Future of Business and Finance

Ludovit Garzik   Editor

Successful
Innovation
Systems
A Resource-oriented and Regional
Perspective for Policy and Practice
Future of Business and Finance
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Ludovit Garzik
Editor

Successful Innovation
Systems
A Resource-oriented and Regional
Perspective for Policy and Practice
Editor
Ludovit Garzik
Innovationorbit
Austrian Council for Research and
Technology Development
Vienna, Austria

ISSN 2662-2467 ISSN 2662-2475 (electronic)

Future of Business and Finance
ISBN 978-3-030-80638-5 ISBN 978-3-030-80639-2 (eBook)
https://doi.org/10.1007/978-3-030-80639-2

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For Jana and Theo
Foreword

This book is about innovation and the magic of cultural diversity, which is the
fundament of global creativity. Humankind has developed a plethora of cultural
characteristics. Our duty is to preserve and advance this heritage. This book will
deepen your insight into the ties and bonds between cultural diversity, human
capability, and innovation.
Ludovit Garzik has done a remarkable job to combine this publication which
presents a global perspective on innovation and the data economy which will fuel the
twenty-first century. Today, we experience a global battle for digital supremacy
between the USA and China. The USA has the globally leading data companies
operating in a “business first” paradigm. China has some of the fastest growing data
companies even though the country is operating from a “government first” paradigm.
The open question remains if Europe and other world regions can retain their
competitive edge with a “people and privacy first” paradigm.
This book provides a remarkable wide analysis of successful innovation systems
around the world. From Berlin to Bangalore and from Sofia to Shanghai, businesses,
policy makers, and academics will find valuable lessons in driving innovation and
digital transformation.

The World Bank Wolfgang Fengler

Washington, DC, USA

vii
Preface

This book will close the gap between knowledge and innovation. The cultural
characteristics of different global regions shape the nature and speed of innovation
processes. The results are the preconditions of our future prosperity.
We live in a world and time of growing tensions between global blocs and close
neighbors. Some individual representatives of mankind think it would be a great idea
to expand their own beliefs and systems to as many others as possible. Their
intention is for all people to believe in the same religion or the same political system
that they do. This is the biggest threat to diversity in every sense.
The earth is the only planet we have to live on. After many years of experience in
the space business, one must admit that there is no option for us to live on Mars or
any other planet in the coming centuries—although we still salute the front-runners
for their efforts to settle on Mars or the Moon. It took billions of years until mankind
adapted to the living conditions on earth. As we have just that one single option, we
must take care of our planet together.
The same applies to our bodies. Every individual relies on their own body; it is the
only place any of us can live. We must take care of our bodies, being careful what we
shove in our mouths and to which external influences we expose ourselves. Many
individuals do not seem to care, and statistics are full of early deaths due to avoidable
illnesses like obesity or sedentary lifestyles. Awareness about the importance of our
own health, however, often only comes when health deteriorates. At that point, it is a
difficult task indeed to reverse the situation before the point of no return—a
menacing analogy to our handling of environmental challenges.
This book will provide the reader with many tools for improving innovation
performance, but there is much more to discover. Make use of the cultural diversity
that comes with the global family of authors and coauthors who contributed to the
regional chapters in this book. Discover the cultural lessons in the content they
provide, their selection of topics, and their styles of presentation. Enjoy!

Vienna, Austria Ludovit Garzik

ix
Acknowledgments

I want to thank the global family of authors and coauthors who contributed to this
book. In many hours of discussion and exchanging views, we formed a mosaic of
cultural diversity that will improve mutual understanding of people and cultures.
I also want to thank Katie Caves and Philipp Marxgut for harmonizing our
Babylon of languages into a homogeneous style.

xi
Contents

Part I Introducing the Framework

1 Launch Pad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Ludovit Garzik
2 Human Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Ludovit Garzik
3 Finance Capital, Market, and Policy . . . . . . . . . . . . . . . . . . . . . . . . 27
Ludovit Garzik
4 Infrastructure and Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Ludovit Garzik
5 Management of Resources and Lessons Learned . . . . . . . . . . . . . . . 57
Ludovit Garzik

Part II Learning from Successful Innovation Regions

6 Bangalore Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Leena Pishe Thomas, Sana Salah, and Ludovit Garzik
7 Berlin Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Helge Dauchert and Ludovit Garzik
8 Medellín Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Alejandro Crespo Jaramillo, Cesar Augusto Zambrano Osorio, Susana
Crespo Jaramillo, and Ludovit Garzik
9 Moscow Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Dmitry Vasilev and Ludovit Garzik
10 Nairobi Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Linet Kwamboka Nyang’au and Ludovit Garzik
11 New York Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Brian Frumberg, Lisa Stapleton, Sam Yazdanseta, and Ludovit Garzik

xiii
xiv Contents

12 Shanghai Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

Hui Yan, Yixi Xue, Xiong Li, and Ludovit Garzik
13 Shenzhen Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Yiming Yang and Ludovit Garzik
14 Silicon Valley Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Georg Fuerlinger and Ludovit Garzik
15 Sofia Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
Veneta Andonova, Christian Betov, Mira Krusteff, Nadia Soultanova,
Irina Obushtarova, and Ludovit Garzik
16 Tel Aviv Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
Ido Garbi and Ludovit Garzik
17 Zurich Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Mathias Beck and Ludovit Garzik
Abbreviations

5G Fifth Generation of Cellular Mobile Communications

6G Sixth Generation of Cellular Mobile Communications
ABAI Association of Bengaluru Animation Industry
AI Artificial Intelligence
API Application Programming Interface
AR Augmented Reality
ASI Agency for Strategic Initiatives Russia
AVGC Centre of Excellence in Animation, Visual effects, Gaming and
Comics
B2B Business to Business
B2C Business to Consumer
BIFOLD Berlin Institute for the Foundations of Learning and Data
BMBF German Federal Ministry of Education and Research
BPO Business Process Outsourcing
BVCA Bulgarian Venture Capital Association
BYD Build Your Dream (Company Shenzhen)
CHF Swiss Currency
CoE Center of Excellence
CPSU Central Public Sector Undertakings
CSR Corporate Social Responsibility
CST Central Sales Tax
CTA Antioquia Science and Technology Center
CUEE University-State Business Committee Colombia
CUSP Center for Urban Science and Progress New York City
CWUR Center for World University Rankings
CxO C Level Position
DAX German Share Index
DESI Digital Economy and Society Index
DNA Deoxyribonucleic Acid
DPIIT Department for Promotion of Industry and Internal Trade
ECI Electronic Communication Israel
EIS European Innovation Scoreboard
EPFL École Polytechnique Fédérale de Lausanne

xv
xvi Abbreviations

ERC European Research Council

ESDM Karnataka Electronics System Design and Manufacturing
ETH Swiss Federal Institute of Technology in Zurich
EU European Union
EUR Euro (European Currency)
EY Ernst & Young
FASIE Foundation for Assistance to Small Innovative Enterprises
FDI Foreign Direct Investment
FP7 Framework Program 7
GBA Greater Bay Area Pearl River Delta
GBI Global Business Inroads
GCP Gross County Product (Kenya)
GCP Gross County Product
GDP Gross Domestic Product
GEM Global Entrepreneurship Monitor
GII Global Innovation Index
GoI Government of India
GoK Government of Karnataka
GPS Global Positioning System
GTI Global Technology Interface
HQ Headquarter
HR Human Resource
HTGF High-Tech Gründerfonds
IBB Investment Bank Berlin
ICT Information and Communications Technology
IDC Interdisciplinary Center Israel
IDF Israel Defense Forces
IIA Israeli Innovation Authority
IIIT-B International Institute of Information Technology Bangalore
IIM Indian Institute of Management
IISc Indian Institute of Science
IMB Inter-Ministerial Board
IoT Internet of Things
IPO Initial Public Offering
IPR Intellectual Property Rights
IPSOS Independent Polling System of Society
IT Information Technology
ITM Instituto Tecnológico Metropolitano Colombia
JEREMIE Joint European Resources for Micro to Medium Enterprises
KPI Key Performance Indicator
KTT Knowledge and Technology Transfer
LGBT Lesbian, Gay, Bisexual, and Transgender
LGBTQ Lesbian, Gay, Bisexual, Transgender, and Queer
LLC Limited Liability Company
MeITY Ministry of Electronics and Information Technology
Abbreviations xvii

Minciensias Ministry for Science, Technology and Innovation Colombia

MINRO K-Tech Centre of Excellence in Machine Intelligence and Robotics
MIT Massachusetts Institute of Technology
MNC Multinational Company
MOU Memorandum of Understanding
MVP Minimum Viable Product
NASDAQ National Association of Securities Dealers Automated Quotations
NASSCOM National Association of Software and Service Companies
NGO Non-governmental Organization
NIH National Institutes of Health USA
NLSIU National Law School of India University
NSRCEL Raghavan Centre for Entrepreneurial Learning
NSTIS National Science, Technology and Innovation System Colombia
NYC New York City
NYCEDC New York City Economic Development Corporation
NYSE New York Stock Exchange
OECD Organisation for Economic Co-operation and Development
PARC Palo Alto Research Center
PCT Patent Cooperation Treaty
PDI Power Distance Index
PE Private Equity
PhD Philosophiae Doctor
PLO Palestine Liberation Organization
PoC Proof of Concept
PPP Public–Private Partnership
Pro FIT Program for the Promotion of Research, Innovations and
Technologies
QS Quacquarelli Symonds
R&D Research & Development
R&I Research & Innovation
RfP Request for Proposals
RIS Regional Innovation Scoreboard
RMB Renminbi (Chinese Currency)
Rs. Indian Rupees (Currency)
RSI Regional System of Innovation
S&T Science & Technology
SENA National Learning Service Colombia
SIM Subscriber Identity Module
SMB Small and Medium Business
SME Small and Medium-sized Enterprise
SOHO Small Office/Home Office
SRI Stanford Research Institute
STEM Science Technology Engineering and Mathematics
STI/STi Science, Technology and Innovation
xviii Abbreviations

SWOT Strength Weakness Opportunity Threat

TAU Tel Aviv University
TEU Standard Container Units
TTO Technology Transfer Office
TTP Tech Talent Pipeline New York City
UAE United Arab Emirates
UAI Uncertainty Avoidance Index
UK United Kingdom
UNEP United Nations Environment Programme
USA United States of America
USD United States Dollar
USSR Union of Soviet Socialist Republics
VAT Value-Added Tax
VC Venture Capital
VR Virtual Reality
WEF World Economic Forum
WIPO World Intellectual Property Organization
WW2 World War 2
List of Figures

Fig. 2.1 Knowledge as a consequence of belief and truth. Source:

Author’s own figure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fig. 2.2 International connectivity. Source: Author’s own figure . . . . . . . . . . 22
Fig. 4.1 Condensation from communities into teams. Source:
Author’s own figure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Fig. 4.2 Manifestations of relationships. Source Pictures: www.pixabay.
com (Pixabay license grants an irrevocable, worldwide, nonex-
clusive, and royalty-free right to use, download, copy, modify,
or adapt the content for commercial or noncommercial purposes
(website April 23, 2021).). Source Graph: Author’s own figure . 46
Fig. 4.3 Research and innovation. Source Pictures: www.pixabay.com
(Pixabay license grants an irrevocable, worldwide, nonexclusive,
and royalty-free right to use, download, copy, modify, or adapt the
content for commercial or noncommercial purposes (website
April 23, 2021)). Source Graph: Author’s own figure . . . . . . . . . . . . 47
Fig. 4.4 Global patent filings 1980–2014. Source: WIPO (Data source
provided by Creative Commons Attribution (BY) 30
IGO license) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Fig. 4.5 Wall in universities/ministries. Source: Author’s own figure . . . . . 54
Fig. 5.1 Ecodynamics: phases of development. Source: Author’s own
figure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Fig. 5.2 Diagram of resource flexibility and importance. Po. . .point of
priority origin. Source: Author’s own figure . . . . . . . . . . . . . . . . . . . . . . . 66
Fig. 7.1 Patent Intensity of the German Federal States 2007 and 2017
(per one million employees). Source: EPO-PATSTAT;
Statistisches Bundesamt (Federal Statistical Office) calculations
by Fraunhofer ISI in Neuhäusler P et al. (2021) Patent
Applications—Structures, Trends and Recent Developments
2020. Studien zum deutschen Innovationssystem. Berlin: EFI . . . 115
Fig. 7.2 New Business rates in the German Federal States 2007–2018 (as
percentages). Number of new businesses in the period 2017–2018
as a percentage of all companies. Source: Mannheim Enterprise

xix
xx List of Figures

Panel, Calculations by ZEW (ZEW—Leibniz Centre for European

Economic Research) in Bersch J et al. (2021)
Unternehmensdynamik in der Wissenswirtschaft in Deutschland
2018, Gründungen und Schließungen von Unternehmen,
Gründungsdynamik in den Bundesländern, Internationaler
Vergleich, Wagniskapital-Investitionen in Deutschland und im
internationalen Vergleich. Studien zum deutschen
Innovationssystem. Berlin: EFI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Fig. 7.3 Rate of New Businesses in the Federal States 2017–2019. New
businesses as a percentage of the total number of companies.
Source: Mannheim Enterprise Panel, Calculations by ZEW
(ZEW—Leibniz Centre for European Economic Research) in
Bersch J et al. (2021) Unternehmensdynamik in der
Wissenswirtschaft in Deutschland 2018, Gründungen und
Schließungen von Unternehmen, Gründungsdynamik in den
Bundesländern, Internationaler Vergleich, Wagniskapital-
Investitionen in Deutschland und im internationalen Vergleich.
Studien zum deutschen Innovationssystem. Berlin: EFI . . . . . . . . . . 118
Fig. 7.4 Investment per Capita by Country and City. Source: Dealroom
(2019) Berlin Ecosystem Launch Report. https://startup-map.
berlin (Provided by Dealroom (according to communication with
authors April 16, 2021)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Fig. 7.5 Domestic and foreign venture capital investment into Germany
(in EUR billion). Source: Dealroom (2020a) Shortage of later-
stage venture capital in Germany: more acute due to Corona crisis.
https://startup-map.berlin (Provided by Dealroom (according to
communication with authors April 16, 2021)) . . . . . . . . . . . . . . . . . . . . . 123
Fig. 8.1 Financing of STI activities by type of resource, 2018 in Colombia.
Source: Document OCYT 2018 (https://ocyt.org.co/
Libro2018_Completo/INDICADORES_OCyT_2018%20Ver-
sion%2023-07-19.pdf; The OCyT is the Colombian Observatory
of Science and Technology that was created in 1999 as a not-for-
profit organization promoted and lead by Colciencias, the national
governmental agency in charge of policymaking and funding of
STI activities in Colombia) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Fig. 8.2 Financing of R&D by type of resource, 2018 in Colombia. Source:
Document OCYT 2018 (https://ocyt.org.co/
Libro2018_Completo/INDICADORES_OCyT_2018%20Ver-
sion%2023-07-19pdf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Fig. 8.3 Education levels in Colombia (Data 2017). Source: Document
OCYT 2018 (https://ocyt.org.co/Libro2018_Completo/
INDICADORES_OCyT_2018%20Version%2023-07-19pdf) . . . . 131
Fig. 10.1 GDP growth in Kenya 1960–2018. Source: The World Bank
(https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?
List of Figures xxi

locations¼KE; Provided by Creative Commons Attribution 4.0

International License (CC BY 4.0)) . . .. . . .. . . .. . .. . . .. . . .. . . .. . .. . . . 164
Fig. 10.2 Kenya: Share of Counties in GDP (2013–2017). Source: Kenya
National Bureau of Statistics (KNBS) (https://www.knbs.orke/?
wpdmpro¼gross-county-product-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Fig. 10.3 Population Pyramid Kenya. Source: PopulationPyramid.net
(www.populationpyramid.net made available under a Creative
Commons license CC BY 3.0) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Fig. 14.1 Key industries and leading companies in Silicon Valley. Source:
Own depiction, based on Heaton et al. 2019 (Heaton S, Siegel D
and Teece DJ (2019) “Universities and Innovation Ecosystems: A
Dynamic Capabilities Perspective.” Industrial and Corporate
Change 28 (4): 921–39. https://doi.org/10.1093/icc/dtz038) . . . . . 226
Fig. 14.2 Successful entrepreneurs support by “Giving Back”. Source: own
depiction, based in Isenberg 2010 (Isenberg D (2010) How to Start
an Entrepreneurial Revolution. Harvard Business Review.
Retrieved June 2010) . . . . .. . . .. . . .. . . . .. . . .. . . . .. . . .. . . . .. . . .. . . . .. . . . 244
Fig. 15.1 Cumulative foreign direct investments (FDI) by 31.12.2018.
Source: The authors based on the Sofia Economic and Investment
Profile (2019) (Sofia Economic and Investment Profile, November
2019 (2019). Available at https://investsofia.com/wp-content/
uploads/2019/12/Sofia-Economic-and-Investment-Profile-
2019-EN.pdf (accessed on January 5, 2021)) . . . . . . . . . . . . . . . . . . . . . . 260
Fig. 15.2 Patents in the top ten technological areas of business patent
activity in Bulgaria, 2001–2019. Source: Georgieva T, Yalamov
T (2020) (Georgieva T and Yalamov T (2020) Economic Resil-
ience through Innovation. Available at http://www.arcfund.net/
fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf.
(accessed on January 6, 2021)), Economic Resilience through
Innovation, using data from the Patent Office of Republic of
Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
Fig. 15.3 Scientific and technical publications per billion USD PPP GDP.
Source: The authors, based on Andonova. V et al. (2021)
(Andonova V (2021) Entrepreneurial Ecosystems and Innovation
in the Balkans in Cahen, F., Casanova, L., Miroux, A., (Eds.)
Innovation from Emerging Markets: From Copycats to Leaders,
Cambridge University Press, 150–182) with data from the Global
Innovation Index report 2019 (https://www.wipo.int/
global_innovation_index/en/; Provided by Creative Commons
Attribution (BY) 3.0) . . .. . . .. . . .. . . .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . . 271
Fig. 15.4 Selected innovation- and technology-driven entrepreneurial
ventures from Central and Eastern Europe according to their
valuation. Source: Andonova V (2021) (Ibid) based on Dealroom.
co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
xxii List of Figures

Fig. 16.1 European Research Council (ERC) and the Horizon 2020
Program. Source: Data EC, Author’s own figure . . . . . . . . . . . . . . . . . . 293
Fig. 16.2 Total Israeli Seed Stage Capital. Source: Data EC, Author’s
own figure . . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . . . 294
Fig. 16.3 Competitive tax rates. Source: Author’s own figure . . . . . . . . . . . . . . . 300
Fig. 16.4 Private Capital Reliance. Source: Author’s own figure . . . . . . . . . . . 309
Fig. 16.5 Venture capital growth Israel. Source: Author’s own figure . . . . . . 311
Fig. 16.6 Migration success story. Source: Research and Information
Center, Knesset Israel (Israeli Parliament) . . . . . . . . . . . . . . . . . . . . . . . . . 312
List of Tables

Table 3.1 Number of days to start a new business, World Bank

(Data 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Table 3.2 Ranking ease of doing business, World Bank (Data 2019) . . . . . 36
Table 4.1 Ranking of patent filing according to WIPO statistics
(2018) . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . .. . . 50
Table 4.2 Capital vs. innovation regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Table 5.1 Flexibility scale of resources (alphabetical) . . . . . . . . . . . . . . . . . . . . . . 64
Table 5.2 Importance scales of resources (alphabetical) . . . . . . . . . . . . . . . . . . . . 65
Table 8.1 Group of universities that make up the research G8 . . . . . . . . . . . . . 132
Table 9.1 Main institutional players in Moscow Innovation system . . . . . . . 152
Table 14.1 Key figures comparison: Silicon Valley, California, USA . . . . . . 227
Table 17.1 Facts about ETH Zurich and University of Zurich . . . . . . . . . . . . . . 328

xxiii
 Part I
Introducing the Framework
Launch Pad
1
Ludovit Garzik

Abstract

Some regions in the world are more successful at innovation than others. We can
learn why by studying the lessons of successful global innovation regions.
Ecosystems in different regions around the globe demonstrate diverse develop-
ment trajectories and properties. Therefore, we take a deeper look into the
characteristics and particularities we observe in some of today’s most exciting
global innovation regions. The selection of the ecosystems that we study in this
book will always be a snapshot of reality—as time passes, new innovative regions
will emerge and others will lose their innovative energy. The geographical
distribution of global innovation regions and their connections to each other are
constantly on the move.

1.1 The Essence

Some regions in the world are more successful at innovation than others. We can
learn why by studying the lessons of successful global innovation regions. After
reading this book, the audience will gain a sound understanding of how innovation
processes are accelerated or hindered by regional characteristics. This deep dive into
the differences in innovation ecosystems across global regions will provide a
detailed mosaic of their strengths and weaknesses. You will learn to assess the
resources and elements of regional innovation systems and to compare and contrast
the structures and processes of innovation management in Africa, Asia, Europe, and
the Americas.

L. Garzik (*)
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 3

L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_1
4 L. Garzik

This book will answer a number of questions. For example, why are ideas best
born in the brains of rebelling intellectuals? Or, as we will call them, smart people.
The number of smart people across the globe is limited. How can a region become a
magnet for this smart crowd? Is a society’s level of tolerance, what makes the
difference in this magnetic effect?
Regions can be like couch potatoes waiting for their fortunes, or they can act like
triathletes and race toward every competition. Readers will learn about the develop-
ment status of their own region and will know how to recognize “ecofreeze,” when
an innovation ecosystem reaches the development stage where its resources are
insufficient for the next level of innovation output.
There is no shortcut in the evolution of a regional innovation ecosystem, just like
there was none in the evolution of intelligent life. A pandemic is a merciless reality
check for regional innovation systems. The crisis rips off the façade of political
softeners and lets everyone look in the mirror of truth. The crisis will favor the strong
while punishing the laggards, therefore contributing to the concentration of power in
certain regions and companies.
The important question for the future development of any ecosystem is whether it
can distribute its available energy for change and progress in the best possible way.
That optimum distribution of change energy can be called precision innovation. Just
add rebelling intellectuals and tolerance, and you will be on your way to cooking a
successful innovation meal. That is what the book is about.

1.2 Diving into the Topic

At first, there is a seed. This seed needs a favorable environment to develop into a
strong plant. Multiple factors influence the dimension and speed of development:
soil, humidity, light, wind, and temperature. The plant’s natural enemies above- and
belowground influence its chance of success. The seed is not able to change the
modes of influences in its natural ecosystem, but its species will adapt to changing
environmental conditions over time. That is called evolution.
Let the seed be an idea. It is born in the brain of a human being who finds the
opportunity to turn the idea into a social or economic success. The ecosystem is the
sum of influences that confront the idea like infrastructure, money, the level of
tolerance in its society, or whether the idea-bearing person is inspired by his or her
environment to grow the idea into something bigger. There is one major difference
between an idea and a seed. A person can carry his or her idea-loaded brain into a
different ecosystem. Therefore, the idea is not—like a seed—fortuitously blown off
to its destination by the wind.
Ecosystems, whether they are natural ecosystems or innovation ecosystems, are
communities of interacting organisms and their physical environments. In this book,
the term of ecosystems shall be transferred from its original use in biological systems
into the world of research and innovation.
1 Launch Pad 5

In the 1990s, there was a more technological approach to innovation ecosystems.

Metcalfe, A (1995)1 defined national innovation systems as “that set of distinct
institutions which jointly and individually contribute to the development and diffu-
sion of new technologies and which provides the framework within which
governments form and implement policies to influence the innovation process. As
such it is a system of interconnected institutions to create, store and transfer the
knowledge, skills and artifacts which define new technologies.” This definition was
extended in recent years to include elements of the cultural framework and the social
infrastructure.
Ecosystems in different regions around the globe demonstrate diverse develop-
ment trajectories and properties. Therefore, we take a deeper look into the
characteristics and particularities we observe in some of today’s most exciting global
innovation regions. The selection of the ecosystems that we study in this book will
always be a snapshot of reality—as time passes, new innovative regions will emerge
and others will lose their innovative energy. The geographical distribution of global
innovation regions and their connections to each other are constantly on the move.
In the 1970s and 1980s, 86% of international patent sourcing came from just
USA, Japan, and Western Europe. This share fell to 56% in the last 10 years
according to the WIPO Report (2019).2 Various new regions have emerged as up-
and-coming innovation hotspots in Africa, Asia, and Eastern Europe. To a large part,
this global shift in patenting activity is due to China and the Republic of Korea. In
the past 5 years, these two nations have accounted for around 20% of filed patents.
Innovation activities are not spreading indiscriminately to most parts of the globe;
there is a distinct concentration in urban areas. More than 80% of inventions and
scientific output worldwide is generated in specific hotspots. These megacities are
often more closely connected with their peers than with their local surroundings.
While well-educated high earners move flexibly between these hotspots, other
regions lose ground in the dynamics of income growth. This leads to growing
tensions in society and can be observed, for example, in the housing market.
Population density is not necessarily connected with innovation density. This can
be especially true for capital areas, where bureaucracy demands many highly skilled
workers and pulls them away from potential innovation activities.
The global regions described in this book were selected to illustrate the diversity
of innovation cultures and their consequences for regional competitiveness and
economic development. This wide-ranging perspective allows the reader to gain
insights they can apply and implement in their own context.
The actions of individuals in an ecosystem are usually judged by what they do
and how they do it. An even more interesting question would be why they do what
they do. Successful players in any ecosystem always ask why their partners or clients
purchase the products or services they offer. The most successful among them ask

1
Metcalfe, A (1995) cited in United Nations Conference on Trade and Development, 2008, p. 3.
2
WIPO (2019) World Intellectual Property Report, Geography of Innovation: Local Hotspots,
Global Networks.
6 L. Garzik

this question before their product or service is even ready for the market. The
assumption is that if you are not embarrassed about the first version of your product,
your arrival on the market will be too late.
With the question of why, we dig for the beliefs and attitudes behind the people’s
actions and knowledge. Since beliefs and attitudes are shaped through socialization
over generations, it takes an enormous amount of time and energy to adapt or change
them. One of the most promising ways to influence beliefs is to confront individuals
with cultural elements very different from their own. Confrontation in that context
should be understood as a real immersion into the different culture. If the individual
stays in his or her own surroundings and is simply told about other cultures, he or she
will merely take in the new knowledge without changing any beliefs. If someone
wants to extend and adapt his or her own cultural mindset and apply those changes,
he or she must physically visit the region and culture, confronting an old mindset
with new experiences. Therefore, reading this book is a great first step. That alone
will not be enough to change one’s own attitudes and behaviors, but it should give
motivation to learn about other innovation cultures.3

1.3 Resources in Global Innovation Ecosystems

Resources are influencing factors that can help or hinder the transformation of an
idea into innovation. Innovation is understood as an idea translated into a service or
product that meets its market. To be precise, innovation can be a new-to-the-market
product or service or an existing service or product brought to a new market. As the
godfather of “creative destruction,” Joseph Schumpeter (1983),4 puts it, innovation
is “the introduction of new goods, . . . new methods of production, . . . the opening of
new markets, . . . the conquest of new sources of supply . . . and the carrying out of a
new organization of any industry.”
Resources in innovation ecosystems show similar properties. Humans act in these
ecosystems, mostly in developed institutional structures. There are also other
resources such as financial capital, the legal framework, and migration exchange.
These resources can be further split into subgroups. For example, institutional
structures can be split into categories like companies and public institutions, which
themselves consist of government departments, intermediary agencies, and others.
Each of these resources includes a plethora of dependencies and conditions. For
example, human capital can depend on factors like the quality of the education
system or the migration policy. To judge the impact of a single resource on the
innovation potential of a region, each resource must be categorized in two ways: first

3
All the selected regions in this book have been or will be destinations of cultural trainings
organized by www.innovationorbit.com. These trainings aim at bringing individuals from different
cultures together as a group.
4
Schumpeter J (1983) The theory of economic development: an inquiry into profits, capital, credit,
interest, and the business cycle. Opie, Redvers, Elliott, John E. New Brunswick, New Jersey. ISBN
0-87855-698-2 OCLC 8493721.
1 Launch Pad 7

on the availability and flexibility of the resource, and second as a function of its
importance to the whole system.

1.3.1 Flexibility/Availability

The flexibility of resources is a function of the time lag that an ecosystem must bear
to improve the availability of the resource. On a descriptive scale from 1 (very
inflexible) to 10 (most flexible), resources like mindset and culture would score very
low, probably near 1, whereas capital would be very flexible, near 10. Chapter 5 will
show the numbers in the flexibility scale.

1.3.2 Importance/Impact

We can classify a resource’s importance using an inverse function of what happens if

that resources stopped existing. If the ecosystem can survive without all or some of
the resource, then it is less important. This scale is like the flexibility scale from 1 to
10, with 1 being unimportant and 10 very important. In this example, human capital
is classified at 10 because there is no innovation ecosystem without humans working
in it. On the other end of the scale, we might find a resource like the legal framework
because there are some examples of ecosystems in emerging countries that profit
from less regulation—although this may lead to lower ethical standards. Still, an
ecosystem with a weak or nonexistent legal framework can still be a stimulating
environment for innovation.
The flexibility and importance for the list of resources is shown in detail in
Tables 5.1 and 5.2.

1.3.3 Discussion and Structure

Regional innovation ecosystems can be X-rayed from different angles. In the 1990s,
Henry Etzkowitz (2003)5 discussed regional innovation systems in three spheres,
university, industry, and government. That approach was named “Triple Helix
Analysis” and additional research developed it further over the following years.
The big advantage of this method is its radical reduction of complexity. Every aspect
of an ecosystem is assigned to one of the spheres for analysis. This approach is
perfectly suited for communication with decision makers like politicians or CxO
managers who surf on higher abstraction levels. An enhanced version of Etzkowitz’s
theory was tested for its applicability in a study on the regional innovation system in

5
Etzkowitz H (2003) Innovation in innovation: the triple helix of university-industry-government
relations. Social science information 42, p. 293–337.
8 L. Garzik

Salzburg, Austria. That approach used three spaces for knowledge, innovation, and
consensus.6
Which resources define a region as an innovation ecosystem, or—better—a
successful innovation ecosystem? Are some resources more important than others?
The examples of global innovation regions in Chap. 6 provide some answers based
on evidence. In Chaps. 2–4, this book introduces the key resources and discusses
them one by one, followed by Chap. 5, which discusses the interdependencies
between resources.

6
Garzik L and Ranga M (2015) Mozart 4.0. Innovation based on cultural tradition. Vienna,
Palo Alto.
Human Capital
2
Ludovit Garzik

Abstract

The foundation of every innovation ecosystem is the availability of high-quality

human capital. However, we cannot judge an ecosystem merely on its number of
people or their qualifications. If managers know of the entrepreneurial mindset of
their crowd and its inflow and outflow dynamics, they can design new measures
to influence those dynamics, attracting people with the qualifications their insti-
tution or region lacks. The seed of an idea is ideally born in the brain of a rebelling
intellectual. A rebelling intellectual is a person who has intellect, knowledge, and
skills combined with a drive to break off the beaten path. These individuals must
have enough energy to lead motivated people along on their new paths.

