The IPL newsletter: Volume 18, Issue 369

Impact and Effectiveness of Public Support for Business Innovation

David A. Wolfe, Innovation Policy Lab, University of Toronto
As the 21st century unfolds, there is a growing recognition that the competitive global landscape is altering the context within which government support for innovation programs should be assessed. The primary justification for this area of public policy is the widespread recognition of the link between innovation and productivity growth and its impact on future income levels. Technological advance, broadly construed, is the most important source of productivity growth; but recent evidence suggests that those advances are concentrated among the leading firms in more technologically innovative sectors, while both lagging firms and sectors that experience a lower rate of productivity growth tend to reduce average productivity levels across the entire economy. The changing dynamics of innovation in the 21st century accentuates the need for a clearer understanding of what the current state of research tells us about the design, implementation and effectiveness of business innovation policies. This report explores a number of conceptual and policy design issues that are relevant for an understanding of these issues within the federal government. It provides an overview of some of the relevant conceptual frameworks used in leading industrial economies, as well as some that have experienced more rapid innovation-based (RIB) economic development. It provides an introduction to recent thinking in the academic and policy relevant literature on the nature of these design issues and summarizes some of the insights and findings of recent reviews that have been undertaken on program impacts. It is intended to be a high level review of the current state of thinking on these issues.

Global Startup Ecosystem Report 2017

Startup Genome
The mission of the Global Entrepreneurship Network (GEN) is to help build one entrepreneurial ecosystem. People are mobile, ideas fly around the world, and capital moves rapidly across borders. Entrepreneurs no longer need to be constrained by geographic boundaries: startups in Africa working on global problems will seek connections with startups in Europe and the United States. Venture capitalists have followed this pattern, expanding their global investment portfolio over the past two decades.Yet we have lacked ways to fully capture the globalization of start-ups and the progress of the global entrepreneurial ecosystem. And, while we have evidence-based insights about the DNA of specific innovation hubs such as London, New York, and Silicon Valley, we have not understood what works in helping smaller ecosystems accelerate their growth and increase their performance. Until now. This report is a leap forward in our understanding of startup ecosystems and the global network of capital and connections that drive them. It also provides advanced analysis of the specific drivers of startup ecosystems, based on survey responses from thousands of technology startups from around the world.

RAPID TECHNOLOGY GROWTH

By any measure, the global technology sector has been growing rapidly, outdistancing most other economic sectors over a sustained period of time. Projections indicate that this growth will continue at its current rate and perhaps even increase. Global gross domestic product today is around $100 trillion. The technology sector (information and communications technology) is roughly 4.5 percent of that, compared to only 2 percent in 1992. If the pace continues at current growth rates, then the tech sector will be 8 percent of global GDP within the next 15 to 20 years. Global growth, meanwhile, is projected to be about 2.6 percent, which means that the tech sector is growing twice as fast as the global economy.3 Long-term growth rates, however, give short shrift to the economic dominance of the technology sector:

• Technology is one of the few sectors worldwide where the return on equity for public companies has increased.
• Ten years ago, technology companies accounted for 17 percent of the foreign earnings of American multinationals. Today, this number is 46 percent.
• Technology companies now lead the rankings of largest public companies.

On any given day, depending on the stock market’s gyrations, technology companies may occupy the five top spots in the world in terms of market capitalization. These numbers arguably understate the magnitude of the trends. When even old-line industrial corporations such as Boeing, Ford, General Electric, and John Deere are turning large parts of their businesses into software as a service (SaaS) offerings, it dramatically illustrates Marc Andreessen’s “software is eating the world” idea. Many technological advances, moreover, are excluded from official economic statistics. Since the advent of smartphones, for example, sales of cameras have plummeted. Yet this is calculated as a decline in GDP because the inclusion (and improvement) of cameras in smartphones is not captured in economic data. Similar effects are true for a wide variety of technological change.

Trillions of dollars in economic value is being created by the technology sector, with much of that growth driven by startups. This is good news. Areas of the economy with greater use of information technology enjoy faster employment growth than those that have slower adoption.4 Technology creates more jobs than it displaces overall, and advances such as artificial intelligence will improve living standards in many ways. Yet the technological payoff is not uniform. For this major engine of the world economy, with trillions of dollars in wealth—and much of it created by startups—only a handful of regions around the world are capturing these benefits.

