselves. Many individuals do not seem to care, and statistics are full of early deaths due to avoidable illnesses like obesity or sedentary lifestyles. Awareness about the importance of our own health, however, often only comes when health deteriorates. At that point, it is a difficult task indeed to reverse the situation before the point of no return—a menacing analogy to our handling of environmental challenges. This book will provide the reader with many tools for improving innovation performance, but there is much more to discover. Make use of the cultural diversity that comes with the global family of authors and coauthors who contributed to the regional chapters in this book. Discover the cultural lessons in the content they provide, their selection of topics, and their styles of presentation. Enjoy! Vienna, Austria

Ludovit Garzik

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Acknowledgments

I want to thank the global family of authors and coauthors who contributed to this book. In many hours of discussion and exchanging views, we formed a mosaic of cultural diversity that will improve mutual understanding of people and cultures. I also want to thank Katie Caves and Philipp Marxgut for harmonizing our Babylon of languages into a homogeneous style.

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Contents

Part I

Introducing the Framework

1

Launch Pad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ludovit Garzik

3

2

Human Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ludovit Garzik

9

3

Finance Capital, Market, and Policy . . . . . . . . . . . . . . . . . . . . . . . . Ludovit Garzik

27

4

Infrastructure and Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ludovit Garzik

39

5

Management of Resources and Lessons Learned . . . . . . . . . . . . . . . Ludovit Garzik

57

Part II

Learning from Successful Innovation Regions

6

Bangalore Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leena Pishe Thomas, Sana Salah, and Ludovit Garzik

75

7

Berlin Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Helge Dauchert and Ludovit Garzik

8

Medellín Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Alejandro Crespo Jaramillo, Cesar Augusto Zambrano Osorio, Susana Crespo Jaramillo, and Ludovit Garzik

9

Moscow Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Dmitry Vasilev and Ludovit Garzik

10

Nairobi Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Linet Kwamboka Nyang’au and Ludovit Garzik

11

New York Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 Brian Frumberg, Lisa Stapleton, Sam Yazdanseta, and Ludovit Garzik

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Contents

12

Shanghai Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Hui Yan, Yixi Xue, Xiong Li, and Ludovit Garzik

13

Shenzhen Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Yiming Yang and Ludovit Garzik

14

Silicon Valley Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Georg Fuerlinger and Ludovit Garzik

15

Sofia Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Veneta Andonova, Christian Betov, Mira Krusteff, Nadia Soultanova, Irina Obushtarova, and Ludovit Garzik

16

Tel Aviv Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 Ido Garbi and Ludovit Garzik

17

Zurich Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 Mathias Beck and Ludovit Garzik

Abbreviations

5G 6G ABAI AI API AR ASI AVGC B2B B2C BIFOLD BMBF BPO BVCA BYD CHF CoE CPSU CSR CST CTA CUEE CUSP CWUR CxO DAX DESI DNA DPIIT ECI EIS EPFL

Fifth Generation of Cellular Mobile Communications Sixth Generation of Cellular Mobile Communications Association of Bengaluru Animation Industry Artificial Intelligence Application Programming Interface Augmented Reality Agency for Strategic Initiatives Russia Centre of Excellence in Animation, Visual effects, Gaming and Comics Business to Business Business to Consumer Berlin Institute for the Foundations of Learning and Data German Federal Ministry of Education and Research Business Process Outsourcing Bulgarian Venture Capital Association Build Your Dream (Company Shenzhen) Swiss Currency Center of Excellence Central Public Sector Undertakings Corporate Social Responsibility Central Sales Tax Antioquia Science and Technology Center University-State Business Committee Colombia Center for Urban Science and Progress New York City Center for World University Rankings C Level Position German Share Index Digital Economy and Society Index Deoxyribonucleic Acid Department for Promotion of Industry and Internal Trade Electronic Communication Israel European Innovation Scoreboard École Polytechnique Fédérale de Lausanne xv

xvi

ERC ESDM ETH EU EUR EY FASIE FDI FP7 GBA GBI GCP GCP GDP GEM GII GoI GoK GPS GTI HQ HR HTGF IBB ICT IDC IDF IIA IIIT-B IIM IISc IMB IoT IPO IPR IPSOS IT ITM JEREMIE KPI KTT LGBT LGBTQ LLC MeITY

Abbreviations

European Research Council Karnataka Electronics System Design and Manufacturing Swiss Federal Institute of Technology in Zurich European Union Euro (European Currency) Ernst & Young Foundation for Assistance to Small Innovative Enterprises Foreign Direct Investment Framework Program 7 Greater Bay Area Pearl River Delta Global Business Inroads Gross County Product (Kenya) Gross County Product Gross Domestic Product Global Entrepreneurship Monitor Global Innovation Index Government of India Government of Karnataka Global Positioning System Global Technology Interface Headquarter Human Resource High-Tech Gründerfonds Investment Bank Berlin Information and Communications Technology Interdisciplinary Center Israel Israel Defense Forces Israeli Innovation Authority International Institute of Information Technology Bangalore Indian Institute of Management Indian Institute of Science Inter-Ministerial Board Internet of Things Initial Public Offering Intellectual Property Rights Independent Polling System of Society Information Technology Instituto Tecnológico Metropolitano Colombia Joint European Resources for Micro to Medium Enterprises Key Performance Indicator Knowledge and Technology Transfer Lesbian, Gay, Bisexual, and Transgender Lesbian, Gay, Bisexual, Transgender, and Queer Limited Liability Company Ministry of Electronics and Information Technology

Abbreviations

xvii

Minciensias MINRO MIT MNC MOU MVP NASDAQ NASSCOM NGO NIH NLSIU NSRCEL NSTIS NYC NYCEDC NYSE OECD PARC PCT PDI PE PhD PLO PoC PPP Pro FIT

Ministry for Science, Technology and Innovation Colombia K-Tech Centre of Excellence in Machine Intelligence and Robotics Massachusetts Institute of Technology Multinational Company Memorandum of Understanding Minimum Viable Product National Association of Securities Dealers Automated Quotations National Association of Software and Service Companies Non-governmental Organization National Institutes of Health USA National Law School of India University Raghavan Centre for Entrepreneurial Learning National Science, Technology and Innovation System Colombia New York City New York City Economic Development Corporation New York Stock Exchange Organisation for Economic Co-operation and Development Palo Alto Research Center Patent Cooperation Treaty Power Distance Index Private Equity Philosophiae Doctor Palestine Liberation Organization Proof of Concept Public–Private Partnership Program for the Promotion of Research, Innovations and Technologies Quacquarelli Symonds Research & Development Research & Innovation Request for Proposals Regional Innovation Scoreboard Renminbi (Chinese Currency) Indian Rupees (Currency) Regional System of Innovation Science & Technology National Learning Service Colombia Subscriber Identity Module Small and Medium Business Small and Medium-sized Enterprise Small Office/Home Office Stanford Research Institute Science Technology Engineering and Mathematics Science, Technology and Innovation

QS R&D R&I RfP RIS RMB Rs. RSI S&T SENA SIM SMB SME SOHO SRI STEM STI/STi

xviii

SWOT TAU TEU TTO TTP UAE UAI UK UNEP USA USD USSR VAT VC VR WEF WIPO WW2

Abbreviations

Strength Weakness Opportunity Threat Tel Aviv University Standard Container Units Technology Transfer Office Tech Talent Pipeline New York City United Arab Emirates Uncertainty Avoidance Index United Kingdom United Nations Environment Programme United States of America United States Dollar Union of Soviet Socialist Republics Value-Added Tax Venture Capital Virtual Reality World Economic Forum World Intellectual Property Organization World War 2

List of Figures

Fig. 2.1 Fig. 2.2 Fig. 4.1 Fig. 4.2

Fig. 4.3

Fig. 4.4

Fig. 4.5 Fig. 5.1 Fig. 5.2 Fig. 7.1

Fig. 7.2

Knowledge as a consequence of belief and truth. Source: Author’s own figure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 International connectivity. Source: Author’s own figure . . . . . . . . . . 22 Condensation from communities into teams. Source: Author’s own figure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Manifestations of relationships. Source Pictures: www.pixabay. com (Pixabay license grants an irrevocable, worldwide, nonexclusive, and royalty-free right to use, download, copy, modify, or adapt the content for commercial or noncommercial purposes (website April 23, 2021).). Source Graph: Author’s own figure . 46 Research and innovation. Source Pictures: www.pixabay.com (Pixabay license grants an irrevocable, worldwide, nonexclusive, and royalty-free right to use, download, copy, modify, or adapt the content for commercial or noncommercial purposes (website April 23, 2021)). Source Graph: Author’s own figure . . . . . . . . . . . . 47 Global patent filings 1980–2014. Source: WIPO (Data source provided by Creative Commons Attribution (BY) 30 IGO license) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Wall in universities/ministries. Source: Author’s own figure . . . . . 54 Ecodynamics: phases of development. Source: Author’s own 59 figure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diagram of resource flexibility and importance. Po. . .point of priority origin. Source: Author’s own figure . . . . . . . . . . . . . . . . . . . . . . . 66 Patent Intensity of the German Federal States 2007 and 2017 (per one million employees). Source: EPO-PATSTAT; Statistisches Bundesamt (Federal Statistical Office) calculations by Fraunhofer ISI in Neuhäusler P et al. (2021) Patent Applications—Structures, Trends and Recent Developments 2020. Studien zum deutschen Innovationssystem. Berlin: EFI . . . 115 New Business rates in the German Federal States 2007–2018 (as percentages). Number of new businesses in the period 2017–2018 as a percentage of all companies. Source: Mannheim Enterprise

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xx

Fig. 7.3

Fig. 7.4

Fig. 7.5

Fig. 8.1

Fig. 8.2

Fig. 8.3

Fig. 10.1

List of Figures

Panel, Calculations by ZEW (ZEW—Leibniz Centre for European Economic Research) in Bersch J et al. (2021) Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen Vergleich. Studien zum deutschen Innovationssystem. Berlin: EFI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of New Businesses in the Federal States 2017–2019. New businesses as a percentage of the total number of companies. Source: Mannheim Enterprise Panel, Calculations by ZEW (ZEW—Leibniz Centre for European Economic Research) in Bersch J et al. (2021) Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler Vergleich, WagniskapitalInvestitionen in Deutschland und im internationalen Vergleich. Studien zum deutschen Innovationssystem. Berlin: EFI . . . . . . . . . . Investment per Capita by Country and City. Source: Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map. berlin (Provided by Dealroom (according to communication with authors April 16, 2021)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Domestic and foreign venture capital investment into Germany (in EUR billion). Source: Dealroom (2020a) Shortage of laterstage venture capital in Germany: more acute due to Corona crisis. https://startup-map.berlin (Provided by Dealroom (according to communication with authors April 16, 2021)) . . . . . . . . . . . . . . . . . . . . . Financing of STI activities by type of resource, 2018 in Colombia. Source: Document OCYT 2018 (https://ocyt.org.co/ Libro2018_Completo/INDICADORES_OCyT_2018%20Version%2023-07-19.pdf; The OCyT is the Colombian Observatory of Science and Technology that was created in 1999 as a not-forprofit organization promoted and lead by Colciencias, the national governmental agency in charge of policymaking and funding of STI activities in Colombia) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing of R&D by type of resource, 2018 in Colombia. Source: Document OCYT 2018 (https://ocyt.org.co/ Libro2018_Completo/INDICADORES_OCyT_2018%20Version%2023-07-19pdf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Education levels in Colombia (Data 2017). Source: Document OCYT 2018 (https://ocyt.org.co/Libro2018_Completo/ INDICADORES_OCyT_2018%20Version%2023-07-19pdf) . . . . GDP growth in Kenya 1960–2018. Source: The World Bank (https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?

116

118

122

123

129

130

131

List of Figures

Fig. 10.2

Fig. 10.3

Fig. 14.1

Fig. 14.2

Fig. 15.1

Fig. 15.2

Fig. 15.3

Fig. 15.4

locations¼KE; Provided by Creative Commons Attribution 4.0 International License (CC BY 4.0)) . . .. . . .. . . .. . .. . . .. . . .. . . .. . .. . . . Kenya: Share of Counties in GDP (2013–2017). Source: Kenya National Bureau of Statistics (KNBS) (https://www.knbs.orke/? wpdmpro¼gross-county-product-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Population Pyramid Kenya. Source: PopulationPyramid.net (www.populationpyramid.net made available under a Creative Commons license CC BY 3.0) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key industries and leading companies in Silicon Valley. Source: Own depiction, based on Heaton et al. 2019 (Heaton S, Siegel D and Teece DJ (2019) “Universities and Innovation Ecosystems: A Dynamic Capabilities Perspective.” Industrial and Corporate Change 28 (4): 921–39. https://doi.org/10.1093/icc/dtz038) . . . . . Successful entrepreneurs support by “Giving Back”. Source: own depiction, based in Isenberg 2010 (Isenberg D (2010) How to Start an Entrepreneurial Revolution. Harvard Business Review. Retrieved June 2010) . . . . .. . . .. . . .. . . . .. . . .. . . . .. . . .. . . . .. . . .. . . . .. . . . Cumulative foreign direct investments (FDI) by 31.12.2018. Source: The authors based on the Sofia Economic and Investment Profile (2019) (Sofia Economic and Investment Profile, November 2019 (2019). Available at https://investsofia.com/wp-content/ uploads/2019/12/Sofia-Economic-and-Investment-Profile2019-EN.pdf (accessed on January 5, 2021)) . . . . . . . . . . . . . . . . . . . . . . Patents in the top ten technological areas of business patent activity in Bulgaria, 2001–2019. Source: Georgieva T, Yalamov T (2020) (Georgieva T and Yalamov T (2020) Economic Resilience through Innovation. Available at http://www.arcfund.net/ fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on January 6, 2021)), Economic Resilience through Innovation, using data from the Patent Office of Republic of Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scientific and technical publications per billion USD PPP GDP. Source: The authors, based on Andonova. V et al. (2021) (Andonova V (2021) Entrepreneurial Ecosystems and Innovation in the Balkans in Cahen, F., Casanova, L., Miroux, A., (Eds.) Innovation from Emerging Markets: From Copycats to Leaders, Cambridge University Press, 150–182) with data from the Global Innovation Index report 2019 (https://www.wipo.int/ global_innovation_index/en/; Provided by Creative Commons Attribution (BY) 3.0) . . .. . . .. . . .. . . .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . . Selected innovation- and technology-driven entrepreneurial ventures from Central and Eastern Europe according to their valuation. Source: Andonova V (2021) (Ibid) based on Dealroom. co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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165

172

226

244

260

270

271

273

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Fig. 16.1 Fig. 16.2 Fig. 16.3 Fig. 16.4 Fig. 16.5 Fig. 16.6

List of Figures

European Research Council (ERC) and the Horizon 2020 Program. Source: Data EC, Author’s own figure . . . . . . . . . . . . . . . . . . Total Israeli Seed Stage Capital. Source: Data EC, Author’s own figure . . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . . . Competitive tax rates. Source: Author’s own figure . . . . . . . . . . . . . . . Private Capital Reliance. Source: Author’s own figure . . . . . . . . . . . Venture capital growth Israel. Source: Author’s own figure . . . . . . Migration success story. Source: Research and Information Center, Knesset Israel (Israeli Parliament) . . . . . . . . . . . . . . . . . . . . . . . . .

293 294 300 309 311 312

List of Tables

Table 3.1 Table 3.2 Table 4.1 Table 4.2 Table 5.1 Table 5.2 Table 8.1 Table 9.1 Table 14.1 Table 17.1

Number of days to start a new business, World Bank (Data 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ranking ease of doing business, World Bank (Data 2019) . . . . . Ranking of patent filing according to WIPO statistics (2018) . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . .. . . Capital vs. innovation regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Flexibility scale of resources (alphabetical) . . . . . . . . . . . . . . . . . . . . . . Importance scales of resources (alphabetical) . . . . . . . . . . . . . . . . . . . . Group of universities that make up the research G8 . . . . . . . . . . . . . Main institutional players in Moscow Innovation system . . . . . . . Key figures comparison: Silicon Valley, California, USA . . . . . . Facts about ETH Zurich and University of Zurich . . . . . . . . . . . . . .

36 36 50 52 64 65 132 152 227 328

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Part I Introducing the Framework

1

Launch Pad Ludovit Garzik

Abstract

Some regions in the world are more successful at innovation than others. We can learn why by studying the lessons of successful global innovation regions. Ecosystems in different regions around the globe demonstrate diverse development trajectories and properties. Therefore, we take a deeper look into the characteristics and particularities we observe in some of today’s most exciting global innovation regions. The selection of the ecosystems that we study in this book will always be a snapshot of reality—as time passes, new innovative regions will emerge and others will lose their innovative energy. The geographical distribution of global innovation regions and their connections to each other are constantly on the move.

1.1

The Essence

Some regions in the world are more successful at innovation than others. We can learn why by studying the lessons of successful global innovation regions. After reading this book, the audience will gain a sound understanding of how innovation processes are accelerated or hindered by regional characteristics. This deep dive into the differences in innovation ecosystems across global regions will provide a detailed mosaic of their strengths and weaknesses. You will learn to assess the resources and elements of regional innovation systems and to compare and contrast the structures and processes of innovation management in Africa, Asia, Europe, and the Americas.

L. Garzik (*) Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_1

3

4

L. Garzik

This book will answer a number of questions. For example, why are ideas best born in the brains of rebelling intellectuals? Or, as we will call them, smart people. The number of smart people across the globe is limited. How can a region become a magnet for this smart crowd? Is a society’s level of tolerance, what makes the difference in this magnetic effect? Regions can be like couch potatoes waiting for their fortunes, or they can act like triathletes and race toward every competition. Readers will learn about the development status of their own region and will know how to recognize “ecofreeze,” when an innovation ecosystem reaches the development stage where its resources are insufficient for the next level of innovation output. There is no shortcut in the evolution of a regional innovation ecosystem, just like there was none in the evolution of intelligent life. A pandemic is a merciless reality check for regional innovation systems. The crisis rips off the façade of political softeners and lets everyone look in the mirror of truth. The crisis will favor the strong while punishing the laggards, therefore contributing to the concentration of power in certain regions and companies. The important question for the future development of any ecosystem is whether it can distribute its available energy for change and progress in the best possible way. That optimum distribution of change energy can be called precision innovation. Just add rebelling intellectuals and tolerance, and you will be on your way to cooking a successful innovation meal. That is what the book is about.

1.2

Diving into the Topic

At first, there is a seed. This seed needs a favorable environment to develop into a strong plant. Multiple factors influence the dimension and speed of development: soil, humidity, light, wind, and temperature. The plant’s natural enemies above- and belowground influence its chance of success. The seed is not able to change the modes of influences in its natural ecosystem, but its species will adapt to changing environmental conditions over time. That is called evolution. Let the seed be an idea. It is born in the brain of a human being who finds the opportunity to turn the idea into a social or economic success. The ecosystem is the sum of influences that confront the idea like infrastructure, money, the level of tolerance in its society, or whether the idea-bearing person is inspired by his or her environment to grow the idea into something bigger. There is one major difference between an idea and a seed. A person can carry his or her idea-loaded brain into a different ecosystem. Therefore, the idea is not—like a seed—fortuitously blown off to its destination by the wind. Ecosystems, whether they are natural ecosystems or innovation ecosystems, are communities of interacting organisms and their physical environments. In this book, the term of ecosystems shall be transferred from its original use in biological systems into the world of research and innovation.

1

Launch Pad

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In the 1990s, there was a more technological approach to innovation ecosystems. Metcalfe, A (1995)1 defined national innovation systems as “that set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies.” This definition was extended in recent years to include elements of the cultural framework and the social infrastructure. Ecosystems in different regions around the globe demonstrate diverse development trajectories and properties. Therefore, we take a deeper look into the characteristics and particularities we observe in some of today’s most exciting global innovation regions. The selection of the ecosystems that we study in this book will always be a snapshot of reality—as time passes, new innovative regions will emerge and others will lose their innovative energy. The geographical distribution of global innovation regions and their connections to each other are constantly on the move. In the 1970s and 1980s, 86% of international patent sourcing came from just USA, Japan, and Western Europe. This share fell to 56% in the last 10 years according to the WIPO Report (2019).2 Various new regions have emerged as upand-coming innovation hotspots in Africa, Asia, and Eastern Europe. To a large part, this global shift in patenting activity is due to China and the Republic of Korea. In the past 5 years, these two nations have accounted for around 20% of filed patents. Innovation activities are not spreading indiscriminately to most parts of the globe; there is a distinct concentration in urban areas. More than 80% of inventions and scientific output worldwide is generated in specific hotspots. These megacities are often more closely connected with their peers than with their local surroundings. While well-educated high earners move flexibly between these hotspots, other regions lose ground in the dynamics of income growth. This leads to growing tensions in society and can be observed, for example, in the housing market. Population density is not necessarily connected with innovation density. This can be especially true for capital areas, where bureaucracy demands many highly skilled workers and pulls them away from potential innovation activities. The global regions described in this book were selected to illustrate the diversity of innovation cultures and their consequences for regional competitiveness and economic development. This wide-ranging perspective allows the reader to gain insights they can apply and implement in their own context. The actions of individuals in an ecosystem are usually judged by what they do and how they do it. An even more interesting question would be why they do what they do. Successful players in any ecosystem always ask why their partners or clients purchase the products or services they offer. The most successful among them ask

1

Metcalfe, A (1995) cited in United Nations Conference on Trade and Development, 2008, p. 3. WIPO (2019) World Intellectual Property Report, Geography of Innovation: Local Hotspots, Global Networks. 2

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this question before their product or service is even ready for the market. The assumption is that if you are not embarrassed about the first version of your product, your arrival on the market will be too late. With the question of why, we dig for the beliefs and attitudes behind the people’s actions and knowledge. Since beliefs and attitudes are shaped through socialization over generations, it takes an enormous amount of time and energy to adapt or change them. One of the most promising ways to influence beliefs is to confront individuals with cultural elements very different from their own. Confrontation in that context should be understood as a real immersion into the different culture. If the individual stays in his or her own surroundings and is simply told about other cultures, he or she will merely take in the new knowledge without changing any beliefs. If someone wants to extend and adapt his or her own cultural mindset and apply those changes, he or she must physically visit the region and culture, confronting an old mindset with new experiences. Therefore, reading this book is a great first step. That alone will not be enough to change one’s own attitudes and behaviors, but it should give motivation to learn about other innovation cultures.3

1.3

Resources in Global Innovation Ecosystems

Resources are influencing factors that can help or hinder the transformation of an idea into innovation. Innovation is understood as an idea translated into a service or product that meets its market. To be precise, innovation can be a new-to-the-market product or service or an existing service or product brought to a new market. As the godfather of “creative destruction,” Joseph Schumpeter (1983),4 puts it, innovation is “the introduction of new goods, . . . new methods of production, . . . the opening of new markets, . . . the conquest of new sources of supply . . . and the carrying out of a new organization of any industry.” Resources in innovation ecosystems show similar properties. Humans act in these ecosystems, mostly in developed institutional structures. There are also other resources such as financial capital, the legal framework, and migration exchange. These resources can be further split into subgroups. For example, institutional structures can be split into categories like companies and public institutions, which themselves consist of government departments, intermediary agencies, and others. Each of these resources includes a plethora of dependencies and conditions. For example, human capital can depend on factors like the quality of the education system or the migration policy. To judge the impact of a single resource on the innovation potential of a region, each resource must be categorized in two ways: first 3

All the selected regions in this book have been or will be destinations of cultural trainings organized by www.innovationorbit.com. These trainings aim at bringing individuals from different cultures together as a group. 4 Schumpeter J (1983) The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. Opie, Redvers, Elliott, John E. New Brunswick, New Jersey. ISBN 0-87855-698-2 OCLC 8493721.

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on the availability and flexibility of the resource, and second as a function of its importance to the whole system.

1.3.1

Flexibility/Availability

The flexibility of resources is a function of the time lag that an ecosystem must bear to improve the availability of the resource. On a descriptive scale from 1 (very inflexible) to 10 (most flexible), resources like mindset and culture would score very low, probably near 1, whereas capital would be very flexible, near 10. Chapter 5 will show the numbers in the flexibility scale.

1.3.2

Importance/Impact

We can classify a resource’s importance using an inverse function of what happens if that resources stopped existing. If the ecosystem can survive without all or some of the resource, then it is less important. This scale is like the flexibility scale from 1 to 10, with 1 being unimportant and 10 very important. In this example, human capital is classified at 10 because there is no innovation ecosystem without humans working in it. On the other end of the scale, we might find a resource like the legal framework because there are some examples of ecosystems in emerging countries that profit from less regulation—although this may lead to lower ethical standards. Still, an ecosystem with a weak or nonexistent legal framework can still be a stimulating environment for innovation. The flexibility and importance for the list of resources is shown in detail in Tables 5.1 and 5.2.

1.3.3

Discussion and Structure

Regional innovation ecosystems can be X-rayed from different angles. In the 1990s, Henry Etzkowitz (2003)5 discussed regional innovation systems in three spheres, university, industry, and government. That approach was named “Triple Helix Analysis” and additional research developed it further over the following years. The big advantage of this method is its radical reduction of complexity. Every aspect of an ecosystem is assigned to one of the spheres for analysis. This approach is perfectly suited for communication with decision makers like politicians or CxO managers who surf on higher abstraction levels. An enhanced version of Etzkowitz’s theory was tested for its applicability in a study on the regional innovation system in

5

Etzkowitz H (2003) Innovation in innovation: the triple helix of university-industry-government relations. Social science information 42, p. 293–337.

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Salzburg, Austria. That approach used three spaces for knowledge, innovation, and consensus.6 Which resources define a region as an innovation ecosystem, or—better—a successful innovation ecosystem? Are some resources more important than others? The examples of global innovation regions in Chap. 6 provide some answers based on evidence. In Chaps. 2–4, this book introduces the key resources and discusses them one by one, followed by Chap. 5, which discusses the interdependencies between resources.

6 Garzik L and Ranga M (2015) Mozart 4.0. Innovation based on cultural tradition. Vienna, Palo Alto.

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Human Capital Ludovit Garzik

Abstract

The foundation of every innovation ecosystem is the availability of high-quality human capital. However, we cannot judge an ecosystem merely on its number of people or their qualifications. If managers know of the entrepreneurial mindset of their crowd and its inflow and outflow dynamics, they can design new measures to influence those dynamics, attracting people with the qualifications their institution or region lacks. The seed of an idea is ideally born in the brain of a rebelling intellectual. A rebelling intellectual is a person who has intellect, knowledge, and skills combined with a drive to break off the beaten path. These individuals must have enough energy to lead motivated people along on their new paths.

2.1

Human Capital as the Foundation of Innovation

The foundation of every innovation ecosystem is the availability of high-quality human capital. According to the OECD (2001),1 human capital is “the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being.” However, we cannot judge an ecosystem merely on its number of people or their qualifications (Sect. 2.2). Instead, we should use—to borrow from mathematics—the first and second derivatives of human capital. The general mindset and level of tolerance is the first derivative of human capital (Sects. 2.3 and 2.4), and the ability to grow these characteristics is the

1

OECD (2001) The Well-Being of Nation: The Role of Human and Social Capital, OECD, Paris.

L. Garzik (*) Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_2

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second derivative (Sect. 2.5). The success of an innovation region depends, to a large extent, on these two factors. The people responsible for developing a region will naturally want strict formulas they can use to calculate the impact of their decisions. Then, if they know of the entrepreneurial mindset of their population and its inflow and outflow dynamics, they can design new measures to influence those dynamics, attracting people with the qualifications their region lacks. One of the best examples of this kind of action is the region of Shenzhen (Sect. 6.8), where the government has made attractive offers to Chinese nationals living and working abroad in innovation hotspots like Silicon Valley, successfully bringing them back. In this specific case, Shenzhen harvested the mindset resources that it had sown years before with generous grants for leaving the region. This kind of strategy requires a great deal of energy to maintain contact with the diaspora. Overall, the success of an innovation region will be influenced by the “Pool of Mindset and its Dynamics.” A different example is Medellín (Sect. 6.3) and its influx of young, well-educated people from all over Latin America. There, Spanish-speaking countries from Mexico to Chile provide fertile sources of migration. However, Medellín functions like flow heater in many cases—after gaining experience, many of Medellín’s still-young migrants leave again, heading north to the USA, Canada, or Europe. Medellín’s approach is to offer them an attractive environment in the region, incentivizing them to stay. Mindset is also a driver for developing more of a region’s talent toward invention and innovation. Low family income is a major barrier keeping talented young people from transforming into innovators: there is a substantially higher probability that children from high-income families exploit their talent than their peers in low-income households. This group, called the “lost Einsteins,” faces barriers because they are much less exposed to inventors, role models, and mentors. Any would benefit from developing this local talent pool, for example, by exposing children in poor neighborhoods to mentors and role models. A recent discussion suggests that such policies could quadruple long-term invention rates in the USA.2

2.2

Education and Skills

Let us try a thought experiment. The government of some random country is designing a new education system from scratch without historical dependency, resource constraints, or other limitations. The result will most likely be a system that focuses on the skills young people need in order to meet the challenges the future might bring. The system would focus on the skills needed for disruptive careers and developing entrepreneurial mindsets with ethical standards. Teachers

Bell A et al. (2019) Do tax cuts produce more Einsteins? The impacts of financial incentives vs. exposure to innovation on the supply of inventors. Journal of the European Economic Association, p. 651–677. 2

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would bring a dynamic mindset and focus their teaching on the students’ future needs. Now let us consider the education systems of the 193 member states of the United Nations. How many of them get even close to reaching these objectives? Just a few, perhaps a handful. Most education systems do not meet these standards, and are very expensive on top of that. Why is it so difficult to change educational systems if we essentially know what it should look like? There is no universally accepted explanation, but a few examples can demonstrate the problem. Semester Structure Most countries, especially in industrialized Western countries, stick to excessively long summer holidays for students of up to 10 weeks. The historic reason is agriculture where children had to help harvest crops during the summer months. 200 years ago, agriculture was by far the most important sector of the economy. Today, in industrialized countries, the agricultural sector makes up around 2–3% of GDP. Nonetheless, the educational system reflects the long-ago need for children to participate in the harvest. Ideology Education is a hotly contested political topic. Political parties form opinions on optimal educational policies, and these become controversial in the eyes of political strategists. The effect is that parties block their opponents’ positions not because of their merit but for the sake of politics—even when there is a common understanding that the system is overdue for change. Moreover, the party positions persist for decades. If party representatives are asked off the record, they might confess that their parties’ positions on the education system are not future oriented. However, on the record they will stick to the party’s political strategy. Persistent Teachers’ Education Young people who choose to become teachers will most likely keep that profession until their retirement. The fluctuation or permeability to careers in industry is very low, in both directions. This means that the time horizon for changing the education and mindset of teachers is around 35 years. In addition, the impermeability between careers in education and the economy means that economic expertise does not percolate into the education system. As a consequence, education systems tend to suppress rather than drive change. Even small changes in education systems require enormous effort. Some regions have switched their strategies, using attractive packages to lure well-educated people from other regions instead of reforming their own education systems. Most of the regions described in Chap. 6 have developed successful strategies to attract skilled people from around the world. We will discuss this issue further in Sect. 2.5. Young people should acquire a fair basic education. However—far more than they did in the past—modern students need the skills to adapt to changing conditions

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and continuously acquire new knowledge. Thus far, education systems have not been able to adapt to the knowledge sector’s change dynamics. Neither have they coped with the ever-increasing speed of these dynamics. One of the most important skills for young people today is continuous personal development. Stopping this development risks sliding into stagnation, even for the brightest individual. In many areas but in innovation especially, stagnancy means decline. Even a positive change dynamic could mean losing ground to others who can change even faster. Another increasingly important skill is interdisciplinarity. Current educational systems are discipline-oriented. Geography, chemistry, physics, biology, and mathematics are taught separately. Most teachers focus on their disciplines and are neither informed nor interested in what students learn before or after their lessons. Formally, teachers are not required to consider what other subjects are teaching. However, making these connections offers major benefits. When students learn the interdisciplinary connections across disciplines, they can understand concepts like how physics and chemistry contribute to data processing in their mobile phones. A showcase example of a successful interdisciplinary approach in the tertiary sector is the d.school at Stanford University. The d.school is full of equipment at students’ disposal for experimentation. Its creativity workshops teach interdisciplinary solutions. In Europe, this kind of experimentation environment is only found in kindergartens. This is not a joke—real commitment to innovation would mean extending kindergartens’ spirit of creativity across all sectors of education and up to universities. The ability to recognize an idea’s implementation potential depends on the skills learned in primary and secondary education, or on entrepreneurial experience. If the focus on disciplines and culture is too tight, it will negatively affect technology transfer into markets.3 The issues discussed above all emphasize the importance of creating a pool of future entrepreneurs—people with the vision to lead the way into the future. But a dynamic innovation ecosystem needs more. Chief and Indians is a popular children’s game and sometimes, every child wants to be the chief of the tribe. The same can occur in an innovation ecosystem. If education just develops entrepreneurs and migration policies focus only on founders, there will be a point when companies cannot scale without scores of developers, (software) engineers, project managers, and more. The most sought-after employees have high IT literacy skills. Many new businesses rely on digital business models or, at least, their distribution channels are connected to bits and bytes. When Google announced in 2019 that the company intends to expand its Zurich operation by an additional 3000 employees, one could feel the wince throughout the ecosystem. This generally positive investment might turn into a nightmare for the other players in the ecosystem—the region will look

3 Shane S (2001) Prior knowledge and the discovery of entrepreneurial opportunities. Organization Science Vol. 11 No. 4, p. 448–469.

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like a reef after a trawler hammered it down and will have no IT fish left. In economic terms, this is called a cluster risk: one major player attracts a large part of the resources in the region, then the smaller players have to survive on scraps. The region becomes less attractive and its Run Mode described in Chap. 5 becomes an attempt to run a marathon with a wooden leg. The moment the wooden leg rots or the major player leaves the region, there will be little dynamic remaining. This story is not fiction, it has happened in many regions. One of the most famous cluster risks can be seen in Finland with its Nokia moment. Regions with large populations have an advantage, especially if they manage to educate a good amount of IT-literate talent in their local education system. Shenzhen is globally unmatched in its ability to scale digital hardware and software business models. In the surrounding Pearl River Delta—which recent strategy papers are calling the Greater Bay Area—around 120 million people are available to empower the industry if there is an appropriate proportion of STEM topics in the education system. As innovation ecosystems develop, they demand additional skill sets. Former founders take development to the next level and become business angels or VC investors. To succeed in this new role, they must gain additional skills like the capability to distinguish renegades—individuals unwilling to follow any rules who collect black marks as they move from company to company—from talent that needs freedom from unnecessary regulation to tap its full potential for new methods and solutions. Developing new skills like these makes individuals smarter and, as we will discuss later, the number of smart people around the globe is finite. As a region, there are two ways to ensure a supply of smart people: being a migration magnet with all of the ingredients for a “running” innovation ecosystem according to Chap. 5, or growing necessary skills in the local population. The latter strategy also requires that homegrown talent will not immediately leave the region. This sends an unfortunate message to all innovation ecosystem managers: the regions that are successful at retaining their homegrown talent are probably also magnet regions for migration. An important part of “smartness” is the ability to fail. It is a specific skill to fail and learn from failure. This skill can be a valuable resource in any ecosystem. As UC Berkeley faculty Marc Coopersmith and John Danner write in The Other F Word,4 “truly successful leaders know how to turn a bad experience from a regret into a resource.” Failure is a permanent companion in our daily professional and private lives. A prerequisite for turning a failure into an advantage is a reality check and public admission. Christoph Keese looked at it from a different angle and concluded that the ability to disrupt oneself starts by admitting you are falling behind changing conditions.5 In other words, you can innovate internally when you recognize you are not up to date anymore and then dare to tell others.

4 5

Coopersmith M and Danner J (2015) The Other F Word. Wiley. Keese C (2018) Disrupt yourself. Penguin.

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Fig. 2.1 Knowledge as a consequence of belief and truth. Source: Author’s own figure

2.3

Beliefs and Mindset

The education system can provide literacy, knowledge, and the foundation for other skills in a structured manner. The attitudes behind it will be shaped by a much broader spectrum of influencing parameters such as family, friends, and the region’s culture and society, characterized by common norms and ethical convictions. These parameters set the beliefs that shape individuals’ actions—this is known as the region’s mindset. Let us dig a little deeper into the similarities and differences between knowledge and beliefs. Ecosystems do not act according to their supply of knowledge, but according to their shared beliefs. Discussions in our society often roll around knowledge and “the knowledge society,” but in the end, knowledge is only part of a larger source of action. As Fig. 2.1 shows, knowledge is a part of our beliefs. Knowledge is the part of the truth where truth is in line with our beliefs. Our parents and broader network of family and friends shape our beliefs during early childhood socialization. Knowledge is local. It can also be influenced by religious beliefs, which are becoming less important in industrialized countries but are still a major force in developing countries. Knowledge can be dynamic, with new findings changing or expanding the sea of truth. We accept new knowledge when it meets our beliefs. If this is not the case, we can ignore the truth even if we have the feeling that it could be true. We will continue to act in the name of our beliefs. The total of regional beliefs and the assets of shared values can be called culture. Peter Drucker is credited with saying that “culture eats strategy for breakfast.” Now we tie that saying to our previously mentioned foundation of beliefs: culture is the set of beliefs of people who designed the strategy with their knowledge. When it comes to implementation, beliefs will be stronger than knowledge of the strategy, and any element in the strategy that contradicts implementers’ beliefs is unlikely to become a reality. Strategies are closely related to the analysis that takes place before the plan is formalized and implementation begins. Analysis is handled in an open and evidencebased way, unless this is prevented by lobbies that are not interested in the true picture of the system as it is. Strategy development, discussed in Sect. 3.3, is not a big issue—most project managers responsible for strategy development are experienced at that task. However, strategy implementation is when seemingly willing people and institutions are prevented from making changes that contradict their

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cultures and mindsets. The problem may not be visible in the first years of the implementation stage, and usually this lack of system transformation is only visible when it is too late. A vision can change our perspective on values from a threat in strategy execution to a potential resource. Visions harness emerging energy and are a prerequisite for successful founders. No matter how often strategies and products are changed during a founding process, the vision must remain the same. The dominance of attitudes and beliefs over knowledge and rational decisionmaking options influences individuals’ lives, including professional and private life decisions. We must accept that we do not define our stories, instead our stories define us. This does not mean we are helpless passengers in our lives. The deeper we understand our own inner storytellers, the better we can learn how to steer them where we want to go. Cognition Versus Emotion The power of belief against knowledge can also be translated into emotion and cognition. Everyone has experienced a situation when emotion runs roughshod over cognition, just as beliefs can do to knowledge. During implementation, cognition is placed defenselessly under its stronger emotional superstructure. We could discuss cultural patterns in further detail. However, since the theoretical background of culture and shared values are not the main topic of this book, we will only mention where interested readers can dig deeper. Geert Hofstede (2001)6 provided a well-grounded foundation for cultural classification and its consequences. He defined five dimensions of cultural differences: power distance, uncertainty avoidance, individualism, masculinity or femininity, and long-term or short-term orientation. The first two summarize regional attitudes to policy and the level of risk-taking in the community. The Power Distance Index (PDI) and Uncertainty Avoidance Index (UAI) categorize people’s behavior relative to new ideas and perceived risks, respectively. A region is balanced when both indices are either high or low. If both are high, the region’s greater uncertainty is compensated by a strong superior power that takes away most of the uncertainty. If both metrics are low, there is no correcting power, but it should not be needed because the uncertainty is also low. It gets more interesting if uncertainty is high and power distance is low. In this case, nothing compensates for latent risk avoidance. The consequences are low entrepreneurship and conservative capital investment that prefers real estate investments over riskier new ventures. The inverse—high power distance and low uncertainty—does no harm to entrepreneurial activity. Diversity Diversity is a precondition and a powerful driver of innovation in small entities like teams and in entire ecosystems. New ideas and their creative implementation are

6

Hofstede GH (2001) Culture’s consequences: Comparing values, behaviors, institutions and organizations across nations. Geert Hofstede (Ed.). Sage. p. 29.

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based on sets of intercultural experiences and values. The more diverse these experiences are, the broader the options for implementation will be. One-sided ways of thinking always bring the discussion to the same limited possibilities, just like walking downstream along a river will always bring you to the same endpoint. To find new destinations, you need to follow the river upstream and follow its many arms and tributaries. Techniques for capitalizing on diversity for innovation are well described by De Bono in many of his publications7,8. Diversity should be understood in its broadest context, from religion to ethnicity to gender. Developing Beliefs To bring out the best ideas, teams and ecosystems require diversity and another ingredient. That second ingredient is trust. Trust in a diverse team can be built through positive experiences and open communication. If this is not possible, trust can also develop through contacts and networks. However, it is difficult to build trust when there is more than one degree of separation. That also applies to the “warm introduction” approach used in successful regions like Silicon Valley. Is it possible to change, or better, to develop our beliefs? Let us discuss the case of a random company in the manufacturing or service sector in a relatively industrialized region, but not one of the “hip” leading innovation regions where the future seems to happen magically by itself. The company’s supervisory board realizes one day that the company is stuck in a complacency mode, serving only its existing customers. The board assesses the medium-term future and points out that the company’s business model will have to change—otherwise the company may run out of customers before too long. The assessment shows that their value chain could function perfectly without them. What options does the supervisory board have to face this challenge? Obviously, the company’s current management is not able to deliver sufficient leadership energy for a change process. The immediate reaction of most supervisory boards is to replace the management. In many cases that is the wrong decision: on one hand, new management would need time to get familiar with the company’s visible and hidden lines of communication. On the other hand, the new management is likely to have the same mindset as the previous one if people are selected through the same process and by the same people. A better approach is to develop the existing management’s mindsets by sending them to regions that are successfully meeting their key challenges. They must spend sufficient time in those regions and must be forced to join in as entrepreneurs or by tackling day-to-day business in the new environment. Management will try to delegate this task to lower levels in the hierarchy, but that will not work. The new mindset must be as high in hierarchy as possible, otherwise no cultural change can take place in the entire company.

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De Bono E (1992) Practical Thinking: 4 Ways to be Right; 5 Ways to be Wrong; 5 Ways to Understand. 8 De Bono E (2015) Serious Creativity: How to be creative under pressure and turn ideas into action.

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When discussing mindset change throughout an organization, we also need to ask who is responsible for everyday entrepreneurial thinking. In rare cases, organizations will have an entrepreneurship role with the same weight as finance, IT, or marketing. This role should be part of the functional organizational chart for any organization that wants to stay competitive. If our hypothetical company wants to remain competitive and avoid stagnation, it should install someone whose job it is to maintain momentum. When we take this to the next level and discuss ecosystems, the same is true. Ecosystems entail responsibilities like political strategizing, implementation by agencies, and the design of laws and regulations. Who monitors entrepreneurship in an ecosystem and reminds all stakeholders of the entrepreneurial models and processes that inspire people to disrupt themselves every day? Innovation ecosystems in the WakeUp or WarmUp modes according to Chap. 5 will especially be able to boost their development by installing a regional function for entrepreneurship. Ideas can develop in any corner at any time. The entrepreneurial function is charged with giving these ideas enough space for development and for innovators to succeed or—more likely but still important—fail. Entrepreneurial Mindset Entrepreneurship is anchored in the beliefs of the mindset, not in knowledge. Informing a group of people in a seminar about the benefits of entrepreneurial activity leads to 100% nodding heads and 0% impact on their behavior. Preachers recruiting new members for their sects are the rare species that can change the attitudes and behaviors of their lambs in just one seminar. Entrepreneurship and self-employment have also been included in the European Innovation Strategy 20209 due to their perceived impact on sustainable growth and social participation. The Flash Eurobarometer10 showed European citizens’ miserable mindset in this area compared with their global peers. Compared with the barometer results from 3 years earlier, Europeans’ attitude toward self-employment even fell by 8% from 45% to 37%. In countries like Turkey (82%) or Brazil (63%), these numbers are well over 50%. Entrepreneurial mindset is not a genetic disposition. It is formed in the process of socialization by parents, friends, and teachers. In European countries, neither group seems to see young people’s entrepreneurship as an asset. It is simply not an issue.

http://ec.europa.eu/social/main.jsp?langId¼en&catId¼952 https://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/ instruments/FLASH/surveyKy/1024 9

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Tolerance

According to the Cambridge Dictionary,11 “tolerance is the willingness to accept behavior and beliefs that are different from your own, even when you do not agree with or approve of them.” In the context of innovation, the advantages of tolerance are immediately transparent. In a tolerant community, products and services will get a chance to be adopted and tested for usefulness and appropriateness even if they are far from existing standards. Conservative socialization will block everything new by arguing that established procedures already work well enough. Tolerance is an important—if not the most important—requirement for the success of an innovation ecosystem. The discussion in Chap. 5 rates tolerance as the most important resource for innovation, but also identifies at minimal flexibility. Why should it be so difficult to set or improve tolerance levels? It appears that tolerance is a long-term social achievement. We can explore this through two examples. Silicon Valley, described in detail in Sect. 6.9, is home to an open and tolerant community. Why is that region tolerant? We can trace two waves of tolerance flocking into the region. The first wave rolled with the adventurers who were drawn to the gold rush in the mid-nineteenth century as described in Sect. 4.2. Open-minded gold miners were ready to leave their established lives behind to venture into an uncertain fortune. The second wave of tolerance flowed into the Valley after the World War II when the LGBT community discovered the openness to diversity in San Francisco and the Bay Area. The movement rose to prominence when hippies poured into the Haight-Ashbury district in San Francisco in the 1960s. There are not many places in the world where holding hands with or kissing a samesex partner will not cause whispers from the surrounding crowd. On the contrary, there are many more regions around the world where homosexuality is still punishable by death. A community that accepts differences in every social form is also a perfect testbed for new business models or services. The crowd will be willing and able to adapt, test, and provide informed feedback. For many readers, the second example of tolerance may be more surprising than San Francisco: Israel and the Tel Aviv region in Sect. 6.11. Today’s newspapers are full of stories about religious and political battles in the region. If you wipe off the foam of politics, you will find a surprisingly open and tolerant society. The history of this social pragmatism can be traced back a few hundred years to Levantine times when a multitude of societal and religious cultures in the region had to merge and come to terms with one another. Since the coastal regions, at that time, were more or less divided between Muslims and Christians, the mountainous backcountry was a secluded retreat for all types of minorities. These groups had to cope with each other to develop trade and prosperity. They learned to be tolerant over many generations. This worked quite well until fanatics began using religious differences for their own power and wealth.

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https://dictionary.cambridge.org/de/worterbuch/englisch/tolerance

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Chapter 5 provides a scale for the flexibility of key resources, and gives tolerance’s flexibility the lowest possible rating of 1. It takes generations and a remarkable amount of pragmatism to develop a tolerant community. In contrast, the loss of tolerance can happen much faster. After more than a thousand years of pragmatic tolerance, parts of the Levantine region (today known as the state of Lebanon) got caught up in a civil war and in just a few years destroyed many social achievements. The loss of culture and intellect is irreversible in the short or medium term. The same occurred in parts of Central Europe during World War II, when xenophobia and anti-Semitism largely displaced intellectual capacity. Regardless of development level, every innovation region’s leaders should ask the same questions that companies ask themselves. How can we provide talents with a playing field where they can develop ideas? How can we tell the difference between real talent and renegades who just want to break the rules? How can we prevent accountants and auditing bodies from killing an idea before it sees the light of day? The killing of new ideas has a long history. In 1707, at the beginning of the first industrial revolution, one of the supposed inventors of the first steam engine, Denis Papin, built a boat powered by a new kind of oar and tested it on the river Weser. Professional boatmen at the river realized that the idea would create competition for them and destroyed Papins’ craft. To prepare for meetings with auditors, we recommend providing them with a copy of Black Swan12 to inform them that forecasting achievements or targets is likely to be a pointless endeavor. Humans are in the favorable position of having ideas out of the blue, a widely underestimated advantage over animals who are unable to think about things that do not exist. The advantage of imagination can only develop to its full potential if there is a social environment that allows for new ideas. Again, that environment relies on tolerance. We need to mention a third example for the importance of tolerance: China. Most readers will wonder why China is an example for tolerance since that country seems to be more bureaucratic and a closed shop against innovation-sharing with other global regions. Furthermore, China is often hidden behind a severe language barrier and living conditions that might be difficult to endure for people who are used to the standards of western industrialized nations. It is the Chinese people who drive innovation. They are socialized in a kind of chàbùduō which can be translated as “that works quite well at the moment.” This Chinese attitude is similar to Silicon Valley’s preference for lean processes, with chàbùduō being a minimum viable product that, due to its method of implementation, will be tested in the community and improved with feedback.

12

Taleb N (2010) Black Swan. The impact of the highly improbable. Pantheon.

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Migration and International Connectivity

This section discusses migration and connectivity questions. Further aspects of infrastructure for mobility and social interaction will be tackled in Sects. 4.1 and 4.2.

2.5.1

Immigration and Emigration

Immigration and emigration are valuable sources for cultural exchange. As shown in Chap. 1, people who travel learn about differences in innovation tools and cultures and acquire the ability to understand and believe in them. Some global regions act like magnets for people trying to realize their entrepreneurial dreams. Somebody somewhere has a great idea, and that person chooses where to go based on which region they think is best to develop the idea and lead it to success. The regions in Chap. 6 have a fair chance of being at the top of entrepreneurs’ personal rankings. Since there are many reasons for migration— economic pressure, war, religion, and many others—it is not easy to distinguish the “migration of ideas” that arises from entrepreneurial motivation specifically. For more than 40 years, Silicon Valley, which is discussed in detail in Sect. 6.9, has been the destination that makes entrepreneurial dreams come true. Ever since the mid-nineteenth century when fortune-seekers joined the gold rush in Northern California, thousands of people flock to Silicon Valley every year in search of the holy grail of entrepreneurial happiness. Another global region has seen a similar magnetic effect driving smart people to storm into the region with their ideas: Shenzhen in Sect. 6.8. Shenzhen has offered a less regulated and less bureaucratic framework than most other Chinese regions since its establishment as one of China’s first special economic zones in the 1970s. Due to its lower levels of regulation and bureaucracy, intellectuals, rebels, and— more importantly—rebellious intellectuals have poured into the region to implement their smart ideas. That does not mean that other global regions are more bureaucratic than Shenzhen, but the difference to other Chinese regions is enough to get a large crowd moving. Other regions use political strategies to attract bright minds into research and the tertiary sector, exposing local students and researchers to peers from different cultural backgrounds. This costs a lot of money but can be quite successful, which we can see from these regions’ positions in the innovation rankings. Israel uses this knowledge-driven approach, and is home to more engineers and researchers per capita than any other nation in the world. There are more Israeli companies listed at NASDAQ than European ones, which is very impressive for a country of around 9 million people compared with more than 500 million in European Union member states. Migration is a major factor, both immigration and emigration. Around a third of Israel’s residents were not born in the country. This creates space for a lot of diversity in cultures and ways of thinking. Furthermore, the diaspora is in close contact with their networks in Israel and keeps the doors open for

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people to return home after gaining experience abroad, then make use of their new practical knowledge. Another example of how important even small regulatory differences can be for migration is the reverse flow of Artificial Intelligence (AI) and blockchain experts from the USA and Canada to European regions like Berlin. While two decades ago the flow of experts was predominantly directed from Europe to North America, the stream has been reversed in recent years by lowering the immigration barriers. Christoph Keese describes the German case in his discussion on the development of the AI scene in Berlin.13 Another way to analyze the power of migration is to follow the global flows of patent applications and their implementation. The first question is the source of patent applications, where we can observe the movement from established industrialized regions like Europe and the USA to emerging regions. Between 2010 and 2020, most patent applications moved from Europe and the USA to Asia, in particular China. This trend is expected to continue over the next decade. This raises questions on the difference between the region where ideas are born and the regions where patents are applied for and granted. Europe is an abundant source of ideas, but implementation happens in other global regions like the USA and China. In some cases, the source of the idea travels to another region with the patent and the original region loses a pool of potential new patents. There is no simple formula for becoming a magnet for “smart” people, as we might call a person who is well educated and has an intrinsic motivation to translate that knowledge into markets. Magnets develop slowly and can deteriorate if the region cannot retain its advantages over other regions. There are many factors, such as the list of resources discussed in the regional Strength, Weakness, Opportunity, Threat (SWOT) analyses in Chap. 6. All these factors combine to form an ecosystem that meets entrepreneurs’ expectations. The number of smart people in the world at any one time is limited. Any region unable to attract them will lose ground in knowledge implementation. These regions will find themselves in an input–output dilemma observable both in the innovation rankings and in long-term macroeconomic development. Since the quality and quantity of the workforce influence migration dynamics—smart people want to work with other smart people—this also accelerates the agglomeration effect of global innovation hotspots.

2.5.2

International Connectivity

International connectivity, which we discuss in four dimensions, is firmly linked to migration. The four dimensions are as follows:

13

Keese C (2018) Disrupt yourself. Penguin.

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Fig. 2.2 International connectivity. Source: Author’s own figure

Immigrants: People who immigrate to the region. Diaspora: People who emigrated from the region and maintain contact with the region. Open-minded couch potatoes: People who were born in the region and have never lived outside the region for more than a few months but have developed sustainable contacts with the outside world. Cake sharing alliance: People who have immigrated and connect with immigrants from different regions (Fig. 2.2). Immigrants We have already discussed various reasons for migration. The connectivity of immigration focuses on the lines of connection that immigrants maintain with their regions of origin and the effects of those connections. After settling in the destination region, immigrants can interpret their culture and tools of origin and optimize them for innovation. However, they have an additional advantage: immigrants can assess whether a venture or investment would be successful in their home countries. Due to their networks at home, they can even implement it there. Regardless of whether they have left their home countries due to economic pressure, war, or because of a more promising ecosystem, many immigrants live with a deep desire to support their origins or even to return if possible. Diaspora People who have left their home regions create valuable connections between their old and new networks. Since many retain the desire to keep in touch with their origins, these “masters of two worlds” can benefit their new ecosystems with little effort. Sometimes, regions tend to discourage people—especially young people— from leaving, but this is a serious mistake. These potential migrants must get out into the world and maximize their intercultural experiences, and then they can open doors or even return home. Some migrants will return and some will not, like any risk investment. There is a simple psychological explanation for migrants’ likelihood of returning home. If a person feels pressure or is not supported to leave but

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nevertheless finds a way out, that person will never return because they know it would be difficult to leave again. In contrast, a person who receives support will be more motivated to return or support their region of origin from abroad. There are several examples of large diaspora communities in successful innovation regions such as the Indian community in Silicon Valley or the Russian community in Tel Aviv. Some regions and countries have set up networks of global support for their diaspora. However, integrating network nodes into embassies has not proven successful for two reasons. First is the diplomatic corps, which focuses on forms and regulation that are not necessarily in the spirit of innovation. The second reason is that embassies are usually located in the capital cities, which are not the best ground for innovation ecosystems for various reasons described in Sect. 3.3. Open-minded Couch Potatoes According to archeological research, the sedentary lifestyle began in the Upper Paleolithic Period about 20,000 years ago when it became possible to grow food in one place year-round. People wanted to stay in one place, so it was not the initial expertise in agricultural techniques that made them settle, but the other way around. People settled down, hunted deer around their settlements, and when deer became rare, had to learn about agriculture to avoid a return to nomadic traditions. Today, people still like to settle down. A few decades ago, a person’s radius was typically their village. They only looked to the neighboring village or valley when they had to look for partners, which was good for refreshing the gene pool. Modern means of travel make it possible to spend a night on a plane and wake up a few thousand kilometers away on another continent, so people who love their settlements can now look beyond their own noses. These individuals are very valuable for an ecosystem. Open-minded couch potatoes will never leave their hamlet, but they travel and bring back stories about diverse cultures that can motivate others to escape their cultural dead ends. Cake Sharing Alliance There is an interesting phenomenon in developing countries, as well as in modern Western democracies, where xenophobia occurs in immigrant communities. The Migration Institute14 describes this as reverse xenophobia, or immigrants showing intolerance toward the local community or toward other immigrant groups. In developing countries where there is not much to share, socioeconomic pressure is the usual explanation for reverse xenophobia. In highly industrialized countries, we have to dig deeper for an explanation. Reverse xenophobia seems to be driven by the fear of having to share the “cake” of host-country support with other immigrants being greater than the perceived risk to their own status in the community. In elections, the phenomenon manifests in immigrant groups voting for parties with xenophobic political attitudes. This is surprising because these people essentially vote against their own status as

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https://www.migrationinstitute.org/publications/reverse-xenophobia

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immigrants and is driven by fear of other immigrants taking the lion’s share of social support. The effects of reverse xenophobia on regional ecosystems are embedded in the potential of cultural diversity for innovation. In addition to discipline, gender, or skills diversity, having diversity in socialization and culture is key for successful innovation teams regardless of whether they work together in a large company or start a new venture. If a region wants to be a destination for migrants, it should also review the level of reverse xenophobia and maximize tolerance to enable its entrepreneurial spirit.

2.6

Quality of Life

Quality of life is a deeply individual metric. Despite a wide range of indicators used to objectify and compare its contributing factors in international rankings such as the Mercer ranking,15 perceived quality of life will always depend on individual socialization and culture. We can try to correlate clusters of perceived quality with regional development and status in emerging countries like those in Africa in Sect. 6.5, one party systems in regions like China in Sects. 6.7 and 6.8, or regions with advanced democratic standards like Germany in Sect. 6.2 or Switzerland in Sect. 6.12. Perceived quality of life depends on social and individual norms and priorities. If individual business success is a priority, issues like air quality or restricted individual freedom in a surveillance society take a back seat. When one migrates from one region to another and tries to set the same priorities as before, one will encounter several cultural barriers that take a lot of energy to overcome. Is it possible to classify the typical priorities and attitudes of people who come from a certain region of the world, such as from Asia, Africa, or America? These priorities are a function of individual needs and the availability of resources to meet those needs, which goes hand in hand with the region’s prosperity. Individual needs follow the hierarchy of needs introduced by Abraham Maslow16 in the 1940s. People will invest their energy to climb the hierarchy and achieve self-realization. The ecosystem should provide a fertile ground for research and innovation as the key factor to reaching the next level. However, regional prosperity will not always motivate people to seek wealth through risky endeavors. It can provide a social security framework that motivates individuals to step out of their comfort zones, but it can also provide a safe standard of living that keeps them away from taking risks. In history, innovation has often been based on misery. People who had to deal with demanding situations developed great ideas to get out of their painful situations. Industrialized countries have been developing social security systems that reduce the dangers of individual misery and distribute wealth. In the slipstream of prosperity

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https://www.mercer.com/newsroom/2019-quality-of-living-survey.html Maslow AH (1943) A theory of human motivation. Psychological Review. 50 (4): 370–96.

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lurks the danger of complacency, so any regional development status requires certain measures. To assess the present and future necessities for a successful ecosystem, economic development models must account for the Lewis Point. Regional economic development is similar around the world, progressing from agriculture to textiles and machines and then to high-tech industry. The Lewis Point is moment when the labor surplus declines, which often happens after women get better jobs and birth rates decline. The Lewis Point can be understood as a design freeze in economic development. Whenever that point happens will be the stage where the economy will stay, whether that is the textile industry moment like in Vietnam or the high-tech industry moment like in South Korea. Perceived quality of life is also strongly influenced by the social and political system. The status of this system is not surprising as it is highly path-dependent and resistant to dynamic changes. If political systems suddenly change, it is usually not for the better. In addition, a volatile social or political system prevents the migration of smart people to the region since there is no medium-term guarantee of security.

2.7

Soil for the Seed: Ideas Born in Rebelling Intellectuals

The conclusion of this discussion on human capital issues is that the seed of an idea is ideally born in the brain of a rebelling intellectual. A rebelling intellectual is a person who has intellect, knowledge, and skills combined with a drive to break off the beaten path. These individuals must have enough energy to lead motivated people along on their new paths. Rebelling intellectuals can also be referred to as “smart people.” Based on this discussion of human capital, we will understand the characteristics of these smart people as follows: Intellectualism: Solid knowledge based on the humanities, engineering, and economics as well as design and the arts. Ability to communicate with an audience. Rebelliousness: Awareness of existing regulations but seeking alternatives. Better solutions may require a forward-looking interpretation of the rules. Purpose: Wants to change the world for the better. Relates to at least some of the UN’s 2015 Sustainable Development Goals, for example, climate change or poverty. Resilience: Recognizes flops and failures as experience. Uses outside doubt and envy as extra motivation. Follows the motto that envy is earned, but pity is free. Leadership: Has the energy to inspire others to follow. The secret sauce of any global innovation ecosystem is how many of these smart people with the characteristics of intellectualism, rebelliousness, purpose, resilience, and leadership it can grow at home or attract.

3

Finance Capital, Market, and Policy Ludovit Garzik

Abstract

Capital, understood as nonhuman capital, is a diverse resource with a wide range of subgroups including venture capital, bank loans, research funding, “family, friends and fools,” and more. Money is an enabler, but a bad motivator. Founders believe in their ideas and their potential impact on society. The big difference between a startup with seed capital funding and an established company’s project budget is the perceived ownership of the money. The spirit of innovation is diametrically opposed to the many uncertainties of products and markets. Ecosystems that focus on a conservative view of the market will face growing disadvantages due to changing relationships between markets and demand. Demand is one of the most underestimated drivers for success in many regional innovation systems. The strategy for that is a consequence of policy, and is often our main window into the policies themselves.

3.1

Finance Capital

Capital, understood as nonhuman capital, is a diverse resource with a wide range of subgroups including venture capital, bank loans, research funding, “family, friends and fools,” and more. In most of its forms, capital has a fairly flexible character, as we also see in Chap. 5 where all kinds of capital can be in the upper section of the flexibility scale. One reason is the fact that, in most regions, the available capital is greater than the number of projects ready for investment. Before going into different forms of finance capital, we should highlight the nature and role of this resource in an ecosystem. Money is an enabler, but a bad

L. Garzik (*) Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_3

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motivator. Founders believe in their ideas and their potential impact on society. Income that could be a result of this is not their first thought. We can call this the impact of a new venture. Of course, investors from business angels to VCs are interested in their return on investment in the event of an exit. The big difference between a startup with seed capital funding and an established company’s project budget is the perceived ownership of the money. In a startup, the money invested in the startup phase is fully under the founders’ control. They can move on to their best intentions and change their minds, as long as they believe in their ideas. In a company, the money stays entirely in the company’s ownership without the project managers’ full commitment to put their heart and soul into it. There are major cultural differences in how finance capital is raised and used. There was already an impressive difference between Europe and the USA in the early days of VC at the end of the twentieth century. According to Botazzi L et al. (2001),1 “between 1995 and 2000 the flow of venture capital investment in Europe has increased by a factor of six, but the gap with the USA has become larger—there investment has increased, over the same period, by a factor of 24. In addition, the VC industry in Europe is in its “infant stage and thus lacks experience. Contrary to the USA, it is dominated by banks. The result is that quoted venture-backed companies do not grow faster than non-venture backed ones.”

3.1.1

Risk Capital

Risk capital is the fire accelerant of entrepreneurial activity. To be clear, risk capital is an additional accelerant, so startups that develop market–product relationships out of pocket have no need for it. However, most new products and services begin with a development phase where there are few options for immediate market entry or revenue. Most risk capital comes with a range of experience and valuable contacts, which should not be underestimated. Startups use different types of financing as they progress through various entrepreneurial phases. In the beginning, most entrepreneurs try to hold onto their shares by drawing on their own savings. At least by the time they hire their first employee, they recognize the burden of being an employer and try to find support in their immediate environments. These initial supporters are “family, friends and fools.” When startups find themselves with an urgent need to expand their customer range and validate their business model, the hour has come for experienced business angels. The next stage is to scale the product or service to new market sectors with the support of VC investments. Crowdfunding is an additional option useful in different stages of the process. Successful innovation regions offer a wide range of support options that entrepreneurs can use based on their individual needs. In regions with a tradition

1 Botazzi L et al. (2001) Research, patents and the financing of ideas: Why is the EU growth potential so low? Economic analysis of the European Commission’s President.

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of bank lending, it will be difficult to find VC sources willing to accept that the borrower will not repay the money in the event of failure. These capital owners prefer to invest in less risky assets like real estate and keep their capital away from knowledge and innovation. Politicians try to meet this challenge with funds that mix public and private capital. They face two obstacles. First, public auditing bodies are socialized with a risk-free investment culture, especially when it comes to tax money. These bodies will try to prevent the benefits of venture investments from being used in the system. The second obstacle is private investors themselves, as there is often a misunderstanding where public (co-)investment is regarded as a free gift and not an incentive to increase one’s own risk. The consequences are models in which PPP is not translated “Public-Private Partnership” as originally intended, but as “Public Pays Private.” There are regional solutions to overcome these obstacles. One is a national law in the USA that requires public and private cofinancing. This is an incentive for the fund management to remain strictly private because public capital is served first during successful exits with cash outflows. Due to the different genesis and conditions across global regions, VC and Private Equity (PE) attractiveness varies greatly. An impressive example of successful public engagement in the VC sector is the Israeli Yozma program. Yozma is the Hebrew word for “initiative.” Launched in the early days of the VC business in the 1990s, it offered attractive tax incentives, especially for foreign investors and their VC funds. This resulted in important international VC activity in Israel today where mostly US-based VC investors work with their local peers. Investment topics range from the life sciences to the software and communication sectors.

3.1.2

Bank Loans

The main difference between bank loans and VC is that banks expect to be fully paid back regardless of the investment’s success. The spirit of innovation is diametrically opposed to the many uncertainties of products and markets. A regional tradition of bank lending is a barrier to venture investments. There may be a legitimate need for bank loans for later-stage investments. The future of banking is emerging in Africa. In the absence of institutional banking systems, people’s need for money transfer operations resulted in a multitude of service providers, most of whom had no history in banking. Cellular operators were the first to provide apps that could be used for money transfers in urban and remote areas, but also for daily payments or microfinancing. M-pesa, Swahili for mobile money, is one of the most famous examples. The company, based in Nairobi, Kenya, was developed primarily by mobile service provider Safaricom and has spread across many Sub-Saharan countries. Users’ cell phones become their wallets, spending phone-based loans on everyday purchases like apples in the market or microfinance investments for energy or mobility.

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Africa’s lack of banking institutions is more of an asset than an obstacle. The continent does not need to eliminate or work around oversized banking administrations like the USA and Europe do. Instead, Africa is kicking off the new banking business and leapfrogging the old world in banking. There are many examples of new banking businesses in Africa today. It would be difficult to set up a structure for bank branches like that in western countries that could serve a continent with 54 countries, many of which have more than 50 million inhabitants. The banking business in Africa is following a dynamic development path with hotspots for new services and startups in Kenya, South Africa, Nigeria, and Rwanda. Bank managers in other global regions should take a close look at these developments—it will be the future of their business.

3.2

Market and Demand

Ecosystems that focus on a conservative view of the market will face growing disadvantages due to changing relationships between markets and demand. From a conservative point of view, markets are defined as theoretical consumers. Companies ask questions like how many people live there? How many are between 20 and 30 and buy products for that age group? These theoretical projections lack information about market participants’ real spending intentions related to any given product. Unlike the product’s market, demand for a product means that the customers who actually buy it, when available, will have a pull effect. This is an important difference that regional managers should consider when discussing markets and demand. The question that defines demand is more appealing: do people really have the problem that the product is going to solve? Demand is one of the most underestimated drivers for success in many regional innovation systems. Is it worth discussing the importance of demand? Yes, definitely. National and regional innovation policies, as discussed in Sect. 3.3, focus mainly on the supply side of the system and ignore its potential to cope with innovation-oriented demand. Traditional companies have countless employees who have no idea that their salaries are paid by customers rather than their companies. In the entrepreneurial world, the customer is taken into account from the first moment of brainstorming. Who will my customers be? Whose problem can I solve? Whose lives will be better because of my idea? These questions are directly related to the topics dealt with in Sect. 2.2. Power lies in beliefs, which drive the inferior contribution of knowledge in carrying out ideas and desires. The majority of people spend their money on how they feel, not on the technical details they might know. What do we know about the technology in a mobile phone? Almost nothing, for most of us. Instead, we rely on properties like perceived usefulness and ease of use—properties we judge with our guts, not our brains. In the language of startups, we could say that people vote with their feet and not with their brains. They run to the offer that serves them best in their holistic

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understanding. Unfortunately, the effect is the same in politics—but that is a different story. This discussion assumes that people know what they want. If they do not always get what they want, we can blame some wayward beliefs. The situation is actually much worse. In many cases, people do not know what they want. How can they find out? Eric Ries suggested a process called Lean Startup.2 In the lean process, potential customers are involved in the product’s first development cycle—the Minimum Viable Product (MVP). In Mandarin, the MVP can be understood as chàbùduō, which translates to “that is working quite well for the moment.” Markets need to be open for test and pilot activities with early adopters. The process requires a reasonable number of early adopters willing to provide feedback at a stage when the product is not completely ready to use. The MVP will improve in incremental steps as the startup promotes it and perseveres in making small developments. After creation, the crowd assesses the MVP and the feedback helps the startup learn. One of the most important findings from many MVP development processes is that customers do not primarily ask questions about technical details. Instead of how or what, customers ask why is the product or service useful in their lives? In order to answer the why question, we have to remember that traditional surveys reveal knowledge about people but usually not the attitudes and desires behind their actions. However, we know that people vote with their feet—customers reveal their true preferences with their behavior, including whether they might be enthusiastic about a new product or service. If a product or service is not ready for implementation, a prototype can help. The startup can move the prototype to future customer environments and observe their behavior when confronted with the new test object. After that, the startup can pivot or persevere, following the Lean Startup method above. The why question assumes that customers should be involved in the development of a new product or service. Many teams start a new venture without hiring anyone to represent or solicit customers’ opinions—they simply forget. It is naturally up to team management to assign this role, but who is that manager in a startup team of equals? Neglecting necessary roles in a team or process is a common mistake in small startups and in large corporate or government projects. Take the example of the 2007 USA housing bubble. A sophisticated process provided real estate investors and private homebuilders with capital in the form of mortgages. Fannie Mae and Freddie Mac, the two big players in the field, provided the money. Well-known organizations like auditing multinationals assessed the projects’ suitability. After the money went to its destination, no one was responsible for lenders’ ability to process their mortgage repayments. When housing prices slowly fell in 2006 and 2007, no one waved the red flag to correct the imbalance between mortgages and lender

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http://theleanstartup.com/

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capabilities. The bubble grew until the pressure unloaded on Lehmann Brothers and caused its bankruptcy, followed by the rest of the financial crisis. Global regions differ in their ambitions to access new and existing markets. Success depends on their depth of knowledge about the market, its customers, and—most challenging—those customers’ demand motivations. Successful companies like Google or Amazon invest a lot of energy and money in understanding their customers better. They use personal profiling to show them the right promotional messages and even to know their customers’ desires before the customers know themselves. From a market point of view, this is difficult but simple: if you are not paying for a service, you are not the customer but the product.

3.3

Policy and Regulation

The cornerstones of society are the written and unwritten agreements about how we want to live together. The legal framework is a written part of this agreement. Even within this more explicit structure, there is a wide spectrum of variation from laissezfaire nonregulation to structured law and order where rules enforced by powerful public authorities govern every aspect of life. Innovation and regulation usually do not like each other much. A former Kenyan Minister of Innovation summed up the ideal approach, “first innovation, then regulation.” The goal of such an approach is to avoid killing baby ideas before they can see the light of day. Regulation can act as both an enabler and an obstacle in a regional innovation ecosystem. Examples in this book illustrate both sides of the coin. Shenzhen, discussed in Sect. 6.8, is a perfect example of what happens when the rules of the game are changed and regulation acts as an enabler. As one of the first “Special Economic Zones” in China, Shenzhen in the early 1980s was still in a highly regulated environment. However, some changes in its economic and labor regulations made it more attractive for knowledge—and innovation—driven people. Those small changes were enough to accelerate Shenzhen’s impressive development such that it surpassed Hong Kong’s GDP in 2019. In the late 1970s, people risked their lives with trying to swim across the border river from Shenzhen to Hong Kong in hopes of a better life. Now, the stream of innovation has reversed and today Shenzhen’s quality of life—including air quality—is much higher than Hong Kong’s. As a second example, we can focus on the mobility sector. Around 10 years before Uber—one of the leading startups in the mobility sector—was founded, taxi companies had their first projects in European cities to test digital devices and navigation systems. New technologies were available, but projects in Europe focused on technological support for drivers and their navigation systems, not on riders’ user convenience. The established taxi companies wasted a decade of potential head start, cutting off potential projects with the argument that drivers knew their industry best and did not need any support from digital devices.

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The fundamentals of technology have not changed since the days of taxis—Uber uses cellular providers’ communication systems and location services like GPS. Now, taxi companies are trying to protect themselves through regulation and lobbying, a strategy that cannot be successful in the long term. User convenience is critical to the market, and this is where tech companies from Silicon Valley like Uber or Bolt provide better service.

3.3.1

Policy and Strategy

Policy is an important resource for an ecosystem. It provides confidence in region’s future direction and the sustainability of resources available in the region. People will be ready to invest their brains and financial capital when they are convinced that they can achieve their ideas and dreams. The slightest doubt about corruption or the substance of policy will force people to think about alternatives, and they may migrate to another region more supportive of their dreams. Strategy is a consequence of policy, and is often our main window into the policies themselves. Strategy development for a region is a task for civil servants, who are charged with changing attitudes in the ecosystems they have created. As mentioned in Sect. 2.2, even strategies based on analytical evidence and strategies full of ambitious goals will have to face the hurdle of implementation. This task, which is still in the hands of the same civil servants, is even more difficult when confronted by bureaucratic mindsets or the path dependency of public administration. Policies for the public support of businesses need to be handled with care. Striking a balance between promoting the public interest and bowing to lobby groups is one of the most challenging tasks in an ecosystem. While public policy may want to support key projects and areas, lobbyists will try to channel public money into their companies and limit exposure to market competition. This is one reason why, in most cases, successful innovation regions are not located in the national capitals. Apart from the reduced availability of human capital for research and innovation mentioned in Sect. 2.3, capital regions are magnets for lobbyists who invest their energy in developing contacts rather than markets. Lobbyists use their contacts to create dependencies, which are obstacles for change processes. Any innovation region looking to become a success story must balance and manage its resources, including clear priorities for energy investment. One of the most commonly used input indicators for innovation is the share of GDP dedicated to R&D. The optimal approach is to invest the maximum that human capital and infrastructure can effectively absorb. Another important question will be the dynamism of changing investment directions if necessary. Example of a Successful Policy Measure Governments often use various types of tax credits as an innovation policy measure. These credits can lower R&D costs and incentivize companies to increase their own

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spending.3 The relationship between changes in tax regulations and R&D spending is therefore positive and amounts to an increase of about 10% in R&D spending for a 10% decrease in tax income. In the long term, such measures will have further effects on R&D transfer and innovation activities. Example of a Failed Policy Measure Between 2010 and 2015, many countries—including many OECD countries— expected patent boxes to have positive innovation effects. They developed special tax regimes to encourage innovation and consequently patenting activity. To keep the message short: patent box measures had no impact on innovation activity as a recently published research paper4 shows, and only a slight impact on patent ownership. Global corporations have benefited, using these policy measures to lower their tax burdens by shifting patent royalties among jurisdictions. In the end, patent boxes only helped these large companies outperform the startups that were not flexible enough to take advantage. Government investment in R&D is important, according to recent literature, because it encourages spillover effects from knowledge institutions to companies and from business to business. There is evidence of successful interventions using tax incentives and direct grants. The latter is also useful for controlling political motivations related to sustainable development goals or other content-related policy measures. Just like a drug overdose, public support can have a negative impact if it is too much for the system to absorb. During the COVID-19 pandemic, many regions have launched new public support measures or expanded existing ones. However, public financial support to companies often reduces the impact of market mechanisms and can lead to dangerous reductions in the pressure to innovate. The consequence is reduced competitiveness for subsidized companies on a global level. Government investment in the human capital supply is reasonable but difficult to implement. Policies directed toward grants for R&D projects that require a skilled workforce risk inefficiency. Without sufficient opportunities to develop a skilled local workforce, these grants will raise the cost of the existing workforce and boost inequality while maintaining the same level of R&D, thus wasting taxpayers’ money. An alternative to R&D grants is to focus on increasing innovative human capital itself by forcing skilled migration or making investments in the education system. Skilled workers are more likely to invent and have same effects intended by direct project grants without risking an imbalance. This conclusion is reinforced by a

Dechezlepretre A et al. (2016) Do tax incentives for research increase firm innovation? Center for economic performance, LSE. 4 Gaessler F et al. (2018) Should there be lower taxes on patent income? SSRN Scholarly Paper. 3

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number of recent papers, most of which focused on expanding the Science, Technology, Engineering, Mathematics (STEM) workforce5, 6 Many discussions of policy and innovation end by advising governments to stay away from intervention in entrepreneurial activities. However, some resources in an ecosystem are sensitive to government incentives. Silicon Valley would not be so successful if its governments had not invested billions of dollars in military projects at Stanford University in its warm-up phase as discussed in Sect. 2.7. Today, public funding at Stanford is only 25% of the total, but that is still around USD one billion per year. The key question for policy makers is how to strike a balance, motivating knowledge for social wellbeing without restricting the creativity and freedom of basic research.

3.3.2

Regulation and Its Advisers

Regulation According to Boettke P and Coyne C (2003),7 “the two most important core institutions for encouraging entrepreneurship are well-defined property rights and the rule of law.” Regulation is necessary to structure interactions between participants in economic and societal processes. The spectrum of regulation’s effects ranges from building insurmountable walls to encouraging high-risk investments. We can use the example of insolvency law and Japan to see the transition from barrier to an enabler. At the end of the 1990s, Japan’s bankruptcy law was refined to include the special liquidation chapter of corporate law. One of the important changes was to provide an exit option for failed ventures. As a result, the number of startups rose sharply in the following years. People do not enter the risk arena if they believe that there is no exit option. When an ecosystem offers such options, more potential entrepreneurs are encouraged to join the sea of new ventures. The same applies to social stigma. Dealing with flops and mistakes in society strongly influences entrepreneur’s motivation, as shown in Sect. 2.3. As discussed in detail in Sect. 4.2, the speed of change is key to an innovation ecosystem’s success. Regulation has the ability to accelerate or slow down the momentum. For example, regulations can make it very easy or very difficult to start new businesses. World Bank data8 in Table 3.1 shows how many days it takes in our exemplar regions. 5

Andrews M (2019) How do institutions of higher education affect local invention? Evidence from the establishment of US colleges. Social Science research Network. 6 Valero A and Reenen J (2016) The economic impact of universities: Evidence from across the globe. National bureau of economic research. 7 Bottke P and Coyne C (2003) Entrepreneurship and Development: Cause or Consequence? Advances in Austrian Economics, Vol. 6, pp. 67–88. 8 https://data.worldbank.org/indicator/IC.REG.DURS, provided by Creative Commons Attribution 4.0 International License (CC BY 4.0).

