Investing in Comparative AdvantageScott Stern

Role of Innovation & Entrepreneurship in Competitiveness and Regional Economic Performance

12 November 2014

Investing in Comparative Advantage

Scott Stern

MIT and NBER

2

Field of Dreams…

3

Some leading thinkers such a Richard Florida seem to imply that regions are engaged in a war for talent and the creative class to be the “next” Silicon Valley

4

With many “Silicon Xs” strategies being implemented around the world….

5

“…we don’t want 50 Silicon Valleys; we want 50 different variations of Silicon Valley, all unique from each other and all focusing on different domains.”

Marc Andreesen, 2014

6

If we are not trying

to become the

“next” Silicon

Valley, what are we

trying to become?

How can we leverage

innovation-driven

entrepreneurship within

clusters to accelerate

economic performance and

social progress?

What is the relationship

between cluster-led

economic development

and a focus on

innovation-driven

entrepreneurship?

How can we invest in our entrepreneurial comparative

advantage?

• Innovation-Driven Entrepreneurial Ecosystems

• IDE Ecosystems and Regional Economic Strategy

• Investing in Entrepreneurial Comparative Advantage

10

MIT REAP Framework

System

StakeholderStrategy

11

REAP IDE Ecosystem Framework

12

E-CapI-Cap Linkages

IDE Framework

13

E-Capacity

Ability to start and build new to

the world businesses from

inception to maturity.

Strong I-Cap:

Universities, Central R&D,

Network of researchers,

Medical Centers

Strong E-Cap:

Entrepreneurs, Mentors,

Founding Teams

Investors at all stages

I-Capacity

Ability to develop new to the

world innovations from inception

through to the market.

Innovative Capacity & Entrepreneurial

Capacity Are Distinct Regional Assets

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SingaporeNorway

Switzerland

Hong Kong

United States

Netherlands

Ireland

AustriaDenmark

Sweden

Australia

Germany

Canada

Belgium

Finland

Iceland

France

United Kingdom

Japan

Italy

Spain

New Zealand

Israel

Korea

Czech Republic

Slovakia

34

56

78

9

Log

Pa

tent

App

lica

tion

(PC

T)

per

1 m

il p

eop

le

-1 0 1 2 3Log New Firm Formation per 1000 people

Data source: World Bank

Top 30 GDP per capita countries, 2011

Patent Application vs. New Firm Formation

Innovation and Entrepreneurship are Related but Different

15

Innovative Capacity and Entrepreneurial Capacity

Reflect Distinct Investments, Policy and Norms

I-Capacity

PERFORMANCE

PEOPLE

FUNDING

INFRASTRUCTURE

POLICY

CULTURE &

COMMUNITY

DEMAND

Entrepreneurship output (new firms & growth)

Pool of entrepreneurs

Quality of entrepreneurial education

Accessibility of entrepreneurial capital

(government, private, equity, debt, grants)

Physical infrastructure (space, transportation)

Availability of key services (internet, training)

Clear rules on new business creation

Clear rules on business operations and growth

Culture of entrepreneurialism and failure

Societal support, ties and recognition

Government, corporate and consumer demand for

new products and services

Innovation output (patents and papers)

Pool of innovators

Education in tech and ommercialization

Funding for research

Government programs

Physical infrastructure

Example: hi speed internet

Clear rules around patents

Clear support for STEM education

Celebration of invention and innovation

-Rewards to innovation – tenure process

Nature of established companies in region

E-Capacity

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Assessing Innovative Capacity

I-Capacity

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0

50

100

150

200

250

300

-10% -5% 0% 5% 10% 15% 20% 25% 30%

–Source: USPTO (2008), EIU (2008)

