Entrepreneurial Ecosystems and Growth-Oriented Entrepreneurship

Professor Colin MasonAdam Smith Business School, University of Glasgow,Glasgow, Scotland, UK

Presentation to Workshop jointly organised by the OECD LEED Programme and The Netherland’s Ministry of Economic Affairs

The Hague, The Netherlands

7th November 2013

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1. Context: changing focus of industry policy• 1960s and 1970s: active policy

– Promoting industrial ‘champions’: sectors and companies– Regional policy

• Late 1970s/1980s– Small business policies– Technology policy

• 1990s/2000s– High growth firms (‘gazelles’)– Cross over between entrepreneurship and innovation policies

• Innovation systems• Venture capital

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continued• Current policy

– Promotion of HGFs (Scott Shane: “Encouraging more people to become entrepreneurs is bad public policy”)

• Accelerators• Innovation policy• Emphasis on transactional support: e.g. grants, tax incentives,

funding• Supporting university spin-offs

• Questioning of current policy– How effective?– How appropriate is it to provide new firms with ‘easy money’: “new

ventures must be exposed early to the rigours of the market … to ensure that entrepreneurs develop toughness and resourcefulness …” (Isenberg, 2010) 3

continued• Is relational forms of support more appropriate?

– Strategic guidance– Leadership development– Mentoring

• Entrepreneurial eco-systems– Holistic approach– Developing networks– Building new institutional capabilities– Fostering synergies between different stakeholders– Is this a more effective way to generate HGFs?

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2. HGFs – a geographical perspective• What is the geography of HGFs?• Audretsch: there is a paucity of research concerned with

the locational determinants and dynamics of HGFs• What do we know:

– HGFs can be found everywhere: in the UK “firms have been able to grow in environments which lack the range and scale of facilities and agglomeration advantages of the South East” (Vaessen and Keeble, 1995)

– HGFs in peripheral regions develop strategies to overcome the constraints of such regions (Vaessen and Wever, 1993)

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continued• Minority view: no locational effect (Davidsson, 2002)• Majority view: HGFs have a distinctive geography

– USA: analysis of INC 500 – region, state, urban levels– Mueller and Acs: using micro data - ‘gazelle regions’– Within metropolitan areas: favour suburbs and edge cities– UK: HGFs over-concentrated in SE– Canada: HGFs disproportionately concentrated in Toronto and Vancouver– The Netherlands: “there is no strong correlation between regional new firm

formation rates … and the relative number of gazelles” (Stam, 2005)– Norway: influence of oil and gas clusters (Bastesen and Varne, 2009)– Qualitative differences in nature of HGFs in different regions

• Size, sector, footprint– Distribution of HGFs cannot be explained by technology clusters, research-

oriented universities or availability of venture capital (Motoyama and Danley, 2010)

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3. Geographical Clustering of Economic Activity• Examining the clustering of economic activity is a long established

theme in economic geography and geographical economics• Is Entrepreneurial ecosystems saying anything new?

– or is it “old wine in new bottles”?• Industrial districts – Alfred Marshall – late 19th century

– Companies in similar industries benefit from agglomeration economies– Specialisation, intermediaries, reduced transport due to geographical

proximity to suppliers and customers, pool of specialised labour, collective resources (e.g. training) and supportive ‘industrial atmosphere’

– Specialised regions very evident in 19th and early 20th centuries – but now largely disappeared (exception: finance!)

– So attention focused on urbanisation economies rather than agglomeration economies

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continued• Rediscovery of Marshallian industrial districts in NE Italy

– Piore and Sabel (1984)• One-industry local production systems, each firm

specialising in one part of the production process• Drivers:

– Flexible production methods and machines to meet demand for design-intensive and customised products

– Social, cultural and institutional foundations and social practices and conventions – trust

• Demise of these regions

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continued• Regional Advantage – Saxenian (1994)

– Neo Marshallian approach to high tech clusters: Silicon Valley vs. Route 128

– Success of SV in 1980s attributed to its vertically disintegrated industrial structure and open networks

• High level of movement of engineers between firms• High level of inter-firm collaboration – formal and informal• Valley and industry based business and social gatherings• Larger firms (e.g. H-P) supported start-ups• Venture capital transferred skills and knowledge

– All of this favoured innovation and entrepreneurship

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continued• Learning perspectives: learning regions, innovative milieu,

regional collective learning, regional innovation systems– Emphasis on innovation rather than cost as the driver of

economic competitiveness– Led to an emphasis on knowledge and learning– Tacit knowledge is ‘sticky’ – so difficult to transfer over distance– Needs face-to-face contact to be transmitted – which requires

geographical proximity• Gossip• Movement of employees from company to company• Spin-off of new companies from existing businesses• Needs high level of trust and reciprocity