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Table 3.1 Number of days to start a new business, World Bank (Data 2019) Region New York, SV Berlin Shanghai, Shenzhen Medellin Moscow Zurich Tel Aviv Bangalore Nairobi Sofia

Nation USA Germany China Colombia Russian Federation Switzerland Israel India Kenya Bulgaria

Start a new business 4 8 9 10 10 10 11 18 23 23

Table 3.2 Ranking ease of doing business, World Bank (Data 2019) Region New York, SV Berlin Moscow Shanghai, Shenzhen Tel Aviv Zurich Nairobi Sofia Bangalore Medellin

Nation USA Germany Russian Federation China Israel Switzerland Kenya Bulgaria India Colombia

Ease of doing business 6 22 28 31 35 36 56 61 63 67

Another indicator of whether regulations help or hurt entrepreneurship is the ranking for ease of doing business. The national-level data includes 190 countries worldwide in Table 3.2, including the countries where our innovation regions in (Chap. 6 Successful Innovation Regions) are located. The ranking includes measures for processes like starting a business, obtaining a building permit or electricity, transferring property, accessing to credit, protecting minority investors, paying taxes, conducting international trade, enforcing contracts, and resolving bankruptcies. Only two African countries (Mauritius at number 13, Rwanda at number 38) are in the top 50 countries. Despite a spirit of new ventures and exciting tools for the “bottom of the pyramid” market, most countries on this continent have a long way to go before their regulations are supportive of innovation. In addition to the static view of the World Bank rankings, there are also dynamics between countries. Regardless of whether a country has made improvements, it may still lose ground due if its rate of change is slower than its counterparts’. Two of the countries discussed in this book have outperformed others with their rates of change: China and India.

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China and India have jumped up many positions in the rankings compared with previous years. These two countries’ progress builds on the implementation of reforms. Both have reformed regulations in areas like business formation, building permits, cross-border trade, and bankruptcy trading. China has also been able to improve its regulations on purchasing electricity, protecting minority investments, paying taxes, and enforcing contracts. Neither country is in the top position, but if they maintain their pace of change, they have a fair chance of outperforming other countries in the years to come.

3.3.3

Legal Advisers

Lawyers, tax advisers, and patent attorneys are examples of the group of service providers that prevent entrepreneurs from having to know all the legal details that could get them into trouble. Startups are known for their expertise at stretching legal interpretation to reach new markets or old ones protected by lobby groups and regulatory walls. Most observers believe that these advisers wear grey suits, provide passive support if mandated, and receive immediate reimbursement for their service. However, this group can do much more than legal support or tax advice. Advisers and consultants can play an active or passive role in the ecosystem. Advisers become unexpected valuable components of the ecosystem when they play an active role and get involved in startups’ innovation projects or industry themselves. In this role, they not only have an interest in the project’s success, but can also provide irreplaceable contributions to the innovation process itself. Interdisciplinarity: Advisers work in a cross-disciplinary way and draw in potential partners from disciplines far away from the core of the project. Innovation is most successful when ideas come from sectors that, at first glance, have nothing to do with each other. The innovation sector shares this characteristic with humor, as good jokes are built the same way. Network: Advisers establish contacts with potential investors and make initial market contacts in lean development. Founders can trust feedback most when it comes from a source not more than one degree removed from their own networks. Investment: Advisers are expensive. If they are part of a project, they will know about solvency and will request and receive payments for their services when there is no risk to liquidity. However, this is only possible when advisers really believe in the success of the project. Against this background, advisers’ role in an innovation ecosystem should not be underestimated.

4

Infrastructure and Institutions Ludovit Garzik

Abstract

Infrastructure includes as all hard and soft facilities used by individuals directly, either for research and innovation or for the mobility of people, assets, or data. Infrastructure enables connections between individuals through communication networks, roads, and community buildings. Innovators in Asia regard their infrastructure much more highly than do their peers in Europe and the USA. Since living conditions in Asia are also improving, the crowd could move from west to east in the next few decades if the others fail to accelerate their investments. There is no shortcut to developing a regional innovation ecosystem, just as there was not in the evolution of intelligent life. The strongest position in a competitive environment is with the organizations that can adapt most quickly to changing conditions. In ecosystem development, first prepare the soil for a fertile environment and then sow the plants.

4.1

Physical Infrastructure

Infrastructure includes as all hard and soft facilities used by individuals directly, either for research and innovation or for the mobility of people, assets, or data. While the diversity described in Chap. 2 affects individuals, more than one person can use infrastructure. In addition, infrastructure enables connections between individuals through communication networks, roads, and community buildings. People who live in industrialized countries are unaware of most of the infrastructure around them because they are accustomed to its availability. Like their health, people only seem to notice the value of infrastructure when it is lacking.

L. Garzik (*) Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_4

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Comprising universities, research centers, roads, and data lines, infrastructure takes time for planning, construction, and financing. Because it is often made of concrete, asphalt, and steel, infrastructure is often mistaken for a constant, nonvarying resource. That is not the case. Compared to resources like human capital or mindset, infrastructure is very flexible. It can rot or go out of date very quickly. A house should last for about a hundred years, but a laboratory can be old-fashioned a few months after it is built if new research methods emerge that require a different setup.

4.1.1

Infrastructure for Research

Research infrastructure is closely connected to other resources like human and financial capital. It is a flexible resource due to its almost real-time availability, scoring 8 on the resource flexibility scale in Table 5.1. The challenge of research infrastructure is not its availability but how efficiently it can be used. Before making any strategic investments in future infrastructure, decision makers should know about existing inventory, its degeneration, and— very importantly—its use capacity. Local knowledge institutions already doing research using expensive infrastructures have no interest in passing on this information, as they do not want to restrict their flexibility of use. Often, neighboring university institutions will duplicate (expensive) infrastructure without either side knowing. In order to meet this challenge, the first step is to set up a database of infrastructure quantity and degeneration status. The next is installing procedures for regular updating, in which infrastructure owners themselves continuously edit the database. It would not be feasible to update this status from the outside. Even in industrialized regions, it is difficult to maintain quality infrastructure. Not only is existing infrastructure more obsolete every day, but also research is advancing at a rapid pace and smart human capital requires the highest level of equipment to keep up with international competition. This can be an opportunity for up-andcoming regions, who can offer an infrastructure party zone to attract smart people. Such a strategy requires a high level of leadership and decision-making power due to the opposing energy of incumbent groups who will lobby for their share of the budget. In other words, most regions already have a fierce internal battle for infrastructure and investments, leaving little space for newcomers.

4.1.2

Infrastructure for Living and Working: And the Third Space

Housing is a basic need for everyone. As discussed in Sect. 2.5, the availability and cost of living spaces define parts of the quality of life. The geography of regions can be a limiting factor for expansion, even with increased migration. Innovation regions put pressure on housing supply, and housing costs in many regions rise sharply.

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Many regions follow a similar process. First, when housing is affordable, a young and creative crowd is drawn to the expanding and creative community. Many of them will use their creativity to succeed on the market, increasing their incomes and their funds available for expensive housing. Rents rise, even as quality does not. The situation is even worse in the best innovation hubs, since success stories are a magnet for even more migration. Locals are pushed into distant suburbs and have to commute long distances for their jobs. Social cohesion can come under pressure as people with everyday jobs diverge from those in the entrepreneurial space. Two examples illustrate the process by which innovation success can create housing crises. Apart from its historically wealthy neighborhoods, Berlin had comparably low rents a decade ago. Young creative people from all over Germany and from many other regions in Europe poured into the city. In recent years, costs of living are rising and more is expected in the next decade. Another region is—cynically speaking—approaching the end of this process. The San Francisco Bay Area, which includes Silicon Valley, is geographically limited in terms of residential development. The price levels for housing are already detached from the surrounding regions and even more so from national housing prices. The pandemic will leave some trace on the Bay Area’s pricing structures, but is not yet clear how strong those implications will be. The San Francisco Bay Area’s extremely high housing prices have led to the endemic social challenges that have surfaced in Silicon Valley and especially the city of San Francisco in the past 10 years. The next implication will be that housing prices become a barrier, blocking arriving migrants in the region and permanently weakening the ecosystem. Like housing, office space rents have grown with the movement of startups. Many are headquartered in or near the city of San Francisco, while in the decade before they were founded and headquartered around Palo Alto, Mountain View, and Cupertino. A new landmark that defines this movement into the city and further into the sky is the Salesforce Tower, inaugurated in 2018. Innovation ecosystems require residential and office space as a prerequisite, but they need more to be successful. One of the special ingredients in the system is the third space. The third space comes from sociolinguistic theory and defines identity and community. The modern third space is neither home nor the office, but some other space that can be used by an individual without barring others from use. In some literature, Starbucks is an example of a modern third space. That may be true, except that it cannot be used by an endless number of people. We can use two examples to demonstrate the third space concept. The Red Rock Café in Mountain View has a first floor where around 40–50 nerds can focus on their own entrepreneurial projects. Full-service infrastructure is provided, with no limitation on how much time they can spend there. Each person has enough space and time to work alone, alongside many like-minded people who may start as strangers but can be partners for an hour or a project. The opposite example is the traditional coffeehouse one finds in many European capital cities, great coffee, mostly nice service, but an almost friendly question every 10 min about ordering something else and no option to get into creative mode.

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Co-working spaces are being developed in every innovation region from Africa to Asia, Europe, and the Americas. Cafes in these spaces are a hotspot for generating interdisciplinary ideas. For a small fee, tenants receive a full load of like-minded people for exchange and potential partnership. As their level of services or financial investments increasing, co-working spaces change into accelerators or incubators. Experienced mentors, serial entrepreneurs, or investors give their money and/or advice for starting, scaling, and achieving a successful exit.

4.1.3

Infrastructure for Mobility

Successful human interaction in an ecosystem depends on personal contact. More than 50% of communication between people is nonverbal. People need to be able to meet their peers to share ideas, build teams, or pitch for capital investment. Public and private transportation is key to enabling interaction. When deciding on a region, bright minds take into account how quickly and, more importantly, how easily they can get from A to B. Transportation infrastructure is heavily dependent on historical developments. The earlier a region started land-use planning, the easier it was to define zones for development or mobility corridors. There are brutal ways to erase neighborhoods for new freeways like California did in the 1970s, or to elevate highways like many Chinese cities do. Examples from the two sides of the Pacific Ocean can provide a sense of the differences in current and future mobility settings. A few years ago, in Silicon Valley, the maximum physical distance of venture investment was defined using the “Tesla radius.” The range of the first models from this manufacturer of electric cars was around 40 km. If an entrepreneur stuck one end of a compass on the map where the VC headquarters are and draw a 40-km circle, they know that establishing their office inside that circle will increase the chances of getting an investment. Not only has the range of battery-powered vehicles expanded in recent years, but also driving through the Bay Area on Highway 101 can now take up to 2 h even inside that 40-km radius. The alternative of public transportation is very limited, and there is simply no room for a new transport corridor anywhere in the area. That is why Elon Musk proposed the Hyperloop project, a futuristic underground rapid transit solution. Still, even if that project succeeds it will take decades. Across the Pacific, we find an example of a similar distance in Shanghai, China, where the distance between the international airport Pudong and the city is about 60 km. As shown in comparison with a 60-km crossing of Silicon Valley, the transrapid Maglev—in operation since 2002—needs 7 min and 18 s with a top speed of 430 km per hour. It must be said that Shanghai also faces a serious problem every day due to heavy traffic jams, but this example should point to the options of modern transport. The lesson is that the technology is available, and regions should strive to facilitate connections between individuals. The second important question after regional mobility is connectivity to other prosperous regions. In most cases, these connections are airports or possibly

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high-speed railway networks. China invested heavily in its railroads, resulting in a rail infrastructure that covers more miles than all other global regions combined. Airport development strategies have changed dramatically in recent years from hubs to direct connections with smaller, still long-haul aircrafts. The change is most obvious at European aircraft producer Airbus, which has ceased production of its A-380, which served hub connections with large numbers of passengers. Bright minds do not like to waste their time changing planes in hubs. They like to get on a plane at the start of their trip and leave it at their final destination without stopping over. Regions need to be aware of the networks their airlines offer at airports. If the airport offers direct connections to less than half of the regions listed in Chap. 6, this can put it at a competitive disadvantage.

4.2

Nonphysical Infrastructure

4.2.1

Social Infrastructure: Community, Network, Teams, and Media

New ideas arise when people from different backgrounds, different cultures, and different levels of knowledge interact and communicate. The more they talk and interact, the more ideas arise. As Licht A and Siegel J (2005)1 emphasize, a social system that values innovation, risk-taking, and independence is more likely to lead to entrepreneurial events than a system with contrasting values, “with the underlying compass that entrepreneurial behavior responds to a rich set of clues from the social environment.” A reasonable level of trust in the regional crowd will speed up the process. Let us consider the following situation: four people meet for a drink. They were in casual contact in a private context and thought it could be interesting to discuss business opportunities. They sit together and share what they can bring to the group. One is an engineer with experience miniaturizing hard drives, another has worked in business development in the telecommunications sector, and so on. They try to find a core or a common context from the sum of their expertise and interests. They find it in the optimization of wireless technology advancements in the field of mobile services. Four years later, they sell their company for USD800 million. Stories like this are not fiction—this is the real story one of the four told when having a coffee on the Stanford University campus a few years ago. Did that story happen in Silicon Valley by chance? Most likely no. In that region, there are similar meetups every morning of the week. Joining such a group on Tuesday morning in Sunnyvale, on Thursday in Redwood City, and on Friday in Cupertino instills the impression that these discussion spaces for potential entrepreneurs are one of the ingredients in Silicon Valley’s secret sauce.

1

Licht A and Siegel J (2005) The social dimensions of entrepreneurship.

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A few components stand out and make these informal meetings effective. First, there is no random selection of topics or experiences before the meetings. Second, meetings take place an hour or 2 before office hours, at times like 7:30 in the morning. Participants are working full time, but use these meetings to exchange ideas with like-minded peers from other industries and from different backgrounds. Of course, weather conditions play an important role. When the temperature is already 20 ○ C by 7:30, it is more convenient to go out and meet up than in regions where there are still freezing temperatures at that time of day. Open Innovation Meetups and the like are stimuli for exchanging ideas and an appropriate way to include diversity. However, success takes more than an incentive. It takes the openness of qualified people, as presented in Sect. 2.1, who are willing and able to interact with one another. There are various methods like open innovation as introduced by Henry Chesbrough (2003)2 and community-based innovation. These methods are all more likely to succeed if interpersonal interaction comes with an appropriate level of openness. The situation is similar to precision farming. Most people think that fertilizers help poor soil and slow-growing crops, but it is the other way around. Fertilizers are a waste of money when the soil is infertile and barren, because plants will never grow comfortably. They should be used where the soil is good, and then, they can unfold their full effects and the plants will grow much more than they would unfertilized. Open innovation works almost the same way. It can expand to its full capacity when used in a climate of openness, but is a waste of energy where communication is limited and people have barriers to sharing their ideas with others. The same applies to strategies for attracting people to a region. If there is no strength or fertile ground for entrepreneurial success, it will be difficult to convince innovators to move in. There is no shortcut to developing a regional innovation ecosystem, just as there was not in the evolution of intelligent life. The analogy with Charles Darwin’s theory of evolution can go even further: The strongest position in a competitive environment is with the organizations that can adapt most quickly to changing conditions. In ecosystem development, first prepare the soil for a fertile environment and then sow the plants. Open innovation faces a serious obstacle in the “not invented here” attitude. This phenomenon appears in many companies, especially large corporations that employ thousands of researchers who believe in their own intellect and independence. Procter and Gamble once ran a program called “Proudly Found Elsewhere” to incorporate outside ideas into their research projects. In companies in Asia, innovators pose two main questions: What do I need and where can I find it? It is

2

Chesbrough, H. (2003): Open Innovation: The new Imperative for Creating and Profiting from Technology. Harvard Business School Press.

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Fig. 4.1 Condensation from communities into teams. Source: Author’s own figure

unimportant whether solutions come from inside or outside the company; the point is surmounting the challenge and achieving the largest market share. Community and Network An innovation region will reach its full capacity in the spirit of altruism. If a member of a selfless community invests energy in the support of another member without expecting a direct return on investment, they can be sure to get support back from another corner of the same altruistic environment. Overall, the environment balances give and take, along with trust that advances will pay off. A Winston Churchill quote exemplifies the pay-it-forward spirit, “we make a living by what we get; we make a life by what we give.” To assess regional innovation community quality, we can begin by measuring quality as it condenses into smaller units in Fig. 4.1. Another indicator of an open community is whether receptionists are effective barriers. People with power and money tend to hide behind receptionists and assistants. In open communities, however, the same people are easily accessible. However, if you do not have a good idea they like, you will not get a second appointment. A community with a spirit of openness is a prerequisite, and the next step is networks. The networks in active innovation communities are therefore broader, but remain on the surface. In many cases, networks operate in hidden circles before they emerge as teams, only tightening as teams form. This type of process requires catalysts like the meetup structure offered in Silicon Valley. Relationships can manifest in different ways, as shown in Fig. 4.2. A high degree of openness in networks is not only a driver for the formation of teams from communities, but also an invaluable asset for the integration of migrants into the region. Potential newcomers will carefully examine their chances of joining local networks within an acceptable period. If not, they will prefer other regions.

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Fig. 4.2 Manifestations of relationships. Source Pictures: www.pixabay.com (Pixabay license grants an irrevocable, worldwide, nonexclusive, and royalty-free right to use, download, copy, modify, or adapt the content for commercial or noncommercial purposes (website April 23, 2021).). Source Graph: Author’s own figure

Teams Teams are the core of entrepreneurial activity and the success of any innovation ecosystem. Investors allocate their capital to teams and not necessarily to their current ideas. In the end, the idea’s implementation and not the idea itself will provide the return on investment. When a bad team comes up with a great idea, it will struggle to implement. In contrast, a brilliant team can always come up with new ideas if old ones fail. Most teams do not implement the same idea they had when the team formed, since development is a dynamic process as described by Eric Ries.3 The serial entrepreneur and business angel David Rose4 published his way of structuring idea evaluation and implementation. He assigns the idea a multiplier between –1 for a terrible idea and +20 for a brilliant one. Implementation, according to Rose, is linked to market success and is therefore assessed using the expected financial revenue. The scale starts with no implementation at USD1, then medium implementation at USD10,000, and finally brilliant implementation worth USD10,000,000. We can now look at the medium-brilliant combination from two

3 4

http://theleanstartup.com/ http://www.davidsrose.com/

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Fig. 4.3 Research and innovation. Source Pictures: www.pixabay.com (Pixabay license grants an irrevocable, worldwide, nonexclusive, and royalty-free right to use, download, copy, modify, or adapt the content for commercial or noncommercial purposes (website April 23, 2021)). Source Graph: Author’s own figure

angles. Medium implementation of a brilliant idea could generate revenues of USD200,000, while a medium idea with brilliant implementation is worth USD50,000,000. The numbers are hypothetical, but the difference is striking. We need to consider the relationship between teams and ideas from a different perspective. So far, we have assumed that ideas come from one team member or the entire team, that is not the only way ideas can arise. Traditional companies operate in the model where high-level executives come up with ideas, then look around the company, and find someone to implement. However, if you separate the owner of an idea from its implementation, 90% of the commitment is lost. There is hardly anything more motivating than your own idea starting to fly from your own hands. Modern companies will never separate ideas from their owners for implementation. Companies and education systems invest money to create new knowledge. The best option for creating a seamless transition of implementing the knowledge in the marketplace—what we would call innovation—is to keep the generation and implementation of knowledge in the same brain. Figure 4.3 shows the two processes of interaction between the brain and money. The processes of knowledge generation and implementation are two parts of a wheel, circulating well when both parts are in harmony. If implementation lags, the company or region could run out of money to generate new knowledge.

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Communities and networks use different types of open and closed communication channels like social media platforms. The exchange of ideas in these channels wafts around like the surface of a geyser pool in Yellowstone National Park. Like the temperature in the pool, the level of communication activity is more or less stable and decreases when its atmosphere gets colder. External impulses like new topics and discussions come from outside the pool through the media, providing energy to keep the temperature at a boil. Regions with mostly traditional media will not be able to provide enough energy to accelerate the momentum of change—there has to be a mix of high-quality digital media. Journalists in digital and traditional media need to understand new business models and community dynamics. Then, they can play an important role in connecting teams, inspiring new ideas, and accelerating lean processes to connect founders and their early markets.

4.2.2

Digital Infrastructure

Digital infrastructure is the backbone of modern business. Server farms, as the heart of the system, pump trillions of bits and bytes down into the underground fiber-optic bloodstream and up into antennas via radio. Global regions occupy different stages of digital infrastructure development. According to the OECD broadband statistics update,5 fiber connections average about 25% of total fixed lines, but the distribution across countries is diverse. If someone wants to start a venture with digital business models, resources like digital services connectivity and computing capacity are decisive for the success. Every business today relies heavily on the availability of digital exchange, from city dwellers ordering farm fresh produced online to high-tech computer chips designed in one region of the world and manufactured in another. The COVID-19 crisis in 2020/2021 showed not only the vulnerability of societies and economies, but also the value of digital infrastructure. From one day to the next, millions of people had to move their whole lives onto digital communications. Schools, small and large businesses, and health and social services that could not meet their customers due to risk of infection were suddenly online entities. The future of digital infrastructure will be even more exciting with 5G, 6G, and further generations. Antenna density will increase, especially in urban areas, which will also increase the demand for capital investment and political commitment. The dynamism of changing to new technical standards will determine the competitiveness of innovation regions. As Eberhard von Kuehnheim put it, “it’s not the big that eat the small. . .it’s the fast that eat the slow.” The COVID-19 crisis once again confirmed that the regions that can quickly adapt to changing conditions will be much better off than their slower peers. The COVID-19 crisis will favor the strong,

5

https://www.oecd.org/internet/broadband/broadband-statistics-update.htm

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punish the laggards, and contribute to the concentration of power in regions and companies. Digital infrastructure connects individuals with one another and with the Internet. Technology scaling is much easier than it was a few decades ago. It took the phone more than 100 years to reach 100 million users. Now, the same milestone took apps like Facebook only 1600 days and has taken recently developed gaming apps less than 100 days. The COVID-19 crisis has also shown that companies’ level of digitization increases their resilience to external crisis shocks. The more digital a company is, the better it will emerge from a crisis. Conversely, the higher the digitization rate and digital capabilities of a region, the better off it will be after a crisis.

4.2.3

Intangible Infrastructure

In addition to tangible infrastructures like roads and power plants, ecosystems also rely on intangible assets. Some of these are already covered in other chapters like education in Chap. 2, the financial system in Sect. 3.1, and the penetration of business services in Sect. 3.3. Other intangible infrastructure deals with issues like health care or intellectual property rights (IPRs). There are many opinions about the contribution of intellectual property rights or patents to the proper development of an innovation ecosystem. These range from Bottke PJ and Coyne CJ (2003)6 statement that “the two most important core institutions for encouraging entrepreneurship are well-defined property rights and the rule of law” to researchers who argue that the preoccupation with patents takes startups too much time, making founders spend less time with their markets and lose ground compared to nonpatenting peers. Both are true depending on the industry. In the software and IT businesses, the rate of change is too fast for adequate patent protection. Once a patent is granted, the technology would already be outdated. In life sciences or engineering, product life cycles require some protection to avoid a market flooded with cheap replicas before break-even. A common mistake is the classification of IPR as a purely legal issue. IPR in the modern world is a tool for economic competitiveness. Large corporations from Apple to Samsung collect huge piles of IPR to discourage their competitors from suing them, and actual lawsuits on patent infringements are rare compared to earlier times. Apart from economic issues, IPR plays an important role in the motivation for entrepreneurship. As Johnson S et al. (1999)7 stated, “insecure property rights were more inhibiting to entrepreneurship than inadequate finance.” Figure 4.4 shows the available data on patent filing and how it has developed across global regions. Just two decades ago, Japan was the long-term global leader in

6 Boettke PJ and Coyne CJ (2003) Entrepreneurship and development: Cause or consequence. Advances in Austrian economics, 6, p. 67–88. 7 Johnson S et al. (1999) Property rights, finance and entrepreneurship. Working Paper.

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750,000

500,000

250,000

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14

0

China European Patent Office Japan

Republic of Korea United States of America

Fig. 4.4 Global patent filings 1980–2014. Source: WIPO (Data source provided by Creative Commons Attribution (BY) 30 IGO license) Table 4.1 Ranking of patent filing according to WIPO statistics (2018) Region Shanghai, Shenzhen New York, Silicon Valley Berlin Zurich Moscow Bangalore Tel Aviv Medellin Sofia Nairobi

Nation China USA Germany Switzerland Russian Federation India Israel Colombia Bulgaria Kenya

Ranking of filing activity (patents) 1 2 5 8 11 12 15 57 61 72

https://www.wipo.int/edocs/pubdocs/en/wipo_pub_941_2019.pdf Source: WIPO

patent applications. It still is today in terms of total applications. In just a few years, China overtook Japan at high speed. Compared to the development of China, all other regions are sleepy. More specifically to the discussion in this book, the World Intellectual Property Organization (WIPO) statistics provide an overview of patenting activity in the regions described in Chap. 6, shown in Table 4.1. As stated in Sect. 2.4, filing patents is no guarantee of implementation, including the IPR monetization. Even if the idea is implemented, it may not be carried out in the region where the patent was filed.

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Institutions

Institutional structures follow strict rules of path dependence. Since history plays an important role in current structures, the ability to change these structures is critical to the support that institutions can provide for an innovation region. There are two aspects of institutional structures, and we will look at each separately. First is the architecture of the institutional landscape in a region. This is the outside view. Second, each institution has an internal structure that often follows common regional rules and has a major impact on institutional leaders’ ability to bring their performance to the streets.

4.3.1

Landscape of Institutions

Ecosystems are made of many different structures, from public institutions like ministries or agencies to private companies and from billion-dollar corporations to startups, all supplemented by intermediaries and NGOs of various kinds. All of these institutions have two great things in common. First, they are not lifeless skeletons, but full of souls—the people who work there—and consequently carry the least common denominator of their employees’ beliefs and mindsets. Second, they share the need for permanent renewal—stagnation is synonymous with decline. In innovation, there is no such thing as “too big to fail.” Big companies disappear just like startups do—there is an endless list of examples like Kodak, Sega, Pan Am, and Atari just to name a few. These once-dominant companies failed to recognize the entrepreneurial spirit that would have informed them of changing market demand and customer needs. In other words, the incumbents missed the window of opportunity to self-disrupt. They become dinosaurs, unable to adapt to changing circumstances in a short period. A logical thought might be that stagnation is a question of size. Small startups may be less likely to fall into the complacency trap due to their entrepreneurial DNA, which forces constant communication with their markets. Large companies run into trouble because of their communication and management requirements, which consume all of the energy that should go to their markets. However, it is not company size that determines the power of innovation but the company’s age. Like a human body in its aging process, a company needs continuous entrepreneurial training to maintain or expand its innovative strength. Coad A et al. (2017)8 showed the ratio of age and performance, with young companies having an around 10% of turnover from radical innovation. This number drops to around 5% beginning with a firm age of 10 years. The architecture of institutions in industrialized countries is well developed. In most cases, it is over-developed due to the inability of the system to reduce its number of institutions once they are established. A first insight into the efficiency of 8

Coad A et al. (2017) Firm age and performance. J Evol Econ 28, 1–11 (2018).

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Table 4.2 Capital vs. innovation regions

Nation China India USA South Africa Colombia Israel Switzerland

Capital Beijing New Delhi Washington Pretoria Bogota Jerusalem Bern

Innovation region Shenzhen Bangalore San Francisco Cape Town Medellin Tel Aviv Zurich

an institutional system can be derived by following the institutional hierarchy from the top political level to the point where the first employee actually does research or innovation. This can be five to seven levels of hierarchy down from different ministries, agencies, and other intermediary bodies. Another aspect of institutional efficiency is the number of institutions in a certain hierarchy level. In most university systems, the flexibility to open or close an institution is very limited. Therefore, path dependence is extremely influential. A few decades ago, many universities were founded not because the region needed a new university, but because of a leader’s political intention to have such an institution in the region. Successful regions can open and close institutions quickly to react to demand in real time. For most regions, though, this scenario is wishful thinking. Once an institution is established, it can stand up for itself. The bigger it gets, the less likely it is to disappear when it is no longer needed. After a while, unnecessary institutional bodies block large portions of financial and human capital. This is also a major reason why innovation centers do not typically appear in capital regions, as shown in Table 4.2. Capital regions are where the level and energy of lobbying culminate. Innovation regions in developing countries can be more flexible in creating institutional structures tailored to today’s needs since they do not have to carry the rucksack of history in their institutional structures. These regions can have a lot of freedom to develop new ideas and bring them to market quickly. The other side of that coin, however, is the risk that some companies will abuse the lack of control and regulation with unethical business models. The most important institutions in any innovation ecosystem are innovative companies, no matter their size or structure. Every company is an enabling structure for the talent and intrinsic motivation of its employees. A company is future-oriented and innovative if it enables its employees’ ideas to be checked and tested for potential market implementation.

4.3.2

Governance and Lead Printing

After discussing the number and hierarchies of institutions from an outside view, we can turn to their internal cycles to learn more about their contributions to the innovation ecosystem. As a baseline, we refer to lean thinking methods with the conviction that the success of an institution or organization depends on the quality of

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the human capital it can attract and retain. From there, we will consider organizational structures and process structures. There is great discussion in the scientific literature on how to make organizational structure most efficient. We will focus on two aspects that are relevant to the management of research and innovation institutions. Organizational Structure: Number of Hierarchical Levels The first important issue is the number of hierarchy levels from top management to the project level. Top-down styles of leadership and imprinting are discussed later in this section as process structures. We will also discuss bottom-up communication later, specifically its direct influence on top-level managers’ information quality and its significance for decision making. For historical reasons, institutions like ministries have many hierarchical levels. Bottom-up communication is influenced by the ability of the various levels to keep the quality of communication high and to avoid losing information at each level. We can call it the melon theory: The project-level experiences challenge that project managers cannot overcome, so the project struggles. The project manager communicates problems to the next hierarchical level, including a message that there are problems but the team is working on solutions. When the next level reads that message, it hears that there are problems, but since the team is working on them they will soon be resolved. At the end of the information flow, top management receives the message that all projects are progressing successfully without any real problems. In terms of the melon, the top management sees it from the outside and everything looks green (as in the traffic light). However, if you cut into the melon, it is deep red. Then, you can see the challenges—projects are far from successful, and may even collapse. Top-class management knows when to cut into the melon. Organizational Structure: The Wall of Communication An institutional structure should seek to maximize its positive impact on outputs. Some institutions have a clear distinction between the management level and the implementation level, creating a figurative wall within the institution and a very real communication barrier. Two examples of this type of structure are ministries and universities. These institutions share many similarities, beginning with their processes for appointing top management. In both cases, leadership appointments are motivated by strong influences from outside the institution. In ministries, the management is political, while civil servants are the implementing body. Political-level appointments are often determined by elections, which are influenced by political parties and many specific issues like social security or the health care or retirement systems. Research and innovation are not of big concern for the voters. In addition, politicians employ a large number of cabinet members with political backgrounds. These individuals can create a kind of a second ministry within the institution, which raises the wall of noncommunication even higher as shown in Fig. 4.5.

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Fig. 4.5 Wall in universities/ ministries. Source: Author’s own figure

A similar challenge occurs in universities, whose management and faculty are separated from each other by how management teams are appointed. In some regions, faculty can propose candidates for positions like the vice chancellor. By default, this group of proposed candidates will most likely not include those who want to change the university’s attitudes, since the faculty is interested in continuity of known operations and procedures. The consequence is that universities are hindered in adapting to changing conditions. In other regions, management teams are appointed by a supervisory board composed of nonacademic industry managers who appoint vice chancellors of their own kind. This creates a barrier to the faculty, who disregard “nonacademic” management decisions. Even in these cases, we find a built-in handicap due to budgeting processes within the faculty—the management team only has a small part of the budget to influence the strategic direction of the entire institution. Organizational Structure: Internal Teams Institutional structures, as discussed above, follow different schools, from simple hierarchies to matrix function structures. Most of them lack the flexibility to form internal teams, which limits the room to experiment and merge the skills of team members. Virtual structures for internal teams seem like a great alternative, but they do not increase the internal energy of innovation. An entrepreneurial team should feel confident about the availability of time and monetary resources to conduct its experiments. After those, the best support they can get is to leave them alone. Sometimes, it is also necessary to provide some kind of autonomy in an organizational structure outside the overall hierarchy, which will protect them from corporate antibodies that may attack germs of innovation that threaten complacency. Process Structure: Lead Printing Lead printing is a concept that was introduced in a discussion about the ability of knowledge institutions to transfer their knowledge to the regional economy9: “Lead printing is the flow of leadership energy from top management that is transferred through the imprinting capacity of the downstream hierarchical chain and made possible by an institutional governance model that enables this transfer.”

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Garzik L (2020) Leadprinting - Competitive capacity of knowledge driven institutions. Vienna.

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As mentioned in Chap. 2, this section combines leadership and imprinting issues. We assume that the system was able to appoint a management team that is able and willing to provide leadership energy and lead the institution through change processes to meet the requirements of the future. In an article on university management performance, McCormack et al. (2013)10 describe the difference between “managing a group of employees in a plant and (managing) faculty members.” Universities share a tradition of autonomous procedures and personal responsibility. When it comes to budget allocation and infrastructure investments, however, there is internal competition that must be led by a skilled team. As McCormack observed, “trying to manage faculty members is like herding cats.” The management of universities does not follow established rules. For example, we can assume academics have great intrinsic motivation. According to management theory, it would not be advisable to put too much leadership energy on them, as they would become frustrated and create barriers. Besley T and Ghatak M (2005)11 and Bénabou R and Tirole J (2006)12 have stressed that “sharp incentives may not be as important or effective when agents are motivated.” Within disciplines, faculty knows what to do better than management ever could. However, issues like the impact of a knowledge-based institution on the regional economy or sharing of infrastructure between institutes are management tasks that cannot be performed by collective management. Indeed, there are very few institutional frameworks in which collective management can be successful, but there are many failed attempts. Assuming that top management has invested sufficient leadership energy, an appropriate governance and process structure must allow energy to flow down the hierarchy, with each level shaped with the right amount of motivation to pass the energy further down. If the entrepreneurial mindset is shaped by top management, the effects should be seen at the project level, where, for example, PhD students are motivated to think about implementing their findings on the market by their advisors. Imprinting is the social influence one individual has on another. The term “imprinting” was first introduced by Spalding DA (1873)13 to domestic birds’ innate tendency to follow the first moving object they see. It was followed in the field of animal research by Konrad Lorenz and his grey geese Lorenz K (1937),14 who proved that imprinting differs from other learning processes, relying uniquely on early experiences to determine subsequent social behavior. 10 McCormack et al (2013) Herding Cats? Management and University Performance. The Economic Journal Volume124, Issue578. 11 Besley T and Ghatak M (2005) Property Rights and Economic Development. In Dani Rodrik and Mark Rosenzweig, editors: Handbook of Development Economics, Vol. 5, The Netherlands: NorthHolland, 2010, pp. 4525–4595. 12 Bénabou R and Tirole J (2006) Incentives and Prosocial Behavior. American Economic Review, vol. 96, no. 5, December 2006, (pp. 1652–1678). 13 Spalding DA (1873) Instinct, with original observations on young animals. MacMillan Mag. 27:282. 14 Lorenz K (1937) The companion in the birds world. The Auk 54(1): 245–273.

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Azoulay P et al. (2009)15 applied imprinting to careers, demonstrating the social impact of career imprints in creating academic entrepreneurs. The primary result they found is that “postdoctoral advisers’ patenting behavior is imprinted on their trainees. . .moreover, the social influence effect is statistically large.” Imprinting at the ecosystem level works the same way. Leadership energy is transferred from the top down the system by institutional managers and CxOs. The imprinting pattern cascades through middle management to implementers, who can be imprinted to perform their tasks in innovative ways.

4.3.3

Public Administration Far Away

The institutional structure of a region is, in most cases, similar to its national structure. Ministries are the highest political decision bodies, with politicians in responsible positions and civil servants providing expertise. The agency level implements programs based on strategies, followed by a level of other intermediaries. Ultimately, research and innovation organizations—either private business structures or publicly run research institutions—bring new knowledge into the system. Regions known for their ability to innovate are usually not capital regions. Table 4.2 shows some examples. An opposing example is Berlin, as discussed in Sect. 6.2. However, looking back in history, Berlin was not the capital of West Germany when its entrepreneurial spirit developed in the 1980s. At that time, Bonn was the city with an ongoing administrative hangover. Capital regions offer many well-paying jobs in administration for their human capital stock. In many ways, the administration acts as a vacuum cleaner, crossing capital area and sucking in potential entrepreneurs. In addition, people who are building new markets and looking to take big risks are not, by default, interested in regulation and administration.

15

Azoulay P et al. (2009) Social influence given (partially) deliberate matching: Career imprints in the creation of academic entrepreneurs (Harvard Business School Entrepreneurial Management working paper).

5

Management of Resources and Lessons Learned Ludovit Garzik

Abstract

The management of resources considers all resources from an ecosystem perspective. Regions try to promote their development as innovation leader in three key ways that is first analyzing the status quo, second deciding on a strategy, and third implementing the chosen strategy. Most of the time, regions bite off more strategic objectives than they can chew, and implementation suffers. Many resource control knobs need to be turned simultaneously to be successful, so leaders have to set priorities and invest political energy in often-unpopular areas. The most important task is finding the balance between important ingredients like human capital, financial capital, and infrastructure investments. To make the discussion independent from individual and institutional interests, the chapter focuses on two key dimensions of variation across resources: flexibility and importance. The energy to change the system or its dynamics is limited. Leaders can decide where to start and how much energy to invest in which resources are based on the region’s resource flexibility and importance.

5.1

Ecodynamics: Development Levels of Innovation Regions

After discussing the individual resources in Chaps. 2–4, this chapter considers all of them from an ecosystem perspective. Regions try to promote their development as innovation leader in three key ways:

L. Garzik (*) Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_5

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First: Analyzing the status quo, Second: Deciding on a strategy, and Third: Implementing the chosen strategy. Most of the time, regions bite off more strategic objectives than they can chew, and implementation suffers. Many resource control knobs need to be turned simultaneously to be successful, so leaders have to set priorities and invest political energy in often-unpopular areas. The most important task is finding the balance between important ingredients like human capital, financial capital, and infrastructure investments. Invest too much financial capital in a short period, and it will not be absorbed by other resources and part of it will end up being wasted. The money will still find its way, but the impact will be rather disappointing. Conversely, investing too little financial capital will cause the innovation pump to run dry and collapse. Human capital will leave the region to find better options. Regardless of how external conditions change, regions that can adapt quickly to new requirements are better off. Just like economic matters, the saying is, “it’s not the big that eat the small, it’s the fast that eat the slow.” An important aspect of managing resources is killing outdated ideas. Most discussions focus on creating new ideas, qualifying more human capital, and building new infrastructure. System-expanding ideas like these can generate energy for new developments, but so can eliminate unproductive activities that block resources. Therefore, the best ecosystems can give up resource guzzlers within an acceptable time frame. Example of Good Resource Management: Shenzhen Shenzhen is a success story in implementing a good strategy with the uncompromising execution that is presumably only possible in the Chinese tradition of civil servant selection and strong top-down management and leadership. Given the changes this region has seen over the 40 years since it was established as China’s first Special Economic Zone in 1979, we have to assume it had the ingredients to transform a fishing village into a megacity. The region also switched from agriculture to the high-tech industry, a change unmatched in magnitude by any other global innovation region. Almost every corner of our daily (digital) lives relies on contributions from Shenzhen: The region builds cell phones, laptops, drones, electric cars, and much more. Further details can be found in Sect. 6.8. Regional managers will inevitably ask about the main development factors: taxes and infrastructure. China prioritized Shenzhen for national infrastructure investments over the opposition of other regions that wanted equal treatment. The government acted on its motto that “there will be no winners without losers,” and drew a continuous line through the decades until 2018 when Shenzhen succeeded at overtaking Hong Kong’s GDP for the first time. Infrastructure investments were far-reaching, including advanced mobility infrastructure and more than 100 km of new underground lines implemented in record time. The city continues to invest in

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Fig. 5.1 Ecodynamics: phases of development. Source: Author’s own figure

digital infrastructure with broadband at every corner and in research infrastructure including new institutional management facilities. Shenzhen’s income taxes and corporate taxes have been brought to a minimum, which has had a magnetic effect on founders and workers from across the country. For example, in 1989 the average civil servant in China earned RMB 50 every month. In the same year, the industry salary in Shenzhen was RMB 3000 per month. Many people were drawn to promising prospects for future prosperity. This relative advantage was sufficient to bring large numbers of highly skilled Chinese from other provinces into Shenzhen. From a global perspective, the bright minds who want to implement their ideas and are motivated to move will investigate where they can best conduct their research or scale their startups. Ecosystems are not static, and they are continuously on the move. They develop, they build energy, and they slow down. Innovation ecosystems can even stop suddenly in cases like natural disasters, nuclear reactor meltdowns, or war. Sudden increases in status are unlikely—changes and investments must be absorbed and connected to their corresponding resource elements. Based on the resources and characteristics discussed above, certain patterns of development are common in most regions. We will discuss these in this section. In Sect. 2.5, we learned about the Lewis point, when macroeconomic development freezes because of disruption in one of the two most important economic growth factors. For example, the expansion of the workforce might come to a standstill due to lower birth rates. Like economic progress, the innovation ecosystem development follows phases we can compare across global regions. Figure 5.1 summarizes the chronological sequence of these phases, which are as follows: Snooze. Wake-up. Warm-up. Run Aging.

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Snooze

In snooze mode, a region manages its available resources by maintaining a low and more or less stable competitive position compared to other regions. The region’s development is stagnant, which means that it is (unconsciously) declining relative to other regions. The absolute numbers may still show growth, but with less momentum than its peers, the region will be overtaken in rankings and will lose more ground every year (or keep its low position). Politicians in such regions will blame low input growth numbers, and there will be no correction because of the imperceptible decline. One indicator for snooze mode can be brain drain. More precisely, negative skill drain means highly qualified people leave the region, while those with lower qualifications either move in or stay. The best way to describe snoozing is to use the story of the frog in the pan. If a frog were to step into boiling water, it would notice immediately and leap away from the deadly danger. If the water starts cold, however, the frog will not notice its slowly increasing heat until it is too late. Snoozing regions only become aware of their decreasing resources and energy when change comes from the outside in key economic framework conditions like digitization or shifting markets. Like the frog, the region will be unable to adapt and will metaphorically die, losing its essential human capital and, consequently, its ability to use all other resources like infrastructure and capital. Ernest Hemingway has an apt explanation for the phenomenon: “How did you go bankrupt? Two ways. Gradually, then suddenly.” Quantitatively, snooze mode is stagnation in the lower third of region rankings. Its consequence can be permanent loss of resources to other regions—resources the snoozing region could otherwise use to drive toward a higher level.

5.1.2

Wake-Up

The wake-up phase describes an occasional event where critical resources take the region to the next level. It can arise endemically or in reaction to external forces. Such an event does not necessarily have to do with knowledge or innovation. It can also be a war that triggers a wave of refugees or a few strong leaders who point the way to the future. It is not important what goal these people want to achieve in business or politics or whether these goals are realistic. What is important is that these people set themselves and their environment in motion. Famous examples are Frederick Emmons Terman, godfather of the semiconductor industry (Silicon Valley), in business, or Chaim Weizmann (Israel) and Deng Xiaoping (China) in politics. Unlike snoozing or warming up, the wake-up phase can be quite a short moment in time.

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Warm-Up

The seeds of a wake-up call need fertile soil to grow into a successful innovation region. The warm-up is not a race, and it usually takes 20–30 years to switch to the subsequent run mode. Warming up an innovation ecosystem is perfectly analogous to the same process in sports. Mobilizing the muscles to make them strong and durable requires balanced effort, adequate hydration and nutrition (innovation resources), and not over-extending too early in the warm-up—otherwise risking irreversible damage to the musculoskeletal system. Regional leaders will be excited to know when the body is ready for competition. This will come—after a few months of training, exercise will become a habit and the body will become an engine that demands ever more exercise. This is when the resource migration discussed in Sect. 2.4 turns the region into a magnet. After this, continuously attracting new entrepreneurs requires less energy—it has turned into a perpetual motion machine. How can regional managers with innovation ambitions be sure they have reached the warm-up phase instead of being stuck in a self-deceiving daydream of snooze mode? One key indicator that a region is on its way to becoming a successful innovation ecosystem is the expansion and acceptance of failure. At the beginning of the warm-up, individual founders receive funding from family, friends, and fools, and perhaps from a business angel. Many of them fail because they lack later-stage funding or simply because the market and the community cannot support the venture. These first founders have valuable experience, becoming mentors for the second generation of entrepreneurs and their capital partners. The numbers of founders will increase, and so will their success stories. The third generation will provide support for second-generation founders to act as mentors and business angels. These everincreasing sequences of founders and mentors are characteristic of an effective warm-up phase. Every single failure is a valuable contribution to the collective experience in a successful innovation ecosystem, so is spreading the word about success stories. As explained in Sect. 4.2, the media and especially new and digital media have a decisive influence on the speed of development when it comes to connecting role models with their successors in entrepreneurial activities.

5.1.4

Run

A running region is in a constantly successful mode. Resources seem to be magically renewed; word of mouth about the region’s success drives the flow of human and financial capital. The perpetual motion machine introduced in the warm-up phase is running, providing a self-sustaining process of the use and renewal of ecosystem resources. Money flows, and the main challenge is keeping that flow targeted where it is most effective instead of letting it become a watering can pouring out indiscriminately.

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Running innovation regions might experience some cooling effects, but without much loss of conversion. The body of the ecosystem can be nourished with special regulations or expanded education institutions. No additional leadership or manager is required, and after some time, those responsible for the region will tend to reach out to other regions and ask them, “Do you have any idea why we are so successful?” Regional leaders will begin to feel that, even in a long-term success story, there are some pitfalls. In the sport context, water and food are prerequisites, but there is no long-distance run without the muscle of infrastructure, trained during the warm-up phase. Overhydrating or overfeeding causes inefficient absorption and hinders distance running. Continue in that vein for too long and the body will add fat and lose its ability to move fast—shifting into complacency.

5.1.5

Aging

As in many facets of life, reaching a certain level of wealth and prosperity brings with it the risk of diminishing motivation and ambition. As discussed in Sect. 2.5, there is a risk of complacency in the slipstream of prosperity. A running innovation ecosystem requires a sensitive, balanced approach to energy delivery. Too much could trigger a vicious circle down, including losing attractiveness to migrants and shifting capital investments to lower risk projects. Success stories are still possible during the aging process, but the herd has already moved on and is unlikely to look back or consider another opportunity in the region it has already left behind. Aging is like institutional aging—it affects the ability to innovate as discussed in Sect. 4.3. A decline in innovation capacity means that part of the energy invested in the institutional change only serves to maintain the balance. Additional efforts are required to expand innovation capacity. For humans, there is not and never will be a drug against aging. However, there are techniques to renew cells with fresh ones. Studies in gerontology show that cell renewal through yoga or exercise can be achieved after 12 h without calorie intake. In institutional life, the institution has to be continuously re-established—something easier said than done. In other words, staving off aging requires self-disruption, both of your body and your institution.

5.1.6

Momentary Dynamics

In addition to the progression of ecosystem development through the phases of snooze, wake-up, warm-up, run, and aging, certain specific moments can happen in multiple phases. These include Ecofreeze, breath, and forced reflection. Ecofreeze One decisive momentary effect can happen in any of the innovation stages. Ecofreeze is the status of the development of an innovation ecosystem when endemic input into more resources is not generating a higher level of innovation

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output. This design freeze can also occur while the ecosystem is still in snooze, warm-up, or wake-up mode. It happens when the development process can no longer be motivated by further energy input. It is not easy to judge whether an ecosystem is still developing or has gone into Ecofreeze. One indicator is the shift between input and output, when some additional input produces less output than expected. Quantitatively, Ecofreeze is a sign change in the first derivative of the input-to-output function. It is a slowdown in the acceleration of output growth under a constant increase in inputs. The point at which this derivative changes from positive to negative numbers is the moment of Ecofreeze. Breath There is a common requirement for the vital functions in every development phase: Oxygen needs to get into the body. Customers and their spending capacity are the oxygen that every ecosystem body must breathe constantly or it will die. Forced Reflection Global economic crises like the financial and economic crisis in 2008 or the COVID19 crisis and its economic consequences are merciless reality checks for regional innovation systems. Regardless of what managers claim as their regions’ development status, crises tear down the façade of political softeners and let everyone look in the mirror of truth. In many cases, this is a rude awakening. At best, it can lead to decisions and reactions that make for stronger development in the future.

5.2

The Power of Priorities: Investing in Resources

Based on the discussion about the resources and their influence in innovation ecosystems’ development processes, the people responsible for the management of companies and other institutions or regions will ask about the best way to invest their available resources and change energy. Every institution and region has a dense web of interests and lobbies that shape the distribution of investment energy. To keep it simple, the chance that this pattern happens to be the best option for development is low. To make this discussion independent from individual and institutional interests, we will focus on two key dimensions of variation across resources: flexibility and importance.

5.2.1

Flexibility

Flexibility (F) assesses each resource’s potential to increase or decrease over time:

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Table 5.1 Flexibility scale of resources (alphabetical)

Resources Bank loans Culture and mindset Digital infrastructure Education and skills Institutions Legal advisers Market and demand Migration Policy and strategy Quality of living Regulation Research infrastructure Risk capital Science and research Social infrastructure: Community Tolerance and trust

Flexibility 5 1 5 3 2 3 4 7 4 3 6 7 10 6 2 1

F ¼ f ðS0, Sþ, t Þ S0 ¼ status quo S+ ¼ aspirational status t ¼ time until situation improves from S0 to S+ Resources’ flexibility is an indicator of how fast they can be changed, made available, and/or implemented in the system. Due to geographical, social, political, and other conditions, there are regional differences in the flexibility of resources. The values assigned to resource flexibility in Table 5.1 are global averages on a scale from 1 (very inflexible) to 10 (completely flexible). A resource that scores 1 is maximally inflexible, and it will take a long time to access or change. A 10 is very flexible—it is more or less available and can be adjusted on a daily basis.

5.2.2

Importance

The importance (I) of a resource is a function of a reduced status quo of the resource compared to its current status: I ¼ f ðR0, R0–x , D, PhÞ R0 ¼ resource status quo R0 – x ¼ degree by which resource availability is reduced

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Table 5.2 Importance scales of resources (alphabetical)

Resources Bank loans Culture and mindset Digital infrastructure Education and skills Institutions Legal advisers Market and demand Migration Policy and strategy Quality of living Regulation Research infrastructure Risk capital Science and research Social infrastructure: Community Tolerance and trust

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Importance 2 8 8 10 6 6 9 7 5 6 2 5 7 8 8 10

D ¼ development level of the resource Ph ¼ ecodynamic development phase The importance scale ranges from 1 (low importance) to 10 for the most important resources. Resources’ importance should be calculated according to the functions above. It will depend on development status as discussed in Sect. 5.1, because importance can vary according to current phase. Table 5.2 shows resource importance for a paradigmatic region in run mode.

5.2.3

Combination of Flexibility and Importance

The combination of a region’s flexibility and importance scores provides a precious jewel of information for decision makers setting about priorities, developing strategy, and the distributing implementation energy. The diagram in Fig. 5.2 shows the information in Tables 5.1 and 5.2 graphically. The energy to change the system or its dynamics is limited. Leaders can decide where to start and how much energy to invest in which resources based on the region’s resource flexibility and importance. If a resource is very important but has little flexibility, it does not make sense to invest too much energy there—especially if other areas of the ecosystem are in urgent need of change. A better approach is to look for alternatives and improve the situation faster by changing resources that are more flexible. The value of the information in Fig. 5.2 is most evident in three key decisions. These are as follows.

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Tolerance and Education and Skills Trust

Point of Priority Origin P0

10

Market and Social Demand Digital Infrastructure: 8 Science and Research Culture and Community Infrastructure Mindset Quality of Living Risk Capital Migration Legal Advisers 6 Institutions Research Policy and Infrastructure 4 Strategy 2

Bank Loans

Regulation

0 0

2

4

6

8

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Fig. 5.2 Diagram of resource flexibility and importance. Po. . .point of priority origin. Source: Author’s own figure

Sequencing resource handling, Setting priorities, and Distributing implementation energy. Sequencing Resource Handling In daily regional or institutional routines, many influencing factors provoke the handling of resources in a certain order. These factors can be as diverse as entrenched operations, special interests from domestic or external lobby groups, or simply incompetence. It makes more sense to structure the sequence based on the proximity of the position of a resource to the point of maximum importance and flexibility Po. The sequence of handling should start at Po and then, like the concentric circles around a water droplet, extend outward to one resource after the other. Setting Priorities The water droplet’s ripples will be largest where the drop fell at Po and then lose power on their way through the graph. This is also the best way to distribute the available energy for investment and change. This approach is not like a watering can that provides a little bit for every resource plan. Instead, it follows the discussion about precision farming above. There, the best approach is to focus the fertilizer on the most fertile land. Fertility for change guides the decision about how much fertilizer (change energy) each resource can use.

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Distributing Implementation Energy Setting priorities is not sufficient. Daily routines will always drag the distribution of implementation energy toward the watering-can approach, so an additional guideline for the investment allocation is reasonable and necessary. The principle of doubled energy states that, as soon as the sequence of resource handling is clear and priorities for the distribution of change energy are set, each resource should get twice as much change energy as the next priority. This means that higher priority resources always get double the change energy compared to the next lower priority resource. Principle of Doubled Energy Formula E1 ¼

100 * 2ðn–1Þ 2n – 1

En ¼

2

E1 ðn–1Þ

N ¼ number of resources E1¼ energy investment to the highest priority resource En ¼ energy invested to resource n. . .with n from 1 to N The formula yields high implementation energy—just above 50% of the total— for E1 with a medium number of resources. Therefore, more than half of an institution’s, company’s, or region’s (change) team will be working to change just one resource, that is real priority setting. At the other end of the line, the lowest priority resources will get nearly no energy. This is the courage to leave a gap. Not everyone will be happy with this kind of tough priority setting. However, if there are no losers then there will also be no winners.

5.3

Outlook

Ecosystems are comparable to humans. Both are complex environments of beliefs and knowledge, emotion, and cognition. Every region and every ecosystem are different. Every human being is the endpoint of developments that began 4 billion years ago. If there had been a disruption in that period, the specific person would not exist. The same applies to ecosystems. Each innovative ecosystem’s development is unique, just as individuals are. There is no point trying to copy an ecosystem like Silicon Valley, but nonetheless the number of “Silicon Somethings” in the world is astounding. As pointed out in Sect. 6.8, that region has managed to establish a brand that stands in for the general phenomenon of innovation. The 50 miles between San Francisco and San Jose are synonymous with a successful innovation region.

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Like small children, every ecosystem holds the potential for learning and development. Just as children play best with their peers, ecosystems would do well to look to their peers for guidance and strategies for overcoming shared challenges. Of course, any ecosystem can try to play in the big leagues from the start. Playing with someone more advanced can help anyone learn more quickly, just like playing tennis with a professional can rapidly improve a mediocre athlete’s game. However, although the athlete will learn quickly from the professional, it will be a continuously frustrating experience and the athlete may lose interest at a certain point. Ecosystems are distinct, just like humans are. Their development depends on a multitude of influences from their historical settings to external influences like the development of the world economy or game changers like global pandemics. No matter what happens outside, ecosystems hold many possibilities for action and reaction within themselves. Some regions act like couch potatoes waiting for their fortune to wander in unannounced. Other regions act like triathletes and take part in every competition. Regardless of what kind of setting you face with or what mindset you have, the important question for the future development of your innovation ecosystem is how well you distribute the energy available for change and progress.

5.4

Lessons Learned: Executive Citations

Like the relationship between great ideas and implementation, the lessons of this book depend on your ability and desire to make changes in your own business processes. Therefore, the best way to present the most important take-home messages is not an executive summary but a set of easy-to-remember statements taken from throughout the book.

5.4.1

Executive Citations

Ecosystem Ecofreeze is the status of the development of an innovation ecosystem when endemic input into more resources is not generating a higher level of innovation output. One key indicator that a region is on its way to becoming a successful innovation ecosystem is the expansion and acceptance of failure. Every single failure is a valuable contribution to the collective experience in a successful innovation ecosystem. There is no shortcut to developing a regional innovation ecosystem, just as there was not in the evolution of intelligent life. The best ecosystems can give up resource guzzlers within an acceptable time frame. The COVID-19 crisis will favor the strong, punish the laggards, and contribute to the concentration of power in regions and companies.

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Global economic crises like the financial and economic crisis in 2008 or the COVID-19 crisis and its economic consequences are merciless reality checks for regional innovation systems. Regardless of what managers claim as their regions’ development status, crises tear down the façade of political softeners and let everyone look in the mirror of truth. Population density is not necessarily linked to innovation density. If you have a smart idea in the morning, you are likely to have a prototype in your hands in the evening—that is the essence of Shenzhen speed. Chinese people are socialized in the way of chàbùduō, which can be translated as “that works quite well for the moment.” This Chinese characteristic is similar to Silicon Valley’s lean processes, with chàbùduō similar to a minimum viable product that can be tested in the community and improved with feedback. A prerequisite for taking advantage of failure is a reality check and admitting its existence to others. Invest most where things grow best, which applies to both fertilizers and ecosystem resources. You can maximize your innovation ecosystem’s impact by using the tools for ecosystem development and associated energy to accelerate regional strengths. It is not we who define our stories, but our stories that define us. The combination of a region’s flexibility and importance scores provides a precious jewel of information for decision makers setting about priorities, developing strategy, and the distributing implementation energy. Finance Capital, Market, and Policy If you are not embarrassed by the first version of your product, you are too late to market. If you are not paying for a service, you are not the customer but the product. Demand is one of the most underestimated drivers for success in many regional innovation systems. Risk capital is the fire accelerant of entrepreneurial activity. Customers and their spending capacity are the oxygen that every ecosystem body must breathe constantly or it will die. How can I prevent the accountants or auditing bodies from killing the idea babies before they see the light of day? In preparation for meetings with auditors, we recommend providing them with a copy of Black Swan1 so they are aware that any forecast, including impending achievement or missing targets, could be a pointless endeavor. Human Capital Real commitment to innovation would mean extending kindergartens’ spirit of creativity across all sectors of education and up to universities. The number of smart people around the globe is finite. 1

Taleb N (2010) Black Swan. The impact of the highly improbable. Pantheon.

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In the slipstream of prosperity lurks the danger of complacency. The power of belief against knowledge can also be translated into emotion and cognition. Everyone has experienced a situation when emotion runs roughshod over cognition, just as beliefs can do to knowledge. During implementation, cognition is placed defenselessly under its stronger emotional superstructure. The internal in-house entrepreneurial team needs to know about their time and money resources for their experiments, but nothing else. The best support they can get is to leave them alone. Open-minded couch potatoes will never leave their hamlets, but they travel and bring back stories about diverse cultures that can motivate others to escape their cultural dead ends. It is a skill to fail and learn from failure. In many regions, the fact that university professors own shares in companies based on their research would be viewed as a conflict of interest. Maybe it is, but if there is no conflict, there is no interest and that is the worst option. The seed of an idea is ideally born in the brain of a rebelling intellectual. The secret sauce of any global innovation ecosystem is how many “smart” people with the characteristics of intellectualism, rebelliousness, purpose, resilience, and leadership it can grow at home or attract. Tolerance is an important—if not the most important—requirement for the success of an innovation ecosystem. Infrastructure and Institutions The incumbents missed the window of opportunity to self-disrupt. They become dinosaurs, unable to adapt to changing circumstances in a short period. The higher the digitization rate and digital capabilities of a region, the better off it will be after a crisis. The strongest position in a competitive environment is with the organizations that can adapt most quickly to changing conditions. Modern companies will never separate ideas from their owners for implementation. It is not company size that determines the power of innovation but the company’s age. Every company is an enabling structure for the talent and intrinsic motivation of its employees. Migration Since the quantity and quality of the workforce influence the migration dynamics— smart people want to work with other smart people—this also accelerates the agglomeration effect of global innovation hotspots. The effects of reverse xenophobia on regional ecosystems are embedded in the potential of cultural diversity for innovation. When it comes to implementation, beliefs will be stronger than knowledge, and any element in a strategy that contradicts implementers’ beliefs is unlikely to become a reality.

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Ever since the mid-nineteenth century when fortune-seekers joined the gold rush in Northern California, thousands of people flock to Silicon Valley every year in search of the holy grail of entrepreneurial happiness. Regulation Innovation and regulation usually do not like each other much. The key question for policy makers is how to strike a balance, motivating knowledge for social well-being without restricting the creativity and freedom of basic research. People do not enter the risk arena if they believe that there is no exit option. When an ecosystem offers such options, more potential entrepreneurs are encouraged to join the sea of new ventures. As a result of the difference in the levels of regulation and bureaucracy, intellectuals and rebels and, even more important, rebelling intellectuals poured into the regions to implement their smart ideas. The consequences are models in which PPP is not translated “Public-Private Partnership” as originally intended, but as “Public Pays Private.”

Part II Learning from Successful Innovation Regions

6

Bangalore Innovation System Leena Pishe Thomas, Sana Salah, and Ludovit Garzik

Abstract

Technology entrepreneurship and startups ecosystems are drawing the attention of policymakers and empirical researchers across the world. In India, Bangalore has been receiving increased global recognition and has turned into an irresistible magnet for tech startups because of its favorable climate, technically skilled talent pool, established private and public research institutions, and proactive government policies. As of now, Bangalore is home to the largest number of tech startups India and third most in the world. A significant feature behind Bangalore’s status and recognition is the development of a unique entrepreneurial ecosystem that supports and endorses startups. Given this, it is important to understand how a favorable entrepreneurial ecosystem for startups emerged in Bangalore and what its major components are. How mature Bangalore’s ecosystem and how ready is it to nurture the emergence, sustenance, and growth of new startups? This chapter is an attempt to shed light on these facets and attributes of Bangalore.

6.1

Why Bangalore as an Innovation Ecosystem?

There are innumerable challenges associated with zeroing in on the right location for establishing a startup ecosystem. It is imperative that the location has the right pool of people to connect to, a lot of networking opportunities, skilled and talented

L. P. Thomas (*) · S. Salah Global Business Inroads, Bangalore, India e-mail: [email protected]; [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_6

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employees for hire, and ample support from the local government and local community. These should help foster the entrepreneurship ecosystem, support development, and establish a financial environment that can foster and grow startups. With so many factors at play, the Indian city that best fits the criteria is Bangalore, also known as “Indian Silicon Valley” and “Startup Heaven.” Co-working spaces in Bangalore support the rapid growth of startup hubs in India by offering a wide range of facilities to serve clients’ needs. These co-working spaces provide a platform where startups can communicate, collaborate, and work together to increase their creativity, productivity, and efficiency. This enables all of the region’s startups, freelancers, and emerging businesses to succeed by aiding one another. Moreover, as India’s youth population is the largest in the world and—according to the Bloomberg News analysis—the country is on track to have the world’s largest workforce by 2027. In addition to its co-working spaces and human capital resources, Bangalore has a high density of investors. As a result, entrepreneurs have easy access to many venture capitalists and business angels. Funding is fundamental and critical for launching a startup, and a startup with a great idea, the right vision, and motivation can find an investor relatively easily in Bangalore. Entrepreneurs can also apply to the Government of Karnataka (GoK) for funds, provided they register their companies under the Karnataka Shops and Commercial Establishment Act, 1961. The Karnataka government launched its startup policy in 2015 and has set up several funds worth over 3 billion rupees (around USD34 million) to back startups across different sectors such as biotechnology, tourism, and animation. Bangalore also sports remarkable infrastructure in the form of roads, a railway transport system, ports, power, and airports. Infrastructure is fundamentally imperative to giving startups the confidence and platform to grow, as it is indispensable for businesses to deliver employment, growth, and national prosperity. Bangalore is one of the top-ranking cities in India for its highly advanced infrastructure and is ranked 84th globally among other developed cities on this key input for startups.1 The city also boasts “technocratic powers,” hosting almost 2300 active startups. These employ more young, hardworking tech talent than other startup hubs in India.2 On average, Bangalore sees a huge influx of talent from all parts of the country, so most of India’s talent is available here. Other aspects support Bangalore’s status as an innovation hub. It has a low cost of living compared to its big-city counterparts like Mumbai and Delhi. The ambient climate and pleasant weather of Bangalore have boosted the city’s rise, making it the epicenter of the Indian startup ecosystem. Alongside all this, countless media platforms in the city focus on startups and entrepreneurs. This provides muchneeded publicity and exposure, vital during a startup’s growth stages. Bangalore also organizes a wide range of competitions, meetups, hackathons, and many similar conclaves every year. These events are one of the biggest reasons why

1 2

https://www.noveloffice.in/blog/7-reasons-why-bangalore-is-called-the-startup-capital-of-india/ ibid.

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the city is a paradise for startups. They enable promising and budding entrepreneurs to socialize and mingle with the community while giving them a platform to share their experiences of overcoming challenges and achieving goals. Participants also get ideas, thoughts, and inspiration from speakers and other attendees; showcase their ideas, products, and potential; and get to build networks with each other. The above are some of the reasons why many to choose Bangalore as their dream startup location. It has the best atmosphere to start a company and make it grow. Today, there are many prominent companies in Bangalore that were nascent startups around 5 years ago. In total, an amalgamation of all these factors has helped Bangalore grow as a hub for the startup ecosystem in India.

6.2

Why India for Startups

India is a solid foundation for cultural, grassroots, and frugal innovations and the inception of ideas. Add a population of over one billion to the mix, and the country becomes an exciting proving ground where startups can foster scalable and repeatable business models. It is also very promising and encouraging to see that—despite being a developing country—India is a genuinely supportive environment for startups just like its developed peers like the USA, UK, and Australia. In developed countries, things have reached a saturation point and entrepreneurs have captured almost every possible domain and sector. In a nation like India, in contrast, people have not yet established the easiest solutions to all their problems and issues. India is an amazingly young country, a nation full of young talented people with an urge to do something that can be applied to a billion people someday. Thus, India bursts with opportunities for scores of new, innovative and mindblowing ideas. The size of Indian consumer market, its tech talent, and its low labor costs are a colossal attraction for foreign entrepreneurs and investors. One of the chief advantages that India offers is its enormous domestic market. With a population of over one billion, India will have adequate customers for any decent and innovative product. Furthermore, a company based in India would have access to skilled tech workers, a wonderful workforce in every possible domain, and diverse people of different economic and social strata. Increased political will and government support have also made India more supportive of its own startups. The Indian government has also launched many schemes and programs like the Skill India Movement, the Make in India campaign, Aatmanirbhar Bharat, Startup India, and the Digital India Campaign. All of these have had an impact on the Indian startup ecosystem and have been exceptionally beneficial for the country. India’s enormous diversity in culture, language, and religion has been both a bane and a blessing for startups. On the one hand, a startup’s understanding of customers is often limited to certain regions where they know the local language and local people. This makes it hard for startups to scale their products to customers across the country. On the other hand, if solutions and products are successful at addressing the

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needs of diverse customers pan-India, they can likely find market uptake in other geographies like Africa and Latin America or even the developed Western world. There is also a huge need for innovative solutions, particularly those that alleviate poverty and benefit a large number of people. Because of the resource constraints and the scale required in India, low-cost, high-impact solutions are required. Startups in different technological areas are crucially important in India because they have the potential for scalability and exponential growth. The Indian market offers countless prospects for startups and, in turn, startups carry abundant hope for Indian growth and employment. Over the last two decades, more startups have emerged in India and the associated ecosystem has developed vigorously. Consequently, support has increased in many dimensions: office space and infrastructure, business support for mentoring and networking, political will and willingness, and the availability of financial capital. There are many push and full factors, and the feeling is optimistic that the ecosystem will continue to mature in India. Indian startups also face significant challenges. Overcoming these hindrances will require the energy of all stakeholders like ecosystem actors, governmental authorities, and the startups themselves. In addition, changes in the broader cultural milieu would help encourage people to take risks and possibly develop impactful solutions for the startup ecosystem in India.

6.3

How Did Bangalore Become an Innovation Hot Spot?

In the global economy, India is recognized as a potential source of technology-based startups3 and currently ranks third globally for its number of existing startups and number of startup exits.4 Within India, its “Silicon Valley” in Bangalore is considered one of the nine International Startup Hubs outside the USA.5 According to the Startup Genome, Bangalore ranks 15th among 20 cities with the best ecosystems for startups globally. Bangalore’s rise as the preferred destination for startups took off nearly 70 years ago when the foundation of a Hindustan Aeronautics Ltd. engineering facility was laid in the city. Although the emergence of a technology startup hub in Bangalore is a very recent event, the seeds were sown soon after India’s independence in 1947. Bangalore City has lost hosted industry, including modern engineering businesses of varying sizes. It is also home to several publicly funded R&D institutions and highquality public and private educational institutions. The city has also had industryfavoring regional governments that have formulated and implemented state-level

3

Gai B and Joffe B (2013) India Startup Report. World Startup Report. NASSCOM (2015) Startup India: Momentous Rise of the Indian Startup Ecosystem. Bangalore, India: Zinnov Consulting. 5 Pullen J P (2013) Emerging Tech: 9 International Startup Hubs to Watch. Entrepreneur, May 7, Business Daily, USA. 4

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industrial policies for the development of industries and infrastructure. Thus, Bangalore has the much-needed industry–institutional government combination that helps a conducive ecosystem for startups emerge. After India’s independence in 1947, an entrepreneurial ecosystem began to evolve in Bangalore. It was primarily driven by public policies that initiated by the national government. These fostered central public sector undertakings (CPSUs), and then, later set up industrial estates for modern small-scale industries. In addition, the government established national government-funded public R&D institutions and public and private education institutions.6 All of these laid the foundation for the much-needed regional innovation system, led by the “triple helix” comprising universities, industry, government, and their interactions.7 In the triple helix model, the state (national government) plays a leading role, motivating industry, and academia toward national and/or regional growth and development. The development this regional innovation system occurred over a period of almost four decades, starting in the late 1940s and lasting into the mid-1980s. This was the first phase in the advancement of an entrepreneurial network in Bangalore. The evolution from the first phase to the second phase occurred smoothly and spontaneously, commencing in the mid-1980s with the entrance of Texas Instruments and the origin of Bangalore-based IT firms. The process was spurred on by the introduction of national economic reforms in 1991 and their acceleration since that time. Those reforms virtually removed the barriers to entry for multinational corporations in the IT industry. Interventions by the regional and state governments reinforced Bangalore’s physical and virtual infrastructure and its education institutions. Bangalore developed into an IT industry cluster and a biotechnology industry hub by the late 1990s. The national government’s role shrank after the introduction and acceleration of national economic reforms, though regional and state governments continued to be important. Industry and academia also became more important, developing into the triple helix discussed above. The role of the industry shifted from central public sector undertakings to multinational corporations and domestic IT industry firms. Bangalore’s transition from its second to third development phases was also very smooth, with the third phase beginning in the late 1990s. In this phase, more and more multinational companies and corporations established their R&D facilities in the city. These facilities, combined with the publicly funded R&D institutions, enabled Bangalore to stand out as an R&D cluster. Collaborations, partnerships, and networking initiatives grew between multinationals’ R&D centers, public R&D

6

Sudhira HS, Ramachandra TV and Bala Subrahmanya MH (2007) City Profile: Bangalore. Cities: The International Journal of Urban Policy and Planning, 24(5): 379–390. 7 Etzkowitz H (2003) Innovation in Innovation: The Triple Helix of University-Industry-Government Relations. Social Science Information, 42(3): 293–337.

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centers, the IT industry, academia, and government. All of these factors helped Bangalore emerge as one of the 46 global hubs of technological Innovation.8 Weather has played a critical role in the emergence of Bangalore as a startup hub. Its favorable weather has helped the city foster a culture of optimism and openness, as stated by the Massachusetts Institute of Technology (MIT) Technology Review.9 Because of its geographical location on the Deccan Plateau at an altitude of more than 3000 feet above the sea level, Bangalore is cooler than most other Indian cities—giving it possibly the best climate in the country. This favorable weather has contributed to attracting investments and a technology workforce to the city. Bangalore’s more than six decades of growth began with government public sector activities in the modern manufacturing industry with its machinery and electronics. Over time, Bangalore has witnessed the growth of a much-needed SME sector, education institutions and public R&D institutions. These were followed by the IT and biotechnology industries, and then by the R&D affiliates of multinational corporations. Bangalore has a strong triple helix composed of government, industry, and academia. This development has progressively and steadily led to the emergence of all the components of an entrepreneurial ecosystem in Bangalore, with the technology startups to prove it.

6.4

What Is the Cultural Pattern of the Bangalore Ecosystem?

A growing and vibrant innovation ecosystem has many actors and stakeholders. Talent is of foremost importance. A rich talent pool with diverse experience and skills can bring about marketplace disruptions. Academia is an important stakeholder and plays a big role in developing this kind of talent pool. In the current business scenario, a paradigmatic mindset shift is needed to enable a shift from traditional career choices and paths, to encourage risk-taking and challenging the status quo, and to foster the ability to think differently and adapt. Academic institutions have a major role to play in shaping talent and human resources, and these must be complimented by a free flow of risk capital. Innovation can be accelerated with the help of the venture community and incubation firms. One imperative enabler for the innovation ecosystem is industry. Industry actors can foster an environment conducive to and suitable for innovation. In the Indian scenario, there are currently strong signs of a growing innovation ecosystem. There are over 800 startups today in India, and nearly 50 VC and private equity firms fund their local startups. There are also nearly 200 angels, and we are witnessing a surge in their networks.

8

UNDP (2001) Human Development Report 2001. New York: Oxford University Press, United Nations Development Programme (UNDP). 9 Times of India (2013) Bengaluru Among Top 8 Technology Innovation Clusters. Times of India, August 2, 2017. Accessed July 27, 2020: http://economictimes.indiatimes.com/tech/ites/bangaloreamong-top-8-tech

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As a final component of the innovation ecosystem, established global players need to have a system in place that not only harnesses but actually fosters the growth of the local ecosystem. This is already underway, and companies like Yahoo! have opened up their APIs in India so the local tech community can build applications on that basis.

6.5

Facts and Figures Bangalore Innovation System

Biotech: More than 60% of the biotech companies in India have a base in Karnataka, and the state is responsible for 50% of the total revenues being generated in the biotech sector across the country.10 Aerospace: Karnataka is the first state in India to establish an aerospace policy, making it a pioneer in the country. Karnataka Aerospace Policy has predicted an investment potential of USD12.5 billion in the period from 2013 to 2023.11 Information technology: The state of Karnataka is India’s IT hub and sports the fourth largest technology cluster in the world. Per data released by Department for Promotion of Industry and Internal Trade (DPIIT), the state has attracted Foreign Direct Investment (FDI) equity inflow worth USD46.61 billion between April 2000 and March 2020. It is also India’s largest software exporter with software and service exports totaling USD77.80 billion in 2018–2019.12 Institutional system: The K-Tech Center of Excellence for IoT India, in Bangalore, is part of the Digital India Initiative to develop the IoT ecosystem in India. It leverages India’s IT strengths to help the country attain a leadership role in the convergent areas of hardware and software. K-Tech Center of Excellence in Machine Intelligence and Robotics The Department of Electronics Information Technology, Biotechnology, and Science and Technology (Department of IT, BT and S&T) in association with the International Institute of Information Technology Bangalore (IIIT-B) has established a K-Tech Center of Excellence on Machine Intelligence and Robotics (MINRO) at cost of Rs. 34.70 crores.13 K-Tech Center of Excellence by C-Camp The K-Tech Center of Excellence is a joint effort between Karnataka Innovation and Technology Society (KITS), the Department of IT BT and S&T, the Department of Agriculture, the Government of Karnataka, and C-CAMP. It is supported by the

10

http://www.mmactiv.in/pdf/Karnataka_Report.pdf https://www.ibef.org/states/karnataka.aspx#:~:text¼Karnataka%20is%20the%20first%20state, different%20regions%20of%20the%20state 12 https://www.fdi.finance/states/karnataka 13 https://www.iiitb.ac.in/funded-projects/machine-intelligence-and-robotics-center-minro-projectgok 11

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Department of Biotechnology, Government of India, to encourage innovation by inviting various technological solutions to the predominant and looming problems in agriculture.14 IIM Bangalore IIM Bangalore’s innovation and entrepreneurship hub, the NS Raghavan Center for Entrepreneurial Learning (NSRCEL), works on the development of the startup and innovation ecosystem. The NSRCEL was envisioned as a world-class center for excellence in seeding and promoting entrepreneurship with an emphasis on startups and existing organizations with high growth potential. The objective is to help entrepreneurs channel their energy and talent toward transforming ideas into successful companies. The NSRCEL guides them in understanding specific opportunities for business growth and helps them access the resources they require. NSRCEL was selected as one of the top six established incubators in India under the Atal Innovation Mission. Global Business Inroads (GBI) Global Business Inroads (GBI) is an international technology, business, and innovation management consulting entity based in Bangalore, India, with expertise in technology transfer, project management, and program and ecosystem development in the clean-tech, life sciences, health care, biotechnology, and information and communication technology (ICT) sectors. GBI has experience effectively engaging with both the public and private sectors in India, Asia, North America, South America, the Middle East, and Europe. It helps build consortia to promote technology adoption, identify technology gaps, and develop ecosystems to deploy technologies in new and emerging markets. It brings together technology, markets, finance, capacity, and policy. GBI has also created an online ecosystem, the Global Technology Interface™ (GTI™), showcasing technologies from around the world to markets, investors, and policymakers in a virtual ecosystem for scaling knowledge, capacity, business, and investment for tech access and deployment. Bangalore’s ecosystem can be broadly viewed as a system within the triple helix model comprising three main factors. The first is a nucleus of technology startups and prospective technology startups. These are surrounded by the second element, indispensable (primary) factors consisting of finance sources including seed funds, angel investors, venture capital funds, private equity firms; market support; human resources, and support systems like accelerators, incubators, co-working spaces; and technology and business mentors. The third key factor is supplementary (secondary) factors like a supportive culture induced by constant talent immigration, supportive media, and good weather. Karnataka state and Bangalore, which is its capital, have the third largest cohort of professional (technical and management) education institutions and one of the

14

https://startup.karnataka.gov.in/Center-of-excellence/

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highest concentrations of universities and university-level institutes in the country. Most of these are located in Bangalore itself. The many education and research institutions in Bangalore have multiple roles in supporting and endorsing the ecosystem. First, these education institutions generate entrepreneurial and human resource talent for technology startups. Second, faculty members in these institutions provide mentorship and sometimes even facilitate market support as the early adopters of startup products/services. Third, some of these institutions (e.g., the Indian Institute of Science, the Indian Institute of Management Bangalore, the International Institute of Information Technology Bangalore, the Institute for Bioinformatics and Applied Biology, and the National Center for Biological Sciences) have their own technology business incubators and arrange for other support services, such as intellectual property consultancy, to nurture entrepreneurship through technology innovation commercialization, particularly among their own faculty and potential graduates. Sl No 1. 2. 3. 4. 5. 6.