Average U.S. patents per 1 million population, 2006-2008

CAGR of US-registered patents, 1998 to 2008

Not simply a matter of variation in the level of realized

innovation performance…

–Hong Kong

–Germany

–Canada

–Norway

–Belgium

–Netherlands

–Taiwan

–India

–France

–Israel

–Spain

–Sweden

–Finland

–China

–United States

–Singapore–Denmark

–Italy

–Australia

–Switzerland

–UK

–South Korea

10,000 patents =

–Austria

–South Africa

–Japan

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Innovative Capacity Reflects the Distinct Investments,

Resources, Institutions and Policies of a Region

I-Capacity

PERFORMANCE

PEOPLE

FUNDING

INFRASTRUCTURE

POLICY

CULTURE &

COMMUNITY

DEMAND

Innovation output (patents and papers)

Pool of innovators

Education in tech and ommercialization

Funding for research

Government programs

Physical infrastructure

Example: hi speed internet

Clear rules around patents

Clear support for STEM education

Celebration of invention and innovation

-Rewards to innovation – tenure process

Nature of established companies in region

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Taiwan:

Innovation Island

20Taipei, 1960

21

Taiwanese Innovation Leadership Reflects Significant

Investment Over Time in People and Resources

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000 2001 2002 2003 2004 2005 2006 2007

Researchers /1,000 Employees

OECD

average,

2006

Source: National Science Council, R.O.C., Indicators of Science and Technology, Taiwan, 2008; OECD Science, Technology, and Industry Scoreboard 2009.

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As well as systematic long-term investment in institutions

supporting world-class innovation

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Innovative Capacity Indices that weight framework conditions rather than

outputs are now a common benchmarking tool for nations and countries

(Porter and Stern, 1998)

-20

30

80

130

180

230

Figure 3-2 The Innovation Index for Selected Countries

Australia

Denmark

France

Germany

Italy

Japan

Ireland

S Korea

Sweden

Switzerland

UK

USA

The REAP IDE Ecosystem Framework

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E-CapI-Cap Linkages

IDE Framework

Globally impactful innovation is grounded in strong innovative capacity

25

Assessing Entrepreneurial Capacity

E-Capacity

While the entrepreneurship rate (# of registered businesses / cap)

tends to increase with GDP/cap, this rate is highly variable, even for

countries at similar stages of economic development

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Singapore

Norway

Switzerland

United States

NetherlandsIreland

Austria

Denmark

Sweden

Australia

GermanyCanada

BelgiumFinland

Iceland

France

United Kingdom

Japan

ItalySpain

New Zealand

Israel

Korea

Czech Republic

SlovakiaRussian Federation

Hungary

MalaysiaCroatia

Chile

Latvia

Turkey

Uruguay

Romania

AzerbaijanMexico

Bulgaria

Brazil

ThailandAlgeria

South Africa

Macedonia

SerbiaColombia

JordanTunisia

Jamaica

Indonesia

UkraineSri LankaGuatemala

ArmeniaArgentina

Georgia

PhilippinesIndiaPakistan

KyrgystanZambia

BangladeshTajikistan05

1015

Ne

w F

irm F

orm

atio

n pe

r 10

00 p

eopl

e

0 20000 40000 60000 80000 100000GDP Per Capita, PPP Adjusted

Data source: World Bank

World Bank, 2011

New Firm Formation Versus GDP per Capita

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Similar to Innovative Capacity, Entrepreneurial Capacity

Reflects Distinct Investments, Policy and Norms

PERFORMANCE

PEOPLE

FUNDING

INFRASTRUCTURE

POLICY

CULTURE &

COMMUNITY

DEMAND

Entrepreneurship output (new firms & growth)

Pool of entrepreneurs

Quality of entrepreneurial education

Accessibility of entrepreneurial capital

(government, private, equity, debt, grants)

Physical infrastructure (space, transportation)

Availability of key services (internet, training)

Clear rules on new business creation

Clear rules on business operations and growth

Culture of entrepreneurialism and failure

Societal support, ties and recognition

Government, corporate and consumer demand for

new products and services

E-Capacity

Significant evidence that variation across countries due to the

ease of “Doing Business” and “Starting Business”

