Innovation Ecosystem: Where statups thrive

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For long US has dominated in innovation for obvious reasons: best institutes, tech giants, government policies, start-ups, and easily available funding.  Presence of Silicon Valley in US has led the economy growth of country and attracted best talents from world.  Companies based in Silicon Valley benefit from the system coopetition.  Many global companies from Silicon Valley have centres in many countries, they have acquired companies, and they have partnership with many companies.  Following the success of Silicon Valley, many clusters of innovation, made of Policy-makers, established organisations, and start-ups, emerged that are similar to Silicon Valley but are unique in their own sense.  Ecosystems are not bound to technology or boundaries and are open, as agents and networks keeps on changing.  Innovation and collaborative ecosystem have become a need organisations, government, and industries.

Every year since 2005, Strategy& has conducted the Global Innovation 1000 study, which investigates the relationship between how much companies spend on R&D and what their overall financial performance is[1]; insights gathered from report suggest, how innovation ecosystem is centred in specific regions of world.  All top five Most Innovative Companies in the report are from same country, United States, and four out of top six Top R&D Spenders are from United States[2].  R&D is undergoing transformation, in past few years, as companies strengthen their software and service offerings.  The transformation is driven by improvement in software, growing use of embedded sensors, cloud based data storage, and rising customer expectations. The sectors in which R&D spending is growing rapidly – healthcare and internet – are heavily weighted to companies headquartered in North America (see Exhibit 1).  Companies based in most developed economy (in US) are retaining their significant lead in investment in R&D. For the past seven years, Apple and Alphabet (both based in US) are voted the most innovative companies, 3M and Tesla (also based in US) have been rising, and other US companies (Amazon, IBM, and Microsoft) maintain their position in top ten (see Exhibit 2). Traditional research and development approaches, such as stage-gate development for products and technology, remain valid, but more innovative approaches such as open innovation models, design thinking, agile methodologies, co-creation, and in-company incubators are becoming more important as portfolios change (Jaruzelski, Staack, & Shinozaki, 2016).
Most of the top innovative companies from US are based in Silicon Valley, southern portion of San Francisco Bay Area, and they are technology companies.  Few tech companies (Apple, Microsoft, and Alphabet) from Silicon Valley are among top in the list of Companies with the largest cash piles[3]. The cash rich tech companies and innovation culture along with talented workforce make Silicon Valley ecosystem, world’s centre or innovation and technology.
Organisations in Silicon Valley are imbricated in that system that they interact with, shape it, and are shaped by.  The industry, local context, and national legislative context combined create a contextual complexity of Silicon Valley. Contextual complexity once understood, it becomes competitive advantage because it is unique and can’t be copied (because of inherent complexities, uncertainties, ambiguous, and adaptive).  Silicon Valley can’t be copied[4].
Entrepreneurial mindset, access to skilled labour, proximity to customers and competitors, weather, and universities are top strengths of Silicon Valley, but success of the ecosystem such as Silicon Valley, depends not only on continuous innovation and stellar products, but also on a rich environment (Best schools, Affordable housing, Fluid transportation, and Government support) to support the businesses that provide them[5]
Following Silicon Valley, many technological hubs have developed in recent years such as FinTech’s in New York and London, Security in Tel Aviv, Health in Austin, and Start-ups around world from Cambridge to Bangalore.  These technological (or innovation) hubs are created after learning lessons from Silicon Valley and creating a cluster of innovation that is unique in its own sense.  All innovation hubs are different and they are tailored to the context (country, culture, society) in which they originate and exist.  
The geographic footprint for innovation is changing as R&D becomes global.  The companies are shifting their innovation spending to countries in which sales and manufacturing is increasing and right access to technical talent; therefore, innovation spending is increasing in India and China[6].  The innovators from all industries are shifting their focus of R&D from products to programming[7]. Digital start-ups are mushrooming in every industry and in every market and similarly Digital Giants.
In a slightly bigger context, Innovation ecosystem can expand to city or state in which many loosely coupled agents cooperate and compete.  Massachusetts is innovation ecosystem and an economy and a top destination for technology companies, entrepreneurs, incubators, scientists and others, to conduct business, innovate new ideas and launch products[8].
Dr. Deborah Jackson authored a white paper[9] that described an innovation ecosystem models the economy and is believed to be fundamental source of wealth generation. The actors in an innovation ecosystem are materials (funds, facilities, etc.), humans, and institutes (universities, Venture Capitalists, policy makers, etc.).  An important aspect of innovation ecosystem is balance of resources for research economy (R&D) and resources for commercial economy (marketplace), and efficient translation of innovations from research economy to commercial sector.  Entities within the ecosystem can be geographically localized (such as Silicon Valley) or strategically linked to develop a specific technology (such as link between Silicon Valley and Bangalore, India).  At one end of innovation spectrum is heavy government investment (institutes, policies, and support) for research and at the other end higher industry investments for product development and commercial success, but in between lies valley of death, in which many innovations die.  Surviving the valley of death depends on the robustness of collaboration among agents – consultancies, conferences, and so on (Jackson, 2015)
Focus of the report “Collaborative Innovation Transforming Business, Driving Growth”[10], part of World Economic Forum’s work on Enhancing European Competitiveness is to find new forms on innovation and overcome two challenges: first, young firms face wide range of challenges and barriers to scale their ideas, and second, tradition in-house R&D models of large firms is not so good at creating disruptive products and entirely new markets.  Based on extensive firm-level research and interviews with policy makers, report proposes a robust and promising approach for innovation: collaboration between young dynamic firms and established businesses to create value that spans from firms to customers to economies.  Report also emphasises the increased responsibilities of policy makers and political leaders in fostering collaborative innovation, supportive regulations, raising awareness and networking, and skills support.  
Collaborative innovation is the next big idea that needs to shape up with actionable items, allowing players across the value chains to participate in the emergence of new collaborative business models.” - Mark Esposito, Professor of Business and Economics, Harvard University Extension School, Grenoble Ecole de Management