Education Institution Indian Institute of Management (IIM), Bangalore Indian Institute of Science (IISc) International Institute of Information Technology Bangalore National Aerospace Laboratories, Bangalore

Established 1973

Students per year 12,000 students/year

1909 1999

3842 students/year 772 students/year

1959

National Law School of India University, Bangalore (NLSIU) Institute for Bioinformatics and Applied Biology

1988

350 full-fledged R&D professionals/year 560 students/year

2001

200 students/year

K-Tech Center of Excellence K-Tech Centers of Excellence were established in multiple areas to improve accelerator support to the startup ecosystem and drive innovation and entrepreneurship in the state of Karnataka.15 The K-techs have industry support in different sectors to help them drive innovation. Supported by the Government of Karnataka, the National Association of Software and Service Companies (NASSCOM), and the Ministry of Electronics and Information Technology (MeITY), the Internet of Things (IoT) Center of Excellence is the largest deep tech innovation ecosystem in India. It provides incubation, funding, acceleration, industry connections, and mentoring to IoT startups, helping them build market-ready products. The model applies to a diverse set of fields. The Center of Excellence in Aerospace and Defense operates in association with Dassault Systèmes and VTU, Bengaluru, and develops dedicated engineers. The Center of Excellence in Machine

15

https://startup.karnataka.gov.in/Center-of-excellence/

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Learning and Robotics was set up in association with IIIT-B and carries out highquality research.16 The Center of Excellence in the Animation, Visual effects, Gaming and Comics (AVGC) works with the Association of Bengaluru Animation Industry (ABAI) and is intended to support IP making and innovation. The Center of Excellence in Cyber Security that is being established in Bengaluru will address skills gaps, build awareness, facilitate innovation, and conduct training programs. Finally, the Semiconductor Fabless Center of Excellence that will be set up in association with India Electronics and Semiconductor Association will encourage products like rural broadband connectivity, microcontrollers for IoT applications, energy meters, and electric vehicles. The Center of Excellence AVGC Karnataka features in the top three destinations for data science and artificial intelligence in the world, and it is here that India’s first Center of Excellence for Data Science and Artificial Intelligence has been established. This center is in association with NASSCOM. The government had previously collaborated with NASSCOM to set up the 10,000 Startup Warehouse program in Bengaluru and funded close to 180 startups. Mysuru city in Karnataka will soon have an Advanced Electronics Test Facility called the Hebbal Industrial Area, under the electronic manufacturing clusters scheme of the Government of India (GoI). This Karnataka Electronics System Designs and Manufacturing (ESDM) Cluster will empower electronics industries in areas like medical devices, IT hardware products and subassemblies or components, power and energy products, and automotive industries and aerospace. Its goal is to help startups move up the product value chain. IIM Bengaluru NS Raghavan Center for Entrepreneurial Learning (NSRCEL), the startup hub at the Indian Institute of Management Bangalore (IIMB), has incubated over 225 startups, has helped create over 5400 jobs, and is connected to around 46,000 entrepreneurs. Its undertakings have a total portfolio of over USD1.5 billion.17 As NSRCEL prepares itself for the upcoming years, its new logo and website mirror its transition, scale, and trajectory of growth. NSRCEL is preparing to mentor 4000 entrepreneurs to introduce three to five new programs supported by industry partners and to incubate nearly 200 new ventures.18

16

ibid. https://www.iimb.ac.in/node/5444 18 ibid. 17

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SWOT Analysis of the Bangalore Innovation Ecosystem

Resources Culture and mindset

Strengths India has the second largest population on the globe. Therefore, people face a competitive social and economic environment from a young age. This forms a mindset driven to implement knowledge into markets

Weaknesses The caste system that divides Hindus into four categories represents a barrier to the free flow of intercultural exchange

Opportunities A large part of the population has an entrepreneurial mindset but lacks the means to implement on the market. As economic development will provide infrastructure and other system ingredients, this potential could be tapped

Digital infrastructure

In regions like Bangalore, digital infrastructure is already at a very high level

If India’s national and state administrations are able to focus their investments on the most advanced regions, developments like 5G can be a competitive advantage over other global regions

Education and skills

Education helps expand the talent pool and produce appealing talent. It can also render potential improvements in social position

Bangalore is dependent on the infrastructure provided by the state of Karnataka as well as neighboring states. Digital infrastructure is also only functional if energy is provided on a reliable basis—a permanent weakness in most regions in India The lack of standardized regulation and education infrastructure leads to talent loss. Education is still in a traditional system focusing on the transfer of

Bangalore region will continue growing as a magnet to young people from all over India

Threats As the population is still growing, social tensions could develop into a major barrier. Understanding of customers is often limited to certain regions where the local language and people are familiar. This makes it hard to scale products to customers across the country The dynamics in the development of digital infrastructure leave no room for complacency. If a region slows down due to bureaucracy or lack of supplies like energy, it will soon fall behind its peers in other regions

Bangalore could get into the flow heater trap of attracting lots of young people, training them, and losing them again to other global regions

(continued)

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Institutions

Strengths

Bangalore’s institutional landscape is rich, including the presence of several centers of excellence and top engineering and researchbased institutes

Weaknesses knowledge and neglecting the broader concept of skills development There is a limited funding scope for R&D. The curriculum is not industry-oriented and is largely not inclined toward innovation or R&D. Limited international exposure

Market and demand

Bangalore has the advantage of a vast home market in India, with nearly 1.4 billion people

Migration

The rapidly expanding city provides increasing employment and educational opportunities, which act as pull factors for the talent pool to move to Bangalore. The pleasant climate has always been an attraction for immigrants from far and wide

The purchasing power of a large part of the population in India is quite weak, so products have to be dedicated to a bottom-of-thepyramid market The high magnitude of urban in-migration to a few locations in and around Bangalore has stretched the city’s carrying capacity. Bangalore is facing increasing problems due to inadequate infrastructure facilities, including education and health infrastructure. It is suffering water shortages, traffic

Opportunities

Threats

Strengthening of institutes through different national and state government schemes.

The COVID-19 pandemic is impeding the sector

International collaboration for exposure. More crowdsourced funding through alumni networks The home market is expanding fast in its number of people as well as its purchasing power

Bangalore is the leading center of the high-tech industry and high-level services. Bangalore is also an emerging niche that is increasingly linked to a global network

Products focusing on the bottom-of-thepyramid market will not be able to be successful in most regions in Europe or the USA Migrants are subject to continuous vulnerabilities at multiple levels: Social, political, emotional, and economic. Social security measures like public distribution systems and health care are a concern

(continued)

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Resources

Quality of living

Strengths

Bangalore’s urban lifestyle, excellent healthcare facilities, job opportunities, top-notch academic institutions, and abundant greenery make it one of the best cities to live in India. The weather of Bangalore has always been a key attraction for the people.

Research infrastructure

Bangalore scores strongly for its infrastructure. Its elaborate rail and road transport, combined with access to airports and a metro system, make this city one of the most accessible cities in India. These infrastructures have also contributed to the rise of FDI in Bangalore Infrastructure is built to desired levels. Bangalore hosts many institutions with high-quality infrastructure that attract researchers from the whole country

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Weaknesses

Opportunities

Threats

congestion, and insufficient low-income housing Development and traffic congestion result in additional traffic and congestion problems in the city.

Bangalore offers abundant employment opportunities.

There is parallel development in other Indian cities, and as a result, talented and skilled workers are moving out of the city. This is seriously threatening the monopoly Bangalore used to have in the ITES and IT sectors

Housing demand in the region due to the influx of migrants may have a negative effect on the supply of affordable housing

University budgets are too low to keep up with the higher dynamics of reinvestment into infrastructure required to keep the quality level

The economy of Bangalore is flourishing and contributes hugely to the overall Indian fiscal scenario. The best part about the economy of the city is that the central government invests heavily in the private sector, spurring growth in the IT and manufacturing industries. Moreover, Bangalore is also known for its aviation domain and aerospace industry

Effective strategies and funds flow to improve the infrastructure, bolster them, and spark more excellence around them

Risks include average input quality and rapid technological changes, as well as a potential decrease in quality standards among research institutes (continued)

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Resources Bank loans

Legal advisers

Policy, strategy, and regulation

Strengths Bangalore has a good and proliferating network of public and private banks, and, due to the booming startup culture, there is a high demand for bank loans Lawyers, patent lawyers, and accountants are traditional role model or partners in innovation

Karnataka state is highly proactive in designing and implementing policies related to all sectors. The state has

Weaknesses Startups do not have sufficient resources to provide to the banks to give them access to easy loans

Opportunities Banking sectors can grow along with the overall startup ecosystem

Threats Startup failure can pose risks for banks’ loan recovery

IPR, legal advice, and related activities are keys for the growth of most startups. There are very good IP lawyers in India that have experience with global and Indian IP and can support startups with IP management. The European Commission will be setting up an IPR helpdesk in India and the government of India also provides low-cost IP advisory support to Indian startups. There is a strong emphasis on IP protection and management in India Widespread awareness and policy execution is the bottleneck in implementation of policies and strategies

The growing startup ecosystem is creating huge demand for legal advisors. There is an imbalance between the demand and supply. There is an opportunity here for more actions on IP management. National and state governments, lawyers, and the private sector are all gearing up for this demand

While there is legal support, knowing who to reach out to and identifying reliable legal support can still be challenging. If this is not done, it creates problems in the setup and growth of the startup ecosystem

Rapid development and execution of policy will boost the morale of the startup ecosystem and help in its growth

Consultation among stakeholders and its impact have not yet been measured during policy drafting (continued)

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Resources

Strengths

Risk capital

been the frontrunner in bringing up policies and guidelines that help foster new sectors Bangalore has a strong ecosystem of VCs and angel investors. Generally, the investment ecosystem is very strong

Tolerance and trust

India, especially Bangalore, is an open and democratic society where mutual support is regarded highly valued

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Weaknesses

Opportunities

Threats

VC funding is skewed to limited sectors

Since the startup ecosystem has a very strong base, it gives opportunities to the VCs to diversify their funding and reduce the risk If basic challenges like poverty and energy supply can be met, Bangalore will have multiple opportunities to become one of the leading innovation ecosystems in the world

The COVID-19 pandemic has restricted the funding scope for the startups

The existing caste system incorporates barriers for the establishment of a fully open exchange of ideas

The growing difference between poor and rich (Gini index) creates potential for social unrest and political instability. It could bring innovation to a stop

One of the major strength of the regional ecosystem in Bangalore is the public support structures on national and regional levels. The government of Karnataka launched a startup policy in November 2015. The crucial pointers of the policy are as follows19: • The new age incubation scheme under implementation in engineering colleges will be expanded to all professional and postgraduate institutions in tier 2 cities. Institutes will be supported via grants for operational expenses, annual financial support for projects, training, capacity building, etc. • The government will assist in establishing TBIs in institutions of higher learning with well-developed research and development facilities.

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https://www.startupindia.gov.in/srf/reports/Karnataka_Report_26072020.pdf

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• Karnataka state will provide funding in the form of grant-in-aid (up to USD5 million to be released in tranches) to innovators who need early stage funding. • The state will support the private sector as it sets up incubation centers and accelerators or expands existing facility and operations on a public–private partnership (PPP) basis. • The state shall maintain a list of common instrumentation facilities present across the state. • The total incubation area maintained by the State Government of Karnataka is 124,320 square feet. • Seed funding through Idea2POC scheme. • Provision of matching funds to support angel investors. • Support to new and disruptive technologies such as AI, data science, robotics, AVGC, and cybersecurity. • Karnataka has collaboration with various countries such as Australia, Finland, the Netherlands, the USA, France, and Germany for knowledge and resource exchange. Startup Karnataka’s USP20 • Synergy between government, industry, and academia. • High-level involvement through the startup council under the guidance of honorable CM of Karnataka and industry representatives. • Partnership with industry at various levels. • Channelizing innovation for social impact through grand challenges. • Transparent online processes and systems in place. • Focus on multiple sectors in tier 2 cities. The Government of Karnataka has set up subsidized incubation centers. The K-Tech Innovation Hub at NASSCOM, Domlur, Bengaluru, is one facility that has been built with good infrastructure over an area of 37,000 square feet with a seating capacity of 350 and all the world-class facilities.21 The center of excellence has been set up in the following places: Aerospace and Defense at Dassault Systèmes, France. Data Sciences and AI at NASSCOM, Bengaluru. Agri Innovation at C-CAMP, Bengaluru. Internet of Things (IOT) at NASSCOM, Bengaluru. Cyber Security at ISSC, Bengaluru. AVGC at ABAIL, Bengaluru.

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https://www.startupindia.gov.in/content/dam/invest-india/compendium/Startup%20India%20-% 20State%20report_Karnataka.pdf 21 https://startup.karnataka.gov.in/incubators/

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Machine Learning and Robotics at IIIT, Bengaluru. Semiconductor Design Fabless Accelerator at IESA, Bengaluru. One of the major benefits of being a part of startup in Karnataka is that selected startups get USD5 million as grants; 264 startups have already been funded, and 100 startups are yet to be funded. Many successful startups that are now well established in the market were funded by these grants initially.22 The focus of the grant challenges was on water and sewage management, plant disease and pest infestation diagnostics, effective delivery of primary health services, tackling undernutrition, traffic congestion in Bangalore, and water conservation. Global Innovation Alliance is another initiative made by Startup Karnataka to encourage collaboration across startup ecosystems in 19 countries globally. It has already signed an MOU for elderly health care, cybersecurity, soft landings for startups, and genetics.23 The Karnataka Innovation Authority is going to set up regulatory sandboxes. These will help the entrepreneurs solve the regulatory issue that may arise in the future. Policies and regulations will be built for selected startups. This is still in process and will be effective soon. India has seen historic growth in both the quantity and variety of its startups. In the last 10 years, India has carved its way to being one of the top five startup ecosystems across the globe alongside the USA, China, the UK, and Israel. India today is home to solid angel investors. This domain has seen vigorous contributions from every main VC or private equity firm. In the same timeframe, the startup sector has brought in nearly USD20 billion of capital and today employs about 100,000 people—a number that doubles every 2 years. Additionally, over 100 active incubators aid entrepreneurs’ research with novel ideas by giving them practical expertise and incomes. The recent growth of the Indian startup ecosystem has resulted from the convergence of multiple features. On the demand side, there has a been massive growth due to the massive increase in online customers driven by smartphone proliferation. Because of this large customer base, rising income levels, and enhanced demand for consumption, India is becoming a highly attractive captive consumer base. On the supply side, there has been a gigantic inflow of talent and a large influx of capital from global investors that have helped to bring the spark into our country. The amalgamation of government policies, capital support, backing from corporations, direction and supervision from academics, and the complete brilliance of Indian entrepreneurs has released the true potential of Indian startup ecosystem. While India is a country of many problems and is unique in its own ways, its greatest assets include its young talent pool and its resilience. By banking on these, it can overcome a wide range of challenges and hurdles through innovative solutions. Startups provide an excellent atmosphere to incubate talent and as well as to leverage

22 23

https://startup.karnataka.gov.in/funding/ https://startup.karnataka.gov.in/gia-international-partnerships/

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the latest technologies. In doing so, some of them have the capacity to transform the country and possibly become the next set of Indian technology giants. To promote growth and aid the Indian economy, the following benefits are being given to entrepreneurs to establish startups by the Indian Government. Simple process The Government of India has started a mobile app and a website for easy registration of Indian startups. Reduction in cost The government is also providing lists of facilitators for patents and trademarks. These advisors provide quality intellectual property right services including fast examination of patents at lower fees. Easy access to funds The government set up a 10,000 crore rupees fund to provide funds to the startups as VC.24 Tax holiday for 3 years Startups are exempted from income tax for 3 years provided they have a certification from Inter-Ministerial Board (IMB).25 R&D facilities Seven new research parks have been be set up to provide facilities to startups in the R&D sector.26 No time-consuming Numerous agreements have been simplified for startups to save time and money. Tax saving for investors People investing their capital gains in the venture funds set up by the government are exempt from capital gains taxes, which helps startups attract more investors. Bangalore is demonstrating that it is far and away India’s startup capital. It has a solid community of engineers with global work experience, a strong customer base, and growing pools of capital. All of these are transforming the city into a global startup hub just like Silicon Valley in the USA. The city also has a ripe pool of talent for startups and has a high density of entrepreneurs and investors. It has the reputation as a hub for cutting-edge technology and accounts for 41% of all new ventures launched in India according to the World Startup Report.27 India remains a challenging market, but there are at some prominent reasons that global firms cannot overlook the country. These are as follows.

24

https://www.startupindia.gov.in/content/sih/en/compendium_of_good_practices/angel_and_ven ture_funding.html 25 ibid. 26 ibid. 27 https://economictimes.indiatimes.com/biz-entrepreneurship/7-reasons-why-bangalore-is-themecca-of-startups/slideshow/19273647.cms

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Firstly, India has witnessed growth in infrastructure spending. Since 2014, India has stretched its solar-generating capacity eightfold and has achieved its capacity target of 20GW 4 years ahead of schedule.28 India has plans to boost new investments of around USD300 billion in renewable energy infrastructure in the next 10 years. In this regard, many industries have successfully leveraged India’s infrastructure investments.29 It is projected that India needs about USD five trillion in infrastructure investment to sustain its economic growth. Local Indian companies currently lack the required competencies, so multinational companies with core competencies in high-tech infrastructure solutions have immense opportunities to explore in India and use this platform.30 Secondly, India’s emerging middle class is strong. It is obvious and very evident that India’s business conditions pose tests and hurdles for all companies in the consumer economy. Some global consumer companies have been able to overcome these hurdles and constraints and are doing spectacularly well. Three approaches have helped global firms establish bases in India. First is to have a tactical and long-term obligation to the Indian market. Second is to build strong local teams in India by shifting resources and decision-making authority to India. Finally, and most importantly, is the evolution of business models and producing the products that are affordable and accessible to the majority of the middle class. The bigger challenge for most global companies is to adapt and make their approaches appropriate to other markets rather than copying and pasting their developed-market models across the globe. Finally, India is in a tech startup boom. The major reason why India’s importance to global firms should endure is not the size of the market but the opportunity to contribute and take part in one of the lushest tech startup innovation ecosystems in the world. The startup ecosystem, now the third largest in the world, is growing and maturing rapidly and is no longer dominated by e-commerce companies. In fact, tech startups have attracted over USD20 billion in the past 3 years. The three factors driving this boom are: First is India’s investment in its technology infrastructure. Government agencies and tech volunteers have collaborated to create “Indian Stack”—a set of APIs giving governments, businesses, startups, and developers a common digital infrastructure and platform on which to build and deliver human-less, paperless, and cashless services.

28

https://hbr.org/2018/02/3-reasons-global-firms-should-keep-investing-in-india#:~:text¼India% 20has%20expanded%20its%20solar,four%20years%20ahead%20of%20schedule.&text¼It's%20 been%20estimated%20that%20India,companies%20lack%20the%20competencies%20needed 29 https://www.ibef.org/industry/infrastructure-sector-india.aspx 30 ibid.

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Second is India’s gigantic number of consumers and its large, highly educated, and young talent base. Around 10,000 engineering institutes in India alone produce more engineers than China and the USA combined, and India adds 10–12 million young and skilled people to its workforce annually.31 Third is that India’s problems cannot be solved without leveraging and using technology. Many sectors like financial services, education, health care, justice, and several other services can only be delivered by effectively using technology. India is a paradox with mega opportunities and mega headaches. The major headaches include bureaucratic administrative rules and regulations, strong labor and other associated unions, corruption, underdeveloped institutions, inadequate physical infrastructure, and difficulty acquiring land. If a company can overcome these obstacles and challenges, the reward is overwhelming.

6.7

Strategy and Implementation

The startup policy 2015–202032 envisions fostering a world-class startup ecosystem in India through tactical investments and policy mediation, leveraging the robust innovation climate and ecosystem. The strategies are intended to achieve the following goals: Goals • • • •

20,000 tech startups including 6000 product startups by 2020 0.6 million direct and 1.2 million indirect new jobs in the sector Mobilizing USD333 million funding for startups, by leveraging the funds. Focus on generation of 25 innovative technology solutions with social interference. The strategies are very holistic in approach and are enumerated below. Fostering strong partnerships between R&D centers and industry

Equipment and viability gap funding. Industry-academia connect and project funding. Providing early stage/Idea2 POC (proof of concept) funding Grants up to Rs. 5 million. Validation of proof of concept. Virtual incubation.

31 https://economictimes.indiatimes.com/industry/services/education/indian-engineering-studentscant-think-as-high-as-chinese-and-russians/articleshow/63612439.cms?from¼mdr 32 https://startup.karnataka.gov.in/docs/Startup_Policy_Karnataka.pdf

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Encouraging entrepreneurship in education through NAIN Backing given to professional and post graduate colleges in tier 2 and tier 3 cities of India for setting up incubators. 10 student projects funded in each partner institute. Mentors provided to student projects. Creating incubation infrastructure through PPP Floating of request for proposals (RFPs) or with industry associations for the selection of partners. Incubator participants to be provided with infrastructure support, mentoring, legal, and accounting services. Partners will help implement incentives and benefits to startups. Channelizing innovation for social impacts Five challenges/completions will be announced every year. Based on the achievement of milestones, initial and follow-up funding will be given. Pilot projects will be implemented through departments. Winners of the competitions will be provided with incubation space. Startup funding through fund of funds Selection of a fund manager. Experts from academia and industry shall be part of the investment committee. The fund will focus exclusively on startups. Promoting capacity building through exposure visits and workshops For market expansion, opportunities will be given to join the Karnataka Startup Cell at global conferences. Opportunities will be given to meet incoming trade delegations and foreign investors with the Karnataka Startup Cell. Providing support in the form of encouraging incentives and concessions Reimbursement of VAT and CST for early stage startups. Reimbursements on patent spend for both domestic and foreign filings. Reimbursement on marketing expenditure up to 30% of the cost incurred subject to half a million per startup annually. Women will be given a 10% reservation in seats of partner incubators. Self-certification under various enactments.

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The region-wide strategy and plans are overseen and monitored by the nodal departments for implementation of the startup policy. Specifically, the Department of IT, BT, and S&T is in charge, and the nodal officer for the same is the Principal Secretary, Department of IT, BT, and S&T. The individual state startup cell is led by a senior manager and has five other members. Because of these supportive policies, nearly USD32 billion in investments has come into Bengaluru and Karnataka. The Spider Web Graph below details the implementation status of the policy on each of the seven areas of assessment, in comparison to the national average.

Source:https://www.startupindia.gov.in/content/dam/invest-india/compendium/Startup%20India% 20-%20State%20report_Karnataka.pdf

Each of the seven pillars of the ranking framework forms individual axes and the overall performance of the state in each pillar is indicated on the respective axes. Karnataka has done remarkably well in areas such as incubation support and seed funding support. In pillars such as startup policy implementation, funding support— angel and venture—, awareness and outreach and “simplified regulations”, the state’s initiatives are good, and its score is above the national average. Some of the initiatives that have been successfully implemented are as follows33: The Government of Karnataka has signed MoUs with 11 partners to set up Incubators and facilitate startups with relevant infrastructure.

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https://www.startupindia.gov.in/content/dam/invest-india/compendium/Startup%20India%20-% 20State%20report_Karnataka.pdf

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The startup portal has enlisted more than 100 mentors, who are registered on the portal. More than 250 startups were given subsidized incubation in state-supported incubators between January 2016 and April 2018. The total incubation area in incubators supported by the Government of Karnataka is 124,320 square feet. More than 170 startups have been provided government-supported seed funding in the state between January 2016 and April 2018. State government formed partnership with countries such as Australia, Finland, the Netherlands, USA, France, and Germany. What are the special tools that can be regarded as crucial for the regional innovation ecosystem in Bangalore?

Source: Author’s own figure

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Multinationals’ Headquarters Bangalore has evolved into a hub for public sector industries particularly in aerospace, telecommunications, heavy equipment, space, and defense and has seen massive investments from the government. This is very important for an ecosystem to foster and thrive into a vibrant and enabling hub. These facilitated Bangalore headquarters for manufacturing giants like The Hindustan Aeronautics, The National Aerospace Laboratories, Bharat Heavy Electronics, Indian Telephone Industries, and Bharat Earth Movers. Also, because of sufficient technical and scientific manpower, Bangalore witnessed the IT revolution in the early 2000 and that resulted in an influx of more companies and venture into robotics, manufacturing marketplaces, and tools for the manufacturing sector as they were influenced by the ongoing ecosystem. The advantages of progressive infrastructure and abundance of support have led many multinational corporations to follow suit and place their headquarters in the city. Entrepreneurs and Investors Bangalore sports the best entrepreneurial ecosystem and financial environment for starting, establishing, and growing a business. Moreover, the metropolitan city has a lot of networking opportunities that foster the growth of startups in the area and thus makes the city a “startup heaven.” Co-working spaces in Bangalore are also helping in the rapid growth of startup hubs in India by offering a wide range of facilities to meet its clients’ needs. The co-working spaces offer a stage for all the independent parties to communicate, to collaborate, and to work together with the goal to increase their originality, productivity, and competency. Thus, by providing a networking platform, it enables all the startups, freelancers, and emerging businesses to succeed by aiding one another. The government, through the right policy support and allied infrastructure, is trying to nurture innovation in the startup ecosystem. With the creation of the Startup Vision Group—Karnataka under the Startup Karnataka program, the top government officials involved in this sector aim to bring together the brightest minds in the ecosystem. They should help set up a robust outline for policy formulation that can be both flexible in its reaction to disruptive technologies but at the same time fair to all stakeholders that are involved. A decade ago, regulations were very strict. Now, however, we are seeing a lot of government regulations around supporting startups, and the government has become very supportive and flexible. The Karnataka startup policy has led to the establishment of a startup cell that helps encourage strong partnerships between research institutions and industry. It also encourages entrepreneurship in innovation. It channels innovation for social impact and is also helps create an incubation infrastructure through public–private partnerships.

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Ease of Doing Business One of the main reasons for the rise of tech in Bangalore has been digital and mobility transformation. Apart from that, there has to be an abundance of ideas and innovation. The Indian market has been offering many opportunities for startups, and, in turn, these startups carry great hopes to promote growth and generate employment. Over the last 20 years, more startups emerged in India and the associated ecosystem has developed dynamically. Therefore, support has increased in many dimensions: office space and infrastructure, business support like mentoring and networking, and the availability of financial capital. Stakeholders are optimistic that the ecosystem will continue to mature. Startups do not exist in solitude, but are part of the broader economy. Policy reforms like the Karnataka startup policy will help improve the general economic conditions as well as specific investments in digital and physical infrastructure that are expected to also benefit startups. With regard to the regulatory framework, improving the implementation of existing startup policies and removing inefficiencies within the bureaucracy will be crucial to ease doing business for startups. Reducing necessary paperwork and documentation, improving access to information, establishing more standardized operating procedures, and having clear criteria would help startups. Moreover, it is important to channel investments and funding into education to develop a broader talent pool. Ecosystem stakeholders tend to be geographically concentrated in large and metro cities, and startups that are not placed in these locations and cannot change bases may find it more difficult to succeed. Support must be extended to entrepreneurs in smaller tier 2, 3, and 4 cities of India. Due to resource constraints, India needs low-cost and high-impact solutions, and thus, the focus on scalable tech startups is understandable. In addition, fostering a good work culture is necessary for attracting and retaining talent. Eradicating the male-dominated culture will also help attract qualified women and foster a more gender inclusive and innovative environment. The last decade in India has seen noteworthy action on manifold fronts including the formation of new startups, amount of funding and number of investment rounds, an influx of global investors and startups, development of regulatory infrastructure, global mergers and acquisitions, and internationalization. The latest trends show that startups in India are booming and especially Web-based tech companies are internationalizing quickly. Startups from India are keen to access new markets and develop partnerships and market opportunities in regions like Europe, North America, South and Southeast Asia. The thinking is that a new unicorn can be born anywhere, and to reach that status, expanding beyond India to new markets is key. Connectivity to new ecosystems will be a key additional driver for growth.

7

Berlin Innovation System Helge Dauchert and Ludovit Garzik

Abstract

The Berlin innovation ecosystem is characterized by its highly developed research landscape. Berlin boasts a high density of universities—and their graduates—and numerous well-developed and publicly financed research institutions. At the same time, a lack of large research-active companies and a weakly developed SME sector are major deficits in Berlin’s innovation ecosystem. These shortcomings result in weak privately financed R&D, the pronounced small-scale nature of Berlin’s economy, and rather low patent performance. What sets Berlin apart as an innovation ecosystem in Germany and throughout Europe is the vibrant startup scene that has developed since the 2000s. Interestingly, the Berlin startup boom is not the result of exceptionally favorable political and administrative conditions or ambitious support programs, but rather of social and cultural factors. Innovative startups that align with Berlin’s strength in publicly financed R&D generate positive long-term effects: They encourage large, well-established companies to invest in the city. These investments are no longer merely incubators and showrooms but, increasingly, R&D centers and—like in Tesla’s case—production facilities. Thus, science and innovation are making a decisive contribution to turning a poor and structurally weak city back into an attractive location for business and industry.

H. Dauchert (*) Commission of Experts for Research and Innovation, Berlin, Germany e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_7

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Berlin Innovation System Overview

Spatial Conditions: Berlin—An Urban Island The Berlin Innovation Ecosystem is essentially limited to the city of Berlin or rather the federal state of the same name. Unlike other urban innovation ecosystems in Germany like Munich, Frankfurt, Cologne, or Stuttgart, Berlin is not located in a highly agglomerated urban region or in the immediate vicinity of other economically dynamic cities. Instead, Berlin forms an urban island in the sparsely populated, rural, and structurally weak federal state of Brandenburg. Only a few suburbs just outside the city limits and the Brandenburg capital of Potsdam immediately southwest of Berlin can be assigned to the Berlin innovation ecosystem. In a Nutshell: Strengths and Weaknesses of the Berlin Innovation Ecosystem The strength of Berlin’s innovation ecosystem lies in its highly developed research landscape. Berlin boasts a high density of universities, including many graduates, and numerous well-developed and publicly financed research institutions. The lack of large research-active companies and a weakly developed SME sector are major deficits of the Berlin innovation ecosystem. These shortcomings result in a low level of privately financed R&D, a pronounced small-scale nature of Berlin’s economy, and rather low patent performance.1 The last is also a shortcoming for Berlin as a startup location.2 Berlin and its environs have been largely deindustrialized since at least the early 1990s due to the collapse of East German companies and the phasing out of subsidies for West German companies after reunification.3 High unemployment rates, low per capita income, and low economic growth were all characteristic of Berlin and still are despite a trend reversal that began in the late 2000s. However, economic weakness and the resulting lack of career prospects in established companies for many qualified young people have also been one of the reasons for the dynamic development of startup activity in recent years. This activity is an outstanding feature of Berlin’s innovation ecosystem. A Special Feature of the Berlin Innovation Ecosystem: Startups What makes Berlin special as an innovation ecosystem in Germany and throughout Europe is its vibrant startup scene, which has been developing since the 2000s. Interestingly, the Berlin startup boom is not the result of exceptionally favorable political and administrative conditions or ambitious support programs, but rather of social and cultural factors. Due to its pronounced economic weakness, Berlin was 1

Lübbers T et al. (2020) Evaluierung der Berliner Innovationsförder-Programme 2018/2019, Ramboll Management Consulting GmbH, Berlin. 2 Compared to the other leading European startup locations London, Paris and Stockholm, Berlin lags behind when it comes to patent intensity. Startup Genome (2019) Global Start-up Ecosystem Report 2019. p. 29ff. 3 Rupf W (1999) Der Wirtschaftsstandort Berlin. In: Rytlewski, R.; Süß, W. (Hrsg.): Berlin – Die Hauptstadt. Bundeszentrale für politische Bildung, Bonn. p. 391ff.

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characterized for many years by cheap apartments and favorable commercial rents, as well as a generally low cost of living. Combined with its rich cultural and leisure offerings, the city became highly attractive for artists, students, and creative people—including creative entrepreneurs.4 Berlin’s city administration plays a dual role: On the one hand, it has been and continues to be considered inefficient5 and presents an obstacle to innovators and founders. On the other hand, the Berlin administration—due to its limited capabilities and impact—has repeatedly created unregulated white spots that were used as free spaces by creative people putting their ideas into practice. This unregulated dynamic stood in contrast to other German cities and contributed to the city’s “poor but sexy”6 appeal. However, recent surveys of company founders have put the negative image of the Berlin administration into perspective. Both the Berlin 2019 Innovation Survey and the PWC 2018 study of startup companies in the Berlin area rank the city very low for its bureaucracy and administrative deficits.7,8,9 More surprisingly, these surveys show that the era of low costs for living and real estate are over. High costs are now cited as a central problem for companies and startups. From today’s perspective, Berlin’s oft-lamented lack of a broad industrial base and its absence of large companies are now seen as helpful preconditions for the startup boom. Although Berlin’s startups lack immediate proximity to potential customers, the city’s founders do not have to compete with seven DAX (Deutscher Aktien Index) companies for the best employees like their peers in Munich. The Berlin job market, in combination with three large state universities and numerous other colleges, ensures that well-trained young people are available in sufficient numbers. Berlin’s high international attractiveness compared to other German cities enables its employers to hire from a wide variety of countries, and it is easier to establish an internationally operating company in Berlin than in other German innovation ecosystems.10 EFI – Expertenkommission Forschung und Innovation (2013) Gutachten zu Forschung, Innovation und technologischer Leistungsfähigkeit Deutschlands 2013. Berlin: EFI. p. 35 f. and Dauchert H (2013) IT-Unternehmensgründungen in Berlin, Studien zum deutschen Innovationssystem. Berlin: EFI. p. 18f. 5 https://www.tagesspiegel.de/berlin/probleme-in-der-verwaltung-berlin-endlich-regierbarmachen/20984010.html (last accessed on March 25, 2021). 6 The popular phrase was coined by Klaus Wowereit, mayor of Berlin from 2001 to 2014. https:// www.theguardian.com/cities/2014/sep/11/poor-but-sexy-not-enough-rise-fall-berlin-mayor-klauswowereit (last accessed on March 25, 2021). 7 Wolf G (2020) Innovationserhebung Berlin 2019 – Innovationsverhalten der Berliner Wirtschaft, Technologiestiftung Berlin 2020. p. 44f. 8 PWC (2018) Start-up-Unternehmen im Raum Berlin, PricewaterhouseCoopers GmbH, Berlin. p. 4f. 9 Lübbers T et al. (2020) Evaluierung der Berliner Innovationsförder-Programme 2018/2019, Ramboll Management Consulting GmbH, Berlin. p. 66f. 10 EFI—Expertenkommission Forschung und Innovation (2013) Gutachten zu Forschung, Innovation und technologischer Leistungsfähigkeit Deutschlands 2013. Berlin: EFI. p. 35 f. and 4

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Innovative startups in line with Berlin’s strength in publicly financed R&D generate positive long-term effects: They encourage large, well-established companies to invest in the city. These investments are no longer merely incubators and showrooms but, increasingly, R&D centers and—like in Tesla’s case—production facilities. Thus, science and innovation are making a decisive contribution to turning a poor and structurally weak city back into an attractive business and industrial location. The dynamic startup scene has motivated numerous large companies to establish a presence in Berlin. Instead of relocating headquarters or production facilities to the German capital, these companies typically set up incubators and financing startups through corporate venture capital. By promoting startups in company-owned incubators and by investing in existing startups, many established companies hope to access Berlin’s innovative ideas and find opportunities to incorporate external innovations.11 In recent years, large companies’ interest in Berlin seems to have taken on a new quality. These companies are no longer content to establish strategic bridgeheads in Berlin, instead setting up branch offices and business units in the city. Numerous multinationals like Google, SAP, VW, and Siemens have announced plans to establish corporate units or campuses, and these are merely the prominent examples. These initiatives show that large companies hope to stay in touch with innovative developments and trends while promoting their own interests. Electric car manufacturer Tesla has taken its interest in Berlin one step further. With the construction of a so-called Gigafactory at the outskirts of Berlin, the company is creating large-scale production capacity for the first time in many years. The establishment of a design and development center is also under discussion. The growing presence of large companies is a strong indicator that the Berlin innovation ecosystem has achieved a self-reinforcing dynamic. How the Covid-19 pandemic will affect this promising development cannot yet be estimated. At present, the data situation is not sufficient for empirically validated statements. Turning Research into Businesses: The Outcome of the Berlin Innovation System Research and innovation are not an end in themselves but should generate economic growth and jobs. To the regret of many economists and politicians, it is impossible to draw a direct link between investment in research an innovation and economic outcomes. However, a few indicators can signal how much research and innovation contribute to the economic performance of a region or country.

Dauchert H (2013) IT-Unternehmensgründungen in Berlin, Studien zum deutschen Innovationssystem. Berlin: EFI. p. 18f. 11 Dealroom (2020a) Shortage of later stage venture capital in Germany: more acute due to Corona crisis. https://startup-map.berlin. p. 24ff. Provided by Dealroom (according to communication with authors April 16, 2021).

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The striking concentration of funding cases through the EXIST program suggest that the Berlin ecosystem is—compared to other German innovation ecosystems— particularly successful in transferring publicly financed research into real economic impulses. The concentration of High-Tech Gründerfonds-funded startups also implies that Berlin is successfully turning R&D investments into advanced products. A close look at the geographical distribution of innovative startups and companies within the ecosystem further highlights the link between research and economic impact. Just looking at the spatial proximity of university campuses or public research institutions and innovative companies shows that there is a close connection between the two sides. A striking number of innovative startups and companies operate near the Technical University in Berlin’s Charlottenburg district, and the same pattern holds for Humboldt University and Charité Universitätsmedizin in the Mitte district. Clusters of innovative companies have also formed around the Buch campus on the outskirts of Berlin and the Adlershof science and technology park.12 Berlin’s strengths in publicly financed R&D in line with its innovative startup scene generate a positive effect in the long run: They encourage large, wellestablished companies to invest in the city. These investments are no longer merely incubators and showrooms but, increasingly, R&D centers and—like in Tesla’s case—production facilities. In this way, science and innovation make a decisive contribution to turning a poor and structurally weak city into an attractive business and industrial location again.

7.2

Innovation Policy of the Berlin State Government

In Berlin, innovation policy and startup support schemes are not the source of current developments but a consequence. Innovation policy in Berlin is an attempt to regulate and promote a development that was already underway. The state government’s innovation policy strategies were late, appearing after innovation itself. In addition, policymakers’ actions and the innovation strategy they devised were initially aimed at strengthening existing structures, not at creating new ones or attracting new industries. In the context of its innovation strategy, the Berlin state government supports startups in innovative technologies through the state-owned “Investitionsbank Berlin” (IBB) and the Technology Foundation Berlin. The latter includes public– private partnership initiative Berlin Partner for Business and Technology.13

Rammer C et al. (2019) Knowledge proximity and firm innovation: A microgeographic analysis for Berlin. 13 https://www.technologiestiftung-berlin.de/de/startseite/; https://www.ibb.de/de/ wirtschaftsfoerderung/unternehmensphasen/gruenden/gruenden.html; https://www.berlin-partner. de/en/ (last accessed on March 25, 2021). 12

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The governments of the federal states of Berlin and Brandenburg adopted a joint innovation strategy (innoBB) for the first time in 2011.14 This followed on from the innovation policy cooperation between the two states since 2006. The geographical focus of the innovation strategy goes beyond Berlin’s innovation ecosystem and includes the entire federal state of Brandenburg. For the first time, the governments of Berlin and Brandenburg defined five sectors (called Zukunftsfelder or “future fields”) to prioritize for development into permanent, high-performance clusters. The future field designation assigns a key function to the capital region’s innovation processes and bundles them according to the principle of “strengthening strengths” to succeed in international innovation competition. In principle, the future fields represent established industrial and service sectors: health care (biotechnology, medical technology and pharmaceuticals); energy; transport, mobility and logistics; optics; and ICT, media and creative industries. Interestingly, startups are marginal in the innoBB plan. The foundation of new businesses is only mentioned to illustrate the dynamics in the abovementioned clusters. Only the newest edition of the joint innovation strategy (innoBB 2025), published in 2019, recognizes startups as an important component of the innovation ecosystem in Berlin and Brandenburg and a focus in their own right. The updated strategy identifies key factors for strengthening the startup ecosystem, including not only financing opportunities but also access to relevant networks, specific target groups, know-how, and research infrastructure, and as well as test beds and real-life laboratories. The joint innovation strategy establishes eight innovation support programs in the Berlin state government. These are intended to stimulate research and innovation, as well as related private investment and startup activities. The program for promoting research, innovation, and technology (Pro FIT) is central to innoBB 2025. Its goal is to promote the intensity of R&D in Berlin’s economy by supporting ambitious, innovative projects. Support is primarily allocated to the clusters defined in the original innoBB strategy.15 The strategy’s eight innovation support programs were evaluated in 2018/2019, but the evaluation’s methodology prevented any conclusive assessment of their effectiveness. One clearly positive development is the establishment of new research facilities in the city. The 2013 founding of the Berlin Institute of Health by Charité and the Max Delbrück Center were important steps toward increasing health research performance in Berlin. The institute’s foundation and further initiatives illustrate Berlin’s

14

Senat von Berlin; Regierung des Landes Brandenburg (2011) Gemeinsame Innovationsstrategie der Länder Berlin und Brandenburg (innoBB), Berlin und Potsdam. 15 https://www.bundesbericht-forschung-innovation.de/de/Berlin-1758.html (last accessed on March 25, 2021).

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ambitions to become a globally recognized location for health research. In fact, the innoBB’s healthcare cluster has experienced an impressive rise in recent years. As a consortium of the four large Berlin universities, the University of Potsdam and two research institutions won the competition to establish a German Internet Institute in 2017. Part of the Weizenbaum Institute for the Networked Society, the German Internet Institute, is a collaborative project in Berlin and Brandenburg funded by the Federal Ministry of Education and Research (BMBF). Its goal is to better understand the dynamics, mechanisms, and implications of digitalization.16 The Einstein Center Digital Future was also inaugurated in 2017 as an interuniversity institution for research on digital transformation.17 The Einstein Center is organized as a public–private partnership based in the Einstein Foundation. The Einstein Foundation was established in 2009 by the Berlin state government to promote science and research in the city. In 2018, the Berlin innovation ecosystem saw another success with the award of excellence status to the Berlin University Alliance. This award is part of the excellence strategy initiated by the German federal and state governments. The Alliance was supported by the Berlin state government to boost the national and international visibility of all four participating universities.18 Berlin’s latest coup was the establishment of the new Berlin Institute for the Foundation of Learning and Data (BIFOLD), announced in early 2020. The BIFOLD is intended to become an internationally recognized lighthouse for AI research. Berlin’s success at establishing new research locations may also have been made possible by changes in the priorities set by the city’s policymakers. While the previous mayor, Klaus Wowereit, focused his work on the city’s art and cultural scene, his successor, Michael Müller, shifted his political emphasis to science and research. This shift is illustrated by the fact that Müller, as governing mayor, also took over the department for higher education and research. Despite the increasing attention of the Berlin state government to science and research, it should be critically noted that the institutions and initiatives mentioned above are not financed by the city itself but by the federal government and other external sources. In recent years, the Berlin state government has repeatedly found it difficult to raise its share of the funding and to fulfill its financial commitments.

16

https://www.weizenbaum-institut.de/en/the-institute/ (last accessed on March 25, 2021). https://www.einsteinfoundation.de/personen-projekte/einstein-zentren/ (last accessed on March 25, 2021). 18 Freie Universität Berlin, Humboldt-Universität zu Berlin, Technische Universität Berlin and Charité – Universitätsmedizin Berlin. https://www.berlin-university-alliance.de/news/items/berlinsenate.html (last accessed on March 25, 2021). 17

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SWOT Analysis of the Berlin Innovation Ecosystem

Resources Culture and mindset

Strengths The Berlin innovation community understands itself as a part of society that is free in its thoughts and their implementation. That creates fertile ground for a strong orientation toward innovation

Digital infrastructure

Compared to other German cities and regions, Berlin has good highspeed internet penetration

Education and skills

Berlin has a welldeveloped education system in primary, secondary, and

Weaknesses Berlin has been seat of the German government for over two decades, and government jobs are continuously being created. This decreases the pool of potential inventors and founders. In addition, Berlin has strong traditional milieus that are characterized by skepticism toward technological progress, largescale enterprises and profitoriented economic activities Berlin cannot score points in an international comparison of internet speeds

The focus of education is too much on the transfer of knowledge and less on the

Opportunities The mindset of seeing Berlin as an internationally recognized innovation hub is still in its infancy and offers plenty of room for further development

Threats The creative community chose Berlin for its lower cost of living and could move on to other regions as costs rise

If Berlin manages to be at the vanguard of 5G and 6G implementation, that will create a competitive advantage against other German and European regions Many young people from the German countryside come to Berlin and can be

The speed of change in digital hardware represents a threat to Berlin and other regions if it is unable to keep up

Time lags in changing education and skill parameters are long due to cultural tradition (continued)

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Strengths

Weaknesses

Opportunities

Threats

tertiary education

development of skills

Institutions

The institutional landscape is highly sophisticated and was generated over many decades

The large number of institutions makes it hard to gain an overview

further trained and educated to develop the city’s pool of human resources International tech players and global education institutions will find it easy to locate cooperation partners, so they may choose it over other regions

and can be a competitive disadvantage against more dynamic regions Despite the large number of existing institutions, more are established every year without a clear view of how old institutions can be closed

Legal advisers

Berlin is home to a large number of lawyers, patent lawyers, and accountants

Lawyers and accountants have very traditional roles in their support of startups entrepreneurs

Market and demand

Large home market of more than 80 million in Germany, more than 100 million including Germanspeaking regions of Austria, Switzerland and Belgium Berlin has a magnetic effect and many people want to implement their ideas in the city.

Demand is a weakness, public procurement especially is not oriented toward innovative stimulation, and many opportunities are missed

Reduction of language barriers will lead to an expanded “home market” in Europe

The lack of large research-active companies limits job options and career opportunities, making Berlin less attractive to international scientists.

In recent years, German and international companies have established innovationoriented divisions in Berlin. There is a chance that internationally competitive opportunities for top researchers will develop in the private sector.

Migration

It is one of the most attractive locations for international scientists when it comes to universities and research institutions.

Rising costs of living endanger the city’s alternative cultural and leisure offerings.

If networks of legal advisers are not available for entrepreneurs, it will be a structural disadvantage for the region Home markets of many competing regions like China and the USA are much larger

If the Berlin innovation ecosystem fails to attract or develop strong research-active companies, there is a danger that many talented foreign students and young researchers will leave Berlin due to the lack of career opportunities (continued)

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Strengths The city is highly attractive for students and young professionals from all over the world

Weaknesses

Opportunities

Language is a barrier for migration, and international smart people prefer Englishspeaking regions

If Berlin keeps apartment rents and living costs moderate, it will increasingly be a destination for skilled young people Strategic public investments in research and innovation can trigger extensive private-company involvement.

In recent years, the federal and state governments have increasingly discovered research, innovation, and startups as factors for future economic growth

All too often, there are gaps between the Berlin state government’s funding plans and its real commitments. New research institutions are largely financed from external sources (e.g., Weizenbaum, Einstein, Bifold, BIG)

Quality of living

Berlin is a safe place to live and offers a lot of entertainment, culture, and convenience— even for less affluent residents

Regulation

People are used to a broad spectrum of regulation, so it will not be a barrier for innovators socialized in Germany Research infrastructure is on a high level due to continued investments by public and

Parts of the region have lost the balance of a broad spectrum of society, instead dividing into richer and poorer neighborhoods New business development is hindered by regulatory measures

Policy and strategy

Research infrastructure

The rhythm of financing is too broad due to the multiple responsibilities of national,

If Berlin manages to seamlessly transition from creating a strategy to implementing it, it will be ahead of many other regions The high quality of living provides opportunity to keep and expand Berlin’s advantages

Change in regulations like insolvency law can boost founders

It is much easier to maintain a high level than it is to reach it in the first place

Threats

Berlin’s state government must show that it really takes the promotion of research and innovation seriously and does not hide behind investments and support initiatives from the federal government

Regions in Asia and Africa are developing their quality of living standards and could become competitors for talent in the future Regulators and interest groups could increase their influence and create a major barrier for future business development The requirements for research infrastructure are growing at enormous speed. (continued)

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Strengths

Weaknesses

private institutions

regional, and local authorities

Investment volume has risen sharply in recent years. Berlin attracts more venture capital than any other German innovation ecosystem

There is no tradition of investing in high-risk projects; people in Germany tend to invest in real estate rather than startups.

Bank loans

There is a high level of communication and confidence between businesses and their financing banks

Tolerance and trust

Berlin perceives itself as a tolerant, open, and dynamic metropolis. The city is considered

There is a lack of later-stage venture capital. German funds mostly focus on early stage financing, creating a gap in growth financing compared to other countries Every step of Basel regulation lowers the risk level of bank loan investments

Tolerance often serves as a pretext to ignore the city’s social problems.

Opportunities

Threats

If the expansion of growth financing is successful, Berlin-based startups could also grow into internationally significant companies. This applies especially to capital-intensive tech and biotech startups

It is very expensive to stay competitive in all disciplines. It is unclear whether the Berlin state government is permanently willing to invest. If not, this could lower quality or force Berlin to focus on specific research fields Due to the lack of German growth financiers, many startups are migrating to the USA or are being taken over by other companies. Plans by the German federal government to set up large funds are not progressing

Banks will be the backbones of startup and scaleup investments. If regulation allows, they can have a massive impact on technology projects In view of increasing isolationist tendencies and repressive developments in

Regulation is expected to be tightened in the future, which will make the wall between founders and investments a little higher with every step Due to its own complacency and overconfidence, the city is in danger of waiting too long (continued)

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Resources

7.4

Strengths

Weaknesses

Opportunities

Threats

one of the few truly internationally oriented places in Germany

Self-satisfaction and a laid-back mentality may contribute to regular political and administrative failure to perform tasks that are taken for granted in other German cities

other innovation ecosystems (e.g., USA under trumpadministration and China), Berlin has the chance to profile itself as an open and tolerant location for innovation

for important developments, postponing unpleasant decisions, and thus stagnating in the medium term

Input Indicators: Strong but Driven by Public Funding

The Berlin Innovation Ecosystem is very well positioned on the input side, as shown by its investments in R&D, its numerous publicly funded research institutions and universities, and its many students and graduates.

7.4.1

Publicly Funded Research and Educational Institutions: A Big Asset

The Berlin innovation ecosystem is characterized by a density of publicly funded research institutions that is unique in Germany. Five institutions of the FraunhoferGesellschaft, three institutions of the Helmholtz Association, 22 institutions of the Leibniz Association, nine institutions of the Max Planck Society, and an academy of science (Berlin Brandenburg Academy of Science) are located in the federal state of Berlin and its immediate surroundings. In addition, there are six federal institutions with R&D tasks and five federal state institutions with R&D tasks. All in all, there are around 70 research institutions based in the city.

7.4.2

Universities: Attractive for German and Foreign Students

Berlin is home to four state universities plus the Charité—Universitätsmedizin Berlin, three state universities of arts, four state and two theological universities of applied sciences, and 29 private universities. In addition, the immediate vicinity of Berlin boasts another 10 universities. In the winter semester 2019–2020, Berlin’s universities alone had around 194,000 students, 126,000 of whom were enrolled at

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universities and 61,000 at universities of applied sciences.19 Of these 194,000 students, 41,300 came to the city from abroad. Berlin has by far the highest proportion of foreign students of any German state. The high proportion of foreign students is an indicator of Berlin’s attractiveness as a place to study, even beyond Germany’s borders. In 2018, 32,600 students graduated in Berlin, making its population of recent university graduates higher than any other federal state per employed person (employment subject to social insurance contributions). Berlin’s labor market has a particularly large number of academically trained people available.

7.4.3

R&D Activities: Driven by Publicly Funded Institutions

Berlin invests a lot of money in R&D; 3.4% of its GDP is invested in R&D (2017). However, a closer look at R&D expenditures also reveals a central weakness in Berlin’s innovation ecosystem: R&D expenditure mostly comes from the publicly funded higher education sector and the nonuniversity research institutions that are also publicly funded.20 The private business sector plays only a subordinate role. The combined R&D expenditure intensity of the publicly funded university sector (0.84% in 2017) and nonuniversity research institutions (1.19% in 2017) amounts to 2.03% (2017), while the R&D intensity of the business sector is only 1.37% (2017). It is also noteworthy that the business sector’s R&D expenditures declined from 2.05% to 1.37% between 2001 and 2017. This development clearly differs from the overall German trend. Nationwide, business sector R&D expenditures rose from 1.67% to 2.10% between 2001 and 2017.21 The pronounced strength of publicly funded research and the comparatively weakness of privately funded research also apply to R&D personnel intensity. The R&D personnel intensity of Berlin’s university sector and nonuniversity research institutions is very high at 52 and 62 full-time equivalents per 10,000 labor force, respectively, and is only surpassed by the federal state of Bremen. With an R&D personnel intensity of 69 full-time equivalents, Berlin’s business sector achieves only a mediocre ranking in comparison with the other federal states. It lags well behind the economically strong states like Bavaria and Baden-Württemberg, which have R&D personnel intensities of 132 and 219 full-time equivalents, respectively.

19

Students at Berlin’s art colleges: 5700, at the administration colleges: 900. The number of students at all Brandenburg universities was 49,500 in the winter semester 2019/20 according to Federal Statistical Office. 20 Nonuniversity research institutions include the four major scientific organisations (FraunhoferGesellschaft zur Förderung der angewandten Forschung, Hermann von Helmholtz-Gemeinschaft Deutscher Forschungszentren, Wissenschaftsgemeinschaft Gottfried Wilhelm Leibniz, Max Planck Gesellschaft zur Förderung der Wissenschaften), the Max Weber Stiftung and other institutions. 21 Gehrke B et al. (2020) Forschung und Entwicklung in Staat und Wirtschaft – Deutschland im internationalen Vergleich. Studien zum deutschen Innovationssystem. Nr. 2–2020. Berlin: EFI. p. 137.

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Output Indicators

Publications: Strong Performance Given the density of nonuniversity research institutions and universities mentioned above, it is hardly surprising that Berlin produces many scientific publications. In relation to its population of 3.6 million, Berlin produces significantly more scientific publications than any other federal state. In 2019, Berlin produced 9725 publications per million inhabitants. The federal state of Saxony follows with 5111 publications, then Hamburg with 4218 publications and Bremen with 3960 publications per million inhabitants. The federal states of Bavaria, Baden-Württemberg, and North Rhine-Westphalia—the industrial heartlands of Germany—produce 2743, 2472 and 1820 scientific publications per million inhabitants, respectively.22 Above-average performance in the city-states of Berlin, Hamburg, and Bremen is understandable because ratio of research institutions to the population is much higher in these urban places than in the other federal states.23 In absolute numbers, the state of Bavaria with 35,900 publications is ahead of Berlin with 35,000 publications (2019). The federal states of North Rhine-Westphalia Baden and Baden-Württemberg follow with 32,800 and 27,500 publications, respectively.24 Patents: Weak Performance Berlin’s patent intensity in Fig. 7.1, calculated as the number of patent filings divided by the number of employees (in millions), is rather low. Baden-Württemberg and Bavaria are the best in Germany by this indicator.25 This is not surprising given that large parts of German industry—including multinational companies—are concentrated in the southern part of the country. Berlin, as a largely deindustrialized federal state without a pronounced SME sector or large multinational companies, has only a moderate patent intensity compared to other federal states. The city’s numerous research institutions and universities cannot compensate for the lack of an industrial base. Despite the missing industry connection, Berlin’s major universities are very active at patenting. Compared to other German universities, the Freie Universität, Humboldt Universität, Technische Universität, and Charité Universitätsmedizin Berlin are all characterized by a significantly above-average patent intensity.

22 Open Access Monitor. https://open-access-monitor.de/#/publications (last accessed on March 25, 2021). The Open Access Monitor collects data the Dimensions database and several Open Access databases. 23 Frietsch et al. (2017) Performance and Structures of the German Science System 2016, Studien zum deutschen Innovationssystem, Berlin: EFI. 24 Hamburg: 7600 publications; Bremen: 2700 publications (all figures for 2019). Open Access Monitor. https://open-access-monitor.de/#/publications (last accessed on March 25, 2021). 25 Neuhäusler P et al. (2021) Patent Applications – Structures, Trends and Recent Developments 2020. Studien zum deutschen Innovationssystem. Berlin: EFI.

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Patent intensities of the German Federal States 2007 and 2017 (per 1 million employees) 2000 1500 1000 500 0

2007

2017

Fig. 7.1 Patent Intensity of the German Federal States 2007 and 2017 (per one million employees). Source: EPO-PATSTAT; Statistisches Bundesamt (Federal Statistical Office) calculations by Fraunhofer ISI in Neuhäusler P et al. (2021) Patent Applications—Structures, Trends and Recent Developments 2020. Studien zum deutschen Innovationssystem. Berlin: EFI

Newly Found Businesses: High Level of Activities in All Sectors A special feature of the Berlin innovation ecosystem is its many new businesses. Berlin is at the top of all federal states for its number of new businesses,26 ahead of Hamburg and Bremen (Fig. 7.2). In this context, we must consider that—unlike the territorial federal states—city-states like Berlin, Hamburg, and Bremen do not include any rural areas and thus have structural advantages with regard to new business rates.27 Restricting the comparison to the highly agglomerated urban regions of the territorial federal states, for example, Munich, the Rhine-Main area, Rhine-Ruhr, or Stuttgart, would significantly reduce the gap between Berlin and other German regions. A look at the time series (2007–2008; 2012–2013; 2017–2018) shows that new business rates in Berlin are not only exceptionally high now, but have been for some time. In the previous decade, they were already significantly higher than in the other 26

Rate of new businesses: number of new businesses as Percentage of the total number of businesses. 27 The differences between the federal states with regard to the startup rates can be attributed to a considerable extent to the sectoral composition of new businesses. In Berlin and the city-states of Hamburg and Bremen, a relatively high proportion of startups is in the service sector, which is typical of highly densely populated areas (agglomerations). Bersch J et al. (2021) Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen Vergleich. Studien zum deutschen Innovationssystem. Berlin: EFI.

116 Fig. 7.2 New Business rates in the German Federal States 2007–2018 (as percentages). Number of new businesses in the period 2017–2018 as a percentage of all companies. Source: Mannheim Enterprise Panel, Calculations by ZEW (ZEW—Leibniz Centre for European Economic Research) in Bersch J et al. (2021) Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen Vergleich. Studien zum deutschen Innovationssystem. Berlin: EFI

H. Dauchert and L. Garzik

New business rates in the German Federal States, 2007-2018, knowledge-intensive sectors (as percentages) Berlin Hamburg Bremen Bavaria Saarland Baden-Württemberg Hesse Schleswig Holstein North Rhine-Westphalia Lower Saxony Brandenburg Rhineland-Palatinate Saxony Mecklenburg-West Pomerania Saxony-Anhalt Thuringia % 2017/2018

0

2

4

2012/2013

6

8

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New business rates in the German Federal States, 2007-2018, all sectors (as percentages) Berlin Hamburg Bremen Saarland North Rhine-Westphalia Hesse Bavaria Baden-Württemberg Lower Saxony Schleswig Holstein Rhineland-Palatinate Brandenburg Saxony-Anhalt Mecklenburg-West Pomerania Saxony Thuringia % 2017/2018

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federal states (Fig. 7.2). Since 2007, Berlin has further consolidated its attractiveness as a location for young companies in comparison to the other federal states. We should note that the gap between Berlin’s new business rate and those of the other federal states has grown over the years. This is because new business rates, i.e., the number of new businesses as a percentage of all companies, in all federal states fell significantly between 2007–2008 and 2017–2018, especially in knowledgeintensive sectors. However, the decline in founding activities was higher in other federal states, so the gap between Berlin and the rest of Germany has continued to widen over time.28 If the new business rates are differentiated and evaluated according to all industries or limited to startups in the field of knowledge-intensive services and high-tech, Berlin is at the top for both sectors (Fig. 7.3). Berlin’s founding dynamics radiate beyond the borders of the federal state to the city’s suburban periphery. This explains why the federal state of Brandenburg— although sparsely populated and structurally weak—has the highest rate of new businesses of all eastern German states. Another structural feature of Berlin’s founding activity is the high proportion of new businesses in the manufacturing sector compared to the number of people employed there. A comparison of the economically most important agglomeration areas in Germany shows that Berlin is the leader by far with 230 new businesses per 100,000 employees in the manufacturing sector (average for the years 2012–2016). Munich, as the agglomeration with the second highest rate of new businesses in the manufacturing sector, has only 105 startups. The Rhine-Main area is third with only 77 new businesses per 10,000 employees.29

7.6

Startups: The Strong Pillar of the Berlin Innovation Ecosystem

Startups are a special subgroup of newly founded businesses. They are characterized as young companies with innovative business ideas and high growth potential.30 Startups are not only providers of innovative products, processes, and business models, but also provide impetus and cooperation partners for innovation in

28

Bersch J et al. (2021) Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen Vergleich. Studien zum deutschen Innovationssystem. Berlin: EFI. 29 Gornig M and Werwatz A (2019) Anzeichen für eine Reurbanisierung der Industrie, DIW Wochenbericht Nr. 47/2018, Berlin. p. 1008f. 30 Kollmann T et al. (2019) Deutscher Start-up Monitor 2019. Hrsg.: Bundesverband Deutsche Startups e.V. und PWC Deutschland.

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New Business rates in the German Federal States 2017–2019 (as percentages) 7 6 5 4 3 2 1 0

high technology

knowledge-intensive services

all sectors

Fig. 7.3 Rate of New Businesses in the Federal States 2017–2019. New businesses as a percentage of the total number of companies. Source: Mannheim Enterprise Panel, Calculations by ZEW (ZEW—Leibniz Centre for European Economic Research) in Bersch J et al. (2021) Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen Vergleich. Studien zum deutschen Innovationssystem. Berlin: EFI

established companies.31 Therefore, they are of particular importance for any innovation ecosystem. Startups pursue new business models and use innovation to expand and modernize their ranges of products and services. In terms of their specific skills and their incentives, they are often better able than established companies to take up disruptive ideas and convert them into marketable solutions. Startups are also trend scouts and sources of inspiration for established companies, which are constantly challenged by competition with startups. As cooperation partners with established companies, startups contribute to the joint development and marketing of innovations. Startups from the science sector (universities and nonuniversity research institutions) also play an important role in the transfer of knowledge and technology into practice.

31 EFI – Expertenkommission Forschung und Innovation (2019) Gutachten zu Forschung, Innovation und technologischer Leistungsfähigkeit Deutschlands 2019. Berlin: EFI.

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In recent years, Berlin has become the German capital for startups—a phenomenon that has attracted attention beyond the country’s borders. In 2019, 63% of the top 100 funded startups in Germany were located in Berlin, 195 in Munich, and 7% in Hamburg. Every other city together accounted for only 11% of the top 100 funded startups. Moreover, Berlin consistently ranks among the top three European tech hubs. For this reason, the analysis of the startup ecosystem in Berlin is not only based on the other major startup locations in Germany, but primarily on other highperforming locations in Europe. State subsidies for startups from academic institutions as well as venture capital investments are important indicators that the Berlin innovation ecosystem produces more innovative startups with sophisticated technical and knowledge-intensive business models than other innovation ecosystems in Germany. Moreover, it indicates that the Berlin innovation ecosystem is comparatively successful in transferring knowledge and technology from universities to the market. A closer look to the funding data of the EXIST program, which supports innovative technology-oriented and knowledge-intensive startups originating from academic institutions,32 reveals that 325 Berlin-based startups are supported by EXIST Business Start-ups Grants and 39 receive support from EXIST Transfer of Research program. In comparison, Munich, the second ranked startup hot spot in Germany, hosts 160 startups supported by EXIST Business Start-ups Grants and 19 startups benefiting from the EXIST Transfer of Research program.33 The impression of Berlin as the leading German startup hub is supported by data from the High-Tech Gründerfonds (HTGF) an early stage fund set up as a public– private partnership. The HTGF is one of the most important funding instruments for technology-oriented startups.34 The importance of the HTGF, founded in 2005, is also evident from the fact that foreign investors often base their investment decisions on the HTGF portfolio. A closer look to the active portfolio of the HTGF shows that 52 startups from Berlin receive funding. Munich follows with 29 funded startups.35 Berlin’s advantage over other German ecosystems is not limited to technologyoriented startups and startups from the scientific community. Berlin also boasts high startup dynamism among e-commerce and low-tech companies. Several studies commissioned by the Berlin state government are used below to quantify the startup ecosystem in the city. According to recent studies, approximately 3300 Berlin-based startups have been founded in the past 20 years (1999–2019). Most of these companies, approximately 85%, are less than 10 years old. The dynamics of startups therefore clearly differ from the overall trend of declining entrepreneurship.

32

https://www.exist.de/DE/Home/inhalt.html (last accessed on March 25, 2021). Period from 2007 to 2018. 34 https://www.bmwi.de/Redaktion/DE/Artikel/Mittelstand/gruendungsfinanzierung-high-techgruenderfonds.html (last accessed on March 25, 2021). 35 Active portfolio of HTGF I, II and III as of November 2018. 33

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The more than 1200 funds and corporate investors in the city are important components of the innovation ecosystem. In addition, over 200 accelerators, incubators, and workspaces are located in the city.36 Berlin startups were particularly successful in the online consumer marketplace sector in the early years, where they attracted great public attention. Since then, Berlin’s startup industries have become highly differentiated. Today, there are successful Berlin startups in all business areas including fintech, the Internet of things and robotics, blockchain, mobility, enterprise software, service, and artificial intelligence. Employment Effects: Startups as Job Engines Startups have developed into one of the city’s most important job engines over the past 15 years. In 2019, 78,000 people were employed in startups and almost 20,000 of those jobs had been created in the last 2 years (2017–2019).37 If we include the jobs created by startups founded from 1999 to 2005—technically no longer startups due to their age—the number rises to 84,000. In 2020, about half of all Berlin startups were small companies with a maximum of 10 employees. Around 90% of all startups have fewer than 50 employees. Due to their size, however, they generate considerable employment effects. The number of large startups that have made the leap to becoming large companies with more than 500 employees is limited. Only nine companies, mainly e-commerce companies, belong to this group. Venture Capital Investments: Berlin Dominates German VC Market The Berlin innovation ecosystem and its lively startup scene attract venture capital like no other city or region in Germany. Of the total EUR 6.8 billion in venture capital invested in Germany in 2019, four billion flowed to Berlin. The city thus attracted almost 60% of all venture capital investments in Germany. After Berlin had attracted increasing amounts of venture capital for many years in a row, investments plummeted in 2020. Only EUR 2.3 billion were invested in the city. Despite this massive decline, Berlin’s innovation ecosystem remains the undisputed champion in Germany when it comes to attracting venture capital. Even if it seems obvious to attribute 2020s massive decline to the consequences of the COVID-19 pandemic, a comparison with other European cities shows that this explanation falls short. Although venture capital investments have also declined in European cities like Barcelona, Stockholm, and Copenhagen, other cities like London and Paris have continued to record increases. Venture capital investments in London grew moderately from EUR 9.7 billion to EUR 9.8 billion, and in Paris 36

Dealroom (2020) Startup jobs in Berlin. https://startup-map.berlin Calculation of the number of startups in Berlin: 3752 companies were identified from public databases. From these companies, service providers, non-tech, mature startups (founded before 2006) and workspaces were excluded. From the remaining 2.935 startups all companies lacking employment data were excluded. 1.958 startups remained. Dealroom (2020): Startup jobs in Berlin. https://startup-map.berlin 37

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from EUR 3.0 to 3.4 billion. In Munich, the most important German startup metropolis after Berlin, venture capital investments even jumped from EUR 860 million in 2019 to EUR 1.2 billion in 2020.38 It is not yet possible to explain why Berlin’s venture capital investments fell in 2020 while other European and even German cities’ did not. It is quite possible that venture capital investments in Berlin and other European cities will return to precrisis levels once the COVID-19 pandemic is over. Since it is not clear how big the pandemic’s effects are, any interpretation would be pure speculation. To avoid this, the following chapter on venture capital will only present the developments until the end of 2019. From 2015 to 2019, the amount of venture capital invested in Berlin rose from EUR 1.9 to 4 billion. Despite this dynamic development, financing startups through venture capital funding remains the exception in Berlin and other German cities.39 In general, the venture capital market in Germany is considered underdeveloped by international standards. Figure 7.4 shows that venture capital investments in Germany, at EUR 36 per capita, are only in the lower middle range of the countries compared. Despite the strong increase in investment volume, Germany is far from countries like the USA and Israel whose investments per capita reach EUR 272 and EUR 270, respectively. Great Britain and leading EU countries like Ireland and Sweden also reach a different level than Germany with investments per capita of EUR 93, 132, and 110, respectively. The impression of limited venture capital availability is confirmed by a direct comparison of Berlin with other European cities. Venture capital investments per capita in innovation ecosystems like Tel Aviv, Cambridge, Stockholm, or Paris exceed investments in Berlin, sometimes considerably. They are a sign that the venture capital market in Berlin still has plenty of room for further growth (Fig. 7.5).40 A look at the origin of the investments shows that most of the funds invested in Germany come from abroad. The dominance of foreign investors has increased significantly in recent years (Fig. 7.5). While foreign venture capital investments were only EUR 1.8 billion or 61% of total investments in 2015, they rose to EUR 5 billion or 75% of total investments in 2019. Over the same period (2015–2019), the volume of annual venture capital investment rose from EUR 3 billion to EUR 6.7 billion. As a result, foreign funds are the lifeblood of successful startups from Berlin and Germany. The trend of increasing foreign investment and decreasing domestic investment is not limited to Germany but can be demonstrated throughout Europe. However, the

38

https://startup-map.berlin/heatmaps/funding/cities (last accessed on March 25, 2021). Around 70% of startups are not venture financed. Dealroom (2020): Startup jobs in Berlin. https:// startup-map.berlin 40 Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map.berlin; Provided by Dealroom (according to communication with authors April 16, 2021). 39

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Investment per Capita by Country in € (average 2014-2018) USA Israel Ireland Sweden United Kingdom Finland Denmark Netherlands France Germany Norway Belguim Austria Spain Portugal Italy Russia Turkey

272 270 132 110 93 63 51 40 37 36 28 26 17 17 10 5 3 1

Investment per Capita by City in € (average 2014-2018) Tel Aviv Cambridge Stockholm Paris Berlin Amsterdam London Barcelona Copenhagen Lisbon Munich Vienna Madrid Brussels Bucharest Moscow Budapest Rome Prague

2,030 1,749 874 684 474 433 422 297 292 181 174 75 65 51 48 22 16 12 11

Fig. 7.4 Investment per Capita by Country and City. Source: Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map.berlin (Provided by Dealroom (according to communication with authors April 16, 2021))

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Domestic and Foreign Venture Capital Investment into Germany in €billion 6.7

4.6 5

3.3

3 2.2

Investment from outside Germany Domestic investment

3.3 2.3

1.8 1.4 1.2

0.8

1

1.3

1.7

2015

2016

2017

2018

2019

Fig. 7.5 Domestic and foreign venture capital investment into Germany (in EUR billion). Source: Dealroom (2020a) Shortage of later-stage venture capital in Germany: more acute due to Corona crisis. https://startup-map.berlin (Provided by Dealroom (according to communication with authors April 16, 2021))

share of domestic investors in venture capital in Germany is lower than in all comparable European countries. In France, for example, the share of domestic venture capital in the total capital supply in 2019 was 61%, in Germany 25%. The dominance of foreign venture capitalists in the financing of German startups is mainly driven by large later-stage financing rounds. While the share of German investors in small financing rounds of up to EUR 10 million is around 50%, their share in large financing rounds of over EUR 50 million in recent years was less than 15% (2016–2019). Recent large later-stage financing rounds were dominated by USA and Asian investors. German venture capital funds—the majority of which are based in Berlin—are primarily active in early stage financing. Approximately 80% of their capital is raised by Seed and Series A stage funds. It is difficult to judge whether the large amount of foreign venture capital is a problem for Germany and the Berlin innovation ecosystem. On the one hand, a high level of participation by foreign investors speaks to the attractiveness of the location.41 At the same time, however, the low level of domestic participation indicates that venture capital investments in startups are only conditionally attractive for German investors. One assumes that it is still comparatively unattractive for German investors to invest in the domestic venture capital market and that there is still a lack of large, institutional investors in Germany.42

41

Dealroom (2020a) Shortage of later stage venture capital in Germany: more acute due to Corona crisis. https://startup-map.berlin 42 EFI – Expertenkommission Forschung und Innovation (2019) Gutachten zu Forschung, Innovation und technologischer Leistungsfähigkeit Deutschlands 2019. Berlin: EFI.

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Berlin’s startup ecosystem is broad-based. Venture capital investments are also made in almost all sectors. If the distribution of investments in Berlin is compared to the distribution of investments in Europe, however, recent years (2017–2019) show clear focal points: 19% of capital is concentrated in the fintech sector (EU: 15%), 17% is invested in the transportation sector (Europe 6%), and 12% in the enterprise software sector (Europe: 14%). Another focus is the travel sector, which accounts for 10% of investments (Europe: 3%). The Berlin ecosystem shows a conspicuously low level of investment in the health (Berlin: 3%; Europe: 13%), biotech (Berlin: 1%; Europe: 8%), and energy (Berlin: 2%; Europe: 4%) sectors.43 Unicorns: London at the Top, Paris and Berlin Lagging Behind The Berlin Innovation Ecosystem has already produced many successful startups. As of 2019, 11 of 30 German unicorns come from Berlin. The Berlin innovation ecosystem lags far behind London (2019: 49 unicorns), but compares well with other European innovation ecosystems. However, other countries and their innovation ecosystems are catching up. A comparison of potential unicorns (startups valued over EUR 250 million but less than EUR one billion) shows that there are now more promising startups in Paris than in Berlin (Paris: 37; Berlin: 27).44 The French government has made the promotion of startups a top priority, and its measures seem to be bearing fruit. When it comes to total value created by startups (2013–2019), Berlin is in fourth place in Europe. London (EUR 129 billion), Stockholm (EUR 47 billion), and Amsterdam (EUR 36 billion) have produced more value with their startups since 2013 than Berlin (EUR 29 billion). Startups from Paris follow in fifth place, having created a value of EUR 18 billion.45

7.7

The Future of the Startup Metropolis Berlin

Berlin’s perspective as a startup metropolis is mixed. Although the ecosystem has developed dynamically in recent years and is still the undisputed champion in Germany, other innovation ecosystems show even better performance in terms of investments per capita, number of potential unicorns, and total value created. According to worldwide comparative study Global Startup Ecosystem Report, “in Europe, Berlin was once the undisputed hub in the continent after London. In the

43 Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map.berlin: 11). Provided by Dealroom (according to communication with authors April 16, 2021). 44 A total of 54 potential unicorns are counted in France and 60 in Germany. The position of Great Britain and London remains undisputed. London alone has 60 potential unicorns, Great Britain a total of 98. 45 Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map.berlin

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past few years—driven primarily by strong performance in Deep Tech—Paris and Stockholm have strengthened their positions relative to Berlin”.46 The study identifies the low number of IPOs in Berlin as a key reason for this weakness,47 thus identifying that affects startups not just in Berlin but throughout Germany. Although two new exit channels have been established in recent years, the Deutsche Börse Venture Network and the new SME stock exchange segment Scale, it remains to be seen whether these are sufficient. Until further notice, acquisitions by corporations are by far the most important exit channel for German startups. Another problem is the lack of later-stage venture capital in Germany. This shortage is caused by, among other things, the lack of financially strong institutional investors like insurance companies and pension funds. In the venture capital market, these often assume the function of anchor investors, providing important signals to domestic and foreign investors. German funds, which mostly focus on early stage financing, are not very attractive to large institutional investors from abroad due to their small size. Instead, financially strong institutional investors prefer to invest in large funds active in the USA and Asian markets. As a result, German startups above a certain size are usually bought up by other companies or migrate to the countries where financiers are located. The German federal government has been planning for years to tackle this problem by setting up the so-called future fund (Zukunftsfonds). The Federal Government is making EUR 10 billion available for this purpose. Whether the fund will attract further public and private donors and thus successfully close the gap in growth financing remains to be seen.48 Support from the German Federal Government The startup boom is the central feature of Berlin’s performance as an innovation system. However, as mentioned above, it is not due to an exceptionally favorable political–administrative framework or favorable financial conditions. Nor can the success be attributed to a decisive funding and support policy of the Berlin state government. Instead, it developed of its own accord. In this respect, the origin of Berlin’s innovation and startup ecosystem differs from ecosystems such as Silicon Valley where startup booms were based on massive government investment in ICT. Berlin also differs from Paris, which has been built up into a startup ecosystem in recent years through targeted government support measures and massive improvements in the regulatory framework. The Munich innovation ecosystem and its strong startup scene would also be inconceivable without the long-term support provided by the Bavarian government. 46

Startup Genome (2019) Global Start-up Ecosystem Report 2019. “While it is still a high-performing ecosystem, it faces a challenge we highlighted in our 2017 report: Berlin had two 2014 IPOs worth close to $14 billion total (from Zalando and Rocket Internet), but has not produced comparable successes since. As exits declined, its rank followed.” Startup Genome (2019) Global Start-up Ecosystem Report 2019. 48 Harhoff D (2020) Die Forschung kann nicht warten, Frankfurter Allgemeine Zeitung, August 3, 2020. 47

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Just recently, the Berlin innovation ecosystem and its startup scene have benefited from initiatives in federal research and innovation policy. The German federal government has not only massively expanded investments in research and innovation but also improved the framework conditions for startups and startup financing in Germany. For example, the HTGF and Exist support programs have been extensively expanded in recent years. To invigorate stock markets as a source of financing for young, growing companies and to provide a crucial exit channel for investors, the Deutsche Börse Venture Network was set up in June 2015. In March 2017, Scale—a new segment for small and medium-sized companies—opened on the Frankfurt Stock Exchange. Finally, the restrictive treatment of loss carry-forward was newly regulated in 2016/2017. These support measures from the German government were not intended to promote the Berlin ecosystem as such, but to strengthen the whole of Germany as a startup location. However, Berlin was able to profit from these measures to a particular extent. It remains to be seen whether the commitment of the German Government will continue during and after the COVID-19 pandemic. The package of measures announced by the German government in April 2019 supports startups and venture capital funds to the tune of EUR 2 billion and creates hope that these entities have not been forgotten. The first large tranche of the package is intended to support funds. The second tranche is intended to support smaller startups through the federal states’ funding institutions. Thus, the availability of funds depends to a considerable extent on the speed of implementation in federal states. The Berlin government has the chance to demonstrate its commitment to Berlin as a creative metropolis, as a startup hub, and as a place for innovative technology and science by acting swiftly and unbureaucratically.

8

Medellín Innovation System Alejandro Crespo Jaramillo, Cesar Augusto Zambrano Osorio, Susana Crespo Jaramillo, and Ludovit Garzik

Abstract

Innovation for Medellín is synonymous with competitiveness, differentiation, and economic development. Innovation can improve citizens’ quality by generating knowledge-based jobs through the support of intercompany projects, universities, entrepreneurs, investors, government, and other stakeholders. This chapter shows how the innovation ecosystem works in the city, focusing on the public policies that promote Science, Technology and innovation (STi), the actors that support and promote businesses based on STi, and the establishment of University-State Business Committees that facilitate synergies among businesspeople, university delegates, unions, and the National Government. We also describe public investments into institutions promoting innovation and entrepreneurship. Finally, we show how two plans from Medellín’s Mayoralty intend to support and promote the development of STi for the economic and social benefit of the city. Specifically, these are the Development Plan Medellín Future 2020–2023 and the Strategic Plan for Science, Technology, and Innovation of Medellín 2011–2021.