2.1 Human Capital as the Foundation of Innovation

The foundation of every innovation ecosystem is the availability of high-quality

human capital. According to the OECD (2001),1 human capital is “the knowledge,
skills, competencies and attributes embodied in individuals that facilitate the creation
of personal, social and economic well-being.” However, we cannot judge an ecosys-
tem merely on its number of people or their qualifications (Sect. 2.2). Instead, we
should use—to borrow from mathematics—the first and second derivatives of
human capital. The general mindset and level of tolerance is the first derivative of
human capital (Sects. 2.3 and 2.4), and the ability to grow these characteristics is the

1
OECD (2001) The Well-Being of Nation: The Role of Human and Social Capital, OECD, Paris.

L. Garzik (*)
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 9

L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_2
10 L. Garzik

second derivative (Sect. 2.5). The success of an innovation region depends, to a large
extent, on these two factors.
The people responsible for developing a region will naturally want strict formulas
they can use to calculate the impact of their decisions. Then, if they know of the
entrepreneurial mindset of their population and its inflow and outflow dynamics,
they can design new measures to influence those dynamics, attracting people with
the qualifications their region lacks. One of the best examples of this kind of action is
the region of Shenzhen (Sect. 6.8), where the government has made attractive offers
to Chinese nationals living and working abroad in innovation hotspots like Silicon
Valley, successfully bringing them back. In this specific case, Shenzhen harvested
the mindset resources that it had sown years before with generous grants for leaving
the region. This kind of strategy requires a great deal of energy to maintain contact
with the diaspora. Overall, the success of an innovation region will be influenced by
the “Pool of Mindset and its Dynamics.”
A different example is Medellín (Sect. 6.3) and its influx of young, well-educated
people from all over Latin America. There, Spanish-speaking countries from Mexico
to Chile provide fertile sources of migration. However, Medellín functions like flow
heater in many cases—after gaining experience, many of Medellín’s still-young
migrants leave again, heading north to the USA, Canada, or Europe. Medellín’s
approach is to offer them an attractive environment in the region, incentivizing them
to stay.
Mindset is also a driver for developing more of a region’s talent toward invention
and innovation. Low family income is a major barrier keeping talented young people
from transforming into innovators: there is a substantially higher probability that
children from high-income families exploit their talent than their peers in
low-income households. This group, called the “lost Einsteins,” faces barriers
because they are much less exposed to inventors, role models, and mentors. Any
would benefit from developing this local talent pool, for example, by exposing
children in poor neighborhoods to mentors and role models. A recent discussion
suggests that such policies could quadruple long-term invention rates in the USA.2

2.2 Education and Skills

Let us try a thought experiment. The government of some random country is

designing a new education system from scratch without historical dependency,
resource constraints, or other limitations. The result will most likely be a system
that focuses on the skills young people need in order to meet the challenges the
future might bring. The system would focus on the skills needed for disruptive
careers and developing entrepreneurial mindsets with ethical standards. Teachers

2
Bell A et al. (2019) Do tax cuts produce more Einsteins? The impacts of financial
incentives vs. exposure to innovation on the supply of inventors. Journal of the European Economic
Association, p. 651–677.
2 Human Capital 11

would bring a dynamic mindset and focus their teaching on the students’ future
needs.
Now let us consider the education systems of the 193 member states of the United
Nations. How many of them get even close to reaching these objectives? Just a few,
perhaps a handful. Most education systems do not meet these standards, and are very
expensive on top of that.
Why is it so difficult to change educational systems if we essentially know what it
should look like? There is no universally accepted explanation, but a few examples
can demonstrate the problem.

Semester Structure
Most countries, especially in industrialized Western countries, stick to excessively
long summer holidays for students of up to 10 weeks. The historic reason is
agriculture where children had to help harvest crops during the summer months.
200 years ago, agriculture was by far the most important sector of the economy.
Today, in industrialized countries, the agricultural sector makes up around 2–3% of
GDP. Nonetheless, the educational system reflects the long-ago need for children to
participate in the harvest.

Ideology
Education is a hotly contested political topic. Political parties form opinions on
optimal educational policies, and these become controversial in the eyes of political
strategists. The effect is that parties block their opponents’ positions not because of
their merit but for the sake of politics—even when there is a common understanding
that the system is overdue for change. Moreover, the party positions persist for
decades. If party representatives are asked off the record, they might confess that
their parties’ positions on the education system are not future oriented. However, on
the record they will stick to the party’s political strategy.

Persistent Teachers’ Education

Young people who choose to become teachers will most likely keep that profession
until their retirement. The fluctuation or permeability to careers in industry is very
low, in both directions. This means that the time horizon for changing the education
and mindset of teachers is around 35 years. In addition, the impermeability between
careers in education and the economy means that economic expertise does not
percolate into the education system. As a consequence, education systems tend to
suppress rather than drive change.

Even small changes in education systems require enormous effort. Some regions
have switched their strategies, using attractive packages to lure well-educated people
from other regions instead of reforming their own education systems. Most of the
regions described in Chap. 6 have developed successful strategies to attract skilled
people from around the world. We will discuss this issue further in Sect. 2.5.
Young people should acquire a fair basic education. However—far more than
they did in the past—modern students need the skills to adapt to changing conditions
12 L. Garzik

and continuously acquire new knowledge. Thus far, education systems have not
been able to adapt to the knowledge sector’s change dynamics. Neither have they
coped with the ever-increasing speed of these dynamics.
One of the most important skills for young people today is continuous personal
development. Stopping this development risks sliding into stagnation, even for the
brightest individual. In many areas but in innovation especially, stagnancy means
decline. Even a positive change dynamic could mean losing ground to others who
can change even faster.
Another increasingly important skill is interdisciplinarity. Current educational
systems are discipline-oriented. Geography, chemistry, physics, biology, and math-
ematics are taught separately. Most teachers focus on their disciplines and are neither
informed nor interested in what students learn before or after their lessons. Formally,
teachers are not required to consider what other subjects are teaching. However,
making these connections offers major benefits. When students learn the interdisci-
plinary connections across disciplines, they can understand concepts like how
physics and chemistry contribute to data processing in their mobile phones.
A showcase example of a successful interdisciplinary approach in the tertiary
sector is the d.school at Stanford University. The d.school is full of equipment at
students’ disposal for experimentation. Its creativity workshops teach interdisciplin-
ary solutions. In Europe, this kind of experimentation environment is only found in
kindergartens. This is not a joke—real commitment to innovation would mean
extending kindergartens’ spirit of creativity across all sectors of education and up
to universities.
The ability to recognize an idea’s implementation potential depends on the skills
learned in primary and secondary education, or on entrepreneurial experience. If the
focus on disciplines and culture is too tight, it will negatively affect technology
transfer into markets.3
The issues discussed above all emphasize the importance of creating a pool of
future entrepreneurs—people with the vision to lead the way into the future. But a
dynamic innovation ecosystem needs more. Chief and Indians is a popular children’s
game and sometimes, every child wants to be the chief of the tribe. The same can
occur in an innovation ecosystem. If education just develops entrepreneurs and
migration policies focus only on founders, there will be a point when companies
cannot scale without scores of developers, (software) engineers, project managers,
and more.
The most sought-after employees have high IT literacy skills. Many new
businesses rely on digital business models or, at least, their distribution channels
are connected to bits and bytes. When Google announced in 2019 that the company
intends to expand its Zurich operation by an additional 3000 employees, one could
feel the wince throughout the ecosystem. This generally positive investment might
turn into a nightmare for the other players in the ecosystem—the region will look

3
Shane S (2001) Prior knowledge and the discovery of entrepreneurial opportunities. Organization
Science Vol. 11 No. 4, p. 448–469.
2 Human Capital 13

like a reef after a trawler hammered it down and will have no IT fish left. In economic
terms, this is called a cluster risk: one major player attracts a large part of the
resources in the region, then the smaller players have to survive on scraps. The
region becomes less attractive and its Run Mode described in Chap. 5 becomes an
attempt to run a marathon with a wooden leg. The moment the wooden leg rots or the
major player leaves the region, there will be little dynamic remaining. This story is
not fiction, it has happened in many regions. One of the most famous cluster risks
can be seen in Finland with its Nokia moment.
Regions with large populations have an advantage, especially if they manage to
educate a good amount of IT-literate talent in their local education system. Shenzhen
is globally unmatched in its ability to scale digital hardware and software business
models. In the surrounding Pearl River Delta—which recent strategy papers are
calling the Greater Bay Area—around 120 million people are available to empower
the industry if there is an appropriate proportion of STEM topics in the education
system.
As innovation ecosystems develop, they demand additional skill sets. Former
founders take development to the next level and become business angels or VC
investors. To succeed in this new role, they must gain additional skills like the
capability to distinguish renegades—individuals unwilling to follow any rules who
collect black marks as they move from company to company—from talent that needs
freedom from unnecessary regulation to tap its full potential for new methods and
solutions. Developing new skills like these makes individuals smarter and, as we will
discuss later, the number of smart people around the globe is finite. As a region, there
are two ways to ensure a supply of smart people: being a migration magnet with all
of the ingredients for a “running” innovation ecosystem according to Chap. 5, or
growing necessary skills in the local population. The latter strategy also requires that
homegrown talent will not immediately leave the region. This sends an unfortunate
message to all innovation ecosystem managers: the regions that are successful at
retaining their homegrown talent are probably also magnet regions for migration.
An important part of “smartness” is the ability to fail. It is a specific skill to fail
and learn from failure. This skill can be a valuable resource in any ecosystem. As UC
Berkeley faculty Marc Coopersmith and John Danner write in The Other F Word,4
“truly successful leaders know how to turn a bad experience from a regret into a
resource.” Failure is a permanent companion in our daily professional and private
lives. A prerequisite for turning a failure into an advantage is a reality check and
public admission. Christoph Keese looked at it from a different angle and concluded
that the ability to disrupt oneself starts by admitting you are falling behind changing
conditions.5 In other words, you can innovate internally when you recognize you are
not up to date anymore and then dare to tell others.

4
Coopersmith M and Danner J (2015) The Other F Word. Wiley.
5
Keese C (2018) Disrupt yourself. Penguin.
14 L. Garzik

Fig. 2.1 Knowledge as a

consequence of belief and
truth. Source: Author’s own
figure

2.3 Beliefs and Mindset

The education system can provide literacy, knowledge, and the foundation for other
skills in a structured manner. The attitudes behind it will be shaped by a much
broader spectrum of influencing parameters such as family, friends, and the region’s
culture and society, characterized by common norms and ethical convictions. These
parameters set the beliefs that shape individuals’ actions—this is known as the
region’s mindset.
Let us dig a little deeper into the similarities and differences between knowledge
and beliefs. Ecosystems do not act according to their supply of knowledge, but
according to their shared beliefs. Discussions in our society often roll around
knowledge and “the knowledge society,” but in the end, knowledge is only part of
a larger source of action. As Fig. 2.1 shows, knowledge is a part of our beliefs.
Knowledge is the part of the truth where truth is in line with our beliefs. Our
parents and broader network of family and friends shape our beliefs during early
childhood socialization. Knowledge is local. It can also be influenced by religious
beliefs, which are becoming less important in industrialized countries but are still a
major force in developing countries. Knowledge can be dynamic, with new findings
changing or expanding the sea of truth. We accept new knowledge when it meets our
beliefs. If this is not the case, we can ignore the truth even if we have the feeling that
it could be true. We will continue to act in the name of our beliefs.
The total of regional beliefs and the assets of shared values can be called culture.
Peter Drucker is credited with saying that “culture eats strategy for breakfast.” Now
we tie that saying to our previously mentioned foundation of beliefs: culture is the set
of beliefs of people who designed the strategy with their knowledge. When it comes
to implementation, beliefs will be stronger than knowledge of the strategy, and any
element in the strategy that contradicts implementers’ beliefs is unlikely to become a
reality.
Strategies are closely related to the analysis that takes place before the plan is
formalized and implementation begins. Analysis is handled in an open and evidence-
based way, unless this is prevented by lobbies that are not interested in the true
picture of the system as it is. Strategy development, discussed in Sect. 3.3, is not a
big issue—most project managers responsible for strategy development are experi-
enced at that task. However, strategy implementation is when seemingly willing
people and institutions are prevented from making changes that contradict their
2 Human Capital 15

cultures and mindsets. The problem may not be visible in the first years of the
implementation stage, and usually this lack of system transformation is only visible
when it is too late.
A vision can change our perspective on values from a threat in strategy execution
to a potential resource. Visions harness emerging energy and are a prerequisite for
successful founders. No matter how often strategies and products are changed during
a founding process, the vision must remain the same.
The dominance of attitudes and beliefs over knowledge and rational decision-
making options influences individuals’ lives, including professional and private life
decisions. We must accept that we do not define our stories, instead our stories define
us. This does not mean we are helpless passengers in our lives. The deeper we
understand our own inner storytellers, the better we can learn how to steer them
where we want to go.

Cognition Versus Emotion

The power of belief against knowledge can also be translated into emotion and
cognition. Everyone has experienced a situation when emotion runs roughshod over
cognition, just as beliefs can do to knowledge. During implementation, cognition is
placed defenselessly under its stronger emotional superstructure.
We could discuss cultural patterns in further detail. However, since the theoretical
background of culture and shared values are not the main topic of this book, we will
only mention where interested readers can dig deeper.
Geert Hofstede (2001)6 provided a well-grounded foundation for cultural classi-
fication and its consequences. He defined five dimensions of cultural differences:
power distance, uncertainty avoidance, individualism, masculinity or femininity, and
long-term or short-term orientation. The first two summarize regional attitudes to
policy and the level of risk-taking in the community. The Power Distance Index
(PDI) and Uncertainty Avoidance Index (UAI) categorize people’s behavior relative
to new ideas and perceived risks, respectively. A region is balanced when both
indices are either high or low. If both are high, the region’s greater uncertainty is
compensated by a strong superior power that takes away most of the uncertainty. If
both metrics are low, there is no correcting power, but it should not be needed
because the uncertainty is also low. It gets more interesting if uncertainty is high and
power distance is low. In this case, nothing compensates for latent risk avoidance.
The consequences are low entrepreneurship and conservative capital investment that
prefers real estate investments over riskier new ventures. The inverse—high power
distance and low uncertainty—does no harm to entrepreneurial activity.

Diversity
Diversity is a precondition and a powerful driver of innovation in small entities like
teams and in entire ecosystems. New ideas and their creative implementation are

6
Hofstede GH (2001) Culture’s consequences: Comparing values, behaviors, institutions and
organizations across nations. Geert Hofstede (Ed.). Sage. p. 29.
16 L. Garzik

based on sets of intercultural experiences and values. The more diverse these
experiences are, the broader the options for implementation will be. One-sided
ways of thinking always bring the discussion to the same limited possibilities, just
like walking downstream along a river will always bring you to the same endpoint.
To find new destinations, you need to follow the river upstream and follow its many
arms and tributaries. Techniques for capitalizing on diversity for innovation are well
described by De Bono in many of his publications7,8. Diversity should be understood
in its broadest context, from religion to ethnicity to gender.

Developing Beliefs
To bring out the best ideas, teams and ecosystems require diversity and another
ingredient. That second ingredient is trust. Trust in a diverse team can be built
through positive experiences and open communication. If this is not possible, trust
can also develop through contacts and networks. However, it is difficult to build trust
when there is more than one degree of separation. That also applies to the “warm
introduction” approach used in successful regions like Silicon Valley.
Is it possible to change, or better, to develop our beliefs? Let us discuss the case of
a random company in the manufacturing or service sector in a relatively
industrialized region, but not one of the “hip” leading innovation regions where
the future seems to happen magically by itself. The company’s supervisory board
realizes one day that the company is stuck in a complacency mode, serving only its
existing customers. The board assesses the medium-term future and points out that
the company’s business model will have to change—otherwise the company may
run out of customers before too long. The assessment shows that their value chain
could function perfectly without them.
What options does the supervisory board have to face this challenge? Obviously,
the company’s current management is not able to deliver sufficient leadership energy
for a change process. The immediate reaction of most supervisory boards is to
replace the management. In many cases that is the wrong decision: on one hand,
new management would need time to get familiar with the company’s visible and
hidden lines of communication. On the other hand, the new management is likely to
have the same mindset as the previous one if people are selected through the same
process and by the same people.
A better approach is to develop the existing management’s mindsets by sending
them to regions that are successfully meeting their key challenges. They must spend
sufficient time in those regions and must be forced to join in as entrepreneurs or by
tackling day-to-day business in the new environment. Management will try to
delegate this task to lower levels in the hierarchy, but that will not work. The new
mindset must be as high in hierarchy as possible, otherwise no cultural change can
take place in the entire company.

7
De Bono E (1992) Practical Thinking: 4 Ways to be Right; 5 Ways to be Wrong; 5 Ways to
Understand.
8
De Bono E (2015) Serious Creativity: How to be creative under pressure and turn ideas into action.
2 Human Capital 17

When discussing mindset change throughout an organization, we also need to ask

who is responsible for everyday entrepreneurial thinking. In rare cases, organizations
will have an entrepreneurship role with the same weight as finance, IT, or marketing.
This role should be part of the functional organizational chart for any organization
that wants to stay competitive. If our hypothetical company wants to remain
competitive and avoid stagnation, it should install someone whose job it is to
maintain momentum.
When we take this to the next level and discuss ecosystems, the same is true.
Ecosystems entail responsibilities like political strategizing, implementation by
agencies, and the design of laws and regulations. Who monitors entrepreneurship
in an ecosystem and reminds all stakeholders of the entrepreneurial models and
processes that inspire people to disrupt themselves every day? Innovation
ecosystems in the WakeUp or WarmUp modes according to Chap. 5 will especially
be able to boost their development by installing a regional function for entrepreneur-
ship. Ideas can develop in any corner at any time. The entrepreneurial function is
charged with giving these ideas enough space for development and for innovators to
succeed or—more likely but still important—fail.

Entrepreneurial Mindset
Entrepreneurship is anchored in the beliefs of the mindset, not in knowledge.
Informing a group of people in a seminar about the benefits of entrepreneurial
activity leads to 100% nodding heads and 0% impact on their behavior. Preachers
recruiting new members for their sects are the rare species that can change the
attitudes and behaviors of their lambs in just one seminar.
Entrepreneurship and self-employment have also been included in the European
Innovation Strategy 20209 due to their perceived impact on sustainable growth and
social participation. The Flash Eurobarometer10 showed European citizens’ misera-
ble mindset in this area compared with their global peers. Compared with the
barometer results from 3 years earlier, Europeans’ attitude toward self-employment
even fell by 8% from 45% to 37%. In countries like Turkey (82%) or Brazil (63%),
these numbers are well over 50%. Entrepreneurial mindset is not a genetic disposi-
tion. It is formed in the process of socialization by parents, friends, and teachers. In
European countries, neither group seems to see young people’s entrepreneurship as
an asset. It is simply not an issue.

9
http://ec.europa.eu/social/main.jsp?langId¼en&catId¼952
10
https://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/
instruments/FLASH/surveyKy/1024
18 L. Garzik

2.4 Tolerance

According to the Cambridge Dictionary,11 “tolerance is the willingness to accept

behavior and beliefs that are different from your own, even when you do not agree
with or approve of them.” In the context of innovation, the advantages of tolerance
are immediately transparent. In a tolerant community, products and services will get
a chance to be adopted and tested for usefulness and appropriateness even if they are
far from existing standards. Conservative socialization will block everything new by
arguing that established procedures already work well enough.
Tolerance is an important—if not the most important—requirement for the
success of an innovation ecosystem. The discussion in Chap. 5 rates tolerance as
the most important resource for innovation, but also identifies at minimal flexibility.
Why should it be so difficult to set or improve tolerance levels? It appears that
tolerance is a long-term social achievement. We can explore this through two
examples.
Silicon Valley, described in detail in Sect. 6.9, is home to an open and tolerant
community. Why is that region tolerant? We can trace two waves of tolerance
flocking into the region. The first wave rolled with the adventurers who were
drawn to the gold rush in the mid-nineteenth century as described in Sect. 4.2.
Open-minded gold miners were ready to leave their established lives behind to
venture into an uncertain fortune. The second wave of tolerance flowed into the
Valley after the World War II when the LGBT community discovered the openness
to diversity in San Francisco and the Bay Area. The movement rose to prominence
when hippies poured into the Haight-Ashbury district in San Francisco in the 1960s.
There are not many places in the world where holding hands with or kissing a same-
sex partner will not cause whispers from the surrounding crowd. On the contrary,
there are many more regions around the world where homosexuality is still
punishable by death. A community that accepts differences in every social form is
also a perfect testbed for new business models or services. The crowd will be willing
and able to adapt, test, and provide informed feedback.
For many readers, the second example of tolerance may be more surprising than
San Francisco: Israel and the Tel Aviv region in Sect. 6.11. Today’s newspapers are
full of stories about religious and political battles in the region. If you wipe off the
foam of politics, you will find a surprisingly open and tolerant society. The history of
this social pragmatism can be traced back a few hundred years to Levantine times
when a multitude of societal and religious cultures in the region had to merge and
come to terms with one another. Since the coastal regions, at that time, were more or
less divided between Muslims and Christians, the mountainous backcountry was a
secluded retreat for all types of minorities. These groups had to cope with each other
to develop trade and prosperity. They learned to be tolerant over many generations.
This worked quite well until fanatics began using religious differences for their own
power and wealth.

11
https://dictionary.cambridge.org/de/worterbuch/englisch/tolerance
2 Human Capital 19

Chapter 5 provides a scale for the flexibility of key resources, and gives
tolerance’s flexibility the lowest possible rating of 1. It takes generations and a
remarkable amount of pragmatism to develop a tolerant community.
In contrast, the loss of tolerance can happen much faster. After more than a
thousand years of pragmatic tolerance, parts of the Levantine region (today known as
the state of Lebanon) got caught up in a civil war and in just a few years destroyed
many social achievements. The loss of culture and intellect is irreversible in the short
or medium term. The same occurred in parts of Central Europe during World War II,
when xenophobia and anti-Semitism largely displaced intellectual capacity.
Regardless of development level, every innovation region’s leaders should ask
the same questions that companies ask themselves. How can we provide talents with
a playing field where they can develop ideas? How can we tell the difference
between real talent and renegades who just want to break the rules? How can we
prevent accountants and auditing bodies from killing an idea before it sees the light
of day?
The killing of new ideas has a long history. In 1707, at the beginning of the first
industrial revolution, one of the supposed inventors of the first steam engine, Denis
Papin, built a boat powered by a new kind of oar and tested it on the river Weser.
Professional boatmen at the river realized that the idea would create competition for
them and destroyed Papins’ craft. To prepare for meetings with auditors, we
recommend providing them with a copy of Black Swan12 to inform them that
forecasting achievements or targets is likely to be a pointless endeavor.
Humans are in the favorable position of having ideas out of the blue, a widely
underestimated advantage over animals who are unable to think about things that do
not exist. The advantage of imagination can only develop to its full potential if there
is a social environment that allows for new ideas. Again, that environment relies on
tolerance.
We need to mention a third example for the importance of tolerance: China. Most
readers will wonder why China is an example for tolerance since that country seems
to be more bureaucratic and a closed shop against innovation-sharing with other
global regions. Furthermore, China is often hidden behind a severe language barrier
and living conditions that might be difficult to endure for people who are used to the
standards of western industrialized nations.
It is the Chinese people who drive innovation. They are socialized in a kind of
chàbùduō which can be translated as “that works quite well at the moment.” This
Chinese attitude is similar to Silicon Valley’s preference for lean processes, with
chàbùduō being a minimum viable product that, due to its method of implementa-
tion, will be tested in the community and improved with feedback.

12
Taleb N (2010) Black Swan. The impact of the highly improbable. Pantheon.
20 L. Garzik

2.5 Migration and International Connectivity

This section discusses migration and connectivity questions. Further aspects of

infrastructure for mobility and social interaction will be tackled in Sects. 4.1 and 4.2.

2.5.1 Immigration and Emigration

Immigration and emigration are valuable sources for cultural exchange. As shown in
Chap. 1, people who travel learn about differences in innovation tools and cultures
and acquire the ability to understand and believe in them.
Some global regions act like magnets for people trying to realize their entrepre-
neurial dreams. Somebody somewhere has a great idea, and that person chooses
where to go based on which region they think is best to develop the idea and lead it to
success. The regions in Chap. 6 have a fair chance of being at the top of
entrepreneurs’ personal rankings. Since there are many reasons for migration—
economic pressure, war, religion, and many others—it is not easy to distinguish
the “migration of ideas” that arises from entrepreneurial motivation specifically.
For more than 40 years, Silicon Valley, which is discussed in detail in Sect. 6.9,
has been the destination that makes entrepreneurial dreams come true. Ever since the
mid-nineteenth century when fortune-seekers joined the gold rush in Northern
California, thousands of people flock to Silicon Valley every year in search of the
holy grail of entrepreneurial happiness.
Another global region has seen a similar magnetic effect driving smart people to
storm into the region with their ideas: Shenzhen in Sect. 6.8. Shenzhen has offered a
less regulated and less bureaucratic framework than most other Chinese regions
since its establishment as one of China’s first special economic zones in the 1970s.
Due to its lower levels of regulation and bureaucracy, intellectuals, rebels, and—
more importantly—rebellious intellectuals have poured into the region to implement
their smart ideas. That does not mean that other global regions are more bureaucratic
than Shenzhen, but the difference to other Chinese regions is enough to get a large
crowd moving.
Other regions use political strategies to attract bright minds into research and the
tertiary sector, exposing local students and researchers to peers from different
cultural backgrounds. This costs a lot of money but can be quite successful, which
we can see from these regions’ positions in the innovation rankings.
Israel uses this knowledge-driven approach, and is home to more engineers and
researchers per capita than any other nation in the world. There are more Israeli
companies listed at NASDAQ than European ones, which is very impressive for a
country of around 9 million people compared with more than 500 million in
European Union member states. Migration is a major factor, both immigration and
emigration. Around a third of Israel’s residents were not born in the country. This
creates space for a lot of diversity in cultures and ways of thinking. Furthermore, the
diaspora is in close contact with their networks in Israel and keeps the doors open for
2 Human Capital 21

people to return home after gaining experience abroad, then make use of their new
practical knowledge.
Another example of how important even small regulatory differences can be for
migration is the reverse flow of Artificial Intelligence (AI) and blockchain experts
from the USA and Canada to European regions like Berlin. While two decades ago
the flow of experts was predominantly directed from Europe to North America, the
stream has been reversed in recent years by lowering the immigration barriers.
Christoph Keese describes the German case in his discussion on the development
of the AI scene in Berlin.13
Another way to analyze the power of migration is to follow the global flows of
patent applications and their implementation. The first question is the source of
patent applications, where we can observe the movement from established
industrialized regions like Europe and the USA to emerging regions. Between
2010 and 2020, most patent applications moved from Europe and the USA to
Asia, in particular China. This trend is expected to continue over the next decade.
This raises questions on the difference between the region where ideas are born
and the regions where patents are applied for and granted. Europe is an abundant
source of ideas, but implementation happens in other global regions like the USA
and China. In some cases, the source of the idea travels to another region with the
patent and the original region loses a pool of potential new patents.
There is no simple formula for becoming a magnet for “smart” people, as we
might call a person who is well educated and has an intrinsic motivation to translate
that knowledge into markets. Magnets develop slowly and can deteriorate if the
region cannot retain its advantages over other regions. There are many factors, such
as the list of resources discussed in the regional Strength, Weakness, Opportunity,
Threat (SWOT) analyses in Chap. 6. All these factors combine to form an ecosystem
that meets entrepreneurs’ expectations.
The number of smart people in the world at any one time is limited. Any region
unable to attract them will lose ground in knowledge implementation. These regions
will find themselves in an input–output dilemma observable both in the innovation
rankings and in long-term macroeconomic development. Since the quality and
quantity of the workforce influence migration dynamics—smart people want to
work with other smart people—this also accelerates the agglomeration effect of
global innovation hotspots.

2.5.2 International Connectivity

International connectivity, which we discuss in four dimensions, is firmly linked to

migration. The four dimensions are as follows:

13
Keese C (2018) Disrupt yourself. Penguin.
22 L. Garzik

Fig. 2.2 International

connectivity. Source:
Author’s own figure

Immigrants: People who immigrate to the region.

Diaspora: People who emigrated from the region and maintain contact with the
region.
Open-minded couch potatoes: People who were born in the region and have never
lived outside the region for more than a few months but have developed sustain-
able contacts with the outside world.
Cake sharing alliance: People who have immigrated and connect with immigrants
from different regions (Fig. 2.2).

Immigrants
We have already discussed various reasons for migration. The connectivity of
immigration focuses on the lines of connection that immigrants maintain with their
regions of origin and the effects of those connections. After settling in the destination
region, immigrants can interpret their culture and tools of origin and optimize them
for innovation. However, they have an additional advantage: immigrants can assess
whether a venture or investment would be successful in their home countries. Due to
their networks at home, they can even implement it there. Regardless of whether they
have left their home countries due to economic pressure, war, or because of a more
promising ecosystem, many immigrants live with a deep desire to support their
origins or even to return if possible.

Diaspora
People who have left their home regions create valuable connections between their
old and new networks. Since many retain the desire to keep in touch with their
origins, these “masters of two worlds” can benefit their new ecosystems with little
effort. Sometimes, regions tend to discourage people—especially young people—
from leaving, but this is a serious mistake. These potential migrants must get out into
the world and maximize their intercultural experiences, and then they can open doors
or even return home. Some migrants will return and some will not, like any risk
investment. There is a simple psychological explanation for migrants’ likelihood of
returning home. If a person feels pressure or is not supported to leave but
2 Human Capital 23

nevertheless finds a way out, that person will never return because they know it
would be difficult to leave again. In contrast, a person who receives support will be
more motivated to return or support their region of origin from abroad.
There are several examples of large diaspora communities in successful
innovation regions such as the Indian community in Silicon Valley or the Russian
community in Tel Aviv. Some regions and countries have set up networks of global
support for their diaspora. However, integrating network nodes into embassies has
not proven successful for two reasons. First is the diplomatic corps, which focuses
on forms and regulation that are not necessarily in the spirit of innovation. The
second reason is that embassies are usually located in the capital cities, which are not
the best ground for innovation ecosystems for various reasons described in Sect. 3.3.

Open-minded Couch Potatoes

According to archeological research, the sedentary lifestyle began in the Upper
Paleolithic Period about 20,000 years ago when it became possible to grow food
in one place year-round. People wanted to stay in one place, so it was not the initial
expertise in agricultural techniques that made them settle, but the other way around.
People settled down, hunted deer around their settlements, and when deer became
rare, had to learn about agriculture to avoid a return to nomadic traditions.
Today, people still like to settle down. A few decades ago, a person’s radius was
typically their village. They only looked to the neighboring village or valley when
they had to look for partners, which was good for refreshing the gene pool. Modern
means of travel make it possible to spend a night on a plane and wake up a few
thousand kilometers away on another continent, so people who love their settlements
can now look beyond their own noses. These individuals are very valuable for an
ecosystem. Open-minded couch potatoes will never leave their hamlet, but they
travel and bring back stories about diverse cultures that can motivate others to escape
their cultural dead ends.

Cake Sharing Alliance

There is an interesting phenomenon in developing countries, as well as in modern
Western democracies, where xenophobia occurs in immigrant communities. The
Migration Institute14 describes this as reverse xenophobia, or immigrants showing
intolerance toward the local community or toward other immigrant groups. In
developing countries where there is not much to share, socioeconomic pressure is
the usual explanation for reverse xenophobia. In highly industrialized countries, we
have to dig deeper for an explanation.
Reverse xenophobia seems to be driven by the fear of having to share the “cake”
of host-country support with other immigrants being greater than the perceived risk
to their own status in the community. In elections, the phenomenon manifests in
immigrant groups voting for parties with xenophobic political attitudes. This is
surprising because these people essentially vote against their own status as

14
https://www.migrationinstitute.org/publications/reverse-xenophobia
24 L. Garzik

immigrants and is driven by fear of other immigrants taking the lion’s share of social
support.
The effects of reverse xenophobia on regional ecosystems are embedded in the
potential of cultural diversity for innovation. In addition to discipline, gender, or
skills diversity, having diversity in socialization and culture is key for successful
innovation teams regardless of whether they work together in a large company or
start a new venture. If a region wants to be a destination for migrants, it should also
review the level of reverse xenophobia and maximize tolerance to enable its
entrepreneurial spirit.