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continued• Clusters: “a geographically proximate group of interconnected

companies, specialised suppliers and service providers, firms in related industries and associated institutions in particular fields that compete but also collaborate” (Michael Porter)

• Clusters enhance the competitive advantage of its competitive firms:– Increasing their productivity: Superior or low cost access to inputs, access to

information and knowledge, access to institutions and public goods– Increasing their capacity for innovation: access to information and learning– Stimulating new business formation: better information about opportunities,

available suppliers, skills, staff, access to institutional support – e.g. finance– Can search out distinctive strategic positions and access to necessary capabilities

and resources• Critique: Martin and Sunley (2003 JEG)

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continued• Extensions

– Global pipelines: to access specialised information (and resources) not available locally

– Local ‘buzz’ “the information and communication ecology created by face-to-face contacts, co-presence and co-location of people and firms within the same place or region”

• Firms both benefit and contribute just be “being there” – “being there” is also necessary to make sense of the local buzz

– Untraded dependencies: “conventions, informal rules and habits that co-ordinate economic actors under conditions of uncertainty. These relations constitute region-specific assets in production ..” (Storper)

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Entrepreneurial ecosystems• Does it add to this rich intellectual body of work?• Four recent contributions[1] Brad Feld: StartUp Communities

– Draws on the case of Boulder - possibly the most entrepreneurial place in the USA

– Various themes• Place assets: university, R&D labs: “full of smart intellectually

curious people”• Culture: inclusive, “giving before you get”• Key role of a small core of entrepreneurs who invested time and

energy in creating support activities• Limited role of government – “when a start up community starts

relying on government to be a leader, bad things happen”13

continued• Boulder continued

– The “Boulder thesis”: • A critical mass of entrepreneurs have provided leadership• These entrepreneurs have taken a long-term view• Boulder’s philosophy of inclusiveness• Events which have engaged the entire entrepreneurial

community– Key participants

• Investors• Mentors• Service providers• Large companies

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continued• Role of universities is downplayed

– Main role is in attracting students (u/gs and graduate students) to enrich the talent pool

– Entrepreneurship programmes are located in the business school “which is exactly the wring place for them .. They should be juxtaposed with the students and professors creating new innovations … in engineering, computer science, life science departments ..”

– Technology transfer offices have “absurd licencing terms and overreaching, restrictive IP protection”

– Key role is as convenor of entrepreneurial activities and groups

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contribution• Culture

– Welcoming and inclusive– Give-before-you-get attitude– Positive attitude to failure– Experimentation and fail fast– Porous boundaries – “when someone leaves one company for another they

are not shunned”• What is on the ground

– Lots of organisations and events– Accelerators (“Tech Stars”)– University – events, meetings, venture challenge, alumni role– Venture capital: not essential

• Does not get companies started• Importance is as a growth accelerant – quality of the opportunity is critical

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continued• Critique

– Ethnographic or ‘Anecdotal’?– Importance of prior place assets– Based on the ‘here-and now’: so how did the cluster get started?– How do places without such place assets build start-up

communities?

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continued[ii} Ecosystems for young scalable firms (FORA)

– Ecosystems for young high growth firms differ significantly from start-up ecosystems

– Characteristics of such ecosystems• Typically built around one sector• Critical mass of dedicated investors• Key role of established businesses – spin-offs, training ground for new

graduates, partners, suppliers, possible exit opportunities• Knowledge institutions – source of skilled workers, educate service

providers, spin-offs• Service providers – to assist young firms avoid stumbling blocks• Dense networking and collaboration facilitated by high trust environment• Key role of ‘blockbuster entrepreneurship’

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continued• Critique

– Evidence base? (visits to USA?)– Much in common with prior academic studies– Link between ecosystem and high growth not demonstrated– Blockbuster entrepreneurship is a novel contribution

• Brings the ‘exit’ into the policy domain• Need to reduce small scale and premature exits

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continued[iii] The entrepreneurial ecosystem: Daniel Isenberg, Babson College

– Conducive culture– Enabling policies and leadership– Availability of appropriate finance– Quality human capital– Venture friendly markets– Institutional supports– They all react in highly complex and idiosyncratic ways

• Each ecosystem emerges under a unique set of conditions and circumstances

• Importance of ‘law of small numbers’ – spill over effect of successful entrepreneurship:– Serial entrepreneurs, angels, mentors, VCs, board members, politicians