TECHNOLOGY’S BENEFITS ARE CONCENTRATED

1. Divergence between regions. For many decades, the economic fortunes of different places— across and within countries—converged pretty steadily. In recent years that steady convergence turned into accelerated divergence instead: metropolitan areas have increasingly outperformed non-metro areas. However, new research suggests a divergence among seemingly successful American cities—places like San Francisco, New York City, and Boston have outpaced other cities. This divergence helps explain sluggish global growth. The Great Recession nominally ended in mid-2009, but the subsequent expansion has been comparatively weak by historical standards. More broadly, new business creation (across all types of firms, not just tech startups) has become increasingly concentrated. From 2010 to 2014, five American metro areas had the same level of business creation as the entire rest of the country. This divergence is driven by tech companies. Comparing the performance of the five largest public tech companies in four U.S. cities that are among our top 10 startup ecosystems, with that of the five largest public non-tech companies in other American cities, there is a marked difference. The speed at which large tech companies create wealth (as measured by their market capitalization growth rate) has been nearly three times higher than for non-tech companies since 2012. As a result, cities leading the global tech startup revolution, such as Silicon Valley, Seattle, New York City, and Boston have experienced much faster growth in this key resource than Philadelphia, Houston, Denver, and Atlanta. These four cities also have growing tech startup ecosystems, but ones that are not nearly as effective at creating unicorns and large tech winners.
2. Concentration of startup ecosystem value. The effects of this concentration among startup ecosystems are evident in the global distribution of Ecosystem Value and Exit Values. Within the tech sector, companies reliant on network effects have outpaced their competitors—these “category kings” are growing faster and larger than all other public companies, thus capturing a bigger slice of market value. Based on data compiled by Battery Ventures, these roughly three dozen companies account for around one-fifth of the entire global market value of software companies. Among top ecosystems, there is a decided skew in where these “category kings” are located. Five ecosystems (Silicon Valley, New York City, Beijing, Seattle, and Shanghai) account for 49 percent of the market value of these dominant public companies. The skew will be exacerbated in coming years as most of the leading technology companies in the IPO pipeline (such as Uber and Airbnb) are based in California. The upshot is that, while the technology sector is growing twice as fast as the world economy and transforming all types of different industries, the vast majority of that wealth creation is concentrated in only a handful of places. Without attending to creating a strong startup ecosystem, the slice of global technology and economic returns that is captured by other regions will fall.
3. Technical inequality between workers. The global technology sector is on its way to doubling its share of world GDP within the next two decades, with trillions of dollars in economic value being added by the expansion of software innovation. Much of that increase is driven by tech startups. Yet if current concentration levels persist, 80 percent or more of the value created by the tech sector will accrue to only a few cities in only a handful of countries. Concerns about what technological growth means for individual workers are high. It’s commonly thought that 47 percent of occupations in the United States are susceptible to automation. Already, technology-fueled job creation in the United States has been mostly concentrated among high-wage workers, worsening labor market polarization. Emerging markets look to be worse off: at current projections, 60 to 80 percent of jobs in China, Thailand, Argentina, and South Africa, among others, are threatened by automation. Some countries, in fact, are experiencing “premature de-industrialization,” wherein they shed manufacturing jobs before fully developing industrial economies. The twin forces of increasing automation and de-industrialization mean serious economic difficulty for many countries.

FOCUS ON STARTUP ECOSYSTEMS

In his landmark book, Startup Communities, Brad Feld posited that it takes about 20 years for a vibrant entrepreneurial ecosystem to develop in a city or region. This is a good estimate. In New York City, where a vibrant startup ecosystem has coalesced in the last few years, the seeds were planted at least two decades ago. Building on prior efforts, Israel and Singapore implemented innovative and aggressive policies in the 1990s to spur the growth of their startup ecosystems. In Israel, Tel Aviv has been a top-performing startup ecosystem for several years, and in our 2017 rankings, Jerusalem was a close runner-up, scoring strong in Talent and Market Reach. Singapore appeared in the top 10 ranking for the first time in 2015 (though it fell slightly to 12th in the current ranking). Over the next 15 years, global economic value from technological change will double. But, because it takes roughly 20 years for a thriving startup ecosystems to develop, aggressive investments are needed urgently, or else more places will miss out on that wealth creation. The world needs more vibrant startup ecosystems to be part of the global circulation of innovation. This can be done by working together to build a more distributed global startup ecosystem. We know this is possible because a handful of places have successfully taken steps to foster thriving startup ecosystems. Applying the knowledge and lessons from those places, adapting them to different contexts and local strengths and weaknesses, and investing scarce resources in the right way can create more startup ecosystems in more places.