2.6 Quality of Life

Quality of life is a deeply individual metric. Despite a wide range of indicators used
to objectify and compare its contributing factors in international rankings such as the
Mercer ranking,15 perceived quality of life will always depend on individual sociali-
zation and culture. We can try to correlate clusters of perceived quality with regional
development and status in emerging countries like those in Africa in Sect. 6.5, one
party systems in regions like China in Sects. 6.7 and 6.8, or regions with advanced
democratic standards like Germany in Sect. 6.2 or Switzerland in Sect. 6.12.
Perceived quality of life depends on social and individual norms and priorities. If
individual business success is a priority, issues like air quality or restricted individual
freedom in a surveillance society take a back seat. When one migrates from one
region to another and tries to set the same priorities as before, one will encounter
several cultural barriers that take a lot of energy to overcome.
Is it possible to classify the typical priorities and attitudes of people who come
from a certain region of the world, such as from Asia, Africa, or America? These
priorities are a function of individual needs and the availability of resources to meet
those needs, which goes hand in hand with the region’s prosperity. Individual needs
follow the hierarchy of needs introduced by Abraham Maslow16 in the 1940s. People
will invest their energy to climb the hierarchy and achieve self-realization. The
ecosystem should provide a fertile ground for research and innovation as the key
factor to reaching the next level. However, regional prosperity will not always
motivate people to seek wealth through risky endeavors. It can provide a social
security framework that motivates individuals to step out of their comfort zones, but
it can also provide a safe standard of living that keeps them away from taking risks.
In history, innovation has often been based on misery. People who had to deal
with demanding situations developed great ideas to get out of their painful situations.
Industrialized countries have been developing social security systems that reduce the
dangers of individual misery and distribute wealth. In the slipstream of prosperity

15
https://www.mercer.com/newsroom/2019-quality-of-living-survey.html
16
Maslow AH (1943) A theory of human motivation. Psychological Review. 50 (4): 370–96.
2 Human Capital 25

lurks the danger of complacency, so any regional development status requires certain
measures.
To assess the present and future necessities for a successful ecosystem, economic
development models must account for the Lewis Point. Regional economic devel-
opment is similar around the world, progressing from agriculture to textiles and
machines and then to high-tech industry. The Lewis Point is moment when the labor
surplus declines, which often happens after women get better jobs and birth rates
decline. The Lewis Point can be understood as a design freeze in economic devel-
opment. Whenever that point happens will be the stage where the economy will stay,
whether that is the textile industry moment like in Vietnam or the high-tech industry
moment like in South Korea.
Perceived quality of life is also strongly influenced by the social and political
system. The status of this system is not surprising as it is highly path-dependent and
resistant to dynamic changes. If political systems suddenly change, it is usually not
for the better. In addition, a volatile social or political system prevents the migration
of smart people to the region since there is no medium-term guarantee of security.

2.7 Soil for the Seed: Ideas Born in Rebelling Intellectuals

The conclusion of this discussion on human capital issues is that the seed of an idea
is ideally born in the brain of a rebelling intellectual. A rebelling intellectual is a
person who has intellect, knowledge, and skills combined with a drive to break off
the beaten path. These individuals must have enough energy to lead motivated
people along on their new paths.
Rebelling intellectuals can also be referred to as “smart people.” Based on this
discussion of human capital, we will understand the characteristics of these smart
people as follows:

Intellectualism: Solid knowledge based on the humanities, engineering, and eco-

nomics as well as design and the arts. Ability to communicate with an audience.
Rebelliousness: Awareness of existing regulations but seeking alternatives. Better
solutions may require a forward-looking interpretation of the rules.
Purpose: Wants to change the world for the better. Relates to at least some of the
UN’s 2015 Sustainable Development Goals, for example, climate change or
poverty.
Resilience: Recognizes flops and failures as experience. Uses outside doubt and envy
as extra motivation. Follows the motto that envy is earned, but pity is free.
Leadership: Has the energy to inspire others to follow.

The secret sauce of any global innovation ecosystem is how many of these smart
people with the characteristics of intellectualism, rebelliousness, purpose, resilience,
and leadership it can grow at home or attract.
Finance Capital, Market, and Policy
3
Ludovit Garzik

Abstract

Capital, understood as nonhuman capital, is a diverse resource with a wide range

of subgroups including venture capital, bank loans, research funding, “family,
friends and fools,” and more. Money is an enabler, but a bad motivator. Founders
believe in their ideas and their potential impact on society. The big difference
between a startup with seed capital funding and an established company’s project
budget is the perceived ownership of the money. The spirit of innovation is
diametrically opposed to the many uncertainties of products and markets.
Ecosystems that focus on a conservative view of the market will face growing
disadvantages due to changing relationships between markets and demand.
Demand is one of the most underestimated drivers for success in many regional
innovation systems. The strategy for that is a consequence of policy, and is often
our main window into the policies themselves.

3.1 Finance Capital

Capital, understood as nonhuman capital, is a diverse resource with a wide range of

subgroups including venture capital, bank loans, research funding, “family, friends
and fools,” and more. In most of its forms, capital has a fairly flexible character, as
we also see in Chap. 5 where all kinds of capital can be in the upper section of the
flexibility scale. One reason is the fact that, in most regions, the available capital is
greater than the number of projects ready for investment.
Before going into different forms of finance capital, we should highlight the
nature and role of this resource in an ecosystem. Money is an enabler, but a bad

L. Garzik (*)
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 27

L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_3
28 L. Garzik

motivator. Founders believe in their ideas and their potential impact on society.
Income that could be a result of this is not their first thought. We can call this the
impact of a new venture. Of course, investors from business angels to VCs are
interested in their return on investment in the event of an exit.
The big difference between a startup with seed capital funding and an established
company’s project budget is the perceived ownership of the money. In a startup, the
money invested in the startup phase is fully under the founders’ control. They can
move on to their best intentions and change their minds, as long as they believe in
their ideas. In a company, the money stays entirely in the company’s ownership
without the project managers’ full commitment to put their heart and soul into it.
There are major cultural differences in how finance capital is raised and used.
There was already an impressive difference between Europe and the USA in the
early days of VC at the end of the twentieth century. According to Botazzi L et al.
(2001),1 “between 1995 and 2000 the flow of venture capital investment in Europe
has increased by a factor of six, but the gap with the USA has become larger—there
investment has increased, over the same period, by a factor of 24. In addition, the VC
industry in Europe is in its “infant stage and thus lacks experience. Contrary to the
USA, it is dominated by banks. The result is that quoted venture-backed companies
do not grow faster than non-venture backed ones.”

3.1.1 Risk Capital

Risk capital is the fire accelerant of entrepreneurial activity. To be clear, risk capital
is an additional accelerant, so startups that develop market–product relationships out
of pocket have no need for it. However, most new products and services begin with a
development phase where there are few options for immediate market entry or
revenue. Most risk capital comes with a range of experience and valuable contacts,
which should not be underestimated.
Startups use different types of financing as they progress through various
entrepreneurial phases. In the beginning, most entrepreneurs try to hold onto their
shares by drawing on their own savings. At least by the time they hire their first
employee, they recognize the burden of being an employer and try to find support in
their immediate environments. These initial supporters are “family, friends and
fools.” When startups find themselves with an urgent need to expand their customer
range and validate their business model, the hour has come for experienced business
angels. The next stage is to scale the product or service to new market sectors with
the support of VC investments. Crowdfunding is an additional option useful in
different stages of the process.
Successful innovation regions offer a wide range of support options that
entrepreneurs can use based on their individual needs. In regions with a tradition

1
Botazzi L et al. (2001) Research, patents and the financing of ideas: Why is the EU growth
potential so low? Economic analysis of the European Commission’s President.
3 Finance Capital, Market, and Policy 29

of bank lending, it will be difficult to find VC sources willing to accept that the
borrower will not repay the money in the event of failure. These capital owners
prefer to invest in less risky assets like real estate and keep their capital away from
knowledge and innovation. Politicians try to meet this challenge with funds that mix
public and private capital. They face two obstacles. First, public auditing bodies are
socialized with a risk-free investment culture, especially when it comes to tax
money. These bodies will try to prevent the benefits of venture investments from
being used in the system.
The second obstacle is private investors themselves, as there is often a misunder-
standing where public (co-)investment is regarded as a free gift and not an incentive
to increase one’s own risk. The consequences are models in which PPP is not
translated “Public-Private Partnership” as originally intended, but as “Public Pays
Private.” There are regional solutions to overcome these obstacles. One is a national
law in the USA that requires public and private cofinancing. This is an incentive for
the fund management to remain strictly private because public capital is served first
during successful exits with cash outflows. Due to the different genesis and
conditions across global regions, VC and Private Equity (PE) attractiveness varies
greatly.
An impressive example of successful public engagement in the VC sector is the
Israeli Yozma program. Yozma is the Hebrew word for “initiative.” Launched in the
early days of the VC business in the 1990s, it offered attractive tax incentives,
especially for foreign investors and their VC funds. This resulted in important
international VC activity in Israel today where mostly US-based VC investors
work with their local peers. Investment topics range from the life sciences to the
software and communication sectors.

3.1.2 Bank Loans

The main difference between bank loans and VC is that banks expect to be fully paid
back regardless of the investment’s success. The spirit of innovation is diametrically
opposed to the many uncertainties of products and markets. A regional tradition of
bank lending is a barrier to venture investments. There may be a legitimate need for
bank loans for later-stage investments.
The future of banking is emerging in Africa. In the absence of institutional
banking systems, people’s need for money transfer operations resulted in a multitude
of service providers, most of whom had no history in banking. Cellular operators
were the first to provide apps that could be used for money transfers in urban and
remote areas, but also for daily payments or microfinancing. M-pesa, Swahili for
mobile money, is one of the most famous examples. The company, based in Nairobi,
Kenya, was developed primarily by mobile service provider Safaricom and has
spread across many Sub-Saharan countries. Users’ cell phones become their wallets,
spending phone-based loans on everyday purchases like apples in the market or
microfinance investments for energy or mobility.
30 L. Garzik

Africa’s lack of banking institutions is more of an asset than an obstacle. The

continent does not need to eliminate or work around oversized banking
administrations like the USA and Europe do. Instead, Africa is kicking off the new
banking business and leapfrogging the old world in banking. There are many
examples of new banking businesses in Africa today. It would be difficult to set
up a structure for bank branches like that in western countries that could serve a
continent with 54 countries, many of which have more than 50 million inhabitants.
The banking business in Africa is following a dynamic development path with
hotspots for new services and startups in Kenya, South Africa, Nigeria, and Rwanda.
Bank managers in other global regions should take a close look at these
developments—it will be the future of their business.

3.2 Market and Demand

Ecosystems that focus on a conservative view of the market will face growing
disadvantages due to changing relationships between markets and demand. From a
conservative point of view, markets are defined as theoretical consumers. Companies
ask questions like how many people live there? How many are between 20 and
30 and buy products for that age group? These theoretical projections lack informa-
tion about market participants’ real spending intentions related to any given product.
Unlike the product’s market, demand for a product means that the customers who
actually buy it, when available, will have a pull effect. This is an important
difference that regional managers should consider when discussing markets and
demand. The question that defines demand is more appealing: do people really have
the problem that the product is going to solve?
Demand is one of the most underestimated drivers for success in many regional
innovation systems. Is it worth discussing the importance of demand? Yes, defi-
nitely. National and regional innovation policies, as discussed in Sect. 3.3, focus
mainly on the supply side of the system and ignore its potential to cope with
innovation-oriented demand. Traditional companies have countless employees
who have no idea that their salaries are paid by customers rather than their
companies. In the entrepreneurial world, the customer is taken into account from
the first moment of brainstorming. Who will my customers be? Whose problem can I
solve? Whose lives will be better because of my idea?
These questions are directly related to the topics dealt with in Sect. 2.2. Power lies
in beliefs, which drive the inferior contribution of knowledge in carrying out ideas
and desires. The majority of people spend their money on how they feel, not on the
technical details they might know. What do we know about the technology in a
mobile phone? Almost nothing, for most of us. Instead, we rely on properties like
perceived usefulness and ease of use—properties we judge with our guts, not our
brains.
In the language of startups, we could say that people vote with their feet and not
with their brains. They run to the offer that serves them best in their holistic
3 Finance Capital, Market, and Policy 31

understanding. Unfortunately, the effect is the same in politics—but that is a

different story.
This discussion assumes that people know what they want. If they do not always
get what they want, we can blame some wayward beliefs. The situation is actually
much worse. In many cases, people do not know what they want. How can they
find out?
Eric Ries suggested a process called Lean Startup.2 In the lean process, potential
customers are involved in the product’s first development cycle—the Minimum
Viable Product (MVP). In Mandarin, the MVP can be understood as chàbùduō,
which translates to “that is working quite well for the moment.” Markets need to be
open for test and pilot activities with early adopters. The process requires a reason-
able number of early adopters willing to provide feedback at a stage when the
product is not completely ready to use. The MVP will improve in incremental
steps as the startup promotes it and perseveres in making small developments.
After creation, the crowd assesses the MVP and the feedback helps the startup learn.
One of the most important findings from many MVP development processes is
that customers do not primarily ask questions about technical details. Instead of how
or what, customers ask why is the product or service useful in their lives?
In order to answer the why question, we have to remember that traditional surveys
reveal knowledge about people but usually not the attitudes and desires behind their
actions. However, we know that people vote with their feet—customers reveal their
true preferences with their behavior, including whether they might be enthusiastic
about a new product or service.
If a product or service is not ready for implementation, a prototype can help. The
startup can move the prototype to future customer environments and observe their
behavior when confronted with the new test object. After that, the startup can pivot
or persevere, following the Lean Startup method above.
The why question assumes that customers should be involved in the development
of a new product or service. Many teams start a new venture without hiring anyone to
represent or solicit customers’ opinions—they simply forget. It is naturally up to
team management to assign this role, but who is that manager in a startup team of
equals?
Neglecting necessary roles in a team or process is a common mistake in small
startups and in large corporate or government projects. Take the example of the 2007
USA housing bubble. A sophisticated process provided real estate investors and
private homebuilders with capital in the form of mortgages. Fannie Mae and Freddie
Mac, the two big players in the field, provided the money. Well-known organizations
like auditing multinationals assessed the projects’ suitability. After the money went
to its destination, no one was responsible for lenders’ ability to process their
mortgage repayments. When housing prices slowly fell in 2006 and 2007, no one
waved the red flag to correct the imbalance between mortgages and lender

2
http://theleanstartup.com/
32 L. Garzik

capabilities. The bubble grew until the pressure unloaded on Lehmann Brothers and
caused its bankruptcy, followed by the rest of the financial crisis.
Global regions differ in their ambitions to access new and existing markets.
Success depends on their depth of knowledge about the market, its customers,
and—most challenging—those customers’ demand motivations. Successful
companies like Google or Amazon invest a lot of energy and money in understand-
ing their customers better. They use personal profiling to show them the right
promotional messages and even to know their customers’ desires before the
customers know themselves. From a market point of view, this is difficult but simple:
if you are not paying for a service, you are not the customer but the product.

3.3 Policy and Regulation

The cornerstones of society are the written and unwritten agreements about how we
want to live together. The legal framework is a written part of this agreement. Even
within this more explicit structure, there is a wide spectrum of variation from laissez-
faire nonregulation to structured law and order where rules enforced by powerful
public authorities govern every aspect of life.
Innovation and regulation usually do not like each other much. A former Kenyan
Minister of Innovation summed up the ideal approach, “first innovation, then
regulation.” The goal of such an approach is to avoid killing baby ideas before
they can see the light of day.
Regulation can act as both an enabler and an obstacle in a regional innovation
ecosystem. Examples in this book illustrate both sides of the coin.
Shenzhen, discussed in Sect. 6.8, is a perfect example of what happens when the
rules of the game are changed and regulation acts as an enabler. As one of the first
“Special Economic Zones” in China, Shenzhen in the early 1980s was still in a
highly regulated environment. However, some changes in its economic and labor
regulations made it more attractive for knowledge—and innovation—driven people.
Those small changes were enough to accelerate Shenzhen’s impressive development
such that it surpassed Hong Kong’s GDP in 2019. In the late 1970s, people risked
their lives with trying to swim across the border river from Shenzhen to Hong Kong
in hopes of a better life. Now, the stream of innovation has reversed and today
Shenzhen’s quality of life—including air quality—is much higher than Hong
Kong’s.
As a second example, we can focus on the mobility sector. Around 10 years
before Uber—one of the leading startups in the mobility sector—was founded, taxi
companies had their first projects in European cities to test digital devices and
navigation systems. New technologies were available, but projects in Europe
focused on technological support for drivers and their navigation systems, not on
riders’ user convenience. The established taxi companies wasted a decade of poten-
tial head start, cutting off potential projects with the argument that drivers knew their
industry best and did not need any support from digital devices.
3 Finance Capital, Market, and Policy 33

The fundamentals of technology have not changed since the days of taxis—Uber
uses cellular providers’ communication systems and location services like GPS.
Now, taxi companies are trying to protect themselves through regulation and
lobbying, a strategy that cannot be successful in the long term. User convenience
is critical to the market, and this is where tech companies from Silicon Valley like
Uber or Bolt provide better service.

3.3.1 Policy and Strategy

Policy is an important resource for an ecosystem. It provides confidence in region’s

future direction and the sustainability of resources available in the region. People
will be ready to invest their brains and financial capital when they are convinced that
they can achieve their ideas and dreams. The slightest doubt about corruption or the
substance of policy will force people to think about alternatives, and they may
migrate to another region more supportive of their dreams.
Strategy is a consequence of policy, and is often our main window into the
policies themselves. Strategy development for a region is a task for civil servants,
who are charged with changing attitudes in the ecosystems they have created. As
mentioned in Sect. 2.2, even strategies based on analytical evidence and strategies
full of ambitious goals will have to face the hurdle of implementation. This task,
which is still in the hands of the same civil servants, is even more difficult when
confronted by bureaucratic mindsets or the path dependency of public
administration.
Policies for the public support of businesses need to be handled with care.
Striking a balance between promoting the public interest and bowing to lobby
groups is one of the most challenging tasks in an ecosystem. While public policy
may want to support key projects and areas, lobbyists will try to channel public
money into their companies and limit exposure to market competition. This is one
reason why, in most cases, successful innovation regions are not located in the
national capitals. Apart from the reduced availability of human capital for research
and innovation mentioned in Sect. 2.3, capital regions are magnets for lobbyists who
invest their energy in developing contacts rather than markets. Lobbyists use their
contacts to create dependencies, which are obstacles for change processes.
Any innovation region looking to become a success story must balance and
manage its resources, including clear priorities for energy investment. One of the
most commonly used input indicators for innovation is the share of GDP dedicated
to R&D. The optimal approach is to invest the maximum that human capital and
infrastructure can effectively absorb. Another important question will be the dyna-
mism of changing investment directions if necessary.

Example of a Successful Policy Measure

Governments often use various types of tax credits as an innovation policy measure.
These credits can lower R&D costs and incentivize companies to increase their own
34 L. Garzik

spending.3 The relationship between changes in tax regulations and R&D spending
is therefore positive and amounts to an increase of about 10% in R&D spending for a
10% decrease in tax income. In the long term, such measures will have further effects
on R&D transfer and innovation activities.

Example of a Failed Policy Measure

Between 2010 and 2015, many countries—including many OECD countries—
expected patent boxes to have positive innovation effects. They developed special
tax regimes to encourage innovation and consequently patenting activity. To keep
the message short: patent box measures had no impact on innovation activity as a
recently published research paper4 shows, and only a slight impact on patent
ownership. Global corporations have benefited, using these policy measures to
lower their tax burdens by shifting patent royalties among jurisdictions. In the end,
patent boxes only helped these large companies outperform the startups that were not
flexible enough to take advantage.

Government investment in R&D is important, according to recent literature,

because it encourages spillover effects from knowledge institutions to companies
and from business to business. There is evidence of successful interventions using
tax incentives and direct grants. The latter is also useful for controlling political
motivations related to sustainable development goals or other content-related policy
measures.
Just like a drug overdose, public support can have a negative impact if it is too
much for the system to absorb. During the COVID-19 pandemic, many regions have
launched new public support measures or expanded existing ones. However, public
financial support to companies often reduces the impact of market mechanisms and
can lead to dangerous reductions in the pressure to innovate. The consequence is
reduced competitiveness for subsidized companies on a global level.
Government investment in the human capital supply is reasonable but difficult to
implement. Policies directed toward grants for R&D projects that require a skilled
workforce risk inefficiency. Without sufficient opportunities to develop a skilled
local workforce, these grants will raise the cost of the existing workforce and boost
inequality while maintaining the same level of R&D, thus wasting taxpayers’
money.
An alternative to R&D grants is to focus on increasing innovative human capital
itself by forcing skilled migration or making investments in the education system.
Skilled workers are more likely to invent and have same effects intended by direct
project grants without risking an imbalance. This conclusion is reinforced by a

3
Dechezlepretre A et al. (2016) Do tax incentives for research increase firm innovation? Center for
economic performance, LSE.
4
Gaessler F et al. (2018) Should there be lower taxes on patent income? SSRN Scholarly Paper.
3 Finance Capital, Market, and Policy 35

number of recent papers, most of which focused on expanding the Science, Tech-
nology, Engineering, Mathematics (STEM) workforce5, 6
Many discussions of policy and innovation end by advising governments to stay
away from intervention in entrepreneurial activities. However, some resources in an
ecosystem are sensitive to government incentives. Silicon Valley would not be so
successful if its governments had not invested billions of dollars in military projects
at Stanford University in its warm-up phase as discussed in Sect. 2.7. Today, public
funding at Stanford is only 25% of the total, but that is still around USD one billion
per year.
The key question for policy makers is how to strike a balance, motivating
knowledge for social wellbeing without restricting the creativity and freedom of
basic research.

3.3.2 Regulation and Its Advisers

Regulation
According to Boettke P and Coyne C (2003),7 “the two most important core
institutions for encouraging entrepreneurship are well-defined property rights and
the rule of law.” Regulation is necessary to structure interactions between
participants in economic and societal processes. The spectrum of regulation’s effects
ranges from building insurmountable walls to encouraging high-risk investments.
We can use the example of insolvency law and Japan to see the transition from
barrier to an enabler. At the end of the 1990s, Japan’s bankruptcy law was refined to
include the special liquidation chapter of corporate law. One of the important
changes was to provide an exit option for failed ventures. As a result, the number
of startups rose sharply in the following years. People do not enter the risk arena if
they believe that there is no exit option. When an ecosystem offers such options,
more potential entrepreneurs are encouraged to join the sea of new ventures. The
same applies to social stigma. Dealing with flops and mistakes in society strongly
influences entrepreneur’s motivation, as shown in Sect. 2.3.
As discussed in detail in Sect. 4.2, the speed of change is key to an innovation
ecosystem’s success. Regulation has the ability to accelerate or slow down the
momentum. For example, regulations can make it very easy or very difficult to
start new businesses. World Bank data8 in Table 3.1 shows how many days it takes
in our exemplar regions.

5
Andrews M (2019) How do institutions of higher education affect local invention? Evidence from
the establishment of US colleges. Social Science research Network.
6
Valero A and Reenen J (2016) The economic impact of universities: Evidence from across the
globe. National bureau of economic research.
7
Bottke P and Coyne C (2003) Entrepreneurship and Development: Cause or Consequence?
Advances in Austrian Economics, Vol. 6, pp. 67–88.
8
https://data.worldbank.org/indicator/IC.REG.DURS, provided by Creative Commons Attribution
4.0 International License (CC BY 4.0).
36 L. Garzik

Table 3.1 Number of days to start a new business, World Bank (Data 2019)
Region Nation Start a new business
New York, SV USA 4
Berlin Germany 8
Shanghai, Shenzhen China 9
Medellin Colombia 10
Moscow Russian Federation 10
Zurich Switzerland 10
Tel Aviv Israel 11
Bangalore India 18
Nairobi Kenya 23
Sofia Bulgaria 23

Table 3.2 Ranking ease of doing business, World Bank (Data 2019)
Region Nation Ease of doing business
New York, SV USA 6
Berlin Germany 22
Moscow Russian Federation 28
Shanghai, Shenzhen China 31
Tel Aviv Israel 35
Zurich Switzerland 36
Nairobi Kenya 56
Sofia Bulgaria 61
Bangalore India 63
Medellin Colombia 67

Another indicator of whether regulations help or hurt entrepreneurship is the

ranking for ease of doing business. The national-level data includes 190 countries
worldwide in Table 3.2, including the countries where our innovation regions in
(Chap. 6 Successful Innovation Regions) are located.
The ranking includes measures for processes like starting a business, obtaining a
building permit or electricity, transferring property, accessing to credit, protecting
minority investors, paying taxes, conducting international trade, enforcing contracts,
and resolving bankruptcies.
Only two African countries (Mauritius at number 13, Rwanda at number 38) are
in the top 50 countries. Despite a spirit of new ventures and exciting tools for the
“bottom of the pyramid” market, most countries on this continent have a long way to
go before their regulations are supportive of innovation.
In addition to the static view of the World Bank rankings, there are also dynamics
between countries. Regardless of whether a country has made improvements, it may
still lose ground due if its rate of change is slower than its counterparts’. Two of the
countries discussed in this book have outperformed others with their rates of change:
China and India.
3 Finance Capital, Market, and Policy 37

China and India have jumped up many positions in the rankings compared with
previous years. These two countries’ progress builds on the implementation of
reforms. Both have reformed regulations in areas like business formation, building
permits, cross-border trade, and bankruptcy trading. China has also been able to
improve its regulations on purchasing electricity, protecting minority investments,
paying taxes, and enforcing contracts. Neither country is in the top position, but if
they maintain their pace of change, they have a fair chance of outperforming other
countries in the years to come.

3.3.3 Legal Advisers

Lawyers, tax advisers, and patent attorneys are examples of the group of service
providers that prevent entrepreneurs from having to know all the legal details that
could get them into trouble. Startups are known for their expertise at stretching legal
interpretation to reach new markets or old ones protected by lobby groups and
regulatory walls.
Most observers believe that these advisers wear grey suits, provide passive
support if mandated, and receive immediate reimbursement for their service. How-
ever, this group can do much more than legal support or tax advice. Advisers and
consultants can play an active or passive role in the ecosystem. Advisers become
unexpected valuable components of the ecosystem when they play an active role and
get involved in startups’ innovation projects or industry themselves. In this role, they
not only have an interest in the project’s success, but can also provide irreplaceable
contributions to the innovation process itself.
Interdisciplinarity: Advisers work in a cross-disciplinary way and draw in poten-
tial partners from disciplines far away from the core of the project. Innovation is
most successful when ideas come from sectors that, at first glance, have nothing to
do with each other. The innovation sector shares this characteristic with humor, as
good jokes are built the same way.
Network: Advisers establish contacts with potential investors and make initial
market contacts in lean development. Founders can trust feedback most when it
comes from a source not more than one degree removed from their own networks.
Investment: Advisers are expensive. If they are part of a project, they will know
about solvency and will request and receive payments for their services when there is
no risk to liquidity. However, this is only possible when advisers really believe in the
success of the project.
Against this background, advisers’ role in an innovation ecosystem should not be
underestimated.
Infrastructure and Institutions
4
Ludovit Garzik

Abstract

Infrastructure includes as all hard and soft facilities used by individuals directly,
either for research and innovation or for the mobility of people, assets, or data.
Infrastructure enables connections between individuals through communication
networks, roads, and community buildings. Innovators in Asia regard their
infrastructure much more highly than do their peers in Europe and the USA.
Since living conditions in Asia are also improving, the crowd could move from
west to east in the next few decades if the others fail to accelerate their
investments. There is no shortcut to developing a regional innovation ecosystem,
just as there was not in the evolution of intelligent life. The strongest position in a
competitive environment is with the organizations that can adapt most quickly to
changing conditions. In ecosystem development, first prepare the soil for a fertile
environment and then sow the plants.

4.1 Physical Infrastructure

Infrastructure includes as all hard and soft facilities used by individuals directly,
either for research and innovation or for the mobility of people, assets, or data. While
the diversity described in Chap. 2 affects individuals, more than one person can use
infrastructure. In addition, infrastructure enables connections between individuals
through communication networks, roads, and community buildings.
People who live in industrialized countries are unaware of most of the infrastruc-
ture around them because they are accustomed to its availability. Like their health,
people only seem to notice the value of infrastructure when it is lacking.

L. Garzik (*)
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 39

L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_4
40 L. Garzik

Comprising universities, research centers, roads, and data lines, infrastructure

takes time for planning, construction, and financing. Because it is often made of
concrete, asphalt, and steel, infrastructure is often mistaken for a constant,
nonvarying resource. That is not the case. Compared to resources like human capital
or mindset, infrastructure is very flexible. It can rot or go out of date very quickly. A
house should last for about a hundred years, but a laboratory can be old-fashioned a
few months after it is built if new research methods emerge that require a different
setup.

4.1.1 Infrastructure for Research

Research infrastructure is closely connected to other resources like human and

financial capital. It is a flexible resource due to its almost real-time availability,
scoring 8 on the resource flexibility scale in Table 5.1.
The challenge of research infrastructure is not its availability but how efficiently it
can be used. Before making any strategic investments in future infrastructure,
decision makers should know about existing inventory, its degeneration, and—
very importantly—its use capacity. Local knowledge institutions already doing
research using expensive infrastructures have no interest in passing on this informa-
tion, as they do not want to restrict their flexibility of use. Often, neighboring
university institutions will duplicate (expensive) infrastructure without either side
knowing.
In order to meet this challenge, the first step is to set up a database of infrastruc-
ture quantity and degeneration status. The next is installing procedures for regular
updating, in which infrastructure owners themselves continuously edit the database.
It would not be feasible to update this status from the outside.
Even in industrialized regions, it is difficult to maintain quality infrastructure. Not
only is existing infrastructure more obsolete every day, but also research is advanc-
ing at a rapid pace and smart human capital requires the highest level of equipment to
keep up with international competition. This can be an opportunity for up-and-
coming regions, who can offer an infrastructure party zone to attract smart people.
Such a strategy requires a high level of leadership and decision-making power due to
the opposing energy of incumbent groups who will lobby for their share of the
budget. In other words, most regions already have a fierce internal battle for
infrastructure and investments, leaving little space for newcomers.

4.1.2 Infrastructure for Living and Working: And the Third Space

Housing is a basic need for everyone. As discussed in Sect. 2.5, the availability and
cost of living spaces define parts of the quality of life. The geography of regions can
be a limiting factor for expansion, even with increased migration. Innovation regions
put pressure on housing supply, and housing costs in many regions rise sharply.
4 Infrastructure and Institutions 41

Many regions follow a similar process. First, when housing is affordable, a young
and creative crowd is drawn to the expanding and creative community. Many of
them will use their creativity to succeed on the market, increasing their incomes and
their funds available for expensive housing. Rents rise, even as quality does not.
The situation is even worse in the best innovation hubs, since success stories are a
magnet for even more migration. Locals are pushed into distant suburbs and have to
commute long distances for their jobs. Social cohesion can come under pressure as
people with everyday jobs diverge from those in the entrepreneurial space.
Two examples illustrate the process by which innovation success can create
housing crises. Apart from its historically wealthy neighborhoods, Berlin had com-
parably low rents a decade ago. Young creative people from all over Germany and
from many other regions in Europe poured into the city. In recent years, costs of
living are rising and more is expected in the next decade.
Another region is—cynically speaking—approaching the end of this process. The
San Francisco Bay Area, which includes Silicon Valley, is geographically limited in
terms of residential development. The price levels for housing are already detached
from the surrounding regions and even more so from national housing prices. The
pandemic will leave some trace on the Bay Area’s pricing structures, but is not yet
clear how strong those implications will be. The San Francisco Bay Area’s
extremely high housing prices have led to the endemic social challenges that have
surfaced in Silicon Valley and especially the city of San Francisco in the past
10 years. The next implication will be that housing prices become a barrier, blocking
arriving migrants in the region and permanently weakening the ecosystem.
Like housing, office space rents have grown with the movement of startups. Many
are headquartered in or near the city of San Francisco, while in the decade before
they were founded and headquartered around Palo Alto, Mountain View, and
Cupertino. A new landmark that defines this movement into the city and further
into the sky is the Salesforce Tower, inaugurated in 2018. Innovation ecosystems
require residential and office space as a prerequisite, but they need more to be
successful. One of the special ingredients in the system is the third space. The
third space comes from sociolinguistic theory and defines identity and community.
The modern third space is neither home nor the office, but some other space that can
be used by an individual without barring others from use. In some literature,
Starbucks is an example of a modern third space. That may be true, except that it
cannot be used by an endless number of people.
We can use two examples to demonstrate the third space concept. The Red Rock
Café in Mountain View has a first floor where around 40–50 nerds can focus on their
own entrepreneurial projects. Full-service infrastructure is provided, with no limita-
tion on how much time they can spend there. Each person has enough space and time
to work alone, alongside many like-minded people who may start as strangers but
can be partners for an hour or a project.
The opposite example is the traditional coffeehouse one finds in many European
capital cities, great coffee, mostly nice service, but an almost friendly question every
10 min about ordering something else and no option to get into creative mode.
42 L. Garzik

Co-working spaces are being developed in every innovation region from Africa to
Asia, Europe, and the Americas. Cafes in these spaces are a hotspot for generating
interdisciplinary ideas. For a small fee, tenants receive a full load of like-minded
people for exchange and potential partnership. As their level of services or financial
investments increasing, co-working spaces change into accelerators or incubators.
Experienced mentors, serial entrepreneurs, or investors give their money and/or
advice for starting, scaling, and achieving a successful exit.