A. C. Jaramillo · C. A. Z. Osorio Universidad de Medellin, Centro de Innovación y Desarrollo Empresarial, Medellín, Colombia e-mail: [email protected]; [email protected] S. C. Jaramillo (*) Universidad Pontificia Bolivariana, Centro de Investigación para el Desarrollo y la Innovación, Medellín, Colombia e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_8

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Medellín as the Most Innovative City in the World

Who competed with New York and Tel Aviv for the title of the most innovative city in the world? Medellín. Who won the competition? Again, Medellín. In 2013, the city was recognized as the most innovative city in the world in the City of the Year contest organized by the Wall Street Journal. The contest evaluated cities’ promotion of social inclusion policies, modern public transport systems, and environmental policies. The decision depended on an online vote overseen by the Urban Land Institute, a nongovernmental organization that analyzed each shortlist to choose one candidate. In the “most innovative” category, Medellín competed with New York and Tel Aviv. The award highlighted Medellín’s impressive development trajectory, especially its reduction of CO2 emissions, its creation of cultural spaces such as the electric stairs in Commune 13, and its reduction of crime. While there were about 400 homicides per 100,000 inhabitants in the 1990s, the number fell to 50 homicides per 100,000 inhabitants in 2011. Medellín is a pioneer in Colombia, incorporating in its development plan a public policy to promote, coordinate, and articulate innovation as a development model. Volunteerism, commitment, credibility, and a culture of innovation have made its knowledge-based economy sustainable even across government changes. Medellín, capital of the Antioquia region, is the second largest city in Colombia. With an average temperature of around 24 ○ C and a location 1479 m above sea level, it is known as the city of eternal spring. Medellín has 105 km2 of urban zone and 270 km2 of rural land. The city is in the center of the Aburrá Valley in Colombia’s central mountain range and is crossed from south to north by the Medellín River. According to the 2018 census data (National Administrative Department of Statistics), Medellín had a population of 2,427,129 inhabitants, 47% men and 53% women. In economic terms, Medellín stands out as one of the main financial, industrial, commercial, and service centers in Colombia—especially in the textile, clothing, metal-mechanic, electrical and electronic, telecommunication, automotive, food and health sectors. Six out of the top ten most valuable companies on the Colombian Stock Exchange have their headquarters in Medellín. Its value on the stock exchange represents more than 28% of the country’s stock market. Among the 100 biggest companies in the country, 13 were born or have their main headquarters in Medellín. Four of those are in the top six, affirming Medellín as a center of business and economy.1

1 https://www.rutanmedellin.org/es/nosotros/ruta-n/medell%C3%ADn-hub-mundial-de-innovaci% C3%B3n

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80.00%

67.45%

60.00% 32.36%

40.00% 20.00%

0.19% 0.00% Públicos /Public

Privados / Private

Internacionales / International

Fig. 8.1 Financing of STI activities by type of resource, 2018 in Colombia. Source: Document OCYT 2018 (https://ocyt.org.co/Libro2018_Completo/INDICADORES_OCyT_2018%20Version %2023-07-19.pdf; The OCyT is the Colombian Observatory of Science and Technology that was created in 1999 as a not-for-profit organization promoted and lead by Colciencias, the national governmental agency in charge of policymaking and funding of STI activities in Colombia)

8.2

Facts and Figures of the Innovation Ecosystem in Medellín

In its last report, the national science and technology observatory2 shows indicators for the investment in Science and Technology in Colombia. These indicators identify streams of investment and show the country’s major drivers for growth and progress. The report has a chapter that discusses investments in science, technology, and innovation (STI) activities, segmented by actors’ investment percentage. The measurement of investment in STI activities is based on the data published by DANE on the growth of the gross domestic product (GDP) and the latest available results from the technological development and innovation surveys for the years 2016, 2017 and 2018.

8.2.1

Investment in Science, Technology and Innovation (STI) Activities

In 2018, a total of USD2 billion were invested in STI activities (Fig. 8.1).

8.2.2

Investment in Research and Development Activities (R&D)

The goal for 2021 in Medellín is to invest 3% of its GDP in innovation, science, and technology. This is a consequence of public–private bets to stimulate investment and 2

Annual Report on Science and Technology Indicators 2018 https://www.ocyt.org.co/proyectos-yproductos/informe-anual-de-indicadores-de-ciencia-y-tecnologia-2018

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Financing of R&D by type of resource, 2018 in Colombia 72.23%

80.00%

Públicos /Public 60.00% 40.00%

Privados / Private 27.25%

20.00% 0.53%

Internacionales / International

0.00% Fig. 8.2 Financing of R&D by type of resource, 2018 in Colombia. Source: Document OCYT 2018 (https://ocyt.org.co/Libro2018_Completo/INDICADORES_OCyT_2018%20Version% 2023-07-19pdf)

programs like the Great Pact for Innovation where nearly 4800 organizations, as a symbolic act, declare that they commit to invest. The signatories of the Great Pact for Innovation constitute the greatest demonstration to date in Colombia of a territory moving cohesively toward a knowledge economy. R&D Indicators 2018: – Investment in Medellín in R&D = 2.14% of gross domestic product (GDP) compared to the USA, where 2.7% of GDP invests in R&D.3 – Investment in other Colombian cities in R&D = 0.68% of GDP. The main cities in Colombia are Bogotá, Cali, Barranquilla, Cartagena, and Bucaramanga. In 2018, USD782 million were invested in R&D, as shown in Fig. 8.2. More than 70% of R&D is financed by companies, with the rest coming from national public budgets. There is hardly any investment in R&D from international sources, which can be interpreted as an opportunity to attract more foreign direct investment in the future. The quality of education and skills is rising in Colombia, driving human capital growth. The Ministry for Science, Technology, and Innovation (Minciencias) is designing calls that promote doctoral studies. This will help move the degree attainment distribution by level of education as shown in Fig. 8.3. Education and training in Colombia are categorized as follows: high school graduate, technical (2-year training programs in operational and instrumental occupations), technological (3-year programs training professionals in occupations aligned with technological advances, emphasis on practice), professional (4–5-year professional university programs), master (2-year postgraduate degree focused on enhancing management skills and deepening and updating field-specific skills to

3

http://uis.unesco.org/apps/visualisations/research-and-development-spending/

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Fig. 8.3 Education levels in Colombia (Data 2017). Source: Document OCYT 2018 (https://ocyt. org.co/Libro2018_Completo/INDICADORES_OCyT_2018%20Version%2023-07-19pdf)

stimulate growth in the productive sector), and PhD (3–5-year program training researchers and generating new knowledge).

8.3

Institutional Actors in the Medellín Innovation System

One fundamental actor is crucial for the development of STI in Colombia: Minciencias–the Ministry of Science, Technology, and Innovation. Minciencias manages public administration as the principal actor in the sector. As head of the National Science, Technology, and Innovation System (NSTIS), Minciencias is in charge of formulating, guiding, directing, coordinating, executing, implementing, and controlling state policy in the matters of STI. It does this in accordance with development plans and programs. This new Ministry was created in 2019, replacing the old institution called Colciencias. In the Antioquia region as well as the city of Medellín, the STI issue has been the subject of intensive work for many years. The goal is to improve the region’s competitiveness and productivity, achieving a transformation from a traditional economy to one based on knowledge. One key action has been the establishment of University-State-Business Committees (CUEE) in 2003. These are spaces that facilitate synergies among businesspeople, university delegates, unions, and the national government. The goal is to formulate department-level work R&D&I agendas and plans to improve the productivity and competitiveness of the strategic productive sectors. The Agenda for Innovation and Technological Development for Medellín and Antioquia (2004) and the Tecnnova Corporation (2007, began 2005) were both developed in CUEEs. Both aim to facilitate, incentivize, promote, and realize opportunities in applied research, innovation, and technological development projects. These should generate social capital across companies, universities, and the state to drive development, competitiveness, and improved living conditions throughout the country. Tecnnova was born as an initiative of the CUEE. In addition to the productive sector, it aims to improve the productivity and competitiveness of the G8, a group

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Table 8.1 Group of universities that make up the research G8 Universities G8 University of Medellín EAFIT University of Antioquia National University of Colombia University CES University EIA Bolivarian Pontifical University University Corporation Lasallista

Students 2020 10,352

Scopus products 2020a 977

Professors 2020 468

Investigation groups 30

Granted patents 2020 19

Type Private

14,909 37,052

2010 14,178

606 1763

44 269

51 46

Private Public

53,367

26,655

3005

611

25

Public

1316

448

35

10

Private

322

175

8

10

Private

2908

1215

56

14

Private

637

535

42

2

Private

5632 Does not apply 8554

11,345

a

Scopus is an expertly curated abstract and citation database. Is one of the largest and most important indexes the world, cataloguing the results of research in the fields of science, technology, medicine, social sciences, and the arts and humanities

made up of eight universities in the region (National University of Colombia, headquarters Medellín, Bolivarian Pontifical University, EAFIT, University Corporation Lasallista, University of Medellín, University of Antioquia, CES, and University EIA). The G8 is a nonprofit institution founded to support applied research, technological development, and innovation in Colombia. It is aiming for quality education that encourages harmonious and sustainable development for people and the country. It also intends to close Colombia’s gaps and inequities. The universities are recognized by Minciencias, their research and scientific production groups are part of national calls, and they have obtained outstanding results. Contributions of their research groups raise the scientific level of the country, as shown in Table 8.1. The Universities that make up the G8 and the Instituto Tecnológico Metropolitano (ITM) created the regional R&D agenda. This prioritizes research topics of global interest with local viability to promote the territorial development of Antioquia. Topics include nature and resources, competitive organizations and territories, health, social welfare, and culture. The most important actor in Medellín is the Ruta N Corporation, which was created in 2009. The Corporation develops programs and channels the resources of the Municipality for STA with the aim of developing knowledge-based businesses in Medellín and in the region.

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Other key actors are the Antioquia Science and Technology Center (CTA), established in 1989 to strengthen the development of science and technology. In 2011, the CTA built a map of the regional innovation system, identifying the role of actors in the system. Among the main projects carried out by this entity is the Antójate de Antioquia Award. Finally, the CREAME Incubator and accelerator provide services that maximize business value. It was created in 1996 by 29 academic, governmental, and business institutions. It has national recognition and operates programs in 80 municipalities in 19 departments of Colombia.

8.3.1

Main Institutions of the Financial System

There are a number of institutions promoting innovation and entrepreneurship through financial support. These banks and other entities are as follows: Culture E is a program promoted and financed by the Medellín’s Mayoralty that seeks to create and improve the culture of entrepreneurship and the economy of the city by creating innovative companies. It has different programs such as the opportunity bank, the entrepreneurship fund, training programs, business integration projects, seedbeds, and microcredit networks. Fondo emprender SENA is a seed capital fund created by the national government. It is operated by the National Learning Service (SENA) and grants forgivable credits. The main objective of the fund is to finance initiatives created by students or associations between students, university practitioners, and/or professionals. Resources are allocated through calls, some of them open throughout the year and others established by seasons or by specific economic sectors. In 2018, the Fondo emprender allocated more than USD90 billion for seed capital. This fund has benefited 48% women and 52% men. Its ventures have been distributed 22% in service companies, 23% in industrial companies, and 41% in commercial companies. As of 2019, there have been 5006 business plans developed, 28,471 companies created, and 12,780 jobs generated since the program was created.4 Tecnoparques SENA is a national technological innovation program focused on the development of projects that develop functional prototypes in four technological areas: (1) electronics and telecommunications, (2) virtual technologies, (3) engineering and design, and (4) biotechnology and nanotechnology. The services they offer include consulting for R&D&I projects, technology transfer, generation and social appropriation of knowledge, and access to physical and technological infrastructure like specialized laboratories. Antioquia Science and Technology Center (CTA) is a corporation that articulates three actors: universities, companies, and the state. Its purpose is to promote, articulate, transfer, and generate scientific and technological knowledge. It should contribute to improving the organizational performance of innovative companies. The CTA helps in the creation and construction of agendas and guidelines for public

4

http://www.fondoemprender.com/SitePages/FondoEmprenderFE.aspx

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policies. It also designs and creates projects focused on science, technology, and innovation.5 Parquesoft is a cluster of digital art, science, and information technologies made up of more than 200 companies from various cities in the country that share innovation, knowledge, and experience in computer technologies.6 Apps.co is an initiative of the Colombian Ministry of Information and Communication Technologies (ICT). Its purpose is to promote and empower businesses based on the use of ICT. It offers support for ideas, mentoring, and calls to promote the best ventures. “Since its creation in 2012, Apps.co has accompanied 2175 teams and companies and benefited more than 137,000 people through the entire offer.” Innpulsa is an institution of the National Government designated to support and promote business initiatives that can grow quickly, profitably, and sustainably. It focuses on detecting and overcoming the obstacles that may impede the growth of companies. It also works on the mental barriers that can slow down the creative process and encourages the development of companies in all regions. The CREAME Incubator is a business incubator created by academics, business, and government institutions. It offers entrepreneurship programs, accompanies the acceleration of high-potential ventures, and advocates for the incorporation of companies in global financial and commercial markets. CREAME operates in 80 municipalities in 19 departments of Colombia. Its main areas of action are acceleration and entrepreneurship, climbing and innovation, capital and operations and innovative culture. Endeavor is a global network that supports and connects entrepreneurs to ensure that their projects have a maximum level of impact. It offers entrepreneurs a network of mentors and partners, also putting on education and networking events. Endeavor also supports entrepreneurs in the creation of high-impact companies that promote economic growth and the creation of quality jobs.7 Ventures Corporation is an extensive network of allies that promote the creation and development of business projects in Colombia. Its mission is to attract capital and link the public, social, and private sectors to strengthen the business ecosystem. It has acceleration, financing, training programs, and the ventures contest that rewards the most innovative and sustainable projects. It gives support in the following four areas: 1. Entrepreneurs: financial enlistment; soft landing; strategy and corporate governance; sales; intellectual property and trademark registration; preparation for export; marketing. 2. Corporate: innovation strategy; connection with entrepreneurs; acceleration of projects; newco spin-off.

5

https://cta.org.co/ https://parquesoft.com/ 7 endeavor.org.co 6

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3. Investors: acceleration of portfolio; pipeline generation; how to invest. 4. Second-floor acceleration: custom acceleration; training in courses.8 Odiseo is a Colombian early stage fund targeting high growth, passionate, and committed entrepreneurs leading scalable, innovative, and impactful businesses. The fund provides acceleration, co-investment alternatives, and a formal scaling up process to support companies in their expansion strategies. Odiseo is a USD20 million fund that invests in across industries including biotech, clean energy, applied engineering, IT, and FinTech. Companies in these industries have capital requirements of USD250,000 on average in their first round and USD1 million in subsequent rounds.9 The fund has the backing of investors like Ruta N, which is the Medellín Business and Innovation Center. The fund articulates and energizes the innovation ecosystem of Medellín, emphasizing four key ingredients: talent training, access to capital, generation of the necessary infrastructure, and the development of innovative businesses. FCP Innovation is an investment fund worth USD40 million. It focuses on companies and projects that apply high levels of STI to the public services sector. It is part of the EPM Ventures Program, exemplifying the general strategy of investment in ventures associated with public services.10 VeroNorte manages corporate venture capital strategy in Colombia for Grupo Sura (finance industry association) and Grupo Argos (construction industry association). It invests in companies in the insurance, health, and financial services sectors on the one hand and in the energy, infrastructure, and construction sectors on the other hand.11

8.4

SWOT Analysis Medellín

Resources Bank loans

Strengths The banking system is well developed, with many actors. Medellín is the headquarters of the country’s main bank (Bancolombia),

Weaknesses Startup loans are few and not yet affordable. Interest rates are high, banks prefer to grant private loans over corporate loans, it is difficult to

Opportunities Strengthening lines of credit would help finance new processes, mainly early stage ventures. The support of angel investors from

Threats The innovation ecosystem needs greater support from financial entities. Innovation depends on resources for new ventures. Without sufficient resources,

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http://ventures.com.co/ https://capria.vc/network/odiseo/ 10 http://www.fcp-innovacion.com/ 11 http://www.veronorte.com/en/ 9

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Strengths

Weaknesses

Opportunities

Threats

which has also made a commitment to innovation issues in recent years.

access financial sector resources for new ventures, and there is a lack of angel investors in the country

outside the country could be very helpful

startups will begin to migrate out of the country and will not help Colombia increase its competitiveness

The entrepreneurial and creative culture is lacking. There is a very tough attitude toward possible failure and what others think, which does not stimulate leaving one’s comfort zone Coverage is lacking for the entire city. Due to the high costs, the most vulnerable populations do not have access to internet service

There is a great opportunity to work on soft skills, supported by institutions such as Ruta N. local openness and an international perspective can help generate synergies with other cultures The current infrastructure can be used the foundation for future development of the digital economy. In this sense, the current government’s development plan focuses on developing a “software valley.” The combination of high university education rates with low labor costs may promote innovation

Vertical structures and organizational rigidity do not allow incorporating new knowledge and create a fear of innovating or leaving traditional markets

The investment of banks in highrisk projects depends on evaluations that banks make for such loans There is a solid and wellarticulated ecosystem supporting a culture of innovation. Medellín is a national benchmark for its strong and innovative mentality Medellín has made investments into infrastructure. The city boasts high-speed internet in public places like parks and libraries, plus good 4G network coverage

Education and skills

Medellín has a good amount of human capital at low costs

There is not much standardization of second language skills and subjects

Institutions

Various entities exist to promote innovation. For

There is a lack of articulated work between

Public and private institutions

There is a lack of trained personnel to meet existing job demands and a lack of training in second languages. Growth and internationalization will make these issues more acute

Permanent training to international standards, offered by different public and private organizations through calls and contests can raise the level of education and skills Public agendas lack continuity and

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Strengths

Weaknesses

Opportunities

Threats

example, Ruta N, CTA, and CREAME all support research, innovation and entrepreneurship

universities, companies, the state, and society to further stimulate innovation. A lack of financing and support entities undermines entrepreneurship It is difficult to transfer technology to companies, so there are many knowledge assets and technological developments that are not commercialized

contribute their resources to innovationpromoting spaces

change with each administration

Redirect efforts to international markets to commercialize knowledge and technological developments. Strengthen the synergies between universities, companies, and government Medellín is open to receive technology-based companies that help improve its legal development

Competition from more developed countries with more researchers and higher levels of technology

Intangible infrastructure

Scientific knowledge abounds in Medellín, with more than 180 research groups working on innovation issuesa

Legal advisers

There are plenty of advisers; Medellín is a city that has many lawyers

Not all attorneys specialize in intellectual property issues

Market and demand

In Colombia, most products are for export. Those are recognized and consumed around the world

Migration

Many of the people who enter Colombia are from Venezuela, Brazil, Argentina,

Competition with other regions and with the capital of Bogotá. Internationally, Colombia has low purchasing power due to its high unemployment rate, low education levels, and increased migration from Venezuela Other countries offer better working conditions

Expansion of technology companies and high demand for production abroad create a market for exported products and services, and Medellín can meet high-quality standards

Minciencias is developing strategies to retain PhDs financed by Colombia. It is

Public policies and tax payments are in some cases not attractive to foreign investment. On average, taxes are higher than other developed countries like the USA There are many competing companies, and domestic consumption is focused on basic necessities

Leakage of talented scientists with doctorates to other developed countries, mainly

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Resources

Policy and strategy

Strengths Ecuador, and Mexico. These migrants can get jobs that strengthen organizations with their experience in innovation topics Medellín has an STI plan for 2011–2021

Weaknesses

There is a low level of national investment in STI (0.24% of GDP)

Quality of living

Generating jobs through highperformance productive activities has a great impact for society

There is a lack of training for human capital in areas associated with the digital economy and the fourth industrial revolution

Regulation

A strategy of tax benefits in STI promotes competitiveness in companies and the development of high-impact research

As the tax level is quite high, the impact of tax benefits is reduced

Research infrastructure

Existence of the research G8, CUEE, and other actors creates a solid foundation for the research ecosystem

The alignment of applied ICT research with technologybased ventures is not clear, only 3.05% of researchers work with companies and only 1.28% are dedicated to the development of new

Opportunities

Threats

also making scientific scholarships available so that everyone can access doctoral and master studies

the USA and Europe

Supportive policies could encourage and promote research and technological development to identify and explore new businesses The existence of the CUEE promotes conditions that enable economic growth via social projects that improve quality of life Raising awareness in political bodies and strategic entities can establish legal and regulatory frameworks, improve technical and regulatory capacity, and renew institutions The STI and entrepreneurship system is still in its early activation stage. To move to the consolidation stage, the system requires improved articulation among actors

It is unclear whether the STI plan’s goals will be reached, or if there is a further plan after 2021

Inequality and increasing unemployment both pose threats

Other countries could adapt their regulations and tax systems faster, which would increase the gap in competitiveness

Financing and investment for development and innovation need to be strengthened

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Medellín Innovation System

Resources

Strengths

Risk capital

There are venture capital funds for startup financing in the city. The startup ecosystem is growing

Social infrastructure: Community

Medellín is undergoing urban transformation through the construction of large urban infrastructure works, equipment, and sustainable mobility (electric public transport, improvement of parks, streets, spaces for cyclists, etc.)

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Weaknesses knowledge or technological and industrial development The quality of tutoring startups is low. Startup loans are few and not yet affordable. Interest rates are high, banks prefer to grant private loans over corporate loans, and it is difficult to access financial sector resources for new ventures There have been delays in the development timelines of infrastructure projects in the city

Opportunities

Threats

Foreign investment in R&D and risk capital is low compared to other global innovation regions. This is a big opportunity for future development

The innovation ecosystem needs greater support from financial entities. Innovation requires resources to support new ventures. Without sufficient resources, startups will begin migrating outside the country and will not help improve competitiveness

Investment in urban infrastructure works (environmental urban planning and sustainable mobility) can generate jobs

Continued development can create a sense of ownership among citizens, encouraging them to use and care for new citizen infrastructure projects

a

GrupLAC Minciencias, grupos con nombre innovación https://scienti.minciencias.gov.co/cienciawar/busquedaAvanzadaGruposdo?buscar=buscar

8.5

Strategy and Implementation in Medellín’s Innovation System

Currently, the city of Medellín has two plans focused on supporting and promoting the development of STI for the economic and social benefit of the city. They are the Strategic Plan for Science, Technology, and Innovation of Medellín 2011–2021 and the Development Plan Medellín Future 2020–2023.

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The Strategic Plan for Science, Technology, and Innovation of Medellín 2011–202112 aims to “promote and coordinate policies to support research and scientific, technological and innovation development in Medellín, with a view to identifying and exploitation of new knowledge businesses.” It prioritizes three productive sectors: energy, health and information, and ICT. The plan aims to achieve synergy between universities and companies, promoting STI projects across the academic and productive and social sectors. These should generate vanguard technologies, goods, and services that add value to the city’s economy. These projects should also promote the creation and development of technology-based companies to produce goods and services, especially in prioritized sectors. Specifically, the plan seeks to “incentivize basic and applied research, define indicators to quantify the level of activity in the field of science, technology, and innovation, and disseminate the achievements made to the public” through programs and activities that involve technology transfer, the formation of human capital, and the strengthening of the relationship between the academy and the productive sector. Successful execution of the strategic plan relies on policies that favor a modern eco-industrial environment and a strategic framework that guarantees the achievement of the proposed objectives through the institutionalization and governance of the Regional System of Innovation (RSI). The execution strategy of the Strategic Plan for Science, Technology and Innovation will be the responsibility of Ruta N, which is “the innovation and business center of the Medellín’s Mayoralty, which powers new knowledge-based businesses, through the promotion, development, and strengthening the ecosystem of science, technology, and innovation.”13 The purpose of the Medellín Future 2020–202314 Development Plan from Medellín’s Mayoralty is to “contribute to closing gaps and social and economic inequality, through informed and rational decision making and generation of capacities and opportunities for all citizens,” where inclusive industrialization and innovation will lay the foundations for Medellín’s future. The plan states that “the entire science and technology ecosystem will be strengthened with strategies that unleash the potential for innovation and entrepreneurship to be put at the service of increasing productivity and solving the city’s great challenges, especially in social and environmental matter.” To achieve its goals, the plan includes a strategic line for economic reactivation and the creation of a Software Valley. It aims to transform the city “through the management of technological and scientific knowledge, applied to social, cultural, and environmental fields, economic, and political.” The plan prioritizes clear and

12

Taken from the website of Ruta N. Plan for Science, Technology and Innovation, consulted on July 2020. 13 https://www.rutanmedellin.org/es/nosotros/ruta-n/sobre-nosotros 14 19 Taken from the website of the Medellín’s Mayoralty. “Medellín Futuro 2020–2023” Development Plan, consulted on July 2020.

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precise data and information for decision making and promoting better conditions in human talent and employment. The development plan and its objective of turning Medellín into a Software Valley is a project of “transformation of human life, by generating capacities, solutions, and opportunities that are efficient, effective, and consistent with economic, social, cultural, and political needs of the entire population; supported by technological innovation and social innovation.” This strategic line aims to strengthen Medellín as the industrial capital of Colombia. As Medellín undergoes the fourth industrial revolution and transitions to a digital economy, it is a national science and technology hub. Institutions like Ruta N, universities, new companies, and the scientific and technological communities throughout the territory will be the engine of the new economy. This will be achieved by connecting science, technology, innovation, and entrepreneurship through the CUEE. New opportunities can help generate new opportunities for the diversification and modernization of the city’s economy and can turn information into an asset. Medellín’s Mayoralty will be leading the way as it executes the plan.

8.6

Lessons Learned from Medellín’s Innovation System

Medellín is an innovation hub for Latin America because it has sought technological answers to the needs of its population. The city decided to stop supporting its economic development exclusively in traditional industries and began to promote a knowledge economy that gives more value to ideas and therefore promotes the change to a high-quality workforce. The main contributing factors to the success of this regional innovation ecosystem are as follows: – Government policies that support research, development, and innovation projects. – Companies that finance entrepreneurship and innovation initiatives. – Human capital trained in technological skills. – Creation of channels for financing innovation projects in companies. – Careers or courses at universities focusing on innovation issues to promote and improve student capacity. – Increased investment in digital infrastructure (hardware and software). – Universities that promote research and innovation through projects that impact society and the articulation across universities, companies, the state, and society. Medellín’s innovation ecosystem has continued improving thanks to the leadership of Ruta N. The city’s innovative culture is reflected in the Great Pact for Innovation that involves more than 4000 companies and in the existence of the CUEE. Other key actors facilitate, incentivize, and promote STI in the city, enabling further regional growth by increasing productivity and solving the city’s challenges, especially in social and environmental matters. Recent governments have consistently increased net monetary investments in health, nutrition, education, and innovation programs in Medellín. As a result,

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companies in the region benefit from innovation processes while enjoying the support of several key actors in the city. Jobs focused on STI have been created and are expected to develop human capital, especially skills related to the technologies of the fourth industrial revolution. It is important to highlight that investments in STI activities have increased as a proportion of municipal GDP. Thanks to the high-level educational and research offered by higher education institutions, the framework of technological and social innovation, and the articulation of actors of the system, Medellín enjoys good conditions for industrial development, cluster creation, service sales, access to new markets, and more. Investments in education in Medellín have increased by 0.8% every year from 2013 to 2018. This has led to 83% education coverage for the population. When the population is more educated, mechanisms can be created to help entrepreneurship and innovation. These, in turn, generate larger development projects that lead to technologies that can be protected and give competitive advantages to organizations.

9

Moscow Innovation System Dmitry Vasilev and Ludovit Garzik

Abstract

Russia, and the Moscow region specifically, are very promising sources for innovative solutions and companies. Moscow has shown stable growth even during the financial crisis at an average pace of 10% per year. The region doubled its GDP in 10 years and managed to attract an impressive concentration of research institutes, universities, researchers, solid infrastructure, and a variety of other resources. The region has many highly educated citizens and boasts strong roots and tradition in science, making it very promising for high-tech industries. There are obviously local weaknesses, which are discussed in the chapter, but these weaknesses create the potential for innovative transformation in the future. The Russian Federation in general and Moscow specifically is very different from the rest of the world, and this makes it very appealing to study its approach to the innovation economy and derive new lessons.

9.1

Introduction to the Moscow Innovation System

The situation in the Russian Federation is very important for the frame in which innovation happens in the Moscow region. This discussion will focus on the region, beginning with an economic and geographical analysis of the Russian Federation and then introducing the history and development of innovative culture in Russia.

D. Vasilev (*) “Karfidov Lab” LLC, Moscow, Russian Federation e-mail: dv@karfidovlab.com L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_9

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This chapter concludes with a description of the current state of the innovative ecosystem considering these historical and cultural factors. The Russian Federation is a democratic federal legal state with a republican form of governance. Russia is the largest country in the world with a history dating back thousands of years. The country is the largest in the world, with a territory larger than 17 million km2. It has the sixth highest purchasing power parity and ninth largest population in the world. Its federal structure means that there are 85 equal subordinate entities within the Russian Federation, including 22 republics, nine areas known in Russia as “krais,” 46 provinces referred to as “oblasts,” three cities of federal importance, one autonomous region, and four autonomous districts. The Russian Federation is also divided into eight federal districts, each of which has an empowered and authorized representative of the President of the Russian Federation. The Federation’s subordinate entities each have their own administrative and territorial subdivisions. As a rule, the main administrative–territorial units, within the constituent entity of the Federation, are districts and cities of regional (republican, areal, provincial) significance. This division is quite complex: The territory can be divided by nationality, geography, or by some other or mixed issue. The complexity of Russia’s administrative and territorial subdivisions means that even Russians are not always familiar with the subordinate entities of their country. The President of the Russian Federation1 performs the duties of the Head of State, and is assisted by the Chairman of the Government. In 2020, the latter post was taken by Mikhail Vladimirovich Mishustin, who was appointed after the resignation of Dmitry Anatolyevich Medvedev in January 2020. This extraordinary event is probably an important signal for change in the country’s governance. It also might be a sign of achieving the country’s development priorities as a technologically advanced power. The Chairman of the Government of the Russian Federation takes over for the president in case of death or resignation. The president is elected for a 6-year term by secret ballot in general direct elections. The same person cannot hold a presidential post for more than two consecutive terms. It should be noted that the population density in Russia is extremely uneven, and a large part of the country called Siberia, located in the Far East, has yet to be developed. Moscow and St. Petersburg are Russia’s two central, richest cities. They are the country’s largest and most population-dense cities, and also they are most important in world trade and financial, cultural, and scientific terms. These two cities are the engines of economic growth that attract, as if by force of gravity, financial flows, and economically active populations. Local and international companies have their head offices in these cities. Moscow and St. Petersburg are Russia’s first cities for innovation, development institutions, and access to venture capital. At the same time, unfortunately, the once strong and rich rural life of the Soviet period and Tsar’s Russia is of little importance in the national economy today. There is an active process of urbanization, and villages are disappearing because of

1

In 2021: Vladimir Vladimirovich Putin.

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unemployment and a lack of prospects for the young population. This is partly due to poor territorial connectivity both on the highway system and the air transportation system. Russia has 1442 km of highways, which is 100 times less than in China and 1000 times less than the USA. Today, in Russia there are only 254 airports, which is comparable to a single USA state. It is impossible to plunge into Russia’s history without a “quantum leap” into the history of the Soviet Union. This is because the immense Russian legacy relates to what was built during the Soviet Union. It was built not only in terms of bricks, buildings, and factories, but also in terms of institutional construction, regulations, norms, rules, and traditions. The Soviet engineer generally had an excellent technical education. This education model can be considered a blueprint for many other education systems like Finland, Germany, and even parts of the USA system. Teachers of that time taught precise sciences and made schoolchildren think logically, build conclusions, and identify evidence. Moreover, teachers had an untouchable authority among schoolchildren and their parents, often participating in the upbringing of their students. Now, teachers face criticism from all sides, are pushed to their limits, and are forced to do a lot of paperwork. This pressure leaves very little time for education and upbringing. The education system in Russia has switched to the Unified State Exam, which is accepted by all universities. On the one hand, this equalizes the rights of schoolchildren living in remote places with those living in cities and almost solves the problem of corruption. On the other hand, today’s teaching is all about successfully passing of the state exam tests without any ability to think, write, or prove something. During the Soviet period, everyone without exception could get technical education for free. Studying at universities was not necessary and did not guarantee high wages. In some cases, technical college graduates could earn more than those with high-level degrees who worked at research institutes and universities. Therefore, only those who wanted to devote their life to science and an academic environment entered the university. Between the end of World War II and the end of the 1980s, there was a dramatic rise in industry and manufacturing. Invention and science were held at the same level as religion. In fact, Communist Party doctrine banned all faiths and religions. The typical Soviet engineer, doctor, or librarian believed in scientific and technological progress rather than in God. The time of high scientific and technological progress was the formative period for all of Soviet Russia’s industrial spheres. Plants and factories were built, design studios and R&D centers were created. The population of the Soviet Union was sufficient to provide plants and factories with a large market for domestic consumption. Scientific financing was readily available. Scientists and engineers were part of an intellectual society better known as the Intelligentsia. At the same time, the authoritarian regime of governing meant that tasks could be delegated to a team or particular person without the resources to achieve it, and the consequences of failure were strict. Modern management in Russia is sometimes described by phrases like

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“incredible goals achieved at a heavy cost.” This nature and approach to work comes from the Soviet era, with earlier influences from the time of the Russian Empire. While most capitalist countries had already opened their markets and joined the world economy hundreds of years ago, the Russian free and open market only dates to the late 1980s—just over 30 years. The Soviet period is characterized by its stateplanned and state-controlled economy. The government was the main buyer and distributor of all benefits created in the process of economic activity (even the word “economics” was prohibited). This may sound surprising, but the factory that manufactured irons or vacuum cleaners named “Vihr” (translates as “Vortex”) did not try to improve the devices to make them better, more technological or ergonomic, or more attractively designed. It simply was not necessary because consumers had no alternatives and would buy any model. There was no need for innovation as we understand it today. Thus, almost all scientific achievements and developments benefited only the military or heavy engineering. The vision of the Communist Party can be understood as follows: The state provides people with necessities, excessive luxury is not necessary and even harmful, and defending against potential enemies is a vital necessity. Therefore, all science should work for defense and heavy industry. It is obvious that there was no competition in this field of activity, which initially put Russian enterprises in an unfortunate position against world players. After the economic system converted a more capitalist approach, Russian plants and factories simply did not have time to rebuild their economic and management models. They did not know how to continue their activities, how to be competitive, or how to develop products to meet the needs of the market and satisfy sophisticated consumers. One more feature of the Soviet period is that the education and research functions were separated. Universities and academic teaching staff participated in the basic educational process and separate independent R&D institutes were created for research, including PhD dissertations. These R&D institutes were part of the Russian Academy of Sciences or sometimes at universities or large enterprises. Technical sciences graduates who entered the R&D institutes had the opportunity to access a good career, which could not be said about the universities. This advantage was more tangible in scientific and production associations (especially in the military–industrial areas), which made it easier to switch from “pure science” to production and vice versa. On the one hand, this large system allowed scientists from R&D institutes to focus exclusively on research without being distracted by students. On the other hand, the gap between theory and practice grew and universities began to lose contact with excellence in science. At the same time, due to the nature of the economy, many inventions developed at R&D institutes simply did not reach civilian enterprises as all were absorbed by military demands. The unclaimed residue became paper stored in a locker or in a hidden archive. For this reason, Soviet scientific achievements and a large number of Russian scientific papers were not accessible to the English-speaking public for a long time. Many of these are now used in patent wars by patent trolls within large companies.

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Several thousand R&D institutes were inherited from the Soviet Union. The following are just a few examples of typical institutes that were among the first to appear in a Web search: 1. Research Institute of Optoelectronic Instrumentation. 2. Scientific Research Institute of Nutrition at Russian Academy of Sciences. 3. Research Institute of Atomic Reactors. The conclusion of the discussion above is that despite advanced, extremely costly research, scientists’ results did not turn into innovation in the Soviet era. Ordinary citizens could not access innovative devices or products. There were no products that could be successful on a competitive global market except for heavy engineering products like nuclear reactors.

9.2

Cultural Characteristics of the Moscow Innovation System

It is important to mention that after the collapse of the Soviet Union, funding for most of the R&D institutes ceased and the institutes were not able to earn money on their own. People were either fired or they went to work in simple low-paying jobs. Some went abroad. For survival, R&D institutes began to lease space and premises, or individuals sold intellectual property. Some R&D institutes and their competencies have been lost forever. However, some were saved. Today, some of the Soviet R&D institutes have turned into successful and innovative companies. For example, the team from the former Institute for System Analysis of the Russian Academy of Sciences formed the basis of Cognitive Technologies, a Russian software corporation that develops corporate applications, AI-based advanced driver assistance systems, and more. The company operates in Russia, the CIS countries, the Baltic States, Holland, China, South Korea, Germany, France, the USA, Singapore, and Brazil.2 There are many similar examples. After 2000, the remaining institutions started receiving a moderate level of funding, although new ideas and advanced developments continued to concentrate mainly in the defense industry. In 2009, Russia’s government, headed by Dmitry Medvedev, came up with the idea to create a fundamentally new plan that would spur an innovation renaissance. They understood that, under the existing conditions held over from Soviet times, no innovation activity was likely to appear. They took Silicon Valley as a concept to form a new plan. MIT joined as the main partner in the new adventure. This project, called Skolkovo, will be discussed in detail in the next chapter. Considering the brain drain and the loss or sale of a huge amount of intellectual property in the early 90s, today’s Russia has inherited an interesting feature of the Russian innovative business and its players. The inventor of an innovative product

2

https://ru.wikipedia.org/wiki/Cognitive_Technologies

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will try in vain to defend the idea—keeping it secret or trying to hide it behind a dummy patent. Today, we see that such tactics simply do not work. An idea or invention does not mean anything without an appropriate team. Today, the team is the most important factor in investors’ consideration of a project and the most important element of success. Since about 2000, Russian science and industry have been driven by military orders. Now that the army is 80% rearmed, the industry faces a revenue slump as defense procurement tapers off. Industry players saw the slump coming several years ago and began converting industries to civilian products. It is difficult to discuss the potential results of that shift because its impact is not expected to be visible until 2025–2030. However, we can discuss the specific strategies undertaken to shift from military to civilian production. First, state-owned holding conglomerate Rostec3 set a targeted indicator for the production of civilian products by its subsidiaries. According to the Rostec Strategy, 50% of the state-owned holding conglomerate’s revenue should come from civilian products by 2025. As of the end of 2017, these products already accounted for 27.6%. Despite these stated goals and priorities, enterprises still prefer to develop something large, heavy, and expensive—not a small gadget or device. Obviously, it is easier to achieve the indicator by releasing a new civilian aircraft MS-21 or Sukhoi Superjet-100. However, the risks are very high and both programs have encountered considerable difficulties. Second, large enterprises have launched their own accelerators and venture capital funds to support innovative projects. Potential entrepreneurs can access these funds from both inside and from outside the enterprise. Third, state-owned corporations are encouraged to create demand for innovation products, including through the purchase of startups. A good example for this is the state bank Sberbank, which in 5 years bought dozens of Russian startups and built a whole ecosystem of products. Fourth, enterprises are beginning to invest their own resources in the development of innovative products for the mass market. They are even opening the necessary departments at plants and factories. At one point, the major players and policymakers realized that universities were a potentially powerful source of new ideas and products. Technology commercialization centers began to appear at universities (i.e., the National University MISiS) to facilitate the transfer of university technologies to industry through licensing and startup creation. However, university startups could not begin in practice until 2013 due to difficulties with motivation and the regulations over rights. As a rule, everything done within the university had been owned by the university. Now, according to Federal Law 217 of August 2, 2009, universities may cofound of small innovative enterprises. This has given a boost to startup foundation and has allowed for many companies with solid revenues. Much is being done to protect

3

The Rostec Group of Companies includes almost all state-owned enterprises and design bureaus. In actuality, Rostec is the Ministry.

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investments and increase investment prospects. As a result, Russia has risen from the bottom to 31st position in the Doing Business—2020 rating, a World Bank4 ranking of business climate. It has not yet been possible to get into the top 20 again, although the president set that goal. In 2011, Russia ranked 120th position among 190 countries, so it has overcome a huge gap in 9 years. In general, accounting for historical experience and understanding one’s own weaknesses are not as much about key indicators and facts as it is about the psychology of people. It is a huge job to train people to open new horizons and opportunities for them and to bring small companies into the global arena. In modern reality, the education of motivated and talented youth and the reeducation of senior managers from older generations are crucial priority but not an easy task. Various exhibitions, events, and conferences fill the calendars of those who want to develop innovation. Their number increases every year, and the variety ranges from large events like Startup Village and Open Innovations to small events in cities and technoparks. All this is aimed at changing people’s culture and concentrating their consciousness toward innovative development in a market-driven and competitive world economy. Russia’s main stakeholders and policymakers are taking steps to turn the tide and build a digital economy instead of a resource-based one. In the following chapters, we will consider the actions of the authorities, specific initiatives, and new forms of supporting innovation activity in modern Russia.

9.3

Facts and Figures in the Moscow Innovation System

The economy of the Russian Federation ranks sixth in world and second among the countries of Europe in terms of PPP GDP, which is estimated at USD4.4 trillion in 2019. Russia’s nominal GDP for 2019 was USD1.7 trillion. In nominal terms, Russia ranks 11th in the world. According to the Russian Federal State Statistics Service (Rosstat) and the calculations of the Analytic Center, the largest sectors under the government of the Russian Federation in 2018 were mining, manufacturing, and trade, which occupy 11.5%, 12.3%, and 12.8% of GDP, respectively. The oil and gas industry dominates the market by many figures and parameters. The Russian petroleum industry is one of the largest in the world with the largest reserves and largest export sales of natural gas. Russia has the second largest coal reserves, the eighth largest oil reserves, and is one of the largest producers of oil in the world. It is also the third largest energy user. Petroleum has been Russia’s major source of income—especially in foreign currency—since Soviet times and the industry are populated by both state-owned and privately owned companies.

4

Data The World Bank, provided by Creative Commons Attribution 4.0 International License (CC BY 4.0).

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The oil and gas industry historically relied on foreign technologies and was not innovation-driven—it was considered a low-tech industry for many years. The situation began changing after 2014 when Western technologies became unavailable for key producers. This forced companies to develop their own technologies like the digital well, smart drilling, data science for reserves analytics, software, and more. It also forced them to look at innovative companies and startups in the industry. In general, the situation began changing after specific signals from both the market and the government. The major companies in oil and gas are generally monopolists. Other big industries, like finance, development, manufacturing, and trade are also represented by large corporations. To stimulate SMEs, the government has set a national project for “small- and medium-sized entrepreneurship,” the goal of which is that, by 2019, 22.9% of the economy will be SMEs and 23.5% will be SMEs by the end of 2020. The plan is to increase the role of SMEs in the economy, especially in nonmining areas. Significant steps have also been made in the availability of venture investment. Russia’s venture capital market began to form in the first half of the 1990s. During this period, Western countries showed their first financial interest in the new market but classified all potential investments as high risk. From 1993 to 1996, venture capital firms formed and spread throughout the country. Almost all of them were funds for the late stages of investment and collaborated with existing enterprises in the field of consumer production. The total number of funds during this period was 26 companies with a capitalization of more than USD1.5 million. Since the 1998 crisis, most regional funds have fallen apart. The current Russian investment market actively developed between 2000 and 2013. The main events in this time included the following: 1. Establishment of the innovation promotion fund (Fund for Assistance to Small Innovative Enterprises) in 1994. 2. Establishment of the Venture Innovation Fund in 2000. 3. Investment growth in technology companies (Yandex, mail.ru, Kaspersky Lab, Rambler, ozon.ru, etc.). 4. Development and adoption of the Russian venture capital industry development concept in 2002–2004. 5. Opening of Russian Venture Company LLC in 2005. 6. Creation of national projects from large-scale and institutions to support innovation: Rusnano, Skolkovo Science Center, Agency for Strategic Initiatives, Russian Direct Investment Fund in 2010–2011. 7. Establishment of the Internet Initiatives Development Fund in 2013. 8. National Technological Initiative in 2014.

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According to the Venture Barometer,5 a lot of investments were attracted to projects at the primary stage (33%) in 2019. The average check ranges between USD500,000 and USD2 million. The Dsight and EY study find slightly higher estimates for the average check for all stages at USD3.8 million. Check amounts are growing for the second year in a row. The percentage of investments in Russian projects for the year has grown slightly from 21% in 2018 to 28% in 2019. Nevertheless, the weighted average percentage of Russian companies in investor portfolios is about half (54%) on average and stable over time. 2019 is not the first year when study participants have been conservative about their investments. Artificial intelligence and machine learning are the most popular fields, and, like the past 2 years, FinTech is third. In 2019, there was a boom in the EdTech segment, and it climbed to second place in investors’ interest. Investors’ interest did not let them down—2020s capitalization of ZOOM (which can be partially attributed to the EdTech segment) exceeded the capitalization of all airlines in the world due to the COVID-19 pandemic. According to a study by the Russian venture capital market Dsight and EY, the total volume of investments in the venture capital market in 2019 increased by 13% compared to 2018 at USD868.7 million, despite the fact that the total number of transactions decreased from 310 to 230. Most of Russia’s funds and business angels invest in projects at the seed and Series A stages—these make up for 65% of respondents according to the same Venture Barometer. The Russian market is characterized by a very low number of business angels and low number of related transactions. In 2019, there were 37 transactions total investments from business angels amounted USD47 million. At the same time, the role of accelerators and funds created by corporations is increasing. We will talk about the main players in the innovation market in the next section.

9.4

Institutional Players in the Moscow Innovation System

There are a lot of rich people who primarily reside in Moscow and can invest in venture capital funds. However, as a rule, potential investors are wary of them, fearing loss of capital control and long investment periods. Therefore, the role of venture investors is often performed by large Russian corporations. For example, VTB, KamAZ, Sberbank, Skolkovo Ventures, Russian Railways, Mail.ru Group, Sistema joint-stock financial holding, RBC Group, and other corporations are active in this space. Large companies are increasingly using their accelerators to find innovation. For example, Sberbank (500 Startups, SberUp), Kaspersky Lab (iHub for Cyber Security projects), MTS (MTS StartUp Hub), Qiwi (Qiwi Universe Product Hub), and Severstal (metallurgy projects) are actively developing accelerators. More than that, multicorporate accelerators have begun to appear for whole industrial sectors.

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rvc.ru

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Table 9.1 Main institutional players in Moscow Innovation system Venture companies VEB Innovations SBT Venture Skolkovo Ventures Da Vinci Capital Grishin Robotics Maxfield Capital I2BF AFK Sistema PAO Baring Vostok Flint Capital Runa Capital Almaz Capital

Corporate VC funds Rostelecom Sberbank MTS mail.ru MegaFon Rostec Rosatom Rusnano Gazprom Neft Lanit

Business angels Alexander Rumyantsev Sergey Dashkov Igor Ryabenkiy Konstantin Sinushin Vitaly Polekhin Alexander Borodich and many others

Government development institutions R&D instituteF Skolkovo Foundation IIDF RVC Fund for Assistance to Small Innovative Enterprises (FASIE) ASI NTI

Source: Author’s own figure

For example, Build UP operates in modern building technologies and is funded by Hals-Development, Don-Stroy-Invest, and Fodd companies with the support of the Skolkovo Foundation. Government agencies have high expectations for acceleration programs. 2019 saw the launch of accelerators Russian Helicopters, Rosatom, Russian Railways, VTB, GTLK, and KAMAZ. Russian Railways has already invested in 7 startups, and VTB in 12. The demand for such incubators from corporations is expected to increase every year. Conventionally, it is possible to divide all participants in an innovation activity in Russia into four types: a venture fund, a corporation/strategic investor, a business angel, and a development institute. The most prominent representatives in each category who actively invest in Russian technology companies at the moment are as follows (Table 9.1): Let us focus on two main institutional players in the region. First one is the oldest and most active innovation development institution: the Fund for Assistance to Small Innovative Enterprises (FASIE). Many consider FASIE the first stop for assistance after kicking off a new startup or venture. All the programs are in the form of nonreturn grants, which are a valuable resource for early stage startups or even students with promising ideas. Typically, to receive a grant, one must submit a specific set of documents through an online system for future judging. In some cases,

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like the Umnik program, there is also a live pitch contest. Umnik is a great way to work on an idea with some resources, to launch a prototype, or to check hypothesis—it is easy to get and easy to submit the final financial report. Thousands of students have received such grants. The more financial support is provided, the tighter is the competition. Even though it is easy to apply to Umnik, competition is stiff since resources are limited. In some cases (start programs and commercialization, NTI development), the competitions are anywhere between 5 and 10 submissions per winner. All programs operate throughout the country, which stimulates geographical development in all regions. Russia’s best-known innovation center is called Skolkovo in the Moscow suburb area. Skolkovo is the modern scientific and technological innovation complex operating to foster the development and commercialization of new technologies. It is the first in post-Soviet Russia built from scratch as a science city, including technoparks, R&D centers, offices, a graduate-level university, housing, parks, and more. The plan was to launch the construction of large facilities in a clean field to exclude the heavy legacy of perestroika and use unique human and financial resources to create an ecosystem of researchers, students, businesses, and investors. The idea is sound, though many criticize it strongly. Due to the catastrophic shortage of private venture investments, the Russian venture market in 2019, according to various estimates, was between USD500 and 900 million, which is less than 0.3% of the world—many startups with Russian roots have left country and built successful businesses in Europe or the USA. The Skolkovo project partially compensates for the lack of private investment. Today Skolkovo it is probably the best-known Russian innovation center internationally. The whole ecosystem provides special economic conditions, grants, and support for companies operating in priority sectors of the Russian economy: telecommunications and space, biomedical technologies, energy efficiency, information technology, and nuclear technology. As of the beginning of 2019, the project was estimated to be 80% complete. At the end of the same year, 730 people permanently resided and 16,000 people worked in Skolkovo. According to the updated master plan, the population of the innovation city should exceed 5000 people by the end of 2023. The completion of all facilities is planned after 2025— at that point, 17,000 will live in Skolkovo and more than 80,000 people will work there. As a result of the activities of the Skolkovo Foundation, it should be a selfgoverning and self-developing ecosystem that is favorable for the development of entrepreneurship and research, contributing to the creation of companies that are successful in the global market. Private capital constitutes a significant part of Skolkovo’s development. The Skolkovo Foundation has concluded about 70 agreements with Russian and international corporations. The first major partner to deploy a representative office in Skolkovo in 2015 was Boeing. Other major partners include Sberbank, Transmashholding, the Pipe Metallurgical Company, Sibur, Tatneft, and Yandex.. At the end of 2019, 64 R&D centers were operating on the territory of Skolkovo. Over 40 agreements have been signed with Russian and foreign venture companies. At the moment, more than 3000 active startups are based in Skolkovo.

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If one looks at the dry figures and facts, then the situation in the innovation environment looks stable and even positively developing. However, several facts and events have negatively affected or continue to affect the Russian innovation market. First are the scandals of alleged embezzlement of state institutions’ funds to develop an innovative environment. In 2012–2013, investigations into the Skolkovo Foundation and its investments made it toxic for several years. The Vice President of the Pumpyanskaya Foundation writes about those events, “Skolkovo had a very good image in the West, on which we had been worked carefully. And the next day all this work was gone. It was useless both to call to London and even to Silicon Valley. Everyone wrote about this situation—the investments were over.” Other recent events have severely damaged investment and innovation activity. One example is the case of Michael Calvey, one of the largest and first Western investors in modern Russia. The continuation of sanction policies by Western states and pressure on some Russian companies like Yandex have had negative effects on innovation policy. There is discussion about a law that will reduce the share of foreigners in important Internet companies. There is an investigation going on about the CEO of RVC, the well-known government institution with many venture capital funds, that adds pessimism. These investigations are said to be for the purpose of defeating corruption, but given the nature of venture financing the results are unclear. Despite all these cases, Russian investors and startup founders remain optimistic. According to StartupBlink, Russia’s Startup Map has 1780 startups, and the most popular startups in Russia are Badoo, amoCRM, and Skyeng. Russia ranks 17th globally among 202 countries for the strength of its startup ecosystem. The cities with the most vibrant startup ecosystems in Russia are Moscow, Saint Petersburg, and Kazan. The most popular and innovative industries in Russia are the software and data, e-commerce and retail, and social and leisure industries.

9.5

SWOT Analysis of the Moscow Innovation System

Resources Bank loans

Strengths Russia’s banking system is well developed; there are many private and government players. Sberbank (now known as Sber) is the most innovative bank with its own

Weaknesses Loans for businesses are still hard to get. The interest rates are high; banks prefer to give private loans rather than corporate loans, especially for risky new ventures. There is a lack of

Opportunities Capital availability is one of the reasons for startups to migrate from one country to another. There is a room for development in that sense in Russia and Moscow.

Threats An innovation ecosystem requires a lot of resources— Money is blood for startups. Without sufficient resources, startups will start migrating out of the country (continued)

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Strengths

Weaknesses

Opportunities

startup ecosystem

resources outside Moscow

Culture and mindset

There is a good research and development culture with its roots in the USSR and the mindset of a winning nation. A multinational culture and mix of races enrich society

Digital infrastructure

Highly developed infrastructure. High-speed internet in any city, very good coverage of 4G networks. Low cost of data

Russia has a highly vertical management culture and weak horizontal connections between departments in corporations. Creative skills and mindset are weak. A very tough attitude toward possible failure does not stimulate attempts at innovation Sometimes, digital transformation is done in the sake of achieving KPIs

Russian regions must attract investments from other countries and build presence in the innovation economy Partnerships with other countries could help mitigate weak attributes. This is a big opportunity for further development of soft skills

Education and skills

There is a large amount of highly educated human resources. Strong skills in theoretical sciences, historically strong scientific component in national development

Less developed practical skills. Sometimes weak management and marketing skills

The current infrastructure can be used as a foundation for the future development of digital economy, like a digital healthcare system Great potential to turn scientific research into innovative businesses. Good potential to convert corporate R&D into new ventures

Threats

Adoption of innovation outside corporations could be hampered by strong vertical management and decision-making processes that are not always transparent and logical

Data leaks, business data protection, and personal data protection are all challenges

The education system is no longer among the leading countries. Need for reform if the system is to come back to a leading position. Brain drain is a threat, and high quality of life is needed to stop the drain (continued)

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Resources Institutions

Legal advisers

Market and demand

Migration

Policy and strategy

Strengths Many institutions were created to support innovation activities. Nonreturn grants available from the very first stages of a project Affordable legal support is available

The population of 144 million people is almost enough for the economy to focus on its own internal market. With the country’s development, this demand is growing Incoming migration from CIS countries forms a cheap workforce of often-talented people (especially from Belarus, Ukraine, Kazakhstan) There is a strategy, understanding, and desire to shift from an oil and gas economy to an innovationbased economy. Many policies are written and

Weaknesses Institutions should play a more important role in the development of measures to stimulate innovation

Opportunities Measures taken in the past 5–10 years create promising opportunities for growth

Threats Some institutions are influenced by other players, and sometimes investigations make it hard to promote the innovative agenda

Lawyers have low skills

Corporate law, rules, and norms should be cultivated with more attention

There is a high percentage of poor citizens, and the poverty level is still high

With decreasing poverty levels, the demand and markets will expand. Many industries like e-commerce and retail are growing many times faster than GDP

Fairness of the courts is sometimes under question, which could be a threat for the incoming investments A large portion of population is in debt. The situation should be fixed, otherwise consumption will steadily go down

Brain drain to developed countries is an issue

There is a high opportunity for the return of the brains, which is already happening

Brain drain to developed countries may continue to be an issue

Sometimes policies do not work

New programs and policies should be adopted like the China 2025 program and others in developing countries

Policymakers often have little to do with new ventures or innovation. That is a threat

(continued)

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Quality of living

Strengths under implementation to make that happen Quality of living is better than in many countries. The 2018 Human Development Index that was published in 2019 places Russia 49th out of almost 190 countries

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Weaknesses

Opportunities

Threats

There is still a low quality of living outside of big cities

Cities are changing their faces in recent years, becoming more adapted for citizens, leisure, and work. The quality of living is rising

The low quality of living in remote regions is driving people to big cities like Moscow. This unbalances the economy and concentrates resources in one or two regions. Low quality of living is also a threat because it drives brain drain Overregulation is always bad for the economy. New industries, like autonomous transport cannot develop without cuts in regulation. This may lead to startup drain in the future

Regulation

Regulation in the past 10–15 years has become more solid for investment protection

Regulation is considered too strict by many. Low tolerance policies for government investments decrease the chances of success before a unicorn can emerge

Research infrastructure

There is a very good level of research infrastructure. The past 20 years have seen major transformation in research equipment in government institutions Corporations have launched their own funds

The infrastructure is there, but sometimes is rarely used. Human and financial resources are needed to conduct research

The current regulation is under review. In late 2019, there was a plan to cut regulation significantly. Many laws and rules especially in food and drug industries are out of date. Reducing the “regulatory guillotine” may create new opportunities Availability of infrastructure makes it easy to access and relatively cheap to use. Other opportunities arise from scientific research

The amount of venture capital is not sufficient

Creation of corporate funds opens

Risk capital

Sanctions block some important research equipment from being delivered to the country

The lack of available risk capital creates a (continued)

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Resources

Strengths

Weaknesses

to invest in risky ventures

Tolerance and trust

9.6

Russia inherits a winning attitude and strong character from its past. The nation’s ability to overcome difficulties is very strong

Low tolerance toward failures, low confidence in success

Opportunities

Threats

opportunities that were not previously available High tolerance to other cultures and easy adoption to external conditions. Multi-nationality and diverse culture create opportunities to build multinational companies

threat for the startup ecosystem Low tolerance of failure and low confidence in success are a threat to innovation development

Strategy and Implementation

Decision makers in Russia have come up with several strategies and ideas, understanding the difficulties associated with bringing developments to the market for both enterprises and the scientific community. First, they created transparent rules and investment protection. Second, they poured money to a knowledge-based economy. Third, they created new institutions and innovation centers from scratch. These national- and high-level goals and policies are set by the President’s office and Government and implemented by ministries, institutions, and agencies. For example, the long-term strategy development up to 2035 in innovation, technologies, and new markets is under the control of the Agency for Strategic Initiatives (ASI). This agency oversees identifying future markets where national companies can be competitive. It is also responsible for the distribution of resources to support the most promising companies in their development and for investment plans in high-tech areas. As of 2021, there are 12 markets identified as most promising and that are projected to be more than USD100 billion by 2035: AutoNet, MariNet, SafeNet, TechNet, EnergyNet, AeroNet, HealthNet, FoodNet, NeuroNet, FasionNet, MediaNet, and EduNet. The word “Net” is in the names of all future markets because, according to the ASI website and FAQ, all emerging new markets are related to the Internet either by using its physical infrastructure or its protocols or by being built in its likeness. For example, principle will be used by “smart grids” that will connect producers and consumers of electricity under EnergyNet. This is how the transport systems of the future—AeroNet, AutoNet, and MariNet—will be organized. Even conservative markets, such as agricultural machinery, are turning

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into networks of cyber-physical devices owned by the manufacturer and leased to farmers and renewed by software licenses. Essentially, all the markets of the future also projected to be networks. ASI develops roadmaps of technologies and how they evolve and function for each market with support measures. The key goal of the strategy is to bring new high-tech Russian businesses to the global level. One may also ask why ASI focuses on markets and not on technologies, and the answer is because the technology is nothing if there is no need or market for it. ASI is responsible for that as well—it designs new rules and eliminates the old ones that might prevent the introduction of new technologies (i.e., autonomous cars in heavy traffic). ASI has working groups for each market comprising corresponding experts. ASI is also responsible for creation of “boiling points,” which are places in cities where innovators, businesses, and regulators can meet and work together. Conferences on future markets, talks, and pitches are also hosted at boiling points. They include space for working on projects and for early stage startups. ASI also funds and promotes centers for basic research (competence centers) in the markets mentioned above. As of 2021, 16 centers like these were created. In addition, ASI supports centers for children’s development and children’s tech contests. It has a number of programs that aim to show teenagers how technologies and innovation change the world and foster national technological development. The country-level strategy is implemented in several layers. The most influential is probably the ministry level. As an example of how it works, in 2018 the former Ministry of Communications and Mass Media of the Russian Federation was renamed to the Ministry of Digital Development, Communications and Mass Media. The digital economy and economic transformation are now under the control of that ministry. It is in charge of achieving national goals in research and innovation related to digital services and IT. Other ministries have their own sets of strategies that, together, should fulfill the national goals set by the president and government.

9.7

Lessons Learned from the Moscow Innovation System

We have learned that Russia, and the Moscow region specifically, are very promising sources for innovative solutions and companies. Moscow has shown stable growth even during the financial crisis at an average pace of 10% per year. The region doubled its GDP in 10 years and managed to attract an impressive concentration of research institutes, many universities and researchers, solid infrastructure, and a variety of other resources. Russia’s other regions are less developed, and only a few can be named as candidates for being an innovation core: Saint Petersburg as the second largest regional economy in the country, Novosibirsk with its science centers and science parks, Tomsk as a students’ city, Yekaterinburg with its heavy machinery and industries, and Vladivostok with its location and proximity to Asia. New centers built from scratch like Skolkovo are a new part of the Moscow ecosystem focused on fostering innovation activity and creating new local ecosystems that are no longer based on historical sites with heavy backgrounds.

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The region has also some weaknesses. We have learned that innovation in Russia is sometimes KPI-driven and sometimes relies on previously achieved results and USSR science. The entrepreneurial culture needs to be improved, and it will be as time passes and the market economy evolves. The investment climate, important for tech-intensive industries, has been damaged by recent corruption cases and the arrests of some well-known businesspeople. Legal reforms could improve transparency and increase the confidence and trust between government and business. At the same time, thanks to its deep roots and tradition in science, the Russian Federation has many highly educated citizens. Given its large amount of research institutions, one can conclude that the most promising form of innovation is probably when the state invests in research and education while businesses (probably with the participation of the state) invest in the creation of applied solutions on that basis. The principle is quite simple common sense and also accounts for regional traditions and peculiarities.

Nairobi Innovation System

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Linet Kwamboka Nyang’au and Ludovit Garzik

Abstract

Africa, especially the sub-Saharan region, is a hot spot of “frugal innovation,” which focuses on technology that meets the market’s needs. While this sounds trivial, frugal technology’s precise alignment to specific needs is unlike industrialized Western nations, where products come with hundreds of surplus features that consumers will never be able to use. As an illustrative example of this overfeaturing, it would clearly be overkill for a consumer intending to get some fresh milk from the farmer around the corner to buy a Ferrari to drive there. The high-speed undersea Internet cable arrived in Kenya in 2009 and, combined with increasingly affordable mobile phones, meant that ordinary Kenyans had consistent access to high-speed Internet on mobile devices. This access drove the demand for the applications and infrastructure development that connected Kenyans to the rest of the world. Companies like Safaricom, Jamii Telecommunications, and Zuku have joined the government in efforts to spread fiber connectivity. Companies like Fireside Communications bring last-mile connectivity to Kenyans across the country.

L. K. Nyang’au (*) Data Science Ltd, Nairobi, Kenya e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_10

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Development Milestones of the Nairobi Innovation Ecosystem

Today, Sub-Saharan Africa hosts many tech hubs. Some of the most dynamic include South Africa, Kenya, Rwanda, Ghana, and Nigeria. Kenya, specifically the region around Nairobi, was the birthplace of innovation in Africa in the early 2000s. In 2007, Safaricom founded M-Pesa, a SIM-based banking service that enabled the vast majority of the population in Kenya to access some kind of banking services for the first time through their mobile devices. This approach hit the core of users’ needs. Various technology incubators and co-working spaces were founded in 2008, providing business development and services for technology startups in cooperation with universities. These helped ensure the transfer of knowledge into business activities. Many new companies were founded on the backbone of infrastructure and business support provided by the incubators and co-working spaces. Developments over the past 20 years have been based on the daily and urgent needs of a population with low incomes but high willingness to adopt new technologies. This so-called bottom of the pyramid creates demand in a phase of product development where more developed regions cannot detect customers’ needs. Africa, especially the sub-Saharan region, is a hot spot of “frugal innovation,” which is focused on technology that meets the market’s needs. While this sounds trivial, frugal technology’s precise alignment to specific needs is unlike industrialized Western nations where hundreds of surplus features that consumers will never be able to use come with products. An illustrative example of this overfeaturing would be if that a consumer intended to get some fresh milk from the farmer around the corner and bought a Ferrari to drive there. However, frugal innovation is much more than merely the adjustment of technological levels. It is differentiated into six specific characteristics: F: functional R: robust/resource-efficient U: user-friendly G: growth opportunities A: affordable (for consumers, society, and the environment) L: less complex/simplified Frugal innovation is also an important concept for innovation leaders. It focuses on the question “How can I best address the needs of my customers?” Engineers love their technology and may create an intricate product first and ask about the consumer later. Frugal innovation is an ideal reflection technique for any innovator to stay connected to the needs of their potential customer community. In the words of Erik Hersman (Co-Founder of Ushahidi, iHub, BRCK): “The Western world should try to be more like Africa and not the other way round.”

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10.2

163

Culture and Mindset of Ecosystem Players

For many years, the Kenyan economy was driven by Agriculture and Tourism both for local development and as a valuable source for foreign income. Improved health care and increased investment in education have rapidly increased Kenya’s human capital and a demand emerged for more innovation and for innovative solutions to local challenge. This in turn created a need for investment from the government and the local private sector ecosystem to meet this need for innovation. The high-speed undersea Internet cable arrived in Kenya in 2009 and, combined with increasingly affordable mobile phones, meant that ordinary Kenyans had consistent access to high-speed Internet on mobile devices. This access drove the demand for the applications and infrastructure development that connected Kenyans to the rest of the world. Companies like Safaricom, Jamii Telecommunications, and Zuku have joined the government in efforts to spread fiber connectivity across the country. Companies like Fireside Communications have joined in for last-mile connectivity across the country. Kenyans, in general, are attracted to technology and innovation. This is demonstrated by the mobile payment and banking ecosystem, especially after the introduction of mobile banking services like M-Pesa. Some of the most successful technology companies in the country are involved in mobile money payments, including Cellulant, PesaPal, and Kopokopo. This has led to the introduction of lending and betting services, and while the jury is still out on their success and ethical impact, there is no question about the extent of uptake for both homegrown and foreign products and services in this space.

10.3

Facts and Figures in the Regional Economy

Nairobi and Kenya have undergone waves of success and crisis over the last few decades. This development is best expressed with the rise and fall of GDP growth in Fig. 10.1. GDP development in Kenya was very volatile in the early 1960s and then had two periods of stabilization of development in the mid-1970s and after the global financial crisis in 2010. Stable and predictable economic development is one of the preconditions for the development of regional innovation ecosystems because risk is too dangerous under very unstable economic conditions. After the promulgation of Kenya’s current constitution in 2010, Kenya was devolved into 47 counties. This devolved system of government took effect in 2013, making and Nairobi one of Kenya’s counties in addition to its capital city. The Kenya National Bureau of Statistics carries out an annual exercise of calculating each county’s economic contribution to national GDP, called the Gross County Product (GCP). Nairobi County has led GCP rankings since devolution, aided by its historical strategic and geographical advantages as the capital city, as shown in Fig. 10.2.

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15 10 GDP growth (annual %)

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1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

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Fig. 10.1 GDP growth in Kenya 1960–2018. Source: The World Bank (https://data.worldbank. org/indicator/NY.GDP.MKTP.KD.ZG?locations¼KE; Provided by Creative Commons Attribution 4.0 International License (CC BY 4.0))

10.4

Institutional Players in the Nairobi Ecosystem

Kenya’s institutional players are structured according to the concept of the Triple Helix Analysis, introduced by Henry Etzkowitz and further developed in Etzkowitz H and Ranga M (2010).1 The Triple Helix comprises universities, industry (the private sector), and government structured into the spaces of Knowledge, Innovation and Consensus. According to the triple helix structure, the innovation ecosystem consists of different levels of institutional players. Knowledge production institutions like universities or research organizations provide the raw material for innovation with basic and applied research. These institutions also develop the human capital necessary for the whole ecosystem, so their philosophies are central to the attitudes that shape the region. Knowledge Space (Knowledge Generation) The greater Nairobi region includes approximately 60 universities and other higher education/tertiary institutions. The following table shows the Top 4 universities in Kenya according to uniRank. They are all located in Nairobi.

1

Etzkowitz H and Ranga M (2010) A Triple Helix System for knowledge-based regional development: From “Spheres” to “Spaces,” in: VIII Triple Helix Conference, Madrid, October.

2.6 2.1 2.2 2.2 2.3 2.3 2.3 2.4 1.4 1.4 1.4 1.5 1.6 1.6 1.7 1.7 1.8 1.9 1.0 1.0 1.1 1.1 1.1 1.2 1.2 1.4 1.4 1.4 0.8 0.8 0.7 0.7 0.5 0.5 0.5 0.6 0.2 0.3 0.4 0.5

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Fig. 10.2 Kenya: Share of Counties in GDP (2013–2017). Source: Kenya National Bureau of Statistics (KNBS) (https://www.knbs.orke/?wpdmpro¼grosscounty-product-2019)

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IsioIo Samburu Lamu Marsabit Tana River Mandera Wajir Garissa West Pokot Taita Taveta Vihiga Tharaka Nithi Laikipia Busia Baringo Kwale Turkana Siaya Migori Nyamira Kirinyaga Kitui Embu Makueni Homa Bay Kajiado Nandi Kilifi Trans Nzoia Elgeyo Marakwet Kericho Bomet Kisii Nyeri Narok

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Muranga Bungoma Uasin-Gishu Kakamega Nyandarua Kisumu Meru Machakos Mombasa Kiambu Nakuru Nairobi

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University University of Nairobi Kenyatta University Strathmore University United States International University Africa

Year of foundation 1956 1985 1961 1969

Number of students 98,000 71,000 5000 8500

Research Organizations Public research institutions Kenya Medical Research Institute (KEMRI) Kenya Agricultural and Livestock Research Organization (KALRO) Kenya Forestry Research Institute (KEFRI) Kenya Industrial Research Institute (KIRDI) Kenya Medical Research Institute Kenya Veterinary Vaccines Production Institute Kenya Marine and Fisheries Research Institute National Crime Research Centre National Museums of Kenya Tegemeo Institute of Agricultural Policy and Development Tourism Research Institute

Private research institutions Africa Institute for Capacity Development Academic Model Providing Access to Healthcare (AMPATH) HJF Medical Research International Inc. International Cancer Institute International Livestock Research Institution (ILRI) The Research Care and Training Programme (RCTP) Family AIDS Care and Education Services (FACES) Regional Centre for Mapping of Resources for Development The International Centre of Insect Physiology and Ecology (ICIPE) The World Agroforestry Centre (ICRAF)

Innovation Space (Knowledge Implementation) The second key element of the triple helix ecosystem is known as the Innovation Space, where knowledge implementation takes place. Small, medium, and large businesses make up Kenya’s knowledge implementation ecosystem, along with intangible assets like patents and intellectual property. Of the seven million SMEs in Kenya, only 1.5 million are licensed and registered with the government. In many cases, unregistered SMEs are in the informal sector. The SMEs that are formally registered with the government have to pay taxes, which can be quite high. As a result, many SMEs prefer to remain unregistered. This presents a massive barrier preventing public authorities from managing or supporting SMEs. Even if big businesses like Safaricom (M-Pesa) get most of the attention, the Kenyan economy is driven by small businesses. 79 of the top 100 SMEs are in Nairobi County. Kenya is ranked 61st in the World Bank’s ease of doing business index. This is a major improvement, with the country moving 80 places upward since 2014. Improvement has been driven by important reductions in the barriers to entry for new businesses in Kenya (e.g., being able to open a business within one day and with

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only one person), but there are still many hurdles for startups. Things like unfavorable tax regimes and a lack of capital continue to hinder new companies’ progress. Consensus Space The triple helix’s consensus space contains all other institutions and the legal framework that enables knowledge and innovation to evolve. One of the most important elements of the consensus space is the strategy, which paves the way to an innovative region and envisions the system as it should be in 10–15 years.

10.5

SWOT Analysis of the Nairobi Innovation Ecosystem

Resources Culture and mindset

Strengths The community is open to new ideas, innovations, and investments. The country is known as a hotbed of innovation Significant investment by the government has helped set up the right digital infrastructure

Weaknesses A traditional way of approaching technology can be limited to the adoption of new innovations

Opportunities Nairobi is a cosmopolitan city, presenting an opportunity for integration and knowledge exchange

Threats An insular way of thinking can lock out better ideas

There is a lack of capacity for the uptake of all available infrastructure development

Incomplete utilization of existing digital infrastructure can discourage investments

Education and skills

The general population is very well educated especially at secondary and tertiary levels

Institutions

There are strong and wellorganized technology and innovation institutions in government, the private sector, and civil society

The lack of direct opportunities within qualifications has shifted the interests of the workforce Institutions work in silos and do not always pull together toward common goals

Service providers can make the infrastructure more affordable to encourage uptake There is plenty of well trained but underutilized human capital

A unifying approach could integrate and improve the technology ecosystem

The lack of coordination and cooperation can mean duplicated efforts and wasted resources

Digital infrastructure

An underutilized workforce creates conditions for apathy and professional brain drain

(continued)

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Resources Legal advisers

Strengths The legal system supporting and regulating technology is improving in a very good direction

Weaknesses The lack of a comprehensive legal support system creates vulnerabilities for technology goals

Opportunities A strong legal system would encourage more investment and opportunities in a stable system

Market and demand

A young and ready market has created a lot of demand for innovation

There is a lack of infrastructure supporting rising market demand

Migration

Nairobi attracts a lot of top talent both locally and internationally

Policy and strategy

There is consistent effort in curating the right policies and strategies for the technology ecosystem In general, the quality of life in Nairobi is above average

An increasing supply of human capital increases competition for limited resources The policies and strategies are not supported by a strong legal framework

More investments in infrastructure and capacity development can meet and encourage demand More investment can meet the demands of the increasing population There is an opportunity to base new legislation on existing policies and strategies

Quality of living

Regulation

The historical lack of detailed regulation drives innovation. Companies from other regions are attracted to Nairobi as a test bed for logistics, banking and other branches

The quality of life is not consistent for all people and places across the region The lack of strong regulations creates a weak support system for more sustainable and dependable innovation, since no one knows how new regulations will disrupt their efforts

More investment in consistently high quality of life can encourage higher productivity Regulators can work with innovators to come up with regulations that favor the ecosystem’s current and future plans

Threats The lack of a clear direction in legal developments creates fragmentation, misinformation, and poorly informed activities Without the right infrastructure to support rising demand, the ecosystem risks losing the right investment and support Frustration in the lack of opportunities can lead to criminal activities The lack of legal frameworks could invalidate new and existing policies and strategies Unpredictable quality of life across the region reduces confidence and risk-taking Regulation is growing, and innovation and regulation are often opposing concepts

(continued)

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Resources Research infrastructure

Strengths The research ecosystem in Nairobi is due to increased investment and international grants

Weaknesses With funding coming from external sources, most of the research work is structured to favor foreign ideologies

Opportunities There is an opportunity for local investors and philanthropists to put resources into local research

Risk capital

There is an improved appetite for and trust in local innovations, which have started earning high returns

The investments in this category are still focused on a few groups of innovators

Investors need to cast their nets wider, spend more time and resources, and identify new opportunities and categories of innovators

Bank loans

Banks have started changing their attitudes toward lending to smaller and newer businesses

Common “know your customer” (KYC) processes and requirements are still quite cumbersome for some

Tolerance and trust

Having gone through and overcome adversity, the people of Nairobi are some of the most tolerant and confident

Being too tolerant and accepting can be exploited by unscrupulous individuals

Banks can invest more in widening their risk appetites and including nontraditional channels of borrowers High tolerance and confidence can be harnessed to enhance innovation and invention

10.6

Threats With research topics and methods dictated by external investors, local research runs a risk of becoming irrelevant to local problems and ideas Concentrating all investments on a small group of innovators locks out and discourages other groups from taking part in the ecosystem or even venturing into potential highrisk high-return opportunities A lack of working capital can easily kill innovation

Tolerance and confidence that is not properly harnessed can lead to apathy in the ecosystem and the loss of valuable human capital

Strategy and Goals for Midterm Future Development?

In 2009, the government of Kenya launched its first long-term strategy, called “Vision 2030.” This was the first time the country defined knowledge and innovation as key performance indicators for national prosperity and economic development.

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As shown previously, GDP growth has been stable since 2010 after its 2008 slump due to postelection chaos that brought the country to a standstill. This economic stability and other long-term vision strategies from the government have provided a feeling of stability that encourages long-term investment and entrepreneurial risktaking. Vision 2030 Is Guided by Three Key Pillars The economic pillar assesses the existing opportunities and challenges related to Kenya’s economic growth. The social pillar deals with the construction of a just and cohesive society that enjoys equitable social development in a clean and secure environment. The political pillar envisions a democratic political system that is issue-based, people-centered, result-oriented, and accountable to the public. All four pillars are founded on the vision’s goal of moving all Kenyans to the future as one nation. The vision further aims to ensure that the economic, social, and political gains made under its auspices are neither reversed nor lost as a result of regime change. While the government of Kenya has set up various institutions responsible for innovation through the Ministry of ICT and Youth Affairs, various private and civil society organizations have also stepped up to provide support and create innovative solutions in the country. The government has worked to include the private sector, especially in the governance boards of its innovation ecosystem and community. With devolution in place, county governments are also responsible for championing innovation beyond urban areas. Most of these efforts are supported and coordinated through the Ministry of ICT. Every other year, the government publishes innovation reports on progress in the innovation ecosystem. Unfortunately, this puts the government in the position of auditing itself as there is not much effort or investment from the private sector or civil society toward this kind of reporting. Even so, multiple reports detail the investments from independent private sector entities flowing into the technology and innovation ecosystem. Strategy in Finance Over the past few years, venture capital funds have flooded the Nairobi innovation and business ecosystem. Many have been criticized for favoring foreign innovators and businesses moving into Kenya while ignoring local innovators, despite the abundance of innovative and creative Kenyan people.2

2

https://www.theguardian.com/business/2020/jul/17/african-businesses-black-entrepreneurs-usinvestors

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In a recent proposal, the Ministry of ICT has moved to require that all foreignowned companies must have at least 30% Kenyan shareholding. This is more favorable to foreign investment than similar policies in neighboring countries like Ethiopia, where foreigners are required to make a joint venture with local companies and are not allowed to have more than a 51% stake.3,4

10.7

Lessons Learned and Tools for Other Regions

Demography: Young Population The population of Kenya is growing younger and younger. Younger people are generally more educated and have better access to health care and technology. This drives an increasing demand for more than basic needs, which includes the latest technologies and hardware available in the global north (Fig. 10.3). Access to Technology Kenya has 91% mobile subscription penetration, compared to Africa’s 80% average. More Kenyans access the Internet and Internet services via mobile phones compared to traditional Internet access via computers. This creates a ripe environment for stable future market demand for the services, tools, and innovation that are already available in the Global North as the world becomes increasingly flat in terms of access and demand. Leapfrogging: Access to Mobile Banking Despite its late arrival to the credit and cashless economy, Kenya essentially leapfrogged the normal progression. Kenya skipped the credit card period with the launch of mobile money services like M-Pesa from various telecommunications operators and banks. Less than 5% of the population use credit cards in Kenya, while more than 60% of the adult population uses mobile banking services. This is in comparison to countries in the Global North like Germany, where more than 35% of adults used credit cards in 2020. In the global spread of mobile money customers, an overwhelming share of more than 40% live in Sub-Saharan Africa. As a result, more people in Kenya have access to banking services than ever before. In addition, a lot of innovation has gone into mobile banking. For example, Kenyans can make cashless payments for all utility and government services. One key advantage of this innovation is that it dramatically simplified navigation of the COVID-19 pandemic.

