- How should we understand innovation ecosystems in the evolutionary context of global economics and innovation?
- How should we operate and interact strategically with innovation ecosystems from a company perspective?
Innovation Ecosystems in an Evolutionary Context
Around 1850, the German economist George Friedrich List argued that Germany needed a “national system” for economic development to catch up with Britain. One of List’s main contributions was in building a national manufacturing base and protecting “strategic infant industries” from foreign competition until they had matured enough to successfully compete internationally.
In 1899, the English economist Alfred Marshall coined the term “agglomeration” and the advantages it held for companies to be located in proximity to other companies within the same industry. Marshall’s argument for agglomeration was based on the numerous small companies and related services located around cutlery production in Sheffield, Northern England.
In 1950, the Swedish economist Eric Dahmén launched the term “development blocks” as a recipe for Sweden’s economic development and industrial transformation.
In the late 1980s, Christopher Freeman and Bengt Åke Lundvall introduced the concept of a “national system of innovation” embracing the primary factors of entrepreneurs, companies and capital as well as the national regulation of labor markets, factor markets, education and other policies in the framework for economic development.
In 1990, Michael Porter published “The Competitive Advantage of Nations” introducing the concept of “clusters” as a vehicle for economic development of industries, regions and nations. Porter’s cluster concept contained many of the same elements of the earlier concepts, but achieved more global recognition. Today, more than 100 regions or nations have experimented with or implemented variations of cluster policy based on Porter’s framework.
In 2010, Stanford University launched the international innovation ecosystems network in cooperation with select partners in Finland, China and Japan. Meanwhile, innovation ecosystems denote Information and Communication Technology Platforms like Apple’s iPhone, Google’s Android, cloud computing and software platforms dominated by companies like Microsoft and Amazon.
Towards an Understanding of Innovation Ecosystems
Today, 90 percent of the innovation ecosystems are a combination of the historical concepts above.
Innovation ecosystems are based on successful examples of agglomeration in geographic, economic, industrial or entrepreneurial terms. According to Schumpeter, innovation ecosystems are primarily about successful innovative regions (Silicon Valley, Bangalore), successful ICT platforms (iPhone, Android) or new industries (cloud computing), and entrepreneurs and investors from all over the world jump on the bandwagons of these successes.
The remaining 10 percent can be found in the Internet/mobile/ICT systems’ platform dimension and web 2.0. Today, any entrepreneur with a good idea can launch a business application for Apple’s or Google’s iPhone or Android platforms and, regardless of geographical location, can become a success. This was not the case in Alfred Marshall’s time of cutlery in Sheffield. To benefit from the agglomeration or ecosystem back then, you had to be physically present in that place and time.
In 2011, most innovation ecosystems are still based on geographical concentration of amassed entrepreneurs, investors, talent and/or universities. However, the Internet now seems mature enough that these 10 percent may be the most strategically important going forward. Furthermore, the ICT revolution has blurred the distinction between physical goods and services. So how does a company take advantage of Innovation Ecosystems?
Initial Strategy for Positioning Within Innovation Ecosystems
One way for companies to position themselves advantageously in today’s global landscape of innovation ecosystems is via an initial critical assessment of key strategic dimensions including those highlighted below.
Leadership and partner role
Is the ecosystem centralized and closed with one or few dominant players—i.e. Apple, Google and Microsoft—or is it decentralized and open with dispersed leadership—like Linux? Controlling ecosystems is a new source of competitive advantage and companies need to carefully review how they participate and what levels of control or risk reduction are available.
Technology lock-in risks
Tapping into one ecosystem or platform is similar to the risk of “betting on just one number at a roulette wheel.” This is generally considered a risky strategy. It might be better to use smaller business projects to tap into a few different ecosystems to test their benefits.
Supply side risks
There might be superior management and transaction-cost gains derived from dealing with just one or a few ecosystems. Yet, such dependency can be fatal—as Japanese companies learned when an earthquake suspended 25 percent of the world’s production of silicon wafer supply. This could have had wide ranging implications for the global electronics industry.
Brand reputation
Reputation is one of the most underestimated dimensions when companies consider which ecosystem to engage with. The outsourcing of food-production and consumer goods to emerging markets’ “manufacturing ecosystems” represents additional risk in view of the quality and social responsibility within the supply-chain of the ecosystem. China’s tainted milk scandal and Nike’s child labor case are examples that show how quickly and easily online communities like Facebook and You-tube can damage even leading global companies’ brands and reputations.
Pros and cons of tier one versus tier two ecosystems
What are the advantages of partnering with non-obvious ecosystems outside the norm or mainstream within an industry? For example, most ICT companies consider partnering with Silicon Valley or Bangalore, but few consider Tomsk or Novosibirsk in Russian Siberia. Yet, both Russian cities have top-level talent and educational institutions in mathematics, physics and programming; and a lower price than Bangalore. Deutsche Bank switched from Bangalore to Tomsk a few years ago; and Singapore and Japan set up a formal cooperation agreement with Tomsk. Individual companies often have a stronger bargaining position when working with partners in a tier two ecosystem and, In fast changing markets, tier two ecosystems can quickly become tier one.
Conclusion
In order to make sense of today’s innovation ecosystems it’s useful to see them as successful agglomerations of industrious activity. Moreover, the allure of partnering with the most successful and obvious ecosystems should be considered carefully, with robustness testing of options such as diversifying into a larger number of ecosystems thereby avoiding the pitfalls and risks highlighted above.
About the author
Jørn Bang Andersen is currently senior advisor to the
Nordic Innovation Centre on innovation and globalization. Prior to this, he worked as special advisor to the Ministry of Business and Industry on innovation and technology development, deputy director to the Ministry of Foreign Affairs of Denmark’s “Invest in Denmark” unit, and marketing and business development manager and special advisor to the Trade Council of Denmark on global innovation strategy.
Internationally, Andersen worked for the European Commission on international business, trade and technology co-operation; served as Denmark’s senior advisor to Estonia and Latvia on their transition to market economies and EU memberships; and is embedded in the Ministry of Economic Affairs in Estonia, Tallinn.
Private sector engagements include founder of Hansa Consulting House and Nordic, and East European area manager for
Interlace. Andersen earned an MA in political science from Aarhus University, Denmark and an MA in Western European Politics and International Economics from University of Essex. He has published books and articles on innovation and lectures internationally.