4.1.3 Infrastructure for Mobility

Successful human interaction in an ecosystem depends on personal contact. More

than 50% of communication between people is nonverbal. People need to be able to
meet their peers to share ideas, build teams, or pitch for capital investment. Public
and private transportation is key to enabling interaction. When deciding on a region,
bright minds take into account how quickly and, more importantly, how easily they
can get from A to B.
Transportation infrastructure is heavily dependent on historical developments.
The earlier a region started land-use planning, the easier it was to define zones for
development or mobility corridors. There are brutal ways to erase neighborhoods for
new freeways like California did in the 1970s, or to elevate highways like many
Chinese cities do. Examples from the two sides of the Pacific Ocean can provide a
sense of the differences in current and future mobility settings.
A few years ago, in Silicon Valley, the maximum physical distance of venture
investment was defined using the “Tesla radius.” The range of the first models from
this manufacturer of electric cars was around 40 km. If an entrepreneur stuck one end
of a compass on the map where the VC headquarters are and draw a 40-km circle,
they know that establishing their office inside that circle will increase the chances of
getting an investment. Not only has the range of battery-powered vehicles expanded
in recent years, but also driving through the Bay Area on Highway 101 can now take
up to 2 h even inside that 40-km radius. The alternative of public transportation is
very limited, and there is simply no room for a new transport corridor anywhere in
the area. That is why Elon Musk proposed the Hyperloop project, a futuristic
underground rapid transit solution. Still, even if that project succeeds it will take
decades.
Across the Pacific, we find an example of a similar distance in Shanghai, China,
where the distance between the international airport Pudong and the city is about
60 km. As shown in comparison with a 60-km crossing of Silicon Valley, the trans-
rapid Maglev—in operation since 2002—needs 7 min and 18 s with a top speed of
430 km per hour. It must be said that Shanghai also faces a serious problem every
day due to heavy traffic jams, but this example should point to the options of modern
transport. The lesson is that the technology is available, and regions should strive to
facilitate connections between individuals.
The second important question after regional mobility is connectivity to other
prosperous regions. In most cases, these connections are airports or possibly
4 Infrastructure and Institutions 43

high-speed railway networks. China invested heavily in its railroads, resulting in a

rail infrastructure that covers more miles than all other global regions combined.
Airport development strategies have changed dramatically in recent years from
hubs to direct connections with smaller, still long-haul aircrafts. The change is most
obvious at European aircraft producer Airbus, which has ceased production of its
A-380, which served hub connections with large numbers of passengers. Bright
minds do not like to waste their time changing planes in hubs. They like to get on a
plane at the start of their trip and leave it at their final destination without stopping
over. Regions need to be aware of the networks their airlines offer at airports. If the
airport offers direct connections to less than half of the regions listed in Chap. 6, this
can put it at a competitive disadvantage.

4.2 Nonphysical Infrastructure

4.2.1 Social Infrastructure: Community, Network, Teams,

and Media

New ideas arise when people from different backgrounds, different cultures, and
different levels of knowledge interact and communicate. The more they talk and
interact, the more ideas arise. As Licht A and Siegel J (2005)1 emphasize, a social
system that values innovation, risk-taking, and independence is more likely to lead to
entrepreneurial events than a system with contrasting values, “with the underlying
compass that entrepreneurial behavior responds to a rich set of clues from the social
environment.”
A reasonable level of trust in the regional crowd will speed up the process. Let us
consider the following situation: four people meet for a drink. They were in casual
contact in a private context and thought it could be interesting to discuss business
opportunities. They sit together and share what they can bring to the group. One is an
engineer with experience miniaturizing hard drives, another has worked in business
development in the telecommunications sector, and so on. They try to find a core or a
common context from the sum of their expertise and interests. They find it in the
optimization of wireless technology advancements in the field of mobile services.
Four years later, they sell their company for USD800 million. Stories like this are not
fiction—this is the real story one of the four told when having a coffee on the
Stanford University campus a few years ago.
Did that story happen in Silicon Valley by chance? Most likely no. In that region,
there are similar meetups every morning of the week. Joining such a group on
Tuesday morning in Sunnyvale, on Thursday in Redwood City, and on Friday in
Cupertino instills the impression that these discussion spaces for potential
entrepreneurs are one of the ingredients in Silicon Valley’s secret sauce.

1
Licht A and Siegel J (2005) The social dimensions of entrepreneurship.
44 L. Garzik

A few components stand out and make these informal meetings effective. First,
there is no random selection of topics or experiences before the meetings. Second,
meetings take place an hour or 2 before office hours, at times like 7:30 in the
morning. Participants are working full time, but use these meetings to exchange
ideas with like-minded peers from other industries and from different backgrounds.
Of course, weather conditions play an important role. When the temperature is
already 20  C by 7:30, it is more convenient to go out and meet up than in regions
where there are still freezing temperatures at that time of day.

Open Innovation
Meetups and the like are stimuli for exchanging ideas and an appropriate way to
include diversity. However, success takes more than an incentive. It takes the
openness of qualified people, as presented in Sect. 2.1, who are willing and able to
interact with one another.
There are various methods like open innovation as introduced by Henry
Chesbrough (2003)2 and community-based innovation. These methods are all
more likely to succeed if interpersonal interaction comes with an appropriate level
of openness. The situation is similar to precision farming. Most people think that
fertilizers help poor soil and slow-growing crops, but it is the other way around.
Fertilizers are a waste of money when the soil is infertile and barren, because plants
will never grow comfortably. They should be used where the soil is good, and then,
they can unfold their full effects and the plants will grow much more than they would
unfertilized.
Open innovation works almost the same way. It can expand to its full capacity
when used in a climate of openness, but is a waste of energy where communication is
limited and people have barriers to sharing their ideas with others. The same applies
to strategies for attracting people to a region. If there is no strength or fertile ground
for entrepreneurial success, it will be difficult to convince innovators to move in.
There is no shortcut to developing a regional innovation ecosystem, just as there
was not in the evolution of intelligent life. The analogy with Charles Darwin’s theory
of evolution can go even further: The strongest position in a competitive environ-
ment is with the organizations that can adapt most quickly to changing conditions. In
ecosystem development, first prepare the soil for a fertile environment and then sow
the plants.
Open innovation faces a serious obstacle in the “not invented here” attitude. This
phenomenon appears in many companies, especially large corporations that employ
thousands of researchers who believe in their own intellect and independence.
Procter and Gamble once ran a program called “Proudly Found Elsewhere” to
incorporate outside ideas into their research projects. In companies in Asia,
innovators pose two main questions: What do I need and where can I find it? It is

2
Chesbrough, H. (2003): Open Innovation: The new Imperative for Creating and Profiting from
Technology. Harvard Business School Press.
4 Infrastructure and Institutions 45

Fig. 4.1 Condensation from

communities into teams.
Source: Author’s own figure

unimportant whether solutions come from inside or outside the company; the point is
surmounting the challenge and achieving the largest market share.

Community and Network

An innovation region will reach its full capacity in the spirit of altruism. If a member
of a selfless community invests energy in the support of another member without
expecting a direct return on investment, they can be sure to get support back from
another corner of the same altruistic environment. Overall, the environment balances
give and take, along with trust that advances will pay off. A Winston Churchill quote
exemplifies the pay-it-forward spirit, “we make a living by what we get; we make a
life by what we give.”
To assess regional innovation community quality, we can begin by measuring
quality as it condenses into smaller units in Fig. 4.1.
Another indicator of an open community is whether receptionists are effective
barriers. People with power and money tend to hide behind receptionists and
assistants. In open communities, however, the same people are easily accessible.
However, if you do not have a good idea they like, you will not get a second
appointment.
A community with a spirit of openness is a prerequisite, and the next step is
networks. The networks in active innovation communities are therefore broader, but
remain on the surface. In many cases, networks operate in hidden circles before they
emerge as teams, only tightening as teams form. This type of process requires
catalysts like the meetup structure offered in Silicon Valley. Relationships can
manifest in different ways, as shown in Fig. 4.2.
A high degree of openness in networks is not only a driver for the formation of
teams from communities, but also an invaluable asset for the integration of migrants
into the region. Potential newcomers will carefully examine their chances of joining
local networks within an acceptable period. If not, they will prefer other regions.
46 L. Garzik

Fig. 4.2 Manifestations of relationships. Source Pictures: www.pixabay.com (Pixabay license

grants an irrevocable, worldwide, nonexclusive, and royalty-free right to use, download, copy,
modify, or adapt the content for commercial or noncommercial purposes (website April 23, 2021).).
Source Graph: Author’s own figure

Teams
Teams are the core of entrepreneurial activity and the success of any innovation
ecosystem. Investors allocate their capital to teams and not necessarily to their
current ideas. In the end, the idea’s implementation and not the idea itself will
provide the return on investment. When a bad team comes up with a great idea, it
will struggle to implement. In contrast, a brilliant team can always come up with new
ideas if old ones fail. Most teams do not implement the same idea they had when the
team formed, since development is a dynamic process as described by Eric Ries.3
The serial entrepreneur and business angel David Rose4 published his way of
structuring idea evaluation and implementation. He assigns the idea a multiplier
between 1 for a terrible idea and +20 for a brilliant one. Implementation, according
to Rose, is linked to market success and is therefore assessed using the expected
financial revenue. The scale starts with no implementation at USD1, then medium
implementation at USD10,000, and finally brilliant implementation worth
USD10,000,000. We can now look at the medium-brilliant combination from two

3
http://theleanstartup.com/
4
http://www.davidsrose.com/
4 Infrastructure and Institutions 47

Fig. 4.3 Research and

innovation. Source Pictures:
www.pixabay.com (Pixabay
license grants an irrevocable,
worldwide, nonexclusive, and
royalty-free right to use,
download, copy, modify, or
adapt the content for
commercial or
noncommercial purposes
(website April 23, 2021)).
Source Graph: Author’s own
figure

angles. Medium implementation of a brilliant idea could generate revenues of

USD200,000, while a medium idea with brilliant implementation is worth
USD50,000,000. The numbers are hypothetical, but the difference is striking.

We need to consider the relationship between teams and ideas from a different
perspective. So far, we have assumed that ideas come from one team member or the
entire team, that is not the only way ideas can arise. Traditional companies operate in
the model where high-level executives come up with ideas, then look around the
company, and find someone to implement. However, if you separate the owner of an
idea from its implementation, 90% of the commitment is lost. There is hardly
anything more motivating than your own idea starting to fly from your own hands.
Modern companies will never separate ideas from their owners for implementation.
Companies and education systems invest money to create new knowledge. The
best option for creating a seamless transition of implementing the knowledge in the
marketplace—what we would call innovation—is to keep the generation and imple-
mentation of knowledge in the same brain. Figure 4.3 shows the two processes of
interaction between the brain and money.
The processes of knowledge generation and implementation are two parts of a
wheel, circulating well when both parts are in harmony. If implementation lags, the
company or region could run out of money to generate new knowledge.
48 L. Garzik

Communities and networks use different types of open and closed communica-
tion channels like social media platforms. The exchange of ideas in these channels
wafts around like the surface of a geyser pool in Yellowstone National Park. Like the
temperature in the pool, the level of communication activity is more or less stable
and decreases when its atmosphere gets colder. External impulses like new topics
and discussions come from outside the pool through the media, providing energy to
keep the temperature at a boil.
Regions with mostly traditional media will not be able to provide enough energy
to accelerate the momentum of change—there has to be a mix of high-quality digital
media. Journalists in digital and traditional media need to understand new business
models and community dynamics. Then, they can play an important role in
connecting teams, inspiring new ideas, and accelerating lean processes to connect
founders and their early markets.

4.2.2 Digital Infrastructure

Digital infrastructure is the backbone of modern business. Server farms, as the heart
of the system, pump trillions of bits and bytes down into the underground fiber-optic
bloodstream and up into antennas via radio. Global regions occupy different stages
of digital infrastructure development. According to the OECD broadband statistics
update,5 fiber connections average about 25% of total fixed lines, but the distribution
across countries is diverse. If someone wants to start a venture with digital business
models, resources like digital services connectivity and computing capacity are
decisive for the success.
Every business today relies heavily on the availability of digital exchange, from
city dwellers ordering farm fresh produced online to high-tech computer chips
designed in one region of the world and manufactured in another. The COVID-19
crisis in 2020/2021 showed not only the vulnerability of societies and economies,
but also the value of digital infrastructure. From one day to the next, millions of
people had to move their whole lives onto digital communications. Schools, small
and large businesses, and health and social services that could not meet their
customers due to risk of infection were suddenly online entities.
The future of digital infrastructure will be even more exciting with 5G, 6G, and
further generations. Antenna density will increase, especially in urban areas, which
will also increase the demand for capital investment and political commitment. The
dynamism of changing to new technical standards will determine the competitive-
ness of innovation regions. As Eberhard von Kuehnheim put it, “it’s not the big that
eat the small. . .it’s the fast that eat the slow.” The COVID-19 crisis once again
confirmed that the regions that can quickly adapt to changing conditions will be
much better off than their slower peers. The COVID-19 crisis will favor the strong,

5
https://www.oecd.org/internet/broadband/broadband-statistics-update.htm
4 Infrastructure and Institutions 49

punish the laggards, and contribute to the concentration of power in regions and
companies.
Digital infrastructure connects individuals with one another and with the Internet.
Technology scaling is much easier than it was a few decades ago. It took the phone
more than 100 years to reach 100 million users. Now, the same milestone took apps
like Facebook only 1600 days and has taken recently developed gaming apps less
than 100 days.
The COVID-19 crisis has also shown that companies’ level of digitization
increases their resilience to external crisis shocks. The more digital a company is,
the better it will emerge from a crisis. Conversely, the higher the digitization rate and
digital capabilities of a region, the better off it will be after a crisis.

4.2.3 Intangible Infrastructure

In addition to tangible infrastructures like roads and power plants, ecosystems also
rely on intangible assets. Some of these are already covered in other chapters like
education in Chap. 2, the financial system in Sect. 3.1, and the penetration of
business services in Sect. 3.3. Other intangible infrastructure deals with issues like
health care or intellectual property rights (IPRs).
There are many opinions about the contribution of intellectual property rights or
patents to the proper development of an innovation ecosystem. These range from
Bottke PJ and Coyne CJ (2003)6 statement that “the two most important core
institutions for encouraging entrepreneurship are well-defined property rights and
the rule of law” to researchers who argue that the preoccupation with patents takes
startups too much time, making founders spend less time with their markets and lose
ground compared to nonpatenting peers. Both are true depending on the industry. In
the software and IT businesses, the rate of change is too fast for adequate patent
protection. Once a patent is granted, the technology would already be outdated. In
life sciences or engineering, product life cycles require some protection to avoid a
market flooded with cheap replicas before break-even.
A common mistake is the classification of IPR as a purely legal issue. IPR in the
modern world is a tool for economic competitiveness. Large corporations from
Apple to Samsung collect huge piles of IPR to discourage their competitors from
suing them, and actual lawsuits on patent infringements are rare compared to earlier
times. Apart from economic issues, IPR plays an important role in the motivation for
entrepreneurship. As Johnson S et al. (1999)7 stated, “insecure property rights were
more inhibiting to entrepreneurship than inadequate finance.”
Figure 4.4 shows the available data on patent filing and how it has developed
across global regions. Just two decades ago, Japan was the long-term global leader in

6
Boettke PJ and Coyne CJ (2003) Entrepreneurship and development: Cause or consequence.
Advances in Austrian economics, 6, p. 67–88.
7
Johnson S et al. (1999) Property rights, finance and entrepreneurship. Working Paper.
50 L. Garzik

1,000,000

750,000

500,000

250,000

0
80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14
19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20
China Republic of Korea
European Patent Office United States of
Japan America

Fig. 4.4 Global patent filings 1980–2014. Source: WIPO (Data source provided by Creative
Commons Attribution (BY) 30 IGO license)

Table 4.1 Ranking of patent filing according to WIPO statistics (2018)

Region Nation Ranking of filing activity (patents)
Shanghai, Shenzhen China 1
New York, Silicon Valley USA 2
Berlin Germany 5
Zurich Switzerland 8
Moscow Russian Federation 11
Bangalore India 12
Tel Aviv Israel 15
Medellin Colombia 57
Sofia Bulgaria 61
Nairobi Kenya 72
https://www.wipo.int/edocs/pubdocs/en/wipo_pub_941_2019.pdf
Source: WIPO

patent applications. It still is today in terms of total applications. In just a few years,
China overtook Japan at high speed. Compared to the development of China, all
other regions are sleepy.
More specifically to the discussion in this book, the World Intellectual Property
Organization (WIPO) statistics provide an overview of patenting activity in the
regions described in Chap. 6, shown in Table 4.1.
As stated in Sect. 2.4, filing patents is no guarantee of implementation, including
the IPR monetization. Even if the idea is implemented, it may not be carried out in
the region where the patent was filed.
4 Infrastructure and Institutions 51

4.3 Institutions

Institutional structures follow strict rules of path dependence. Since history plays an
important role in current structures, the ability to change these structures is critical to
the support that institutions can provide for an innovation region. There are two
aspects of institutional structures, and we will look at each separately. First is the
architecture of the institutional landscape in a region. This is the outside view.
Second, each institution has an internal structure that often follows common regional
rules and has a major impact on institutional leaders’ ability to bring their perfor-
mance to the streets.

4.3.1 Landscape of Institutions

Ecosystems are made of many different structures, from public institutions like
ministries or agencies to private companies and from billion-dollar corporations to
startups, all supplemented by intermediaries and NGOs of various kinds. All of these
institutions have two great things in common. First, they are not lifeless skeletons,
but full of souls—the people who work there—and consequently carry the least
common denominator of their employees’ beliefs and mindsets.
Second, they share the need for permanent renewal—stagnation is synonymous
with decline. In innovation, there is no such thing as “too big to fail.” Big companies
disappear just like startups do—there is an endless list of examples like Kodak, Sega,
Pan Am, and Atari just to name a few. These once-dominant companies failed to
recognize the entrepreneurial spirit that would have informed them of changing
market demand and customer needs. In other words, the incumbents missed the
window of opportunity to self-disrupt. They become dinosaurs, unable to adapt to
changing circumstances in a short period.
A logical thought might be that stagnation is a question of size. Small startups
may be less likely to fall into the complacency trap due to their entrepreneurial DNA,
which forces constant communication with their markets. Large companies run into
trouble because of their communication and management requirements, which
consume all of the energy that should go to their markets. However, it is not
company size that determines the power of innovation but the company’s age.
Like a human body in its aging process, a company needs continuous entrepreneurial
training to maintain or expand its innovative strength. Coad A et al. (2017)8 showed
the ratio of age and performance, with young companies having an around 10% of
turnover from radical innovation. This number drops to around 5% beginning with a
firm age of 10 years.
The architecture of institutions in industrialized countries is well developed. In
most cases, it is over-developed due to the inability of the system to reduce its
number of institutions once they are established. A first insight into the efficiency of

8
Coad A et al. (2017) Firm age and performance. J Evol Econ 28, 1–11 (2018).
52 L. Garzik

Table 4.2 Capital vs. inno- Nation Capital Innovation region

vation regions
China Beijing Shenzhen
India New Delhi Bangalore
USA Washington San Francisco
South Africa Pretoria Cape Town
Colombia Bogota Medellin
Israel Jerusalem Tel Aviv
Switzerland Bern Zurich

an institutional system can be derived by following the institutional hierarchy from

the top political level to the point where the first employee actually does research or
innovation. This can be five to seven levels of hierarchy down from different
ministries, agencies, and other intermediary bodies. Another aspect of institutional
efficiency is the number of institutions in a certain hierarchy level.
In most university systems, the flexibility to open or close an institution is very
limited. Therefore, path dependence is extremely influential. A few decades ago,
many universities were founded not because the region needed a new university, but
because of a leader’s political intention to have such an institution in the region.
Successful regions can open and close institutions quickly to react to demand in
real time. For most regions, though, this scenario is wishful thinking. Once an
institution is established, it can stand up for itself. The bigger it gets, the less likely
it is to disappear when it is no longer needed. After a while, unnecessary institutional
bodies block large portions of financial and human capital. This is also a major
reason why innovation centers do not typically appear in capital regions, as shown in
Table 4.2. Capital regions are where the level and energy of lobbying culminate.
Innovation regions in developing countries can be more flexible in creating
institutional structures tailored to today’s needs since they do not have to carry the
rucksack of history in their institutional structures. These regions can have a lot of
freedom to develop new ideas and bring them to market quickly. The other side of
that coin, however, is the risk that some companies will abuse the lack of control and
regulation with unethical business models.
The most important institutions in any innovation ecosystem are innovative
companies, no matter their size or structure. Every company is an enabling structure
for the talent and intrinsic motivation of its employees. A company is future-oriented
and innovative if it enables its employees’ ideas to be checked and tested for
potential market implementation.

4.3.2 Governance and Lead Printing

After discussing the number and hierarchies of institutions from an outside view, we
can turn to their internal cycles to learn more about their contributions to the
innovation ecosystem. As a baseline, we refer to lean thinking methods with the
conviction that the success of an institution or organization depends on the quality of
4 Infrastructure and Institutions 53

the human capital it can attract and retain. From there, we will consider organiza-
tional structures and process structures.
There is great discussion in the scientific literature on how to make organizational
structure most efficient. We will focus on two aspects that are relevant to the
management of research and innovation institutions.

Organizational Structure: Number of Hierarchical Levels

The first important issue is the number of hierarchy levels from top management to
the project level. Top-down styles of leadership and imprinting are discussed later in
this section as process structures. We will also discuss bottom-up communication
later, specifically its direct influence on top-level managers’ information quality and
its significance for decision making.
For historical reasons, institutions like ministries have many hierarchical levels.
Bottom-up communication is influenced by the ability of the various levels to keep
the quality of communication high and to avoid losing information at each level. We
can call it the melon theory: The project-level experiences challenge that project
managers cannot overcome, so the project struggles. The project manager
communicates problems to the next hierarchical level, including a message that
there are problems but the team is working on solutions. When the next level
reads that message, it hears that there are problems, but since the team is working
on them they will soon be resolved. At the end of the information flow, top
management receives the message that all projects are progressing successfully
without any real problems. In terms of the melon, the top management sees it from
the outside and everything looks green (as in the traffic light). However, if you cut
into the melon, it is deep red. Then, you can see the challenges—projects are far from
successful, and may even collapse. Top-class management knows when to cut into
the melon.

Organizational Structure: The Wall of Communication

An institutional structure should seek to maximize its positive impact on outputs.
Some institutions have a clear distinction between the management level and the
implementation level, creating a figurative wall within the institution and a very real
communication barrier. Two examples of this type of structure are ministries and
universities.
These institutions share many similarities, beginning with their processes for
appointing top management. In both cases, leadership appointments are motivated
by strong influences from outside the institution. In ministries, the management is
political, while civil servants are the implementing body. Political-level
appointments are often determined by elections, which are influenced by political
parties and many specific issues like social security or the health care or retirement
systems. Research and innovation are not of big concern for the voters. In addition,
politicians employ a large number of cabinet members with political backgrounds.
These individuals can create a kind of a second ministry within the institution, which
raises the wall of noncommunication even higher as shown in Fig. 4.5.
54 L. Garzik

Fig. 4.5 Wall in universities/

ministries. Source: Author’s
own figure

A similar challenge occurs in universities, whose management and faculty are

separated from each other by how management teams are appointed. In some
regions, faculty can propose candidates for positions like the vice chancellor. By
default, this group of proposed candidates will most likely not include those who
want to change the university’s attitudes, since the faculty is interested in continuity
of known operations and procedures. The consequence is that universities are
hindered in adapting to changing conditions. In other regions, management teams
are appointed by a supervisory board composed of nonacademic industry managers
who appoint vice chancellors of their own kind. This creates a barrier to the faculty,
who disregard “nonacademic” management decisions. Even in these cases, we find a
built-in handicap due to budgeting processes within the faculty—the management
team only has a small part of the budget to influence the strategic direction of the
entire institution.

Organizational Structure: Internal Teams

Institutional structures, as discussed above, follow different schools, from simple
hierarchies to matrix function structures. Most of them lack the flexibility to form
internal teams, which limits the room to experiment and merge the skills of team
members. Virtual structures for internal teams seem like a great alternative, but they
do not increase the internal energy of innovation. An entrepreneurial team should
feel confident about the availability of time and monetary resources to conduct its
experiments. After those, the best support they can get is to leave them alone.
Sometimes, it is also necessary to provide some kind of autonomy in an organiza-
tional structure outside the overall hierarchy, which will protect them from corporate
antibodies that may attack germs of innovation that threaten complacency.

Process Structure: Lead Printing

Lead printing is a concept that was introduced in a discussion about the ability of
knowledge institutions to transfer their knowledge to the regional economy9: “Lead
printing is the flow of leadership energy from top management that is transferred
through the imprinting capacity of the downstream hierarchical chain and made
possible by an institutional governance model that enables this transfer.”

9
Garzik L (2020) Leadprinting - Competitive capacity of knowledge driven institutions. Vienna.
4 Infrastructure and Institutions 55

As mentioned in Chap. 2, this section combines leadership and imprinting issues.

We assume that the system was able to appoint a management team that is able and
willing to provide leadership energy and lead the institution through change pro-
cesses to meet the requirements of the future.
In an article on university management performance, McCormack et al. (2013)10
describe the difference between “managing a group of employees in a plant and
(managing) faculty members.” Universities share a tradition of autonomous
procedures and personal responsibility. When it comes to budget allocation and
infrastructure investments, however, there is internal competition that must be led by
a skilled team. As McCormack observed, “trying to manage faculty members is like
herding cats.” The management of universities does not follow established rules. For
example, we can assume academics have great intrinsic motivation. According to
management theory, it would not be advisable to put too much leadership energy on
them, as they would become frustrated and create barriers. Besley T and Ghatak M
(2005)11 and Bénabou R and Tirole J (2006)12 have stressed that “sharp incentives
may not be as important or effective when agents are motivated.”
Within disciplines, faculty knows what to do better than management ever could.
However, issues like the impact of a knowledge-based institution on the regional
economy or sharing of infrastructure between institutes are management tasks that
cannot be performed by collective management. Indeed, there are very few institu-
tional frameworks in which collective management can be successful, but there are
many failed attempts. Assuming that top management has invested sufficient lead-
ership energy, an appropriate governance and process structure must allow energy to
flow down the hierarchy, with each level shaped with the right amount of motivation
to pass the energy further down. If the entrepreneurial mindset is shaped by top
management, the effects should be seen at the project level, where, for example, PhD
students are motivated to think about implementing their findings on the market by
their advisors.
Imprinting is the social influence one individual has on another. The term
“imprinting” was first introduced by Spalding DA (1873)13 to domestic birds’ innate
tendency to follow the first moving object they see. It was followed in the field of
animal research by Konrad Lorenz and his grey geese Lorenz K (1937),14 who
proved that imprinting differs from other learning processes, relying uniquely on
early experiences to determine subsequent social behavior.

10
McCormack et al (2013) Herding Cats? Management and University Performance. The Economic
Journal Volume124, Issue578.
11
Besley T and Ghatak M (2005) Property Rights and Economic Development. In Dani Rodrik and
Mark Rosenzweig, editors: Handbook of Development Economics, Vol. 5, The Netherlands: North-
Holland, 2010, pp. 4525–4595.
12
Bénabou R and Tirole J (2006) Incentives and Prosocial Behavior. American Economic Review,
vol. 96, no. 5, December 2006, (pp. 1652–1678).
13
Spalding DA (1873) Instinct, with original observations on young animals. MacMillan Mag.
27:282.
14
Lorenz K (1937) The companion in the birds world. The Auk 54(1): 245–273.
56 L. Garzik

Azoulay P et al. (2009)15 applied imprinting to careers, demonstrating the social

impact of career imprints in creating academic entrepreneurs. The primary result
they found is that “postdoctoral advisers’ patenting behavior is imprinted on their
trainees. . .moreover, the social influence effect is statistically large.”
Imprinting at the ecosystem level works the same way. Leadership energy is
transferred from the top down the system by institutional managers and CxOs. The
imprinting pattern cascades through middle management to implementers, who can
be imprinted to perform their tasks in innovative ways.

4.3.3 Public Administration Far Away

The institutional structure of a region is, in most cases, similar to its national
structure. Ministries are the highest political decision bodies, with politicians in
responsible positions and civil servants providing expertise. The agency level
implements programs based on strategies, followed by a level of other
intermediaries. Ultimately, research and innovation organizations—either private
business structures or publicly run research institutions—bring new knowledge
into the system.
Regions known for their ability to innovate are usually not capital regions.
Table 4.2 shows some examples.
An opposing example is Berlin, as discussed in Sect. 6.2. However, looking back
in history, Berlin was not the capital of West Germany when its entrepreneurial spirit
developed in the 1980s. At that time, Bonn was the city with an ongoing adminis-
trative hangover.
Capital regions offer many well-paying jobs in administration for their human
capital stock. In many ways, the administration acts as a vacuum cleaner, crossing
capital area and sucking in potential entrepreneurs. In addition, people who are
building new markets and looking to take big risks are not, by default, interested in
regulation and administration.

15
Azoulay P et al. (2009) Social influence given (partially) deliberate matching: Career imprints in
the creation of academic entrepreneurs (Harvard Business School Entrepreneurial Management
working paper).
Management of Resources and Lessons
Learned 5
Ludovit Garzik

Abstract

The management of resources considers all resources from an ecosystem perspec-

tive. Regions try to promote their development as innovation leader in three key
ways that is first analyzing the status quo, second deciding on a strategy, and third
implementing the chosen strategy. Most of the time, regions bite off more
strategic objectives than they can chew, and implementation suffers. Many
resource control knobs need to be turned simultaneously to be successful, so
leaders have to set priorities and invest political energy in often-unpopular areas.
The most important task is finding the balance between important ingredients like
human capital, financial capital, and infrastructure investments. To make the
discussion independent from individual and institutional interests, the chapter
focuses on two key dimensions of variation across resources: flexibility and
importance. The energy to change the system or its dynamics is limited. Leaders
can decide where to start and how much energy to invest in which resources are
based on the region’s resource flexibility and importance.

5.1 Ecodynamics: Development Levels of Innovation Regions

After discussing the individual resources in Chaps. 2–4, this chapter considers all of
them from an ecosystem perspective. Regions try to promote their development as
innovation leader in three key ways:

L. Garzik (*)
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 57

L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_5
58 L. Garzik

First: Analyzing the status quo,

Second: Deciding on a strategy, and
Third: Implementing the chosen strategy.