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CountryEase of Doing Business Rank

Singapore 1

New Zealand 2

Hong Kong SAR, China 3

Denmark 4

Korea, Rep. 5

Norway 6United States 7

United Kingdom 8

Finland 9

Australia 10

CountryStarting a

Business RankNew Zealand 1

Canada 2

Macedonia, FYR 3

Armenia 4

Georgia 5

Singapore 6

Australia 7

Hong Kong SAR, China 8

… …

Norway 22

Drawn from World Bank Doing Business Indicators

Murray, Moon and Stern (2014) documents the distinct and

separable roles of entrepreneurial resources (people, $),

entrepreneurial policy (Doing Business, etc), economic

development, and cluster strength

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Assessing Country-Level Entrepreneurial Capacity

Dep Var = Number of New Businesses (1)

Entrepreneurial Resources0.506*(0.243)

Entrepreneurial Environment0.524*(0.158)

VARIOUS CONTROLS

R-Squared 0.724

From Entrepreneurial Quantity to Entrepreneurial Quality

• As part of the MIT Regional Entrepreneurship AccelerationProgram, the need for a step change to measure the quality ofstart-ups within a region, on a real-time basis and at anarbitrary level of generality

• We combine “big data” (using comprehensive businessregistration records) with a predictive algorithm that assessesthe likelihood of a meaningful growth outcome (e.g., IPO or high-value acquisition) based on observables available at the time ofincorporation (e.g., firm name, patents and copyrights, etc)

• Allows for a novel characterization of start-ups within clusters,and allows for granular evaluation of IDE ecosystems

Source: Guzman and Stern, 2014, “Where is Silicon Valley?” Working Paper 30

Where is Silicon Valley?

Using complete CA business registration records, and novel algorithm to predict start-upsuccess, Guzman and Stern (2014) develop a nowcasting algorithm for Silicon Valley

While per capita start-up quantity is similar in Los Angeles, a much lower

level of entrepreneurial quality than the heart of Silicon Valley

The REAP IDE Ecosystem Framework

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E-CapI-Cap Linkages

IDE Framework

Globally impactful innovation is grounded in strong innovative capacity

With enhanced conceptual and empirical clarity, a close connection between entrepreneurial outcomes and entrepreneurial capacity.

The third pillar of the IDE Ecosystem is the role of

clusters that enhance opportunities for innovation

and entrepreneurship and define the

entrepreneurial comparative advantage of regions

E-CapI-Cap

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Clusters Are Everywhere

A cluster is a regional concentration of

related industries connected through

various types of linkages and spillovers

and supporting institutions

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Motion Pictures – LA Semiconductors - Taiwan

Fashion & Textiles -

Milan

Video Games -

Finland

Do Clusters Matter?

• Cluster theory suggests agglomeration arisesacross related economic units (Porter, 1990,1998, 2003)

• Our Approach: If clusters matter, then the growth of anindustry in a region will be increasing in the strength of theregional cluster within which that industry operates

• Cluster-driven agglomeration could arise in different channels:– Across related industries Within a Cluster, – Across Related Clusters– Across the Same Cluster in Neighboring Regions

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Do Clusters Matter for IDE Ecosystems?

Note: Average Region-Industry Annualized Employment Growth over 1990-2005. Region (EA) and Industry (4-digit SIC).

N=55083. Cluster specialization variable is measured by Location Quotient. High means above the median of the variables.