3

https://www.standardmedia.co.ke/business/article/2001381825/foreign-firms-to-cede-30pc-stakeunder-new-law 4 https://www.theafricareport.com/44673/ethiopia-further-opens-up-sectors-to-diaspora-and-for eign-nationals/

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Fig. 10.3 Population Pyramid Kenya. Source: PopulationPyramid.net (www.populationpyramid. net made available under a Creative Commons license CC BY 3.0)

New York Innovation System

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Brian Frumberg, Lisa Stapleton, Sam Yazdanseta, and Ludovit Garzik

Abstract

New York City (NYC) has transformed itself from military port to manufacturing hub to financial epicenter and now takes center stage in the creative and applied tech sectors. Driving over USD70 billion in startup valuation and exits every year, holding more risk capital than any other city in the world, and with an inherent culture of openness, diversity, and excellence, NYC has had a meteoric rise to its current position in the top two innovation ecosystems globally. This chapter explores the government initiatives, digital infrastructure, and research institutions that helped harness NYC’s assets and allowed it to develop as the world’s second largest startup and venture ecosystem. Given that capital is required for innovation to take off, NYC’s proximity to capital is a strength few ecosystems can match. Waves of IPOs from 2019 to present will only boost innovation as talent from companies become new founders and investors bolstering the NYC ecosystem. New York City will continue to strengthen its position as a leader in the innovation space.

B. Frumberg (*) · L. Stapleton · S. Yazdanseta VentureOut, New York, NY, USA e-mail: [email protected]; [email protected]; [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_11

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Overview and Characteristics of the New York Ecosystem

In an era of rapid globalization, New York City (NYC) is considered a global center of finance, commerce, and innovation. The city is home to the world’s largest stock exchanges: the New York Stock Exchange (NYSE) and NASDAQ. The City of New York has one of the largest tech ecosystems in the world—second only to the San Francisco Bay Area—and boasts one of the fastest-growing startup ecosystems in the world. This would not be possible without the businesses that operate in the city. Many Fortune 500 corporations have their headquarters in New York City, and one out of ten private sector jobs in the city is with a foreign company.1 In 2017, foreign direct investment (FDI) employed almost 300,000 New Yorkers and contributed 11% of the city’s economy.2 The financial crisis of 2008 that led to the Great Recession forced the New York City government—under then-mayor and recent democratic presidential candidate, Michael Bloomberg—to diversify away from financial services alone and create initiatives to strengthen the innovation ecosystems. Since then, dozens of initiatives and milestones have been launched and have transformed NYC into a diversified ecosystem of innovation which includes the NYU Poly Incubator, General Assembly, BioLab, RLab (AR/VR/xR), the NYC Cyber Center, and Civic Hall. Through this work, the city has launched three applied sciences university campuses including Cornell Technion on Roosevelt Island—a joint venture between Cornell University, Technion—Israel Institute of Technology, and the NYC government—NYU CUSP (Center for Urban Science and Progress) and Columbia Data Sciences Institute. These initiatives have helped harness NYC’s assets and have helped it become the world’s second largest startup and venture ecosystem. NYC has a scale to which only a few cities in the world can compare. Former Mayor Michael Bloomberg used to demonstrate this scale through NYC’s student population. The city has almost 900,000 students, which is more than the total population of Boston (685 k) and San Francisco (884 k). The city is home to 124 universities, which in 2016 alone graduated nearly 19,000 STEM students, and thus, technology is the fastest-growing FDI sector. Like many global cities, New York City’s venture capital ecosystem experienced a decade of tremendous growth between 2008 and 2017, fueled by a rebounding postrecession economy. In 2008, businesses headquartered in New York City closed fewer than 300 deals worth a cumulative USD1.7 billion. At the peak of the City’s venture capital deal making in 2015, companies headquartered in New York City finalized over 1440 venture capital deals worth approximately USD8.7 billion. Although the deal count dropped sharply in the following 2 years, the total amount of capital invested in New York City’s companies continued to rise after a pause in 2016. By 2017, deal and capital totals in New York City had risen by 256% and

1 2

Wylde K (2006) “Keeping the Economy Growing”. Gotham Gazette. https://pfnyc.org/wp-content/uploads/2017/11/Global-Business-Local-Benefit-Nov-2017.pdf

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439%, respectively, compared to nominal 2008 levels, with nearly 1000 deals amounting to just under USD9.4 billion raised. Timeline of Growth Traditionally known for Wall Street, private equity, and hedge funds, NYC’s rampup of IPOs over the past few years has forced venture capital (VC) onto the main stage. The story of VC in NYC starts in 1996 when Fred Wilson and Jerry Colonna cofounded Flatiron Partners. It continued in the late 90s with NY startups DoubleClick, About.com, HotJob, and Datek all prospering before the initial tech bubble burst in 2000. From 2005 to 2010, NYC’s startups were often adjacent to NYC’s legacy industries like consumer products and media. Peer-to-peer e-commerce website Etsy came on to the scene in 2005, and Gilt Groupe launched in 2007 along with crowdfunding platform Kickstarter. In 2010, consumer subscription startup Birchbox and e-commerce eyewear site Warby Parker both launched, elevating the tech scene even further. In the mid-2010s, notable exits from IPO and acquisitions started to validated the NYC scene. Etsy—2015 IPO. Jet—2016 Acq’d. MongoDB—2017 IPO. FlatIron Health—2018 Acq’d. Ramp-up in IPOs: 2019–present: Peloton—2019 IPO. DataDog—2019 IPO. Snowflake—2020 IPO. Casper—2020 IPO. DigitalOcean 2021 IPO. Olo 2021 IPO. Pipeline: UiPath files IPO targeting USD35 billion. Attentive raises USD470 million Series E Squarespace raises at USD10 billion valuation. WeWork preps SPAC at USD9 billion.

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Facts and Figures New York Innovation Ecosystem

11.2.1 The Data Any discussion of New York’s advantages has to start with talent, density, and dollars. NYC boasts a deep pool of university and corporate talent, a highly dense community that supports entrepreneurs and startups, and the most corporate buying dollars of any city in the world. VentureOut believes these advantages make NYC the best tech ecosystem in the world and the most welcoming community for startups. Convenience of Corporate Concentration New York City has more corporate headquarters than any city in the world except Tokyo. There are more corporate buying dollars available in NYC than any other city in the world. This concentration of enterprise clients in only 64 square kilometers provides an incomparable opportunity for startups to meet, learn, cooperate, and commercialize with some of the world’s best companies. Diversity of Industries As the second biggest startup and venture ecosystem in the world, New York is always competing to catch up to Silicon Valley. However, New York has more strengths than weaknesses when compared to Silicon Valley, especially when it comes to the diversity of the city. Most cities have a few industries that anchor their business communities. For Silicon Valley, that has been tech ever since the semiconductor was invented in 1961. NYC, however, has been the capital of over a dozen industries for well over 150 years, including finance, fashion, media, advertising, publishing, and retail. This is why NYC is known as a “hyphen-tech” town, including fin-tech, health-tech, ad-tech, media-tech, and fashion-tech. In these hyphen-tech industries, technology innovation influences traditional industry. Industrial Scale Equivalent to the Large Population NYC has a scale that only a few cities in the world can compare to. Former Mayor Michael Bloomberg used to demonstrate this comparative scale through NYC’s student population. The city has almost 900,000 students, which is more than the total population of Boston (685 k) and San Francisco (884 k). Another example: One of Boston’s strengths over NYC is in healthcare innovation. However, as a startup that is partnering or selling with patients, doctors, hospitals, or healthcare corporations, NYC has 8.6 million residents and the largest corporate ecosystem in the USA, which is a scale that would much better support those startups than Boston. The New York region also boasts the largest tech talent market in the USA, surpassing the Bay Area by more than 20,000, a statistic that surprises most people. Traditionally known as a powerhouse in the financial, media, and real estate sectors, New York’s story of becoming a hub for innovation across sectors has been crucial to its growth in becoming the second biggest tech ecosystem and second largest city for foreign direct investment.

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Like many global cities, New York City’s venture capital ecosystem experienced a decade of tremendous growth between 2008 and 2017, fueled by a rebounding postrecession economy. In 2008, businesses headquartered in New York City closed fewer than 300 deals worth a cumulative USD1.7 billion. At the peak of the City’s venture capital deal making in 2015, companies headquartered in New York City finalized over 1440 venture capital deals for approximately USD8.7 billion. Although the deal count dropped sharply in the following 2 years, the total amount of capital invested in New York City headquartered companies continued to rise after a pause in 2016. By 2017, deal and capital totals in New York City had risen by 256% and 439%, respectively, compared to 2008 levels, in nominal terms, with nearly 1000 deals amounting to just under USD9.4 billion raised. Taking a look at the current funding ecosystem in NYC, 684 companies were able to raise funding in 2020, a year of economic turmoil and still an increase of 13% from 2019. This growth came largely from Series B and late-stage companies, where there was a 50+% increase in the number of companies funded (Series B—60 to 91, late stage—62–96). There were 27 mega (USD100 million) funding rounds in the city, an increase of 145% from 2019. These mega deals represent USD4.1 billion or 34% of all capital raised. Aggregate early stage funding was up with the number of companies raising capital slightly down as the world moved remote, making funding more difficult for founders that may not have established networks. Unique to NYC A current snapshot of NYC’s tech scene highlights a thriving, interconnected ecosystem with all the ingredients for business success across every sector. Whether it is the cutting-edge advanced manufacturing in Brooklyn, the state-of-the-art applied sciences research on Roosevelt Island through Cornell Tech, or the food production and distribution in the Bronx, NYC’s key story has always been reinvention. Diversified Economy Manufacturing3: Advanced manufacturing firms based in NYC have seen a major uptick in VC investment since 2017. The average deal size is USD7.5 million in 2020, an increase of more than 225% from just a few years before. Even during the pandemic, the VC community recognizes the value and potential of this growing sector of the city’s economy. Life Sciences: While not typically known for advancements in the life sciences, the city has created a burgeoning life sciences sector in Manhattan through the LifeSci4 NYC initiative and the Alexandria Center for Life Science, offering 1.1 million square feet of office and laboratory space.

3 4

https://edc.nyc/article/nycs-manufacturing-renaissance-has-arrived https://lifesci.nyc/

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Makerspace5: With over USD1 million of advanced equipment and tools, affordable memberships, prototyping and design services, STEAM education, and ample storage, this space supports people who have a product idea they want to bring to life. Legacy Industries While diversifying its economy has been essential in its growth, we must note that legacy industries with a historical stronghold in New York City have become magnets for the creative startups within their verticals that develop new efficiencies and create new jobs. Home to more Fortune 500 companies than any other city in the world save Tokyo, NYC has long been a global leader in traditional “anchor” industries including financial services, media, and fashion retail and manufacturing. These sectors play an invaluable role, fueling the adoption of new innovations in the emerging tech industry. The city’s legacy industries have opened up a diverse range of opportunities for locally based startup enterprises to leverage VC backing for innovation and growth and to take advantage of city initiatives that help usher in the next wave of success stories in these verticals. Fashion and Arts: The future manufacturing hub, part of the Made in NY Campus at Bush Terminal in Sunset Park, Brooklyn, is anticipated to open in 2021 and will provide affordable, best-in-class industrial facilities for garment manufacturing, film and media production, and related services and industries. FinTech: FinTech companies have thrived in NYC since Bloomberg LP revolutionized the way data was consumed in the early 1980s. Banks, capital markets, and insurers have increasingly opened their eyes to the benefits of building a strong FinTech ecosystem in NYC. The proximity that entrepreneurs enjoy allows financial institutions to work collaboratively with startups looking to enter the largest financial market in the world. Media: To address the changing landscape of media and film, NYC will invest USD6 million to create the first publicly funded VR/AR Lab in the country. The laboratory will create thousands of jobs and accelerate the city’s leadership position by providing entrepreneurs with the space, technology, and training to turn their ideas into viable companies along with the space and resources they need to sustain initial growth. The laboratory will also serve as a central hub where VR/AR companies can draw on a pipeline of talent trained in the latest VR/AR technology. Health Care: The Digital Health Marketplace is a New York City Economic Development Corporation (NYCEDC) program that aims to help companies with market-ready products access commercial relationships. Its goal is to facilitate relationships between health-tech buyers and health-tech sellers through two half-day matching sessions in the spring and fall of each year. Since its launch,

5

https://edc.nyc/program/futureworks-makerspace

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the Digital Health Marketplace has facilitated 700 matches between buyers and sellers. The program has disbursed USD2.5 million in commercialization grants to 20 companies who have gone on to receive USD160 million in total venture funding. Real Estate: As the biggest metropolitan market in the USA, it is only fitting that “proptech” (property-tech) pushing innovation forward in NYC. Diversity and Talent While NYC has the largest labor force at over four million people, it also has the world’s most diverse and skilled labor pool. Roughly 2.3 million New Yorkers have a bachelor’s degree or above—more than Los Angeles, San Francisco, Washington DC, Philadelphia, and Boston combined—with nearly half of those obtaining a graduate or professional degree. Moreover, 42% of New York’s workforce is foreign-born, reflecting the city’s ability to attract foreign talent. New York also turns out more computer science graduates annually than any other area. Growing Footprint of Tech Giants Even after COVID-19, major companies are taking notice of the city’s economic transformation and resiliency by investing in NYC. For example: – Google has added about 1.7 million square feet of office space in Manhattan. – Facebook doubled down on NYC by leasing 2.2 million square feet of space in Midtown Manhattan. – Apple plans to expand to a second building, leasing an additional 220 thousand square feet in Penn Plaza. – Amazon is moving ahead with plans to lease 335 thousand square feet of office space in Manhattan and studio and production space in Brooklyn. – TikTok signed a lease to take over 232 thousand square feet of prime real estate in the heart of Times Square. – Beam Suntory relocated its corporate headquarters from Chicago to NYC, transferring 150 positions to Midtown Manhattan. – Deerfield Management is redeveloping a 12-story building at 345 Park Avenue South into a life sciences campus to provide life sciences space to support healthcare and biotech startups and growing companies that work on cuttingedge R&D to treat diseases and chronic conditions.

11.2.2 Innovation Ecosystem Operators Institutions Cornell NYC Tech On December 19, 2011, the City of New York, Cornell University, and Technion—Israel Institute of Technology announced a partnership to build a USD2 billion, 2-million-square-foot applied science and engineering campus on Roosevelt Island in New York City.

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The selection of the Cornell/Technion consortium pairs two of the world’s top institutions in the fields of science, engineering, technology and research, marked a major milestone. Cornell Tech brings together faculty, business leaders, tech entrepreneurs, and students in a catalytic environment to produce visionary results grounded in significant needs that will focus on building technologies to directly address societal and commercial needs. The key to Cornell Tech is its relationship with New York City—the campus has a dedicated K-12 initiative to bring tech education into local schools. In addition, its WiTNY program is a partnership with City University of New York to encourage more young women to pursue degrees and careers in tech. Columbia University’s Data Sciences Institute On July 30, 2012, the City of New York and Columbia University announced an agreement between the City of New York and Columbia University to create a new Data Science Institute, located in Columbia’s Morningside Heights and Washington Heights campuses in New York City. The agreement included the creation of 44,000 square feet of new applied science and engineering space on Columbia’s campus and the addition of 75 new faculty hired within the University’s Fu Foundation School of Engineering and Applied Science. Since 2017, the Columbia Data Science Institute is now a university-level institute whose “Data for Good” mission is to advance the state of the art in data science, enhance fields, profession, and sectors through the application of data science and to ensure the responsible use of data benefits the society. The Institute has enhanced the level of training available to the city’s next wave of talented engineers and applied scientists to generate nearly USD4 billion of economic growth across the five boroughs over the next three decades. NYU Center for Urban Science and Progress The Center for Urban Science and Progress (CUSP) was created as a partnership with NYU, the City of New York, and other academic and industrial partners to make cities around the world more efficient, livable, equitable, and resilient. By 2050, 66% of the world’s population is projected to live in urban cities. This raises key questions, for example, how can rapidly growing cities provide a high quality of life to citizens of every socioeconomic status? How will the effectively and efficiently deliver services, address resource allocation, and increase citizens access to green space? With NYC as its laboratory, NYU’s CUSP uses advances in data creation, storage, and analytics to investigate and answer such questions. These activities are making NYU CUSP the world’s leading authority in the emerging field of urban informatics. CUSP’s impact-driven research and educational programs examine complex urban issues and contribute practical solutions for challenges facing New York City and growing cities worldwide. CUSP grants an M.S. and Advanced Certificate in Applied Urban Science and Informatics. New research and technologies developed at the Center are expected to generate USD5.5 billion in overall economic impact and 7700 jobs over the next three decades.

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11.2.3 Other Programs New York City has a long history of supporting tech education and business at all levels. CS4All: Through an unprecedented USD81 million public–private partnership, CS4All will ensure all NYC public school students learn computer science, with an emphasis on female, black, and Latino students. Metrotech Center: The nation’s largest urban academic–industrial research park is home to businesses at all stages and facilitates cross-industry connections. NYU Tandon School of Engineering (including space at Metrotech): A 2014 engineering and applied sciences university merger, which created a comprehensive school of education and research, rooted in a tradition of invention and entrepreneurship, and dedicated to furthering technology in service to society.

11.2.4 Supportive Infrastructure Incubators and Accelerators Newlab: Located in the Brooklyn Navy Yard, Newlab serves as an innovation hub for over 130 NYC-founded startups. NewLab offers the space for founders to build their ideas into reality with state-of-the-art equipment and testing facilities. AlleyCorp: Focusing primarily on early stage companies, AlleyCorp is a fund and incubator that invests in NYC startups. AlleyCorp carries out an integrative approach to accelerating portfolio companies throughout their lifecycles. 500 Startups: The four-month seed accelerator program provides participants with mentorship, hands-on sessions with startup experts, and a shared office space with other founders. Barclays Accelerator, powered by Techstars: This unique partnership between Barclays and Techstars brings two networks together into one accelerator program that offers entrepreneurs unprecedented access to a leading global bank and to Techstars’ mentor and investor relationships. Dreamit: A growth-focused accelerator designed for startups with market-ready products. ERA: The accelerator combines seed capital, hands-on help, and a co-working location with an expert team to drive the trajectory of early stage startups. ERA runs two 4-month programs per year. FinTech Innovation Lab: An annual program run by the New York City Investment Fund and Accenture, this accelerator focuses on early and growth-stage companies that have developed cutting-edge technology products targeted at financial services customers. Food-X: Helps food entrepreneurs bring their products and services to market at super speed. Food-X partners with early stage companies from across the food supply chain from agriculture through consumer packaged goods and helps the companies grow.

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MetaProp: As both a venture capital firm and tech accelerator, MetaProp invests, advises, and accelerates ten of the top real estate startups each year through an intensive curriculum filled with workshops, panel discussions, and pitch events. New York Fashion Tech Lab: This accelerator is a community-driven, relationshipbuilding, collaboration, and business development platform. The nonprofit program was cofounded by Springboard Enterprises and key fashion retailers to support women-led companies that have developed innovations at the intersection of fashion, retail, and technology. New York Digital Health Innovation Lab: This is an annual program for growthstage companies that have developed cutting-edge technology products for healthcare organizations. StartED: Focused on EdTech, StartED helps accelerate startups innovating in the early to workforce learning space. With just 5 days of programming, StartED serves as a pressure cooker for startups in the idea stage, connecting innovators with the network, capital, and insights they need to succeed. Techstars: This organization helps entrepreneurs raise startup funding and gain critical insight to help launch their businesses through its startup accelerator and development program. Techstars Cedar-Sinai Accelerator: An accelerator that helps today’s technology innovators turns their ideas into breakthroughs that can improve the lives of patients around the world. Urban-X: Guides founders in design, manufacturing, engineering, marketing, community building, and branding. Urban-X connects startups with the leading community of founders, investors, companies, and city officials. VentureOut: Based in NYC, VentureOut supports 200 of the world’s most innovative technology companies each year to launch, raise capital, and scale in the USA. It has supported over 1500 entrepreneurs representing 1000 companies that have raised over USD2 billion in capital and exited to companies like Google. It has created more than 13,000 jobs. XRC Labs: This innovation accelerator focuses on the next generation of disruptors in the retail and consumer goods sectors. Investors Fueling Growth From successful entrepreneurs looking to bolster their local economies to newly minted titans in the VC ecosystem, NYC investors are only getting stronger as the city continues to rack up successful IPOs. Angel Groups NY Angels is one of the longest running active angel groups in New York City and has invested over USD100 million in entrepreneurial ventures. The group is an independent consortium of over 135 individually accredited angel investors. Empire Angels consists of some of the youngest members of any angel group in the country. The group is dedicated to teaching millennials how to become successful angel investors.

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Investors Union Square: Investors in Etsy, MongoDB, Cloudflare, and Lending Club, this fund was founded in 2003 by Fred Wilson and Brad Burnham. It has earned a reputation as a top venture fund. Lerer Hippeau: Located in New York’s ever-trendy SoHo neighborhood, Lerer Hippeau focuses on early stage investment and some investments include consumer standouts like Casper, Glossier, and Warby Parker. RRE: This group is of the most active investors in NYC with USD1.5 billion and investments in Venmo, BARK, Camp, Datadog, Clearpath Robotics, and GIPHY. BoxGroup: This group boasts 3 billion-dollar exits including Flatiron Health, which sold to Roche for USD2.1 billion, Harry’s, which sold for USD1.37 billion to Edgewell Personal Care, and PillPack, which sold to Amazon. BoxGroup is one of the more reputable VCs in the world. Greycroft: This firm is consistently ranked among the most active global VC firms with notable investments in Acorns, App Annie, iCertis, Medly, Plated, Shipt, and The RealReal, which went public in 2019 at USD2.4 billion.

11.3

SWOT Analysis New York City

Resources Culture and mindset

Strengths Collaboration and community are at the core of NYC’s tech culture, which is distinct from the hypercompetitive cultures of finance, media, and other industries the city is known for. This culture, combined with the city’s inherent culture of openness, diversity, and excellence, has fueled the meteoric rise of New York as one of the top innovation

Weaknesses The city’s focus on business models and paths to revenue inhibits some of the “dream big” and “change the world” culture that typifies Silicon Valley. This results in a form of risk aversion in the city’s VC community, which follows a model of high risk for high reward, and is seen by some as the reason the city has not seen more large exits and IPOs over

Opportunities NYC is poised to be the best innovation ecosystem in the world, surpassing even Silicon Valley, if its community can continue to leverage the assets that are inherent to the city. The mindset and culture of the community will very much determine whether these opportunities are seized or not, and the successes of the

Threats A myopic view of tech and innovation as bringing only incremental progress to the industries that dominate the city, rather than the “create the future” mindset that inspires innovations that change the world, could diminish future growth

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ecosystems globally

the past decade. The IPOs and acquisitions of the past year, however, show that this weakness is diminishing With 8.4 million residents spread across 322 square miles, NYC has a unique challenge in providing equitable broadband access to every new Yorker. The city recognizes this challenge and the importance of broadband access to economic inclusion and mobility and recently doubled its investment in expanding internet infrastructure to the most underserved communities, for a total investment of USD157 million The city’s talent deficit has historically been in the area of applied sciences. The city has made tremendous investments in this area, with the launch of three applied

past year are encouraging

Digital infrastructure

NYC has developed a digital backbone that supports the largest business community on the planet as well as the city’s 8.4 million residents. The city government has been at the forefront of digital infrastructure development. The chief digital officer, a role created in 2011, reports directly to the mayor and oversees the city’s digital roadmap, which has directed hundreds of millions in investment to fund the city’s biggest digital infrastructure challenges

Education and skills

New York City’s greatest asset is its people. It is the largest talent market in the USA and has more tech workers than even the Bay Area by 23,000 employees. Roughly 2.3

Threats

The city has maintained a focus on its digital strategy and has made unprecedented investments in digital infrastructure, most recently with USD20 billion for the OneNYC 2050 plan. The city will be benefiting from these investments for years to come

A lack of equitable access to broadband and the benefits of digital infrastructure investments for all new Yorkers could undermine the progress of the last nine years and underutilize the city’s human capital. Fortunately, recent investments should mitigate this future threat

With the largest talent pool in the country, historical educational investments like the three applied sciences campuses, the rapid expansion of innovative companies like

If the city does not continue to invest in the talent pipeline so the current talent pool can meet the city’s growing human capital needs, it would significantly hinder the (continued)

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million new Yorker’s have a bachelor’s degree or above, more than Los Angeles, San Francisco, Washington DC, Philadelphia, and Boston combined. The pipeline of future talent is full, with over one million students enrolled in undergraduate and graduate programs— Making NYC the largest college town in the USA

science campuses since 2012, but the demands of the world’s tenth largest economy (if NYC were a country, it would have the tenth largest economy by GDP) are still not met by the city’s current talent pool

growth of NYC’s tech ecosystem and broader economy

Institutions

Track record of success built post2008 financial crisis as evidenced by diversification of economy

An unintended consequence of developing a strong tech ecosystem may have been a deepening of the digital divide

general assembly, and an insatiable business community, NYC will continue to attract worldclass talent, from students to experienced employees. The NYC tech talent pipeline is another key initiative, with a USD ten million industry partnership to train thousands of new Yorkers with skills for in-demand fields like web development and server administration NYC is poised to maintain its position as the second largest metropolitan area in the world

Legal advisers

New York City has both the largest number of lawyers of any USA city and the highest density with 14 attorneys for every 1000 people. Pair that with the world’s second largest tech and venture ecosystems and you have the largest population

NYC’s VC ecosystem is catching up to Silicon Valley’s in terms of by deals done and dollars invested. Decades of big tech deals in the San Francisco Bay Area have built experience for legal advisers and other service providers.

The tech ecosystem in NYC continues to grow and thrive, as evidenced by the explosion of tech IPOs and large funding rounds in NYC in early 2021. The experience gap between NYC venture tech service providers

As NYC’s tech ecosystem grows, so do the institutions that helped support that growth. This might hinder collaboration and the speed of execution A global or national economic downturn would decrease the deals that legal advisers and other venture tech service providers need for growth of the tech ecosystem

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Market and demand

Migration

Policy and strategy

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Strengths

Weaknesses

Opportunities

of legal advisers in the world

NYC’s legal ecosystem is stronger than Silicon Valley’s in all areas other than early stage ventures and tech M&A, so this is less a weakness than an area for growth The pandemic has caused a major shift in the way markets work. With people being able to work from home, there is a lower demand for people to be present and do business in the city

and those in the San Francisco Bay Area will continue to shrink

New York City is the number-one city globally for SMB and corporate buying power, while also having one of the highest-spending consumer populations in the world. The market demand for all services is extremely strong in NYC, which makes it the likely and the largest consumer NYC is a magnet for international talent. In 2020, 42% of the NYC workforce was foreign-born

Through five core strategies, NYC is highly focused on quality job creation in the technology, manufacturing, life sciences, manufacturing,

Threats

The booming cybersecurity industry coupled with NYC’s commitment to growing the sector will attract an influx of demand for workers and firms

Without an American visa and good credit, people can have difficulty finding housing. Creating community can be difficult when coming to NYC alone

The pandemic has created an opportunity to take advantage of temporary low rent prices in NYC

The lack of transparency with big tech makes it difficult to regulate and predict the consequences of government

NYC is committed to facilitating opportunity by investing in multifaceted city-owned property and implementing

There is some uncertainty around whether people will return to NYC postpandemic. The high cost of living and ability to work remotely has resulted in people moving out of the city Communities are highly relational and outspoken about which organizations they want in their neighborhoods, which can deter (continued)

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and construction spaces. NYC is committed to investing hundreds of millions of dollars in infrastructure, education programs, and property to shape NYC as an industry leader and grow the talent pipeline

policy and strategy

corporations from planting headquarters in NYC. Additionally, recent political instability and disapproval have created a divide between the people and the authorities

Quality of living

NYC offers a rich and diverse culture in every area of the arts and more. New Yorkers have broad access to public transportation

Rising housing costs across boroughs could make it difficult for NYC to hold onto its greatest competitive advantage in the innovation economy: Its highly educated and entrepreneurial workforce

Regulation

NYC boasts a capable local government that gets involved in economic development policy making. The city government invests time, money, and resources into its projects, and many of its initiatives have been at the forefront compared to its peers. NYC’s strong public transit system is a great equalizer,

NYC has higher taxes than other states. It has a decentralized business support system. Many city programs operate across agencies, but many not-forprofit groups are also involved

financial and tax incentives that will help businesses acquire and improve their facilities. Other policies include widespread capital investment in scalable infrastructure and land development The city has committed to a USD one billion neighborhood development fund to support the underlying infrastructure needed to support growth in neighborhoods that have been rezoned for more housing New administration’s approach to immigration will provide easier access to the US market with revised policies specifically geared to global businesses setting up offices or HQ in NYC

NYC’s cost of living continues to increase while wages remain stagnant

The recent changes in the presidential administration may bring increased regulation to businesses

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Resources

Research infrastructure

Risk capital

Strengths allowing people to travel to and from work regardless of financial situation. NYC has the largest public school system in country with more than one million students. It also has a robust higher public education system via CUNY and SUNY With 124 universities, NYC provides research infrastructure for a broad variety of disciplines including options for interdisciplinary projects

There is more risk capital available in NYC than in any other city in the world. While the San Francisco Bay Area still has the most VC investment, NYC is number two

Weaknesses

Opportunities

Threats

With a heavy concentration of universities, there are high research costs that require longterm investments that are not guaranteed to yield a significant return on investment

The diversity within the city and the broad variety of research institutions available enables NYC to make connections and make a global impact

NYC and New York state have some of the highest taxes on businesses totaling 45%, which is 25% higher than the UK. The high tax rate is unattractive for major corporations, which could lead to companies pursuing cities like Austin, Texas with lower tax rates

Growing competition between other major innovation hubs like London, Hong Kong, and Singapore

Significant investment is necessary to keep NYC’s research infrastructure up to international research standards. The wide variety of disciplines multiplies this investment compared to other regions NYC faces growing competition with other regions like London, Hong Kong, and Singapore

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Resources Bank loans

Tolerance and trust

Strengths NYC has been home to the world’s largest financial services center for generations. It boasts incomparable access to capital for qualified businesses, which companies typically use as nondilutive funding as an alternative to or after raising risk capital NYC is known globally for its diversity and tolerance and serves as the HQ for thousands of organizations fighting for the rights of the underserved, minorities, immigrants, the LGBTQ+ community, and more. The diversity and density of the city mean that people of all colors and creeds can find community in New York. For example, 40% of new Yorkers are immigrants, both residents and the workforce, making NYC a true immigrant city

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Weaknesses Equitable access to capital is still an area for improvement across all aspects of financial services

Opportunities A lot of the banks and financial services institutions have innovation offices in NYC and have been making capital available to businesses in continually more innovative ways

Threats Access to bank loans could diminish should the economy face inflation, as many are predicting, which would greatly increase the interest rates on these loans, but this is a threat across all lending nationally

While NYC is one of the most tolerant cities in the world, there is a growing divide among beliefs and growing tensions

NYC is a magnet for opportunistic people of all backgrounds. As NYC tends to be more inclusive while other states become more restrictive, people will migrate to NYC. Additionally NYC has launched several anti-hate crime programs to combat intolerance and promote inclusion

Although NYC leads as an example of collective tolerance, NYC is still battling systemic racism and disadvantaged migrant communities

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Economic and Political Strategy

11.4.1 Impact of the COVID-19 Pandemic Considering the current economic outlook and the effects of the pandemic on NYC, it is clear that many of the industries that were able to weather previous economic downturns, like tourism and education, are now the ones hit hardest by COVID-19. Small businesses struggled with decreased revenue amid public health guidance and certain government policies that affected their hours of operation. Before the COVID-19 pandemic ended a decade-long economic expansion in NYC, the city economy added 980,000 private sector jobs—about a one-third increase—between August 2009 and February 2020. The most significant economic impact of the COVID-19 recession has been job loss as the city’s unemployment rate went from 3.4% in February 2020 to 20.4% in June. The city lost 894,000 jobs from February to April and added back only 308,000 in the following 7 months. Approximately 5% of the city’s population left the city in the first 2 months of the pandemic, and some of the city’s wealthier neighborhoods saw close to 40% of residents leave. The city forecast a USD9 billion revenue shortfall through the middle of 2021, forcing a reduction in the city government’s budget for fiscal year 2021. From May to November, the construction industry gained back 72% of the jobs it lost in March and April. In the same time period, the retail trade industry regained 55% of the jobs it had lost. According to a December 2020 estimate by NYC & Company, the city’s tourism industry will host only 22.9 million visitors in 2020, a 66% drop from 2019. As of this writing, however, there are positive signs of a slight recovery from the substantial economic losses NYC sustained due to the pandemic. Unemployment claims have leveled off, and the demand for New York office space is currently the second highest in the USA.

11.4.2 Strategies and Policies New York Works From 2007 to 2015, about 50% of employment growth came from the education, health, and technology industries. As noted, the city’s diverse talent pool attracts companies looking for employees with global understanding and demographics reflective of their customers.

The Mayor’s office has been vital in creating initiatives and developing tools for creating jobs in the private sector ranging from City-owned property that can be activated for commercial and industrial use. A concerted effort by the office to provide additional financing and tax incentives that help businesses acquire property, construct and renovate facilities, and invest in equipment—all allow capital investment in large-scale infrastructure—directly enabling businesses to start and grow in the city.

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NYC Plan for Job Market Success Leading up to the pandemic, the New York City government was focused on growing the job market and fueling the talent pipeline over the course of 10 years. With COVID-19’s catastrophic impact on the job market, facilitating job market growth and attracting talent to the city has become even more significant. Through large investments in infrastructure, education, and supporting innovation platforms, the city has launched five core strategies across the technology space, life sciences and health care, industrial and manufacturing sectors, creative outlets, and office space, to help achieve this. The most relevant to framing NYC as a leading innovation hub is the city’s commitment to developing prominent leadership in the cybersecurity space. Starting with a USD30 million investment into cybersecurity, the city will generate 10,000 cybersecurity jobs and 30,000 innovation jobs in total. This large investment will provide quality jobs with salaries of USD70,000—80,000. More importantly, 44% of these job opportunities will be accessible to people without a college degree. In addition to creating jobs in the technology sector, NYC is committed to implementing computer science into the core curriculum in order to strengthen the local talent pool by 2025. With this initiative, NYC will be the largest public school in the country to implement computer science into their educational program. Outside of the technology sector, the local government has devoted significant investments to improving the life science and healthcare space. The New York metropolitan area has the highest concentration of bioscience workforce within the country, amounting to USD1.4 billion in National Institutes of Health awards. Coupled with being home to nine major academic medical centers such Columbia University, NYU, Albert Einstein College of Medicine and other notable institutions make NYC a leader in the segment. In efforts to grow the innovation aspect of the life sciences and healthcare sector, the city is investing capital in connecting research to the industry, creating jobs, and advancing health care and technology. Through this investment, the city will establish 16,000 permanent jobs and 1000 paid internships further fueling the talent pipeline.

11.5

Lessons Learned

The city that transformed from military port to manufacturing hub to financial epicenter now takes center stage in the creative and applied tech sectors. Driving over USD70 billion in startup valuation and exits each year, NYC is a global tech powerhouse. NYC remains the preferred location for business leaders both domestically and globally. However, with an unpredictable political and economic climate as well as a growing preference for remote work, it would be a mistake for the city to rest on its laurels. NYC cannot take its status as a global business capital for granted. Initiatives taken by the government both pre and post-COVID-19 limit these fears, as does the

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inextricable draw of NYC as a global hub for artists, innovators, and entrepreneurs. All of these still make NYC an extremely attractive destination. Given that capital is required for innovation to take off, NYC’s proximity to capital is a strength that few ecosystems can match. Initial concerns surrounding NYC’s ability to match capital with the understanding of what it takes to develop a thriving innovation hub proved unfounded. NYC has always been at the forefront of innovation and evolution beginning with industries that the local market understands. Additionally, collaborative efforts from government, local universities, enterprise, and investors has allowed NYC to expand on initial strengths surrounding talent and proximity to capital into the development of a thriving innovation ecosystem that has diversified its economy and ushered in the “next wave” of legacy industries. Progressive and forward thinking initiatives in upskilling and reskilling talent pool from day one can help address concerns that may arise in the future regarding the local talent pool. Wave of IPOs from 2019 to present will only boost innovation as talent from companies becomes new founders and investors—bolstering the NYC ecosystem.

Shanghai Innovation System

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Hui Yan, Yixi Xue, Xiong Li, and Ludovit Garzik

Abstract

Shanghai is not just a large city with around 23 million inhabitants; it is also one of the world’s largest trade hubs. As a cultural melting pot, Shanghai is a hot spot of knowledge and technology development. Shanghai’s Yangpu District hosts more than one-third of the colleges and universities. Learn about the core of the strength of this region with its creation of virtuous circles and the flexibility of incubation mechanism. The three main points for Shanghai’s success compared to other innovation regions are discussed as the degree of linkage across systems, the education level of the population, and the degree of spatial integration. In future, especially Yangpu District will be setting up special plans to attract social institutions to participate in investments. It is also supporting university science and technology parks to establish joint guiding funds for project equity investment in order to enhance the parks’ ability to cultivate high-quality early stage projects.

12.1

Shanghai and Its Yangpu District

Shanghai is not just a large city with around 23 million inhabitants, but it is also one of the world’s largest trade hubs. Its harbor is by far the largest container port in the world with around 42 million standard container units (TEU) per year. For comparison, the largest European container port is Rotterdam handling around 14 million

H. Yan (*) · Y. Xue · X. Li Shanghai University, Management School, Shanghai, China e-mail: dolphinsurfi[email protected]; [email protected]; [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_12

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TEU per year or one-third of the capacity. Shanghai has a long history of trade as the gateway for entry of many non-Asian nationals to China. As a cultural melting pot, Shanghai is a hot spot of knowledge and technology development. The core of Shanghai’s knowledge and technology ecosystem is in the Yangpu district. This is due to its magnetic effect on national and international intellectuals and to a sophisticated political strategy that focuses its dynamics. At the beginning of the twenty-first century, the Yangpu District put forth the idea that “serving colleges and universities is to serve Yangpu, developing colleges and universities is to develop Yangpu” along with a development goal of building a Yangpu University Town. In 2003, Shanghai’s administration further designed the strategy of building a Yangpu Knowledge Innovation Zone. In 2010, Yangpu was identified as one of the first batch of “national innovative pilot urban areas,” which put it on the road to building innovative urban areas with integration and linkage development like university campuses, science and technology parks, and public communities (referred to as the “linkage of three districts”). The universities are the core of Shanghai’s innovation ecosystem, as producers of R&D and technological innovation and sources of knowledge innovation. The development of cities like Boston in USA fully illustrates the key role of university innovation in driving local economic development. The purpose of the Yangpu District’s transformation into a university-type urban district is to strengthen the university as the core force of knowledge innovation, improve the innovation ecosystem around the university, and fully release the innovation potential of the university. The approach lets the university and the city evolve from simple spatial collocation to functional fusion, producing a chemical reaction from that physical fusion. The chemical reaction stimulates innovation activity, and each single innovation activity triggers a chain reaction, producing a multiplier effect and forming the cluster effect so that the university’s scientific research strength and innovation ability can be transformed into Yangpu’s economic strength.

12.2

Facts and Figures in the Shanghai/Yangpu Innovation System

12.2.1 Yangpu District Location and Its Institutions The Yangpu District, located in Shanghai’s northeast, has the highest intensity of higher education resources and intellectual class in China. An area of about 60 square kilometers hosts more than one-third of Shanghai’s colleges and universities, including Fudan University, Tongji University, Shanghai University of Finance and Economics, the Second Military Medical University, and other famous universities. The district represents 87 national key disciplines, covering the fields of economics, mathematics, physics, chemistry, biology, electronics, medicine, journalism, architecture, civil engineering, transportation, finance, banking, accounting, optics, and more.

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The Yangpu District also boasts 14 scientific research institutes, including Shanghai Internal Combustion Engine Research Institute, the 23rd Research Institute of China Electronics Technology Corporation, the Chinese Academy of Fishery Sciences, Shanghai Textile Research Institute, and Shanghai Optical Instrument Research Institute. The educational and scientific research land area of the whole district is 5.57 square kilometers, accounting for 10.1% of the total buildable land in the Yangpu District.

12.2.2 Yangpu and Its Neighboring Districts In general, the population of the Yangpu District is highly educated. Yangpu’s comparative advantage in intellectual resources is apparent when comparing Yangpu with the populations of other districts in Shanghai. Among the 1.3 million permanent residents of Yangpu District, more than 30% of the population have education above the junior college level. In addition to high levels of education in general, Yangpu boasts more than 5000 professors and associate professors and more than 40 academics in the Chinese Academy of Sciences and Chinese Academy of Engineering—more than half of Shanghai’s total. More than 200,000 people are employed in the fields of education, scientific research, and technical services, accounting for a large proportion of the population. In 2008, around 10% of Yangpu’s population was employed in the education sector, compared to around 3% average in the city overall. Considering its intensity of educational facilities, the education level of the population, and the employment structure, Yangpu District is an area with intensive intellectual resources. Its development mission of “Knowledge Yangpu” is in line with its comparative advantages.

12.2.3 Institutional Players in “Knowledge Yangpu” Area Since the beginning of the twenty-first century, Yangpu District in Shanghai has established a development strategy of “Knowledge Yangpu” and constructed its innovation system of three-district linkage across university campuses, technology parks, and the community. After more than 10 years of implementation, certain achievements have been made, but overall development has not yet achieved a qualitative breakthrough. According to a review and evaluation of the “Knowledge Yangpu” strategy, the main reasons for any shortfalls are differences between the policy’s intention and implementation in target orientation, interest demand, and system management. These have led to insufficient linkage and have hindered the effective operation of the innovation ecosystem. Innovation from Yangpu’s university—a core part of the strategy—has failed to play its role effectively. Accordingly, there are four concrete countermeasures:

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Countermeasure 1: Innovation source: Improve the microinnovation ecology of the universities. Countermeasure 2: Innovation direction: Give key disciplines full freedom to determine their own innovation directions. Countermeasure 3: Innovation diffusion: Further promote the spatial integration between universities and urban areas. Countermeasure 4: Innovative atmosphere: Create a microspace environment suitable for the creative class.

12.2.4 Countermeasure 1: Innovation Source To cultivate the innovation ecosystem of universities, universities in Yangpu should actively learn from the MIT’s experience in building an ecosystem for transferring knowledge into markets: set up innovation organizations, open innovation courses, and organize student entrepreneurship communities. These actions will make knowledge available and prepare teachers and students for innovation and entrepreneurship. As the innovation subject can take up large amounts of scientific research and education resources, the university should strengthen its openness especially. Successfully innovative universities need to learn from relevant experience and expand their openness, which should not be limited to opening stadiums and gymnasiums to communities or opening laboratories to enterprises. Wang Na, a scholar, summarized MIT’s openness in four aspects1: First, openness across disciplines to strengthen interdisciplinary teaching and research and development cooperation within the university. Second, openness between universities with the development of modern information technology and cooperation with global R&D institutions and universities. Third, openness to industry to promote technological innovation and transformation of achievements while meeting the university’s R&D funding needs. Fourth, openness of courses and resources to the whole world through a network platform that promotes global participation and collaboration. Universities in the Yangpu District have two main tasks: encouraging knowledge-driven institutions and establishing systematic innovation courses. The first job requires universities to actively encourage innovative organizations through a variety of means. These include the following:

1 Wang Na (2014) Four Key Elements of MIT “Innovation Ecosystem” (J). Journal of Liaoning Institute of Education Administration (1):61–64.

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Acting as a bridge between research centers and businesses, entrepreneurs, and investors. Across universities and between the faculty and alumni who mediate and providing platforms, the innovation organization aims to promote the cooperation between research institutions. Furthermore, it combines entrepreneurs, business capital, patent applications, business licensing for technical achievements, and the communication between teachers, students, and alumni to make the difference in ecosystem performance. Creating innovative organizations in professional fields, including R&D centers in engineering technology, electronic technology, biomedicine, and other disciplines. Enabling the organization of students’ entrepreneurial associations to promote exchange and cooperation between students of different disciplines and between students and alumni, which is conducive to creating a strong entrepreneurial atmosphere, in addition cultivating entrepreneurial ideas and innovative talents and forming entrepreneurial networks. The second main job of a knowledge-driven institution is the establishment of systematic innovation courses. It is necessary to open innovative education for all students and increase openness between departments and institutions. The content of innovation courses should be as complete as possible, including four main strands. First are general entrepreneurship courses on topics like business plans. Second, universities should provide professional courses related to entrepreneurship issues like management, law, finance, and marketing. Third, they need innovative courses related to various disciplines and technical fields. Finally, knowledge-driven institutions should provide experiential and practical entrepreneurship courses.

12.2.5 Countermeasure 2: Innovation Direction The second measure to counteract innovation stagnation is to provide full play to the advantages of key university disciplines. Yangpu District’s industrial development policy during the 12th Five-Year Plan is “two priorities, two promotions, and one maintenance.” It prioritizes the development of modern design, science and technology, financial services, software and information services, electronic information, and other industrial categories. Meanwhile, it proposes the cultivation and maintenance of industries like cloud computing and real estate. The priority industries cover many categories of high and new technology and the modern service industry, which are related to the key disciplines of universities in the Yangpu District—to a certain extent. However, the degree of correlation is not strong overall and industry selection overlaps with neighboring Hongkou and Baoshan districts. In the future, it will be necessary to prioritize the advantages of key university disciplines, determine innovation directions based on the existing industrial foundation, give priority to feasible innovation activities, transform disciplinary advantages into industrial advantages with market potential, and enhance the competitiveness of Yangpu’s industrial structure.

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In addition to the well-developed design and electronics industries, other national key disciplines in Yangpu should guide the direction for further fostering innovation and entrepreneurship. As it selects priority industries, the government should play an active role as a service provider through policy guidance and efficient service to create a good environment for innovation and entrepreneurship.

12.2.6 Countermeasure 3: Innovation Diffusion This countermeasure calls on Yangpu’s leadership to further promote the integration of universities and urban space. At present, the openness of universities in Yangpu District is still very weak. Neither the visible nor invisible walls have been fully torn down. The demolition of fences to reveal green, open sports facilities and other symbolic openings have had limited effects on promoting integration between universities and urban areas and even less on diffusing innovation and entrepreneurship. For example, the new Jiangwan Campus of Fudan University was built recently but still adopts a closed management mode and has not formed its expected integration and interaction situation with the new Jiangwan City community. As a national innovative pilot urban area, universities in Yangpu should break through these figurative walls, overflow them in function and space, maximize opportunities for social spillover effects, and gradually approach the openness of foreign universities. Regional Management of Land Resources (Infrastructure) Efforts to encourage university spillover effects should focus on the Wujiaochang and Binjiang areas. At present, there are 8.27 square kilometers of industrial storage land and 1.8 square kilometers of residential area in the Yangpu District and a total of 10 square kilometers of land resources that can be renovated to provide sufficient space for the overflow of university functions. The Wujiaochang area is an ideal target for maximizing the transformation of industrial land in Yangpu District and the spillover of university functions. It is adjacent to the university and the riverside area and has excellent landscape resources. Several requirements are important for the layout of the spillover space’s selection and planning. First, it must be close to the existing campus. For example, Yangpu could set up a platform for enterprise science and technology R&D near Chanwu Road at Tongji University. Second, the land must have renovation potential. In the area south of Xiangyin Road and east of Guoding East Road, the Shanghai Tractor Internal combustion Engine Company is currently a low-rise and large-volume industrial workshop. A new project can retain the framework of this industrial building as it is rebuilt into loft blocks that meet the dual needs of talented young people in universities for social integration and entrepreneurship support. Third, a new spillover space must be ready to pull along the development of the region. For example, the enterprise scientific research and international cultural exchange center will be on Fuxing Island. This will become an island of culture

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and art, which will drive the transformation and upgrading of the 30-mile riverside area. Function Selection (Links to Companies) Universities have many functions, and spillovers in some areas are more valuable than others. As the main carrier of Shanghai’s vision for a global science and technology innovation center, Yangpu should focus on linking enterprises, people, and services. It should promote the integration of universities and urban areas more fully and should build a service platform for international academic exchange and international talent introduction. There are three key aspects to the spillover functions of colleges and universities. First is the teaching function. Universities can transmit knowledge about newly established disciplines and specialties or provide joint training centers. Students and faculty can also leave campus and settle in urban areas, which expands the space this teaching function might occupy. The second function is the scientific research function. This can be enhanced by the construction of university research institutions and other scientific research hubs. Finally, the third function is the public service function. Universities can establish catering services, business services, libraries, sports facilities, student apartments, and more. They can also serve as talent management services for society.

12.2.7 Countermeasure 4: Innovation Atmosphere This countermeasure focuses on building a spatial environment suitable for the creative class. Richard Florida describes innovative talents in the new economy as “the creative class.” He believes that this creative class tends to live in central areas with moderate costs rather than in marginal areas with separated functions. They also tend to integrate work, residential, and leisure spaces to facilitate the instantaneous conversion between life, work, and leisure activities. Small family living spaces, personalized lifestyles, convenient life service facilities, and flexible working environments are more suitable for the work and lifestyles of the creative class. Yangpu’s University Road has made a successful attempt to create an urban environment suitable for the creative class. The SOHO home office combines living and office functions, which is suitable for young entrepreneurs’ all-hour work habits. Convenient service facilities are integrated with a studio, a book bar, creative “do it yourself” retail stores, Chinese and Western restaurants, and other business forms, creating a fashionable and personalized innovative atmosphere. The small- and medium-sized commercial spaces are suitable for the operation and management of creative businesses that facilitate the integration of personalized goods with various cultural and artistic elements. With Knowledge Yangpu and the innovative city as its north stars, Yangpu should pay more attention to large-scale development and change from pursuing high-end space environments to humanized microspace environments. It should also pay more attention to the creation of innovative atmospheres. The “Central Wisdom

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Zone” in Wujiaochang should be Yangpu’s model for creating an innovative atmosphere. Guokang Road and Chifeng Road are design industry clusters, and Guoding Road is the location of entrepreneurship demonstration park for college students. This has the advantage of gathering creative and entrepreneurial talents gathering. Zhengtong Road features small shops, young people, and leisure businesses. The surrounding area of Changhai Road is characterized by its historical buildings from the Republic of China, and its existing branch road system is utilized to form a humanized street space suitable for walking and cycling.

12.3

SWOT Analysis Shanghai/Yangpu Region

Resources Culture and mindset

Digital infrastructure

Education and skills

Strengths Preliminary establishment of a regional innovation pattern. The policy of threeregion linkage and the knowledge Yangpu strategy establish a preliminary regional innovation system Yangpu’s industrial development policy during the 12th five-year plan prioritizes the development of modern design, science and technology, financial services, software, and information services Yangpu hosts more than one-third of

Weaknesses Opening should not be limited to the opening of stadiums and gymnasiums to communities or of laboratories to enterprises

Opportunities The openness of courses and resources to the whole world through network platforms can promote global participation and collaboration

The correlation to Yangpu’s existing industry is not strong, and industry selection is too similar to neighboring Hongkou and Baoshan districts

The priority industries are emerging industries with large space for development

At present, the openness of regional

Shanghai/ Yangpu ranks first in the

Threats Different target orientations in different subjects lead to low policy response. Different interest demands lead to insufficient policy influence

(continued)

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Institutions

Quality of living

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Strengths

Weaknesses

Opportunities

Shanghai’s colleges and universities. It has 87 national key disciplines. More than 200,000 people are employed in the fields of scientific research and technical services Yangpu hosts 14 scientific research institutes. In 2012, it established the first “technology bank” in China to provide financial services for hightech enterprises: the SPD Silicon Valley Bank

universities in Yangpu District is still very weak

intensity of higher education resources and intellectual class in China

Compared with Haidian District, which is also a national innovative pilot urban area, there is still a big gap in the software and hardware innovation and entrepreneurship atmosphere

New initiatives near university campuses have a lot of potential. For example, a platform for enterprise science and technology R&D can be established near Chanwu road of Tongji University

University road has made a successful attempt to create an urban environment suitable for the creative class

There is a shortage of small family living spaces, personalized lifestyle and convenience facilities. Flexible working environments are more suitable for the work and lifestyles of the creative class

Threats

Neither visible nor invisible walls have been fully torn down. The demolition of fences around sports facilities and other symbolic openings have limited effect on promoting integration between universities and urban areas or the diffusion of innovation and entrepreneurship With its goals of knowledge Yangpu and the innovative city, Yangpu should pay more attention to large-scale development and provide a humanized microspace environment that pays attention to creating an innovative atmosphere (continued)

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Resources Research infrastructure

Policy and strategy

Strengths At present, Yangpu District has built 20 science and technology parks, among which seven are national university science and technology parks, software parks, and hightech entrepreneurship service centers Since the beginning of the twenty-first century, Yangpu has pursued the knowledge Yangpu strategy and constructed an innovation system based on three-district linkage (campus, park, and community)

Risk capital

Regulation

Since the beginning of the twenty-first century, Yangpu has pursued the knowledge Yangpu strategy and constructed an innovation system based on three-district

Weaknesses Compared with Haidian District, which is also a national innovative pilot urban area, Yangpu is lacking incubation institutions and flexibility in its incubation mechanisms

Opportunities A total of 10 square kilometers of land resources can be renovated to provide more space for the spillover of university functions

Threats The key problem lies in the failure to effectively convert universities into innovation hubs and the failure to fully realize their potential as engines of innovation

After more than 10 years of implementation, overall development has progressed but has not yet achieved a qualitative breakthrough. There are still some problems in policy implementation Compared with Haidian District, Yangpu lacks financial capital density

Policy making is a rational decision based on the advantages of science and education resource density

Evaluation of the implementation effects of knowledge Yangpu shows that the innovation virtuous circle has not yet formed and the driving effect of universities is limited

Overall development has not yet achieved a qualitative breakthrough

Growing wealth in the middle class will improve opportunities for broad investment in private equity and venture capital The government has been increasing its support for innovation systems and improving measures

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Market and demand

Strengths linkage (campus, park, and community) After more than 10 years of implementation, knowledge Yangpu and the three-district linkage strategy have made certain achievements

Migration

Due to policy reasons, Shanghai has focused its science and education resources in Yangpu District. Yangpu is the main carrier of Shanghai’s ambitions as a global science and technology innovation center

Bank loans

The first “technology bank” in China to provides financial services for high-tech enterprises (SPD Silicon Valley Bank) With the knowledge Yangpu and

Tolerance and trust

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Weaknesses

Opportunities

Threats

Implementation stalled by differences in target orientation and demand, as well as poor implementation management. This leads to insufficient linkage and hinders the innovation ecosystem. University innovation failed to play its envisioned role The influx of innovation resources is not sufficient. Yangpu should focus on linking its enterprises, people, and service platforms to promote the integration of universities and urban areas

Yangpu can achieve a qualitative breakthrough with four concrete countermeasures related to including innovation sources, innovation direction, innovation diffusion, and innovative atmosphere

The innovation virtuous circle has not yet formed, and universities’ driving effects are limited

Yangpu District has a huge space for the development of scientific and educational resources, providing opportunities for the migration and settlement of innovative talents, innovative companies, and other innovative resources

There are four bottlenecks: Institutional bottlenecks, resource bottlenecks, capital bottlenecks, and talent bottlenecks. Segmentation of land and resources for scientific research is an issue

There is still a big gap in financial capital density compared with other systems

The key problem is the failure of universities to

The creation of students’ entrepreneurial (continued)

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Resources

12.4

Strengths

Weaknesses

Opportunities

innovative city strategies, Yangpu will pay more attention to large-scale development, develop a humanized microspace environment, and pay more attention to the creation of an innovative atmosphere

fulfill their innovation potential, so the atmosphere of tolerance and trust for innovation is not fully established

associations can promote exchange and cooperation across disciplines and between students and alumni. This is conducive to creating a strong entrepreneurial atmosphere, cultivating entrepreneurial ideas and innovative talents, and forming entrepreneurial networks

Threats

Strategy and Implementation in Shanghai/Yangpu Region

12.4.1 Knowledge Yangpu Strategy In 2003, the city management of Shanghai decided on the Knowledge Yangpu development plan. The goal of the strategy is to enable the preliminary establishment of a regional innovation pattern. The policy of three-region linkage formulated by the Knowledge Yangpu strategy should also support this local innovation ecosystem. The essence of three-region linkage is to build a benefit-sharing mechanism among regional innovation actors and form an efficient regional innovation system. Three-region linkage is based on three key sources of innovation. The first is university campuses. Second are science and technology parks, which can be platforms for innovation. Finally, the plan relies on gathering, sharing, and integrating resources in public communities. Communities are the source of linkage across all three areas. At present, Yangpu District has built 20 science and technology parks, among which seven are national university science and technology parks, software parks, and high-tech entrepreneurship service centers. They include the Fudan University Science and Technology Park and the Tongji University Science and Technology Park. Chuangzhi Fang is the model community of three-district linkage. Another key part of the Knowledge Yangpu strategy is that the district actively promotes financial innovation services. In 2012, it established the first “technology

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bank” in China to provide financial services for high-tech enterprises—the Shanghai Pudong Silicon Valley Bank. However, compared with Haidian District—another national innovative pilot urban area—Yangpu is still far behind in areas like its innovation and entrepreneurship atmosphere, its financial capital density, its number and area of incubation institutions, and the flexibility of its incubation mechanisms.

12.4.2 Implementation of the Knowledge Yangpu Strategy The implementation of all the various strategy targets in Knowledge Yangpu is quite demanding. In practice, different management systems and the necessary coordination of interests have led to a lack of connectivity. As a result, the implementation of the Knowledge Yangpu has not yet yielded the desired results. Researchers mainly believe that actors’ different target orientations led to low responsiveness to policies, competing interests limited policies’ influence, and different management systems led to policy fragmentation. As a result, the innovation system set up by the government has not been functioning efficiently. Specifically, scholars like Zhang Renbiao believe that the main problem with implementing the Knowledge Yangpu strategy is that the conflicts of interest among various departments weakened the basis of cooperation. According to Yao Fang, there are four bottlenecks: resource bottlenecks, capital bottlenecks, talent bottlenecks caused by segmentation of land and scientific research resources, and institutional bottlenecks caused by actors’ different value orientations, different evaluation systems, insufficient docking platforms, and different cultural atmospheres. According to Guan Yuanfa, the main problem is that the target for linkage is too restricted since it is limited to the high-tech and knowledge-based service industries. In addition, the path dependence of linking real estate and land development has caused their failure to form an interactive relationship model of symbiotic cooperation. To sum up, the views of all scholars are reasonable, but the real comparative advantage resource of Yangpu is still its universities and its core innovation driver is also its university. Therefore, the key problem lies in the failure to effectively implement the universities as the subject of innovation and the failure to fully release the potential of universities as the engine of innovation.

12.5

Conclusions and Lessons Learned

Yangpu District is designed to be • • • • •

A source of knowledge innovation and a leading area for emerging industries An agglomeration of innovation and entrepreneurship A pilot zone for the service economy A high-end talent gathering area A higher education reform experimentation area

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• An advanced culture promotion area • And a quality-of-life demonstration area In January 2010 at the National Science and Technology Conference, Yangpu District of Shanghai was named as a “National Innovative Pilot City Area.” This is the full affirmation of Yangpu’s unremitting efforts over the years to innovationdriven and to become demonstrative regeneration pathway for old industrial city areas. With its credo of “innovation-driven transformational development,” Yangpu relies on its rich regional scientific and educational resources and relatively perfect regional innovation service system. It stands on the strategic height of enhancing independent innovation ability and building an innovation-oriented country, strengthening the construction of national innovation system and regional innovation system, and promoting the innovative development of the city. The core of the strength of the Shanghai/Yangpu innovation system is based on the following key factors: • • • • • • • • • • •

Creation of a virtuous circle Degree of linkage throughout the system Intensity of educational facilities Educational level of the population Employment structure Innovation and entrepreneurship atmosphere Financial capital density Data and area of incubators Flexibility of the incubation mechanism Openness Degree of spatial integration

According to this analysis, three main points for Yangpu’s/Shanghai’s success compared to other innovation regions are the degree of linkage across systems, the education level of the population, and the degree of spatial integration. In the future, Yangpu will focus on five functional zones to build its innovative ecosystem. 1. Optimizing district planning for innovation This first functional zone focuses on optimizing the layout of the business district in the south. Specifically, Yangpu should upgrade the level of commerce around the central island and build a city-level business landmark. It should also build up the northern innovation world and enhance its international orientation. 2. Constructing science and technology parks based on the knowledge economy circle around Tongji University This item focuses on the construction of a state-level industrial base with special R&D and design services in the ring around Tongji University. It would also entail the development of other science and technology parks based on that model. These include parks at Fudan University focused on electronic

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information and new materials, at the Shanghai University of Finance and Economics focused on science and technology financial services, at the University of Shanghai focused on optical mechatronics, at the Shanghai University of Electric Power Science focused on new energy and smart grids, and at the Shanghai University of Physical Education focused on sports, leisure, and health. 3. Making New Jiangwan City into an international, intelligent, ecological community This project supports the key functions an international science and technology industrial park and demonstrates a low-carbon concept. This measure should accelerate the construction of energy-saving buildings, green transportation, and low-carbon communities. It should also increase the number of international public facilities for services like education and medical care and build international quality-of-life demonstration zones. 4. Constructing a Dalian Road Cluster Area The cluster will be a gathering place for the regional headquarters, R&D centers, and marketing centers of multinational corporations and leading domestic enterprises. The location near Pudong connects this cluster to the Yangtze River Delta and therefore all of China and the world. 5. Constructing a Yangpu Riverside Development Zone This project builds on Yangpu’s century-old industrial heritage, promoting projects like the World Expo Watergate, Fisherman’s Wharf, the China Shanghai International Fashion Center and others. This will launch a global creative economy city project and a modern service industry development belt featuring spaces for innovation and creativity, science and technology, business, tourism, and leisure. It will include exhibition areas and forums. Yangpu provides four key lessons for other regions. First, cultivate the innovation ecosystem of core actors like governments, innovation institutions, and universities to develop a source of innovation. Second, give full play to the advantages of core members and define the direction of innovation. Third, promote the integration of the system with other spaces, especially the spatial integration of universities and urban areas, to spread manufacturing innovation. Finally, create an environment suitable for the entrepreneurial class and create an innovative atmosphere. Strive to Get on the Fast Track Supported by the Municipal Science and Technology Commission, a functional service platform for transfer and transformation and a database of colleges’ and universities’ scientific and technological achievements will be established to support the analysis and evaluation of achievements and value-added cultivation services. The capacity of university science parks to commercialize scientific and technological achievements will be improved to accomplish the “last mile” of commercialization.

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Make Good Use of Financial “Boosters” Given the problems high risks, difficult evaluation, and a long cycle of early investment in scientific research achievements, Yangpu is setting up special plans to attract social institutions to participate in the initial investment. It is also supporting university science and technology parks to establish joint guiding funds for project equity investment, enhancing the parks’ ability to cultivate high-quality early stage projects. A fund of RMB 300 million will be installed to build a life-cycle investment and financing service chain from idea to industry. Furthermore, a science and technology innovation board will be established in close alignment with the Shanghai Stock Exchange to pilot the registration system, speed up sorting, and accurately identify key enterprises.

Shenzhen Innovation System

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Abstract

Shenzhen is one of the fastest-growing cities in human history. In 40 years, Shenzhen has grown from a rural village to a major metropolis and innovation hub. This chapter explores Shenzhen’s innovation ecosystem, infrastructure, policies, and strategies. The examination suggests that the special economic zone is an effective strategy, experimenting with regulations and bypassing bureaucracy to create a space for smart people with great ideas. Importantly, Shenzhen first achieved modern industrialization and then transformed into an innovation hub. Its industrial power enabled Shenzhen to achieve “Shenzhen speed”: If you have a smart idea in the morning, you are likely to have a prototype in your hands in the evening. This speed separates Shenzhen from other global innovation hubs. Today, Shenzhen is keen to create an academic environment where knowledge owners are encouraged to translate their knowledge into business ventures. Shenzhen is also the base of many major venture capitalists. Shenzhen has demonstrated that advanced industry plus knowledge owners plus venture capitalists can achieve great results in innovation.

Y. Yang (*) Country Manager China at Sedo.com, Dongguan, China e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_13

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Shenzhen and Its Historic Development

Until the end of the 1970s, Shenzhen and the whole Pearl River Delta around were farmland. Shenzhen was a rural community with a population around 20,000 people. Compared to neighboring Hong Kong, the economic situation was very weak, and people tried to escape for better jobs into the British-led mega-city. Chinese authorities secured the border tightly and anyone trying to swim across the border river would be risking his or her life. In 1979, Deng Xiaoping visited the town as the new Chinese leader and asked why it was necessary to hurt people who take a risky swim for a better life. He argued that it would be much wiser to develop the economy on the Chinese side of the border so people from Hong Kong would be the ones trying to get across the border. This was the birth of one of the first special economic zones in China, which was followed by many others. The success of the special economic zone was driven by a large and cheap labor force, the financial capital of neighboring Hong Kong, and a strong seaport for export. In the first years after its designation as a special economic zone, Shenzhen attracted a great deal of foreign direct investment and its population rose rapidly. Today, its population is estimated around 20 million people—a 1000-fold increase over 40 years. Income levels rose similarly to population, and Shenzhen’s per capita income today is the highest in China. Forty years after its formulation, Deng Xiaoping’s mission was accomplished. Shenzhen’s GDP surpassed Hong Kong’s in 2019. Today, Shenzhen offers more jobs than its neighbor and, according to some statements, a better quality of life.

13.2

Cultural Characteristics in the Shenzhen Innovation System

At the front gate of the Shenzhen Municipal Committee is a statue of a bull using its full strength to drag a gigantic dry tree root out of the ground. The root represents all the ideological constraints that restrict progress. The bull symbolizes the people of Shenzhen, who sweep away these restrictions and move toward progress with their full strength. Full strength toward progress might seem an obvious approach today, but in 1970s, China the mainstream culture was consumed by the ideological conflict between communism and capitalism. People generally thought capitalism was equivalent to evil. The famous slogan at that time was “I would rather have the grass of socialism than the seeds of capitalism.” Meanwhile, in Shenzhen, the slogan is “time is money, efficiency is life.” It would be hard to imagine the special economic zones strategy working if China’s culture had not shifted from ideology to productivity. In Shenzhen’s case, implementation of the new culture started with the selection of new management. In January 1979, Yuan Geng—the one who coined the phrase “time is money,

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efficiency is life”—was assigned to establish a pilot project for an industrial zone, the Shekou Industrial Park. In April 1979, Deng Xiaoping’s policy to establish China’s special economic zones was drafted on the base of the Shekou Industrial Park.1 Shenzhen was the first special economic zone in China to gain legislative power. This power provides Shenzhen with a lot of options other regions do not have. For example, Shekou law firm was the first law firm in mainland China. Shenzhen is the first city in mainland China to implement a labor contract system. Shenzhen had the direct election of a village chief or mayor with Shenzhen Dapeng town’s “two-vote system.” Shenzhen’s big-ministry reform in 2009 was the most vigorous institutional reform among the governments of major cities in China.

13.3

Institutional Players in Shenzhen

As stated, 40 years ago, Shenzhen was been a fishing village with less than 20,000 inhabitants. To build up to today’s 20-million-person urban area, regional management had to establish every institution from scratch. Shenzhen turned the disadvantage of having no institutional system at all into an advantage over regions with long histories that would have to drag along unnecessary but entrenched institutions. In this way, Shenzhen leapfrogged its international peers by constructing modern and efficient institutional infrastructure. Educational institutions, including universities, are part of a critical regional infrastructure and deserve special attention. Knowledge Institutions Knowledge institutions, especially universities, developed rapidly and dynamically in Shenzhen and its neighboring cities. Today, the university infrastructure in the region comprises approximately 15 high-class, internationally acknowledged colleges and universities. More are established every year. The most important knowledge institutions are as follows: University/College Shenzhen University Shenzhen Polytechnic Shenzhen Institute of Information Technology Southern University of Science and Technology Shenzhen Technology University

Established 1983 1993 2002 2009 2019

Number of students (data year) 35,000 (2019) 21,000 (2019) 16,000 (2019) 6000 (2018) 5000 (2020)

Shenzhen University The installment of one of the first special economic zones in China forced the regional administration to develop critical infrastructure. Shenzhen University was

1

Min Ye (2014). Diasporas and Foreign Direct Investment in China and India. Cambridge University Press.

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an early sign of progress that has been acknowledged by many heads of state since its establishment. The university is funded by the city administration of Shenzhen, which provides it the flexibility to grow rapidly both in terms of faculty and student numbers and in terms of quality and international rankings. The university’s budget of around USD750 million in 2020 puts it in the top league of international universities, especially for its current size of around 35,000 students. Shenzhen Polytechnic Shenzhen Polytechnic offers graduate courses and vocational training in a broad variety of disciplines. This institution’s interdisciplinary exchange between deep technology and fine arts is typical of the large education institutions in Shenzhen. Employing around 1000 teachers for 20,000 students, Shenzhen Polytechnic has a high student–teacher radio. Although established relatively recently in 1993, it was already earning awards and prizes in the early 2000s like the first prize of national education achievement. Chinese education institutions are, like those in other Asian countries, assessed by the labor market’s interest in their students, called the “takeup rate.” Shenzhen Polytechnic has a 95% take-up rate, which makes it attractive for students and employers alike. Shenzhen Institute of Information Technology This Institute provides full-time higher learning programs organized in ten schools. It was established due to the increasing need for IT specialists after the turn of the century. Therefore, it focuses on providing human capital to Shenzhen’s core industry. Due to rising demand in these areas, further expansion of the Institute’s activities is expected in coming years. Southern University of Science and Technology The Southern University of Science and Technology was established in 2011 and has had steep growth in recent years due to regional demand for skilled workers and impressive corresponding investments from regional authorities. This university is a research institution as well as an education institution and has already attracted a number of world-class researchers. The University’s research has pushed it up in international rankings in just a handful years since its establishment. Shenzhen Technology University The Shenzhen Technology University is a university of applied sciences that was founded in November 2019 in the Pingshan District of Shenzhen. Its specialization on engineering and design is due to the exploding demand for skilled workers from local industries involved in high-tech planning, designing, and manufacturing for the world. Shenzhen is the hot spot for global production of mobile phones, tablets, computers, and drones, complemented by an equally strong software industry. The Technology University’s focus on students’ direct market access is expressed in new modes of education like the combination of university education, enterprise internships, and engineering projects. This focus will continue to sharpen: The Technology University plans to establish six new colleges to meet the quality and

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quantity of labor required in the Shenzhen Action on Made in China 2025 and its selected fields of advanced manufacturing and technology. There are additional institutions in the tertiary sector in Shenzhen, most of them subsidiaries of other Chinese education institutions like Shenzhen Graduate School of Peking University, Shenzhen Graduate School of Tsinghua University, the Chinese University of Hong Kong in Shenzhen, Shanghai Jiao Tong University Antai College, and the Harbin Institute of Technology in Shenzhen. Other institutions in this sector operate in specific technologies or branches. These include the Shenzhen Radio and TV University, Shenzhen Institute for Information Technology, Shenzhen Institute of Advanced Technology, and the Shenzhen MSU-BIT University.

13.4

Shenzhen Innovation System SWOT Analysis

Resources Culture and mindset

Digital infrastructure

Education and skills

Institutions

Strengths There is a strong preference for market implementation in society and business. Culture of chàbùduō: “That is working quite well for the moment” Shenzhen is the first city/region to accomplish full 5G coverage. It has a high commitment to all kinds of digital and physical infrastructure High-quality education of the next generation is the highest priority in Shenzhen’s society Shenzhen has a modern and efficient

Weaknesses Shenzhen has an introverted social culture and limited openness to other nationalities

Opportunities The focus on global markets will open society to outside cultural influences

Threats The large home market will reduce the speed of opening and can be an advantage for other regions to develop faster

Infrastructure usage is restricted by government regulations

The top-down management of infrastructure investments enforces speed of implementation

The rapid development of the greater area could lead to overexpansion

The rhythm of education is still very traditional and is organized by discipline

There is an opportunity for higher education attainment expansion in the large rural population Decision makers are focused on establishing

The pace of change in education may be too slow

Shenzhen is lacking some institutions like

The nearby cities of Guangzhou and Hong Kong (continued)

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Strengths

Weaknesses

Opportunities

Threats

institutional infrastructure

universities due to its short history

might draw away academic talent. Both Guangzhou and Hong Kong have far more developed institutional ecosystems

Market and demand

The local market size of USD381.40 billion (2019) is increasing by 7% annually. Consumers are quick to adopt new technologies, products, and services

Rising property prices in recent years have weakened consumer spending power. Despite the per capita disposable income ranking number four among Chinese cities, Shenzhen’s total retail sales only rank seventh

Migration

The population of well-educated and skilled young Chinese people in the Shenzhen area is vast and unbeaten worldwide. A great deal of international Chinese migration to Silicon Valley is attracted back to China by the favorable working and living conditions offered by

There is a lack of international migration to the region; it is still not on the radar of smart internationals looking for new opportunities

subsidiaries of major national and international universities like Peking University Shenzhen, HSBC Business School, and TsinghuaBerkeley Shenzhen Institute Shenzhen will be the core of the Greater Bay Area (GBA). The Greater Bay Area is a plan that integrates 11 Chinese cities includes Hong Kong and Macau into an urban area with a regional GDP of USD1.6 trillion (2018), making it the 12th-biggest economy in the world As more Shenzhen-based companies become multinational corporations, the city’s attractiveness to international talent should continue to increase. The new residence permit regulation also makes it easier for expats to immigrate

Only 37% of the residents in Shenzhen are permanent residents, which puts Shenzhen at risk of population outflow if it loses its attractiveness

Shenzhen’s industry is concentrated on tech sectors. The level of other supporting services (legal, health care, education, etc.) for expats is much weaker than other Chinese cities like Beijing or Shanghai

(continued)

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Resources

Quality of living

Research infrastructure

Strengths national and regional authorities The city offers one of the best infrastructures in the world with well-planned business, residential, and park areas and a vast public transportation network. Buses and taxis are fully electric. Shenzhen has cleaner air and lower rates of traffic than most other Chinese megacities

Shenzhen became one of the four comprehensive national science centers in China in 2020. The major facilities in Shenzhen are Pengcheng Laboratory (provides 1000 petaFLOPS of AI computing power), Shenzhen Bay Laboratory (focuses on life sciences), and quantum information (a science

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Weaknesses

Opportunities

Threats

Real estate price in Shenzhen is among the highest in China

New urban development projects are under construction, including the Qianhai Bay area. Those projects will further improve the infrastructure in Shenzhen. A 5G network and electric car charging stations are already implemented in Shenzhen, which makes the city likely to be one of the first to achieve autonomous transportation The Shenzhen government will spend USD7.3 billion for 12 new science and technology infrastructure projects. Those projects include materials genome, precision medical imaging, phase ii of the national center for supercomputers, an Integrated Particle Facility Research Institute, artificial intelligence, and

Shenzhen is running out of land. Shenzhen has a land area of 2050 km2 compare to Beijing (16,808 km2) and Shanghai (6340 km2). Shenzhen is the smallest first-tier city in terms of land area, which poses a challenge for urban planners

Compared to Beijing and Shanghai, Shenzhen is significant lacking in top-level universities and institutes

Shenzhen might face the challenge of attracting top researchers due to the lack of local universities and institutes

(continued)

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Strengths research platform) Shenzhen has many public, private, and international banks. Local banks like the China Merchants Bank and Ping An Bank are the top-ranking banks in China. They have a variety of loan services targeting SMEs

Weaknesses

It can be very difficult to get a bank loan. Banks typically require guarantees like property, qualified purchase orders, or accounts receivable

Legal advisers

High-quality advice is available, especially for patent issues

Advisers focus on Chinese customers, and there are complicated procedures for foreigners

Policy and strategy

Shenzhen has a clear policy plan for the next 5 years, called the Shenzhen Pilot Reforms Plan 2020 to 2025

The areas outside the Pilot Reforms Plan might be neglected

Opportunities digital economy laboratories The Shenzhen government has a lot of programs targeting the tech industry. The government gives direct funding or guarantees for low-interest bank loans. FinTech companies are exploring opportunities for offering smallsum loans based on the company’s or funder’s credit score Advisers may move into risk projects themselves by opening their contact portfolios to founders Because of its good track record of plan completion, the private sector’s confidence in the Shenzhen government is high. This could further improve efficiency in driving resources toward the targeted areas

Threats

Regulators are moving toward tighter regulation of the financial sector. That could potentially increase requirements for loans in certain industries

Due to the large Chinese domestic market, opening to foreigners will be slow

The Shenzhen Pilot Reforms Plan is primarily focused on further opening the market, especially opening the capital market to foreign investors. The uncertain international political environment could pose a threat to the Shenzhen Pilot Reforms Plan 2020–2025 (continued)

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Resources Risk capital

Regulation

Tolerance and trust

Strengths Shenzhen has a vast amount of VC capital, mostly from Chinese investors. Funds are denominated in RMB. Shenzhen hosts one of two stock exchanges in mainland China. Hong Kong’s Stock Exchange is also within the reach Shenzhen is a special economic zone. The local regulators have the authority to and a good track record of adopting innovations. In Shenzhen’s free trade zone, enterprises and individuals can enjoy some of the lowest tax rates and the most flexible regulations Shenzhen ranks as the most tolerant city in Mainland China. The city is built by immigrants from all over China. It is often referred to as the city with no locals. Shenzhen also has a sizeable expat community. The city’s slogan is “Once you arrive, you’re a Shenzhener”

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Weaknesses Due to its high dependence on Chinese capital, the economic cycle in China greatly affects the supply of risk capital in Shenzhen

Opportunities Increasingly, successful founders become VCs. This creates an upward growth trajectory in Shenzhen’s VC ecosystem

Threats The supply of capital is highly dependent on China’s internal economic cycle. There is relatively limited exposure to international capital

Shenzhen is a provincial-level city under the jurisdiction of the Guangdong province (unlike Beijing or Shanghai which are under the central government). Therefore, Shenzhen’s policymakers could be limited in terms of their level of autonomy The use of English is limited compared to Shanghai or Beijing. For example, most VC events are held in Chinese only

New IPO rules enable startups to be listed on Shenzhen’s ChiNext board with a Nasdaqstyle process

The Shenzhen Pilot Reforms Plan (2020–2025) providing the city with larger autonomy to implement reforms in key areas. This is a stress test for policymakers and may fail

The Greater Bay Area project requires Shenzhen to be a global city. It is expected that the city will make a greater effort to increase its international attractiveness

Increasing real estate pricing may drive people to move away from Shenzhen or may make it difficult to settle. High rental costs could be a challenge for startups

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13.4.1 Strengths Human Capital and Quality of Living The major strength of Shenzhen is the availability of well-educated human capital. The numbers are impressive: Shenzhen itself and the area around it—the Pearl River Delta and cities like Guangzhou or Dongguan—comprise approximately 120 million people. Around 700,000 engineers leave the education system every year in China, and many are attracted to Shenzhen due to its dynamic economic development and its favorable quality of living with much cleaner air and lower rates of traffic than most other Chinese megacities. Policy, Strategy and Regulation Over the past 40 years, there has been a straightforward line of the Pearl River Delta’s development into a Mecca of economic prosperity. This development has pulled many other regions in China in its slipstream. Defining the area as of the first special economic zones made it possible to navigate expansion through volatile markets. Other regions like Europe with tight competition regulations cannot operate and control development with similar effects. Risk Capital We categorize risk capital as high-risk funding available to early stage companies. This includes angel investors, microlenders, seed funds, grants, and venture capital. Risk capital is crucial to the development of new technologies and business models. Initially, the China’s risk capital came exclusively from government-led projects. For incidence, the first venture capital fund in China is China New Technology Venture Capital Corporation, founded in September 1985. On the local level, risk capital is led by the provincial governments. Shenzhen Capital Group Co., Ltd. was founded in 1999 by the Shenzhen municipal government. By the end of May 2020, the Shenzhen Capital Group had invested 1107 projects, with a total investment amount of RMB 50.9 billion (equivalent to USD7.2 billion). Among those investments, 164 companies are listed in 16 different capital markets worldwide and 304 projects have reached exit targets (including IPO). Shenzhen Venture capital scene (with capital size data available):

IDG Capital Shenzhen Capital Group Fortune Venture Capital Capital Today Northern Light Oriental Fortune Capital

Founded 1992 1999 2000 2005 2005 2006

Capital size USD20 billion USD51 billion USD4.4 billion USD2.5 billion USD4.5 billion USD2.9 billion

The supply of the risk capital in Shenzhen comes mostly from Chinese investors and funds denominated in RMB. This limits the risk of foreign investment

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withdrawal. However, due to its high dependence on Chinese capital, the economic cycle in China has a major impact on the supply of risk capital in Shenzhen. These cycles are referred to as capital summer and capital winter. Digital Infrastructure Digital infrastructure is a strong driver of hardware and software business in Shenzhen and neighboring Guangzhou and Dongguan. In September 2020, Shenzhen became the first Chinese city with full 5G network coverage. Around 46,000 5G stations have been implemented, equivalent to the number of installations in all of Europe at the time. Digital infrastructure is as important as financing or human capital, accelerating all digital transformation processes. 5G is not just for selling new smartphones; it allows for an expanded range of applications. If a digital business startup needs a certain bandwidth connected to sufficient processing power, its founders will have to decide where to scale such a venture. Digital infrastructure will not be the only criterion, but any region without sufficient infrastructure will excluded from the list. Market and Demand In 2019, Shenzhen surpassed Hong Kong with a total GDP of RMB 2.69 trillion (USD381.4 billion). With 13.44 million residents, Shenzhen’s per capita GDP is RMB 203,489 (USD29,498). Per capita disposable income in Shenzhen was RMB 62,522 in 2019, which is a 8.7% increase compared to 2018. In the consumer sector, Shenzhen reached RMB 658.29 billion (USD100.5 billion) in retail sales in 2019, putting it in seventh place among Chinese cities. The average age of residents in Shenzhen is 32.5 years of age, and consumers in Shenzhen are generally open to trying new technologies and new ways of shopping. For example, Shenzhen is leading the world in electric vehicle adoption. People no longer visit stores for daily necessities because that kind of shopping is mostly done online. Instead, they go out shopping for experience, novelty, and comfort. In the future, Shenzhen is planned to be the core of the Greater Bay Area (GBA). The GBA is a plan that integrate 11 Chinese cities including Hong Kong and Macau to create an urban area with a regional GDP of USD1.6 trillion (2018), making it the 12th biggest economy in the world.