Most of the time, regions bite off more strategic objectives than they can chew,
and implementation suffers. Many resource control knobs need to be turned simul-
taneously to be successful, so leaders have to set priorities and invest political energy
in often-unpopular areas.
The most important task is finding the balance between important ingredients like
human capital, financial capital, and infrastructure investments. Invest too much
financial capital in a short period, and it will not be absorbed by other resources and
part of it will end up being wasted. The money will still find its way, but the impact
will be rather disappointing. Conversely, investing too little financial capital will
cause the innovation pump to run dry and collapse. Human capital will leave the
region to find better options.
Regardless of how external conditions change, regions that can adapt quickly to
new requirements are better off. Just like economic matters, the saying is, “it’s not
the big that eat the small, it’s the fast that eat the slow.”
An important aspect of managing resources is killing outdated ideas. Most
discussions focus on creating new ideas, qualifying more human capital, and build-
ing new infrastructure. System-expanding ideas like these can generate energy for
new developments, but so can eliminate unproductive activities that block resources.
Therefore, the best ecosystems can give up resource guzzlers within an acceptable
time frame.

Example of Good Resource Management: Shenzhen

Shenzhen is a success story in implementing a good strategy with the uncompromis-
ing execution that is presumably only possible in the Chinese tradition of civil
servant selection and strong top-down management and leadership. Given the
changes this region has seen over the 40 years since it was established as China’s
first Special Economic Zone in 1979, we have to assume it had the ingredients to
transform a fishing village into a megacity. The region also switched from agricul-
ture to the high-tech industry, a change unmatched in magnitude by any other global
innovation region. Almost every corner of our daily (digital) lives relies on
contributions from Shenzhen: The region builds cell phones, laptops, drones, electric
cars, and much more. Further details can be found in Sect. 6.8.
Regional managers will inevitably ask about the main development factors: taxes
and infrastructure. China prioritized Shenzhen for national infrastructure
investments over the opposition of other regions that wanted equal treatment. The
government acted on its motto that “there will be no winners without losers,” and
drew a continuous line through the decades until 2018 when Shenzhen succeeded at
overtaking Hong Kong’s GDP for the first time. Infrastructure investments were
far-reaching, including advanced mobility infrastructure and more than 100 km of
new underground lines implemented in record time. The city continues to invest in
5 Management of Resources and Lessons Learned 59

Fig. 5.1 Ecodynamics: phases of development. Source: Author’s own figure

digital infrastructure with broadband at every corner and in research infrastructure

including new institutional management facilities.
Shenzhen’s income taxes and corporate taxes have been brought to a minimum,
which has had a magnetic effect on founders and workers from across the country.
For example, in 1989 the average civil servant in China earned RMB 50 every
month. In the same year, the industry salary in Shenzhen was RMB 3000 per month.
Many people were drawn to promising prospects for future prosperity. This relative
advantage was sufficient to bring large numbers of highly skilled Chinese from other
provinces into Shenzhen. From a global perspective, the bright minds who want to
implement their ideas and are motivated to move will investigate where they can best
conduct their research or scale their startups.
Ecosystems are not static, and they are continuously on the move. They develop,
they build energy, and they slow down. Innovation ecosystems can even stop
suddenly in cases like natural disasters, nuclear reactor meltdowns, or war. Sudden
increases in status are unlikely—changes and investments must be absorbed and
connected to their corresponding resource elements. Based on the resources and
characteristics discussed above, certain patterns of development are common in most
regions. We will discuss these in this section.
In Sect. 2.5, we learned about the Lewis point, when macroeconomic develop-
ment freezes because of disruption in one of the two most important economic
growth factors. For example, the expansion of the workforce might come to a
standstill due to lower birth rates.
Like economic progress, the innovation ecosystem development follows phases
we can compare across global regions. Figure 5.1 summarizes the chronological
sequence of these phases, which are as follows:

Snooze.
Wake-up.
Warm-up.
Run
Aging.
60 L. Garzik

5.1.1 Snooze

In snooze mode, a region manages its available resources by maintaining a low and
more or less stable competitive position compared to other regions. The region’s
development is stagnant, which means that it is (unconsciously) declining relative to
other regions. The absolute numbers may still show growth, but with less momen-
tum than its peers, the region will be overtaken in rankings and will lose more ground
every year (or keep its low position). Politicians in such regions will blame low input
growth numbers, and there will be no correction because of the imperceptible
decline.
One indicator for snooze mode can be brain drain. More precisely, negative skill
drain means highly qualified people leave the region, while those with lower
qualifications either move in or stay.
The best way to describe snoozing is to use the story of the frog in the pan. If a
frog were to step into boiling water, it would notice immediately and leap away from
the deadly danger. If the water starts cold, however, the frog will not notice its slowly
increasing heat until it is too late. Snoozing regions only become aware of their
decreasing resources and energy when change comes from the outside in key
economic framework conditions like digitization or shifting markets. Like the
frog, the region will be unable to adapt and will metaphorically die, losing its
essential human capital and, consequently, its ability to use all other resources like
infrastructure and capital. Ernest Hemingway has an apt explanation for the phe-
nomenon: “How did you go bankrupt? Two ways. Gradually, then suddenly.”
Quantitatively, snooze mode is stagnation in the lower third of region rankings.
Its consequence can be permanent loss of resources to other regions—resources the
snoozing region could otherwise use to drive toward a higher level.

5.1.2 Wake-Up

The wake-up phase describes an occasional event where critical resources take the
region to the next level. It can arise endemically or in reaction to external forces.
Such an event does not necessarily have to do with knowledge or innovation. It can
also be a war that triggers a wave of refugees or a few strong leaders who point the
way to the future.
It is not important what goal these people want to achieve in business or politics
or whether these goals are realistic. What is important is that these people set
themselves and their environment in motion. Famous examples are Frederick
Emmons Terman, godfather of the semiconductor industry (Silicon Valley), in
business, or Chaim Weizmann (Israel) and Deng Xiaoping (China) in politics.
Unlike snoozing or warming up, the wake-up phase can be quite a short moment
in time.
5 Management of Resources and Lessons Learned 61

5.1.3 Warm-Up

The seeds of a wake-up call need fertile soil to grow into a successful innovation
region. The warm-up is not a race, and it usually takes 20–30 years to switch to the
subsequent run mode. Warming up an innovation ecosystem is perfectly analogous
to the same process in sports. Mobilizing the muscles to make them strong and
durable requires balanced effort, adequate hydration and nutrition (innovation
resources), and not over-extending too early in the warm-up—otherwise risking
irreversible damage to the musculoskeletal system.
Regional leaders will be excited to know when the body is ready for competition.
This will come—after a few months of training, exercise will become a habit and the
body will become an engine that demands ever more exercise. This is when the
resource migration discussed in Sect. 2.4 turns the region into a magnet. After this,
continuously attracting new entrepreneurs requires less energy—it has turned into a
perpetual motion machine.
How can regional managers with innovation ambitions be sure they have reached
the warm-up phase instead of being stuck in a self-deceiving daydream of snooze
mode? One key indicator that a region is on its way to becoming a successful
innovation ecosystem is the expansion and acceptance of failure. At the beginning
of the warm-up, individual founders receive funding from family, friends, and fools,
and perhaps from a business angel. Many of them fail because they lack later-stage
funding or simply because the market and the community cannot support the
venture.
These first founders have valuable experience, becoming mentors for the second
generation of entrepreneurs and their capital partners. The numbers of founders will
increase, and so will their success stories. The third generation will provide support
for second-generation founders to act as mentors and business angels. These ever-
increasing sequences of founders and mentors are characteristic of an effective
warm-up phase.
Every single failure is a valuable contribution to the collective experience in a
successful innovation ecosystem, so is spreading the word about success stories. As
explained in Sect. 4.2, the media and especially new and digital media have a
decisive influence on the speed of development when it comes to connecting role
models with their successors in entrepreneurial activities.

5.1.4 Run

A running region is in a constantly successful mode. Resources seem to be magically

renewed; word of mouth about the region’s success drives the flow of human and
financial capital. The perpetual motion machine introduced in the warm-up phase is
running, providing a self-sustaining process of the use and renewal of ecosystem
resources. Money flows, and the main challenge is keeping that flow targeted where
it is most effective instead of letting it become a watering can pouring out
indiscriminately.
62 L. Garzik

Running innovation regions might experience some cooling effects, but without
much loss of conversion. The body of the ecosystem can be nourished with special
regulations or expanded education institutions. No additional leadership or manager
is required, and after some time, those responsible for the region will tend to reach
out to other regions and ask them, “Do you have any idea why we are so successful?”
Regional leaders will begin to feel that, even in a long-term success story, there are
some pitfalls. In the sport context, water and food are prerequisites, but there is no
long-distance run without the muscle of infrastructure, trained during the warm-up
phase. Overhydrating or overfeeding causes inefficient absorption and hinders
distance running. Continue in that vein for too long and the body will add fat and
lose its ability to move fast—shifting into complacency.

5.1.5 Aging

As in many facets of life, reaching a certain level of wealth and prosperity brings
with it the risk of diminishing motivation and ambition. As discussed in Sect. 2.5,
there is a risk of complacency in the slipstream of prosperity. A running innovation
ecosystem requires a sensitive, balanced approach to energy delivery. Too much
could trigger a vicious circle down, including losing attractiveness to migrants and
shifting capital investments to lower risk projects. Success stories are still possible
during the aging process, but the herd has already moved on and is unlikely to look
back or consider another opportunity in the region it has already left behind.
Aging is like institutional aging—it affects the ability to innovate as discussed in
Sect. 4.3. A decline in innovation capacity means that part of the energy invested in
the institutional change only serves to maintain the balance. Additional efforts are
required to expand innovation capacity.
For humans, there is not and never will be a drug against aging. However, there
are techniques to renew cells with fresh ones. Studies in gerontology show that cell
renewal through yoga or exercise can be achieved after 12 h without calorie intake.
In institutional life, the institution has to be continuously re-established—something
easier said than done. In other words, staving off aging requires self-disruption, both
of your body and your institution.

5.1.6 Momentary Dynamics

In addition to the progression of ecosystem development through the phases of

snooze, wake-up, warm-up, run, and aging, certain specific moments can happen in
multiple phases. These include Ecofreeze, breath, and forced reflection.

Ecofreeze
One decisive momentary effect can happen in any of the innovation stages.
Ecofreeze is the status of the development of an innovation ecosystem when
endemic input into more resources is not generating a higher level of innovation
5 Management of Resources and Lessons Learned 63

output. This design freeze can also occur while the ecosystem is still in snooze,
warm-up, or wake-up mode. It happens when the development process can no longer
be motivated by further energy input.
It is not easy to judge whether an ecosystem is still developing or has gone into
Ecofreeze. One indicator is the shift between input and output, when some additional
input produces less output than expected. Quantitatively, Ecofreeze is a sign change
in the first derivative of the input-to-output function. It is a slowdown in the
acceleration of output growth under a constant increase in inputs. The point at
which this derivative changes from positive to negative numbers is the moment of
Ecofreeze.

Breath
There is a common requirement for the vital functions in every development phase:
Oxygen needs to get into the body. Customers and their spending capacity are the
oxygen that every ecosystem body must breathe constantly or it will die.

Forced Reflection
Global economic crises like the financial and economic crisis in 2008 or the COVID-
19 crisis and its economic consequences are merciless reality checks for regional
innovation systems. Regardless of what managers claim as their regions’ develop-
ment status, crises tear down the façade of political softeners and let everyone look in
the mirror of truth. In many cases, this is a rude awakening. At best, it can lead to
decisions and reactions that make for stronger development in the future.

5.2 The Power of Priorities: Investing in Resources

Based on the discussion about the resources and their influence in innovation
ecosystems’ development processes, the people responsible for the management of
companies and other institutions or regions will ask about the best way to invest their
available resources and change energy. Every institution and region has a dense web
of interests and lobbies that shape the distribution of investment energy. To keep it
simple, the chance that this pattern happens to be the best option for development
is low.
To make this discussion independent from individual and institutional interests,
we will focus on two key dimensions of variation across resources: flexibility and
importance.

5.2.1 Flexibility

Flexibility (F) assesses each resource’s potential to increase or decrease over time:
64 L. Garzik

Table 5.1 Flexibility scale Resources Flexibility

of resources (alphabetical)
Bank loans 5
Culture and mindset 1
Digital infrastructure 5
Education and skills 3
Institutions 2
Legal advisers 3
Market and demand 4
Migration 7
Policy and strategy 4
Quality of living 3
Regulation 6
Research infrastructure 7
Risk capital 10
Science and research 6
Social infrastructure: Community 2
Tolerance and trust 1

F ¼ f ðS0, Sþ, t Þ

S0 ¼ status quo
S+ ¼ aspirational status
t ¼ time until situation improves from S0 to S+

Resources’ flexibility is an indicator of how fast they can be changed, made

available, and/or implemented in the system. Due to geographical, social, political,
and other conditions, there are regional differences in the flexibility of resources. The
values assigned to resource flexibility in Table 5.1 are global averages on a scale
from 1 (very inflexible) to 10 (completely flexible). A resource that scores 1 is
maximally inflexible, and it will take a long time to access or change. A 10 is very
flexible—it is more or less available and can be adjusted on a daily basis.

5.2.2 Importance

The importance (I) of a resource is a function of a reduced status quo of the resource
compared to its current status:
I ¼ f ðR0, R0x , D, PhÞ

R0 ¼ resource status quo

R0  x ¼ degree by which resource availability is reduced
5 Management of Resources and Lessons Learned 65

Table 5.2 Importance Resources Importance

scales of resources
Bank loans 2
(alphabetical)
Culture and mindset 8
Digital infrastructure 8
Education and skills 10
Institutions 6
Legal advisers 6
Market and demand 9
Migration 7
Policy and strategy 5
Quality of living 6
Regulation 2
Research infrastructure 5
Risk capital 7
Science and research 8
Social infrastructure: Community 8
Tolerance and trust 10

D ¼ development level of the resource

Ph ¼ ecodynamic development phase

The importance scale ranges from 1 (low importance) to 10 for the most impor-
tant resources. Resources’ importance should be calculated according to the
functions above. It will depend on development status as discussed in Sect. 5.1,
because importance can vary according to current phase. Table 5.2 shows resource
importance for a paradigmatic region in run mode.

5.2.3 Combination of Flexibility and Importance

The combination of a region’s flexibility and importance scores provides a precious

jewel of information for decision makers setting about priorities, developing strat-
egy, and the distributing implementation energy. The diagram in Fig. 5.2 shows the
information in Tables 5.1 and 5.2 graphically.
The energy to change the system or its dynamics is limited. Leaders can decide
where to start and how much energy to invest in which resources based on the
region’s resource flexibility and importance. If a resource is very important but has
little flexibility, it does not make sense to invest too much energy there—especially
if other areas of the ecosystem are in urgent need of change. A better approach is to
look for alternatives and improve the situation faster by changing resources that are
more flexible.
The value of the information in Fig. 5.2 is most evident in three key decisions.
These are as follows.
66 L. Garzik

12
Tolerance and Education and
Point of Priority
Trust Skills
Origin P0
10 Market and
Social Demand
Infrastructure: Digital
8 Science and Research
Culture and Community Infrastructure
Mindset Quality of Living Risk Capital
Migration
6 Legal Advisers
Institutions
Research
Policy and
4 Infrastructure
Strategy

2
Bank Loans Regulation

0
0 2 4 6 8 10 12

Fig. 5.2 Diagram of resource flexibility and importance. Po. . .point of priority origin. Source:
Author’s own figure

Sequencing resource handling,

Setting priorities, and
Distributing implementation energy.

Sequencing Resource Handling

In daily regional or institutional routines, many influencing factors provoke the
handling of resources in a certain order. These factors can be as diverse as
entrenched operations, special interests from domestic or external lobby groups, or
simply incompetence. It makes more sense to structure the sequence based on the
proximity of the position of a resource to the point of maximum importance and
flexibility Po. The sequence of handling should start at Po and then, like the
concentric circles around a water droplet, extend outward to one resource after the
other.

Setting Priorities
The water droplet’s ripples will be largest where the drop fell at Po and then lose
power on their way through the graph. This is also the best way to distribute the
available energy for investment and change. This approach is not like a watering can
that provides a little bit for every resource plan. Instead, it follows the discussion
about precision farming above. There, the best approach is to focus the fertilizer on
the most fertile land. Fertility for change guides the decision about how much
fertilizer (change energy) each resource can use.
5 Management of Resources and Lessons Learned 67

Distributing Implementation Energy

Setting priorities is not sufficient. Daily routines will always drag the distribution of
implementation energy toward the watering-can approach, so an additional guideline
for the investment allocation is reasonable and necessary.
The principle of doubled energy states that, as soon as the sequence of resource
handling is clear and priorities for the distribution of change energy are set, each
resource should get twice as much change energy as the next priority. This means
that higher priority resources always get double the change energy compared to the
next lower priority resource.

Principle of Doubled Energy Formula

100  2ðn1Þ
E1 ¼
2n  1

E1
En ¼ ðn1Þ
2

N ¼ number of resources
E1¼ energy investment to the highest priority resource
En ¼ energy invested to resource n. . .with n from 1 to N

The formula yields high implementation energy—just above 50% of the total—
for E1 with a medium number of resources. Therefore, more than half of an
institution’s, company’s, or region’s (change) team will be working to change just
one resource, that is real priority setting. At the other end of the line, the lowest
priority resources will get nearly no energy. This is the courage to leave a gap. Not
everyone will be happy with this kind of tough priority setting. However, if there are
no losers then there will also be no winners.

5.3 Outlook

Ecosystems are comparable to humans. Both are complex environments of beliefs

and knowledge, emotion, and cognition. Every region and every ecosystem are
different. Every human being is the endpoint of developments that began 4 billion
years ago. If there had been a disruption in that period, the specific person would not
exist. The same applies to ecosystems.
Each innovative ecosystem’s development is unique, just as individuals are.
There is no point trying to copy an ecosystem like Silicon Valley, but nonetheless
the number of “Silicon Somethings” in the world is astounding. As pointed out in
Sect. 6.8, that region has managed to establish a brand that stands in for the general
phenomenon of innovation. The 50 miles between San Francisco and San Jose are
synonymous with a successful innovation region.
68 L. Garzik

Like small children, every ecosystem holds the potential for learning and devel-
opment. Just as children play best with their peers, ecosystems would do well to look
to their peers for guidance and strategies for overcoming shared challenges. Of
course, any ecosystem can try to play in the big leagues from the start. Playing
with someone more advanced can help anyone learn more quickly, just like playing
tennis with a professional can rapidly improve a mediocre athlete’s game. However,
although the athlete will learn quickly from the professional, it will be a continuously
frustrating experience and the athlete may lose interest at a certain point.
Ecosystems are distinct, just like humans are. Their development depends on a
multitude of influences from their historical settings to external influences like the
development of the world economy or game changers like global pandemics. No
matter what happens outside, ecosystems hold many possibilities for action and
reaction within themselves. Some regions act like couch potatoes waiting for their
fortune to wander in unannounced. Other regions act like triathletes and take part in
every competition.
Regardless of what kind of setting you face with or what mindset you have, the
important question for the future development of your innovation ecosystem is how
well you distribute the energy available for change and progress.

5.4 Lessons Learned: Executive Citations

Like the relationship between great ideas and implementation, the lessons of this
book depend on your ability and desire to make changes in your own business
processes. Therefore, the best way to present the most important take-home
messages is not an executive summary but a set of easy-to-remember statements
taken from throughout the book.

5.4.1 Executive Citations

Ecosystem
Ecofreeze is the status of the development of an innovation ecosystem when
endemic input into more resources is not generating a higher level of innovation
output.
One key indicator that a region is on its way to becoming a successful innovation
ecosystem is the expansion and acceptance of failure.
Every single failure is a valuable contribution to the collective experience in a
successful innovation ecosystem.
There is no shortcut to developing a regional innovation ecosystem, just as there
was not in the evolution of intelligent life.
The best ecosystems can give up resource guzzlers within an acceptable time
frame.
The COVID-19 crisis will favor the strong, punish the laggards, and contribute to
the concentration of power in regions and companies.
5 Management of Resources and Lessons Learned 69

Global economic crises like the financial and economic crisis in 2008 or the
COVID-19 crisis and its economic consequences are merciless reality checks for
regional innovation systems. Regardless of what managers claim as their regions’
development status, crises tear down the façade of political softeners and let every-
one look in the mirror of truth.
Population density is not necessarily linked to innovation density.
If you have a smart idea in the morning, you are likely to have a prototype in your
hands in the evening—that is the essence of Shenzhen speed.
Chinese people are socialized in the way of chàbùduō, which can be translated as
“that works quite well for the moment.” This Chinese characteristic is similar to
Silicon Valley’s lean processes, with chàbùduō similar to a minimum viable product
that can be tested in the community and improved with feedback.
A prerequisite for taking advantage of failure is a reality check and admitting its
existence to others.
Invest most where things grow best, which applies to both fertilizers and ecosys-
tem resources.
You can maximize your innovation ecosystem’s impact by using the tools for
ecosystem development and associated energy to accelerate regional strengths.
It is not we who define our stories, but our stories that define us.
The combination of a region’s flexibility and importance scores provides a
precious jewel of information for decision makers setting about priorities, develop-
ing strategy, and the distributing implementation energy.

Finance Capital, Market, and Policy

If you are not embarrassed by the first version of your product, you are too late to
market.
If you are not paying for a service, you are not the customer but the product.
Demand is one of the most underestimated drivers for success in many regional
innovation systems.
Risk capital is the fire accelerant of entrepreneurial activity.
Customers and their spending capacity are the oxygen that every ecosystem body
must breathe constantly or it will die.
How can I prevent the accountants or auditing bodies from killing the idea babies
before they see the light of day?
In preparation for meetings with auditors, we recommend providing them with a
copy of Black Swan1 so they are aware that any forecast, including impending
achievement or missing targets, could be a pointless endeavor.

Human Capital
Real commitment to innovation would mean extending kindergartens’ spirit of
creativity across all sectors of education and up to universities.
The number of smart people around the globe is finite.

1
Taleb N (2010) Black Swan. The impact of the highly improbable. Pantheon.
70 L. Garzik

In the slipstream of prosperity lurks the danger of complacency.

The power of belief against knowledge can also be translated into emotion and
cognition. Everyone has experienced a situation when emotion runs roughshod over
cognition, just as beliefs can do to knowledge. During implementation, cognition is
placed defenselessly under its stronger emotional superstructure.
The internal in-house entrepreneurial team needs to know about their time and
money resources for their experiments, but nothing else. The best support they can
get is to leave them alone.
Open-minded couch potatoes will never leave their hamlets, but they travel and
bring back stories about diverse cultures that can motivate others to escape their
cultural dead ends.
It is a skill to fail and learn from failure.
In many regions, the fact that university professors own shares in companies
based on their research would be viewed as a conflict of interest. Maybe it is, but if
there is no conflict, there is no interest and that is the worst option.
The seed of an idea is ideally born in the brain of a rebelling intellectual.
The secret sauce of any global innovation ecosystem is how many “smart” people
with the characteristics of intellectualism, rebelliousness, purpose, resilience, and
leadership it can grow at home or attract.
Tolerance is an important—if not the most important—requirement for the
success of an innovation ecosystem.

Infrastructure and Institutions

The incumbents missed the window of opportunity to self-disrupt. They become
dinosaurs, unable to adapt to changing circumstances in a short period.
The higher the digitization rate and digital capabilities of a region, the better off it
will be after a crisis.
The strongest position in a competitive environment is with the organizations that
can adapt most quickly to changing conditions.
Modern companies will never separate ideas from their owners for
implementation.
It is not company size that determines the power of innovation but the
company’s age.
Every company is an enabling structure for the talent and intrinsic motivation of
its employees.

Migration
Since the quantity and quality of the workforce influence the migration dynamics—
smart people want to work with other smart people—this also accelerates the
agglomeration effect of global innovation hotspots.
The effects of reverse xenophobia on regional ecosystems are embedded in the
potential of cultural diversity for innovation.
When it comes to implementation, beliefs will be stronger than knowledge, and
any element in a strategy that contradicts implementers’ beliefs is unlikely to become
a reality.
5 Management of Resources and Lessons Learned 71

Ever since the mid-nineteenth century when fortune-seekers joined the gold rush
in Northern California, thousands of people flock to Silicon Valley every year in
search of the holy grail of entrepreneurial happiness.

Regulation
Innovation and regulation usually do not like each other much.
The key question for policy makers is how to strike a balance, motivating
knowledge for social well-being without restricting the creativity and freedom of
basic research.
People do not enter the risk arena if they believe that there is no exit option. When
an ecosystem offers such options, more potential entrepreneurs are encouraged to
join the sea of new ventures.
As a result of the difference in the levels of regulation and bureaucracy,
intellectuals and rebels and, even more important, rebelling intellectuals poured
into the regions to implement their smart ideas.
The consequences are models in which PPP is not translated “Public-Private
Partnership” as originally intended, but as “Public Pays Private.”
 Part II
Learning from Successful Innovation Regions
Bangalore Innovation System
6
Leena Pishe Thomas, Sana Salah, and Ludovit Garzik

Abstract

Technology entrepreneurship and startups ecosystems are drawing the attention

of policymakers and empirical researchers across the world. In India, Bangalore
has been receiving increased global recognition and has turned into an irresistible
magnet for tech startups because of its favorable climate, technically skilled talent
pool, established private and public research institutions, and proactive govern-
ment policies. As of now, Bangalore is home to the largest number of tech
startups India and third most in the world.
A significant feature behind Bangalore’s status and recognition is the devel-
opment of a unique entrepreneurial ecosystem that supports and endorses
startups. Given this, it is important to understand how a favorable entrepreneurial
ecosystem for startups emerged in Bangalore and what its major components are.
How mature Bangalore’s ecosystem and how ready is it to nurture the emergence,
sustenance, and growth of new startups? This chapter is an attempt to shed light
on these facets and attributes of Bangalore.

6.1 Why Bangalore as an Innovation Ecosystem?

There are innumerable challenges associated with zeroing in on the right location for
establishing a startup ecosystem. It is imperative that the location has the right pool
of people to connect to, a lot of networking opportunities, skilled and talented

L. P. Thomas (*) · S. Salah

Global Business Inroads, Bangalore, India
e-mail: [email protected]; [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 75

L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_6
76 L. P. Thomas et al.

employees for hire, and ample support from the local government and local commu-
nity. These should help foster the entrepreneurship ecosystem, support development,
and establish a financial environment that can foster and grow startups.
With so many factors at play, the Indian city that best fits the criteria is Bangalore,
also known as “Indian Silicon Valley” and “Startup Heaven.” Co-working spaces in
Bangalore support the rapid growth of startup hubs in India by offering a wide range
of facilities to serve clients’ needs. These co-working spaces provide a platform
where startups can communicate, collaborate, and work together to increase their
creativity, productivity, and efficiency. This enables all of the region’s startups,
freelancers, and emerging businesses to succeed by aiding one another. Moreover, as
India’s youth population is the largest in the world and—according to the
Bloomberg News analysis—the country is on track to have the world’s largest
workforce by 2027.
In addition to its co-working spaces and human capital resources, Bangalore has a
high density of investors. As a result, entrepreneurs have easy access to many
venture capitalists and business angels. Funding is fundamental and critical for
launching a startup, and a startup with a great idea, the right vision, and motivation
can find an investor relatively easily in Bangalore. Entrepreneurs can also apply to
the Government of Karnataka (GoK) for funds, provided they register their
companies under the Karnataka Shops and Commercial Establishment Act, 1961.
The Karnataka government launched its startup policy in 2015 and has set up several
funds worth over 3 billion rupees (around USD34 million) to back startups across
different sectors such as biotechnology, tourism, and animation.
Bangalore also sports remarkable infrastructure in the form of roads, a railway
transport system, ports, power, and airports. Infrastructure is fundamentally impera-
tive to giving startups the confidence and platform to grow, as it is indispensable for
businesses to deliver employment, growth, and national prosperity. Bangalore is one
of the top-ranking cities in India for its highly advanced infrastructure and is ranked
84th globally among other developed cities on this key input for startups.1 The city
also boasts “technocratic powers,” hosting almost 2300 active startups. These
employ more young, hardworking tech talent than other startup hubs in India.2 On
average, Bangalore sees a huge influx of talent from all parts of the country, so most
of India’s talent is available here.
Other aspects support Bangalore’s status as an innovation hub. It has a low cost of
living compared to its big-city counterparts like Mumbai and Delhi. The ambient
climate and pleasant weather of Bangalore have boosted the city’s rise, making it the
epicenter of the Indian startup ecosystem. Alongside all this, countless media
platforms in the city focus on startups and entrepreneurs. This provides much-
needed publicity and exposure, vital during a startup’s growth stages.
Bangalore also organizes a wide range of competitions, meetups, hackathons, and
many similar conclaves every year. These events are one of the biggest reasons why

1
https://www.noveloffice.in/blog/7-reasons-why-bangalore-is-called-the-startup-capital-of-india/
2
ibid.
6 Bangalore Innovation System 77

the city is a paradise for startups. They enable promising and budding entrepreneurs
to socialize and mingle with the community while giving them a platform to share
their experiences of overcoming challenges and achieving goals. Participants also
get ideas, thoughts, and inspiration from speakers and other attendees; showcase
their ideas, products, and potential; and get to build networks with each other.
The above are some of the reasons why many to choose Bangalore as their dream
startup location. It has the best atmosphere to start a company and make it grow.
Today, there are many prominent companies in Bangalore that were nascent startups
around 5 years ago. In total, an amalgamation of all these factors has helped
Bangalore grow as a hub for the startup ecosystem in India.

6.2 Why India for Startups

India is a solid foundation for cultural, grassroots, and frugal innovations and the
inception of ideas. Add a population of over one billion to the mix, and the country
becomes an exciting proving ground where startups can foster scalable and repeat-
able business models. It is also very promising and encouraging to see that—despite
being a developing country—India is a genuinely supportive environment for
startups just like its developed peers like the USA, UK, and Australia.
In developed countries, things have reached a saturation point and entrepreneurs
have captured almost every possible domain and sector. In a nation like India, in
contrast, people have not yet established the easiest solutions to all their problems
and issues. India is an amazingly young country, a nation full of young talented
people with an urge to do something that can be applied to a billion people someday.
Thus, India bursts with opportunities for scores of new, innovative and mind-
blowing ideas.
The size of Indian consumer market, its tech talent, and its low labor costs are a
colossal attraction for foreign entrepreneurs and investors. One of the chief
advantages that India offers is its enormous domestic market. With a population of
over one billion, India will have adequate customers for any decent and innovative
product. Furthermore, a company based in India would have access to skilled tech
workers, a wonderful workforce in every possible domain, and diverse people of
different economic and social strata.
Increased political will and government support have also made India more
supportive of its own startups. The Indian government has also launched many
schemes and programs like the Skill India Movement, the Make in India campaign,
Aatmanirbhar Bharat, Startup India, and the Digital India Campaign. All of these
have had an impact on the Indian startup ecosystem and have been exceptionally
beneficial for the country.
India’s enormous diversity in culture, language, and religion has been both a bane
and a blessing for startups. On the one hand, a startup’s understanding of customers
is often limited to certain regions where they know the local language and local
people. This makes it hard for startups to scale their products to customers across the
country. On the other hand, if solutions and products are successful at addressing the
78 L. P. Thomas et al.

needs of diverse customers pan-India, they can likely find market uptake in other
geographies like Africa and Latin America or even the developed Western world.
There is also a huge need for innovative solutions, particularly those that alleviate
poverty and benefit a large number of people. Because of the resource constraints
and the scale required in India, low-cost, high-impact solutions are required. Startups
in different technological areas are crucially important in India because they have the
potential for scalability and exponential growth. The Indian market offers countless
prospects for startups and, in turn, startups carry abundant hope for Indian growth
and employment.
Over the last two decades, more startups have emerged in India and the associated
ecosystem has developed vigorously. Consequently, support has increased in many
dimensions: office space and infrastructure, business support for mentoring and
networking, political will and willingness, and the availability of financial capital.
There are many push and full factors, and the feeling is optimistic that the ecosystem
will continue to mature in India.
Indian startups also face significant challenges. Overcoming these hindrances will
require the energy of all stakeholders like ecosystem actors, governmental
authorities, and the startups themselves. In addition, changes in the broader cultural
milieu would help encourage people to take risks and possibly develop impactful
solutions for the startup ecosystem in India.