• Role of business failures in stimulating entrepreneurship (e.g. IBM, Boulder; Nokia, Finland) 20

continued

[IV] Regional Entrepreneurship Accelerator Programme (REAP) – MIT• An assessment tool:

– People, funding, infrastructure, policy, rewards and norms, demand– Objective data to measure activity pillars– Perceptual data to measure weaknesses and strengths– Captured as spider diagram– Expert forums – summary reports– REAP team produces priority themes for action– High Level Task Forces setup to develop solutions

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4. Entrepreneurial ecosystems – a dynamic model• Critique of prior work

– The time dimension is largely ignored– Ecosystems are examined as they present themselves now– Little understanding of (a) how ecosystems come into being or (b)

their trajectories– ‘chicken and egg’ problems: e.g. finance

• If X is needed to produce Y, but will only appear after Y is established, then how does X initially emerge?

– What is the evolutionary logic of ecosystems?

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Dynamic model continued• Preconditions

– Ecosystems do not emerge just anywhere; need fertile soil– They have emerged in places that already have established and

highly regarded science base that employs significant numbers of scientists and engineers

• Generate scientific discoveries, technological advances and advancement of knowledge that provide the basis for new firms

• Talent magnets – significant proportion of successful entrepreneurs have been geographically mobile

• The research base attracts government funding

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Dynamic model continued• Trigger events: Technology and industry conditions

– Disruptive technological advances – new firm opportunities– Technology trajectories – influence demand– Technologies need development of markets

• Presence of incubator organisations (see cluster maps)– Where entrepreneurs acquire technical skills, product and market knowledge,

knowledge of appropriate structures, strategies and systems– Engineers and scientists need opportunities to gain management knowledge:

internal labour market, job move– Best incubators are technology-rich, at the cutting edge of the technology and

active in the early phases of a new industry– Employees get market exposure– Provide the motivation to start their own business – frustration, role models

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Dynamic model continued• Clustering occurs because spin-off companies locate in close

proximity to the incubator– Entrepreneurs need to use their social networks to access resources– Avoid disruption of family ties, spouse’s job– Locational preferences: many high tech ecosystems are in areas of high residential

amenity – initial role in attracting people; at the new venture stage it anchors them in the area

• Exogenous factors– Washington DC cluster emerged from downsizing of federal government in 1970s

and 1980s – ‘Critical moments’ in the history of companies – e.g. downsizing, takeover, closure– Role of INMOS in semi-conductor cluster in SW England

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Dynamic model continued• Spin-off process gathers momentum – self-reinforcing process which

creates an entrepreneurial ecosystem– Successful role models create legitimacy for entrepreneurship– Creation of role models (of the non-heroic type)– Specialist service providers emerge – business, finance, technology– Institutional emergence: incubation organisations, partnership organisations– Talent is attracted to the area– Start up finance provided locally (3Fs); venture capital is imported initially– Entrepreneurial recycling – cashed out entrepreneurs become serial

entrepreneurs, angels , VCs, mentors, board members, institution creators– Blockbuster entrepreneurship – create profile, puts the area on investor radar

screens, changes attitudes of employees • Mutation and change as technologies change

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summary• Ecosystems usually emerge where there are prior place assets• Link to places of high residential amenity (Florida’s creative class

thesis)• Need an incubator organisation – typically technology-rich• Needs a ‘spark’ – often job losses• Spin-off process develops its own momentum• Support organisations and institutions develop around these spin-offs

(including VC)• Importance of entrepreneurial recycling and blockbuster

entrepreneurship• Time scale

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Policy issues• Implications

– Can policy-makers put in place the initial conditions for an ecosystem to emerge? Can something be built out of nothing? Are they (or their political masters) sufficiently patient?

– Can policy-makers stimulate the spin-off process?– Better to build on existing and emerging clusters– Geographical scale? Ecosystems are local/regional– Framework conditions still matter – e.g. tax, financial regulation,

stock markets, immigration– Promoting entrepreneurial ecosystems will create spatial

inequalities : (i) preconditions means such places have prior advantages: (ii) success will create virtuous circle

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Policy approaches: a typologyfocus examples

Entrepreneurial actors in ecosystems • Business acceleration programmes• Business accelerators•Time-bounded support (trigger points)• Talent attraction

Entrepreneurial organisations in ecosystems

• Business angels, venture capital, banks, service providers, universities

Entrepreneurial connections in ecosystems

• Partnerships• Alliances• Peer-to-peer learning• ‘Pipelines’

Entrepreneurial orientation in ecosystems

• Entrepreneurship education• Role models/peer-to-peer networking• Entrepreneurial recycling

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