13.4.2 Weaknesses Institutions The development of Shenzhen’s institutional system has not kept pace with its economic development in the last 40 years. Knowledge-driven institutions like universities are especially lacking in the ecosystem. Decision makers try to overcome that weakness by establishing subsidiaries of major national and international universities like the Tsinghua-Berkeley Shenzhen Institute.

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Human Capital The pool of well-educated, skilled young Chinese people in the Shenzhen area is vast and unbeaten worldwide, but there is a lack of international migration to the region. Shenzhen is still not on the radar of smart internationals looking for new opportunities. A great deal of international migration to Shenzhen is born out of the Chinese diaspora in Silicon Valley. Many individuals are attracted back to China by the favorable working and living conditions offered by national and regional authorities. Financial Capital Even if Shenzhen managed to surpass Hong Kong in terms of GDP, it is still highly dependent on capital from that neighbor. Most of Shenzhen’s daily value-chain transactions in production and services are financially based across the river in Hong Kong.

13.4.3 Opportunities Migration and Quality of Living Migration is not only a weakness today but an opportunity for tomorrow. Shenzhen’s high quality of living is just not familiar to the international expat audience. National migration to the area of Shenzhen has been consistently high in the last 40 years. However, international migration–including opportunities to learn from other innovation cultures–is still low. The last year has seen early steps toward international migration with the policy of attracting the diaspora living in regions like Silicon Valley to return to China by offering them an attractive package that ranges from low real estate loans to venture capital and government liabilities. Despite heavy pressure on the environment due to the fast economic expansion of the region, there are success stories of balance between growth and protection. After the national declaration of Shenzhen as a model city for environmental protection in the end of the 1990s, it received international attention. In 2002, Shenzhen was added to the United Nations Environment Program (UNEP) Global 500 Roll of Honor. When crossing the border from Hong Kong to Shenzhen, one might notice a surprising number of electrical vehicles on the roads, from buses to taxis and private cars. Shenzhen was the first city in the world to change its bus fleet fully to electrical. The decision was made in 2014, and 4 years later, the mission was accomplished. On the way in 2016, the responsible Shenzhen-based company BYD (Build Your Dreams) also managed to surpass Tesla as the leading manufacturer of electrified cars worldwide. Culture/Mindset and Education China has developed its culture in education and research throughout recent centuries. There is hardly another global region with a comparable history in the process of educating and selecting experts for different kinds of duties in business and public administration. It is a very competitive system that encourages young

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people to gain knowledge in the expectation of being ranked against their peers from the first moment they join the system of education and research. This creates a focus on knowledge that may restrict young people’s energy for knowledge implementation. The next opportunity will be to develop more youth who are motivated to create their own businesses. Still, there is a fair amount of market orientation in the business world that can be an accelerant for young people to try entrepreneurship themselves.

13.4.4 Threats Finance Capital As stated in the weaknesses section, a most of the venture and loan capital for Shenzhen’s whole production value chain is borne by banks and finance bodies in Hong Kong. This has become a threat due to frequent flare-ups of political instability. Hong Kong’s unclear status is a permanent threat to international investors, who may look elsewhere and put their investments in alternative regions like the USA, Europe, or Africa. Advisers Due the lingering conservative culture in business life and the strict separation of disciplines, advisers like lawyers, patent lawyers, and accountants stick to their traditional roles in the value chain. They provide professional services in a bureaucratic administrative system, but they have not been developing into modern roles where they become part of a venture’s risk model by providing their contact portfolios.

13.5

Shenzhen Innovation System Strategy and Implementation

Shenzhen has a clear policy plan for the next 5 years, called the Shenzhen Pilot Reforms Plan (2020–2025). The plan outlines policy on 40 items, categorized under six different sectors. These include the market-oriented allocation of factors, the business environment, technological innovation, further opening of the Chinese market to foreigners, the public service system, environmental protection, and urban space governance. The major timeline of the plan is as follows: 2020 Introduce several major reform measures in areas like the market-oriented allocation of factors, improving the business environment, and overall planning for the use of urban space. Draw and implement the first comprehensive list of items to be authorized.

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2022 Major progress in institutional development in all areas. Develop replicable methodology on major institutional achievements. 2025 Achieve landmark results in reforms in key areas. Complete pilot reforms and set a nationwide example for institutional development. The Shenzhen government is responsible to implement the following reforms. The reform plan includes six sectors outlined below:

13.5.1 Market-Oriented Allocation of Factors • Explore potential innovation in the land management system. • Improve the labor mobility system to suit the characteristics of megacities. • Improve the domestic issuance of shares or depository receipts (CDR), list innovative enterprises on the Shenzhen Stock Exchange. • Set up a FinTech innovation platform based on the Institute of Digital Currency at the People’s Bank of China in Shenzhen. Support the launch of a closed pilot test of the digital RMB and then promote its development, application, and international cooperation. • Further improve the technology transfer system. Reform the way scientific research projects are established and organized. Establish market-oriented mechanisms for selection, funding allocation, and evaluation in scientific and technological projects. • Accelerate the development of the data market. Take the lead in improving the data property rights system, explore new mechanisms for protecting and utilizing data property rights, and establish a data privacy protection system. • Improve market factor evaluation mechanisms. Explore the mechanisms for the market’s evaluation of factors of productions’ contributions and then remunerate according to contribution. Increase the remuneration of workers. The Business Environment • Further improve the fair and open market environment. Drawn up a list of measures to relax market access based on the policy tool “National Unified Negative List for Market Access.” • Establish a benchmark for intellectual property rights protection. • Improve the administrative system and legislation for special economic zones. Technological Innovation • Optimize and improve how resources are allocated and the managed. • Establish an internationally competitive talent recruitment system.

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Further Opening of the Chinese Market to Foreigners • Increase institutional openness. Support closer cooperation between Guangdong, Hong Kong, Macao, and the Greater Bay Area through rules of engagement. Give full play to the role of the China (Guangdong) Pilot Free Trade Zone in Shenzhen and the Qianhai (Shekou) Pilot Free Trade Zone. Comprehensively deepen reform and expand economic opening, and produce more institutional innovation that can be replicated. • Open the financial industry to the outside world. Support qualified domestic enterprises in Shenzhen as they list overseas for financing. Carry out trials to integrate domestic and foreign currencies into cross-border capital pools. Support Shenzhen as it takes the lead in promoting RMB internationalization and improving its foreign exchange management system. The Public Service System • Innovate the medical service system. Support the clinical application of cuttingedge drugs in Shenzhen. Explore ways to improve cross-border medical services, and establish standards for medical personnel training and hospital accreditation in line with international standards. • Explore ways to open the education sector to foreign investors, by enabling highlevel cooperation between Chinese and foreign entities and professionals involved in the administration of schools and universities. Environmental Protection and Urban Space Governance Authorize Shenzhen to implement the reform of the environmental assessment system and formulate a list of key projects that have to carry out such environmental assessment, thus excluding from the said list the construction projects that shall not be subject to the abovementioned assessment. Shenzhen Action on Made in China The Action on Made in China 2025 plan was published by the central Chinese government in Beijing mid-2019. It builds on earlier plans, starting with the installation of one of the first Special Economic Zones in China in 1979 (see history at the beginning of this chapter). The five-year’s goal is to maintain and expand manufacturing success stories, and it targets the continuation and expansion of foreign direct investment in the region. The plan also complements Shenzhen’s links to Hong Kong territory and the whole development of the Greater Bay Area, which comprises cities like Shenzhen, Hong Kong, Guangzhou, and Dongguan. Every year, the Audit Bureau of Shenzhen Municipality publishes the Shenzhen Annual Performance Audit Report. The KPI system measures the performance of each government department and district government. The key objectives accomplishment count for 70% of scores and citizens’ satisfaction rates count for 30%. 100% is the best result. The key objectives include economic goals, market regulation, social management, and public services. Citizens’ satisfaction rates are measured by a questionnaire, feedback devices at service points, and third-party consulting companies.

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Lessons Learned from Shenzhen Innovation System

Shenzhen is a city of the future. It is a place where future technologies are implemented in hardware and software. Shenzhen has a vibrant ecosystem and shares one key ingredient with another famous global ecosystem in Silicon Valley: It is a magnet for intellectuals and rebels, and—even more importantly—for rebelling intellectuals. Shenzhen’s status as a special economic zone starting in 1979 created a space for smart people who had great ideas but were limited in their options to implement them by regulation and bureaucracy. They felt more freedom in Shenzhen and rushed into the city in large numbers from all over China. The setting is quite similar to Silicon Valley, where adventurers and social rebels poured into the region starting with the gold rush in the mid-19th and continue to flow in today. “Shenzhen speed” is another reason for the impressive success of the regional innovation ecosystem. Processes that take weeks in other regions can be accomplished in days or even hours in Shenzhen. If you have a smart idea in the morning, you are likely to have a prototype in your hands in the evening—that is the essence of Shenzhen speed. There is no other global region that can meet this level of dynamism. The third lesson learned is once more a part of the ecosystem that Shenzhen shares with Silicon Valley: its universities. Shenzhen universities are far from the ranking and international reputation of Silicon Valley universities like Stanford, but they share two major ingredients in the secret sauce of successful innovation ecosystems. One is the campus setting in a palm tree-dominated park more reminiscent of holiday destinations than a university campus, which invites students to stay longer than strict requirements would. The other even more important ingredient is the engagement and motivation of knowledge owners like university professors and assistants. They are invited to hold shares of the companies founded based on their research. In many regions, university professors owning shares of companies based on their research would be regarded as a conflict of interest. Maybe it is, but if there is no conflict there is also no interest and that is the worst option.

Silicon Valley Innovation System

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Georg Fuerlinger and Ludovit Garzik

Abstract

Silicon Valley plays a key role in developing innovative technologies and paving the way for new global trends. The region remains, for now, the undisputed leader of the global startup and innovation scenes. So how did this special innovation ecosystem develop, and which factors were at play in turning Silicon Valley into the epicenter of startups and new technologies? Who are the main actors in the region, and how do they contribute to fueling innovation and entrepreneurship? This chapter aims to shed light on Silicon Valley’s unique history and its central role in the global technology community. A special focus is given to cultural characteristics fostering collaboration and experimentation, as well as the social networks that underline the emergence and development of startups and new technologies. The SWOT analysis assesses the region’s strengths and weaknesses in a structured way and discusses the opportunities and threats that could fuel or jeopardize Silicon Valley’s leading role in global innovation. The lessons learned highlight some of the phenomena that underlie the regions entrepreneurial strengths and provide ideas for unlocking similar innovative potential in other regions around the world.

G. Fuerlinger (*) Advantage Austria, Open Austria, San Francisco, CA, USA e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_14

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Fig. 14.1 Key industries and leading companies in Silicon Valley. Source: Own depiction, based on Heaton et al. 2019 (Heaton S, Siegel D and Teece DJ (2019) “Universities and Innovation Ecosystems: A Dynamic Capabilities Perspective.” Industrial and Corporate Change 28 (4): 921–39. https://doi.org/10.1093/icc/dtz038)

14.1

Facts and Figures Silicon Valley

Silicon Valley is often regarded as the global epicenter of disruptive innovation. Over the last decades, it has transformed itself from a rural area known for its orange groves to a dynamic ecosystem for startups, new technologies, and effective business models. A healthy ecosystem consistently converts technology and other inputs into product, service, and enterprise development. It survives—and even gives birth to— disruptions like unforeseen technological change while creating niches to increase diversity.1 Indeed, what is so special about Silicon Valley is that it has ridden successfully through multiple technological waves (Fig. 14.1). While some participants have fallen away, many Silicon Valley companies have evolved to participate in and to shape new waves of innovation.2 The diverse set of actors and special situational factors as well discussed in Chap. 2 contribute to the constant renewal of its 1 Iansiti M and Levien R (2004) The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability. Harvard Business School Press: Boston, MA. 2 Moore JF (1996) The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems. HarperBusiness: New York, NY.

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Table 14.1 Key figures comparison: Silicon Valley, California, USA Inhabitants Area GDP GDP per capita a

Silicon Valley 8 million 18,040 km2 USD781 billiona USD128,000

California 40 million 423,970 km2 USD3.2 trillionb USD75,000

USA 328 million 9,833,520 km2 USD20.5 trillion USD62,000

2016: http://www.bayareaeconomyorg/bay-area-gdp-watch/ 2019 Bea.gov

b

technological base and the sustainability of its unique innovation ecosystem. Without such renewal, regional ecosystems will languish or collapse. Marc Andreessen, co-founder of Mosaic and Netscape and now a venture capitalist in Silicon Valley, famously said, “software is eating the world.” This refers to the disruptive power of information and communication technology in many aspects of our lives. This disruptive force is impacting one industry after the other, with new products and services often originating in Silicon Valley. Today, Silicon Valley can be regarded as the generic trademark of an innovation ecosystem. The Valley is often used as a synonym for a successful innovation region. There are many “Silicon Somethings” around the globe, so named to let people know that they intend to follow in the footsteps of their Californian role model. The name Silicon Valley initially referred to an area situated roughly between Palo Alto (Stanford University) and San Jose, named because of its dominant industry at the time: silicon wafers. Currently, due to the region’s strong growth over recent decades, Silicon Valley is often used to mean the nine counties of the San Francisco Bay Area. Consisting of multiple cities, it has no clear external borders, but it is often divided into the North, East and South Bay regions. San Jose is its southern capital, bookending the Peninsula with San Francisco in the north. Therefore, this chapter uses the terms “San Francisco Bay Area” and “Silicon Valley” interchangeably. In total, the San Francisco Bay Area covers an area of 18,000 square kilometers and is home to about eight million people. This is equivalent to 20% of California’s population and about 2.5% of the total population of the USA. The region is home to the second highest concentration of Fortune 500 companies, behind only the New York metropolitan area, with 30 such corporations based in the Bay Area (Table 14.1).3 Even though Silicon Valley is only home to about 2.5% of the US population, more than 17% of all American patents issued in 2015 were issued in the Bay Area.4

3

Walker R and Schafran A (2015) The strange case of the Bay Area. Environment and Planning. 47: 14. 4 Bay Area Council Economic Institute and McKinsey & Company (2018) Continuing Growth and Unparalleled Innovation: Bay Area Economic Profile. July 2018. Accessed: http://www. bayareaeconomy.org/report/continuing-growth-and-unparalleled-innovation/

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In addition, seven of the top ten patent-generating cities in California were in Silicon Valley in 2018.5 This remarkable scientific output underlines the strength of the research institutions in the region. However, although patents are performance indicators for the inventiveness of an institution or region, they should not be confused as indicators for innovation. It is the process of turning science-based inventions into commercially viable innovations—products and services that fulfill a need or solve a problem—that spurs technological change in a society. In Silicon Valley, the transfer from research to the market works particularly well. One reason for this is the region’s social networks, which transcend traditional organizational boundaries.

14.2

Silicon Valley Innovation Ecosystem Actors

Research on social networks in Silicon Valley has focused on the flow of people, resources, and information across sectors. Silicon Valley is particularly well equipped for this process due to the close collaboration of science and business in the area.6 This section presents the various actors in the region’s innovation ecosystem and then discusses the interrelation and collaboration among them. Science and Research Actors Universities play a crucial role in innovation ecosystems, and most leading metropolitan areas globally are home to renowned universities.7 Through their basic scientific research, universities influence technological development in the long term and produce knowledge and technologies that can be applied to industrial production as prototypes, new processes, and more. The commercialization of research via university startups and spin-off companies, in addition to licensing models, is a common method of fostering technology transfer from universities.8 The transfer of knowledge and technology from universities to the market—often referred to as technology transfer—is enormously important for any region.9 Furthermore, universities provide human capital, which is one of the most important components of a well-functioning entrepreneurship ecosystem.

5

Silicon Valley Index 2020, Joint Venture Silicon Valley & Institute for Regional Studies, https:// jointventure.org/publications/institute-publications/1903-2020-silicon-valley-index 6 Castilla EJ, Hwang H, Granovetter M and Granovetter E (2000) Social Networks in Silicon Valley. Chap. 11 in The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship, edited by Chong-Moon Lee, William F. Miller, Henry Rowen, and Marguerite Hancock. Stanford: Stanford University Press. 7 For example: Massachusetts Institute of Technology (MIT) and Harvard University in (Cambridge near) Boston, ETH in Zurich, TMU and LMU in Munich, Imperial College and LSE in London, Columbia University and New York University (NYU) in New York, to name just a few. 8 Matkin G 1990 Technology Transfer and the University. New York: MacMillan, pp. 240–274. 9 Witt P (2006) Stand und offene Fragen der Gründungsforschung, Studie für das Bundesministerium für Bildung und Forschung (BMBF), März 2006, Dortmund.

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The San Francisco Bay Area is home to some of the best universities in the USA and the world. Most notable are Stanford University in Palo Alto and four regional campuses of the University of California system: UC Berkeley, UC San Francisco, and in close vicinity to the Bay UC Davis and UC Santa Cruz. Stanford University—The Heart of Silicon Valley In 2012, a large-scale survey of entrepreneurs coming out of Stanford University quantified the impact of university-based entrepreneurship ecosystems.10 The authors of that study concluded that, if the active companies founded by Stanford’s graduates were considered an independent nation, their revenues would make that nation the tenth largest global economy. Combined, the 39,900 alumni-founded companies employ 5.4 million people and generate annual worldwide revenues of USD2.7 trillion. To understand the affinity alumni feel toward their alma mater, one need only take a closer look at Bay Area cars’ license plates. Many bear frames with statements of school spirit like “Stanford Alumni,” showcasing the pride alumni feel in their university and the feeling that the university formed the basis for their successful careers. Stanford alumni donate over USD1 billion per year back to the university,11 unmatched by other universities in the USA or on a global scale. Since its foundation in 1885, Stanford University has taken an unconventional path. “The farm,” as the campus is called due to its history as a horse paddock, is an open, green, and inspiring place. From its early days, Stanford has been dedicated to the formation of “cultured and useful citizens.” Its pioneering spirit has been sustained to today, especially in two main attributes: the search for adventure and a focus on building communities. With around 2000 faculty and 16,000 students on campus, an international crowd of smart people from around the world mingles and one might meet a Nobel laureate at the coffee shop. Just like they did at the University’s beginning, Stanford faculty and students work to build companies, analyzing knowledge from independent blue-sky research for market implementation potential. Today, this process draws financial fuel from neighboring Sand Hill Road with its impressive density of Venture Capital investors. The Silicon Valley ecosystem began to develop earlier than most people think, often driven by Stanford graduates and faculty. Frederick Terman, for example, is often referred to as the Father of Silicon Valley. He came to Stanford as a professor of engineering in 1926 and was promoted to the Dean of Engineering in 1946. Frederick Terman changed university rules by encouraging his students to start companies and his fellow professors to consult or take board seats. Furthermore, he eased technology transfer and IP licensing, fostering relationships between industry and the university. This created an advantage for both sides: Industry gained access to the university’s knowledge and technology, and researchers got to test and

10 Eesley C and Miller W (2012) Impact: Stanford University’s Economic Impact via Innovation and Entrepreneurship, October 2012, Stanford University, Palo Alto, USA. 11 https://news.stanford.edu/2020/02/05/stanford-releases-2018-19-fundraising-results/

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implement their ideas on the market. Many of the principles that guide Stanford’s collaboration with Silicon Valley and underlie the entrepreneurial mindset in the region overall can be traced back to those early beginnings. To assess the success of this university–industry cooperation strategy, one needs only to look at the list of companies founded by Stanford faculty or alumni. Google, Cisco, HP, Netflix, Nike, Gap, Nvidia, and PayPal—just to name a few—are some companies that started in this way. Laboratories and Research Institutes The greater San Francisco Bay Area is also home to US Department of Energy laboratories like the Lawrence Berkeley National Laboratory, Lawrence Livermore National Laboratory, SLAC National Accelerator Laboratory, and NASA’s Ames Research Center. Together, these laboratories manage an annual research budget of almost USD4 billion and employ more than 16,000 scientists, engineers, and PhD and postdoc research fellows. Their research focuses on energy science, (cyber)security, particle physics, plasma, nanoscience, and space. One laboratory is also home to the largest laser in the world and one of the world’s fastest computers.12 Initially, these laboratories developed technology exclusively for the US government. Now, they maintain relationships with private companies and corporations interested in the technological inventions they develop.13 Furthermore, due the increasing focus on technology transfer and commercialization, some laboratorydeveloped technologies find their way to market through the formation of startup companies. Other research institutes in the Bay Area include SRI International and the Palo Alto Research Center (PARC). The former, formerly known as Stanford Research Institute, was founded 75 years ago with a mission of supporting government and industry. SRI International is organized around broad disciplines and capabilities, from research and development divisions and laboratories to groups who excel at identifying new opportunities, developing products, and creating custom solutions. Thus far, SRI International holds 4000 patents and their inventions include the computer mouse and the iPhone’s Siri voice assistant.14 PARC is a research and development company that was founded 1969 as a subsidiary of Xerox. Since then, it has created USD1 trillion in new industries, USD60 billion in startups and spin-offs, and almost 6000 patents and patent applications. PARC’s patents include laser printing, Ethernet, and the graphical

12

Bay Area Council Economic Institute (2019) The Bay Area Innovation System: Science and the Impact of Public Investment. March 2019. Accessed: http://www.bayareaeconomy.org/report/thebay-area-innovation-system/ 13 https://www.bayarealabs.org/aboutlinc 14 “About Us,” SRI International, https://www.sri.com/about-us/

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user interface.15 Some also argue that Apple’s Steve Jobs got the idea and technology for the modern personal computer from the PARC.16 Financial Capital Silicon Valley is well known for its high venture capital and private equity investments going to startups and spin-off companies. About 80% of California’s venture capital—and 40% of the USA overall—is invested here, accounting for more than USD40 billion in 2019.17 A diverse network of business angels, business angel syndicates, venture capital firms, corporate venture capital offices, and private equity funds forms the world’s leading venture capital ecosystem, not only in the USA but globally as well. One of the key advantages in Silicon Valley is the way these various financial actors intertwine with each other, investing in different stages of startup development. Although the number of investment deals has fallen since 2015, the average size of investment per deal has consistently increased. This highlights the trend toward larger portions of venture capital investment going to later-stage startups, often valued at several hundred million US dollars. Due this trend, angel investors and groups for early stage startups have become increasingly important.18 A similar development took place in Tel Aviv, which has turned from a startup hub to a region increasingly focusing on scale-ups. The threat of this development is the potential reduction in early stage startup funding, potentially jeopardizing the innovation pipeline. Business Angels and Early Stage Financing Business angels are usually successful founders or experienced managers themselves, who often have made a considerable fortune in their own businesses and wish to support the next generation of aspiring entrepreneurs. They invest in the early stages of a startup, closing a gap in the financing landscape since banks do not typically provide loans to companies in the risky early stage. For business angels, the founder himself or herself is usually key for the decision to invest.19 Angels value the founder’s background and experience, and trust their own assessments of whether he or she “has what it takes” to successfully establish the company. Business angels are often knowledgeable in the startup’s industry and prioritize “chemistry” between themselves and the founder. For reasons of risk diversification, experienced business angels usually invest in multiple young companies, not just “About PARC,” PARC, A Xerox Company, https://www.parc.com/about-parc/ https://www.newsweek.com/silicon-valley-apple-steve-jobs-xerox-437972 17 Silicon Valley Index 2020, Joint Venture Silicon Valley & Institute for Regional Studies, https:// jointventure.org/publications/institute-publications/1903-2020-silicon-valley-index 18 Bay Area Council Economic Institute and McKinsey & Company (2018) Continuing Growth and Unparalleled Innovation: Bay Area Economic Profile. July 2018. Accessed: 19 Mason C and Matthew S (2004) What do Investors Look for in a Business Plan? A Comparison of the Investment Criteria of Bankers, Venture Capitalists and Business Angels, 2004 22: 227 International Small Business Journal. 15 16

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one. They also provide advice and assistance to the founders and grant access to contacts in their social networks. That means that angels are not only financiers, but also take on an important role as mentors and advisors. Numerous angel networks, syndicates, and platforms exist in Silicon Valley. Sand Hill Angels, Band of Angels, Keiretsu Forum, and Bay Angels are just a few well-known groups. These formal and informal communities of angel investors organize pitching and feedback sessions for startups, often conducting joint due diligence and investment decisions in selected startups. Platforms like AngelList20 make it easier for entrepreneurs and angel investors to connect and facilitate angel investments. Additionally, the website is a major hub for job postings in technology startups based in Silicon Valley and beyond. According to AngelList,21 around 21,000 angel investors are interested in the region, with 12,000 of them also residing in Silicon Valley. Financing the Growth Phase: Venture Capital Many startups are urged to grow rapidly and prevent their competitors from gaining market share. To finance the scaling of business activities, many companies need a lot of capital and therefore seek investment from venture capitalists (VCs). VCs are professional investors who invest large sums of money in startups on behalf of other wealthy individuals or financial institutions. The main interest of VCs is to increase the valuation of their investments. When investee companies successfully go public or are acquired by a large company, the VC receives a share of the profit (usually around 20%). Investing in new companies is an extremely risky business and is a difficult undertaking even for experienced VCs.22 In addition to above-average market potential, VCs are primarily looking for a team with the strength to implement. The true value of a new company lies primarily in its implementation ability. Many investors, therefore, attach great importance to both technical competence (i.e., can the team build this product?) and business competence (i.e., can the team successfully take this product to the customer?). A VC’s investment also increases the legitimacy of a young company, which can help its founders raise additional capital. The role of VCs is not limited to providing financing—like a business angel, a good VC helps founders grow their businesses.23 Spotlight: Sand Hill Road—The World’s Leading VC Neighborhood Sand Hill Road, a street that runs along the northwest edge of Stanford University’s campus, is home to many of the world’s leading venture capital firms. Andreessen

20

https://angel.co/ https://angel.co/silicon-valley/investors 22 Freeman J and Engel JS (2007) Models of Innovation: Startups and Mature Corporations, Fall 2007, Vol. 50, No. 1, UC Berkeley. 23 Senor D and Singer S (2011), Start-Up Nation The Story of Israel’s Economic Miracle“. Council on Foreign Relations. April 2011. 21

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Horowitz, Draper Fisher Jurvetson, Greylock Partners, Khosla Ventures, Kleiner Perkins, Lightspeed Venture Partners, Mayfield Fund, New Enterprise Associates, and Sequoia Capital are just some of the VCs that maintain offices on this road. Many of their investors are featured in the Forbes Midas List, which spotlights the world’s best VC investors.24 The road’s proximity to Stanford University is one of the main reasons why the networks between the investment and the research community work particularly well in Silicon Valley. Personal connections are formed between investors, professors, scientists, and students at numerous networking events on and off campus. VC funds focused on early stage startup investments maintain relationships with research laboratories to learn about promising research results and new technologies early on, or about a dedicated team of entrepreneurs looking for funding for a new venture. Corporate venture capital activity plays a greater role in the later-stage financing of new ventures in Silicon Valley. In corporate venturing, a company invests in startups that are potential business partners or takeover candidates. Numerous wellknown, established companies have established corporate venture capital funds to maintain close exchange with innovative young companies and bind them to the company early on. Some of the largest corporate venture funds are in the Valley’s leading companies.25 Other companies go one step further and set up corporate incubators and accelerators to provide young companies with office space, support services, and contacts from their business network in addition to venture capital. Support Infrastructure: Incubators and Accelerators Y Combinator,26 founded in 2005 by Paul Graham and his team in Mountain View, is often referred to as the world’s first startup accelerator. It has funded over 2000 startups, which have a combined valuation of over USD100 billion. The accelerator phenomenon is internationally often referred to as a key factor and a major contribution to increasing startup success.27 Accelerators select a small group of entrepreneurs and invite them to startup boot camps that provide mentoring, resources, and—above all—connections to customers, partners, and investors. Successful graduates usually complete their next funding round before leaving, and a small percentage of their equity remains with the accelerator. Accelerators address the funding gap for startups and the information gap for potential investors, acting as a network institution or intermediary between these two groups. The terms “incubator” and “accelerator” should not be used interchangeably. Different startup organizations offer different kinds of support, ideally tailored to the

24

https://www.forbes.com/midas/ https://www.connectionsiliconvalley.com/corporate-venture-funds 26 https://www.ycombinator.com/ 27 More on the accelerator trend: Dempwolf CS/Auer J and D’Ippolito M (2014) Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations. US Small Business Administration, Office of Advocacy, October 2014. 25

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development stage of the startup.28 Steve Blank29 argues that the development of a new venture can be divided into two phases: search (for a business model) and execution (of the business model). Incubators mainly support new ventures during the earlier search/discovery/exploration stage, with the aim of finding a repeatable and saleable business model. Accelerators, on the other hand, are institutions that “accelerate” the growth of new ventures through time-limited programs. The prerequisite to enter an acceleration program is a working prototype and initial market traction. By providing specific services, resources, and contacts, an accelerator enables the new venture to grow its business (i.e., increase its users/customer base, generate more profits) and to professionalize its organization. This lays the foundation for scaling the business. Regardless of the support organization, the key question is what should happen in or through its support—especially from a social network perspective. Who are the people (groups) who should be involved and how should they get involved? To systematically support the development of startups and innovation in a region, entrepreneurs and founders need to support each other (cp. community). On the other hand, they should be matched with mentors who are willing to share their knowledge, experience, and contacts. A pay-it-forward mentality supports the knowledge transfer between experienced entrepreneurs and first-time founders. Professional Service Providers The network of service professionals that help with legal questions, accounting, staffing and human resource issues, consulting services, and important investor or partner introductions is also referred to as “the entrepreneurial life support system”.30 Whereas these services are remunerated by the hour or based on daily fees in most regions worldwide, Silicon Valley’s service providers get involved in the startup risk system. Many will offer advice and services initially free of charge for aspiring entrepreneurs and early stage startups. The idea is to get involved early on with startups who might not have the financial liquidity yet to pay often substantial fees. This increases the chance that service providers can stay on as the partner of choice once the startup raises venture capital, experiences growth, and starts to have positive cash flow. These “deferred service fees” are part of the pay-it-forward mentality in Silicon Valley. The tight-knit network of service providers and investors underlies a common understanding of how to do business in Silicon Valley. This, for example, has also led to standardized documents for seed-round equity

28

Fuerlinger G (2014) Incubators vs. Accelerators: Fostering university spin-offs by leveraging exploration and execution. Presentation at University Industry Conference, in Barcelona, Spain. April 2014. 29 Blank S (2013) Why the lean Start-Up changes Everything, Harvard Business Review, May 2013, p. 65–72. 30 Pages ER, Freedman D and von Bargen P (2003) Entrepreneurship as a state and local economic development strategy. In D. M. Hart (Ed.), The emergence of entrepreneurship policy: Governance, start - ups, and growth in the U.S. knowledge economy (pp. 240–259) Cambridge: Cambridge University Press.

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investments.31 By agreeing on the standard body of term sheets and other important documents, negotiations can focus on the key terms of the deal and do not need to start from scratch, easing the process of negotiating and reducing the time needed to raise capital. Startups and Corporate Networks Startups in Silicon Valley also work with large firms considerably more often, than entrepreneurs in other ecosystems in Europe or the USA. One study32 has identified these as crucial relationships within an innovation ecosystem, enabling startups to connect with global partners and suppliers. One might conclude that these startupcorporate networks are also a central characteristic of mature entrepreneurship ecosystems like Silicon Valley. It is not a question of whether large or small firms will triumph, but rather how the regional economy links firms of various sizes and competencies together and what the outcome is of these collaborations. This notion of diverse-firm networks is also true for Silicon Valley, even though most of the attention has gone to the network of small firms and startups. However, the Valley’s success also depends crucially on its Hewlett-Packards, Intels, and Cisco Systems—or now its Googles, Facebooks, and Apples. These large Silicon Valley tech companies firms do not simply compete to death with small firms and startups, but instead have an elaborate and complex relation to them that has been a source of vitality for the region. Large established companies play important roles as talent incubators and places to learn about management principles, processes, and the use of technology in the workplace. As mentioned above, established firms can also be a source of venture capital and an important route to market for startup companies. With many world-leading technology companies having established their global headquarters in the Bay Area, the region offers startups numerous potential collaborators for partnerships.

14.3

Silicon Valley SWOT Analysis

Resources Culture and mindset

Strengths The unique culture fostering technological innovation in Silicon Valley has a long

Weaknesses An Americacentered worldview might lead some businesses to predominately

Opportunities The regional advantage of its special innovation culture can help Silicon Valley

Threats Some argue that a progressive monoculture could exclude those with (continued)

31

https://www.seriesseed.com/ Lazerson M and Lorenzoni G (1999) The Firms That Feed Industrial Districts: A Return to the Italian Source. Industrial and Corporate Change 8, no. 2:235–66. 32

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Resources

Strengths

Weaknesses

Opportunities

Threats

focus on the home market, omitting opportunities in other world markets

attract talent, companies, and capital in the future

other (political) views, decreasing diversity—an important ingredient for innovation

Digital infrastructure

tradition. An environment of openness, optimism, and focus on impact attracts talents from the whole world and connects experts across different domains Many of the world’s leading technology companies and digital service providers have their headquarters in Silicon Valley. Therefore, it is sometimes referred to as the digital capital of the world

Similar to the USA overall, the quality of the digital infrastructure can vary depending on the specific location. Whereas most of the region enjoys reliable broadband internet connection, some areas outside the cities might not be as well connected

As the technology mecca of the world, Silicon Valley will most likely continue to develop disruptive technology and introduce new solutions for the global digital infrastructure

New solutions in the educational technology (EdTech) space developed in Silicon Valley (e.g., Khan Academy, Coursera, Udemy, Udacity) democratize access to cuttingedge learning material for people around the world. Established institutions in favor of entrepreneurship and innovation, as well as a strong work ethic

A focus on building up the digital infrastructure predominantly in metropolitan areas could jeopardize the digital access of suburban and rural communities, already arguably being left behind the digital revolution The global war for talent and the skills gap (too few experts with mastery of new technologies) could harm the region’s supply of talent, harming future growth of the tech-economy

Education and skills

Some of the world’s best universities in the region attract talent from all over the world. The education system fosters the exchange between academia and business and places a high value on mentorship

Like living costs, education costs in the Bay Area rank among the highest in the USA. Furthermore, “the American public education system has not kept up with the times and is currently facing a number of serious problems”a

Institutions

Strong institutions are a hallmark of the USA, based on liberal market economics, economic

Some argue that a low level of regulation has led to a rapid rise in prices for basic services like health

A liberal market economy (compared to the social market economies in (continued)

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Strengths

Weaknesses

Opportunities

Threats

freedom, the rule of law, and property rights

care and (higher) educationb

among its citizens, position the USA well for the future

Market and demand

The US economy is the world’s largest, with strong household and business buying power. Businesses and customers in Silicon Valley are especially open to buying new technology products and services

The market in Silicon Valley is not at all representative of markets in the USA beyond the region, with an overrepresentation of people open to new products and early adopters

Migration

Silicon Valley is a melting pot of people from around the world, especially from Europe, China, and India. This diversity fuels innovation and businesses benefit from ties to markets around the world

The high cost of living in the Bay Area makes it hard for people with modest means to immigrate to this region

Attracting talent, businesses, and capital from around the world to Silicon Valley will strengthen demand for the technologies, products, and services developed in the region. So will scouting for investment opportunities and new technologies Attracting the smartest and most motivated talents from around the world to Silicon Valley creates a unique ecosystem of entrepreneurs and technology experts

Quality of living

California and the Bay Area are known for a pleasant climate, natural beauty,

The high cost of living is a result of strong economic growth, particularly in the

many European countries for example) is less efficient at redistributing wealth, potentially leading to more economic inequality and social unrest Strong offerings from technology companies in innovation hubs around the world will increase competition in sectors that were once reserved for technology startups and companies in Silicon Valley Changes in immigration laws could hamper access to talent. For example, restricting the H1B visa category that technology companies rely on to hire foreign experts could lead to a shortage of human capital and ultimately stifle innovation The everincreasing cost of living drives out families and long-term

Due to the COVID-19 crisis, the prices for buying and renting housing

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Resources

Strengths

Weaknesses

Opportunities

Threats

and inhabitants’ casual attitude. The proximity of technology centers to recreational areas in nature is an advantage for the local workforce

technology field. According to a survey conducted by the United States Census Bureau, the Bay Area ranks first in median home values, median monthly mortgage costs, and median gross rentc

in the Bay Area have decreased substantially. This could provide opportunities for families, foreign founders, and other people to move to the area

residents with lower incomes.

Research infrastructure

Silicon Valley is home to some of the best universities and research institutes in the USA and the world. Its per capita scientific output in terms of patents and publications is one of the highest in the world

A high level of research infrastructure comes with an equally high level of reinvestment costs that are difficult to maintain long term

Establishing ties to other strong research hubs in the USA and abroad can strengthen the intellectual base even further and tap into additional funding sources (e.g., the EU’s Horizon research program)

Bank loans

Bank loans are offered by nationally operating banks or those with a strong local

There is a less pronounced tradition of bank loans in the region due to the more attractive venture

An ecosystem changing its focus from startups to scaleups will increase the role of bank

The COVID-19 crisis has pushed many Silicon Valleybased corporations to remote work policies with employees working from anywhere in the state, country, or world. The question remains if companies will keep focusing on building up their workforce in Silicon Valley or move their operations to other hubs once the pandemic ceases Restricting immigration and increasing the legal hurdles for talent to work in US research organizations might jeopardize the region’s leading position in basic and applied sciences As startups develop into established companies, they might be encouraged to (continued)

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Legal advisers

Policy and strategy

Risk capital

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Strengths

Weaknesses

Opportunities

Threats

footprint in the region, particularly those focused on startup banking The tight-knit network of service providers underlies a common understanding of how to do business in Silicon Valley and a strong payit-forward mentality. Based on this concept, many advisors are willing to offer advice and their services initially free of charge for aspiring entrepreneurs and early stage startups (deferred service fees) Silicon Valley was not created top-down by specific policies or an overall strategy. It is a bottom-up system guided by market dynamics that support the ascendance of new ideas and the growth of the best startups

capital and private equity models

loans and the banking system will further develop

look for better loan options in other regions

Establishing an LLC or Inc. is comparatively easy in the USA, but the more pronounced litigation culture means that new companies must spend substantial funds on legal fees to ensure legal security

New technology platforms are venturing into the legal services space, providing access to the services startups and established companies need. These increase businesses’ options and drive prices down

If the dynamic growth of startups decreases in the future, the payit-forward system could slow down. This could endanger the practice accepting deferred service fees for legal advice

Gaps in key areas like housing and transportation indicate public– private imbalance. Local and regional governments in and around Silicon Valley lack the governance capacity to address the negative consequences of overweening successd Time to exit has extended in recent years, making VCs’ investments increasingly risky and unattractive

Local and regional policymakers must walk a fine line between drafting policies that help more people participate in the region’s economic success while not overregulating and hampering innovation The ongoing influx of smart people migrating to Silicon Valley will keep the region attractive for a high

The growing gap between Silicon Valley’s rich and poor could necessitate policies that distribute wealth more equally in the future

About 80% of California’s venture capital and 40% of that in the USA is invested in Silicon Valley.

If the flywheel of investment and exits begins to slow, the dynamics of venture investments (continued)

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Resources

Regulation

Tolerance and trust

Strengths More than USD40 billion (2019) was invested by business angels, venture capitalists, corporate venture capital offices, and private equity funds from around the world The USA is known for its business- and entrepreneurshipfriendly regulatory environment, which favors innovation and competition (e.g., lawsuits against big tech; noncompete clauses for employees). Some argue that the US case law system is more conducive to innovation than written-law systems used in many other parts of the world The San Francisco Bay Area is considered one of the most tolerant and liberal regions in the USA and around the world (e.g., the free speech and LGBTQ movements originated here). This open

Weaknesses

Opportunities

Threats

volume of risk capital

could slow down considerably

The methods and approaches that fueled Silicon Valley’s growth in the past are increasingly under scrutiny. Various public actors have threatened lawsuits and trust-busting actions against potential monopolies that have formed over recent decades

Local authorities are accustomed to the fast pace of innovation and have an inclusive approach to regulating new technologies. Regulations drafted locally could function as blueprints for other regions or nations

Regulation in other parts of the globe like China or Europe can be a hurdle for the expansion of new business models from Silicon Valley, hampering the growth of its companies

The tolerance between different parts of society is threatened by the growing gap in wealth distribution

The high level of tolerance attracts tolerant people from all over the world, making the level sustainable even if the migration from less tolerant communities continues as well

The outflow of tolerant people to other communities and ecosystems can lead to increased competition for talent between regions

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environment attracts optimistic people with a think-big mentality, driven by missions to change the world a

https://www.publicschoolreview.com/blog/the-15-biggest-failures-of-the-american-public-educa tion-system b https://www.publicschoolreviewcom/blog/the-15-biggest-failures-of-the-american-public-educa tion-system c Bee CA (2013) The Geographic Concentration of High-Income Households: 2007–2011 (No. ACSBR/11–23). United States Census Bureau d Etzkowitz H and Steiber A (2019) Silicon Valley: Too Much Success? In: Nourani CF, ed., Computing Predictive Analytics, Business Intelligence, and Economics: Modeling Techniques with Start-ups and Incubators. Oakville, Canada: Apple Academic Press Inc., pp. 155–170

14.4

Lessons Learned

Silicon Valley plays a key global role in developing innovative technologies and paving the way for new global trends. The region remains, for now, the undisputed leader of the global startup and innovation scene. Motivated to create a similar innovation powerhouse in their countries or regions, policymakers around the world are looking for a recipe to promote innovation and entrepreneurship. The aim is to create a supportive environment that encourages people to act outside their usual patterns of thinking, develop new products and services, and establish new companies. Targeted measures and supports can make a decisive contribution and get the ball rolling, but governments are given the difficult task of finding the right balance. According to Fiona Murray, a professor at MIT Sloan School, there are two perspectives to creating an ecosystem.33 The pro-government perspective states that specialized inputs like technology parks and innovation centers are necessary for driving ecosystem emergence. The other perspective exclusively focuses on people and their networks. According to this second perspective, the market can be distorted by an excessive top-down approach without grassroots momentum. New companies are created through constant recombination of ideas, talents, and capital34 embedded in a supportive culture. Cultural change toward a startup-friendly environment, however, is difficult to initiate top-down. The values and habits associated with

33

Regalado A (2013) In Innovation Quest, Regions Seek Critical Mass, MIT Technology Review, September/October 2013, Vol. 116, No. 5. P. 84–86. 34 Timmons J (1994) New Venture Creation. Entrepreneurship for the twenty-first century. Volume 4, Irwin, Boston.

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entrepreneurship must emerge organically, from the bottom up, to promote the development of a sustainable entrepreneurship ecosystem. There was and is no direct political or overall top-down strategy that guided the development of Silicon Valley. That development happened through a mosaic of institutional and individual strategies and motivations (e.g., Fredrick Terman at Stanford University). There are a multitude of factors that make the San Francisco Bay Area such a unique innovation ecosystem: Above all, the diversity of the people and the breadth of the (technology) issues addressed here are unrivaled in the rest of the world. More than half of startup founders come from outside the USA, with leading global universities and research institutions providing much of the intellectual capital and talent that underpin disruptive companies. In addition, large sums of venture capital help promising ideas reach market maturity at record pace. It is the close-knit networks of relationships between people in different fields, embedded in a culture of openness and experimentation, that create this fertile ground for innovation.35 Ultimately, it is the interplay of numerous actors and factors in Silicon Valley’s specific innovation ecosystem that are responsible for its innovative pre-eminence. Some of the actors who are part of a thriving ecosystem have been described in Chap. 2. Even with all necessary actors present, it is the rate of their interaction that determines the innovative output and sustainability of an ecosystem. A special culture based on openness and experimentation and strong social capital among individual actors leads to a dynamic recombination of productive factors and resources like human, financial, and intellectual capital. Investment Based on Excellence Principle Although awareness of and supportive landscapes for technology startups are growing steadily, the resources to support startups are usually limited. There are— roughly speaking—two ways of distributing these funds. The first option is the “watering can principle,” or giving many potential founders the same small portion of available resources. The second option is to focus on a few promising companies and support them with a relatively large part of the available resources—this is the “excellence principle.” Depending on institutional and cultural circumstances as well as the personal focus of the decision makers, the right distribution model will fall somewhere between the two options. It is argued, however, that the best way to achieve maximum effects with limited resources is to follow the principle of excellence. Spending resources on low-potential startups drains those resources from ventures with higher growth potential. Along those lines, it is arguably better for the ecosystem, especially in later stages of startup development, to focus available resources on selected high-potential ventures.

35

Fuerlinger G (2014) Die Bausteine eines Gruenderoekosystems. In Thomas Funke & W. Axel Zehrfeld (Hg.) Abseits von Silicon Valley: Beispiele erfolgreicher Gruendungsstandorte, Frankfurter Allgemeine Buch, Frankfurt.

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Mentors as Innovation Catalysts Compared to their unsuccessful peers, successful entrepreneurs are able to build a network of people that can help them launch and grow their businesses. Once they have established these networks, the likelihood that they will be successful again in their next venture increases dramatically. Therefore, one of the most important features of a dynamic entrepreneurship ecosystem is that successful entrepreneurs engage as mentors. Since they have already founded one or more companies themselves, they know the typical problems that young entrepreneurs face. It can be very helpful for founders to have someone on their side who has already gone through this process and knows what is important. Mentors can provide important feedback when developing the product or service, thereby greatly reducing development time and the likelihood of failure. Furthermore, they can support the team (culture) and organizational development of the new company, thereby helping to professionalize the company internally. This can happen through open feedback discussions in which the mentor points out problems in team dynamics. For example, an engaged mentor, with his outside perspective on the startup, can help the founders define their roles in the team and provide feedback on their overall strategy. In addition, mentors can share personal stories of success (and failures), offering clues on how to navigate certain parts of the entrepreneurial journey. Mentors are experts in their industry and can help young entrepreneurs with business development. They have many years of experience and usually have an extensive network of business contacts. Through personal introductions, they bring founders into contact with their first customers or relevant decision makers, facilitating access to the market. Often, mentees (or protegés) become mentors themselves, helping the next generation of young entrepreneurs build their businesses. This mechanism can also be referred to as the “cycle of entrepreneurship”,36 in which successful entrepreneurs contribute to the development of entrepreneurship in a region through mentoring and support for young companies. There are different ways to institutionalize such a “place of exchange” between mentors and founders. The right approach depends on regional or local idiosyncrasies. On the one hand, it is important to take a closer look at successful startup support initiatives to understand which factors contribute to their impact. On the other hand, due to the different cultural and institutional frameworks in each region, it is not always possible to copy successful initiatives one-to-one from one region in another. One has to understand the local characteristics of an ecosystem in order to develop the right approach, and has to engage the right actors right from the beginning.

36

Fuerlinger G (2014) Die Bausteine eines Gruenderoekosystems. In Thomas Funke & W. Axel Zehrfeld (Hg.) Abseits von Silicon Valley: Beispiele erfolgreicher Gruendungsstandorte, Frankfurter Allgemeine Buch, Frankfurt.

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Fig. 14.2 Successful entrepreneurs support by “Giving Back”. Source: own depiction, based in Isenberg 2010 (Isenberg D (2010) How to Start an Entrepreneurial Revolution. Harvard Business Review. Retrieved June 2010)

Pay It Forward Through Giving Back Pay it forward refers to somebody helping someone else without expecting a direct service in return. The return element is expected to come back through other players of the system or, in the case of the related “giving back” culture, may have already been received before the giver was in the position to give. One of the most interesting cultural phenomena in a sustainable startup ecosystem like Silicon Valley is that entrepreneurs support each other. Many successful entrepreneurs become investors in, consultants to, or board members of new companies and provide young entrepreneurs with capital, experience, and contacts from their personal networks. This crucial principle for a functioning startup ecosystem is called “giving back” as displayed in Fig. 14.2. University Alumni Networks Another important aspect of the social structure in an innovation region is the quality of the connections between universities and their alumni. The profit is twofold: Alumni feel that the university’s education helped lay the foundation for their success, and are willing to share that success by donating part of their profits back to their alma mater. The university will have an active channel to share new research findings with their alumni community, which is actively engaged on the market and can help transfer new findings into new products and services. For example, close ties to decision makers in industry help university laboratories and research centers find licensing or technology development partners, fostering technology transfer and commercialization.

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Entrepreneurial Vision and Aspirations Entrepreneurial vision and aspirations have a significant impact on startup growth performance.37 Entrepreneurs see problems that need to be solved or discover a need in the market they want to satisfy. This is their vision, giving them and their work meaning and setting a direction or a goal. To get there, they might start with an initial idea (plan A) to see whether that can bring them closer to their vision. If it turns out that plan A does not deliver the desired result, they will switch to plan B to see whether this approach works better. It is therefore important to differentiate between visions and ideas. Ideas are of a lower order and are subject to frequent change. Visions, on the other hand, must be inspiring and represent the “guiding star” that sets the general direction of the company and ignites passion for the cause among those involved. A motivated entrepreneur with a convincing vision will not stop at this point but will try different approaches (i.e., iterations and pivots) to get closer to fulfilling their vision. The admission criteria at StartX, Stanford University’s startup accelerator, offer an example38 that underlines the value of human capital for startups’ promise. The startup idea might be great, but if the entrepreneur and his team do not meet certain expectations, the startup will not be admitted in the accelerator program. Ultimately, the founding team is one of the most deciding factors for a company’s success. It is not without reason that most investors say that they would rather invest in a firstclass team with a mediocre idea than vice versa. This spotlights the importance of the human factor (human capital) for selecting companies to support or invest in, instead of focusing predominately on technology, product characteristics, business models, and addressable market sizes. Essentially, what is the value of the best plan without someone who is able to put it into practice? Adapting to Silicon Valley Culture and Business Practices Typically, the principles that apply to the business world overall apply even more in Silicon Valley. Face-to-face contact counts and forms the basis of trust that business relations are built on. Regardless of whether a company is seeking customers, partners, or investors, it is often only possible to progress on or close a deal when decision makers have a good personal connection. Here, Californians’ open and cooperative nature often helps—for example, a person you have just met may introduce you to a relevant contact. This, in turn, allows you to widen your network at a rate that might not have been possible in another part of the world. This is primarily attributable to flat hierarches, low power disparities, and the informal character of interactions between people in different sectors, positions, and career

37

Fuerlinger G (2020) The Impact of Human and Social Capital on University Startup Performance: Evidence from Entrepreneurship Ecosystems in USA and Europe. Doctoral Thesis, Vienna University of Technology, December 2020. 38 Fuerlinger G and Leitner KH (2017) Kulturelle Aspekte der Förderung universitärer Spin-offs, in Wissenschaftsmanagement - Handbuch & Kommentar, Lemmens Medien GmbH, Bonn – Berlin, 1. Auflage, November 2017, ISBN: 978-3-86856-013-8.

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levels. In return, however, newcomers are also expected to share their network of contacts and assist their counterparts. The best way to obtain the right contacts is to bring the right people from your own network together. To succeed in Silicon Valley in the long term, it is vital to have an experienced team: one that understands how to communicate and cooperate properly with tech companies and startups. Ideally, employees will also have experience with collaboration agreements, contract drafting, and similar issues since divergent expectations in these fields can often lead to misunderstandings. Customer Centricity Is Key The Silicon Valley digital industry managed to combine the concepts of customers and products like no other global region. A data-driven, customer-focused approach to measuring product and service performance and constant adaptation of the product or service itself sets companies up for fast learning and growth. One notable feature of the US market is that customers place a high value on service and customer care. As such, companies entering the market must ensure they are aligned with American habits and behaviors regarding customer care, quality standards, and business development practices. It is important to US customers to interact with someone immediately if a problem arises. As such, it is important for new companies to consider early on how they will establish their service structure and guarantee prompt responses to queries. In some cases, this is done with the help of local partners. Speed and Follow-ups The corporate culture of both startups and larger companies plays a central role in response and communication speeds. Only a comprehensive understanding of how US residents communicate, behave, and do business can enable stronger collaboration with local companies. For example, it is customary to send a “follow-up” message within 24 h of meeting someone relevant to your area of business. Speed is of the essence in Silicon Valley, and companies must be prepared to embrace this. It is often noted that other global regions—Europe in particular—have much catching up to do regarding the etiquette of following up on meetings. Furthermore, European corporate cultures and traditional companies—many of which are familyowned companies with storied histories—differ notably from young, growthoriented Silicon Valley startups financed by VCs and private equity firms. For traditional companies, planning to do business in Silicon Valley requires a certain degree of openness and a new mode of action—one that is adapted to the specific features of the Silicon Valley ecosystem. This applies especially for employees who are working locally. Engage in Marketing and Networking A huge emphasis is placed on marketing and sales in the US market and in Silicon Valley in particular. The mere provision of an innovative and competitive product or service is not sufficient. Rather, products are differentiated according to how they are presented and by how their particular advantages stand out. A well laid-out website

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and marketing materials in impeccable English are the minimum requirements. Even more important, however, are the marketing and salespeople hired to tap the market. These must already have a strong network in the region, be experienced in dealing with representatives from the technological world, and, above all, be prepared to keep up with the fast pace. Many initial contacts and new leads are generated by visiting networking events, conferences, and discussion panels and, especially, through personal introductions. Regular attendance at such events is a basic requirement for expanding and strengthening networks and showcasing activity and influence in the field. In addition, when starting out, regular participation in events is a good way to obtain an overview of the industry and get to know the main players. Partnerships and Joint Technology Development Especially when partnering with young technology companies and startups, the right engagement strategy is central to success. Most early stage startups cannot fill an established company’s order for a high number of pieces because they have not yet achieved the necessary size or revenue. However, if the established company has the patience and resources to develop products and services alongside the startup, there is often a unique opportunity for these mostly fast-growing companies to become long-lasting resources, partners, or customers. This makes it possible for established companies to tap new growth markets that might not previously have been on their radar. In many cases, a company’s primary purpose for meeting a Silicon Valley startup will be to better understand the latter’s technology or business model. While this can be helpful in enabling the two companies to get to know one another, ultimately, a startup’s aim is to develop their new product or service and establish it on the market in the long term. For this reason, young companies are primarily interested in meetings and partnerships that focus on joint product development. For startups, the question of whether to attend a meeting or devote time to working on the product is one of opportunity costs. Accordingly, if an established company wishes to hold a meeting with an innovative startup, they should carefully research the startup beforehand so they can add value to the discussion. This also allows the established company to engage meaningfully in discussion about opportunities for collaboration and to highlight their own strengths or suitability for partnership.

Sofia Innovation System

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Veneta Andonova, Christian Betov, Mira Krusteff, Nadia Soultanova, Irina Obushtarova, and Ludovit Garzik

Abstract

Bulgaria’s innovation performance has been distinctly positive since 2015, driven by remarkable innovation efficiency. Much of this dynamism is attributable to the country’s capital, Sofia, and its bubbling innovation and entrepreneurial ecosystem. EU funding has been one of the drivers for this process, but, unlike elsewhere in the region, the Sofia experiment has been very successful from its very first iteration. Sofia’s strongest areas are its increasing employment in fast-growing innovative companies and its number of design and trademark applications. These achievements cannot offset its systemic challenges, the most urgent of which are related to the country’s demographic crisis, low total early stage entrepreneurial activity, small national and regional markets, and low buyer sophistication. The local ecosystem needs to broaden its entrepreneurial community, build

V. Andonova (*) Universidad de los Andes School of Management, GEM Bulgaria, Bogotá, Colombia e-mail: [email protected] C. Betov · M. Krusteff GEM Bulgaria, Sofia, Bulgaria e-mail: [email protected]; [email protected] N. Soultanova Urban Impact Ventures, Sofia, Bulgaria e-mail: [email protected] I. Obushtarova The Recursive, Sofia, Bulgaria e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_15

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collaboration at home and internationally—with the Bulgarian diaspora in particular—and implement a more soundly articulated national strategy for smart growth as part of the global knowledge economy.

15.1

Introduction to the Regional Innovation System Sofia

According to the international rankings, Bulgaria’s innovation performance has been distinctly positive since 2015. The data from the Global Innovation Index (GII) 2020 reveal that the country is among the top three performers in the upper-middle-income group, behind only China and Malaysia. Much of this dynamism is attributable to the country’s capital, Sofia, and its bubbling innovation and entrepreneurial ecosystem. Sofia accounts for about 40% of the country’s GDP (USD67.9 billion), and since 2015 has exhibited sustained GDP growth a full percentage point above the national average (Sofia Economic and Investment Profile, 2019).1 This makes Sofia Bulgaria’s main driver for economic growth. While Sofia’s GDP per capita has always been almost double the national average, the gap between per capita wealth in the capital and the national average has widened since 2014. Structurally, the nonfinancial sector in Sofia differs from Bulgaria’s nonfinancial sector almost all creation and distribution of information, creative products, and telecommunications are concentrated in the capital, along with the largest volume of professional activities and scientific research. The number of employees in nonfinancial enterprises in Sofia is increased by 11% between 2008 and 2018. The largest increases were in the fields of education (104%), the creation and distribution of information, creative products and telecommunications (78%), administrative and support activities (47.4%), and professional activities and scientific research (40%). These increases have come at the expense of the extractive industry (–60%), construction (–36%), and manufacturing (–16.5%) (National Statistics Institute, 2020).2 The role of Information and Communication Technologies (ICT) is crucial for Sofia. In 2014, the city was ranked as the most attractive outsourcing destination in Europe, and third among cities with the highest number of startups. Most of these startups were innovation- and technology-driven ventures that relied heavily on digitalization. In 2016, over 78% of those employed in Bulgaria’s ICT sector were located in Sofia, pushing the annual turnover for the industry in the city to EUR 4.6 billion compared to EUR 2.9 billion in 2007 (Digital Cities Challenge, 2019).3 Although the last 4 years have seen an increase in the number of alternative ICT

1

Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia. com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021). 2 National Statistics Institute (NSI). Available at https://www.nsi.bg/ 3 Digital Cities Challenge (2019) Available at https://www.intelligentcitieschallenge.eu/sites/ default/files/2019-07/Assesment_Report_SOFIA_0.pdf (accessed on December 14, 2020).

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hubs with the rise of Varna, Gabrovo, Stara Zagora, and Bourgas, Sofia still accounts for more than 80% of annual turnover in the industry. Much of Sofia’s growth and dynamism is due to multinationals choosing Sofia for outsourcing operations. It is a cost-effective location for business process outsourcing (BPO) and IT-related R&D. In fact, in 2019/2020, fDi Intelligence ranked Sofia as the world’s top cost-effective location for FinTech ahead of Vilnius and Bucharest (Davies N (2019)).4 Nevertheless, local traditional businesses’ demand for ICT has been modest. Therefore, the larger innovation and entrepreneurial ecosystems in Bulgaria offer somewhat limited prospects with most companies’ managerial processes and market positioning not relying heavily on innovative products and services. Despite this, the EU’s export-oriented Joint European Resources for Micro to Medium Enterprises (JEREMIE) program invested more than USD1.6 billion in Bulgaria between 2014 and 2019 (European Investment Bank (2018)).5 Among the funds selected to manage a total amount of EUR 350 million, four were located in Sofia. The funds were given that task conditional on raising additional private funds and with a focus on innovation-driven startups and SMEs. These initial public investments achieved a 2.57 multiplier effect, which by 2017 attracted EUR 875 million in private financing (Angelov E (2017)).6 As a result, cities like Sofia became important growth hubs for the Balkans’ tech sector, creating incentives for firms to set up there. Arguably, these investments have enhanced the competitiveness of the city’s 9476 SMEs and 180 startups, helping secure more than 25,550 jobs in the region (Angelov E (2017)).7 The outcomes of these public investments have been positive given Bulgaria’s increasing number of exits, volume of private investments, and the valuation of innovation and technology-driven companies. In 2019, R&D expenditure was 0.84% of the GDP, an annual increase of 21% (Georgieva T, Yalamov T (2020)).8 As in previous years, businesses account for the greatest share of R&D activity with a total budget equivalent to 0.56% of GDP, marking a peak in the country’s modern history (Georgieva T, Yalamov T (2020)).9

4 Davies N (2019) FinTech Locations of the Future 2019/20: London tops first ranking. Available at https://www.fdiintelligence.com/Locations/Asia-Pacific/Singapore/FinTech-Locations-of-theFuture-2019-20-London-tops-first-ranking (accessed on January 17, 2020). 5 European Investment Bank (2018) The European Investment Bank Group in Bulgaria 11/2018. Available at https://www.eib.org/attachments/country/the_eib_group_in_bulgaria_en.pdf (accessed on January 17, 2021). 6 Angelov E (2017) Funding Entrepreneurs. Bulgarian VC Association (BVCA), Presentation, Vienna. 7 Ibid. 8 Georgieva T, Yalamov T (2020) Economic Resilience through Innovation. Available at http:// www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on January 6, 2021). 9 Ibid.

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Although positive trends have not yet compensated for the relatively low absolute volume of investments in R&D in Bulgaria, recent initiatives bring optimism for the future. For example, Sofia became home to the Big Data for Smart Society Institute (GATE) in 2019. This EUR 15 million teaming project is the only big data center of excellence in Eastern Europe. It should play a strategic role in disseminating best practices and innovative models to EU countries with lower-than-average R&D performance. GATE is a joint initiative between Sofia University (Bulgaria), the Chalmers University of Technology (Sweden), and the Chalmers Industrial Technology foundation. It was devised to bridge the gap between Eastern Europe and Western Europe’s 55 big data centers. It should also produce large positive spillover effects for Sofia’s ecosystem (European Commission, 2019).10 The rest of the chapter is organized as follows. The next section provides an overview of the elements commonly understood as inputs and outputs of Sofia’s innovation ecosystem. This is followed by a comprehensive SWOT analysis of Sofia’s innovation ecosystem validated by key stakeholders before we conclude the analysis.

15.2

Innovation Inputs and Outputs in Sofia Innovation System

15.2.1 Institutions and the General Political Environment Government programs and policies and the public sector’s functioning are important factors in Sofia’s innovation and entrepreneurial ecosystem, and cannot be separated from wider national institutions and political realities. The annual Global Entrepreneurship Monitor report (GEM Bulgaria Report (2019))11 provides a pertinent comparative perspective on the institutional and political environment. The most positive aspects of the Bulgarian institutional context that influence the local ecosystem are as follows: • Low taxes and little bureaucracy, • Supportive and relevant government programs related to entrepreneurial efforts, and. • State-sponsored entrepreneurship programs. On all these accounts, Bulgaria consistently ranks lower than Baltic countries like Estonia and Latvia, and is mostly on par with Central European countries. In Bulgaria, it takes seven procedures, 23 days, and 1.1% of income per capita in

10 European Commission (2019) The first big data Centre of Excellence in Eastern Europe takes off. Available at: https://ec.europa.eu/info/news/first-big-data-centre-excellence-eastern-europe-takes2019-oct-17_en. (accessed on February 2, 2021). 11 Andonova V, Betov C and Krusteff M (2019) 2017/18 & 2018/19 GEM national report on entrepreneurship in Bulgaria. Global Entrepreneurship Monitor Bulgaria.

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fees and taxes to start a business (World Bank Doing Business Report (2019)).12 In the neighboring Balkan countries, the same process takes on average six procedures, 23 days, and more than 3% of income per capita. There are undoubtedly a growing number of government programs for startups and entrepreneurial ventures, as well as initiatives for the creation of science parks (e.g., Sofia Tech Park)13 and business incubators. Some of these were championed by Bulgaria’s highest-ranked public official—the country’s president—between 2012 and 2017. However, there are multiple ways these facilities’ operations and the state apparatus might be improved and transformed into powerful support mechanisms. Most experts concur that the scientific and business communities in Sofia have not yet been fully able to exploit these initiatives and related infrastructure. Serious reservations about the capacity of government officials to effectively and competently carry out their tasks are pervasive. However, one of the best-rated aspects of government programs is the support that science parks and incubators offer, with significant involvement by the private sector and successful entrepreneurs who participate as mentors, role models, and investors.

15.2.2 Sofia Tech Park and Its Impact Sofia Tech Park, the first science park in Bulgaria, opened in 2015. Envisioned as the missing link in Bulgaria’s innovation ecosystem, its goal is to create a bridge between business, academia, government, NGOs, and civil society at large. The Park includes new and renovated building space located only three kilometers from Sofia’s historical and administrative center. The Park houses fully functional scientific infrastructure, 11 applied research laboratories, an incubator, co-working spaces, an interactive science center, green spaces spanning over 40,000 square meters, and facilities for lectures, training, and demonstrations of new technology. The EUR 42.7 million project was financed by EUR 36.3 million from the EU’s European Regional Development Fund and by the national budget (European Commission (2015)).14 State-owned Sofia Tech Park JSC manages the Park. The Park has established partnerships with leading universities, the Bulgarian Academy of Science (BAS), business clusters, multinational companies, SMEs, local and national authorities, NGOs, and other entities. After a few rocky years, the

12

World Bank (2019) Doing Business 2019: Training for Reform. Available at https://www. doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_ web-version.pdf (accessed on January 17, 2020). Provided by Creative Commons Attribution 4.0 International License (CC BY 4.0). 13 European Commission. Sofia Tech Park creates a unique environment for innovation. Available at https://ec.europa.eu/regional_policy/en/projects/bulgaria/sofia-tech-park-creates-a-unique-envi ronment-for-innovation. (accessed on January 17, 2021). 14 European Commission (2020) European Innovation Scoreboard, 2020. Available at https://ec. europa.eu/commission/presscorner/detail/en/QANDA_20_1150 (accessed on December 20, 2020).

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government-owned innovation complex has started consistently taking steps toward actively working with ecosystem participants. Still, its fragile financial model, red tape-related limitations, and the extremely modest participation of research institutions in its governance bodies remain key weaknesses. December 31, 2020, witnessed the opening of the European Digital Innovation Hub for Data Science, High Performance Computing, and Artificial Intelligence The Hub is a joint not-for-profit venture by the Sofia Tech Park, the ICT Cluster, NEVEQ capital management, the Strategic Center for Artificial Intelligence, Sofia University’s GATE, the Technology University, and Sofia Municipality. The hub should support the digital transformation of data, high-speed computing, and AI industries in Southwest Bulgaria where Sofia is located. It emphasizes improving existing infrastructure, know-how, technology, and expertise (Registry Agency (2021)).15 In addition, in December 2020, the Sofia Tech Park, Sofia Municipality, and the Health and Life Sciences Cluster Bulgaria signed a memorandum of association to initiate the creation of the first-ever Bulgarian BioCentre.16 Its declared objective is to support the joint work of institutions, the science sector, and the business sector to popularize Sofia as a go-to place for science, investment, and health technology development. The BioCentre should become the place where scientists, entrepreneurs, students, SMEs, and innovators find the appropriate intellectual and expert environment in which to create high-impact ventures. In general, better coordination with the private sector and the scientific and entrepreneurial communities could improve the talent pool and the efficiency of existing government programs and initiatives. Following this line of argument, local observers and the ecosystem’s participants recognize that Bulgarian government’s efforts to establish programs for new and growing innovation- and tech-driven businesses are better than most other government initiatives (GEM Bulgaria Report (2019)).17 In September 2020, the government announced that it was establishing the National Innovation and Scientific Research Agency to lead and coordinate public institutions’ innovation efforts.

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Registry Agency (2021) Memorandum of Association of European Digital Innovation Hub for Data Science, High Performance Computing and Artificial Intelligence. Available at https://portal. registryagency.bg/CR/Reports/ActiveConditionTabResult?uic=206339600. (accessed on February 2, 2021). 16 Sofia Tech Park (2020) Sofia Tech Park, Sofia Municipality, and Health & Life Sciences Cluster Bulgaria signed a memorandum of association that will initiate the creation of the first-ever Bulgarian BioCentre. Available at https://sofiatech.bg/en/news/sofia-tech-park-sofia-municipalityand-health-life-sciences-cluster-bulgaria-will-collaborate-in-creating-a-biocentre/. (accessed on February 2, 2021). 17 Andonova V, Betov C and Krusteff M (2019) 2017/18 & 2018/19 GEM national report on entrepreneurship in Bulgaria. Global Entrepreneurship Monitor Bulgaria.

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15.2.3 Predictable Macroenvironment Sofia’s developments happen in a general context of political and policy stability, where the main risk is relatively high levels of corruption. According to Transparency International18 in 2019, Bulgaria ranked 74th out of 198 countries and 12% of public service users reported having paid a bribe in the previous 12 months. On the other hand, the long-standing currency board established in 1997 has contributed to robust fiscal and external balances and the expected adoption of the Euro in early 2022. This would guarantee a stable and predictable macroenvironment. In parallel, none of the major local taxes and fees in Sofia Municipality have been increased since 2012, so the tax environment is predictable (Sofia Economic and Investment Profile (2020)).19

15.2.4 Business-Friendly Tax Regime There is a 10% flat tax on profits in Bulgaria and 5% on dividends, a very attractive arrangement for businesses in the EU context. This, plus the growing number of well-run co-working places, accelerators, and VCs, sets the scene for Sofia as one of the best regional entrepreneurial ecosystems. However, there a number of unquestionable challenges are also involved: The fragmentation and variety of the region’s small markets can be one of the biggest obstacles facing the growth of innovationdriven ventures in the region (Guerrini F (2017)).20

15.3

Human Capital and Research

15.3.1 Leading Talent Pool Sofia stands out as the nation’s leading talent pool and innovation hub in terms of human capital and research intensity. While the age structure of residents in Sofia is similar to that of Bulgaria as a whole, their qualification levels differ significantly: On a national level, 28.2% of the total population has completed higher education, whereas Sofia shows a much higher concentration. Over 51% of Sofia’s residents have completed higher education. Sofia residents also demonstrate the best

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Transparency International (2019) Corruption Perceptions Index 2019. Available at https:// images.transparencycdn.org/images/2019_CPI_Report_EN_200331_141425.pdf (accessed on January 17, 2021). 19 Sofia Economic and Investment Profile (2020) Available at https://investsofia.com/wp-content/ uploads/2020/10/Sofia-Economic-and-Investment-Profile-2020.pdf (accessed on December 1, 2020). 20 Guerrini F (2017) Is Sofia the real digital Capital of the New Markets?. Forbes. Available at https://www.forbes.com/sites/federicoguerrini/2016/04/14/is-sofia-bulgaria-the-real-digital-capitalof-the-new-markets/print/. (accessed on February 24, 2018).

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performance in university entrance examinations and the smallest share of failing grades (Sofia Economic and Investment Profile (2019)).21 Moreover, almost 70% of students in profiled high schools study in language schools learning English, German, Spanish, French, Italian, Russian, Japanese, and other languages. The capital has a lower share of vocational school graduates than the country overall, which is explained by its smaller share of manufacturing compared to the national level. In 2020, Sofia’s unemployed accounted for 2% of its working age population of 682,000 people, while Bulgaria overall had 6% unemployment. Differences in education, performance, and employment are also reflected in wage levels. Wages in Bulgaria have been increasing continuously over the last decade, from an average annual gross salary of EUR 3000 in 2008 to about EUR 6900 in 2018. The trend is even stronger in Sofia, which increased from EUR 4500 to EUR 9500 over the same period. In the last decade, salary growth in Sofia (10.6%) slightly outpaced Bulgaria’s growth trend (Sofia Economic and Investment Profile (2019)).22 The strong labor market and cultural wealth offered by Sofia’s theaters, museums, concert halls, and sports venue help the city retain a young workforce. In 2019, 51% of Sofia’s residents were under 40 years old compared to 45% in Bulgaria overall. In comparison, the percentage of residents under 40 in neighboring Romania and in its capital Bucharest are 46% and 47%, respectively. In 2010, Sofia represented 19% of the total workforce in Bulgaria, or 650,000 people. In 2018, this share grew to 21% or 697,000 people. Retention is not the only factor in Sofia’s demographics; the city is also highly attractive. An additional factor in youths’ attraction to and retention in Sofia is its concentration of higher education institutions. It is home to 23 of the 51 accredited institutions in the country, including the three best universities in Bulgaria. Despite Bulgarian universities’ relatively low rankings in widely cited international scoreboards, the 100,000 students in the city represent an exceptionally large talent pool and account for 40% of all students. Many of them come from their hometowns to study and stay in Sofia, representing a clear migration trend of young and highly qualified individuals from smaller cities to the capital. The three top-ranking universities that attract the largest number and the best students are Sofia University, the Medical University, and the University of National and World Economy. Sofia’s pre-COVID-19 pandemic unemployment was mainly frictional or voluntary for reasons like moving from one job to another or enjoying unemployment benefits. In 2019, Sofia had 15,000 registered unemployed on average, 46% of whom had a university degree, and 31% had a secondary school professional degree. Some 61% of the registered unemployed in Sofia in 2019 were specialists in 21

Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia. com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021). 22 Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia. com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021).

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services, transport, business, economics, or law. In 2019, only 5% of the unemployed in Sofia were chronically unemployed and had maintained this status for over a year, compared to 37% in the rest of Bulgaria. In 2018, the economic activity rate of the working-age population (15–64 years old) in Sofia was about 77% compared to 72% nationally. At the same time, the share of people not included in the workforce is 22% in Sofia compared to the national average of 29%.

15.3.2 Scarcity of IT Specialists As described in Andonova V et al. (2019),23 Bulgaria’s programming talent is globally recognized. According to data from Stack Overflow, the dominant Q&A platform for coders with about 3.5 million users, the best coders come from Bulgaria (Salkever A (2015)).24 Stack Overflow ranks the skill level of coders worldwide using up- and down-votes on their answers to posted questions about coding and systems, as well as rankings by fellow users. Thus, the result is entirely crowddriven. Bulgarian coders score the highest average reputation in the world in average country rankings from the 14,898 Stack Overflow users who have reputation scores of 5000 or more. Bulgaria also has 40 top-performing Stack Overflow users, and their impressively high scores make Bulgaria the country with the highest average reputation in the world. Despite Sofia’s 11,000 students enrolled in IT-related degree programs in 2016–2017 (Digital Cities Challenge (2019)),25 the country lacks necessary competencies. This is especially true in the growing ICT sector, which is one of the drivers of the city’s tight labor market. The need for more skilled workers intensified when the capital shifted to accelerating IT services and BPO sectors after the 2009 construction bubble. IT services and BPO increased the number of employees by almost 80,000 between 2008 and 2018. In 2019, they accounted for nearly 30% of total employment in the city (Sofia Economic and Investment Profile (2019)).26 To tackle skilled-worker scarcity, companies and associations have created academies and internship programs like Telerik Academy or SoftUni that train thousands of students in IT-related skills. In addition, 10% of the companies in Bulgaria provide ICT-related training for their employees. However, this is a low

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Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected Places, Palgrave Macmillan, 2019. 24 Salkever A (2015) Data: Best programming talent in the world is not in California. Available at https://venturebeat.com/2015/04/05/data-best-programming-talent-in-the-world-is-not-incalifornia/. (accessed May 19, 2018). 25 Digital Cities Challenge (2019) Available at https://www.intelligentcitieschallenge.eu/sites/ default/files/2019-07/Assesment_Report_SOFIA_0.pdf (accessed on December 14, 2020). 26 Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia. com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021).