6.3 How Did Bangalore Become an Innovation Hot Spot?

In the global economy, India is recognized as a potential source of technology-based

startups3 and currently ranks third globally for its number of existing startups and
number of startup exits.4 Within India, its “Silicon Valley” in Bangalore is consid-
ered one of the nine International Startup Hubs outside the USA.5 According to the
Startup Genome, Bangalore ranks 15th among 20 cities with the best ecosystems for
startups globally.
Bangalore’s rise as the preferred destination for startups took off nearly 70 years
ago when the foundation of a Hindustan Aeronautics Ltd. engineering facility was
laid in the city. Although the emergence of a technology startup hub in Bangalore is
a very recent event, the seeds were sown soon after India’s independence in 1947.
Bangalore City has lost hosted industry, including modern engineering businesses of
varying sizes. It is also home to several publicly funded R&D institutions and high-
quality public and private educational institutions. The city has also had industry-
favoring regional governments that have formulated and implemented state-level

3
Gai B and Joffe B (2013) India Startup Report. World Startup Report.
4
NASSCOM (2015) Startup India: Momentous Rise of the Indian Startup Ecosystem. Bangalore,
India: Zinnov Consulting.
5
Pullen J P (2013) Emerging Tech: 9 International Startup Hubs to Watch. Entrepreneur, May
7, Business Daily, USA.
6 Bangalore Innovation System 79

industrial policies for the development of industries and infrastructure. Thus,

Bangalore has the much-needed industry–institutional government combination
that helps a conducive ecosystem for startups emerge.
After India’s independence in 1947, an entrepreneurial ecosystem began to
evolve in Bangalore. It was primarily driven by public policies that initiated by the
national government. These fostered central public sector undertakings (CPSUs),
and then, later set up industrial estates for modern small-scale industries. In addition,
the government established national government-funded public R&D institutions
and public and private education institutions.6 All of these laid the foundation for the
much-needed regional innovation system, led by the “triple helix” comprising
universities, industry, government, and their interactions.7
In the triple helix model, the state (national government) plays a leading role,
motivating industry, and academia toward national and/or regional growth and
development. The development this regional innovation system occurred over a
period of almost four decades, starting in the late 1940s and lasting into the
mid-1980s. This was the first phase in the advancement of an entrepreneurial
network in Bangalore.
The evolution from the first phase to the second phase occurred smoothly and
spontaneously, commencing in the mid-1980s with the entrance of Texas
Instruments and the origin of Bangalore-based IT firms. The process was spurred
on by the introduction of national economic reforms in 1991 and their acceleration
since that time. Those reforms virtually removed the barriers to entry for multina-
tional corporations in the IT industry. Interventions by the regional and state
governments reinforced Bangalore’s physical and virtual infrastructure and its
education institutions.
Bangalore developed into an IT industry cluster and a biotechnology industry hub
by the late 1990s. The national government’s role shrank after the introduction and
acceleration of national economic reforms, though regional and state governments
continued to be important. Industry and academia also became more important,
developing into the triple helix discussed above. The role of the industry shifted
from central public sector undertakings to multinational corporations and domestic
IT industry firms.
Bangalore’s transition from its second to third development phases was also very
smooth, with the third phase beginning in the late 1990s. In this phase, more and
more multinational companies and corporations established their R&D facilities in
the city. These facilities, combined with the publicly funded R&D institutions,
enabled Bangalore to stand out as an R&D cluster. Collaborations, partnerships,
and networking initiatives grew between multinationals’ R&D centers, public R&D

6
Sudhira HS, Ramachandra TV and Bala Subrahmanya MH (2007) City Profile: Bangalore. Cities:
The International Journal of Urban Policy and Planning, 24(5): 379–390.
7
Etzkowitz H (2003) Innovation in Innovation: The Triple Helix of University-Industry-Govern-
ment Relations. Social Science Information, 42(3): 293–337.
80 L. P. Thomas et al.

centers, the IT industry, academia, and government. All of these factors helped
Bangalore emerge as one of the 46 global hubs of technological Innovation.8
Weather has played a critical role in the emergence of Bangalore as a startup hub.
Its favorable weather has helped the city foster a culture of optimism and openness,
as stated by the Massachusetts Institute of Technology (MIT) Technology Review.9
Because of its geographical location on the Deccan Plateau at an altitude of more
than 3000 feet above the sea level, Bangalore is cooler than most other Indian
cities—giving it possibly the best climate in the country. This favorable weather
has contributed to attracting investments and a technology workforce to the city.
Bangalore’s more than six decades of growth began with government public
sector activities in the modern manufacturing industry with its machinery and
electronics. Over time, Bangalore has witnessed the growth of a much-needed
SME sector, education institutions and public R&D institutions. These were
followed by the IT and biotechnology industries, and then by the R&D affiliates
of multinational corporations. Bangalore has a strong triple helix composed of
government, industry, and academia. This development has progressively and
steadily led to the emergence of all the components of an entrepreneurial ecosystem
in Bangalore, with the technology startups to prove it.

6.4 What Is the Cultural Pattern of the Bangalore Ecosystem?

A growing and vibrant innovation ecosystem has many actors and stakeholders.
Talent is of foremost importance. A rich talent pool with diverse experience and
skills can bring about marketplace disruptions. Academia is an important stake-
holder and plays a big role in developing this kind of talent pool.
In the current business scenario, a paradigmatic mindset shift is needed to enable
a shift from traditional career choices and paths, to encourage risk-taking and
challenging the status quo, and to foster the ability to think differently and adapt.
Academic institutions have a major role to play in shaping talent and human
resources, and these must be complimented by a free flow of risk capital. Innovation
can be accelerated with the help of the venture community and incubation firms.
One imperative enabler for the innovation ecosystem is industry. Industry actors
can foster an environment conducive to and suitable for innovation. In the Indian
scenario, there are currently strong signs of a growing innovation ecosystem. There
are over 800 startups today in India, and nearly 50 VC and private equity firms fund
their local startups. There are also nearly 200 angels, and we are witnessing a surge
in their networks.

8
UNDP (2001) Human Development Report 2001. New York: Oxford University Press, United
Nations Development Programme (UNDP).
9
Times of India (2013) Bengaluru Among Top 8 Technology Innovation Clusters. Times of India,
August 2, 2017. Accessed July 27, 2020: http://economictimes.indiatimes.com/tech/ites/bangalore-
among-top-8-tech
6 Bangalore Innovation System 81

As a final component of the innovation ecosystem, established global players

need to have a system in place that not only harnesses but actually fosters the growth
of the local ecosystem. This is already underway, and companies like Yahoo! have
opened up their APIs in India so the local tech community can build applications on
that basis.

6.5 Facts and Figures Bangalore Innovation System

Biotech: More than 60% of the biotech companies in India have a base in Karnataka,
and the state is responsible for 50% of the total revenues being generated in the
biotech sector across the country.10
Aerospace: Karnataka is the first state in India to establish an aerospace policy,
making it a pioneer in the country. Karnataka Aerospace Policy has predicted an
investment potential of USD12.5 billion in the period from 2013 to 2023.11
Information technology: The state of Karnataka is India’s IT hub and sports the
fourth largest technology cluster in the world. Per data released by Department for
Promotion of Industry and Internal Trade (DPIIT), the state has attracted Foreign
Direct Investment (FDI) equity inflow worth USD46.61 billion between April 2000
and March 2020. It is also India’s largest software exporter with software and service
exports totaling USD77.80 billion in 2018–2019.12
Institutional system: The K-Tech Center of Excellence for IoT India, in
Bangalore, is part of the Digital India Initiative to develop the IoT ecosystem in
India. It leverages India’s IT strengths to help the country attain a leadership role in
the convergent areas of hardware and software.

K-Tech Center of Excellence in Machine Intelligence and Robotics

The Department of Electronics Information Technology, Biotechnology, and Sci-
ence and Technology (Department of IT, BT and S&T) in association with the
International Institute of Information Technology Bangalore (IIIT-B) has established
a K-Tech Center of Excellence on Machine Intelligence and Robotics (MINRO) at
cost of Rs. 34.70 crores.13

K-Tech Center of Excellence by C-Camp

The K-Tech Center of Excellence is a joint effort between Karnataka Innovation and
Technology Society (KITS), the Department of IT BT and S&T, the Department of
Agriculture, the Government of Karnataka, and C-CAMP. It is supported by the

10
http://www.mmactiv.in/pdf/Karnataka_Report.pdf
11
https://www.ibef.org/states/karnataka.aspx#:~:text¼Karnataka%20is%20the%20first%20state,
different%20regions%20of%20the%20state
12
https://www.fdi.finance/states/karnataka
13
https://www.iiitb.ac.in/funded-projects/machine-intelligence-and-robotics-center-minro-project-
gok
82 L. P. Thomas et al.

Department of Biotechnology, Government of India, to encourage innovation by

inviting various technological solutions to the predominant and looming problems in
agriculture.14

IIM Bangalore
IIM Bangalore’s innovation and entrepreneurship hub, the NS Raghavan Center for
Entrepreneurial Learning (NSRCEL), works on the development of the startup and
innovation ecosystem. The NSRCEL was envisioned as a world-class center for
excellence in seeding and promoting entrepreneurship with an emphasis on startups
and existing organizations with high growth potential. The objective is to help
entrepreneurs channel their energy and talent toward transforming ideas into suc-
cessful companies. The NSRCEL guides them in understanding specific
opportunities for business growth and helps them access the resources they require.
NSRCEL was selected as one of the top six established incubators in India under the
Atal Innovation Mission.

Global Business Inroads (GBI)

Global Business Inroads (GBI) is an international technology, business, and
innovation management consulting entity based in Bangalore, India, with expertise
in technology transfer, project management, and program and ecosystem develop-
ment in the clean-tech, life sciences, health care, biotechnology, and information and
communication technology (ICT) sectors.
GBI has experience effectively engaging with both the public and private sectors
in India, Asia, North America, South America, the Middle East, and Europe. It helps
build consortia to promote technology adoption, identify technology gaps, and
develop ecosystems to deploy technologies in new and emerging markets. It brings
together technology, markets, finance, capacity, and policy. GBI has also created an
online ecosystem, the Global Technology Interface™ (GTI™), showcasing
technologies from around the world to markets, investors, and policymakers in a
virtual ecosystem for scaling knowledge, capacity, business, and investment for tech
access and deployment.
Bangalore’s ecosystem can be broadly viewed as a system within the triple helix
model comprising three main factors. The first is a nucleus of technology startups
and prospective technology startups. These are surrounded by the second element,
indispensable (primary) factors consisting of finance sources including seed funds,
angel investors, venture capital funds, private equity firms; market support; human
resources, and support systems like accelerators, incubators, co-working spaces; and
technology and business mentors. The third key factor is supplementary (secondary)
factors like a supportive culture induced by constant talent immigration, supportive
media, and good weather.
Karnataka state and Bangalore, which is its capital, have the third largest cohort
of professional (technical and management) education institutions and one of the

14
https://startup.karnataka.gov.in/Center-of-excellence/
6 Bangalore Innovation System 83

highest concentrations of universities and university-level institutes in the country.

Most of these are located in Bangalore itself.
The many education and research institutions in Bangalore have multiple roles in
supporting and endorsing the ecosystem. First, these education institutions generate
entrepreneurial and human resource talent for technology startups. Second, faculty
members in these institutions provide mentorship and sometimes even facilitate
market support as the early adopters of startup products/services. Third, some of
these institutions (e.g., the Indian Institute of Science, the Indian Institute of Man-
agement Bangalore, the International Institute of Information Technology
Bangalore, the Institute for Bioinformatics and Applied Biology, and the National
Center for Biological Sciences) have their own technology business incubators and
arrange for other support services, such as intellectual property consultancy, to
nurture entrepreneurship through technology innovation commercialization, partic-
ularly among their own faculty and potential graduates.

Sl
No Education Institution Established Students per year
1. Indian Institute of Management (IIM), 1973 12,000 students/year
Bangalore
2. Indian Institute of Science (IISc) 1909 3842 students/year
3. International Institute of Information 1999 772 students/year
Technology Bangalore
4. National Aerospace Laboratories, Bangalore 1959 350 full-fledged R&D
professionals/year
5. National Law School of India University, 1988 560 students/year
Bangalore (NLSIU)
6. Institute for Bioinformatics and Applied 2001 200 students/year
Biology

K-Tech Center of Excellence

K-Tech Centers of Excellence were established in multiple areas to improve accel-
erator support to the startup ecosystem and drive innovation and entrepreneurship in
the state of Karnataka.15 The K-techs have industry support in different sectors to
help them drive innovation. Supported by the Government of Karnataka, the
National Association of Software and Service Companies (NASSCOM), and the
Ministry of Electronics and Information Technology (MeITY), the Internet of
Things (IoT) Center of Excellence is the largest deep tech innovation ecosystem in
India. It provides incubation, funding, acceleration, industry connections, and
mentoring to IoT startups, helping them build market-ready products.
The model applies to a diverse set of fields. The Center of Excellence in
Aerospace and Defense operates in association with Dassault Systèmes and VTU,
Bengaluru, and develops dedicated engineers. The Center of Excellence in Machine

15
https://startup.karnataka.gov.in/Center-of-excellence/
84 L. P. Thomas et al.

Learning and Robotics was set up in association with IIIT-B and carries out high-
quality research.16 The Center of Excellence in the Animation, Visual effects,
Gaming and Comics (AVGC) works with the Association of Bengaluru Animation
Industry (ABAI) and is intended to support IP making and innovation. The Center of
Excellence in Cyber Security that is being established in Bengaluru will address
skills gaps, build awareness, facilitate innovation, and conduct training programs.
Finally, the Semiconductor Fabless Center of Excellence that will be set up in
association with India Electronics and Semiconductor Association will encourage
products like rural broadband connectivity, microcontrollers for IoT applications,
energy meters, and electric vehicles.

The Center of Excellence AVGC

Karnataka features in the top three destinations for data science and artificial intelli-
gence in the world, and it is here that India’s first Center of Excellence for Data
Science and Artificial Intelligence has been established. This center is in association
with NASSCOM. The government had previously collaborated with NASSCOM to
set up the 10,000 Startup Warehouse program in Bengaluru and funded close to
180 startups.
Mysuru city in Karnataka will soon have an Advanced Electronics Test Facility
called the Hebbal Industrial Area, under the electronic manufacturing clusters
scheme of the Government of India (GoI). This Karnataka Electronics System
Designs and Manufacturing (ESDM) Cluster will empower electronics industries
in areas like medical devices, IT hardware products and subassemblies or
components, power and energy products, and automotive industries and aerospace.
Its goal is to help startups move up the product value chain.

IIM Bengaluru
NS Raghavan Center for Entrepreneurial Learning (NSRCEL), the startup hub at the
Indian Institute of Management Bangalore (IIMB), has incubated over 225 startups,
has helped create over 5400 jobs, and is connected to around 46,000 entrepreneurs.
Its undertakings have a total portfolio of over USD1.5 billion.17 As NSRCEL
prepares itself for the upcoming years, its new logo and website mirror its transition,
scale, and trajectory of growth. NSRCEL is preparing to mentor 4000 entrepreneurs
to introduce three to five new programs supported by industry partners and to
incubate nearly 200 new ventures.18

16
ibid.
17
https://www.iimb.ac.in/node/5444
18
ibid.
6 Bangalore Innovation System 85

6.6 SWOT Analysis of the Bangalore Innovation Ecosystem

Resources Strengths Weaknesses Opportunities Threats

Culture and India has the The caste system A large part of As the
mindset second largest that divides the population population is still
population on the Hindus into four has an growing, social
globe. Therefore, categories entrepreneurial tensions could
people face a represents a mindset but lacks develop into a
competitive barrier to the free the means to major barrier.
social and flow of implement on the
economic intercultural market. As Understanding
environment exchange economic of customers is
from a young development will often limited to
age. This forms a provide certain regions
mindset driven to infrastructure where the local
implement and other system language and
knowledge into ingredients, this people are
markets potential could familiar. This
be tapped makes it hard to
scale products to
customers across
the country
Digital In regions like Bangalore is If India’s The dynamics in
infrastructure Bangalore, dependent on the national and state the development
digital infrastructure administrations of digital
infrastructure is provided by the are able to focus infrastructure
already at a very state of their investments leave no room
high level Karnataka as on the most for complacency.
well as advanced If a region slows
neighboring regions, down due to
states. Digital developments bureaucracy or
infrastructure is like 5G can be a lack of supplies
also only competitive like energy, it
functional if advantage over will soon fall
energy is other global behind its peers
provided on a regions in other regions
reliable basis—a
permanent
weakness in
most regions in
India
Education Education helps The lack of Bangalore region Bangalore could
and skills expand the talent standardized will continue get into the flow
pool and produce regulation and growing as a heater trap of
appealing talent. education magnet to young attracting lots of
It can also render infrastructure people from all young people,
potential leads to talent over India training them,
improvements in loss. Education and losing them
social position is still in a again to other
traditional global regions
system focusing
on the transfer of
(continued)
86 L. P. Thomas et al.

Resources Strengths Weaknesses Opportunities Threats

knowledge and
neglecting the
broader concept
of skills
development
Institutions Bangalore’s There is a limited Strengthening of The COVID-19
institutional funding scope institutes through pandemic is
landscape is rich, for R&D. The different national impeding the
including the curriculum is not and state sector
presence of industry-oriented government
several centers of and is largely not schemes.
excellence and inclined toward
top engineering innovation or International
and research- R&D. collaboration for
based institutes exposure.
Limited
international More crowd-
exposure sourced funding
through alumni
networks
Market and Bangalore has The purchasing The home Products
demand the advantage of power of a large market is focusing on the
a vast home part of the expanding fast in bottom-of-the-
market in India, population in its number of pyramid market
with nearly 1.4 India is quite people as well as will not be able
billion people weak, so its purchasing to be successful
products have to power in most regions
be dedicated to a in Europe or the
bottom-of-the- USA
pyramid market
Migration The rapidly The high Bangalore is the Migrants are
expanding city magnitude of leading center of subject to
provides urban the high-tech continuous
increasing in-migration to a industry and vulnerabilities at
employment and few locations in high-level multiple levels:
educational and around services. Social, political,
opportunities, Bangalore has emotional, and
which act as pull stretched the Bangalore is also economic. Social
factors for the city’s carrying an emerging security
talent pool to capacity. niche that is measures like
move to Bangalore is increasingly public
Bangalore. The facing increasing linked to a global distribution
pleasant climate problems due to network systems and
has always been inadequate health care are a
an attraction for infrastructure concern
immigrants from facilities,
far and wide including
education and
health
infrastructure. It
is suffering water
shortages, traffic
(continued)
6 Bangalore Innovation System 87

Resources Strengths Weaknesses Opportunities Threats

congestion, and
insufficient
low-income
housing
Quality of Bangalore’s Development Bangalore offers There is parallel
living urban lifestyle, and traffic abundant development in
excellent congestion result employment other Indian
healthcare in additional opportunities. cities, and as a
facilities, job traffic and result, talented
opportunities, congestion The economy of and skilled
top-notch problems in Bangalore is workers are
academic the city. flourishing and moving out of
institutions, and contributes the city. This is
abundant Housing demand hugely to the seriously
greenery make it in the region due overall Indian threatening the
one of the best to the influx of fiscal scenario. monopoly
cities to live in migrants may The best part Bangalore used
India. have a negative about the to have in the
effect on the economy of the ITES and IT
The weather of supply of city is that the sectors
Bangalore has affordable central
always been a housing government
key attraction for invests heavily in
the people. the private
sector, spurring
Bangalore scores growth in the IT
strongly for its and
infrastructure. Its manufacturing
elaborate rail and industries.
road transport, Moreover,
combined with Bangalore is also
access to airports known for its
and a metro aviation domain
system, make and aerospace
this city one of industry
the most
accessible cities
in India. These
infrastructures
have also
contributed to
the rise of FDI in
Bangalore
Research Infrastructure is University Effective Risks include
infrastructure built to desired budgets are too strategies and average input
levels. Bangalore low to keep up funds flow to quality and rapid
hosts many with the higher improve the technological
institutions with dynamics of infrastructure, changes, as well
high-quality reinvestment into bolster them, and as a potential
infrastructure infrastructure spark more decrease in
that attract required to keep excellence quality standards
researchers from the quality level around them among research
the whole institutes
country
(continued)
88 L. P. Thomas et al.

Resources Strengths Weaknesses Opportunities Threats

Bank loans Bangalore has a Startups do not Banking sectors Startup failure
good and have sufficient can grow along can pose risks for
proliferating resources to with the overall banks’ loan
network of provide to the startup recovery
public and banks to give ecosystem
private banks, them access to
and, due to the easy loans
booming startup
culture, there is a
high demand for
bank loans
Legal Lawyers, patent IPR, legal The growing While there is
advisers lawyers, and advice, and startup legal support,
accountants are related activities ecosystem is knowing who to
traditional role are keys for the creating huge reach out to and
model or growth of most demand for legal identifying
partners in startups. There advisors. There reliable legal
innovation are very good IP is an imbalance support can still
lawyers in India between the be challenging. If
that have demand and this is not done,
experience with supply. There is it creates
global and Indian an opportunity problems in the
IP and can here for more setup and growth
support startups actions on IP of the startup
with IP management. ecosystem
management. National and
The European state
Commission will governments,
be setting up an lawyers, and the
IPR helpdesk in private sector are
India and the all gearing up for
government of this demand
India also
provides
low-cost IP
advisory support
to Indian
startups. There is
a strong
emphasis on IP
protection and
management in
India
Policy, Karnataka state Widespread Rapid Consultation
strategy, and is highly awareness and development and among
regulation proactive in policy execution execution of stakeholders and
designing and is the bottleneck policy will boost its impact have
implementing in the morale of the not yet been
policies related implementation startup measured during
to all sectors. of policies and ecosystem and policy drafting
The state has strategies help in its growth
(continued)
6 Bangalore Innovation System 89

Resources Strengths Weaknesses Opportunities Threats

been the front-
runner in
bringing up
policies and
guidelines that
help foster new
sectors
Risk capital Bangalore has a VC funding is Since the startup The COVID-19
strong ecosystem skewed to ecosystem has a pandemic has
of VCs and angel limited sectors very strong base, restricted the
investors. it gives funding scope
Generally, the opportunities to for the startups
investment the VCs to
ecosystem is diversify their
very strong funding and
reduce the risk
Tolerance India, especially The existing If basic The growing
and trust Bangalore, is an caste system challenges like difference
open and incorporates poverty and between poor
democratic barriers for the energy supply and rich (Gini
society where establishment of can be met, index) creates
mutual support is a fully open Bangalore will potential for
regarded highly exchange of have multiple social unrest and
valued ideas opportunities to political
become one of instability. It
the leading could bring
innovation innovation to a
ecosystems in stop
the world

One of the major strength of the regional ecosystem in Bangalore is the public
support structures on national and regional levels. The government of Karnataka
launched a startup policy in November 2015. The crucial pointers of the policy are as
follows19:

• The new age incubation scheme under implementation in engineering colleges

will be expanded to all professional and postgraduate institutions in tier 2 cities.
Institutes will be supported via grants for operational expenses, annual financial
support for projects, training, capacity building, etc.
• The government will assist in establishing TBIs in institutions of higher learning
with well-developed research and development facilities.

19
https://www.startupindia.gov.in/srf/reports/Karnataka_Report_26072020.pdf
90 L. P. Thomas et al.

• Karnataka state will provide funding in the form of grant-in-aid (up to USD5
million to be released in tranches) to innovators who need early stage funding.
• The state will support the private sector as it sets up incubation centers and
accelerators or expands existing facility and operations on a public–private
partnership (PPP) basis.
• The state shall maintain a list of common instrumentation facilities present across
the state.
• The total incubation area maintained by the State Government of Karnataka is
124,320 square feet.
• Seed funding through Idea2POC scheme.
• Provision of matching funds to support angel investors.
• Support to new and disruptive technologies such as AI, data science, robotics,
AVGC, and cybersecurity.
• Karnataka has collaboration with various countries such as Australia, Finland, the
Netherlands, the USA, France, and Germany for knowledge and resource
exchange.

Startup Karnataka’s USP20

• Synergy between government, industry, and academia.

• High-level involvement through the startup council under the guidance of honor-
able CM of Karnataka and industry representatives.
• Partnership with industry at various levels.
• Channelizing innovation for social impact through grand challenges.
• Transparent online processes and systems in place.
• Focus on multiple sectors in tier 2 cities.

The Government of Karnataka has set up subsidized incubation centers. The

K-Tech Innovation Hub at NASSCOM, Domlur, Bengaluru, is one facility that has
been built with good infrastructure over an area of 37,000 square feet with a seating
capacity of 350 and all the world-class facilities.21 The center of excellence has been
set up in the following places:

Aerospace and Defense at Dassault Systèmes, France.

Data Sciences and AI at NASSCOM, Bengaluru.
Agri Innovation at C-CAMP, Bengaluru.
Internet of Things (IOT) at NASSCOM, Bengaluru.
Cyber Security at ISSC, Bengaluru.
AVGC at ABAIL, Bengaluru.

20
https://www.startupindia.gov.in/content/dam/invest-india/compendium/Startup%20India%20-%
20State%20report_Karnataka.pdf
21
https://startup.karnataka.gov.in/incubators/
6 Bangalore Innovation System 91

Machine Learning and Robotics at IIIT, Bengaluru.

Semiconductor Design Fabless Accelerator at IESA, Bengaluru.

One of the major benefits of being a part of startup in Karnataka is that selected
startups get USD5 million as grants; 264 startups have already been funded, and
100 startups are yet to be funded. Many successful startups that are now well
established in the market were funded by these grants initially.22 The focus of the
grant challenges was on water and sewage management, plant disease and pest
infestation diagnostics, effective delivery of primary health services, tackling under-
nutrition, traffic congestion in Bangalore, and water conservation.
Global Innovation Alliance is another initiative made by Startup Karnataka to
encourage collaboration across startup ecosystems in 19 countries globally. It has
already signed an MOU for elderly health care, cybersecurity, soft landings for
startups, and genetics.23
The Karnataka Innovation Authority is going to set up regulatory sandboxes.
These will help the entrepreneurs solve the regulatory issue that may arise in the
future. Policies and regulations will be built for selected startups. This is still in
process and will be effective soon.
India has seen historic growth in both the quantity and variety of its startups. In
the last 10 years, India has carved its way to being one of the top five startup
ecosystems across the globe alongside the USA, China, the UK, and Israel. India
today is home to solid angel investors. This domain has seen vigorous contributions
from every main VC or private equity firm. In the same timeframe, the startup sector
has brought in nearly USD20 billion of capital and today employs about 100,000
people—a number that doubles every 2 years. Additionally, over 100 active
incubators aid entrepreneurs’ research with novel ideas by giving them practical
expertise and incomes.
The recent growth of the Indian startup ecosystem has resulted from the conver-
gence of multiple features. On the demand side, there has a been massive growth due
to the massive increase in online customers driven by smartphone proliferation.
Because of this large customer base, rising income levels, and enhanced demand for
consumption, India is becoming a highly attractive captive consumer base. On the
supply side, there has been a gigantic inflow of talent and a large influx of capital
from global investors that have helped to bring the spark into our country. The
amalgamation of government policies, capital support, backing from corporations,
direction and supervision from academics, and the complete brilliance of Indian
entrepreneurs has released the true potential of Indian startup ecosystem.
While India is a country of many problems and is unique in its own ways, its
greatest assets include its young talent pool and its resilience. By banking on these, it
can overcome a wide range of challenges and hurdles through innovative solutions.
Startups provide an excellent atmosphere to incubate talent and as well as to leverage

22
https://startup.karnataka.gov.in/funding/
23
https://startup.karnataka.gov.in/gia-international-partnerships/
92 L. P. Thomas et al.

the latest technologies. In doing so, some of them have the capacity to transform the
country and possibly become the next set of Indian technology giants.
To promote growth and aid the Indian economy, the following benefits are being
given to entrepreneurs to establish startups by the Indian Government.
Simple process
The Government of India has started a mobile app and a website for easy
registration of Indian startups.
Reduction in cost
The government is also providing lists of facilitators for patents and trademarks.
These advisors provide quality intellectual property right services including fast
examination of patents at lower fees.
Easy access to funds
The government set up a 10,000 crore rupees fund to provide funds to the startups
as VC.24
Tax holiday for 3 years
Startups are exempted from income tax for 3 years provided they have a certifi-
cation from Inter-Ministerial Board (IMB).25
R&D facilities
Seven new research parks have been be set up to provide facilities to startups in
the R&D sector.26
No time-consuming
Numerous agreements have been simplified for startups to save time and money.
Tax saving for investors
People investing their capital gains in the venture funds set up by the government
are exempt from capital gains taxes, which helps startups attract more investors.
Bangalore is demonstrating that it is far and away India’s startup capital. It has a
solid community of engineers with global work experience, a strong customer base,
and growing pools of capital. All of these are transforming the city into a global
startup hub just like Silicon Valley in the USA. The city also has a ripe pool of talent
for startups and has a high density of entrepreneurs and investors. It has the
reputation as a hub for cutting-edge technology and accounts for 41% of all new
ventures launched in India according to the World Startup Report.27
India remains a challenging market, but there are at some prominent reasons that
global firms cannot overlook the country. These are as follows.

24
https://www.startupindia.gov.in/content/sih/en/compendium_of_good_practices/angel_and_ven
ture_funding.html
25
ibid.
26
ibid.
27
https://economictimes.indiatimes.com/biz-entrepreneurship/7-reasons-why-bangalore-is-the-
mecca-of-startups/slideshow/19273647.cms
6 Bangalore Innovation System 93

Firstly, India has witnessed growth in infrastructure spending. Since 2014, India has
stretched its solar-generating capacity eightfold and has achieved its capacity
target of 20GW 4 years ahead of schedule.28 India has plans to boost new
investments of around USD300 billion in renewable energy infrastructure in the
next 10 years. In this regard, many industries have successfully leveraged India’s
infrastructure investments.29 It is projected that India needs about USD five
trillion in infrastructure investment to sustain its economic growth. Local
Indian companies currently lack the required competencies, so multinational
companies with core competencies in high-tech infrastructure solutions have
immense opportunities to explore in India and use this platform.30
Secondly, India’s emerging middle class is strong. It is obvious and very evident that
India’s business conditions pose tests and hurdles for all companies in the
consumer economy. Some global consumer companies have been able to over-
come these hurdles and constraints and are doing spectacularly well. Three
approaches have helped global firms establish bases in India. First is to have a
tactical and long-term obligation to the Indian market. Second is to build strong
local teams in India by shifting resources and decision-making authority to India.
Finally, and most importantly, is the evolution of business models and producing
the products that are affordable and accessible to the majority of the middle class.
The bigger challenge for most global companies is to adapt and make their
approaches appropriate to other markets rather than copying and pasting their
developed-market models across the globe.
Finally, India is in a tech startup boom. The major reason why India’s importance to
global firms should endure is not the size of the market but the opportunity to
contribute and take part in one of the lushest tech startup innovation ecosystems
in the world. The startup ecosystem, now the third largest in the world, is growing
and maturing rapidly and is no longer dominated by e-commerce companies. In
fact, tech startups have attracted over USD20 billion in the past 3 years.

The three factors driving this boom are:

First is India’s investment in its technology infrastructure. Government agencies and

tech volunteers have collaborated to create “Indian Stack”—a set of APIs giving
governments, businesses, startups, and developers a common digital infrastruc-
ture and platform on which to build and deliver human-less, paperless, and
cashless services.