INDUSTRY SPECIALIZATION

Low High

CLUSTER

SPECIALIZATION

Strength of Regional

Clusters (presence of

related industries)

Low +13% 0%

High +20% +1%

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Clusters and Jobs

• Industries within stronger clusters are associated with higher levels of job growth from the early 1990s to the mid-2000s

• We test the role of clusters by estimating region-industry employment growth over 1990-2005 as a function of the initial Industry Specialization and Cluster Specialization(outside the industry) in a region, and a set of region and industry fixed effects

Clusters and the IDE Ecosystem

– Industries that are part of a strong cluster environment register

• higher level, growth and sustainability of start-up activity

• higher level and impact of innovation

Level, Growth,

and Surivability of Start-ups

Level and Impact of Innovation

Source: Delgado/Porter/Stern, Clusters and Entrepreneurship, Journal of Economic Geography, 2010

CLUSTER

ENVIRONMENT

Within a Cluster

Related Clusters

Neighboring Clusters

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Clusters Matter

• Positive effects of clusters on various facets of regionalindustry and regional performance

– No measured trade-offs across multiple performancedimensions

• Clusters matter at multiples levels of geography

• Clusters faciliate related economic diversification in regions

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Clusters and Regional Identity

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The REAP IDE Ecosystem Framework

42

E-CapI-Cap Linkages

IDE Framework

Globally impactful innovation is grounded in strong innovative capacity

With enhanced conceptual clarity, a close connection between entrepreneurial outcomes and entrepreneurial capacity.

Clusters are the fulcrum around which a region realizes the potential from its innovative and entrepreneurial capacity. Clusters shape the potential to develop and commercialize new technology and scale new businesses for global impact.

Innovation-Driven Entrepreneurship and a New

Economic Strategy for the High North

• Clusters and Innovation-Driven Entrepreneurial Ecosystems

• IDE Ecosystems and Regional Economic Strategy

• Towards an IDE-Driven Economic Strategy for the High North

What role does regional strategy and stakeholder

engagement play in shaping the growth and evolution of

your IDE Ecosystem?

Regional Economic Development: Prevailing Approaches

“Open for

Business”

Improve the

general

business

environment

“The Next Big

Thing”

Enter new high

tech/ high

growth

industries

“Big Game

Hunting”

Compete

aggressively for

plants and new

investments

• Attempt to match peers’ policies

• Long lists of areas to improve

but limited progress

• Table stakes

“Build it and

They Will

Come”

Invest in large

infrastructure/

industrial zone

projects

• Zero Sum

• “Winner’s curse”

• High cost, low return unless

underlying weaknesses addressed

• Neglects existing base

• Many competing for the same

industries – e.g. biotech, ‘creative

class’

• Very few regions have the assets

to succeed in them

• Rarely offer advantage versus

other regions

• Generic infrastructure will

not offset skill gaps, weaknesses, absence of related

businesses

Regional Value Proposition

What is the distinctive competitive position of a

geographic area given its location, legacy, existing and

potential strengths?

Develop Unique Strengths

What do we do that is different or that

provides sustainable competitiveness in

international markets?

Achieve and Maintain Parity with Peers

What weaknesses must be addressed to

remove key constraints and achieve parity

with peer locations?

A Move Towards Regional Economic Strategy

Policy Improvement

• Implementing best practice in each policy area

• A huge number of policy areas matter

• No region should try to make progress in all areas simultaneously

• Often divorced from private sector concerns

A Regional Economic Strategy is Not Just

“Good Policy”

Regional Economic

Strategy

• A prioritized agenda to create a

unique position, based on its

particular circumstances

• Collaborative effort of across

stakeholders

• Leveraging regional strengths

through innovation and

entrepreneurship

This means making hard choices…

About what to do and what NOT

to do!