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training rate compared to the EU average of 24% (DESI (2020)).27 Despite the low rate, the effects are visible: Bulgaria boasted the second largest increase in human capital for 2019, and one in four of its ICT specialists are female—a markedly higher share than elsewhere in Europe (DESI (2020)).28

15.4

Infrastructure in the Sofia Innovation System

Sofia’s physical and digital infrastructure is the most sophisticated in Bulgaria and compares favorably to other innovation hubs in the EU. Sofia lies on three European transport corridors linking the capital to the Black Sea and to neighboring Greece, Serbia, and Turkey (Sofia Economic and Investment Profile (2019)).29 The largest airport in the country guarantees international connectivity, operating two passenger and cargo terminals and servicing more than 35 airlines that cover 70 destinations and 7.1 million passenger arrivals in 2019 (Sofia Airport (2020)).30 In 2020, Sofia had direct flights to 24 of the top 100 innovation clusters ranked by the World Intellectual Property Organization (WIPO). These include Vienna, Austria; Brussels, Belgium; Copenhagen, Denmark; Paris, France; Berlin, Cologne; Frankfurt, Hamburg, Munich, and Stuttgart, Germany; Tel Aviv, Israel; Milan and Rome, Italy; Amsterdam and Eindhoven, Netherlands; Warsaw, Poland; Moscow, Russia; Barcelona and Madrid, Spain; Basel and Zurich, Switzerland; Istanbul, Turkey; and London and Manchester, UK. It also included three of the ten hot spots in innovation economies: Paris, Frankfurt, and London (FlightsFrom.com (2021),31 WIPO (2020)).32 In Sofia, Bulgaria’s only metro network ensures a quick commute for about 600,000 citizens every day. Improvements in transportation infrastructure should contribute cumulatively to improving the quality of life in the Sofia region since the expansion of the metro network and other eco-friendly transportation modes will

27 DESI, Digital Economy and Society Index (2020) Available at https://ec.europa.eu/digital-singlemarket/en/digital-economy-and-society-index-desi (accessed on December 27, 2020). 28 DESI, Digital Economy and Society Index (2020) Available at https://ec.europa.eu/digital-singlemarket/en/digital-economy-and-society-index-desi (accessed on December 27, 2020). 29 Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia. com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021). 30 Sofia Airport (2020) Passengers 2019–2020. Available at https://www.sofia-airport.bg/sites/ default/files/bg-passengers_2019-2020_14.pdf (accessed on January 16, 2020). 31 FlightsFrom.com (2021) Destinations from Sofia. Available on https://www.flightsfrom.com/ SOF/destinations (accessed on January 17, 2021). 32 WIPO (2020) Global Innovation Index 2020. Available at https://www.wipo.int/global_ innovation_index/en/2020/ (accessed on January 6, 2021). WIPO (2020). Global Innovation Index 2020, Special Edition: The Top 100 Science and Technology Clusters, Table S 1.3. Available at https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2020.pdf (accessed on January 17, 2021).

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effectively reduce yearly greenhouse gas emissions by 90,000 tons (Sofia Economic and Investment Profile (2019)).33 Other large EU-funded projects valued between EUR 15 million and EUR 257 million are expected to further improve quality of life. These include several highways, waste management plants and systems, new public transport vehicles, improvements in the regional water supply and sewage system, and the expansion of a radiotherapy clinic. Still, it is very hard to speculate about the implementation timeline for these initiatives as they depend on the acquisition of land rights, urban planning permits, and public discussions and approvals. Regarding digital infrastructure, the share of households with Internet access in Sofia is 81.9%, similar to Bucharest’s 89%. Data plans in Bulgaria tend to be cheap, and the coverage of the national territory is very good. Moreover, the European High-Performance Computing Joint Undertaking (EuroHPC JU) will install one of five mid-to-high range supercomputers in the Sofia Tech Park, which will receive an additional investment of about BGN 65 million. The other locations for such mid-range supercomputers are Luxembourg, Portugal, Czechia, and Slovenia.

15.5

Market Sophistication

15.5.1 High Integration in the EU and the World Economy Although almost 50% of Bulgaria’s exports are manufactured products, the manufacturing sector represents only 18% of Sofia’s exports. For the metropolitan area, the leading export sectors are trade and repairs, which makes up about 40% of Sofia’s total export revenue, and the innovation-intensive sectors of IT and telecommunications at 16% of revenue. In comparison, these sectors contribute 26% and 7% for Bulgaria, respectively (Sofia Economic and Investment Profile (2019)).34 Sofia’s competitiveness as an ICT hub shows in its cumulative Foreign Direct Investments (FDI). In 2018, Sofia achieved three times the national average of FDI on a per capita basis, (Sofia Economic and Investment Profile (2019)).35 ICT accounted for about 13% of the FDI flows in Sofia, compared to less than 10% at national level. Generally, most investments in Sofia are in the services sector. In 2017, Sofia accumulated half of the inward FDI flows for Bulgaria and represented more than a third (37%) of its exports. Figure 15.1 contains the cumulative FDI by the end of 2018 in Sofia and Bulgaria by economic sector. Sofia’s ICT exports were 33

Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia. com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021). 34 Sofia Economic and Investment Profile (2020) Available at https://investsofia.com/wp-content/ uploads/2020/10/Sofia-Economic-and-Investment-Profile-2020.pdf (accessed on December 1, 2020). 35 Ibid.

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Fig. 15.1 Cumulative foreign direct investments (FDI) by 31.12.2018. Source: The authors based on the Sofia Economic and Investment Profile (2019) (Sofia Economic and Investment Profile, November 2019 (2019). Available at https://investsofia.com/wp-content/uploads/2019/12/SofiaEconomic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021))

about EUR 2.8 billion in 2019 (Sofia Economic and Investment Profile (2020)),36 testifying to the hyperconcentration of this sector in the capital city. Sofia’s ICT sector accounts for 87% of the revenues, 80% of the employees, and about 91% of the value-added in the national sector. At the aggregate level, Sofia’s economic cycle is more like the European economic cycle than other regions in Bulgaria. This is consistent with the city economy’s strong export orientation and high level of competitiveness. The export revenues of enterprises based in Sofia have been rapidly growing since 2014. In 2018, they exceeded EUR 14 billion, which is almost 40% of the country’s export revenue (Sofia Economic and Investment Profile (2019)).37

15.5.2 Growing Digital Maturity In 2018, stakeholder interviews during the Digital Cities Challenge contest showed a somewhat cautious snapshot of Sofia’s digital maturity measured by digital skills, technological competence, and competitiveness (Digital Cities Challenge (2019)).38

36

Ibid. Ibid. 38 Digital Cities Challenge (2019). Available at https://www.intelligentcitieschallenge.eu/sites/ default/files/2019-07/Assesment_Report_SOFIA_0.pdf (accessed on December 14, 2020). 37

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The assessment highlighted two insights. First, Sofia showed advanced digital development in the ICT and startup domains as well as in digital infrastructure and broadband connectivity. On the other hand, the manufacturing and services sectors showed only modest digital development. The key aspect for improving overall performance is a tighter link between business, educational institutions, and science geared toward market introductions with significant R&D components. One limitation for the positive development of R&D activity is the scarcity of human capital. Despite the migration of welleducated working-age individuals to the city, businesses in ICT and the bubbling startup community are subject to shortages of such skilled workers as outlined above. The dynamic relationship between Sofia-based ICT and startup communities and the sizable Bulgarian diaspora abroad brings dynamism and global opportunities, and, to some extent, helps overcome the limitations of locally available skills. However, these dynamics must broaden to include the more traditional manufacturing and service sectors. The Sofia business community is in need of an across-the-board drive toward digital maturity, rather than isolated areas of excellence.

15.5.3 Path Dependency from Communism As part of the Soviet bloc’s Comecon system, Bulgaria was assigned economic specialization in IT (Andonova V et al. (2019)).39 This IT tradition, coupled with a robust STEM-focused education, gave Bulgaria a strong start in the digital economy when it became a member of the EU in 2007. However, STEM education has declined since the fall of the Berlin Wall in 1989. Recently, Bulgaria has rapidly become a competitive outsourcing destination for leading incumbents in the digital economy like Cisco Systems, Hewlett-Packard, VMWare, Microsoft, Oracle, SAP, and IBM. Some of those companies have established R&D laboratories in the city. The presence of these IT leaders and the availability of advanced IT professionals have prepared the ground for IT-based entrepreneurial development. According to the President of the Bulgarian VC Association (BVCA), the export of IT-related products and services has grown more than fourfold since 2008. However, these powerful companies also impose a heavy burden on the local entrepreneurial ecosystem because they compete against domestic entrepreneurial ventures for the same limited local talent. Immigration from the Balkans to Western Europe has been an ongoing process since the early twentieth century. The Balkan countries have suffered from poor governance and corruption, which pushes talent to seek opportunities in the wealthier countries of Western Europe and the USA. Bulgaria is not the exception.

39 Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected Places, Palgrave Macmillan, 2019.

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Between 1990 and 2007 when Bulgaria joined the European Union, one million Bulgarians left the country, that is an average of 60,000 per year. According to estimates made in 2017, 30,000 individuals now leave every year, mostly students seeking graduate degrees in IT, engineering, and medicine (Hope K (2018)).40 Bulgaria’s small population of around seven million, together with the negative trend of an increasingly aging population, mean that this brain drain has a significant impact. It reduces private sector activity, productivity, and overall economic competitiveness. However, there are some early signs of optimism as industry associations like the Bulgarian Association of Software Companies have started to measure and communicate the number of returnees among their members (BASSCOM Barometer (2020)).41

15.6

Culture

One defining feature of Bulgarian culture is pervasive pessimism. Even the most progressive and supportive members of the Sofia entrepreneurial ecosystem agree that changing the nation’s mindset from its communist past has been enormously challenging. This is partly because postcommunist governments throughout the region have resisted a full transition from old ways of thinking and doing. A generational change should bring about a much-needed shift in mentality. That shift is already beginning in the already global community of IT, highly skilled professionals, and managers. Given the country’s recent communist past, it is not surprising that there is a very strong preference for employment rather than self-employment. Participants in the local entrepreneurial ecosystem describe a tendency to shy away from responsibility and an overanalysis of failure. Both of these may be cultural constraints on the faster development of the entrepreneurial ecosystem. Sound business culture is only incipient and shows in the consumption patterns of local tycoons who spend lavishly on yachts and other luxury goods but do not see themselves as investors in the local entrepreneurial and innovation ecosystems.

15.6.1 Diaspora and Returnees as Drivers of Cultural Change Members of the diaspora community and returnees are very important participants in Sofia’s ecosystem, bringing with them significant cultural shifts. Even though there are no readily available statistics on the number of returnees in the Sofia

40 Hope K (2018) Bulgaria battles to stop its brain drain, FT. Available at https://www.ft.com/ content/51f1bd86-d6cc-11e7-ae3e-563c04c5339a. (accessed on March 3, 2018). 41 Bulgarian Association of Software Companies (2020) BASSCOM Barometer 2020. Available at https://www.basscom.org/RapidASPEditor/MyUploadDocs/BASSCOM_Barometer_2020_BG_. pdf (accessed on January 17, 2020).

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entrepreneurial ecosystem or on diaspora members who actively support Sofia-based ventures, the names of the most prominent actors are widely known within the community. According to the National Statistical Institute and the Economic Institute with the Bulgaria Academy of Sciences, more Bulgarians work abroad than in the country, and 55% of those who emigrate every year are aged 20 to 29 (O’Brien C (2018)).42 Those who commit to and work hard in this ecosystem have a fully global outlook and can participate in global networks, which imprints a pattern of behavior that makes Sofia entrepreneurs indistinguishable from their international peers. The Bulgarian diaspora and the returnees are key drivers of the local entrepreneurial culture and mindset. Most education institutions have only recently started to stimulate entrepreneurial experimentation as part of their curricula. Meanwhile, the entrepreneurial culture has been developing quickly, driven by international exchange and collaboration as well as investment. VC investments come through several VC funds with public and private money (e.g., Eleven and LAUNCHub) and private funds (e.g., NEVEQ). Successful exits in the Sofia entrepreneurial ecosystem have led to the emergence of a small but strong network of business angels and mentors who bring new vision and behavior to the community, becoming serial entrepreneurs and regional role models. Entrepreneurial activity in Sofia does not depend only on the activities of the current residents. It also draws on the ties that keep Sofia connected to global entrepreneurial hubs via the Bulgarian diaspora and on the resources that the diaspora makes available to local entrepreneurs (Schmutzler J, Andonova V, Pérez J (2021)).43 Despite the initial brain-drain conditions in Bulgaria, the diaspora stimulates opportunity-driven entrepreneurial activity by contributing essential social and human capital to the Sofia entrepreneurial ecosystem. This effectively turns Bulgaria’s brain drain into brain circulation, contributing positive value to the local economy (Schmutzler J, Andonova V, Pérez J (2021)).44

15.7

Venture Capital

As presented in Andonova V et al. (2019),45 VC investment in Central and Eastern Europe amounted to EUR 0.5 billion in 2015. That investment was 3% of the total amount invested in the VC field across Europe in that year. There seems to be a 42

O’Brien C (2018) Bulgaria rising: Can a growing startup movement reinvent the country’s economy? Available at https://venturebeat.com/2018/03/23/bulgaria-rising-can-a-growing-startupmovement-reinvent-the-countrys-economy/. (accessed on May 19, 2018). 43 Schmutzler J, Andonova V and Pérez-Lopez J (2021) “The role of diaspora in opportunity-driven entrepreneurial ecosystems: A mixed-methods study of Balkan economies” International Entrepreneurship and Management Journal. Available at https://link.springer.com/article/10.1007/s113 65-020-00708-4 44 Ibid. 45 Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected Places, Palgrave Macmillan, 2019.

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growing interest in using private and institutional money to support regional ventures in this part of the world and Sofia specifically. In this context, Sofia has emerged as an accelerator capital in Europe (#3 in 2017 according to BVCA’s President, Evgeni Angelov). According to the EIF, growth has been exponential. In 2016, 210 startups raised USD74 million (O’Brien C (2018)).46 2015 saw the creation of the Fund of Funds as a new mechanism to structure the financial instruments that channel the EU’s public resources and the national budget. Since its creation, the Fund of Funds has directed a total of EUR three billion, of which EUR 211 million went to innovation and productivity programs. In 2020, it launched new financial instruments for equity and quasi-equity investments (Fund of Funds (2020)).47 These included Vitosha Venture Partners Fund 1, a 10-year acceleration, and seed financing fund with EUR 19 million. By 2023, the fund should invest in 116 new ventures. Innovation capital is another EUR 16 million venture fund for innovation-driven Bulgarian ventures. Finally, New Vision 3 and Morningside Hill operate VC funds amounting to EUR 21 million and EUR 29 million, respectively (Fund of Funds (2020)).48 In 2012, two accelerator venture funds headquartered in Sofia were instrumental in its early developments: Eleven and LAUNCHub. Eleven was a USD15 million startup accelerator and seed fund. LAUNCHub started as a USD12 million preseed fund. These were joined by others like NEVEQ, a venture equity fund that has traditionally focused on revenue-generating companies rather than startups (Andonova et al., 2019). LAUNCHub announced in early 2021, that it had completed the first phase of its new VC fund at EUR 44 million (USD53.5 million), backed by the European Investment Fund, corporations, and a number of Bulgarian tech founders and investors. The next phases should reach a target size of EUR 70 million by the second quarter of 2021. This development is a massive boost for Sofia as a home of serious VC funds in Central-Eastern and Southeast Europe (TechCrunch (2021)).49 Ultimately, most of Sofia’s entrepreneurial financing came from the European Union, which invites possible policy discussions on the role of local governments as an arms-length limited partner investor. Bulgaria’s positive experience shows that the government needs to focus more on creating a broad context for the

46

O’Brien C (2018) Bulgaria rising: Can a growing startup movement reinvent the country’s economy? Available at https://venturebeat.com/2018/03/23/bulgaria-rising-can-a-growing-startupmovement-reinvent-the-countrys-economy/. (accessed on May 19, 2018). 47 Fund of Funds (2020) The Fund of Funds Established a Fourth Alternative Investment Fund. https://www.fmfib.bg/en/news/153-the-fund-of-funds-established-a-fourth-alternative-investmentfund (accessed on January 17, 2021). 48 Fund of Funds (2020) The Fund of Funds Established a Fourth Alternative Investment Fund. https://www.fmfib.bg/en/news/153-the-fund-of-funds-established-a-fourth-alternative-investmentfund (accessed on January 17, 2021). 49 TechCrunch (2021) LAUNCHub Ventures heading towards a USD85 million fund for South Eastern European startups. Available at https://techcrunch.com/2021/01/12/launchub-venturesheading-towards-a-85m-fund-for-south-eastern-european-startups/ (accessed January 17, 2021).

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entrepreneurial ecosystem to functioning, not on being an active manager of funds. The right incentives lie with partners and managers, not with bureaucrats. Despite these developments, Bulgaria and the region face a lack of late-stage funding opportunities. This creates incentives for promising local entrepreneurial ventures to sell prematurely since they cannot expect ready access to funds that will fuel their growth (Andonova V et al. (2019)).50 This, however, is also an indicator that the base of the ecosystem is solid and set for expansion. The two accelerator venture funds headquartered in Sofia that started operations in 2012 were instrumental for broader Balkan entrepreneurial community building. Both accelerators catalyzed this process by channeling financial resources, attracting substantial private capital. Private money brought discipline to companies and investments, along with expertise and know-how. The newly built community that formed around these two loci of the Balkan entrepreneurial landscape provided support through contacts, strategy scrutiny, and helping keep ventures and their portfolios on track. Thus, the accelerators brought many benefits in addition to money and made it possible to build a community in Sofia. Establishing a pay-itforward culture was probably the most important component of this community. The accelerators also played a crucial educational role in developing Balkan entrepreneurs as these de facto funds adopted broader regional investment strategies. On average, however, regional financing needs have remained comparatively low. Most of the startups are in the ICT, digital, engineering, and mid-tech sectors. The regional ecosystem promotes these kinds of startups with its tradition of successful innovations and the presence of ICT-focused corporations, education institutions, and community organizations. The entry costs and capital requirements in these industries are low to moderate, and the region already has infrastructure and a history of success in these domains. This allows startups to leverage complementary resources, thus limiting their capital requirements and the need for entrepreneurial finance (Andonova V et al. (2019)). According to the application data obtained from accelerator venture fund Eleven between November 2012 and December 2015, 81% of startups in the region reported having invested their own funds in their startup ventures, with an average amount equal to USD20,210 invested. Between 2014 and 2015, the average amount sought by ventures to increase their operations, according to LAUNCHub data, was the modest amount of USD645,730 (Andonova V et al. (2019)).51

50 Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected Places, Palgrave Macmillan, 2019. 51 Ibid.

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Business Sophistication

15.8.1 Early Adoption of Artificial Intelligence (AI) In comparison with other EU countries, the average Bulgarian business is relatively weak in digitization processes. Specifically, only 9% and 6% of all enterprises report B2C and B2B Web sales, respectively (DESI (2020)).52 In 2019, 60% of enterprises had adopted business digitization processes, 10% used medium-to-highly sophisticated cloud computing services, and 6.5% used big data analysis—the fourth lowest rate in the EU in 2018 (DESI (2020)).53 Overall, Bulgaria’s productivity per individual employed in 2017 was second to last in the EU. Productivity in the ICT sectors was about EUR 60,000 per employee, compared to total productivity of EUR 30,000 per employee. At the same time, Bulgaria is above the EU average in terms of enterprises that reported adopting at least one AI technology and that adopted e-government services for business in 2020 (54% compared to 42%). Additionally, Bulgaria showed one of the highest improvement rates in the Brain Business Jobs concentration, putting the country in eighth place in the EU (The Geography of Europe’s Brain Business Jobs: 2020 Index).54 Still, with 4.9–5.9% of the workforce being active in Brain Business Jobs, the country has a gap to fill.

15.8.2 A Hub for Brain Business Jobs Sofia, as the nation’s economic, political, and cultural center, accounts for about 40% of the national GDP. Its economic indicators are markedly distinct from the country overall. 10.1% of Sofia’s working-age population is employed in Brain Business Jobs (professional, scientific, technical, and other business services), which is twice the national average and growing fast (The Geography of Europe’s Brain Business Jobs: 2020 Index).55 Salaries in Sofia are 28% higher than the national average. The capital is also the country’s leading innovation hub, especially when it comes to ICT innovation and entrepreneurial activity—both key growth drivers. Between 2012 and 2019, the number of employees in the most knowledge-intensive organizations grew from 155,200 to 194,600. Of these, 39,400 were new Brain Business Jobs—73% in ICT, 12% in creative professions, 8% in tech, and 7% in

52 DESI, Digital Economy and Society Index (2020) Available at https://ec.europa.eu/digital-singlemarket/en/digital-economy-and-society-index-desi (accessed on December 27, 2020). 53 Ibid. 54 The Geography of Europe’s Brain Business Jobs: 2020 Index (2020) Available at https://www. ecepr.org/wp-content/uploads/2020/01/Brain-Business-Jobs-2020-Index.pdf (accessed on January 5, 2021). 55 Ibid.

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advanced services (The Geography of Europe’s Brain Business Jobs: 2020 Index).56 Sofia’s strengths are in the pharmaceutical sector, ICT, design, telecommunications, and programming. Sofia is the third fastest-growing hub for Brain Business Job creation in Europe. Competitive wages, local talent, and favorable taxation drive its growth. Companies whose knowledge-intensive units are located in more expensive geographies contribute by relocating to Sofia and subcontracting there. Experts anticipate that links will only grow stronger between Sofia and the European brain job hubs like London, Paris, or Stockholm. Some 10.5% of total employment in Sofia and 83% of the country’s total employment in 2019 were in the creation and distribution of information and creative products and telecommunications. The approximately 6500 IT in Sofia employed these workers. Among them, five companies had more than 1000 employees, 33 had more than 250 employees, 133 were medium-sized companies with 50–249 employees, and 561 were small companies employing between 10 and 49 people. Together, these companies created nearly 21,000 jobs. More than 5800 companies with less than nine employees also included self-employed individuals (Sofia Economic and Investment Profile (2019)).57

15.8.3 Negative Country-of-Origin Effect and Unsophisticated Local Buyers The presence of leading global companies with R&D operations in Sofia has unquestionably improved the country’s knowledge and relevant experience. Nevertheless, local and regional buyers are not very sophisticated, and often, there is no local demand for the products that the advanced regional engineering talent creates. More often than not, this pushes entrepreneurial ventures into early stage internationalization, adding another layer of complexity to their operations. Two significant challenges arise from local markets being small and unsophisticated. First, Bulgarian entrepreneurs experience a shortage of business skills for internationalization because the vast majority lack proper business training. Second, in the not-too-distant past, the prevailing negative image of Bulgaria and other Eastern European countries produced a negative spillover effect even for the most innovative entrepreneurial ventures. Some of the region’s most successful B2B ventures were explicitly asked to keep the names of their world-renowned clients confidential for fear that having Bulgarian suppliers might invite suspicion and mistrust. This has been changing gradually, mainly because some of the most

56

Ibid. Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia. com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021).

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successful entrepreneurial ventures made substantial efforts to educate their clients and show pride in their country as part of their business strategy. Branding Bulgaria and the region is very important for the future of Sofia’s entrepreneurial ecosystem, and there have been some increased awareness and effort made in this regard. Gaining recognition as an attractive place to live and work by citizens and foreign talent is essential to the further maturation of this young ecosystem. Regional governments, especially those of Balkan EU member countries including Bulgaria, are taking cautious steps to encourage the immigration of high-skilled workers and attract talent from non-EU neighbors. There are also many voices in favor of more aggressive government programs promoting high-skilled immigration from outside the region. If there is broad consensus among actors within the ecosystem about one thing, it is that the most important ingredients of a vibrant entrepreneurial ecosystem are its people and their commitment to adding value (Andonova V et al. (2019)).58

15.9

Outcomes of Innovation Activity

According to the European Innovation Scoreboard for 2020, which classifies economies into innovation leaders, strong innovators, moderate innovators, and modest innovators, Bulgaria is a modest innovator. It fits into this category along with Romania because its innovation performance is below 50% of the EU average (European Innovation Scoreboard (2020)). According to Bulgaria’s innovation profile, its strongest areas are its increasing employment in fast-growing innovative companies and its number of design and trademark applications. These achievements cannot offset its systemic challenges, the most urgent of which are related to the country’s demographic crisis, low total early stage entrepreneurial activity, and low buyer sophistication. Bulgaria ranks 37th in the GII 2020, mainly because it has improved its results from innovation activity while maintaining its ecosystem inputs, thus enhancing its innovation efficiency. Bulgaria’s long-standing obstacles to better performance in terms of innovation are related to education—including STEM graduates and public spending—the business environment, access to finance, and access to and use of intellectual property protection mechanisms. Nevertheless, composite innovation rankings like the GII can easily obscure the products and progress of this national innovation system.

58 Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected Places, Palgrave Macmillan, 2019.

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15.9.1 Patents According to European Patent Office data, 181 Bulgarian individuals and legal entities were granted patents in 2019, only two patents short of the 1999 record of 183. Since 2000, a total of 1781 patents were granted to Bulgarian individuals and entities. Almost 19% of these were in class B (technological processes and transport), followed by class A (human needs) at 17% (Georgieva T, Yalamov T (2020)).59 Individual patent holders dominated the institutional structure of patent activity in the same period. They had 40% of patents in 2019 and 57% in the last 20 years. Analysts acknowledge that “despite growth in the number of patents issued to businesses, and the Bulgarian Academy of Sciences (the main representative of the public sector), the role of individuals remains key, and has been growing in the last four years” (Georgieva T, Yalamov T (2020)).60 The business sector’s patent activity is largely concentrated in Sofia, which claims 65% of that activity. Thirteen other towns are registered as the headquarter locations for patent-earning businesses in 2019. Two of the five universities—all public—that were granted a patent in 2019 are located in Sofia: Sofia University and the Technical University in Sofia. Experts highlight that these primary research organizations’ public nature explains Bulgaria’s low degree of technical knowledge institutionalization. The main motivation for public entities is not the industrial application of their inventions but tenure. As a result, in Bulgaria, there is a phenomenon called hidden academic entrepreneurship: new venture creation that embeds new products and processes in personal initiative with no participation or commitment by the public research entity (Georgieva T, Yalamov T (2020)).61 The unexploited potential in this domain is enormous, but the regulatory framework and the national strategy are very weak or nonexistent as of 2020. According to the Patent Office of the Republic of Bulgaria, the top five technological areas of business patent activity in 2001–2019 are the following: human and veterinary medicine, hygiene, dentistry, and pharmacology. Patents themselves comprise basic elements of electrical equipment such as cables, wires, insulators, resistors, magnets, detectors, transformers, switches, and resonators; food and food products, like processing methods, milk, oils, coffee, tea, chocolate, and confectionery; ammunition, blasting, and pyrotechnics; and measurements of physical quantities. Figure 15.2 contains the total number of patents for the top ten technological areas between 2001 and 2019. 59

Georgieva T and Yalamov T (2020) Economic Resilience through Innovation. Available at http:// www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on January 6, 2021). 60 Georgieva T and Yalamov T (2020) Economic Resilience through Innovation. Available at http:// www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on January 6, 2021). 61 Ibid.

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Fig. 15.2 Patents in the top ten technological areas of business patent activity in Bulgaria, 2001–2019. Source: Georgieva T, Yalamov T (2020) (Georgieva T and Yalamov T (2020) Economic Resilience through Innovation. Available at http://www.arcfund.net/fileadmin/user_ upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on January 6, 2021)), Economic Resilience through Innovation, using data from the Patent Office of Republic of Bulgaria

In addition to patents, utility models can protect innovators’ rights over small inventions. Between 2007 and 2019, 2377 certificates for utility models were issued, of which almost 60% came from the business sector (Georgieva T, Yalamov T (2020)).62

15.9.2 Research Bulgaria ranked 61st in the world for research production in 2019 and 22nd in the EU-28. It had 6022 publications, of which 5752 were scientific articles, reports, and reviews (Georgieva T, Yalamov T (2020)).63 For every 1000 people employed in science and technology, Bulgaria produces 29 scientific articles, reports, and abstracts. Other Eastern European countries like Slovenia and Czechia show three times as much productivity. A similar gap appears for productivity measured by the number of scientific and technical publications per billion USD, as reported in Fig. 15.3 (Andonova V (2021)).64 Bulgaria has a positive trend, reporting double-digit growth in annual publication activity for the second consecutive year. The rate increased 13% in 2019 after an

62

Ibid. Ibid. 64 Andonova V (2021) Entrepreneurial Ecosystems and Innovation in the Balkans in Cahen, F., Casanova, L., Miroux, A., (Eds.) Innovation from Emerging Markets: From Copycats to Leaders, Cambridge University Press, 150–182. 63

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Fig. 15.3 Scientific and technical publications per billion USD PPP GDP. Source: The authors, based on Andonova. V et al. (2021) (Andonova V (2021) Entrepreneurial Ecosystems and Innovation in the Balkans in Cahen, F., Casanova, L., Miroux, A., (Eds.) Innovation from Emerging Markets: From Copycats to Leaders, Cambridge University Press, 150–182) with data from the Global Innovation Index report 2019 (https://www.wipo.int/global_innovation_index/en/; Provided by Creative Commons Attribution (BY) 3.0)

increase of 20% in 2018 (Georgieva T, Yalamov T (2020)).65 In 2020, the international institutional ranking SCImago included 18 scientific organizations from Bulgaria: BAS and seven of its units as independent legal entities, plus 10 universities—most located in Sofia.

15.9.3 R&D Spending and Institutional Arrangement With R&D spending at 0.84% of GDP in 2019, Bulgaria is far from its declared target for 2020 of 1.5%. However, systematic underreporting of R&D spending may drive some of this, since Bulgarian companies have no legal obligation or stimulus to disclose such activities publicly. Occasionally, when such incentives were part of public grant application processes, reported investments increased significantly. Some analysts have concluded that real R&D investments could be up to 10 times higher than the reported numbers.

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Following a long-standing trend, businesses accounted for the largest contribution to R&D spending in 2019 at 0.56% of GDP. The 2019 investment was the largest business investment in R&D in Bulgaria’s modern history (Georgieva T, Yalamov T (2020)).66 The most important driver for the sustained increase of R&D investment is European financing through operational programs. As with physical infrastructure, European funding is instrumental for higher education institutions and public research entities, mostly in the form of grants for the latter case (Georgieva T, Yalamov T (2020)).67 This vehicle mobilizes complementary private investments and, as such, stimulates a sustained commitment to R&D by the private sector. Companies tend to absorb their own R&D budgets, with very little going to public research institutes as outsourced research. Part of the reason for this is the country’s relatively underdeveloped technology transfer framework and capacity, the absence of a clear regulatory framework for new venture creation by public research entities, administrative capacity, and researchers’ incentive systems (Georgieva T, Yalamov T (2020)).68

15.9.4 Startups and Innovation-Driven Entrepreneurial Ventures Data on startup and venture creation dynamics are not readily available because many of the investments and exits in the Sofia entrepreneurial scene are done under terms of confidentiality. It is evident, however, that Sofia has continued to attract VC in the last decade. For example, Fig. 15.4 shows an overview of the highest valuation companies in Central and Eastern Europe as reported by Dealroom. This list includes an important number of Sofia-based ventures (Andonova V (2020)).69 In some ways, the young but bubbling entrepreneurial ecosystems in Sofia have played a pivotal role in Bulgaria’s performance on innovation outcomes and efficiency (Andonova V (2020)).70 In this regard, Sofia provides a fascinating case in the search for innovation excellence. It has relatively modest total R&D investments and a less-than-perfect institutional setup. The interactions facilitated by Sofia’s entrepreneurial ecosystem have created spaces for collaboration and go-to-market

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Andonova V (2021) Entrepreneurial Ecosystems and Innovation in the Balkans in Cahen, F., Casanova, L., Miroux, A., (Eds.) Innovation from Emerging Markets: From Copycats to Leaders, Cambridge University Press, 150–182. 67 Ibid. 68 Georgieva T, Yalamov T (2020) Economic Resilience through Innovation. Available at http:// www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on January 6, 2021). 69 Andonova V (2021) “Entrepreneurial Ecosystems and Innovation in the Balkans” in Cahen, F., Casanova, L., and Miroux, A. (Eds.) Innovation from Emerging Markets: From Copycats to Leaders, 2020, Cambridge University Press, 150–182. 70 Ibid.

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Fig. 15.4 Selected innovation- and technology-driven entrepreneurial ventures from Central and Eastern Europe according to their valuation. Source: Andonova V (2021) (Ibid) based on Dealroom. co

dynamics even though the research sector per se and technology transfer system are somewhat deficient by international standards. In particular, well-structured entrepreneurial finance schemes that rely on performance-based market incentives rather than on slow-paced bureaucratic procedures stimulate the development of entrepreneurial ecosystems seeking technology and innovation as key differentiators. Financing opportunities attract the attention of local and regional talent and participants, who, in turn, engage with a globally minded entrepreneurial community that thrives on a culture of sharing and knowledge exchange. Far from being perfect, this creates an ecosystem with a level of connectedness that supports the emergence and scaling of innovation-driven ventures. At the same time, much of the innovation happens outside specialized research centers and by individuals and businesses. These dynamics appear to be particularly relevant for industries with relatively low entry costs, mostly those related to digital technologies (Andonova V (2021)).71

Andonova V (2021) “Entrepreneurial Ecosystems and Innovation in the Balkans” in Cahen, F., Casanova, L., and Miroux, A. (Eds.) Innovation from Emerging Markets: From Copycats to Leaders, 2020, Cambridge University Press, 150–182. 71

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15.10 SWOT Analysis Sofia Innovation System We present a detailed and balanced account of the forces in the regional innovation system in the SWOT table below. To counterbalance any potential biases that the authors of this chapter might have, we validated this SWOT analysis of the Sofia innovation ecosystem with five key stakeholders who have been active in the Sofia innovation and entrepreneurship scene for over a decade. Resources Bank loans

Strengths The currency board guarantees the stability of the banking system. Bulgaria will switch to the EURO in early 2022. Banks offer a growing portfolio of services and loans to support firms’ international growth

Culture and mindset

Bulgaria has an IT tradition coupled with STEM-focused education inherited from its communist past. There are a longstanding tradition and family culture that stimulates STEM-related careers

Weaknesses Loans for startups and scale-ups are the exception rather than the norm; the banking system provides only a marginal percentage of the capital in the entrepreneurial ecosystem

The dominant attitude toward positive development and progress is pessimistic. There is a very strong preference for employment rather than selfemployment. A sound business culture is only incipient. Education institutions have

Opportunities The European Investment Bank has been an active supporter of the local ecosystem by structuring high-impact financing instruments. The European Investment Fund has signed guarantee instruments with a number of Bulgarian banks to support SMEs and startups. Ecosystem growth reduces risks, leading to banks being interested in the tech sector The Bulgarian diaspora and its returnees are positive drivers of the local entrepreneurial culture and mindset. The entrepreneurial culture has been developing quickly, driven by international exchange and collaboration as well as VC investments.

Threats A threat comes from the inconsistent monitoring of bank performance. This institutional weakness disturbs the dynamics, trust, and competitiveness of the banking industry

There is low societal and business awareness of the Sustainable Development Goals and lack of related policies. A “dependence on EU grants” mindset, especially among civil servants, stands in contrast to the (continued)

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Digital infrastructure

Strengths

Bulgaria boasts highly developed nationwide infrastructure, including highspeed internet with the top speeds in Sofia. Data plans are very accessible

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Weaknesses only recently started to stimulate entrepreneurial experimentation as part of their curricula The manufacturing and services sectors show modest digital development in contrast to the ICT and startup domains

Opportunities There is growing acceptance of entrepreneurship as a career choice among younger Bulgarians The European HighPerformance Computing Joint Undertaking (EuroHPC JU) will install one of five mid-to-high range supercomputers in the Sofia Tech Park.

Threats entrepreneurial market-driven mindset of VCs and entrepreneurs

Slightly over 80% of Sofia’s households have internet access

There is a shift to a value-adding knowledge economy where Bulgaria has long-standing traditions.

Education and skills

A large share of the ecosystem participants are either educated abroad or are returnees. Bulgaria has excellent programming talent employed in multinationals’ R&D centers in Sofia.

Bulgarian universities perform poorly in international rankings. Business and marketing education are also weak. There is a dearth of well-qualified scientists and engineers

Digital infrastructure is likely to remain highly developed, and will improve thanks—in part—to EU funding Sofia has the highest national share of relatively young highly skilled talent. Entrepreneurship was introduced in the state education plan starting at primary school level. The welleducated and well-positioned

Deteriorating demographic indicators in the country and the absence of a high-impact immigration policy for skilled workers could create problems. Sofia’s labor market is very tight with steady wage increases (continued)

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Strengths

Weaknesses

Bulgaria has access to generous EU grants and international scientific networks.

Institutions

Legal advisers

Sofia has a higher-thannational concentration of young and welleducated residents Bulgaria has comparatively less bureaucracy than other countries in the region. A growing number of institutions like the Public Registry Agency and the National Revenue Agency use electronic services, which reduces paperwork for businesses Legal services are affordable in the EU framework

Opportunities

Threats

diaspora is a bridge and driver of brain circulation, overcoming the brain drain phase

E-governance is patchy and often inefficient. Regulations and implementation are not efficiently synchronized and wellmaintained

There is a limited supply of expertise on international dealings in niche sectors during startup or scaleup phase. Limited experience in enabling vesting and option agreements. There is no framework for vesting and

The general institutional context enjoys political and policy-related stability. Global tech giants’ R&D centers provide a substantial amount of capital, managerial attention, and training for the ecosystem

IP protection is still new for the ecosystem. Increasing interest in investing in Bulgarian startups is developing legal advisers’ skills at supporting different investment structures.

Bulgaria has relatively high levels of corruption. Worldwide competition over global tech giant R&D center locations is fierce

Law graduates in IP are not of sufficient quality. The IP content created in universities is not ready to be deployed in practice

Several universities in (continued)

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Market and demand

Strengths

Weaknesses

Opportunities

Threats

Sofia’s economy is highly integrated into the EU and world economies.

startups have to search for workarounds The local market is very small (approx. Seven million people) and uses the Bulgarian language and Cyrillic alphabet

Sofia have many students graduating in law Leading incumbents in the digital economy have wellestablished R&D capabilities in the city.

The national market is too small for scaleups.

Sofia has a highly competitive ICT sector and very competitive cost/ productivity ratios in brain jobs

Migration

Policy and strategy

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Sofia is a good market for smallscale testing

The dynamic relationship between the Sofia-based ICT and startup communities and the sizable Bulgarian diaspora abroad brings dynamism and global opportunities, and, to some extent, overcomes limitations in terms of locally available skills

Bulgaria has experienced significant brain drain since the fall of communism

Bulgaria has low taxes and little bureaucracy.

Most have serious reservations about the capacity of government officials to effectively and competently

Government programs related to entrepreneurial efforts offer

There is an increasing number of returnees in the ICT and startup domains, but not reliable statistics at national and city levels. The COVID-19 pandemic and Brexit are seen as triggers for the increasing number of returnees

The EU has a new program period starting in 2020, so strategies and EU spending funds will be updated

The majority of local buyers are not sophisticated or technologically advanced. There is a lack of strong global Bulgarian businesses in industrial or services sectors that are researchoriented Antiimmigration populist politicians normalize xenophobia, leading skilled labor from outside the EU to potentially not feel safe or not consider coming to Bulgaria. Returnees are frustrated with outdated public services and biases Tax increases can undermine Sofia’s positioning as a very costeffective innovation location in the EU. (continued)

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Quality of life

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Strengths

Weaknesses

relevant support; there are statesponsored entrepreneurship programs.

carry out their tasks

There is a 10% flat tax on profits in Bulgaria, and 5% on dividends, a very attractive arrangement for businesses in the EU. Labor laws are also favorable to business Sofia has a good standard of living at lower prices than in Western Europe. Sofia is very safe and wellconnected to Europe.

Regulation

Vast groups of the population have low purchasing power.

Returnees and IT sector workers can afford a good standard of living.

There are high levels of air pollution

Bulgaria is a good destination for a second home for middleclass Western Europeans and Russian citizens. A trend of closeto-nature living can potentially deurbanize Sofia in favor of smaller cities with good digital infrastructure.

There is a lack of personal bankruptcy proceedings. Closing down a legal entity is a complicated process. Government policies are not

Threats Policies are not focused on SMEs nationally or regionally, and SMEs are not represented by the national consultation entities

The current and the subsequent government coalitions are not (expected to be) very stable, posing risks

Sofia has good commute and leisure infrastructure. A remote work culture was established before the COVID-19 pandemic, around a growing community of co-working spaces Tech sectors thrive with low unnecessary regulation

Opportunities

There is gradual improvement in suburban areas Efforts to modernize the blue card program can attract skilled labor from outside the EU. Keeping a flat 10% tax may still

Bulgaria has a relatively weak brand as a country. Social injustice drives talent away. Rural areas have suffered from abandonment, and some have entered into economic collapse

The introduction of extra regulations on E-commerce or a ban on the sharing economy (Airbnb, Uber) can reduce economic (continued)

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Strengths

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Weaknesses

Opportunities

Threats

typically assessed for impact.

be the key to competitiveness.

activity and tax revenue.

There are many sharing economy platforms

Regulations designed for a selected few impose uneven conditions for competition Low salaries drive potential talent away from research.

FinTech is not clearly regulated

Research infrastructure

There is a good level of public research infrastructure like the Sofia Tech Park. Hidden academic entrepreneurship is widespread. Sofia is home to the top three universities in Bulgaria

Research community in Sofia is relatively small and fragmented. Tech giants poach talent and inflate salaries. The low availability of academic positions in public universities fuels brain drain. Weak collaboration between businesses and public research centers makes it difficult to bring inventions to market swiftly.

Universities have a bad reputation among the entrepreneurial community in Sofia, and there is little recognition of their role in innovation. Sofia Tech Park has a fragile financial model, limitations due to red tape, and extremely modest participation of research institutions in its governance bodies

Legal loopholes prevent the use of infrastructure. For example, the laboratories in Tech Park cannot be used efficiently due to red tape. Top universities in Bulgaria are ranked poorly internationally, which decreases their appeal to potential international partners

Sofia has relatively underdeveloped technology transfer frameworks and capacity, and lacks a clear regulatory framework for new venture creation by public research entities. Administrative capacity is (continued)

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Resources

Risk capital

Tolerance and trust

Strengths

Sofia is an accelerator hub in Europe, mostly because of EU funding that drives innovation and digital ventures. It has good networks with global and experienced VCs. The entry cost and capital requirements in prominent local sectors like ICT, digital, engineering, and mid-tech are low to moderate, limiting the capital requirements and the need for entrepreneurial finance Bulgaria has a long-standing tradition of promoting gender equality in science and technology. There is a shared understanding among the entrepreneurial community that diversity is one of the drivers for success. A new generation of

Weaknesses

Opportunities

Threats

limited, and researchers’ incentive systems do not promote entrepreneurship Bulgaria is highly dependent on EU funding.

Sofia enjoys a steady flow of public early stage and seed funding.

Bulgaria has a poor country brand and reputation.

A growing number of private investors are interested in Sofia-based projects.

Higher average valuation for startups located in Western European or USA cities poses risks for startup and scale-up drain.

Local and regional VCs are in the early stage of their learning curve. The angel investor community is very small

Bulgarian startups might lack the confidence to go international and be innovative in terms of sales and marketing. Low selfconfidence and national pride compared to other EU countries

The first accelerated venture funds created a larger regional community that brings more scale and makes Sofia more attractive to smart money from abroad

A growing group of serial entrepreneurs and angel investors are investing in innovationdriven ventures and are committed to strengthening Sofia’s position as an innovation and startup hub

A lack of latestage funding opportunities creates incentives for promising local entrepreneurial ventures to sell prematurely, as they do not expect to have access to readily available funds for growth Bulgaria is dealing with social polarization and the significant influence of fake news. There is a widespread social perception that the country’s fate is in the hands of the great geostrategic powers (USA (continued)

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Resources

Strengths confident Bulgarians is well-educated professionals fluent in English and other languages with experience abroad.

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Weaknesses

Opportunities

Threats and Russia) and not its own national institutions

There is traditional tolerance toward people from the West

15.11 Lessons Learned from Sofia Innovation System Sofia’s innovation and entrepreneurship ecosystem is highly dynamic and relatively new. Geographically, it is located in a region from which positive news is rare and somewhat unexpected. Thus, understanding the realities and the drivers behind Sofia’s recent positive developments as a scene for innovation and entrepreneurial creation is all the more relevant. In recent years, Sofia has emerged as the go-to place for innovation and technology-driven entrepreneurship in the Balkans. EU funding has been the main driver for this process, but, unlike elsewhere in the region, the Sofia experiment has been very successful from its very first iteration. This boosted local actors’ confidence and kick-started the creation of a diverse and global entrepreneurial community with its first generation of serial entrepreneurs mostly in the IT domain. Sofia’s initial success has led to positive developments in its entrepreneurial ecosystem’s complementary pillars, but has not yet produced a balanced and robust result. This will be the main challenge for years to come. The country needs to broaden its entrepreneurial community, build collaboration at home and internationally—and with the Bulgarian diaspora in particular—and implement a more soundly articulated national strategy for smart growth as part of the global knowledge economy. Educational reform at all levels, fighting corruption, and improving the country’s negative reputation are essential if Sofia wants to maintain its position on the European and world maps for talent and become a well-established hub that drives technology and human well-being in the twenty-first century.

Tel Aviv Innovation System

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Ido Garbi and Ludovit Garzik

Abstract

The Tel Aviv ecosystem is one of the most vibrant innovation ecosystems in the world. It is fast, dynamic, direct, and—most of all—extraordinarily successful. This chapter dives into some of the elements that make it so successful, as well as the lessons one can take from Tel Aviv and implement in other ecosystems. Even though the Tel Aviv ecosystem relies almost entirely on private capital, the market picture is quite different when the scope is limited to seed-level venture capital. The Israeli government has managed to attract foreign capital into the ecosystem through a combination of financial incentives, lax labor laws, and a policy of keeping its regulatory power away from the innovation markets. That governance style was not a product of design, but rather of necessity. Culturally, Tel Aviv’s emphasis is on abstract thinking throughout life and its no-barrier culture has assisted in making this ecosystem into a software powerhouse. A SWOT analysis of the ecosystem provides key factors in a format easily comparable with other surveyed ecosystems. This analysis is expected to be valuable to ecosystem designers, investors looking to expand their reach, and entrepreneurs looking for the ideal ecosystem for their enterprise.

I. Garbi (*) IGPT Innovation, Rosh Haayin, Israel e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_16

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History and Status Quo of the Tel Aviv Innovation Ecosystem

Tel Aviv is one of the most vibrant innovation ecosystems in the world. It is fast, dynamic, direct, and most of all, extraordinarily successful. Those facts are common knowledge, but the reasons behind Tel Aviv’s success are less well known. The following discussion will dive into those reasons and describe this spectacular ecosystem. The focus will be on its character, strengths, and weaknesses, as well as the opportunities and threats that might affect it for better or worse. The Tel Aviv ecosystem is one of the most successful technology-oriented ecosystems in the world today. A few statistical highlights can show how successful the Tel Aviv ecosystem is: According to the Global Startup Ecosystem Report from 2018, Tel Aviv has both the most startups per capita (one per 6000 people) and the highest rate of R&D investment as a percentage of GDP in the world. Almost all this R&D investment comes from private capital, and the majority of that private capital is foreign. The Tel Aviv region is home to many of Israel’s dozens of unicorn companies, so it has grown far beyond the startup incubator it once was. Now, with thousands of companies in growth stage, it is one of the most productive scale-up and unicorn incubators in the world. As a result, it has been highlighted by Fortune and Compass as one of the best places in the world to start a business. In absolute numbers, the Tel Aviv ecosystem is composed of 3869 tech-centered companies (entities with over USD1,000,000 in sales), 2052 startups, 191 R&D centers, and 256 investors. The Tel Aviv region also enjoys the benefits of being the technological epicenter of one of the most innovation-oriented countries in the world—Tel Aviv is the core of Israel’s high-tech ecosystem. The Israeli high-tech ecosystem is almost as impressive as the Tel Aviv ecosystem. Among other things, Israel was recently ranked the most innovative country in the world, is second in the OECD on both R&D private expenses per capita and in highly educated working age population per capita, and ranks highest in raised per capita venture capital in the world. Around 4% of all venture capital in the world is invested in Israeli companies, far above Israel’s relative size. These figures and the talent that generates them attract technology-oriented companies from all over the world to Israel. More than 300 multinational tech companies like Google and Facebook have R&D centers in the country. Almost all of Israeli technological activity takes place either in the Tel Aviv region or less than 100 miles away since Israel is geographically small and all other major ecosystems are within a 100 mile radius of Tel Aviv. In terms of both absolute and relative numbers, the Israeli ecosystem is quite substantial. 44 unicorns have been established by Israeli entrepreneurs. In 2019, 4500 Israeli companies were in growth stage. 12 of Israel’s unicorns reached that status in 2019, and 15 new unicorns were added in 2020. The Tel Aviv ecosystem is the center of the Israeli high-tech scene, and as of 2016, the Greater Tel Aviv area is home to 50% of the technology companies, 60% of the startups, and 40% of the research centers in Israel.

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All of these elements have turned the Tel Aviv ecosystem into one of the most significant technological centers in the world. Considering that the Tel Aviv region was essentially nothing but sand only a century ago, this achievement is quite spectacular.

16.1.1 Historic Development The history of the Tel Aviv region tells a fascinating story—the story of how persecuted people from all over the world joined together after one of humanity’s greatest tragedies and built an oasis in the middle of a desert. Around 94% of the population in Tel Aviv region, and Israel in general, are either migrants’ descendants or migrants themselves. Israel’s migrants originate from all over the globe. Despite that, Israeli society is very cohesive, making it a modern migration success story. In the Tel Aviv region itself, most of the land was undeveloped and barren until around 100 years ago. Now, it is one of the most innovative and significant ecosystems in the world. To shed light on how such a thing came to pass, this section provides a short summary of the Tel Aviv region’s history. National and Security History: A Brief Summary The wars between Israel and its neighbors affected the greater Tel Aviv area on several occasions. The full (and even partial) history of Israeli–Arab conflict is too vast to be reviewed here, so this section tackles only selected examples and trends. In general, until the fall of the iron curtain, Israel was under constant threat from multiple Arab states backed by the USSR. On some occasions, there were even direct skirmishes between Israeli and USSR forces acting as “advisors” in adversary states. Direct conflict with the USSR would put any country in significant danger, let alone a country the size of Israel, and the USSR posed a significant threat to Israel directly and indirectly by backing adversary states. The nature and magnitude of the threat on Israel changed dramatically following the fall of the iron curtain. Israel’s Arab adversaries were left without their main pillar of support, which rendered them unable to threaten Israel’s existence any longer—at least in practice. However, aggression did not stop completely, and while the Tel Aviv region’s existence was no longer in peril, its way of life was. After the loss of their main military ally and with the fortification of Israel’s military advantage, Israel’s adversaries resorted to guerilla tactics and terror attacks. These attacks targeted the Tel Aviv region and its population for logistical reasons and for impact-related purposes. For example, in the Gulf War of 1991, the Tel Aviv region was attacked by Scud ballistic missiles fired from Iraq even though Israel was not involved in Operation Desert Storm. Every city in the greater Tel Aviv area except one was hit by the missiles, killing 74, injuring 230, and leaving 4000 people homeless. The missiles were directed at civilian population centers, not at military bases, under the (correct) assumption that Israel would not respond to the attacks and compromise the newly formed US-centered coalition operating in Iraq.

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Tel Aviv was also a center of terror attacks during the first and second Palestinian armed uprisings (Intifadas). These attacks caused the deaths of 1095 Israelis. Terror attacks continued throughout the following years, but preemptive work by Israeli security agencies, in addition to cooperation between Israeli and Palestinian security agencies, has reduced them to virtually zero today. To date, there have been no terror attacks in the Tel Aviv region since 2017. In recent decades, Israel has signed two peace agreements with Jordan and Egypt, as well as mutual acknowledgment agreements with the Palestine Liberation Organization (PLO). In 2020, Israel signed two milestone peace agreements with the United Arab Emirates (UAE) and Bahrain, plus normalization agreements with Sudan, Morocco, and Kosovo as part of the US administration’s “Deal of the Century” peace plan for the Middle East. Discussions regarding normalization with Saudi Arabia and economic agreements with Lebanon are currently in progress but remain unfruitful for now. This normalization with the Muslim world is expected to decrease terror attempts in the foreseeable future and is hopefully a precursor to the resolution of the Middle East conflict in the coming years. Until that stage is reached, the newly achieved peace is expected to benefit all involved countries from an economic standpoint. Economic History and Philosophy The Tel Aviv region is not sovereign and is bound by Israel’s laws and its economic philosophy. Israel started its life as a social democracy, leaning in a socialist direction both economically and in its mindset. This trend changed dramatically in the 1970s with the growth of trade and deepening of the connections between Israel and the USA. Israel turned more capitalistic over time with tax reductions followed by layers of state-service reductions. Nowadays, Israel is a capitalist country and economy, though some pockets of social democracy remain like its centralized and state-owned electricity company, naval ports, and airports. There is a trend of privatization even among these facilities, with varying degrees of success as worker unions resist privatization. The shift toward capitalism benefited Israel’s GDP, which increased dramatically. Israel’s GDP per capita increased by 260% from 1970 to 1980 alone and by 1760% from 1970 to 2018 (USD41,750). Israel’s Arab neighbors, on the other hand, have continued leaning toward socialism. The results of that orientation are reflected in their GDPs per capita, which range between USD2032 (Syria, lowest) and USD8269 (Lebanon, highest). Israel’s GDP per capita is between 504% and 2056% higher. Economically, the fall of the iron curtain was greatly beneficial for Tel Aviv for two main reasons. First, it left Israel’s adversaries without their main pillar of support and forced them to court the trade-oriented west. Second, it generated a giant wave of over a million highly skilled migrants into the state of Israel and ultimately to the region. This migration of former inhabitants of socialism-oriented nations did not turn Israel more socialistic, and instead, the general state of mind in Israel is a capitalistic one in most populations.

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Ecosystem Growth History The seed of the Tel Aviv technological ecosystem was planted in the 1960s. The first technology companies established were Electronic Communication Israel (ECI Telecom) in 1961 and Tadiran and Elron Electronic in 1962. The first international R&D center in the region was opened by Motorola in 1964. From that time and until the early 1990s, growth was slow and only one or two successful companies were established each year. In 1967, the French—then a key arms supplier to the state of Israel—declared a weapons embargo on Israel. This declaration forced Israel to take steps that were very valuable to the Tel Aviv ecosystem. It developed its own military technology to emphasize its military sovereignty and intensified its connection with the USA as a close military and diplomatically. Over time, these steps played a part in Israel’s shift toward a market-based economy and its development into the biggest arms exporter in the world in per capita terms. Commercial innovation for civil use of the newly developed military technology started appearing in the market in the 1970s, but the real shift started in the 1980s. At that time, the international computing industry shifted its focus from hardware to software. This enabled Israel to offer a competitive advantage due to its abstract thinking culture and the nature of software development, which often rewards abstract thinkers. Following this global shift of focus, several successful companies were established in Israel between the 1980s and 1990s, including Amdocs, NICE, and Check Point. In that stage, Israel started to attract international attention. In the 1990s, several positive developments increased foreign investments and interest in the Tel Aviv ecosystem. Among them were extensive international media coverage, a surge of 1,000,000 technically skilled immigrants from the former USSR, the peace agreement with Jordan, and the Oslo Peace Accords with the PLO. The first major “exits” came soon after. In 1998, Mirabilis, the Israeli developer of ICQ, was purchased by AOL for USD407 million. This success triggered the dot-com boom in Israel, with thousands of startups established between 1998 and 2001 and capital raised peaking at USD3.7 billion in 2000. After the dot-com bubble burst shook the ecosystem and scoured the company landscape, Tel Aviv’s underlying dedication to risk-taking and entrepreneurship began to evolve. The Tel Aviv ecosystem is now one of the most successful technological ecosystems in the world, hosting many of Israel’s 44 unicorns. Government Policy Highlights As previously stated, the Tel Aviv region is not sovereign and has no local government. It is subject to the laws, policies, and programs mandated by the state of Israel. Several of these governmental policies and programs have affected the region significantly and are worth mentioning. The “Yozma” (initiative) program for incentivizing venture capital providers is particularly worthy of a detailed discussion. The Yozma program was initiated in 1993 with the intention of incentivizing private capital investment in Israeli ventures. The program offered attractive tax incentives to any foreign VC investments in Israel and matching every investment with equal government funding.

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The Yozma program was a resounding success. Israel’s VC outlays, almost all private, rose by 6000% between 1991 and 2000, and Israel’s IT revenues rose from USD1.6 billion to USD12.5 billion. Israel also opted for low taxes on its technological sectors. It offers an attractive tax rate for technology-centered companies, with rates ranging from 6% to 12% depending on the exact type of business. These rates are very competitive in worldwide comparison. Israel’s steps toward deregulation are another policy highlight. In recent years, Israel has undergone and is currently undergoing significant deregulation efforts. Those efforts are meant to reduce Israel’s high cost of living—some of which is the product of red tape—and prevent red tape from inhibiting innovation in traditionally high-regulation fields like cannabis tech and automotive tech. Those efforts seem to be effective, and the Tel Aviv region is expected to benefit significantly. In addition, the Israeli Innovation Authority (IIA) intends to offer governmenttech startups easy access to governmental facilities for use as beta sites. This policy offers two key benefits: It has the potential to improve Israeli governmental services dramatically as new technologies are introduced in a sector that tends to be sluggish, and it can help turn Israel into a government-tech hub due to the relatively easy access to beta sites. Since the Tel Aviv ecosystem is the locomotive of the Israeli ecosystem, the Tel Aviv ecosystem is expected to be the greatest beneficiary from this policy.

16.2

Facts and Figures in the Tel Aviv Innovation Ecosystem

Few ecosystems match the Tel Aviv region in terms of facts and figures. Among other things, the Tel Aviv ecosystem leads the world in its number of startups per capita (1 per 1400 people) and capital raised per capita. Tel Aviv is the epicenter of the Israeli technological ecosystem and is fed by all other ecosystems in Israel since the geographic distance between Tel Aviv and all other major ecosystems is very short. Some of the facts and figures regarding this ecosystem must be extrapolated from data regarding Israel as a whole since region-specific data are not available. A good general rule of thumb is to attribute 50% of Israel’s total numbers to the Tel Aviv region. With around 1,750,000 inhabitants, Tel Aviv is only 19% of the population of Israel but is responsible for 54% of its GDP. Considering that Israel’s GDP is USD42,850 per capita, Tel Aviv’s GDP should be around USD121,450 per capita. According to estimates, Tel Aviv has 90 co-working centers with around 22,500 available co-working desks. The region has several high-ranking academic institutions, mainly the Weizmann institute (ranked 93 globally) and Tel Aviv University (ranked 100–150). The region also has access to alumni from the Technion (ranked 85), located in the Haifa region. In 2019, Israel was tenth in the world in the WIPO’s technological innovation index, second in total R&D, first in R&D per capita, and first in R&D in relation to GDP. It is ranked 15th worldwide for patent activity. Israel ranks fifth for its percentage of millionaires in the world, and 23rd in overall millionaires. When it

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comes to wealth dispersion, Israel’s Gini index score is 0.35. Israel hosts more NASDAQ-listed companies per citizen than any other country including the USA. Over the years, Israel has become a shopping center for technology enterprises. In fact, US-based companies tend to acquire Israeli startups more than startups from anywhere else. These acquisitions account for half the transactions in 2018. When it comes to startups establishment, 1100–1380 startups are established every year in Israel. Around 60% of them are established in the Tel Aviv region. Israel is also impressive when it comes to companies in growth stages—it hosts around 4500 companies with over USD1,000,000 in revenue. Israel is home to 44 unicorn companies, more than the UK (7.3 times larger population, 26 unicorns in total, most unicorns in Europe). 12 of Israel’s unicorns reached unicorn status in 2019, which matches Germany’s total number of unicorns (nine times the population). In absolute terms, only the USA (35.9 times the population, 265 unicorns) and China (152.4 times the population, 204 unicorns) generated more unicorns than Israel. Out of Israel’s unicorns, many are located in the Tel Aviv region. This is a summary of some of the key figures behind the Tel Aviv ecosystem. In the next sections, we will attempt to dive into each component that is responsible, or might be responsible, for these figures.

16.2.1 Research and Education Education in the Tel Aviv region, like education in the rest of Israel, is fully subsidized up to the high school level. When it comes to higher education, public universities and colleges are subsidized at a rate of 50%. There are one private university and several private colleges in the Tel Aviv region, and these are either nonsubsidized or partly subsidized depending on the institution. Public university after-subsidy tuition is around USD2908 per academic year for undergraduate degrees and USD3930 for graduate degrees. Locals generally consider tuition affordable, and students usually pay it through personal savings or parental support. Student loans for tuition are rare, though students enjoy lowerinterest bank loans up to around USD21,400 in total for any purpose. Several prominent research and educational institutions offer academic education in the Tel Aviv region. The following analysis shows (in order of year of establishment) how those prominent institutions differ in size and focus. University/College Weizmann Institute of Science Tel Aviv University

Established 1934

Number of students 2500 (2012)

1956

29,000 (2005)

Open University of Israel College of Management IDC College

1974 1978 1994

48,000 (2014) 12,000 (2018) 8000 (2018)

Focus Basic research Traditional full university Distance learning Professional training Professional training

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Through the years, each institution has gained a reputation in its specific field of focus. When it comes to basic science research, the Weizmann Institute of Science in Rehovot has a global reputation for its focus on natural and physical sciences. It is not considered a full university since it only accepts graduate and postgraduate students. With approximately 2500 students and 1000 academic staff, it has an impressive student–faculty ratio. Furthermore, this institution is well known for its international exchange programs and serves many international students every year through its summer schools. The Tel Aviv region does not fall short with regard to full universities—Tel Aviv University (TAU) is among the finest research institutes in the world. It is among the highest-ranking institutions in the world for cybersecurity and regularly ranks among the top academic institutions in the world according to the World University Ranking, the QS World University Ranking, and the Shanghai Ranking. TAU offers a broad variety of disciplines from engineering to the liberal arts. It draws many international students from undergraduates to doctoral students and offers programs taught in English. In terms of research impact, TAU was the most-cited university in Israel and the 22nd most cited in the world in the 2016 QS Ratings. It ranked 30th in the world in computer science from 2007 to 2018 according to the CSR Ranking. In topicspecific rankings, TAU is ranked seventh in the world on theory and methods in computer sciences (CWUR rating). TAU is also ranked ninth among the top schools producing entrepreneurs and eighth in the world on graduates that established unicorn companies. It is the only non-US university in the top ten. When it comes to patents submitted, TAU is the 43rd most productive university in the world, tenth highest outside the USA, and first in Israel. Another important institution for Tel Aviv’s ecosystem is the Technion, Israel’s highest school of engineering. It is located outside the Tel Aviv region in the city of Haifa, but the distance between the regions is less than 100 km and its alumni are usually available for hire to companies operating in the Tel Aviv region. It is ranked eighth for information systems and fourth in theory and methods in the CWUR rating, and has three Nobel Prize laureates. In addition to those research-oriented institutions, there are several other institutions in the region reputed for their high education quality. The IDC Interdisciplinary Center is a private research institution founded in 1994 and is the only private university in Israel. Due to its location in the city of Herzliya, it is also called the Herzliya Interdisciplinary Center. It is inspired by the model of the Ivy League Universities and, as a result, is particularly favored by non-Israelis residing in Israel. Out of its 8000 students, around 25% are non-Israelis who originate from 86 countries and provide a mix of cultures and experiences from many global regions. It has an academic staff of around 1000, giving it a student–faculty ratio comparable to high-ranking institutions like Stanford University in Silicon Valley. The IDC has ranked first out of 66 Israeli academic institutions on student satisfaction for the last four consecutive years.

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The College of Management of Academic Studies (COMAS) in Rishon LeZion is in the wider Tel Aviv metropolitan area. It is particularly favored by soldiers and alumni from Israeli Defense Forces (IDF) technological units as an additional academic education layer over the training they get at the IDF. As a result of that trend, COMAS students in the computer sciences program have extraordinarily high aptitude. The Open University of Israel, like other Open Universities worldwide, focuses on distance learning. Today, around 40,000 students from all over the world are enrolled in the Israeli branch of the university. With high growth rates in recent decades, the Open University addresses the needs of people having parallel commitments like jobs, military service, and family formation alongside their studies. It is considered extremely rigorous from an academic standpoint, and its alumni enjoy a good reputation among employers as a result.

16.2.2 Influencing Institutions The Tel Aviv region is affected by several key institutions. Though it shares characteristics with other ecosystems, Tel Aviv also has a number of specific characteristics worth mentioning and describing. The main institutions influencing the Tel Aviv ecosystem are the following: External Influencing Institutions Israeli Defense Forces (IDF) The Israeli Defense Forces (IDF) is the armed forces of Israel. The IDF, specifically its technology-oriented and intelligence-oriented units, has significant influence on the Tel Aviv ecosystem. The IDF has resolved its HR disadvantage compared to rival armies by relying on mechanization instead of infantry since its institution. This continues to modern times, with emphasis on using superior technology as a key strategy. Based on its performance, these decisions have been successful. Some of the locally developed technology the IDF uses to maintain its advantage is developed within the IDF by specialized technological units, and some is acquired from non-IDF vendors. These vendors usually employ alumni from IDF technological units. When technology is developed internally, it is done by soldiers educated and professionally trained by the IDF. Because of this, the IDF technological units are de facto training schools offering selected soldiers training programs and qualifying them to perform various computer science-related tasks and occupations. Given this structure, the IDF benefits the Tel Aviv ecosystem in two capacities— as a customer and as a training institution. As Israel imposes conscription, the IDF has a wider variety of individuals from whom to select high-aptitude candidates in comparison with nonconscription armies. Following their technical training, these selected soldiers face extreme scenarios during their service. These range from scale issues to cyberthreats in systems of large proportions (around Fortune 500 size), and these soldiers face these scenarios at a comparatively young age. All of this is done

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in a stress-rich and resource-rich environment, which incubates and nurtures highly skilled, high-performance personnel. Soldiers’ experience and training are funneled into the private market at the end of their mandatory service terms. This is a magnet to foreign companies looking for high-level, readily available talent with long employment prospects. As most technology-related IDF units are stationed in the greater Tel Aviv area and have longer service periods (around 5 years in total, comprising a mandatory 3-year service and 2-year elective extension), many of these soldiers relocate to the Tel Aviv region to live closer to their bases. This move is a driving force for the migration of highly skilled talent into Tel Aviv from the rest of Israel, which significantly benefits the region. Israeli Government The Israeli government is the main governing and public investing body in the Tel Aviv region. When it comes to the technology sector, the Israeli government tends to be very accommodating. In fact, apart from banning legally questionable items like binary options trade and regulating technologies affecting or possibly affecting Israeli national security, the Israeli government seems to make an effort not to interrupt the ecosystem. This lenient regulation grants the ecosystem relative freedom in comparison with other fields. However, unlike many European governments in similar-sized countries, the Israeli government offers very little funding for commercial R&D. Rather than using its available capital and funding R&D directly, the Israeli government opted to incentivize private investment in various ways, from matching funding for venture capital investment to red-tape elimination and offering competitive tax rates. In practice, these policies seem to have a very positive effect on the ecosystem both in terms of public-opinion satisfaction and in terms of economic terms— Israel’s developers have the fifth highest salaries in the world, despite (or perhaps because of) them having almost only personal contracts and almost no unionization in the technology sector. Public funding makes up only a small amount (around 5.5%) of all venture capital in Israel, making the Israeli technological sector very independent. As stated, the Israeli government tries to incentivize and not interfere with the ecosystem, providing both lax regulation and little to no support. Judging by the prosperity of the Tel Aviv ecosystem, the method appears to be quite effective. Israeli Innovation Authority (IIA) The Israeli Innovation Authority (IIA) is the civil R&D office of the Israeli government. In 2019, the IIA supported 1650 R&D projects with a budget of around USD500 million. The average grant size given by the IIA is around USD385,000. While data regarding IIA support in the Tel Aviv region specifically are not available, the Tel Aviv ecosystem accounts for around 50% of the Israeli ecosystem, so it is reasonable to assume that 50% of IIA support ends up reaching the Tel Aviv ecosystem. When it comes to funding size and total funding amounts, IIA support is quite small by Israeli standards—the Israeli technological sector is funded mostly by private capital, and IIA support funds are only 5.5% of capital raised and 2.5% of

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Fig. 16.1 European Research Council (ERC) and the Horizon 2020 Program. Source: Data EC, Author’s own figure

civilian R&D expenses in the country. By its own admission and as a strategy, the IIA focuses in areas where private capital entities are not interested in investing. Instead of funding projects in fields where private capital is abundant, the current strategy of the IIA is planting “ecosystem seeds” and letting ecosystems grow from them by market forces rather than by funding growth directly. One example of this seeding strategy is the IIA’s effort to create activity in new vectors and fields where Israel has no significant activity, such as bio-convergence. Another example is the IIA’s efforts to address the debt-raising issues of Israeli scale-ups in worldwide comparison. To support Israel’s scale-up and address companies’ debt-raising difficulties, the IIA plans to provide government guarantees to banks that will loan money to scale-ups. Based on the success of previous incentivization programs, it will be interesting to follow the effects of this program. One last example of IIA involvement is government-tech beta site providing, a program in which the IIA plans to let startups pilot their products at government— and state-owned facilities like those owned by the Israeli Postal Service. This will give Israeli business-to-government startups a better starting point and easier market entry compared to their non-Israeli competitors. It is still too early to judge the value of the IIA’s programs since the organization focuses on cultivating the future vectors and fields with high-risk components that the private market avoids. The true value of these activities will only be seen with time (Figs. 16.1 and 16.2). Israel takes part in the Horizon 2020 program. Therefore, participation in the program is open to entities in all of the country’s regions including the Tel Aviv region. Tel Aviv-specific data regarding Horizon 2020 are not available, so we present data regarding Israel in general. Up to 2017, the Horizon 2020 program

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Fig. 16.2 Total Israeli Seed Stage Capital. Source: Data EC, Author’s own figure

cost Israel around USD469 million and returned around USD481 million, which is a slight net positive (+2.56%). Israel also took part in the previous ERC plan, FP7. Israel paid around USD633 million into the FP7 program and gained a return of around USD995 million between 2007 and 2013—a significant net positive (+50.87%). These amounts are small in Israeli ecosystem standards, but they still are significant when looking at two specific niches—academic research funding and grants given to small and medium enterprises. ERC programs are a substantial funding channel for academic research, and Israeli universities use them heavily. In some years, ERC funding has accounted for up to 25% of Israeli universities’ budget. In the current program, 53% of grants from the Horizon 2020 program granted to Israeli entities fund academic research. In fact, Israeli academia is ranked second of 37 in grant amounts received from the program. For comparison, Israel’s commercial grants rank 9th. Therefore, although Horizon 2020 grants are not a significant part of the available capital in the Israeli innovation ecosystem, these grants make up a significant part of the ecosystem’s academic research funding. ERC grants given to small and medium enterprises are also an interesting topic for discussion. In 2019, Israeli small and medium enterprises (SMEs) were granted around USD105 million from the Horizon 2020 program. While this is not a large number in Israeli ecosystem standards, it is a very large number when looking only at seed investments—the entire seed amount raised privately in Israel in 2019 was USD148 million. Considering that, and under the assumption that small and medium enterprise grants are meant to fund innovation and are at least somewhat efficient, Horizon 2020 grants may be quite significant for early stage companies and may

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play a significant role in their funding even though the absolute funds from Horizon 2020 numbers are relatively small in Israeli standards. However, the monetary share of ERC programs in early stage funding does not indicate successful project selection by the ERC, and it is entirely possible that the program funds the “wrong” companies and falls short in comparison with private investors. The answer will likely be given with time, as companies granted Horizon 2020 funds will mature, flourish, or perish. Jewish Communities Abroad Israel is the only Jewish state in the world, and Jewish communities worldwide are deeply rooted in and connected to it. Although the epicenter of this connection in regard to religious affairs is Jerusalem, the epicenter of all nonreligious affairs is the Tel Aviv region. This is true for both non-Israeli Jews and for Israeli emigrants. The latter group is quite large—according to research done by the Shoresh Institute, 9% of Israeli engineering graduates leave Israel. The trend becomes more distinct as academic education levels increase. According to research done by Tel Aviv University, the share of Israeli professors and lecturers that migrated out of Israel is around 25% of the number currently working in Israel, meaning a brain drain of one of five academic minds. Though brain drain is generally regarded as negative, it has a positive effect on the ecosystem from a branding and networking standpoint. This migration pattern ensures that the Tel Aviv ecosystem will always be a center of international attention as a pool for exportable talent and as a center for talent worth investing in and cultivating locally. This is particularly beneficial for Israeli startups and Israeli experts wishing to establish a foothold abroad, as it is easy to find other Israelis in most major ecosystems. Israel’s international presence is especially notable in Silicon Valley, where both Jews and Israelis are highly represented. Because Israelis enjoy relatively easy access to other ecosystems and because they can find similar cultures in most major ecosystems through the large Israeli expat community, moving to Silicon Valley is far less demanding for Israelis than it would be without such access and community. External circumstances No discussion regarding the Tel Aviv region, or Israel in general, is complete without addressing its unique external circumstances. Those circumstances shed light on how a country of less than ten million people became the eighth arms exporter in the world in nominal terms and the first in per capita terms. To understand that, one must start from World War 2 (WW2). In WW2, between 5.6 and 5.8 million Jews, around 59.8% of Europe’s Jewish population, were obliterated. Persecution of Jews, however, is not limited to WW2. Survivors of the carnage were often persecuted by the local population even after the war ended, leading them to look for refuge outside Europe. The then-young state of Israel was the safest place for persecuted Jews regardless of ideology, though a strong ideological component was usually a factor in migrants’ selection of Israel. As the main populated area in

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Israel was the Tel Aviv region, these tragedies and the waves of migration they generated played a significant role in the region’s development. The bloodshed did not end in Europe and followed survivors to the Middle East. The state of Israel was born into war, with seven Arab states declaring war on it on its first day of independence. After that war, six wars and two waves of terrorism followed, in addition to numerous military operations and campaigns not defined as wars. This left the state of Israel in a constant state of defense, all while being significantly outnumbered by its adversaries by a factor of more than 50 to 1. These stress factors forced Israelis to use anything they could to gain an advantage. As Israel was a low-resource environment at the time, they could only rely on their minds for salvation. They did so extensively, working on anything from deceptive warfare to weapon development. Some products of the Israeli military industries are well known, like the Uzi, Galil, and Tavor rifles or the “Iron Dome” and “Arrow” antimissile systems. Other products are less well known, like the shooton-sight helmet and various autonomous drones and military vehicles. But one common denominator can be found in almost all of them—they are designed to address the severe HR disadvantage the IDF has by offering more value per soldier. This added value sells and sells well—Israel is the eighth largest arms exporter in the world and the largest in per capita terms. Major parts of all that activity are carried out in the Tel Aviv greater area. Lack of Natural Resources The Tel Aviv region, and Israel in general, is very short on natural resources. Apart from a significant natural gas deposit discovered in recent years and phosphates originating from the Dead Sea, Israel is relatively low on natural resources compared to the rest of the world. The lack of natural resources has forced Israel’s population to focus on building a service-based economy. Specifically, Israel has focused on high-knowledge industries since it lacks a competitive advantage in manufacturing being geographically small, low on population and—until recent technological developments—short on water. Knowledge-intensive services had the most apparent competitive advantage Israel could offer, and the software revolution that started in the 1980s made this competitive advantage very valuable from an economic standpoint. Tel Aviv has benefited the most from that shift since it was and remains Israel’s main technology hub. War as a Catalyst Calamities are obviously negative for an ecosystem, but they tend to come with a silver lining: The innovation they drive tends to be significant and beneficial for ecosystems. War, like other big transformations, tends to offer fertile ground for innovation for two main reasons—big transformations funnel funding into innovative ventures meant to accommodate transformation, and legislators tend to refrain from intervening in these ventures. In Israel, wars have served as big transformations several times and, in a manner that was somewhat cyclical, have forced the Israeli government to fund military innovation and enable local innovators to work without interference. The Israeli innovation scene has had to keep innovating due to Israel’s constantly changing and

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often unique security needs. Therefore, in an unexpected turn of events, war has become a catalyst for growth not by driving demand for goods but as an innovation engine. The mechanism linking war and innovation is the subject of a common misconception. War itself causes destruction and is an economic disaster. It is not the war itself but the associated reduction in innovation-related restrictions—both regulatory and social—that generates growth. An example of this principle can be seen worldwide in the COVID-19 pandemic and the economic impulses it generated in worldwide technology sectors. As the center of the Israeli innovation scene, no place in Israel was more affected by this than the Tel Aviv region. The experience played a significant role in turning Tel Aviv to the agile and dynamic ecosystem it is today. Global Anti-Semitism Rising worldwide anti-Semitism in recent years, especially in Europe, is driving non-Israeli Jews to migrate to Israel. In fact, 59% of Europe’s post-WW2 Jewish population has migrated out of Europe in the last 50 years. The natural destination of this mass exodus is Israel, and the natural destination in Israel is the Tel Aviv region. Israel supports such migration, and Israeli laws grant Jewish and Jewish-descendant migrants citizenship relatively easily. Israel is a country of migrants because of the combination between Jews’ persecution worldwide and their acceptance in Israel. As of 2017, 3.2 million immigrants had come to Israel since its establishment in 1948. Of these immigrants, 26,400 immigrated in 2017. Most modern migrants to Israel are educated or otherwise skilled enough to function in modern society. Migration is particularly beneficial for the Tel Aviv region. Since Israel’s typical migrants are highly skilled and culturally similar to the local population—sharing the languages, values, and an emphasis on intellect and learning common among Jews—most enjoy quick and simple assimilation. One good example would be migrants from the former USSR. Among the former USSR migrants settling in Israel in 1990, around 60% had higher education of some kind. This was a significant brain gain (around one million people) for Israel as a whole. Since about 50% of this brain gain was centered in the Tel Aviv ecosystem, it was a boon to that ecosystem in particular. Domestic Influencing Institutions Regional Municipalities Several local municipalities influence the region. The municipality of Tel Aviv, or as it is more commonly referred to locally, Tel Aviv City, has the authority of a city and is not sovereign by itself—as stated, the state of Israel has that power. Tel Aviv City still plays a significant role in the ecosystem and its growth. It is only one of the cities in the Tel Aviv ecosystem, but it is by far the largest and most influential. In comparison with other Israeli cities, Tel Aviv City charges relatively high nonresidential municipal taxes of between USD76 and 111 per square meter annually. Software enterprises get a lower rate in municipal taxes, paying 50% of the rate for offices. While it is not considered business-friendly by Israeli citizens, Tel Aviv City is friendly to large foreign corporations and, by its own admission, tries to

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attract them. This effort is quite successful, with 20% growth in international companies operating in Tel Aviv City from 2019. While Tel Aviv City is the center of the ecosystem and its most significant player municipality-wise, several other municipalities in the greater Tel Aviv region are worth mentioning. The city of Rehovot, for example, hosts the Weitzman institute and several international companies like HP. Another example is the city of Herzliya, which hosts the IDC College and several international companies like Microsoft. Each of those is an independent municipal authority and all compete for business-paid municipal taxes, which are their main income source. Private Entities with Significant Critical Mass The Tel Aviv region is a hub for the hundreds of global corporations that operate there including Amazon, Google, Microsoft, Intel, Facebook, eBay, and Yandex. In addition, some Israeli companies like CheckPoint, Wix, IronSource, and Playtica are large enough to affect the local market. These large entities contribute to the ecosystem by enhancing human capital, but also hinder it by driving salaries higher. The sheer amount of talent that is employed, trained, and enhanced by those companies makes them the biggest de facto education centers in the region. Those entities provide significant amounts of training (including paid training) and pour enormous know-how into the region in exchange for the use of its highly qualified workforce.