28
https://hbr.org/2018/02/3-reasons-global-firms-should-keep-investing-in-india#:~:text¼India%
20has%20expanded%20its%20solar,four%20years%20ahead%20of%20schedule.&text¼It's%20
been%20estimated%20that%20India,companies%20lack%20the%20competencies%20needed
29
https://www.ibef.org/industry/infrastructure-sector-india.aspx
30
ibid.
94 L. P. Thomas et al.

Second is India’s gigantic number of consumers and its large, highly educated, and
young talent base. Around 10,000 engineering institutes in India alone produce
more engineers than China and the USA combined, and India adds 10–12 million
young and skilled people to its workforce annually.31
Third is that India’s problems cannot be solved without leveraging and using
technology. Many sectors like financial services, education, health care, justice,
and several other services can only be delivered by effectively using technology.

India is a paradox with mega opportunities and mega headaches. The major
headaches include bureaucratic administrative rules and regulations, strong labor
and other associated unions, corruption, underdeveloped institutions, inadequate
physical infrastructure, and difficulty acquiring land. If a company can overcome
these obstacles and challenges, the reward is overwhelming.

6.7 Strategy and Implementation

The startup policy 2015–202032 envisions fostering a world-class startup ecosystem

in India through tactical investments and policy mediation, leveraging the robust
innovation climate and ecosystem. The strategies are intended to achieve the follow-
ing goals:
Goals

• 20,000 tech startups including 6000 product startups by 2020

• 0.6 million direct and 1.2 million indirect new jobs in the sector
• Mobilizing USD333 million funding for startups, by leveraging the funds.
• Focus on generation of 25 innovative technology solutions with social
interference.

The strategies are very holistic in approach and are enumerated below.
Fostering strong partnerships between R&D centers and industry

Equipment and viability gap funding.

Industry-academia connect and project funding.

Providing early stage/Idea2 POC (proof of concept) funding

Grants up to Rs. 5 million.

Validation of proof of concept.
Virtual incubation.

31
https://economictimes.indiatimes.com/industry/services/education/indian-engineering-students-
cant-think-as-high-as-chinese-and-russians/articleshow/63612439.cms?from¼mdr
32
https://startup.karnataka.gov.in/docs/Startup_Policy_Karnataka.pdf
6 Bangalore Innovation System 95

Encouraging entrepreneurship in education through NAIN

Backing given to professional and post graduate colleges in tier 2 and tier 3 cities of
India for setting up incubators.
10 student projects funded in each partner institute.
Mentors provided to student projects.

Creating incubation infrastructure through PPP

Floating of request for proposals (RFPs) or with industry associations for the
selection of partners.
Incubator participants to be provided with infrastructure support, mentoring, legal,
and accounting services.
Partners will help implement incentives and benefits to startups.

Channelizing innovation for social impacts

Five challenges/completions will be announced every year.

Based on the achievement of milestones, initial and follow-up funding will be given.
Pilot projects will be implemented through departments.
Winners of the competitions will be provided with incubation space.

Startup funding through fund of funds

Selection of a fund manager.

Experts from academia and industry shall be part of the investment committee.
The fund will focus exclusively on startups.

Promoting capacity building through exposure visits and workshops

For market expansion, opportunities will be given to join the Karnataka Startup Cell
at global conferences.
Opportunities will be given to meet incoming trade delegations and foreign investors
with the Karnataka Startup Cell.

Providing support in the form of encouraging incentives and concessions

Reimbursement of VAT and CST for early stage startups.

Reimbursements on patent spend for both domestic and foreign filings.
Reimbursement on marketing expenditure up to 30% of the cost incurred subject to
half a million per startup annually.
Women will be given a 10% reservation in seats of partner incubators.
Self-certification under various enactments.
96 L. P. Thomas et al.

The region-wide strategy and plans are overseen and monitored by the nodal
departments for implementation of the startup policy. Specifically, the Department
of IT, BT, and S&T is in charge, and the nodal officer for the same is the Principal
Secretary, Department of IT, BT, and S&T. The individual state startup cell is led by
a senior manager and has five other members. Because of these supportive policies,
nearly USD32 billion in investments has come into Bengaluru and Karnataka.
The Spider Web Graph below details the implementation status of the policy on
each of the seven areas of assessment, in comparison to the national average.

Source:https://www.startupindia.gov.in/content/dam/invest-india/compendium/Startup%20India%
20-%20State%20report_Karnataka.pdf

Each of the seven pillars of the ranking framework forms individual axes and the
overall performance of the state in each pillar is indicated on the respective axes.
Karnataka has done remarkably well in areas such as incubation support and seed
funding support. In pillars such as startup policy implementation, funding support—
angel and venture—, awareness and outreach and “simplified regulations”, the
state’s initiatives are good, and its score is above the national average.
Some of the initiatives that have been successfully implemented are as follows33:

The Government of Karnataka has signed MoUs with 11 partners to set up

Incubators and facilitate startups with relevant infrastructure.

33
https://www.startupindia.gov.in/content/dam/invest-india/compendium/Startup%20India%20-%
20State%20report_Karnataka.pdf
6 Bangalore Innovation System 97

The startup portal has enlisted more than 100 mentors, who are registered on the
portal.
More than 250 startups were given subsidized incubation in state-supported
incubators between January 2016 and April 2018.
The total incubation area in incubators supported by the Government of Karnataka is
124,320 square feet.
More than 170 startups have been provided government-supported seed funding in
the state between January 2016 and April 2018.
State government formed partnership with countries such as Australia, Finland, the
Netherlands, USA, France, and Germany.

What are the special tools that can be regarded as crucial for the regional
innovation ecosystem in Bangalore?

Source: Author’s own figure

98 L. P. Thomas et al.

Multinationals’ Headquarters
Bangalore has evolved into a hub for public sector industries particularly in aero-
space, telecommunications, heavy equipment, space, and defense and has seen
massive investments from the government. This is very important for an ecosystem
to foster and thrive into a vibrant and enabling hub. These facilitated Bangalore
headquarters for manufacturing giants like The Hindustan Aeronautics, The National
Aerospace Laboratories, Bharat Heavy Electronics, Indian Telephone Industries,
and Bharat Earth Movers.
Also, because of sufficient technical and scientific manpower, Bangalore
witnessed the IT revolution in the early 2000 and that resulted in an influx of more
companies and venture into robotics, manufacturing marketplaces, and tools for the
manufacturing sector as they were influenced by the ongoing ecosystem. The
advantages of progressive infrastructure and abundance of support have led many
multinational corporations to follow suit and place their headquarters in the city.

Entrepreneurs and Investors

Bangalore sports the best entrepreneurial ecosystem and financial environment for
starting, establishing, and growing a business. Moreover, the metropolitan city has a
lot of networking opportunities that foster the growth of startups in the area and thus
makes the city a “startup heaven.” Co-working spaces in Bangalore are also helping
in the rapid growth of startup hubs in India by offering a wide range of facilities to
meet its clients’ needs. The co-working spaces offer a stage for all the independent
parties to communicate, to collaborate, and to work together with the goal to increase
their originality, productivity, and competency. Thus, by providing a networking
platform, it enables all the startups, freelancers, and emerging businesses to succeed
by aiding one another.
The government, through the right policy support and allied infrastructure, is
trying to nurture innovation in the startup ecosystem. With the creation of the Startup
Vision Group—Karnataka under the Startup Karnataka program, the top govern-
ment officials involved in this sector aim to bring together the brightest minds in the
ecosystem. They should help set up a robust outline for policy formulation that can
be both flexible in its reaction to disruptive technologies but at the same time fair to
all stakeholders that are involved.
A decade ago, regulations were very strict. Now, however, we are seeing a lot of
government regulations around supporting startups, and the government has become
very supportive and flexible.
The Karnataka startup policy has led to the establishment of a startup cell that
helps encourage strong partnerships between research institutions and industry. It
also encourages entrepreneurship in innovation. It channels innovation for social
impact and is also helps create an incubation infrastructure through public–private
partnerships.
6 Bangalore Innovation System 99

Ease of Doing Business

One of the main reasons for the rise of tech in Bangalore has been digital and
mobility transformation. Apart from that, there has to be an abundance of ideas and
innovation. The Indian market has been offering many opportunities for startups,
and, in turn, these startups carry great hopes to promote growth and generate
employment.
Over the last 20 years, more startups emerged in India and the associated
ecosystem has developed dynamically. Therefore, support has increased in many
dimensions: office space and infrastructure, business support like mentoring and
networking, and the availability of financial capital.
Stakeholders are optimistic that the ecosystem will continue to mature. Startups
do not exist in solitude, but are part of the broader economy. Policy reforms like the
Karnataka startup policy will help improve the general economic conditions as well
as specific investments in digital and physical infrastructure that are expected to also
benefit startups.
With regard to the regulatory framework, improving the implementation of
existing startup policies and removing inefficiencies within the bureaucracy will
be crucial to ease doing business for startups. Reducing necessary paperwork and
documentation, improving access to information, establishing more standardized
operating procedures, and having clear criteria would help startups. Moreover, it is
important to channel investments and funding into education to develop a broader
talent pool.
Ecosystem stakeholders tend to be geographically concentrated in large and
metro cities, and startups that are not placed in these locations and cannot change
bases may find it more difficult to succeed. Support must be extended to
entrepreneurs in smaller tier 2, 3, and 4 cities of India. Due to resource constraints,
India needs low-cost and high-impact solutions, and thus, the focus on scalable tech
startups is understandable. In addition, fostering a good work culture is necessary for
attracting and retaining talent. Eradicating the male-dominated culture will also help
attract qualified women and foster a more gender inclusive and innovative
environment.
The last decade in India has seen noteworthy action on manifold fronts including
the formation of new startups, amount of funding and number of investment rounds,
an influx of global investors and startups, development of regulatory infrastructure,
global mergers and acquisitions, and internationalization. The latest trends show that
startups in India are booming and especially Web-based tech companies are
internationalizing quickly. Startups from India are keen to access new markets and
develop partnerships and market opportunities in regions like Europe, North Amer-
ica, South and Southeast Asia. The thinking is that a new unicorn can be born
anywhere, and to reach that status, expanding beyond India to new markets is key.
Connectivity to new ecosystems will be a key additional driver for growth.
Berlin Innovation System
7
Helge Dauchert and Ludovit Garzik

Abstract

The Berlin innovation ecosystem is characterized by its highly developed

research landscape. Berlin boasts a high density of universities—and their
graduates—and numerous well-developed and publicly financed research
institutions. At the same time, a lack of large research-active companies and a
weakly developed SME sector are major deficits in Berlin’s innovation ecosys-
tem. These shortcomings result in weak privately financed R&D, the pronounced
small-scale nature of Berlin’s economy, and rather low patent performance.
What sets Berlin apart as an innovation ecosystem in Germany and throughout
Europe is the vibrant startup scene that has developed since the 2000s. Interest-
ingly, the Berlin startup boom is not the result of exceptionally favorable political
and administrative conditions or ambitious support programs, but rather of social
and cultural factors.
Innovative startups that align with Berlin’s strength in publicly financed R&D
generate positive long-term effects: They encourage large, well-established
companies to invest in the city. These investments are no longer merely
incubators and showrooms but, increasingly, R&D centers and—like in Tesla’s
case—production facilities. Thus, science and innovation are making a decisive
contribution to turning a poor and structurally weak city back into an attractive
location for business and industry.

H. Dauchert (*)
Commission of Experts for Research and Innovation, Berlin, Germany
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 101
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_7
102 H. Dauchert and L. Garzik

7.1 Berlin Innovation System Overview

Spatial Conditions: Berlin—An Urban Island

The Berlin Innovation Ecosystem is essentially limited to the city of Berlin or rather
the federal state of the same name. Unlike other urban innovation ecosystems in
Germany like Munich, Frankfurt, Cologne, or Stuttgart, Berlin is not located in a
highly agglomerated urban region or in the immediate vicinity of other economically
dynamic cities. Instead, Berlin forms an urban island in the sparsely populated, rural,
and structurally weak federal state of Brandenburg. Only a few suburbs just outside
the city limits and the Brandenburg capital of Potsdam immediately southwest of
Berlin can be assigned to the Berlin innovation ecosystem.

In a Nutshell: Strengths and Weaknesses of the Berlin Innovation Ecosystem

The strength of Berlin’s innovation ecosystem lies in its highly developed research
landscape. Berlin boasts a high density of universities, including many graduates,
and numerous well-developed and publicly financed research institutions. The lack
of large research-active companies and a weakly developed SME sector are major
deficits of the Berlin innovation ecosystem. These shortcomings result in a low level
of privately financed R&D, a pronounced small-scale nature of Berlin’s economy,
and rather low patent performance.1 The last is also a shortcoming for Berlin as a
startup location.2
Berlin and its environs have been largely deindustrialized since at least the early
1990s due to the collapse of East German companies and the phasing out of
subsidies for West German companies after reunification.3 High unemployment
rates, low per capita income, and low economic growth were all characteristic of
Berlin and still are despite a trend reversal that began in the late 2000s. However,
economic weakness and the resulting lack of career prospects in established
companies for many qualified young people have also been one of the reasons for
the dynamic development of startup activity in recent years. This activity is an
outstanding feature of Berlin’s innovation ecosystem.

A Special Feature of the Berlin Innovation Ecosystem: Startups

What makes Berlin special as an innovation ecosystem in Germany and throughout
Europe is its vibrant startup scene, which has been developing since the 2000s.
Interestingly, the Berlin startup boom is not the result of exceptionally favorable
political and administrative conditions or ambitious support programs, but rather of
social and cultural factors. Due to its pronounced economic weakness, Berlin was

1
Lübbers T et al. (2020) Evaluierung der Berliner Innovationsförder-Programme 2018/2019,
Ramboll Management Consulting GmbH, Berlin.
2
Compared to the other leading European startup locations London, Paris and Stockholm, Berlin
lags behind when it comes to patent intensity. Startup Genome (2019) Global Start-up Ecosystem
Report 2019. p. 29ff.
3
Rupf W (1999) Der Wirtschaftsstandort Berlin. In: Rytlewski, R.; Süß, W. (Hrsg.): Berlin – Die
Hauptstadt. Bundeszentrale für politische Bildung, Bonn. p. 391ff.
7 Berlin Innovation System 103

characterized for many years by cheap apartments and favorable commercial rents,
as well as a generally low cost of living. Combined with its rich cultural and leisure
offerings, the city became highly attractive for artists, students, and creative peo-
ple—including creative entrepreneurs.4
Berlin’s city administration plays a dual role: On the one hand, it has been and
continues to be considered inefficient5 and presents an obstacle to innovators and
founders. On the other hand, the Berlin administration—due to its limited
capabilities and impact—has repeatedly created unregulated white spots that were
used as free spaces by creative people putting their ideas into practice. This unregu-
lated dynamic stood in contrast to other German cities and contributed to the city’s
“poor but sexy”6 appeal.
However, recent surveys of company founders have put the negative image of the
Berlin administration into perspective. Both the Berlin 2019 Innovation Survey and
the PWC 2018 study of startup companies in the Berlin area rank the city very low
for its bureaucracy and administrative deficits.7,8,9 More surprisingly, these surveys
show that the era of low costs for living and real estate are over. High costs are now
cited as a central problem for companies and startups.
From today’s perspective, Berlin’s oft-lamented lack of a broad industrial base
and its absence of large companies are now seen as helpful preconditions for the
startup boom. Although Berlin’s startups lack immediate proximity to potential
customers, the city’s founders do not have to compete with seven DAX (Deutscher
Aktien Index) companies for the best employees like their peers in Munich. The
Berlin job market, in combination with three large state universities and numerous
other colleges, ensures that well-trained young people are available in sufficient
numbers. Berlin’s high international attractiveness compared to other German cities
enables its employers to hire from a wide variety of countries, and it is easier to
establish an internationally operating company in Berlin than in other German
innovation ecosystems.10

4
EFI – Expertenkommission Forschung und Innovation (2013) Gutachten zu Forschung,
Innovation und technologischer Leistungsfähigkeit Deutschlands 2013. Berlin: EFI. p. 35 f. and
Dauchert H (2013) IT-Unternehmensgründungen in Berlin, Studien zum deutschen
Innovationssystem. Berlin: EFI. p. 18f.
5
https://www.tagesspiegel.de/berlin/probleme-in-der-verwaltung-berlin-endlich-regierbar-
machen/20984010.html (last accessed on March 25, 2021).
6
The popular phrase was coined by Klaus Wowereit, mayor of Berlin from 2001 to 2014. https://
www.theguardian.com/cities/2014/sep/11/poor-but-sexy-not-enough-rise-fall-berlin-mayor-klaus-
wowereit (last accessed on March 25, 2021).
7
Wolf G (2020) Innovationserhebung Berlin 2019 – Innovationsverhalten der Berliner Wirtschaft,
Technologiestiftung Berlin 2020. p. 44f.
8
PWC (2018) Start-up-Unternehmen im Raum Berlin, PricewaterhouseCoopers GmbH,
Berlin. p. 4f.
9
Lübbers T et al. (2020) Evaluierung der Berliner Innovationsförder-Programme 2018/2019,
Ramboll Management Consulting GmbH, Berlin. p. 66f.
10
EFI—Expertenkommission Forschung und Innovation (2013) Gutachten zu Forschung,
Innovation und technologischer Leistungsfähigkeit Deutschlands 2013. Berlin: EFI. p. 35 f. and
104 H. Dauchert and L. Garzik

Innovative startups in line with Berlin’s strength in publicly financed R&D

generate positive long-term effects: They encourage large, well-established
companies to invest in the city. These investments are no longer merely incubators
and showrooms but, increasingly, R&D centers and—like in Tesla’s case—produc-
tion facilities. Thus, science and innovation are making a decisive contribution to
turning a poor and structurally weak city back into an attractive business and
industrial location.
The dynamic startup scene has motivated numerous large companies to establish
a presence in Berlin. Instead of relocating headquarters or production facilities to the
German capital, these companies typically set up incubators and financing startups
through corporate venture capital. By promoting startups in company-owned
incubators and by investing in existing startups, many established companies hope
to access Berlin’s innovative ideas and find opportunities to incorporate external
innovations.11
In recent years, large companies’ interest in Berlin seems to have taken on a new
quality. These companies are no longer content to establish strategic bridgeheads in
Berlin, instead setting up branch offices and business units in the city. Numerous
multinationals like Google, SAP, VW, and Siemens have announced plans to
establish corporate units or campuses, and these are merely the prominent examples.
These initiatives show that large companies hope to stay in touch with innovative
developments and trends while promoting their own interests.
Electric car manufacturer Tesla has taken its interest in Berlin one step further.
With the construction of a so-called Gigafactory at the outskirts of Berlin, the
company is creating large-scale production capacity for the first time in many
years. The establishment of a design and development center is also under
discussion.
The growing presence of large companies is a strong indicator that the Berlin
innovation ecosystem has achieved a self-reinforcing dynamic. How the Covid-19
pandemic will affect this promising development cannot yet be estimated. At
present, the data situation is not sufficient for empirically validated statements.

Turning Research into Businesses: The Outcome of the Berlin Innovation

System
Research and innovation are not an end in themselves but should generate economic
growth and jobs. To the regret of many economists and politicians, it is impossible to
draw a direct link between investment in research an innovation and economic
outcomes. However, a few indicators can signal how much research and innovation
contribute to the economic performance of a region or country.

Dauchert H (2013) IT-Unternehmensgründungen in Berlin, Studien zum deutschen

Innovationssystem. Berlin: EFI. p. 18f.
11
Dealroom (2020a) Shortage of later stage venture capital in Germany: more acute due to Corona
crisis. https://startup-map.berlin. p. 24ff. Provided by Dealroom (according to communication with
authors April 16, 2021).
7 Berlin Innovation System 105

The striking concentration of funding cases through the EXIST program suggest
that the Berlin ecosystem is—compared to other German innovation ecosystems—
particularly successful in transferring publicly financed research into real economic
impulses. The concentration of High-Tech Gründerfonds-funded startups also
implies that Berlin is successfully turning R&D investments into advanced products.
A close look at the geographical distribution of innovative startups and
companies within the ecosystem further highlights the link between research and
economic impact. Just looking at the spatial proximity of university campuses or
public research institutions and innovative companies shows that there is a close
connection between the two sides. A striking number of innovative startups and
companies operate near the Technical University in Berlin’s Charlottenburg district,
and the same pattern holds for Humboldt University and Charité Universitätsmedizin
in the Mitte district. Clusters of innovative companies have also formed around the
Buch campus on the outskirts of Berlin and the Adlershof science and technology
park.12
Berlin’s strengths in publicly financed R&D in line with its innovative startup
scene generate a positive effect in the long run: They encourage large, well-
established companies to invest in the city. These investments are no longer merely
incubators and showrooms but, increasingly, R&D centers and—like in Tesla’s
case—production facilities. In this way, science and innovation make a decisive
contribution to turning a poor and structurally weak city into an attractive business
and industrial location again.

7.2 Innovation Policy of the Berlin State Government

In Berlin, innovation policy and startup support schemes are not the source of current
developments but a consequence. Innovation policy in Berlin is an attempt to
regulate and promote a development that was already underway. The state
government’s innovation policy strategies were late, appearing after innovation
itself. In addition, policymakers’ actions and the innovation strategy they devised
were initially aimed at strengthening existing structures, not at creating new ones or
attracting new industries.
In the context of its innovation strategy, the Berlin state government supports
startups in innovative technologies through the state-owned “Investitionsbank
Berlin” (IBB) and the Technology Foundation Berlin. The latter includes public–
private partnership initiative Berlin Partner for Business and Technology.13

12
Rammer C et al. (2019) Knowledge proximity and firm innovation: A microgeographic analysis
for Berlin.
13
https://www.technologiestiftung-berlin.de/de/startseite/; https://www.ibb.de/de/
wirtschaftsfoerderung/unternehmensphasen/gruenden/gruenden.html; https://www.berlin-partner.
de/en/ (last accessed on March 25, 2021).
106 H. Dauchert and L. Garzik

The governments of the federal states of Berlin and Brandenburg adopted a joint
innovation strategy (innoBB) for the first time in 2011.14 This followed on from the
innovation policy cooperation between the two states since 2006. The geographical
focus of the innovation strategy goes beyond Berlin’s innovation ecosystem and
includes the entire federal state of Brandenburg.
For the first time, the governments of Berlin and Brandenburg defined five sectors
(called Zukunftsfelder or “future fields”) to prioritize for development into perma-
nent, high-performance clusters. The future field designation assigns a key function
to the capital region’s innovation processes and bundles them according to the
principle of “strengthening strengths” to succeed in international innovation compe-
tition. In principle, the future fields represent established industrial and service
sectors: health care (biotechnology, medical technology and pharmaceuticals);
energy; transport, mobility and logistics; optics; and ICT, media and creative
industries. Interestingly, startups are marginal in the innoBB plan. The foundation
of new businesses is only mentioned to illustrate the dynamics in the
abovementioned clusters.
Only the newest edition of the joint innovation strategy (innoBB 2025), published
in 2019, recognizes startups as an important component of the innovation ecosystem
in Berlin and Brandenburg and a focus in their own right. The updated strategy
identifies key factors for strengthening the startup ecosystem, including not only
financing opportunities but also access to relevant networks, specific target groups,
know-how, and research infrastructure, and as well as test beds and real-life
laboratories.
The joint innovation strategy establishes eight innovation support programs in the
Berlin state government. These are intended to stimulate research and innovation, as
well as related private investment and startup activities. The program for promoting
research, innovation, and technology (Pro FIT) is central to innoBB 2025. Its goal is
to promote the intensity of R&D in Berlin’s economy by supporting ambitious,
innovative projects. Support is primarily allocated to the clusters defined in the
original innoBB strategy.15 The strategy’s eight innovation support programs were
evaluated in 2018/2019, but the evaluation’s methodology prevented any conclusive
assessment of their effectiveness.
One clearly positive development is the establishment of new research facilities in
the city. The 2013 founding of the Berlin Institute of Health by Charité and the Max
Delbrück Center were important steps toward increasing health research perfor-
mance in Berlin. The institute’s foundation and further initiatives illustrate Berlin’s

14
Senat von Berlin; Regierung des Landes Brandenburg (2011) Gemeinsame Innovationsstrategie
der Länder Berlin und Brandenburg (innoBB), Berlin und Potsdam.
15
https://www.bundesbericht-forschung-innovation.de/de/Berlin-1758.html (last accessed on
March 25, 2021).
7 Berlin Innovation System 107

ambitions to become a globally recognized location for health research. In fact, the
innoBB’s healthcare cluster has experienced an impressive rise in recent years.
As a consortium of the four large Berlin universities, the University of Potsdam
and two research institutions won the competition to establish a German Internet
Institute in 2017. Part of the Weizenbaum Institute for the Networked Society, the
German Internet Institute, is a collaborative project in Berlin and Brandenburg
funded by the Federal Ministry of Education and Research (BMBF). Its goal is to
better understand the dynamics, mechanisms, and implications of digitalization.16
The Einstein Center Digital Future was also inaugurated in 2017 as an interuni-
versity institution for research on digital transformation.17 The Einstein Center is
organized as a public–private partnership based in the Einstein Foundation. The
Einstein Foundation was established in 2009 by the Berlin state government to
promote science and research in the city.
In 2018, the Berlin innovation ecosystem saw another success with the award of
excellence status to the Berlin University Alliance. This award is part of the
excellence strategy initiated by the German federal and state governments. The
Alliance was supported by the Berlin state government to boost the national and
international visibility of all four participating universities.18
Berlin’s latest coup was the establishment of the new Berlin Institute for the
Foundation of Learning and Data (BIFOLD), announced in early 2020. The
BIFOLD is intended to become an internationally recognized lighthouse for AI
research.
Berlin’s success at establishing new research locations may also have been made
possible by changes in the priorities set by the city’s policymakers. While the
previous mayor, Klaus Wowereit, focused his work on the city’s art and cultural
scene, his successor, Michael Müller, shifted his political emphasis to science and
research. This shift is illustrated by the fact that Müller, as governing mayor, also
took over the department for higher education and research.
Despite the increasing attention of the Berlin state government to science and
research, it should be critically noted that the institutions and initiatives mentioned
above are not financed by the city itself but by the federal government and other
external sources. In recent years, the Berlin state government has repeatedly found it
difficult to raise its share of the funding and to fulfill its financial commitments.

16
https://www.weizenbaum-institut.de/en/the-institute/ (last accessed on March 25, 2021).
17
https://www.einsteinfoundation.de/personen-projekte/einstein-zentren/ (last accessed on March
25, 2021).
18
Freie Universität Berlin, Humboldt-Universität zu Berlin, Technische Universität Berlin and
Charité – Universitätsmedizin Berlin. https://www.berlin-university-alliance.de/news/items/berlin-
senate.html (last accessed on March 25, 2021).
108 H. Dauchert and L. Garzik

7.3 SWOT Analysis of the Berlin Innovation Ecosystem

Resources Strengths Weaknesses Opportunities Threats

Culture and The Berlin Berlin has been The mindset of The creative
mindset innovation seat of the seeing Berlin as community
community German an chose Berlin for
understands government for internationally its lower cost of
itself as a part of over two recognized living and could
society that is decades, and innovation hub is move on to other
free in its government jobs still in its infancy regions as costs
thoughts and are continuously and offers plenty rise
their being created. of room for
implementation. This decreases further
That creates the pool of development
fertile ground for potential
a strong inventors and
orientation founders.
toward
innovation In addition,
Berlin has strong
traditional
milieus that are
characterized by
skepticism
toward
technological
progress, large-
scale enterprises
and profit-
oriented
economic
activities
Digital Compared to Berlin cannot If Berlin The speed of
infrastructure other German score points in an manages to be at change in digital
cities and international the vanguard of hardware
regions, Berlin comparison of 5G and 6G represents a
has good high- internet speeds implementation, threat to Berlin
speed internet that will create a and other regions
penetration competitive if it is unable to
advantage keep up
against other
German and
European
regions
Education Berlin has a well- The focus of Many young Time lags in
and skills developed education is too people from the changing
education system much on the German education and
in primary, transfer of countryside skill parameters
secondary, and knowledge and come to Berlin are long due to
less on the and can be cultural tradition
(continued)
7 Berlin Innovation System 109

Resources Strengths Weaknesses Opportunities Threats

tertiary development of further trained and can be a
education skills and educated to competitive
develop the disadvantage
city’s pool of against more
human resources dynamic regions
Institutions The institutional The large International Despite the large
landscape is number of tech players and number of
highly institutions global education existing
sophisticated and makes it hard to institutions will institutions, more
was generated gain an overview find it easy to are established
over many locate every year
decades cooperation without a clear
partners, so they view of how old
may choose it institutions can
over other be closed
regions
Legal Berlin is home to Lawyers and If networks of
advisers a large number of accountants have legal advisers are
lawyers, patent very traditional not available for
lawyers, and roles in their entrepreneurs, it
accountants support of will be a
startups structural
entrepreneurs disadvantage for
the region
Market and Large home Demand is a Reduction of Home markets of
demand market of more weakness, public language barriers many competing
than 80 million procurement will lead to an regions like
in Germany, especially is not expanded “home China and the
more than oriented toward market” in USA are much
100 million innovative Europe larger
including stimulation, and
German- many
speaking regions opportunities are
of Austria, missed
Switzerland and
Belgium
Migration Berlin has a The lack of large In recent years, If the Berlin
magnetic effect research-active German and innovation
and many people companies limits international ecosystem fails
want to job options and companies have to attract or
implement their career established develop strong
ideas in the city. opportunities, innovation- research-active
making Berlin oriented companies, there
It is one of the less attractive to divisions in is a danger that
most attractive international Berlin. There is a many talented
locations for scientists. chance that foreign students
international internationally and young
scientists when it Rising costs of competitive researchers will
comes to living endanger opportunities for leave Berlin due
universities and the city’s top researchers to the lack of
research alternative will develop in career
institutions. cultural and the private opportunities
leisure offerings. sector.
(continued)
110 H. Dauchert and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

The city is highly
attractive for Language is a If Berlin keeps
students and barrier for apartment rents
young migration, and and living costs
professionals international moderate, it will
from all over the smart people increasingly be a
world prefer English- destination for
speaking regions skilled young
people
Policy and In recent years, All too often, Strategic public Berlin’s state
strategy the federal and there are gaps investments in government must
state between the research and show that it
governments Berlin state innovation can really takes the
have government’s trigger extensive promotion of
increasingly funding plans private-company research and
discovered and its real involvement. innovation
research, commitments. seriously and
innovation, and New research If Berlin does not hide
startups as institutions are manages to behind
factors for future largely financed seamlessly investments and
economic growth from external transition from support
sources (e.g., creating a initiatives from
Weizenbaum, strategy to the federal
Einstein, Bifold, implementing it, government
BIG) it will be ahead
of many other
regions
Quality of Berlin is a safe Parts of the The high quality Regions in Asia
living place to live and region have lost of living and Africa are
offers a lot of the balance of a provides developing their
entertainment, broad spectrum opportunity to quality of living
culture, and of society, keep and expand standards and
convenience— instead dividing Berlin’s could become
even for less into richer and advantages competitors for
affluent residents poorer talent in the
neighborhoods future
Regulation People are used New business Change in Regulators and
to a broad development is regulations like interest groups
spectrum of hindered by insolvency law could increase
regulation, so it regulatory can boost their influence
will not be a measures founders and create a
barrier for major barrier for
innovators future business
socialized in development
Germany
Research Research The rhythm of It is much easier The
infrastructure infrastructure is financing is too to maintain a requirements for
on a high level broad due to the high level than it research
due to continued multiple is to reach it in infrastructure are
investments by responsibilities the first place growing at
public and of national, enormous speed.
(continued)
7 Berlin Innovation System 111

Resources Strengths Weaknesses Opportunities Threats

private regional, and It is very
institutions local authorities expensive to stay
competitive in all
disciplines. It is
unclear whether
the Berlin state
government is
permanently
willing to invest.
If not, this could
lower quality or
force Berlin to
focus on specific
research fields
Risk capital Investment There is no If the expansion Due to the lack
volume has risen tradition of of growth of German
sharply in recent investing in financing is growth
years. Berlin high-risk successful, financiers, many
attracts more projects; people Berlin-based startups are
venture capital in Germany tend startups could migrating to the
than any other to invest in real also grow into USA or are being
German estate rather than internationally taken over by
innovation startups. significant other companies.
ecosystem companies. This Plans by the
There is a lack of applies German federal
later-stage especially to government to
venture capital. capital-intensive set up large funds
German funds tech and biotech are not
mostly focus on startups progressing
early stage
financing,
creating a gap in
growth financing
compared to
other countries
Bank loans There is a high Every step of Banks will be the Regulation is
level of Basel regulation backbones of expected to be
communication lowers the risk startup and scale- tightened in the
and confidence level of bank up investments. future, which
between loan investments If regulation will make the
businesses and allows, they can wall between
their financing have a massive founders and
banks impact on investments a
technology little higher with
projects every step
Tolerance Berlin perceives Tolerance often In view of Due to its own
and trust itself as a serves as a increasing complacency and
tolerant, open, pretext to ignore isolationist overconfidence,
and dynamic the city’s social tendencies and the city is in
metropolis. The problems. repressive danger of
city is considered developments in waiting too long
(continued)
112 H. Dauchert and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

one of the few Self-satisfaction other innovation for important
truly and a laid-back ecosystems (e.g., developments,
internationally mentality may USA under postponing
oriented places in contribute to trump- unpleasant
Germany regular political administration decisions, and
and and China), thus stagnating
administrative Berlin has the in the medium
failure to chance to profile term
perform tasks itself as an open
that are taken for and tolerant
granted in other location for
German cities innovation

7.4 Input Indicators: Strong but Driven by Public Funding

The Berlin Innovation Ecosystem is very well positioned on the input side, as shown
by its investments in R&D, its numerous publicly funded research institutions and
universities, and its many students and graduates.