Collaborative Innovation

Collaborative Innovation between young and established firms is sensitive and unique. The capabilities and challenges of young and established firms are different. 

The report “Collaborative Innovation Transforming Business, Driving Growth” from World Economic Forum proposes Collaborative Innovation as a 3-step process: Prepare, Partner, and Pioneer.  
Image Source: World Economic Forum (2015). "Collaborative Innovation Transforming Business, Driving Growth."

The role of Policy makers in Collaborative Innovation is very crucial in order to attract Venture Capitalists and Angel Investors from around world.  The Policy makers should give clear signal of government commitment, strategy to support collaboration, supportive legal and regulatory frameworks, infrastructure, and opportunities in innovation.  The report provides more details on three strategies taken by policy-makers: Empower, Educate, and Enable[11].   Joint Venture of Takeover’s are not only options for partnership, instead procurement (Incubator and Accelerator), project specific partnership (partnering with non-disclosure), and Equity investments are more popular approaches.  Young firms need security and freedom but established firms need more control and a balanced partnership that creates value for both is solution.  Partnership can be one of the four types: Smart procurement, Collaborative Innovation project, Smart direct investment, Strategic partnership, or Joint Venture.


Both young and established firms are embracing this form of collaboration.  Young firms (Start-ups) are able to scale and Established firms (Incumbents) get innovations.
 “More and more large organizations are learning to work with innovative start-ups, and it is clear that corporates are now much better connected in this regard than a decade ago. Those who create such links derive strategic value as they tap into an efficient and growing reservoir of ideas and technologies.” - Luis Alvarez, Chief Executive Officer, Global Services, BT

Conclusion

The success of Silicon Valley is inspiring to many governments and they have taken initiatives to set a creative environment by facilitating the venture capitalists (even from outside country) to invest in the potential start-ups. One of the barriers of growth for young businesses is funding that is solved by Angel investors and Venture Capitalists, who help start-ups cross the valley of death (between product development and commercial success).  Fragmented innovations lead to higher competitions and loss of businesses.  Some sectors, which require heavy initial investments, are dominated by established firms making it very hard for young firms to scale and making overall industry conservative, such as shipping.  Collaborative innovation is the key for growth and need of time for many industries that are facing challenges of increasing cost and reduced profits. The loosely coupled digital giants, established firms, young firms, and policy-makers fuel the growth of any industry at international scale.   Once the ecosystem is established, it will keep on expanding its horizons in terms of industries, boundaries, and technologies and benefit all: local communities by creating more jobs and international communities by providing access to innovation, products, and technology.

Final Remark

As a startup look for innovation ecosystem; where it is located and how to reach there.   

References


Jackson, D. D. (2015, Mar). What Is an Innovation Ecosystem? Retrieved from National Science Foundation: http://erc-assoc.org/content/what-innovation-ecosystem
Jaruzelski, B., Staack, V., & Shinozaki, A. (2016, Oct). Software-as-a-Catalyst. Retrieved from strategy+business: https://www.strategy-business.com/feature/Software-as-a-Catalyst
Peng, M., & Meyer, K. (2016). International Business. Australia: Cengage Learning.
Snowden, D. J., & Kurttz, C. F. (2003). The new dynamics of strategy: Sense-making in a complex and complicated world. IBM Systems Journal.




[1] https://www.strategyand.pwc.com/global/home/what-we-think/51025132/past-year-studies
[2] https://www.strategyand.pwc.com/innovation1000
[3] https://www.forbes.com/pictures/mlf45kijd/companies-with-the-largest-cash-piles/
[4] https://www.technologyreview.com/s/516506/silicon-valley-cant-be-copied/
[5] http://svlg.org/wp-content/uploads/2011/04/2015_CEOSurvey_Web.pdf
[6] https://www.strategy-business.com/feature/00370
[7] https://www.strategy-business.com/feature/Software-as-a-Catalyst?gko=7a1a
[8] http://masstech.org/innovation-ecosystem
[9] http://erc-assoc.org/sites/default/files/download-files/DJackson_What-is-an-Innovation-Ecosystem.pdf
[10] http://www3.weforum.org/docs/WEF_Collaborative_Innovation_report_2015.pdf
[11] http://www3.weforum.org/docs/WEF_Collaborative_Innovation_report_2015.pdf

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