16.3

Tel Aviv SWOT Analysis Highlights

One of the key elements of this work is a SWOT analysis of the Tel Aviv ecosystem. This chapter presents the highlights of that analysis, followed with the full SWOT analysis table. High Cost of Living Tel Aviv is expensive by international standards, from the price of housing to the McDonald’s Index. According to Mercer, Tel Aviv is the 19th most expensive city in the world. Appropriately, wages in the Tel Aviv technology ecosystem are also high and are currently ranked fifth in the world. The yearly salary in a startup is around USD97,000, and median salary is USD83,000 annually. This combination of high costs and high wages is negative for the ecosystem in two main ways. First, the high cost of local labor should theoretically act as a deterrent for foreign companies that consider opening development centers in the country. However, the opposite seems to be true in practice—the region has seen a 30% increase in R&D centers in the last 3 years. Second, high costs and wages make it harder to establish startups since talent is more expensive and potential founders must resist stronger temptation to sell their skills as employees instead of founding a company. IIA data suggest that this is true in practice, with the amount of newly generated startups stagnating if not decreasing. The Israeli government is attempting to reduce the cost of living, mainly through deregulation and competition encouragement. So far, these efforts have only been

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partly successful in price reduction, mostly because of political lobbyism on behalf of interest groups meant to prevent those changes. Dynamic Migration Patterns When it comes to domestic national migration, the city of Tel Aviv suffered a negative migration of 1900 people in 2019. Migration is an important source for cultural exchange and for establishing connections between ecosystems. Strong innovation regions seem to share a domestic group of smart people moving in between these regions. According to Gold S. (2018)1 “Israeli immigrants have among the highest rates of entrepreneurship of all national-origin groups in the United States” and “between 50,000 and 200,000 reside in the greater San Francisco Bay Area.” These migrants are closely connected to their peers in Israel, extending the influence, exposure, and reputation of the Tel Aviv ecosystem to other regions. International Giants Hub Hundreds of international companies operate in Tel Aviv, mostly as R&D centers. These tech giants have had both positive and negative influences on the ecosystem. On the one hand, they act as training agencies and generate a skilled workforce. On the other hand, they drive salaries higher and make Israeli software engineers very expensive in comparison with other countries—as stated, their wages are the fifth highest in the world. Overall, the effect international companies have on the ecosystem can be summed up as talent enhancement—these companies take human capital and perfect it. The result is highly qualified human capital, which in turn costs more to employ as a result of its newly available skills. Low Employer Costs While tech sector wages in the Tel Aviv region are high, employer costs are relatively low. These costs include vacation days, social insurance, health insurance, and other legally mandated or field-mandated social benefits. Israel, and with it the Tel Aviv region, has relatively lax labor laws in comparison with most European countries. It mandates far fewer social benefits, requiring only 16 vacation days until the 5th year in the workplace (up to 28 days maximum for a worker with 14 years in the same workplace, which is rare in the technology sector) and 18 medical leave days per year. All of this leads to relatively low nonsalary employment costs when employing Israelis. According to the international accounting firm UHY, nonsalary employment costs in Israel are around 7% of a salary, in comparison with an 18.8% world average and a 22.7% G7 average. For higher salaries, this number drops further, with

1

Gold, S. (2018) Israeli Infotech Migrants in Silicon Valley. In: The Russell Sage Foundation Journal of the Social Sciences, Vol. 4, No. 1.

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Fig. 16.3 Competitive tax rates. Source: Author’s own figure

a minimum of 3.6% nonsalary employment costs for salaries above USD300,000 annually. These low employer costs offset Israel’s higher salary costs to some degree. Additionally, unionization is very rare in the Tel Aviv innovation ecosystem. While large companies such as SAP and ECI have seen some unionization in recent years, this is very uncommon and personal contracts remain the norm in the Israeli tech market in general and in Tel Aviv in particular. This is very favorable for employers, and in the case of the Tel Aviv ecosystem, it seems to be harmless—if not beneficial—for employees. High Happiness Levels Israel’s population is one of the happiest in the world, ranking 13th in 2019. Accounting for the higher productivity of happier people—estimated at a 20–37% increase—the Israeli software employee offers quite a promising overall package despite higher salary expenses (Fig. 16.3). Corporate tax in Israel for technology companies is relatively low and has been effectively reduced from 25% to rates of between 6 and 12%, depending on the exact business type. Municipal tax is mainly levied per square meter of owned or rented real estate, and not as a percentage of company revenue. This structure makes municipal taxes a nonissue for international companies expanding to Israel, which is naturally good for the Tel Aviv region as it is the most renowned Israeli ecosystem worldwide. In summary, the combination of low state taxes and land-based municipal taxes makes the tax environment of the Tel Aviv region very globally competitive.

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Agile Culture and Mindset Both mental agility and a can-do attitude are essentially part of the Tel Aviv ecosystem’s DNA. The reason, or at a significant part of it, is probably the unique combination of external circumstances the region has had to overcome. The environments of the Tel Aviv region and Israel in general present severe nature-related challenges. More than 50% of Israel is covered by the Negev Desert, and the whole Middle East region suffers from low water availability. As a result, drought has been a severe problem in neighboring countries like Syria and Lebanon. The situation in Israel is different—unlike its neighbors, Israel evaded the current Middle East drought situation and has no water shortage. Israel has avoided drought through a combination of technology and the market economy, specifically water desalination and price-based water conservation plans. This combination was extremely effective—thanks to the use of technological solutions and the government’s foresight to implement them in time, Israel literally became an oasis. In fact, Israel is currently going through a process of de-desertification, which is the subject of worldwide interest. Its neighboring countries, on the other hand, still suffer from drought. Israel’s drought-fighting approach is one example that represents the agile mindset of the Israeli ecosystem in general. Israel’s geopolitical situation has created a mindset of promptly implementing new knowledge as a survival mechanism, as well as high tolerance for failure of such implementation. Moreover, it has also called for the generation of market-relevant new knowledge from Israel’s basic research institutions.

16.4

Strategy and Implementation in the Tel Aviv Ecosystem

16.4.1 Local-Level Strategy Local-level strategy is set by each city in the ecosystem separately. The most significant local-level strategy is set in the city of Tel Aviv. According to its own statements, the city of Tel Aviv—at the center of the ecosystem—focuses on bringing foreign companies to the city. Judging by numbers alone, it does so quite successfully: Between 2012 and 2016, the number of foreign companies operating in the city increased by 115%. The city’s strategy seems to be more market-driven than centrally planned. This enables businesses to determine their own nature but denies them municipal financial support apart from municipal tax reductions, which is common in some parts of Europe. The approach seems to be effective, and it has created a unique, agile, and vibrant environment in the city that attracts young people from all over Israel. The city enjoys a unique status in the Jewish community, the global LGBTQ community, and among those dwelling in other international technology ecosystems. This unique status attracts people to the city from all over the world. Tel Aviv’s market-driven strategy has caused bottom-up development of the entire region, resulting in massive construction of office space in recent years.

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Based on its ability to attract multinational companies despite its high salary levels, it seems that Tel Aviv’s local-level strategy is successful.

16.4.2 National-Level Strategy The national-level strategy affecting the Tel Aviv region is determined by the state of Israel. Though the current Israeli government has not yet published a long-term strategy, the state of Israel has repeated a few key points in its strategies through the years. These key strategic points are the following: Maintaining Military Sovereignty and Superiority Maintaining military superiority is paramount for Israel and specifically its ability to overpower adversary states and state-like entities. Israel also puts great emphasis on military sovereignty, or its ability to manufacture its own armaments in times of war or need with little dependency on foreign countries. This emphasis is the result of the French arms embargo on Israel in 1967 when the French were Israel’s main arms supplier. To accomplish both goals, Israel invests around 15% of its annual budget in its ministry of security, approximately USD21.2 billion in absolute terms. Additionally, the USA provides military foreign aid to Israel worth around USD3.8 billion. Israel’s defense budget is the 15th highest defense budget in the world and the fifth in the world as a percentage of GDP. This combined amount, in addition to its mortal need for arms, has created a fertile ground for what has become one the largest arms exporters in the world and the highest arms exporter in per capita terms. Modern weapons systems are often highly technological instruments, and failure tolerance in the industry (at least in the development stage) is relatively high. This has served the ecosystem well. Israel’s IDF high command bases are located in Tel Aviv and the surrounding area, so the region is the logical base of operations for technology companies that provide or intend to provide services to the IDF. These companies might work on technologies from aiming systems to cybercapabilities, but the location of their buyer remains the same. The IDF is an army involved in active conflict, so it is a good beta site for weapon systems. In addition, the IDF has brand value in the eyes of other armies, and any system it buys is sought by others. As previously stated, Tel Aviv hosts many IDF bases and most of its technological unit bases. These bases house highly qualified soldiers who spend their time in the city for several years as part of their service period. Many of these young people get accustomed to the city and migrate to it during or following their service terms. After that service, their talent is available for hire. Because they settled in the Tel Aviv area during their service period, these former military personnel tend to prefer companies positioned in the Tel Aviv area. This attracts companies to open R&D centers in the Tel Aviv area.

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Maintaining Economic Growth Israel, like most other countries, puts a significant emphasis on economic growth. When it comes to high-tech, the main effects of this effort are attractive and low tax rates between 6 and 12% (effectively), efforts by the IIA to create new innovation ecosystems using its budget, intent to offer government guarantees for scale-up loans, and attracting foreign companies into Israel with a competitive local legislative environment. The Israeli government supports growth relatively well and seems to be very careful not to interrupt the ecosystem with regulation or power grabs. Since the tax rates in the Tel Aviv region are those of the state of Israel, the national tax policy is crucial for the region. Based on the results of this policy in practice, it seems that this combination of low tax and good legal environment is very beneficial for the region. Maintaining R&D Positioning Israel goes to great lengths to maintain its worldwide R&D positioning. Right now, Israel is the first in the world in R&D expense per capita. Israel is currently ranked 14th in academic publications per capita but was ranked first for over 30 years. As previously stated, around 4% of the world’s venture capital is invested in Israel, which has only 0.12% of the world’s population. As the center of R&D activity in Israel is the Tel Aviv region, the region is affected by national R&D promotion efforts for better and worse. On the positive side, as much of the R&D is done in the Tel Aviv region, these efforts benefit the region even when they are focused outside of it. Due to Israel’s small geographic size, all regions in Israel feed the Tel Aviv region and are fed by it. For example, 65% of Israeli startup founders who built startups in the early stages of the Tel Aviv ecosystem were trained at the Technion Institute of Engineering, located in the Haifa region in northern Israel. However, the epicenter and main beneficiary of the startup scene was the greater Tel Aviv area where those startups were founded, not the Haifa region where their founders were educated. Due to government policies meant to develop other ecosystems in Israel, many initiatives are intentionally established outside the Tel Aviv region, like the FoodTech Valley initiative established in northern Israel. As those ecosystems grow, they can potentially attract talent away from Tel Aviv in the same way that region now attracts talent from the rest of Israel. However, that risk to the Tel Aviv region is substantially mitigated by two main things: The trend is not large enough yet to significantly affect the Tel Aviv region, and the fields of innovation selected for those initiatives are usually different than those traditionally associated with the innovation scene in the Tel Aviv region. Since the intentionally non-Tel Aviv activity has not yet reached critical mass, Israel’s government will need to rely on the Tel Aviv region if it wants to maintain Israel’s R&D positioning. This is very likely in both the short and long terms, so the Tel Aviv region will probably continue to be the main source of innovation in Israel and its main beneficiary in the years to come.

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SWOT Table of the Tel Aviv Innovation Ecosystem

To conclude and for easy comparison between ecosystems, this section provides a summary table of the Tel Aviv ecosystem SWOT analysis. Resources Bank loans

Strengths Tel Aviv has a robust and internationally accredited banking system

Weaknesses Loans for startups and scale-ups are the exception rather than the norm (which is equity financing). The banking system provides only a marginal percentage of the capital in the ecosystem. The Israeli banking system is very conservative, and regulation limits the establishment of new banks

Culture and mindset

Israel has a good R&D culture with abstract thinking and problemsolving mindsets. It also has a multinational culture because of its large migrant population and strong interecosystem ties. It is an informal society that welcomes a direct approach and promotes

Opportunities Scale-ups and ecosystem growth reduce lender risks. Banks have been showing interest in the technology sector and opening special departments to serve its specific needs. The IIA has begun a new initiative to back scale-up loans, reducing lender’s risks

It is a highly vocal society. Local culture is often misunderstood as rude or know it all.

The informality of Israeli society enables fast action and fast connections.

Israeli expediency is often misunderstood as pressure (or despair) in other cultures

Abstract thinking skills are very useful when large paradigm shifts occur

Threats The ease of getting loans abroad in comparison with Israel, and specifically the ease of doing so in the USA, poses risk for scale-up drain. The Israeli banking industry mindset is very conservative, and regulation limits the establishment of new banks so change may be slow There is a natural risk of decrease in risk motivation as quality of life increases, and as scale-ups outbid startups’ salary offers

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Digital infrastructure

Education and skills

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Weaknesses

Opportunities

Threats

and rewards agility Infrastructure is highly developed, including highspeed internet region- and country-wide and a low cost of data

Some parts of the population, like the ultra-orthodox, avoid digital infrastructure usage as part of their belief system

Digital infrastructure is likely to remain highly developed, due to the concentration of global research centers in Israel, mostly for R&D

The scarcity of available academic positions generates brain drain

The ecosystem’s high amounts of practical training, especially from the IDF and international R&D centers, generate highly skilled human resources at relatively young ages

Some parts of the population do not use digital infrastructure, preventing the government from total digitalization. This poses the threat of lower bureaucratic speeds and higher bureaucratic burdens on local companies Unlike Israeli academia, the public education system (up to high school) is considered bad, and produces low PISA scores in worldwide comparison. While local students cover the gap in university, this can pose higher risks to Israel’s future position in knowledgerich fields

The region has a very large percentage of highly educated, working-age population (second in OECD). Israeli universities rank very high in international indexes. Strong theoretical skills in sciences, as well as developed practical skills. IDF and tech giants feed the ecosystem with highly trained talent

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Resources Institutions

Strengths The ecosystem has a wide variety of private institutions, as well as public institutions like the IIA that are meant to fill market gaps

Weaknesses As most of the institutions are private, they are affected by competition from other ecosystems and can leave the ecosystem

Opportunities Many global tech giants’ R&D centers provide a substantial amount of capital, managerial attention, and training for the ecosystem without a taxpayer burden

Legal advisers

The region has the most lawyers per capita in the world, with vast accumulated experience in tech affairs. It also offers an impartial court system

The accumulated experience of legal advisers in tech, as well as in the USA, EU, and Asian markets, is a distinct advantage of legal talent in the ecosystem

Market and demand

Tel Aviv has a very innovative market with relative ease of entry because of Israel’s open-minded education culture

Legal advisor fees can be expensive since Israel’s living standard is high. Contracts are interpreted in courts based on party intentions and not only the actual contract, sometimes causing obscurity in legal results The local market is very small (approx. nine million people) and uses a unique language (Hebrew).

Migration

Incoming migration from Jewish populations worldwide is usually highly skilled at the point of migration. Israelis living outside Israel provide a good

Some fields are heavily regulated There is some brain drain to other Western countries, mainly the USA. Israeli immigrationrelated regulation is cumbersome

The region is a good market for testing grounds. The current Israeli government addresses regulation concerns by attempting to deregulate Many Jews worldwide are interested in Israel because of its local economic boom and the rise in global antiSemitism. There is also interest from non-Jewish skilled individuals because

Threats Worldwide competition over R&D center locations for global tech giants is fierce and forces Israel to constantly offer distinct competitive advantages to retain the ecosystem’s position Hyperinflation of legal advisor numbers and scale-up legal needs might consume all legal talent

The area is too small a market for scale-ups in most cases. It requires market-specific knowledge to handle successfully Israeli immigrationrelated regulation, especially for expert work, is reducing the number of foreign students and experts (continued)

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Policy and strategy

Quality of living

Regulation

Strengths interecosystem network Israel is very dependent on its tech industry, economically and for security, and sees great importance in keeping its competitive advantage, resulting in lax regulation and large degree of freedom

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Weaknesses

Israel was politically unstable in recent years and had several elections in 2 years. This prevented clear policy determination and execution and forced ad hoc policies. All recent government coalitions were not very stable, posing similar risks

Tel Aviv enjoys a high quality of living. The 2018 Human Development Index was 0.906 (22nd worldwide)

The region is very expensive compared to other regions (19th worldwide), both nominally and in purchasing power terms

By intention, the Israeli tech industry regulation is relatively nondisruptive.

Regulation is still too strict in some industries, mostly those with national security implications and those concerning the interests of

In the case of private

Opportunities of friendships with Israelis Large deregulation efforts are being made, as well as efforts to provide a good regulatory environment for heavily regulated fields like automotive tech and cannabis tech. The science and technology office appointed a key media-tech entrepreneur, Moran Leshem Bar, as head of office, showing the value it puts on the sector The Israeli government is making large deregulation efforts to reduce price levels. In recent years, competition is rising and prices remain stagnant despite average wage increases

Major deregulation efforts have great potential for regulationdependent tech industries, specifically cannabis tech, and automotive tech

Threats

The current Israeli coalition is under constant risk of disassembly due to political disagreements between its members. This creates a risk of future policy shifts if deregulation efforts are not made swiftly

High price levels increase the risk of brain drain and have been causing it in recent years. Increases in price levels are likely to cause increasing average salaries, making the region less attractive to foreign companies Deregulation is a race between ecosystems, and rapid response by the Israeli government can be crucial. The Israeli (continued)

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Strengths

Weaknesses

ventures and R&D capital regulation, regulation is even assistive There is a very good level of research infrastructure, both public and private

large pressure groups and unions

Tel Aviv has a very good venture capital ecosystem with strong interecosystem ties. Israel has the highest capital raised per capita worldwide Tel Aviv has a can-do attitude resulting from Israeli culture. The national ethos emphasizes overcoming difficulties, high tolerance for failure

Tech giants poach talent and inflate salaries. The low availability of academic positions in public universities fuels brain drain

There is a high dependence on foreign capital

The area has disproportionately high confidence and perceives cautious behavior as stagnation

Opportunities

Research infrastructure is easy to access and relatively cheap (sometimes, free) to use. Commercialization is relatively easy due to extensive global tech giant presence A vast amount and variety of venture capital are available. This variety creates a lot of potential for smart money

The can-do attitude makes the ecosystem very fitting for high-tech

Threats political situation poses risks to regulation reform speeds While research infrastructure is good, a low amount of academic positions drive talent (and consequently research) abroad

The higher on-average valuation for US-based startups poses a risk of startup and scale-up drain

The can-do attitude common in the ecosystem can be problematic in the mature stages of technologies and business ideas, which tend to require proven methodologies for scale rather than abstract thought

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Fig. 16.4 Private Capital Reliance. Source: Author’s own figure

16.6

Lessons Learned from the Tel Aviv Innovation Ecosystem

In the case of the Tel Aviv ecosystem, much indeed can be learned. This ecosystem has handled calamities, brain drain, social changes, and bubble bursts. Some of those events were to an extent and scope that very few other ecosystems have had to handle. The ecosystem has not only survived those events but prospered despite them. The Tel Aviv ecosystem provides some valuable lessons in ecosystem foundation and maintenance for both business and governance. This section outlines the reasons for its success in a manner that will enable decision makers in other ecosystems to implement the lessons learned from the Tel Aviv ecosystem (Fig. 16.4). The Tel Aviv ecosystem is a private capital-based ecosystem. This capital is mostly foreign, and Israeli government actions on the ecosystem are restricted to two items: incentivizing private capital growth and incentivizing the establishment of new domain-specific subecosystems the private market ignores. While Tel Aviv still benefits from public funding programs such as Horizon 2020, and while some domestic public capital can also be found in the ecosystem, the overwhelming majority of the venture capital in the ecosystem is private. To be exact, 88% of the total capital in the ecosystem comes from the private market, and around 55% of the total capital comes from private foreign sources. Hence, the Tel Aviv ecosystem is clearly a private capital-based ecosystem. This has been very beneficial for the ecosystem, and it is a major contributor to its success in the long term.

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Private investors have at least three key advantages over their public counterparts. First, private investors have a strong intrinsic motivation for economic success, including the generation of exit options. Those exits create more investors, as a decent proportion of newly rich entrepreneurs tend to become investors themselves. This generates more exits and starts a reciprocation cycle. In the best-case scenario, this reciprocation cycle gives birth to a self-sustaining ecosystem in the long term. In contrast, public investments are usually not exit-oriented and are often set (and measured) to promote social goals rather than enterprise-related goals. Second, private investors privatize the risk and socialize the gains. If an investment goes south the investor bears all of the capital loss, but if an investment goes well, most of the revenue nourishes the ecosystem. These socialized benefits come in the form of employee salaries, services acquired, and so forth. In fact, only a fraction of the total value generated is actually gained by the shareholders. From a taxpayer standpoint, this risk management policy is ideal. Third, private investors bring their contacts and networks from different fields and branches, providing confidence for early adopters to use the early stage products startups generate. This shortens time to market and helps in establishing initial market footholds, crucial elements for startup success. In contrast, public investments tend to do exactly the opposite. They have few (or even negative) exit incentives, they socialize risks, and they tend to slow down pressure for market implementation and adaptation. This enables competitors to gain a short but decisive market advantage and leaves the nonpressured company forever behind. As a result, private capital tends to outperform public capital in almost any field, with the added benefit of reducing both tax load and the risk of taxpayers. Therefore, available private capital is crucial for ecosystem success over time and venture capital is very valuable for ecosystem growth over time as it funds new enterprises. While government actions cannot generate or mimic private capital, they can incentivize its allocation and, ideally, even its import. Tel Aviv provides a great example of such successful incentivization. Since this incentivization started almost 30 years ago, Tel Aviv is also an example of the positive long-term effects such incentivization can have on an ecosystem. The existence and encouragement of private capital investment, as was done by the Israeli Yozma incentive program and Israeli tax reduction programs, have proved to be very valuable for establishing the region and generating new private venture capital from both local and global sources. The expansion of venture capital in Israel is a case in point, yielding a mature ecosystem with growth rates matching those of emerging ecosystems. This growth is impressive by every standard. Between 2004 and 2019, the venture capital available in Israel increased at an average rate of 13% per year for a total of 450% growth. Between 2013 and 2019 alone, available venture capital increased by 371%. Data regarding the Tel Aviv region exclusively is not available, but since the region is 50% of Israel’s tech market we expect its share of the growth to be similar. The growth of Israeli venture capital demonstrates that private capital incentivization can be a very effective strategy (Fig. 16.5).

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Fig. 16.5 Venture capital growth Israel. Source: Author’s own figure

Stock Market Amalgamation In times of global crisis, the Israeli stock market is relatively stable compared to its peers. This is due to its low trade volume, low trade speed, and the use of a unique low-volume trade currency—the Israeli Shekel. Double registration in other stock markets is possible and common. The first Israeli stock market was established in 1935 and reached its modern form in 1968. From 1975 on, after Israel’s transformation from a centrally planned economy to a market-driven economy, trade consisted mostly of stocks. Now, 450 companies with a joint value of USD251.2 billion are registered in the Israeli Stock Market. In 2000, the Israeli parliament passed a law enabling companies to incorporate both in the USA (at first, NASDAQ only) and in Israel (dual companies). This was later expanded to include NASDAQ Small Cap companies plus companies traded on the London, Singapore, and Toronto stock exchanges. Following its IPO in 2019, the Israeli Stock Exchange is 31.7% privately owned. The Israeli stock market itself is not particularly interesting. Following the global crisis of 2008, regulatory changes, and an increase in taxes, trade volumes in the Israeli stock market have been reduced by 55% from 2007 to 2012. The market does offer Israeli companies a strategic advantage since their company headquarters do not have to move to be listed in key foreign stock exchanges. Challenge as Red-Tape Inhibitor Very little red tape limits the Tel Aviv innovation ecosystem, and this trend is expected to remain as Israel depends on innovation for its national security and survival. This reduces stagnation risks in the ecosystem as it matures and hosts more growth-stage companies. Tel Aviv is in the state of Israel, which faces a constant threat of war by other states that are larger in geography, population, and combined economic size. Israel addresses this threat mainly by maintaining distinct military advantage over those states. This military advantage is achieved and preserved through two main

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Fig. 16.6 Migration success story. Source: Research and Information Center, Knesset Israel (Israeli Parliament)

mechanisms: maintaining a tight relationship with the US Department of Defense and cultivating a strong domestic arms industry centered around innovation. Israel safeguards both mechanisms very diligently. The former ensures Israel is supplied with the best military systems exported by the USA. To maintain the latter, innovation-curbing regulation is kept to a minimum to prioritize agility over stability or safety. This approach seems to be doing wonders for the region, as can be seen by its remarkable economic results. As worker welfare concerns are often a major contributor (or a key justification) for overregulation, it is important to mention that this prioritization of agility and lax regulation in the region has not driven up unemployment rates, which remain extremely low. Given Israel’s outcomes, agility and lax regulation are potentially preferable strategies for any ecosystem, whether the ecosystem is worker welfare-driven or growth-driven (Fig. 16.6). The Tel Aviv region proves that mass migration from multiple countries of origin can be successful in modern times if the value sets of the migrating and domestic populations are compatible. The Tel Aviv region and the state of Israel in general are migration success stories—almost all of those inhabiting the region (around 94%) are either migrants or second-generation migrants. The origins of Israel’s migrants are very diverse, including numerous countries in Europe, Asia, Africa, and America. Surprisingly, this mass migration from multiple origins has resulted in one cohesive society rather than in multiple seclusive ethnoclusters, both in Israel in general and in Tel Aviv in particular. Israeli society’s dividing lines correlate more with religious devotion (not the practiced religion

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itself, but rather the level of religious fundamentalism) than with migration origin, indicating very successful cohesion. As is often seen in major urban areas, the Tel Aviv region is even more cohesive and liberal than the Israeli average. This success story shows that successful mass migration is possible, although it also provides evidence that certain characteristics of the migrating population are important for that success. In Israel, the mutual values of the migrating group and existing domestic groups are largely similar or compatible. In the case of Tel Aviv, an overwhelming number of the migrants were Jewish and showed strong affinity to Israel prior to their migration, giving them religious ideological common ground regardless of national origin. Another success factor in Israel is that the newly migrated are left to fend for themselves economically after the settlement process. In the case of the Tel Aviv region, single-time settlement grants are given either in cash or in temporary tax reductions, and the settler chooses where to settle in a free-market manner like every other citizen. Planned migrant settlements were attempted in the period following Israel’s independence declaration in 1948 and are now generally considered to be a social failure as they ended in suboptimal integration for several generations. It is unclear how successful the mass migration into the Tel Aviv region would be without one or all of these characteristics. Given that several migration waves from various countries—some massive in size—have integrated into the region and into Israeli society successfully, successful mass migration leading to full integration is certainly possible when those characteristics are present. Emphasis on Early Stage Improvisation and Abstract Thinking Israeli culture glorifies improvisation skills and agile thinking, and its citizens learn it at a relatively early age. This skill helps them in setting up innovative and disrupting companies later on in their life. This lesson can be learned from the Israeli ecosystem in general, as it is pan-Israeli and not unique to Tel Aviv, though Tel Aviv is an amplified example of its value. Israeli culture glorifies improvisation skills and agile thinking. Israelis are trained in improvisation and abstract thinking at relatively early age during their mandatory military service. This is not done via standardized training programs or by design (at least not officially), but rather as a byproduct of the challenges of military life. The current legally mandated military service period in Israel is 2.5 years for men and 2 years for women and that military service is rather demanding in nature. As a result of the challenging conditions their military service dictates, Israelis must learn to adapt and overcome disparities in a low-resource environment at a relatively early age. This is not done by program or by design, but rather by the need to overcome the hardships encountered during service and its associated environment. The incentive to overcome hardship can often be a very basic human need, such as a need for survival or shelter in field training. Such incentives, though primitive, tend to be quite powerful motivators for adaptation. The mental agility generated by this process benefits the local innovation scene, especially when it comes to startups in the early stages and their need to constantly adapt to changes in short cycles. That being said, military service also comes at an

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enormous cost to Israeli GDP since 3% of the able population is out of the workforce at any given time due to active service alone. In nominal monetary terms, this accounts for about USD11 billion loss in GDP each year. Furthermore, it is important to state that this loss of years is very likely to be an underestimation, as lost years often span longer than the years of service alone. Former soldiers tend to travel internationally for long periods of time following the service period. This travel period typically spans for between 6 and 12 months and is often followed by another 6-month reacclimation in Israel, totaling in around 4–5 years of lost economic productivity. However, the travel period is not completely negative—these young travelers interact with other cultures where they are usually perceived very positively, branding Israel as a good travel destination. As those who travel to Israel usually travel to Tel Aviv on their visit, this is very positive for the region. If we are to extend the GDP loss by another year, which is a conservative estimation as lost time is usually longer, it accounts for roughly another 1% GDP lost or an additional USD3 billion annually. This trade-off was forced on Israel, and it is unlikely that other countries will opt to make a similar trade-off without existential threats forcing them to do so—nor do we recommend they should. However, an alternative system to military service capable of training the young population in abstract thought and improvisation can offer, at least in theory, the potential to provide similar benefits to those provided by military service without the massive GDP loss drawback. However, no such system has been tested in a major economy, so the concept remains unvalidated in practice. Military Service as Social Adhesive The mandatory military service in Israel benefits the region by being a strong social adhesive and a good ladder to climb for the capable but unfortunate. This is true for Israel in general and not just the Tel Aviv ecosystem. The mandatory military service in Israel acts as a social adhesive element for Israeli society, and it is seemingly very effective. As stated, however, it comes with a huge GDP loss. The main reason for the military’s social adhesion benefit is probably the fact that, during service, social status is irrelevant. Everyone is conscripted, and unit assignment is done at least partly based on merit and not based on social status or pure luck. This gives people of low means and high aptitude the ability to climb the social ladder in a neutral setting, since the military provides all of the available resources. It is unclear whether this social adhesive is worth the high cost of military service in terms of GDP loss. Value of No-Barrier Culture The Tel Aviv ecosystem has a no-barrier culture. One can approach anyone and is encouraged to speak one’s mind. This is very valuable for early stage startups, but is less accepted and even frowned upon in other ecosystems. One of the most interesting lessons from the Tel Aviv ecosystem is the value of its no-barrier approach, which is a key feature of both the region and its inhabitants.

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Israeli culture and conversational norms are characterized by informality, and Tel Aviv is an extreme example of that. In most situations, it is considered completely acceptable to approach anyone via email or telephone, and to lesser extent even in an unannounced office visit—so long as one shows adequate respect for the individual being approached and has something valuable or interesting to say. This no-barrier culture is very beneficial for local startup founders, as it enables (and even encourages) them to approach experts and prospective clients without significant prior validation or proof of their venture’s merit. Such validation is often impossible to get without convincing such experts or clients to examine the startup’s ideas in the first place. This early access to resources prevents the chicken-and-egg situation many startups face in early stages and adds agility to the ecosystem. It reduces the distance between an entrepreneur and resources to a high-value idea and a valid plan of execution. However, this no-barrier approach is both a blessing and a burden. This culture is not widespread and may be frowned upon in other ecosystems, especially those in Europe and Asia. This leads to Israelis having a reputation for being overly upfront or even rude. As the no-barrier approach is far from being the worldwide standard, at least for time being, and as adopting such an approach will usually require a substantial cultural shift, adopting no-barrier culture is probably realistically feasible only as a long-term goal in most ecosystems. Equity Financing Rather than Debt Financing In the Tel Aviv ecosystem, capital is raised for equity and not for debt. This can be problematic for scale-ups and for scale-up retention, as debt-raising in other ecosystems is significantly easier. In the Tel Aviv ecosystem, capital is rarely raised via bank loans, but rather from domestic and foreign venture capital, usually in exchange for equity and not as interest-bearing debt. Hence, the standard transaction in the region is funds for equity, and not funds for interest. While this is useful in reducing risk exposure for the local banking system, which is generally conservative, it is a potential growth inhibitor for scale-up companies. In fact, the Israeli Innovation Authority (IIA), the innovation promotion office of the Israeli government, claims that raising debt in Israel is far harder than raising debt in other markets and that US-based companies have three times more leverage than their Israeli peers. These debt-raising difficulties have the potential to drive scale-ups out of the Tel Aviv ecosystem. This can be especially harmful as the Tel Aviv ecosystem matures and hosts more scale-ups, competition for talent increases, salaries rise, and the need for funds becomes even more imperative for scale-up companies. To address the issue, the IIA is planning to offer incentives to bodies willing to offer scale-up loans. As previous governmental programs creating tax incentives were generally successful in the region, it will be interesting to follow the program and its effects on the ecosystem.

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Ecosystem Maturity-Related Identity Challenge The Tel Aviv ecosystem is no longer just a startup incubator and hosts many scale-up companies, including multiple unicorns. There is an ongoing debate about the identity of the Israeli innovation ecosystem in general, one which specifically applies to the Tel Aviv region as it is the locomotive of the Israeli tech market. It is the question whether Israel is still “the startup nation” or whether it has reached saturation and is now the “scale-up nation.” Several trends point to “scale-up.” According to the Israeli Innovation Authority (IIA), the amount of newly created Israeli startups is decreasing. Seed-round fundraising remains mostly stable, but growth-round fundraising increased by 33% from 2017 to 2018. This suggests a transition from a startup focus to a scale-up focus. The number of Israeli startups choosing to incorporate outside of Israel increased by 10% in 2019. In general, around 18% of Israeli startups incorporate abroad, most of them in the USA (as stated, data for Tel Aviv were unavailable, assumption of a similar ratio in Tel Aviv is reasonable). The main reason reported for this trend is “investor preferences.” Another important issue is talent availability for startups. The Israeli ecosystem already hosts 44 unicorns and over 4500 successful tech companies. These companies need human capital—and lots of it. Far more people in Israel are employed in scale-ups than in startups, and scale-up companies have become a major force in the Israeli talent ecosystem. From 2011 to 2019, the number of people employed in scale-ups increased from 23,000 to 70,000, and sales increased from USD3.5 to 17.7 billion. This growth has created a shortage in talent: The IIA reports a shortage in qualified staff of around 18,500 experts in the Israeli ecosystem in general. This shortage is leaving startups with less available talent, and this trend is very likely to deepen as scale-ups grow further. Considering the funding and personnel factors, the threat of regional saturation appears viable. However, there are also solid arguments against saturation in the Tel Aviv region when it comes to startup generation and regional growth in general. The switch from start up to scale-up is not a regional or Israeli phenomenon, instead it can be observed worldwide. When it comes to innovation levels in scale-ups, Vered Raviv Schwarz, COO of Tel-Aviv-based unicorn Fiverr, claims that both scale-ups and startups must be innovative and that the two do not counteract each other. In other words, innovation is still happening, but it has moved to scale-ups. Scale-ups can mimic startup structure by making separated small teams focusing on one product, generating innovation in a similar fashion and at somewhat similar speed to startups. Another sound argument, and one we will discuss here, is that the human capital needed in a scale-up is not the same as the human capital needed in a startup. Startups focus on bringing innovation to market, and scale-ups focus on the optimization and scale of the innovation they brought to market in previous stages. The shift of focus requires a shift in skill set, and talent with the skill set fitting a startups is not necessarily the same talent desired by scale-ups. Statistically speaking, the average successful startup team is composed of 3–7 people (founders and employees), with specialties in different fields. Having at least

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one founder with a PhD increases the chances of meeting fundraising goals by 60%, so at least one highly educated founder is helpful. It is safe to assume that many of the people involved in the early stages of a startup will be vision-oriented, not detailoriented, as startups typically cannot optimize their product fully until they find product-market fit, which almost always requires some degree of pivot on the startup’s part. Each position in a startup usually requires hands-on work, and mass management skills are not yet relevant. In a scale-up, however, the picture is quite different. In general, startups focus on building a product and scale-ups focus on building a company. The original founders, if they are still involved, tend to take managerial roles in scale-ups with little to no hands-on work. Founders often fail to excel in their new roles or find them frustrating, so they often leave scale-ups. For example, the founder acting as the CEO is often replaced by a hired CEO as the scale-up grows bigger and its ownership composition changes. The skill set needed for the CEO position in a startup is very different from what is needed by a scale-up. We did not find exact data regarding the prevalence of this trend, but it is well established across ecosystems. Once they leave, founders may start another enterprise, at least based on the patterns of founders residing in the Tel Aviv region. Unlike startups, scale-ups have an additional layer of senior leadership team made up of hired staff. This layer of people does not fit the profile of startup founders. Their expertise is useful in scaled enterprises, and their value diminishes in infantstage companies. Therefore, it seems unlikely that scale-ups keep founders away from the market. There is some competition over talent between startups and scale-ups when skill sets overlap, as both seek to acquire the finest talent available. In this competition, scale-ups tend to win as they usually have more available funds. That being said, startups and scale-ups usually require fundamentally different skill sets. As scale-ups focus on optimization and startups focus on innovation, their requirements of their developers are far from identical. Startups are expected to benefit more from developers that exhibit high openness, unconventional thinking, and are less expensive to hire. Scale-ups, in contrast, benefit more from subject-domain expertise and experience in large-scale terms on previous occasions. Similarly, in sales, startups usually focus their sales on the early adoption group, which makes up only 2.5% of the market and has specific characteristics. This group is interested in the startup’s product, which is innovative but usually not perfected. Scale-ups, on the other hand, aim for the “late majority” adoption group. This group makes up 82% of the market and appreciates a mature product and recognizable brand. Selling to majority groups is very different from selling to early adopters and requires a different skill set, so startups and scale-ups are not competing for sales talent. Given these examples, it is likely that startup and scale-up competition over talent is less fierce than initially or intuitively thought. Competition between scale-ups and R&D centers, however, is far more probable. The skill sets needed by scale-ups and R&D centers are at least somewhat compatible.

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Either way, the way the Tel Aviv ecosystem deals with this growth stage can provide a valuable lesson to other regions, and is worth following. As the Tel Aviv ecosystem is a very agile ecosystem that has survived several calamities in the past, its lessons and consequences can be rapidly applicable and may even include creative and novel solutions.

Zurich Innovation System

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Mathias Beck and Ludovit Garzik

Abstract

The Zurich region frequently ranks among the top innovative and competitive regions in the world. This chapter explores the drivers of Zurich’s unique interplay of high competitiveness and innovativeness, distilling the important components of this far-reaching innovation ecosystem. The analysis not only evaluates the relative strengths of resources for economic activities, but also includes the institutional, political, and social characteristics of the Zurich region ecosystem. The key factors of Zurich’s regional innovation ecosystem are its strong research and university systems, its strong private sector with high levels of private investments in R&D and innovation activities, and its flexible and stable innovation and labor regulations. In Switzerland, the institutional system supports the generation and dissemination of knowledge with its transparent structure and public funding dedicated to the research institutions, which provides them with a strong position and high-class infrastructure to produce scientific outcomes. However, policymakers pay less attention to the dissemination of the knowledge and technologies generated by scientific institutions into the private economy and among private enterprises. The appropriation and implementation of newly generated knowledge haves been, in large part, delegated to companies—improving their competitive position on the market.

M. Beck (*) Department of Management, Technology, and Economics, KOF Swiss Economic Institute, ETH Zurich, Zurich, Switzerland e-mail: [email protected] L. Garzik Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria e-mail: [email protected] # The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance, https://doi.org/10.1007/978-3-030-80639-2_17

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Zurich Innovation Ecosystem Introduction

Switzerland is famous worldwide as the home of excellent chocolate, cheese, and watches—and of course as the home of Roger Federer—but it is also the home of Roche, Novartis, ABB, Nestlé, and many more highly innovative and competitive enterprises. In this chapter, we focus on one of the driving economic regions in Switzerland, the greater Zurich region. This region hosts the European (research) headquarters and laboratories of Google, IBM, Microsoft, and Disney. Zurich is also home to world-leading scientific institutions. Two renowned universities, the Swiss Federal Institute of Technology in Zurich (ETH Zurich for its German name, Eidgenössische Technische Hochschule Zürich) and the University of Zurich, lie next to each other in the middle of the city. ETH Zurich is one of the two Swiss Federal Institutes of Technology, the other being EPFL in Lausanne. ETH Zurich is a publicly funded research university, originates from a strong focus on science, technology, engineering, and mathematics, and has a world-class reputation in academia and industry alike. Zurich’s two main universities are joined by high-class universities of applied sciences, and together, they provide excellent conditions for socially impactful innovation, knowledge generation, and knowledge dissemination. Swiss Universities of Applied Sciences were renowned for their practical orientation, providing high-level training for engineers. Very recently, the Regional Innovation Scoreboard 2019 from the EU Commission lists the Zurich region first in a comparison of the innovation capabilities of 238 regions in 23 EU Member States plus Norway, Serbia, and Switzerland. Notably, Zurich’s runner-up is Ticino, another Swiss region.1 At the same time, Switzerland holds the fifth rank in the World Economic Forum’s Global Competitiveness Report.2 In this chapter, we will dive deeper and explore the drivers for Zurich’s unique interplay of high competitiveness and innovativeness. We look behind these interdependencies and distill some important components of this far-reaching innovation ecosystem.

17.2

Zurich Facts and Figures

The Zurich Innovation Ecosystem is strong in both its innovation efforts (input) and its enterprises’ innovation successes. According to the EU Commission’s Regional Innovation Scoreboard, the Zurich region occupies the leading position in the most recent European comparison in 2019.3 The Regional Innovation Index comprises several factors relevant to regional innovation performance, with 17 specific

European Commission, “Regional Innovation Scorecard 2019,” vol. 18, 2019, https://doi.org/10. 2873/85586 2 World Economic Forum, “The Global Competitiveness Report 2019,” ed. Klaus Schwab, 2019. 3 European Commission, “Regional Innovation Scorecard 2019.” 1

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indicators. The report highlights the Zurich region’s excellent standing in a broad range of those indicators. According to the report, the Zurich region is the most innovative in Switzerland and a leader in Europe. It has high levels of tertiary education (rank 4), lifelong learning (rank 1), scientific co-publications (rank 1), and most-cited publications (rank 2). Zurich also has strong R&D expenditure by the private business sector (rank 19), SMEs introducing product or process innovations (rank 26), and SMEs introducing marketing or organizational innovations (rank 4). Finally, it scores highly for its public–private co-publications (rank 4), PCT patent applications (rank 24), and employment in medium–high/high-tech manufacturing and knowledge-intensive services (rank 16). Despite the Zurich region’s leading role for a relatively long period of time (2011–2019), its innovativeness is not unique in Switzerland. Six out of seven Swiss regions are part of the top category of “Innovation Leaders +”, and all Swiss regions are in the top 20 most innovative regions in Europe—five regions are in the top 10.4 Notably, the comparative ranking of Swiss innovation regions is quite dynamic. On one side, regions like Ticino and Ostschweiz have improved recently, while others like Nordwestschweiz have declined. A key driver of its success is that Zurich benefits from the general strength of Switzerland’s innovation system and Switzerland’s overall high competitiveness, which are both in the top worldwide. The World Economic Forum’s competitiveness report ranks Switzerland fifth.5 Switzerland, Sweden, and the USA lead the innovation rankings,6 while Switzerland ranks first among the highest-income countries and top overall in Europe. As pointed out by Carmen Walker Spaeh, the current cantonal councilor and director of Economic Affairs of the Canton of Zurich, a key factor for Switzerland’s success is the internal competition among the country’s regions, cantons, companies, and academic institutions.7 Highlighting this national–regional interplay, we will discuss national level to emphasize issues like development over time, and other data at the regional level to show regional differences.

17.2.1 Input Indicators: Innovation Efforts in the Economy Investments in R&D are one of the most important drivers of economic growth in modern knowledge-based societies. The development of R&D and innovation efforts is thus a key figure for a region’s future-oriented, long-term potential for competitiveness and economic wealth. Sufficient R&D and innovation efforts are

4

European Commission. World Economic Forum (2019) “The Global Competitiveness Report 2019.” 6 World Economic Forum (2020) Global Innovation Index. 7 digitalswitzerland, “Innovation in Zürich, Innovation Schweizweit,” 2019, https:// digitalswitzerland.com/2019/09/19/innovation-in-zurich-innovation-schweizweit/ 5

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fundamental prerequisites for managing the transition toward a sustainable knowledge-based society. High R&D capacity innovation effort is also necessary due to the challenges of the age of digital transformation and to further socioeconomic and environmental challenges. A recent policy report about the firm-level effects of the digital transformation on Swiss enterprises’ performance finds that innovative strength enhances firm productivity following investments in digital technologies.8 Evidently, companies without high capacity for innovation will find it difficult to derive productivity gains from their investments in digitalization. The official survey of innovation activities in Swiss enterprises, which analyzed a representative panel of Swiss enterprises in 2018, reports a slight decline in the share of R&D-active companies in the overall economy (R&D ratio) over recent years.9 Nonetheless, the R&D ratio in manufacturing industries (i.e., high-tech and low-tech sectors) has increased slightly. As the report states, the efforts attributed to innovation activities have increased, where the share of R&D expenditure turnover in innovative companies measures innovation activities. Despite the overall trend of a declining R&D ratio, there has been a slight increase in the concentration of R&D spending in Switzerland. This means that fewer companies carry out R&D efforts. This concentration is also evident in other industrialized countries like Germany. However, this trend of increasing concentration has slowed down very recently, and countries like France and Finland present a contrary picture. Over time, and compared to Germany and Switzerland, these two countries have been able to spread their overall R&D activities over a broader base of companies.10 According to the Swiss innovation report, there are some considerable differences in firms’ engagement in R&D activities across major regions. The share of R&Dactive companies is highest in northwestern Switzerland. Zurich has the highest share of innovative companies, and innovative companies show the strongest average innovation efforts (measured by the share of R&D investment turnover) in Espace-Mittelland. However, there are only slight differences across Swiss regions related to the share of R&D-active firms (R&D ratio in 2018). For more details, refer to the report by Spescha A and Woerter M (2020), which contains more information about the differences between regions.11 For instance, the report states that these differences are mainly driven by services and small enterprises.

Beck M, Plekhanov D and Woerter M (2020) “Analyse der Digitalisierung in der Schweizer Wirtschaft,” KOF Studies 153 (2020), https://doi.org/10.3929/ETHZ-B-000432882 9 Spescha A and Woerter M (2020) “Innovation in der Schweizer Privatwirtschaft – Ergebnisse Der Innovationserhebung 2018” (Bern, 2020), https://www.admin.ch/gov/de/start/dokumentation/ medienmitteilungen.msg-id-72767.html 10 Spescha and Woerter. 11 Spescha and Woerter. 8

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Firm innovation activities’ “openness” is considered an important source of innovation since it enables access to externally available knowledge.12 The different facets of the “open innovation” phenomenon are not a concern of the private sector along, but are also increasingly an economic policy concern—entire regions or economies can benefit from the positive externalities of opening innovation processes and increasing knowledge dissemination.13 Policymakers and academia in Switzerland have reacted to these opportunities, have launched various clusters and network initiatives, and have provided spaces for technology and innovation parks. These activities are intended to foster the transfer and dissemination of knowledge and technology between actors from science and industry and to accelerate the generation of innovations. The official Swiss innovation report shows that Swiss companies have recently increased their R&D cooperation engagement.14 The reported figures show a steady increase in the share of companies with R&D collaborations between 2002 and 2018. Specifically, R&D-active companies have formed in-country partnerships for R&D more frequently, while international R&D cooperation agreements have declined. In sum, development over time indicates a clear increase in R&D partnerships and thus a more open innovation processes within enterprises. Accounting for firm size, the report indicates that smaller enterprises have difficulty with external partner collaboration, especially related to universities. The figures generally show less collaborative innovation activity between private companies and universities. This is primarily because rather large companies enter into R&D cooperation with universities, while smaller companies do so only very rarely. However, small companies more commonly form partnerships with Universities of Applied Sciences. In fact, Universities of Applied Sciences are the third most frequent cooperation partner for SMEs after suppliers and customers (for more details and figures, refer to the report by Spescha A and Woerter M, 2018). R&D cooperation is becoming more important, but the literature indicates that SMEs have difficulties benefiting from engagement with external partners, in particular with scientific partners from universities for the generation of innovation outcome.15 The relatively low numbers of innovative SMEs in the Zurich region

12 Beck M and Schenker-Wicki A (2014) Cooperating with External Partners: The Importance of Diversity for Innovation Performance. European Journal of International Management 8, no. 5 (2014), https://doi.org/10.1504/EJIM.2014.064604 13 Beck M, Junge M and Kaiser U (2017) Public Funding and Corporate Innovation. KOF Working Papers, no. 11196 (2017); Spescha and Woerter, “Innovation in Der Schweizer Privatwirtschaft – Ergebnisse Der Innovationserhebung 2018.” 14 Spescha A and Woerter M (2018). Innovation in der Schweizer Privatwirtschaft – Ergebnisse der Innovationserhebung 2018. 15 Beck M and Lopes-Bento C (2019) Innovation, Partner Configuration and Partner Adaptation in R&D Alliances. Proceedings of the 2019 International Industrial Organization Conference, 2019, 208.

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that engage in collaborative R&D are clear in the Regional Innovation Scoreboard (RIS) Report from the European Commission.16 Policymakers have addressed these SME collaboration shortcomings, which are not unique to Switzerland, through a number of policy instruments. For example, the Eurostars Program from the EU targets SMEs and offers direct financial R&D support. The program attracts an increasing number of Swiss enterprises engaging in national but mostly international collaborative innovation to generate new technologies and services. Recent research analyzing the effectiveness of the Eurostars funding program has identified substantial positive employment effects for the funded SMEs in Switzerland.17 Innovation inputs in the Zurich Innovation Ecosystem are strong, especially when compared internationally on a vector of a wide range of factors. Various measures and indicators show this, like the investments in R&D from the business sector, the high quality of the publicly funded research and university system, and the high number of well-educated students and graduates thereof. Zurich’s excellence is evident at the national level, as confirmed by the Global innovation Index (GII) report’s ranking Switzerland second for its innovation inputs.18 The GII report emphasizes robust R&D expenditures for and by the private sector, and places special emphasis on the Swiss economy’s ability to produce high-quality innovations consistently. It also underlines the overall innovative capacity of the business sector, with its high share of knowledge-intensive labor. However, the report also indicates some weaknesses at the national level. Zurich has relatively weak engagement for performing and financing R&D in the public sector.19 In addition, at the regional level, the RIS reports outlines a relative low position with respect to innovative SMEs engaging in R&D collaboration for the Zurich region.20

17.2.2 Output Indicators: Innovation Success in the Economy According to the Global Innovation Index (GII), Switzerland is best among world economies with respect to its innovation output capabilities.21 This outstanding position remains constant compared to the previous year and in 2018. After the USA, Switzerland ranks second for its quality of innovation, which is based on the high quality of its universities and its scientific publication output. Additionally,

European Commission, “Regional Innovation Scorecard 2019.” Beck M, Hansen J, Kaiser B, Sonne-Holm P, et al. (2019) Eurostars The International Programme for Research Intensive SMEs A Joint Swiss Danish Impact Study. SERI Dossiers (Zurich, 2019), https://www.research-collection.ethz.ch/handle/20.500.11850/413401 18 GII, “Global Innovation Index 2020 – Who Will Finance Innovation?” 19 GII. 20 European Commission, “Regional Innovation Scorecard 2019.” 21 GII, “Global Innovation Index 2020 – Who Will Finance Innovation?” 16 17

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Switzerland also works hard to internationalize its inventions. Therefore, it also ranks first in receiving patent families, or patents granted in two or more patent offices. Remarkably, Switzerland is consistently among the top three countries worldwide in patents by origin, PCT patents by origin, scientific and technical articles, high-technology manufacturing, and receipt of intellectual property (IP).22 The GII report also points out to Switzerland’s particularly well-framed innovation ecosystem.23 For instance, Switzerland’s quantity of university–industry collaborations (UIC) ranks second in the GII. A recent policy report on knowledge and technology transfer (KTT) in Switzerland provides a comprehensive perspective on the form and intensity of KTT activities in Swiss enterprises and scientific institutions.24 A representative survey found that enterprises in the Zurich region are highly engaged in KTT.25 Switzerland is also strong in recent cluster development and is ranked fifth in the GII 2020—Zurich (ranked 49th) and Lausanne (ranked 89th) demonstrate their roles among the top 100 science and technology clusters in the world. The Zurich region’s scientific output is of exceptionally high quality. The RIS 2019 report ranks Zurich first for its international scientific co-publications, second for scientific publications among the top 10% most-cited publications worldwide, and fourth for public–private co-publications. International scientific co-publications are one measure of scientific research quality, as collaborations intend to increase scientific productivity. Similarly, the most-cited publications indicator is a proxy for the efficiency of the research system since highly cited publications are generally higher quality. Public–private co-publications indicate public–private research linkages and active collaboration activities between business sector researchers and public sector researchers. This again demonstrates the active knowledge and technology transfer between private sector enterprises and scientific institutions in the Zurich region. If we look at the innovation output of companies in the Zurich region, a picture emerges of generally strong innovation capacity. However, that capacity varies across indicators as we have seen above in relation to scientific output. For example, the RIS report lists Zurich 26th for the emergence of product or process innovators, fourth for marketing or organizational innovators, and 56th for its performance in generating sales with new-to-market and new-to-firm innovations. This latter indicator measures the turnover of new or significantly improved products and includes both new-to-the-firm and new-to-the-market products. Contrary to organizational and marketing innovation, this captures both the successful introduction of state-of-

22

GII. see also the Research & Innovation report 2020 of the State Secretariat for Education, Research, and Innovation for a documentation about Switzerland’s innovation systems, SERI (2020). 24 Beck M et al. (2020) Analysis of Knowledge and Technology Transfer in Switzerland – the Perspective of the Enterprises. Research and Innovation in Switzerland 2020 C, no. 4 (2020), https://doi.org/10.3929/ETHZ-B-000412676 25 Unpublished data, figure can be provided by the authors upon request. 23

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the-art technological innovations (new-to-market products) and the diffusion of these technological innovations (new-to-firm products) in the market. All three indicators capture the ability of companies to successfully develop new products and services and introduce them to the market, thus determining the basis for them to achieve a competitive advantage. The official Swiss innovation report provides information about private enterprises’ introduction of product, process, marketing, and organizational innovation in Switzerland’s overall economy over time (from 2002 to 2018) and about regional variation in 2018.26 The report shows an increase in the share of innovating enterprises in the most recent years after a longer period with decreasing numbers. The report presents smaller differences across regions in Switzerland for innovation output than for innovation input. According to the report, the Zurich region has the most innovating companies. The official Swiss innovation report also documents the development of private enterprises’ sales of new-to-market and new-to-firm product and service innovations in Switzerland over time (from 2002 to 2018), along with regional differences in 2018.27 These measures indicate the commercial success of private enterprises’ innovative products and services in Switzerland. The figures in this report show a long-term stable share of turnover going to innovative products/services with only small regional differences. The official innovation report also confirms the Zurich region’s strength, this time regarding the share of private enterprises with patent applications.28 The Zurich region is among top the regions in Switzerland for patent applications, with a rate of approximately 6% of private enterprises filing a patent application compared to approximately 3% for the overall economy. In conclusion, the Zurich innovation ecosystem is very well positioned on both the input and output sides of innovation activities. This general picture is strongly coherent with the overall innovation performance of the Swiss economy. According to the GII 2020, Switzerland ranks second worldwide in the input side and first in innovation output. This report also highlights Switzerland’s high capacity for innovation in terms of human capital and shows the high quality of its research system, which produces important scientific outcomes with an international outreach. In more detail, Switzerland ranks fourth in R&D expenditures, fifth in R&Dintensive global companies, and fourth in the quality of universities, with ETH Zurich and École Polytechnique Fédérale de Lausanne (EPFL) both among the top 20 ranked universities in the world.29

Spescha A and Woerter M (2018) “Innovation in der Schweizer Privatwirtschaft – Ergebnisse der Innovationserhebung 2018.” 27 Spescha andSpescha A and Woerter M (2018) “Innovation in der Schweizer Privatwirtschaft – Ergebnisse der Innovationserhebung 2018.” Woerter. 28 Spescha and Woerter. 29 GII, “Global Innovation Index 2020 – Who Will Finance Innovation?” 26

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This high quality in innovation input and output also documents that Switzerland is able to translate innovation input effectively into output. The GII report analyzes the relationship between innovation inputs and innovation outputs for all the economies covered in the GII 2020 report. Switzerland belongs to the category of economies that effectively convert costly innovation investments into larger and higher-value outputs. Specifically, the report highlights that Switzerland produces relatively large innovation outputs in relation to its innovation investments.30 Main Institutional Players in the Regional Innovation Ecosystem The Zurich region hosts a high density of well-connected universities and research institutes. These include, in addition to ETH Zurich and the University of Zurich, the interdisciplinary research institute for materials science and technology Empa and various universities of applied sciences. According to the World University Ranking 2018,31 ETH Zurich is the best university in continental Europe and the global leader in computer science. ETH Zurich has recorded an impressive 400 spin-offs in the last 20 years. It is one of the two universities in Switzerland that are funded at the national level. All other institutions in the region, among them the University of Zurich, are funded at the cantonal level (see also Table 17.1). ETH Zurich’s dynamic innovation environment has stimulated leading global companies like Google (machine learning and artificial intelligence), Disney Research (computer graphics laboratory including video manipulation and encoding, 3D, and perception study), and Microsoft (mixed reality and artificial intelligence) to jointly operate research laboratories with the university. This fruitful symbiosis of renowned science institutions with scientific and technological knowledge has also stimulated the knowledge and technology transfer between private innovative enterprises and scientific institutions. According to an analysis about the knowledge and technology transfer activities in Switzerland, private enterprises located in the canton of Zurich are frequently engaged in KTT activities.32 As also pointed out in the official Swiss Research and Innovation Report, the most important forms of transfer are informal contacts and activities for education and training.33 In the high-tech industry, research cooperation and the use of universities’ technical infrastructure are also relatively important means of knowledge and technology transfer. Not surprisingly, research institutes in the Swiss Federal Research Institutes domain (ETH Zurich and EPFL) are the most frequent transfer partners, along with the universities of applied sciences. The report also emphasizes that technology transfer offices (TTOs) and the public innovation support agency Innosuisse are the most important mediators and

30

GII. http://www.shanghairanking.com/World-University-Rankings-2018/USA.html 32 Unpublished work. Figure can be provided by the authors upon request. 33 Beck M et al. (2020) Analysis of Knowledge and Technology Transfer in Switzerland – the Perspective of the Enterprises. 2020. 31

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Table 17.1 Facts about ETH Zurich and University of Zurich Founded Students

Staff Spin-offs Awards and prizes

Patents and inventions

ETH Zurich 1855 22,200 students, including 4180 doctoral students, from over 120 countries 540 professors; 9845 employees (FTE) 440 spin-offs since 1996 21 Nobel Prize winners, including Albert Einstein and Wolfgang Pauli 2 Fields Medal winners 2 Pritzker Prize winners More than 100 patent applications and 150 invention reports every year

Financial budget

CHF 1.9 billion, comprising CHF 1.3 billion core funding from the Federal Government

Rankings

14th in the ranking (2020/21) 6th in QS ranking (2020/21) 19th in ARWU ranking (2019/20)

Website

www.ethz.ch

University of Zurich 1833 Switzerland’s largest university with 28,000 enrolled students, (4461 from abroad), 5517 doctoral students 678 professorships; 6836 employees 136 spin-offs from 2009 to 2019, 95% success rate after 5 years of starting 12 Nobel Prize winners, including Erwin Schrödinger, Paul Karrer, and Rolf Zinkernagel Over the last 20 years, 1200 patents filed by Unitectra (UZH transfer office) and 2000 invention reports evaluated (60 patent applications per year on average and 100 invention reports) CHF 1.46 billion funding, comprising CHF 316 million core funding from public authorities, CHF 323 million project funding (39 million from EU or other international bodies, 170 million from public Swiss administration including Swiss National Science Foundation, 113 million from private economy or private bodies) 73rd in THE Ranking (2020/21). 69th in QS World University Rankings (2020/21). 56th in ARWU Academic Ranking of World Universities (Shanghai Ranking) www.uzh.ch

Sources: ETH Zurich, University of Zurich

promoters of KTT. For example, around one-third of KTT-active companies see TTOs and Innosuisse as very relevant to their transfer activities. Generally, while there has been a significant increase in the share of KTT-active companies in industry and large companies in Switzerland, the overall share of KTT-active companies has remained constant over time.34 Notably, during the last survey period, private enterprises’ transfer activities with foreign universities have tended to decrease slightly, which might be cause for some concern given the high international embeddedness of the Swiss economy.

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In addition to the high reputation of scientific institutions and the availability of well-trained personnel, certain accompanying institutional factors promote the domestication of innovative global entrepreneurship. According to the GII report, Switzerland has highly effective government institutions, and high environmental performance—increasingly important as a reputational value for many companies in times of greater ecological awareness. A strong domestic private credit sector is also crucial for the formation of new enterprises, as is the support of professional ICT services. Therefore, Zurich is fertile soil for new innovative businesses, not just global companies. In addition to the accelerator and incubator services that ETH Zurich and the University of Zurich provide for academic spin-offs (e.g., ETH Transfer, Unitectra), private incubators also support the growing and lively startup scene. These include the startup factory, geographically centralized office spaces like the Technologiepark, and a plenty of opportunities for co-working at spaces like Impact Hub Zurich. The newly formed publicly funded nonprofit Innovationpark, located in a former military airport in Duebendorf, is now the flagship innovation hub for innovative technology-oriented startups in the greater Zurich region. The retired airspace hangar offers opportunities to support the development of future technologies for autonomous driving, robotics, exploratory geophysics, and modern drone-based transport technologies.

17.3

Zurich SWOT Analysis

The following SWOT analysis evaluates the resources and institutional characteristics of the Zurich region ecosystem according to their relative strengths, weaknesses, opportunities, and threats. It is not limited to indicators from resource economic activities in the narrow sense, but also includes institutional, political and social aspects. In particular, we consider different aspects of human capital, infrastructure, financial capital, legal framework and the global exposure. The sources used for the SWOT analysis are mostly publicly available policy reports.35 The objective of the SWOT table is not to provide conclusive results based on an overarching comparative analysis consistent with the other major competing regions in this book, even though that would be highly interesting. The essence of this SWOT analysis is, instead, to indicate qualitatively some Zurich’s relative strengths, weaknesses, opportunities, and threats as a regional Ecosystem.

35 European Commission (2019) Global Innovation Index, 2020; INSEAD, 2020; OECD, 2016; SERI, 2020; World Economic Forum, 2019.

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Strengths Zurich is a strong international hub for banking. It has a flourishing FinTech sector and is a pioneer in cryptocurrencies and blockchainbased investing. Zurich is a center in the cryptofinancial services industry

Weaknesses Conservative investing is the norm. Zurich has only moderate access to venture capital, especially for SMEs and startups and moderate access to venture capital in particular for SME and startups

Opportunities Financial opportunities for startups and spinoffs are increasing. The emergence and engagement of Business Angels are increasing. Cantonal investment programs have been launched (e.g., Zuercher Kantonalbank)

Linguistic and cultural diversity is a special feature, and English is very common in Switzerland as the second mostspoken language in Zurich. The city is very internationally open and has been the origin of many famous scientists, entrepreneurs, and industrial pioneers Zurich is the European technology hub of many large tech companies such as Google, IBM, Microsoft, and Disney research.

Zurich tends to be risk-averse

There is an emerging development of the entrepreneurial spirit in academia and industry. Large companies are creating their own startups and innovation incubators (e.g., Zuercher Kantonalbank)

The region has a fairly good level of digital infrastructure compared to its European neighbors, but is still too weak to compete with international innovation hot spots

Zurich is the European center for future technology development (e.g., Blockchain).

Zurich has a high degree of digital broadband coverage, (e.g., 4G).

Strong complementarities exist between digital technologies and other breakthrough technologies (e.g., biotech, health

Threats Investment support for innovative startups is too weak. Low presence of risk-tasking investments in innovative ventures. Startups and talents migrate to stronger investment locations There is a threat from political trends toward international disintegration and isolation

Breakthrough technologies invented outside Switzerland diffuse slowly because of regulations. There is a low level of investments in information and communication technologies by (continued)

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Resources

Education and skills

Institutions

Strengths High public investments support the distribution of digital infrastructure Zurich is at the top of the Global Talent Competitiveness Index due to its high-quality education system, highquality apprenticeship training, and its attractiveness to foreign labor thanks to the high quality of life and remuneration. The region offers a broad and diverse availability of highly qualified employees Zurich’s institutional system is well established, with a tradition of efficient and pragmatic development. Companies have easy and direct access to local authorities due to the decentralized government structure. The region has a functioning system of

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Weaknesses

Opportunities

Threats

sciences, geosciences, medicine)

the private sector

There is a shortage of qualified personnel in diverse disciplines

Switzerland’s successful and well-established dual vocational education and training system will be the perfect ground for future development

There is a risk that national and international access to qualified personnel might become more difficult

Political polarization is a problem in some areas, like international openness and international relations; governmental (direct) innovation support for the private sector

Switzerland’s institutions make the country faster and more flexible in adapting to new services and technologies, and drive innovation

Political misalignment between federal and cantonal public bodies with respect to far-reaching innovation projects like the Innovation Park Zurich. Switzerland may lose access to the single European market. There is a risk of the (continued)

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Resources

Legal advisers

Market and demand

Strengths international harmonization practices in many areas (e.g., patents and other intellectual property, trade) Zurich boasts an international network of legal consultants

Zurich is highly attractive for global, European or divisional headquarters. It has high and stable private and public consumption levels. The Swiss economy is highly exportoriented. Switzerland is independent and yet a central component of the European single market: Zurich guarantees access to more than 500 million consumers in Europe. Switzerland also has free trade agreements with 40 partners outside the European Union, including China,

Weaknesses

Opportunities

The crowd of advisers has no tradition of getting involved in innovation projects

The sound education and skills of advisers will pave the way for future innovation activities

There is no guarantee of market access to the EU.

The future may stimulate green markets and economies including trends toward a circular economy. Zurich combines a sound basis of technological and economic strength with strong awareness and mindset toward ecologically friendly economic activities and practices in finance and industry alike

High export orientation makes Switzerland is vulnerable to fluctuations in foreign currencies that might affect companies’ financial strength

Threats termination of harmonization of regulations with EU and other international trade bodies Compared to other innovation regions, the conservative understanding of tasks can act as a stumbling block for innovation An abundance of bilateral contracts may be required to enable market access to the European market. Exchange rate shocks also pose a threat

(continued)

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Resources

Strengths

Migration

Japan, the Republic of Korea, and Canada Zurich is an attractive workplace due to high remuneration.

Policy and strategy

Quality of living

The presence of diverse cultural groups enables social integration Policy and strategy are based on the premise of providing excellent accessibility and infrastructure, business and innovationfriendly regulations, efficient local authorities, flexible labor laws, a wealth of qualified and motivated employees from Switzerland and abroad, and, finally, an attractive tax system. Zurich has high economic, social, and political stability (e.g., few strikes) and high trust in the political and institutional system Zurich is in the top ten in the quality of living report by the EU

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Weaknesses

Opportunities

Threats

Even after decades, the local community will never regard migrants as Swiss

The quality of life and remuneration packages will attract a large international crowd in the future

Upcoming innovation regions could develop faster in gaining attractiveness for the international smart crowd

The mindset of the overall population is conservative, which hinders dynamic changes. The speed of change is growing in the digital era

Strategy development at the political level is pragmatic, which will be very helpful for unforeseeable future developments

Switzerland generally, and the Zurich region in particular, benefits from openness to international collaboration and knowledge spillovers, including participation in international innovation programs. Trends toward international isolation may risk these benefits

The housing market is expensive, with low availability

Zurich has the potential to create new standards for

It is difficult to find threats in a country with the highest quality (continued)

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Strengths

Weaknesses

Opportunities

Threats

commission.

of new apartments and houses.

sustainable living and working

of living standards. Exploding housing costs could be one of them

Labor regulations are rather weak (e.g., young families), and there is some job discrimination

Pragmatic regulation will be a boost for future developments

Underneath all the pragmatism lies the European style of “first regulation, then innovation” which may slow down dynamic changes in the future

The more the infrastructure

Intensifying the already existing

Except for the two federally

The city offers an extremely wellconnected public transport network and an exceptionally high quality of life.

Child care is expensive, and there is little support for young families in labor regulations

The city is surrounded by natural beauty and offers great opportunities for recovery, leisure, and sports. Work–life balance is prioritized.

Regulation

Research infrastructure

The region enjoys high wages and general highquality standards A flexible job market and business-friendly regulations attract innovative global companies, SMEs, and startups. Swiss authorities regulate without hindering innovation. They act pragmatically and progressively and are in constant contact with the industries concerned Zurich boasts many well-

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Zurich Innovation System

Resources

Risk capital

Tolerance and trust

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Strengths

Weaknesses

Opportunities

Threats

connected universities and research institutes. These include ETH Zurich, which is the best university in continental Europe according to the World University Ranking 2018 Due to its history as the world’s safe-deposit box, there is a lot of capital in Switzerland available for all kinds of investment The international crowd inspires all players to be tolerant with each other

the higher the reinvestment costs of keeping it up to date, which demands increasing budgets every year

close cooperation between research institutes and the private sector.

financed universities, the larger number of universities relies on cantonal budgets with the threat of changing regional political priorities

Building on the strengths in leading research in cutting-edge disciplines such as biotechnology, geo-ecological and IT

The tradition of financing is banking and not risk capital

The growing number of exciting innovation projects in the region will motivate more capital into the risk channel

The Swiss tradition is conservative, and trust is not extended to the world outside one’s own village

The top players in the region are gaining increasing international momentum, which will boost the openness—At least at a generational rhythm

Global crises will bring investments back to conservative investment strategies like real estate or low-risk funds Incidents like a pandemic can push back the opening of the traditionally more conservative Swiss mindset, hindering the development of further tolerance

Zurich Strategy and Implementation

The main strategic goals in Switzerland are set at the national level, whereas major parts of their implementation take place at the regional level (the cantonal level). The national strategy on education, research, and innovation was first presented in 2010 and was updated in July 2018.36 The magic of its power is in the professional implementation of certain agencies like Presence Switzerland, The Greater Zurich Area, or Swissnex. The branding and promotion of an image based on research and 36 https://www.sbfi.admin.ch/sbfi/en/home/services/publications/data-base-publications/int-strat egy-eri.html

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innovation success stories are giving Zurich a magnetic appeal to a highly skilled international crowd. The strategy intends to open up the region and nation for international cooperation and to make actors ready for the competition that comes with that kind of openness. Correspondingly, the first guideline of the strategy is the “continuous creation of optimal framework conditions for Swiss education, research and innovation actors to freely engage in international activities.” Comparable strategies in other regions or nations mainly focus on internal challenges before they head to international relations. In speaking to representatives from the national bodies responsible for strategy development, one can feel their humility and respect for the implementing actors— these leaders do not take themselves too seriously. This is also evident in the principles of the strategy, which state that “education, research and innovation cannot be prescribed top-down. . .that needs to be carried out bottom-up by the actors.” The canton of Zurich has issued several strategy papers on topics like ICT or e-government, but there is no dedicated strategy for research or innovation. The strategy papers more or less define the goals for internal administration procedures. In recent years, the implementation of the strategy to attract international top players in innovation has borne fruit, most notably with the expansion of the subsidiary of Google in Zurich. Increasing numbers of young and smart people from the region have been recruited by this global player, which acted like a vacuum cleaner for skilled human capital. The benefits of hosting a subsidiary of a company like Google are challenged by the pains of all the startups and SMEs who cannot compete with the salaries and fringe benefits of a multi-billion company for developers or even management staff. Other regional strategic elements also support research and innovation activities. For example, Switzerland’s fiscal institutions have been successful at keeping the overall levels of taxation and spending moderate.

17.5

Zurich Conclusions and Lessons Learned

17.5.1 Key Factors for the Regional Innovation Ecosystem The key factors of Zurich’s regional innovation ecosystem are its strong research and university systems, its strong private sector with high levels of private investments in R&D and innovation activities, and its flexible and stable innovation and labor regulations. First, Zurich’s high density of well-connected, renowned universities and research institutes provide a continuous supply of highly educated workforce in future technology fields like biotech, robotics, and information and communication. They also serve as a reputation flagship to attract global innovative companies to locate business subsidiaries in the Zurich area. However, this high-profile university and research system require continuous and high levels of public funding to avoid a potential shortage of highly educated graduates or well-trained apprentices and

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engineers. These potential threads of inadequate funding might relate more to the canton-financed Universities of Applied Sciences, as they are more sensitive to changing political priorities. A key challenge for the innovation region will be trying to intensify the already close cooperation between research institutes and the private sector. Success would offer additional potential for future value creation, innovation, and competitive advantages on the global market. A second key factor in the Zurich region concerns the private sector’s ability to invest at high levels in R&D and innovation activities. However, remaining competitive and securing future value creation and wealth will require continuous and possibly increased investments in R&D and innovation activities. The development and adoption of future frontier technologies, as well as the generation and commercialization of cutting-edge technological innovations, necessitate high levels of investment. This requirement for investment on the input side of R&D and innovation may even be strengthened by ongoing shifts in the economy, namely the digital transformation and the transition to a more sustainable and more ecologically friendly economy. Due to its history of being a safe haven for the world’s money, there are meaningful levels of capital available in Switzerland for all kinds of investment. However, the tradition of financing is banking and not risk capital. Turning this into a more risk-taking investment approach will be a challenge but also offers powerful new opportunities. A third key factor reflects regulations and the emergence of policy support activities related to innovation. Over recent years, a variety of innovation support activities (e.g., programs such as Innosuisse and Eurostars) have been initiated or intensified at the cantonal level, and more importantly at the national and international levels. These also include direct and indirect public financial support schemes for private enterprises, and general stimulation to collaborate for innovative activities. These direct and indirect innovation support schemes have been met with keen interest from the private sector. This is not surprising since financial barriers have long been listed as one of the most important barriers to innovation activities in Swiss enterprise.37 Support constitutes an important mechanism for translating innovation activities into commercial success.38 Notably, these direct and indirect innovation supports for the private sector have been proved to be efficient for Swiss enterprises.39 In particular, they help increase private level of R&D investment

37 Spescha A and Woerter M (2018) Innovation in der Schweizer Privatwirtschaft – Ergebnisse der Innovationserhebung 2018. 38 Beck M et al. (2020) Analysis of Knowledge and Technology Transfer in Switzerland – the Perspective of the Enterprises. in Forschung Und Innovation in Der Schweiz 2020 (Staatssekretariat für Bildung Forschung und Innovation SBFI, 2020), 382. 39 Beck M, Lopes-Bento C and Schenker-Wicki A (2016) Radical or Incremental: Where Does R&D Policy Hit? Research Policy 45, no. 4 (May 2016): 869–83, https://doi.org/http://ssrn.com/ abstract¼2507850

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without creating overall substitution effects, they stimulate the generation of radical innovation products, and they help increase employment.40 In recent decades, liberal, flexible, and stable political regulations have ensured general international openness. This is particularly important for securing the labor mobility of R&D workers and scientists. Labor mobility among R&D personnel is of utmost importance for Zurich as an innovation region and for its outstanding higher education and research systems. Furthermore, a flexible job market and businessfriendly regulations attract innovative global companies, SMEs, and startups alike. Regulations have also facilitated access to international EU programs for private companies and public research institutions. The key challenge will be to continuously ensure the provision of these innovation support mechanisms and regulatory conditions to the private sector. Large global innovative companies, national innovative SMEs, and newly established academic or nonacademic startups depend on having stable and supportive regulations to finance their innovative activities and depend on the provision of qualified personnel. What Are the Lessons Learned or Tools for Other Regions? In any innovation ecosystem, there are role models of knowledge generation and knowledge implementation. In Switzerland, the institutional system represents a good role model with its transparent structure and public funding that support both goals. Public money is dedicated to knowledge generation through research institutions, and provides them with a strong position and high-class infrastructure to produce scientific outcomes. However, policymakers have paid less attention to the dissemination of the knowledge and technologies generated by scientific institutions into the private economy and among private enterprises. The IPR for the implementation of newly generated knowledge has been, in large part, delegated to companies, improving their competitive position on the market. Very recently, there has been more emphasis on increasing scientific institutions’ roles in entrepreneurship. ETH Zurich has established ETH transfer, and the University of Zurich has launched Unitectra. Organizations like these are intended to support the commercialization and dissemination of scientific outcomes into society and the private sector. Following the example of US-based universities, ETH transfer has accompanied 429 spin-offs from 1973 to 2018, with a five-year survival rate of 92.9%. A subgroup of 148 analyzed spin-offs have generated market capitalization of CHF 4.8 billion. An average ETH transfer spin-off creates 30 full-time equivalent jobs, more than double the average Swiss startup. The political energy in an ecosystem is largely consumed by balancing interests between the players and stakeholders in the system. Every institution is entitled to fight for its position and for its share of public funding. Weak political structures

40

Beck M, Lopes-Bento C, Schenker-Wicki A, Beck M, Hansen J, Kaiser B, Sonne-Holm P et al. (2019) Eurostars The International Programme for Research Intensive SMEs A Joint Swiss Danish Impact Study. SERI Dossiers, 2019, https://doi.org/10.3929/ETHZ-B-000413401

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distribute their fortunes like a watering can and try not to hurt anyone too much. In other words, these political systems endeavor to avoid producing losers. But if there are no losers, there are also no winners. The Zurich region and Switzerland as a whole focus funding on two major universities. The others are also funded, but know that there is a difference in the prioritization of funding. In history, Switzerland always had a pragmatic view on conflicts: avoid them. Therefore, it was not involved in most of the regular conflicts and wars in Europe or worldwide. Ever more warring parties tried to rescue their fortunes by putting their money in Swiss banks. Since both sides had the same idea, neither had any interest in attacking the country. That genesis resulted in the current situation of Switzerland having full European market access but being able to follow its own tax regime because it is not a member of the European Union. Finally, it is the continuous competitive interplay of the abovementioned key components in this regional innovation ecosystem that constitute the foundation for generating high competitiveness and innovativeness in the private sector and public research system.