Your Region’s

Foundational

Competitiveness

Your Region’s Cost Structure

HIGH LOW

HIGH

LOW

Inside Productivity Frontier

Possible to Improve through

Isolated Policy Improvement

Or Simply Cost Reduction

The Regional Strategy Frontier

At the Frontier

Seeking to Achieve the Frontier

And Improve Foundational

Competitiveness

Your Region’s

Foundational

Competitiveness

Your Region’s Cost Structure

HIGH LOW

HIGH

LOW

Traditional Economic Policy: Competing Through

Devaluation

Your Region’s

Foundational

Competitiveness

Your Region’s Cost Structure

HIGH LOW

HIGH

LOW

Traditional Economic Policy:

The Washington Consensus

Your Region’s

Foundational

Competitiveness

Your Region’s Cost Structure

HIGH LOW

HIGH

LOW

Innovation-Based

Entrepreneurship

Accelerates the

Ability to Reach a

New Frontier

An IDE Ecosystem Strategy

Innovation Shifts

Out

the Regional

Strategy Frontier

Your Region’s

Foundational

Competitiveness

Your Region’s Cost Structure

HIGH LOW

HIGH

LOW

Clusters & Linkages

Allow Regions to

Focus / Prioritize

Innovation and

Entrepreneurhsip on

their Comparative

Advantage to

An IDE Ecosystem Strategy

Towards the Innovative

Cities Program…

IDE Ecosystem Strategy

REGIONAL OBJECTIVE

• What does the region want to

accomplish?

• Why is IDE crucial?

REGIONAL CAPABILITIES

• What are our iCap & eCap levels?

Key clusters? Ecosystem linkages?

• Who is responsible for building

missing components?

REGIONAL SCOPE

• What are the regional priorities?

• How do we prioritize innovators and

entrepreneurs?

• On which cluster do we focus? (Do

not “pick winners”)

REGIONAL POSITIONING

• How will upgrading IDE ecosystem

impact international

competitiveness?

• How can an IDE-based, regional

identity be established?

ACCELERATORS COMPETITIONS

SPACES

NETWORKS & MENTORING

Strategy Realization: Choosing &

Implementing Strategic Interventions

59

COMMERCIALIZATION

PROGRAMS

CROWDFUNDING

INITIATIVES

Strategy and Entrepreneurial Comparative Advantage

• IDE Ecosystem-led growth is different from traditional economic development approaches

• Rather than competing directly with other regions for resources and markets, entrepreneurial comparative advantage leverages those factors that make your region unique and distinct

• There are several potential areas to leverage– Unique clusters and economic structure– Distinctive elements of innovative and entrepreneurial capacity– Rich social networks and ties both within the region and to other

regions– Advantageous programs and policies

• When each region leverages its unique elements in raising their competitiveness, that provides a rationale for increased trade and exchange among regions, thus upgrading all regions in the process

Your IDE Ecosystem Strategy is…

Investing in Your Entrepreneurial Comparative Advantage

IDE Ecosystem Strategy Must be Shaped and Realized through Stakeholder Engagement

62

This approach helped bring a much more diverse range of stakeholders together for the first time throughout Scotland

What is the First Must-Win Battle?

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NEW ZEALAND Wynyard Quarter Innovation Precinct

It will provide the focus, resources, connections and opportunities to launch successful IDE enterprises for success on the global stage. New Zealand REAP is committed to the Maori spirit of Kotahitanga: being highly collaborative and being highly transparent and therefore works closely with government agencies to achieve their goals.

REAP Goal: developing New Zealand into the innovation hub of the Asia-Pacific rim.

“The innovation precinct will be an ICT and digital media hub that brings together innovative entrepreneurs and multi-national companies, as well as research and development-intensive organizations.“ ATEED Auckland

Some Parting Thoughts

• Rather than focusing on a “race” over a scarce resource (the creative class, individual plants, domination of the “next big thing”), regions need to invest in their comparative advantage

• Regional strategy involves prioritizing those areas of economic development that simultaneously leverage their current relative strengths while offering rich opportunities for innovation and entrepreneurship.

• Not simply aspirational, stakeholder engagement that begins with a clear-eyed assessment of the strengths and weaknesses of the IDE ecosystem can serve to catalyze collective action around a set of shared regional priorities and serve as the basis for sustainable IDE Ecosystem Acceleration.

Let’s get started!!

Thank you!!

67 #MITREAP

sstern@mit.edu

www.scott-stern.com