7.4.1 Publicly Funded Research and Educational Institutions:

A Big Asset

The Berlin innovation ecosystem is characterized by a density of publicly funded

research institutions that is unique in Germany. Five institutions of the Fraunhofer-
Gesellschaft, three institutions of the Helmholtz Association, 22 institutions of the
Leibniz Association, nine institutions of the Max Planck Society, and an academy of
science (Berlin Brandenburg Academy of Science) are located in the federal state of
Berlin and its immediate surroundings. In addition, there are six federal institutions
with R&D tasks and five federal state institutions with R&D tasks. All in all, there
are around 70 research institutions based in the city.

7.4.2 Universities: Attractive for German and Foreign Students

Berlin is home to four state universities plus the Charité—Universitätsmedizin

Berlin, three state universities of arts, four state and two theological universities of
applied sciences, and 29 private universities. In addition, the immediate vicinity of
Berlin boasts another 10 universities. In the winter semester 2019–2020, Berlin’s
universities alone had around 194,000 students, 126,000 of whom were enrolled at
7 Berlin Innovation System 113

universities and 61,000 at universities of applied sciences.19 Of these 194,000

students, 41,300 came to the city from abroad. Berlin has by far the highest
proportion of foreign students of any German state. The high proportion of foreign
students is an indicator of Berlin’s attractiveness as a place to study, even beyond
Germany’s borders.
In 2018, 32,600 students graduated in Berlin, making its population of recent
university graduates higher than any other federal state per employed person
(employment subject to social insurance contributions). Berlin’s labor market has
a particularly large number of academically trained people available.

7.4.3 R&D Activities: Driven by Publicly Funded Institutions

Berlin invests a lot of money in R&D; 3.4% of its GDP is invested in R&D (2017).
However, a closer look at R&D expenditures also reveals a central weakness in
Berlin’s innovation ecosystem: R&D expenditure mostly comes from the publicly
funded higher education sector and the nonuniversity research institutions that are
also publicly funded.20 The private business sector plays only a subordinate role.
The combined R&D expenditure intensity of the publicly funded university sector
(0.84% in 2017) and nonuniversity research institutions (1.19% in 2017) amounts to
2.03% (2017), while the R&D intensity of the business sector is only 1.37% (2017).
It is also noteworthy that the business sector’s R&D expenditures declined from
2.05% to 1.37% between 2001 and 2017. This development clearly differs from the
overall German trend. Nationwide, business sector R&D expenditures rose from
1.67% to 2.10% between 2001 and 2017.21
The pronounced strength of publicly funded research and the comparatively
weakness of privately funded research also apply to R&D personnel intensity. The
R&D personnel intensity of Berlin’s university sector and nonuniversity research
institutions is very high at 52 and 62 full-time equivalents per 10,000 labor force,
respectively, and is only surpassed by the federal state of Bremen. With an R&D
personnel intensity of 69 full-time equivalents, Berlin’s business sector achieves
only a mediocre ranking in comparison with the other federal states. It lags well
behind the economically strong states like Bavaria and Baden-Württemberg, which
have R&D personnel intensities of 132 and 219 full-time equivalents, respectively.

19
Students at Berlin’s art colleges: 5700, at the administration colleges: 900. The number of
students at all Brandenburg universities was 49,500 in the winter semester 2019/20 according to
Federal Statistical Office.
20
Nonuniversity research institutions include the four major scientific organisations (Fraunhofer-
Gesellschaft zur Förderung der angewandten Forschung, Hermann von Helmholtz-Gemeinschaft
Deutscher Forschungszentren, Wissenschaftsgemeinschaft Gottfried Wilhelm Leibniz, Max Planck
Gesellschaft zur Förderung der Wissenschaften), the Max Weber Stiftung and other institutions.
21
Gehrke B et al. (2020) Forschung und Entwicklung in Staat und Wirtschaft – Deutschland im
internationalen Vergleich. Studien zum deutschen Innovationssystem. Nr. 2–2020. Berlin:
EFI. p. 137.
114 H. Dauchert and L. Garzik

7.5 Output Indicators

Publications: Strong Performance

Given the density of nonuniversity research institutions and universities mentioned
above, it is hardly surprising that Berlin produces many scientific publications. In
relation to its population of 3.6 million, Berlin produces significantly more scientific
publications than any other federal state. In 2019, Berlin produced 9725 publications
per million inhabitants. The federal state of Saxony follows with 5111 publications,
then Hamburg with 4218 publications and Bremen with 3960 publications per
million inhabitants. The federal states of Bavaria, Baden-Württemberg, and North
Rhine-Westphalia—the industrial heartlands of Germany—produce 2743, 2472 and
1820 scientific publications per million inhabitants, respectively.22
Above-average performance in the city-states of Berlin, Hamburg, and Bremen is
understandable because ratio of research institutions to the population is much
higher in these urban places than in the other federal states.23 In absolute numbers,
the state of Bavaria with 35,900 publications is ahead of Berlin with 35,000
publications (2019). The federal states of North Rhine-Westphalia Baden and
Baden-Württemberg follow with 32,800 and 27,500 publications, respectively.24

Patents: Weak Performance

Berlin’s patent intensity in Fig. 7.1, calculated as the number of patent filings divided
by the number of employees (in millions), is rather low. Baden-Württemberg and
Bavaria are the best in Germany by this indicator.25 This is not surprising given that
large parts of German industry—including multinational companies—are
concentrated in the southern part of the country. Berlin, as a largely deindustrialized
federal state without a pronounced SME sector or large multinational companies, has
only a moderate patent intensity compared to other federal states. The city’s numer-
ous research institutions and universities cannot compensate for the lack of an
industrial base.

Despite the missing industry connection, Berlin’s major universities are very active
at patenting. Compared to other German universities, the Freie Universität,
Humboldt Universität, Technische Universität, and Charité Universitätsmedizin
Berlin are all characterized by a significantly above-average patent intensity.

22
Open Access Monitor. https://open-access-monitor.de/#/publications (last accessed on March
25, 2021). The Open Access Monitor collects data the Dimensions database and several Open
Access databases.
23
Frietsch et al. (2017) Performance and Structures of the German Science System 2016, Studien
zum deutschen Innovationssystem, Berlin: EFI.
24
Hamburg: 7600 publications; Bremen: 2700 publications (all figures for 2019). Open Access
Monitor. https://open-access-monitor.de/#/publications (last accessed on March 25, 2021).
25
Neuhäusler P et al. (2021) Patent Applications – Structures, Trends and Recent Developments
2020. Studien zum deutschen Innovationssystem. Berlin: EFI.
7 Berlin Innovation System 115

Patent intensities of the German Federal

States 2007 and 2017 (per 1 million employees)
2000
1500
1000
500
0

2007 2017
Fig. 7.1 Patent Intensity of the German Federal States 2007 and 2017 (per one million employees).
Source: EPO-PATSTAT; Statistisches Bundesamt (Federal Statistical Office) calculations by
Fraunhofer ISI in Neuhäusler P et al. (2021) Patent Applications—Structures, Trends and Recent
Developments 2020. Studien zum deutschen Innovationssystem. Berlin: EFI

Newly Found Businesses: High Level of Activities in All Sectors

A special feature of the Berlin innovation ecosystem is its many new businesses.
Berlin is at the top of all federal states for its number of new businesses,26 ahead of
Hamburg and Bremen (Fig. 7.2). In this context, we must consider that—unlike the
territorial federal states—city-states like Berlin, Hamburg, and Bremen do not
include any rural areas and thus have structural advantages with regard to new
business rates.27 Restricting the comparison to the highly agglomerated urban
regions of the territorial federal states, for example, Munich, the Rhine-Main area,
Rhine-Ruhr, or Stuttgart, would significantly reduce the gap between Berlin and
other German regions.
A look at the time series (2007–2008; 2012–2013; 2017–2018) shows that new
business rates in Berlin are not only exceptionally high now, but have been for some
time. In the previous decade, they were already significantly higher than in the other

26
Rate of new businesses: number of new businesses as Percentage of the total number of
businesses.
27
The differences between the federal states with regard to the startup rates can be attributed to a
considerable extent to the sectoral composition of new businesses. In Berlin and the city-states of
Hamburg and Bremen, a relatively high proportion of startups is in the service sector, which is
typical of highly densely populated areas (agglomerations). Bersch J et al. (2021)
Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und
Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler
Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen Vergleich. Studien
zum deutschen Innovationssystem. Berlin: EFI.
116 H. Dauchert and L. Garzik

Fig. 7.2 New Business rates

in the German Federal States New business rates in the German
2007–2018 (as percentages). Federal States, 2007-2018,
Number of new businesses in knowledge-intensive sectors (as percentages)
the period 2017–2018 as a
percentage of all companies. Berlin
Source: Mannheim Enterprise Hamburg
Panel, Calculations by ZEW Bremen
Bavaria
(ZEW—Leibniz Centre for
Saarland
European Economic
Baden-Württemberg
Research) in Bersch J et al.
Hesse
(2021) Schleswig Holstein
Unternehmensdynamik in der North Rhine-Westphalia
Wissenswirtschaft in Lower Saxony
Deutschland 2018, Brandenburg
Gründungen und Rhineland-Palatinate
Schließungen von Saxony
Unternehmen, Mecklenburg-West Pomerania
Gründungsdynamik in den Saxony-Anhalt
Bundesländern, Thuringia
Internationaler Vergleich, % 0 2 4 6 8 10
Wagniskapital-Investitionen
in Deutschland und im 2017/2018 2012/2013 2007/2008
internationalen Vergleich.
Studien zum deutschen
Innovationssystem. New business rates in the German Federal States,
Berlin: EFI 2007-2018, all sectors (as percentages)

Berlin
Hamburg
Bremen
Saarland
North Rhine-Westphalia
Hesse
Bavaria
Baden-Württemberg
Lower Saxony
Schleswig Holstein
Rhineland-Palatinate
Brandenburg
Saxony-Anhalt
Mecklenburg-West Pomerania
Saxony
Thuringia

% 0 2 4 6 8 10

2017/2018 2012/2013 2007/2008

7 Berlin Innovation System 117

federal states (Fig. 7.2). Since 2007, Berlin has further consolidated its attractiveness
as a location for young companies in comparison to the other federal states.
We should note that the gap between Berlin’s new business rate and those of the
other federal states has grown over the years. This is because new business rates, i.e.,
the number of new businesses as a percentage of all companies, in all federal states
fell significantly between 2007–2008 and 2017–2018, especially in knowledge-
intensive sectors. However, the decline in founding activities was higher in other
federal states, so the gap between Berlin and the rest of Germany has continued to
widen over time.28

If the new business rates are differentiated and evaluated according to all
industries or limited to startups in the field of knowledge-intensive services and
high-tech, Berlin is at the top for both sectors (Fig. 7.3).
Berlin’s founding dynamics radiate beyond the borders of the federal state to the
city’s suburban periphery. This explains why the federal state of Brandenburg—
although sparsely populated and structurally weak—has the highest rate of new
businesses of all eastern German states.
Another structural feature of Berlin’s founding activity is the high proportion of
new businesses in the manufacturing sector compared to the number of people
employed there. A comparison of the economically most important agglomeration
areas in Germany shows that Berlin is the leader by far with 230 new businesses per
100,000 employees in the manufacturing sector (average for the years 2012–2016).
Munich, as the agglomeration with the second highest rate of new businesses in the
manufacturing sector, has only 105 startups. The Rhine-Main area is third with only
77 new businesses per 10,000 employees.29

7.6 Startups: The Strong Pillar of the Berlin Innovation

Ecosystem

Startups are a special subgroup of newly founded businesses. They are characterized
as young companies with innovative business ideas and high growth potential.30
Startups are not only providers of innovative products, processes, and business
models, but also provide impetus and cooperation partners for innovation in

28
Bersch J et al. (2021) Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018,
Gründungen und Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern,
Internationaler Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen
Vergleich. Studien zum deutschen Innovationssystem. Berlin: EFI.
29
Gornig M and Werwatz A (2019) Anzeichen für eine Reurbanisierung der Industrie, DIW
Wochenbericht Nr. 47/2018, Berlin. p. 1008f.
30
Kollmann T et al. (2019) Deutscher Start-up Monitor 2019. Hrsg.: Bundesverband Deutsche
Startups e.V. und PWC Deutschland.
118 H. Dauchert and L. Garzik

New Business rates in the German

Federal States 2017–2019 (as
percentages)
7
6
5
4
3
2
1
0

high technology knowledge-intensive services all sectors

Fig. 7.3 Rate of New Businesses in the Federal States 2017–2019. New businesses as a percentage
of the total number of companies. Source: Mannheim Enterprise Panel, Calculations by ZEW
(ZEW—Leibniz Centre for European Economic Research) in Bersch J et al. (2021)
Unternehmensdynamik in der Wissenswirtschaft in Deutschland 2018, Gründungen und
Schließungen von Unternehmen, Gründungsdynamik in den Bundesländern, Internationaler
Vergleich, Wagniskapital-Investitionen in Deutschland und im internationalen Vergleich. Studien
zum deutschen Innovationssystem. Berlin: EFI

established companies.31 Therefore, they are of particular importance for any

innovation ecosystem.
Startups pursue new business models and use innovation to expand and modern-
ize their ranges of products and services. In terms of their specific skills and their
incentives, they are often better able than established companies to take up disruptive
ideas and convert them into marketable solutions. Startups are also trend scouts and
sources of inspiration for established companies, which are constantly challenged by
competition with startups. As cooperation partners with established companies,
startups contribute to the joint development and marketing of innovations. Startups
from the science sector (universities and nonuniversity research institutions) also
play an important role in the transfer of knowledge and technology into practice.

31
EFI – Expertenkommission Forschung und Innovation (2019) Gutachten zu Forschung,
Innovation und technologischer Leistungsfähigkeit Deutschlands 2019. Berlin: EFI.
7 Berlin Innovation System 119

In recent years, Berlin has become the German capital for startups—a phenome-
non that has attracted attention beyond the country’s borders. In 2019, 63% of the
top 100 funded startups in Germany were located in Berlin, 195 in Munich, and 7%
in Hamburg. Every other city together accounted for only 11% of the top 100 funded
startups. Moreover, Berlin consistently ranks among the top three European tech
hubs. For this reason, the analysis of the startup ecosystem in Berlin is not only based
on the other major startup locations in Germany, but primarily on other high-
performing locations in Europe.
State subsidies for startups from academic institutions as well as venture capital
investments are important indicators that the Berlin innovation ecosystem produces
more innovative startups with sophisticated technical and knowledge-intensive
business models than other innovation ecosystems in Germany. Moreover, it
indicates that the Berlin innovation ecosystem is comparatively successful in trans-
ferring knowledge and technology from universities to the market.
A closer look to the funding data of the EXIST program, which supports
innovative technology-oriented and knowledge-intensive startups originating from
academic institutions,32 reveals that 325 Berlin-based startups are supported by
EXIST Business Start-ups Grants and 39 receive support from EXIST Transfer of
Research program. In comparison, Munich, the second ranked startup hot spot in
Germany, hosts 160 startups supported by EXIST Business Start-ups Grants and
19 startups benefiting from the EXIST Transfer of Research program.33
The impression of Berlin as the leading German startup hub is supported by data
from the High-Tech Gründerfonds (HTGF) an early stage fund set up as a public–
private partnership. The HTGF is one of the most important funding instruments for
technology-oriented startups.34 The importance of the HTGF, founded in 2005, is
also evident from the fact that foreign investors often base their investment decisions
on the HTGF portfolio. A closer look to the active portfolio of the HTGF shows that
52 startups from Berlin receive funding. Munich follows with 29 funded startups.35
Berlin’s advantage over other German ecosystems is not limited to technology-
oriented startups and startups from the scientific community. Berlin also boasts high
startup dynamism among e-commerce and low-tech companies. Several studies
commissioned by the Berlin state government are used below to quantify the startup
ecosystem in the city.
According to recent studies, approximately 3300 Berlin-based startups have been
founded in the past 20 years (1999–2019). Most of these companies, approximately
85%, are less than 10 years old. The dynamics of startups therefore clearly differ
from the overall trend of declining entrepreneurship.

32
https://www.exist.de/DE/Home/inhalt.html (last accessed on March 25, 2021).
33
Period from 2007 to 2018.
34
https://www.bmwi.de/Redaktion/DE/Artikel/Mittelstand/gruendungsfinanzierung-high-tech-
gruenderfonds.html (last accessed on March 25, 2021).
35
Active portfolio of HTGF I, II and III as of November 2018.
120 H. Dauchert and L. Garzik

The more than 1200 funds and corporate investors in the city are important
components of the innovation ecosystem. In addition, over 200 accelerators,
incubators, and workspaces are located in the city.36
Berlin startups were particularly successful in the online consumer marketplace
sector in the early years, where they attracted great public attention. Since then,
Berlin’s startup industries have become highly differentiated. Today, there are
successful Berlin startups in all business areas including fintech, the Internet of
things and robotics, blockchain, mobility, enterprise software, service, and artificial
intelligence.

Employment Effects: Startups as Job Engines

Startups have developed into one of the city’s most important job engines over the
past 15 years. In 2019, 78,000 people were employed in startups and almost 20,000
of those jobs had been created in the last 2 years (2017–2019).37 If we include the
jobs created by startups founded from 1999 to 2005—technically no longer startups
due to their age—the number rises to 84,000.
In 2020, about half of all Berlin startups were small companies with a maximum
of 10 employees. Around 90% of all startups have fewer than 50 employees. Due to
their size, however, they generate considerable employment effects. The number of
large startups that have made the leap to becoming large companies with more than
500 employees is limited. Only nine companies, mainly e-commerce companies,
belong to this group.

Venture Capital Investments: Berlin Dominates German VC Market

The Berlin innovation ecosystem and its lively startup scene attract venture capital
like no other city or region in Germany. Of the total EUR 6.8 billion in venture
capital invested in Germany in 2019, four billion flowed to Berlin. The city thus
attracted almost 60% of all venture capital investments in Germany.
After Berlin had attracted increasing amounts of venture capital for many years in
a row, investments plummeted in 2020. Only EUR 2.3 billion were invested in the
city. Despite this massive decline, Berlin’s innovation ecosystem remains the undis-
puted champion in Germany when it comes to attracting venture capital.
Even if it seems obvious to attribute 2020s massive decline to the consequences
of the COVID-19 pandemic, a comparison with other European cities shows that this
explanation falls short. Although venture capital investments have also declined in
European cities like Barcelona, Stockholm, and Copenhagen, other cities like
London and Paris have continued to record increases. Venture capital investments
in London grew moderately from EUR 9.7 billion to EUR 9.8 billion, and in Paris

36
Dealroom (2020) Startup jobs in Berlin. https://startup-map.berlin
37
Calculation of the number of startups in Berlin: 3752 companies were identified from public
databases. From these companies, service providers, non-tech, mature startups (founded before
2006) and workspaces were excluded. From the remaining 2.935 startups all companies lacking
employment data were excluded. 1.958 startups remained. Dealroom (2020): Startup jobs in Berlin.
https://startup-map.berlin
7 Berlin Innovation System 121

from EUR 3.0 to 3.4 billion. In Munich, the most important German startup
metropolis after Berlin, venture capital investments even jumped from EUR 860 mil-
lion in 2019 to EUR 1.2 billion in 2020.38
It is not yet possible to explain why Berlin’s venture capital investments fell in
2020 while other European and even German cities’ did not. It is quite possible that
venture capital investments in Berlin and other European cities will return to
precrisis levels once the COVID-19 pandemic is over. Since it is not clear how big
the pandemic’s effects are, any interpretation would be pure speculation. To avoid
this, the following chapter on venture capital will only present the developments
until the end of 2019.
From 2015 to 2019, the amount of venture capital invested in Berlin rose from
EUR 1.9 to 4 billion. Despite this dynamic development, financing startups through
venture capital funding remains the exception in Berlin and other German cities.39 In
general, the venture capital market in Germany is considered underdeveloped by
international standards. Figure 7.4 shows that venture capital investments in
Germany, at EUR 36 per capita, are only in the lower middle range of the countries
compared. Despite the strong increase in investment volume, Germany is far from
countries like the USA and Israel whose investments per capita reach EUR 272 and
EUR 270, respectively. Great Britain and leading EU countries like Ireland and
Sweden also reach a different level than Germany with investments per capita of
EUR 93, 132, and 110, respectively.
The impression of limited venture capital availability is confirmed by a direct
comparison of Berlin with other European cities. Venture capital investments per
capita in innovation ecosystems like Tel Aviv, Cambridge, Stockholm, or Paris
exceed investments in Berlin, sometimes considerably. They are a sign that the
venture capital market in Berlin still has plenty of room for further growth
(Fig. 7.5).40

A look at the origin of the investments shows that most of the funds invested in
Germany come from abroad. The dominance of foreign investors has increased
significantly in recent years (Fig. 7.5). While foreign venture capital investments
were only EUR 1.8 billion or 61% of total investments in 2015, they rose to EUR
5 billion or 75% of total investments in 2019. Over the same period (2015–2019), the
volume of annual venture capital investment rose from EUR 3 billion to EUR 6.7
billion. As a result, foreign funds are the lifeblood of successful startups from Berlin
and Germany.
The trend of increasing foreign investment and decreasing domestic investment is
not limited to Germany but can be demonstrated throughout Europe. However, the

38
https://startup-map.berlin/heatmaps/funding/cities (last accessed on March 25, 2021).
39
Around 70% of startups are not venture financed. Dealroom (2020): Startup jobs in Berlin. https://
startup-map.berlin
40
Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map.berlin; Provided by
Dealroom (according to communication with authors April 16, 2021).
122 H. Dauchert and L. Garzik

Investment per Capita by Country in

€ (average 2014-2018)
USA 272
Israel 270
Ireland 132
Sweden 110
United Kingdom 93
Finland 63
Denmark 51
Netherlands 40
France 37
Germany 36
Norway 28
Belguim 26
Austria 17
Spain 17
Portugal 10
Italy 5
Russia 3
Turkey 1

Investment per Capita by City in €

(average 2014-2018)
Tel Aviv 2,030
Cambridge 1,749
Stockholm 874
Paris 684
Berlin 474
Amsterdam 433
London 422
Barcelona 297
Copenhagen 292
Lisbon 181
Munich 174
Vienna 75
Madrid 65
Brussels 51
Bucharest 48
Moscow 22
Budapest 16
Rome 12
Prague 11

Fig. 7.4 Investment per Capita by Country and City. Source: Dealroom (2019) Berlin Ecosystem
Launch Report. https://startup-map.berlin (Provided by Dealroom (according to communication
with authors April 16, 2021))
7 Berlin Innovation System 123

Domestic and Foreign Venture Capital

Investment into Germany in €billion

6.7

4.6
Investment from outside
3.3 5 Germany
3
2.2 3.3 Domestic investment
1.8 2.3
1.4
1.2 1.3 1.7
0.8 1

2015 2016 2017 2018 2019

Fig. 7.5 Domestic and foreign venture capital investment into Germany (in EUR billion). Source:
Dealroom (2020a) Shortage of later-stage venture capital in Germany: more acute due to Corona
crisis. https://startup-map.berlin (Provided by Dealroom (according to communication with authors
April 16, 2021))

share of domestic investors in venture capital in Germany is lower than in all

comparable European countries. In France, for example, the share of domestic
venture capital in the total capital supply in 2019 was 61%, in Germany 25%.
The dominance of foreign venture capitalists in the financing of German startups
is mainly driven by large later-stage financing rounds. While the share of German
investors in small financing rounds of up to EUR 10 million is around 50%, their
share in large financing rounds of over EUR 50 million in recent years was less than
15% (2016–2019). Recent large later-stage financing rounds were dominated by
USA and Asian investors. German venture capital funds—the majority of which are
based in Berlin—are primarily active in early stage financing. Approximately 80%
of their capital is raised by Seed and Series A stage funds.
It is difficult to judge whether the large amount of foreign venture capital is a
problem for Germany and the Berlin innovation ecosystem. On the one hand, a high
level of participation by foreign investors speaks to the attractiveness of the loca-
tion.41 At the same time, however, the low level of domestic participation indicates
that venture capital investments in startups are only conditionally attractive for
German investors. One assumes that it is still comparatively unattractive for German
investors to invest in the domestic venture capital market and that there is still a lack
of large, institutional investors in Germany.42

41
Dealroom (2020a) Shortage of later stage venture capital in Germany: more acute due to Corona
crisis. https://startup-map.berlin
42
EFI – Expertenkommission Forschung und Innovation (2019) Gutachten zu Forschung,
Innovation und technologischer Leistungsfähigkeit Deutschlands 2019. Berlin: EFI.
124 H. Dauchert and L. Garzik

Berlin’s startup ecosystem is broad-based. Venture capital investments are also

made in almost all sectors. If the distribution of investments in Berlin is compared to
the distribution of investments in Europe, however, recent years (2017–2019) show
clear focal points: 19% of capital is concentrated in the fintech sector (EU: 15%),
17% is invested in the transportation sector (Europe 6%), and 12% in the enterprise
software sector (Europe: 14%). Another focus is the travel sector, which accounts for
10% of investments (Europe: 3%). The Berlin ecosystem shows a conspicuously low
level of investment in the health (Berlin: 3%; Europe: 13%), biotech (Berlin: 1%;
Europe: 8%), and energy (Berlin: 2%; Europe: 4%) sectors.43

Unicorns: London at the Top, Paris and Berlin Lagging Behind

The Berlin Innovation Ecosystem has already produced many successful startups. As
of 2019, 11 of 30 German unicorns come from Berlin. The Berlin innovation
ecosystem lags far behind London (2019: 49 unicorns), but compares well with
other European innovation ecosystems.
However, other countries and their innovation ecosystems are catching up. A
comparison of potential unicorns (startups valued over EUR 250 million but less
than EUR one billion) shows that there are now more promising startups in Paris
than in Berlin (Paris: 37; Berlin: 27).44 The French government has made the
promotion of startups a top priority, and its measures seem to be bearing fruit.
When it comes to total value created by startups (2013–2019), Berlin is in fourth
place in Europe. London (EUR 129 billion), Stockholm (EUR 47 billion), and
Amsterdam (EUR 36 billion) have produced more value with their startups since
2013 than Berlin (EUR 29 billion). Startups from Paris follow in fifth place, having
created a value of EUR 18 billion.45

7.7 The Future of the Startup Metropolis Berlin

Berlin’s perspective as a startup metropolis is mixed. Although the ecosystem has

developed dynamically in recent years and is still the undisputed champion in
Germany, other innovation ecosystems show even better performance in terms of
investments per capita, number of potential unicorns, and total value created.
According to worldwide comparative study Global Startup Ecosystem Report, “in
Europe, Berlin was once the undisputed hub in the continent after London. In the

43
Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map.berlin: 11). Provided by
Dealroom (according to communication with authors April 16, 2021).
44
A total of 54 potential unicorns are counted in France and 60 in Germany. The position of Great
Britain and London remains undisputed. London alone has 60 potential unicorns, Great Britain a
total of 98.
45
Dealroom (2019) Berlin Ecosystem Launch Report. https://startup-map.berlin
7 Berlin Innovation System 125

past few years—driven primarily by strong performance in Deep Tech—Paris and

Stockholm have strengthened their positions relative to Berlin”.46
The study identifies the low number of IPOs in Berlin as a key reason for this
weakness,47 thus identifying that affects startups not just in Berlin but throughout
Germany. Although two new exit channels have been established in recent years, the
Deutsche Börse Venture Network and the new SME stock exchange segment Scale,
it remains to be seen whether these are sufficient. Until further notice, acquisitions by
corporations are by far the most important exit channel for German startups.
Another problem is the lack of later-stage venture capital in Germany. This
shortage is caused by, among other things, the lack of financially strong institutional
investors like insurance companies and pension funds. In the venture capital market,
these often assume the function of anchor investors, providing important signals to
domestic and foreign investors.
German funds, which mostly focus on early stage financing, are not very attrac-
tive to large institutional investors from abroad due to their small size. Instead,
financially strong institutional investors prefer to invest in large funds active in the
USA and Asian markets. As a result, German startups above a certain size are
usually bought up by other companies or migrate to the countries where financiers
are located. The German federal government has been planning for years to tackle
this problem by setting up the so-called future fund (Zukunftsfonds). The Federal
Government is making EUR 10 billion available for this purpose. Whether the fund
will attract further public and private donors and thus successfully close the gap in
growth financing remains to be seen.48

Support from the German Federal Government

The startup boom is the central feature of Berlin’s performance as an innovation
system. However, as mentioned above, it is not due to an exceptionally favorable
political–administrative framework or favorable financial conditions. Nor can the
success be attributed to a decisive funding and support policy of the Berlin state
government. Instead, it developed of its own accord.
In this respect, the origin of Berlin’s innovation and startup ecosystem differs
from ecosystems such as Silicon Valley where startup booms were based on massive
government investment in ICT. Berlin also differs from Paris, which has been built
up into a startup ecosystem in recent years through targeted government support
measures and massive improvements in the regulatory framework. The Munich
innovation ecosystem and its strong startup scene would also be inconceivable
without the long-term support provided by the Bavarian government.

46
Startup Genome (2019) Global Start-up Ecosystem Report 2019.
47
“While it is still a high-performing ecosystem, it faces a challenge we highlighted in our 2017
report: Berlin had two 2014 IPOs worth close to $14 billion total (from Zalando and Rocket
Internet), but has not produced comparable successes since. As exits declined, its rank followed.”
Startup Genome (2019) Global Start-up Ecosystem Report 2019.
48
Harhoff D (2020) Die Forschung kann nicht warten, Frankfurter Allgemeine Zeitung, August
3, 2020.
126 H. Dauchert and L. Garzik

Just recently, the Berlin innovation ecosystem and its startup scene have benefited
from initiatives in federal research and innovation policy. The German federal
government has not only massively expanded investments in research and
innovation but also improved the framework conditions for startups and startup
financing in Germany. For example, the HTGF and Exist support programs have
been extensively expanded in recent years. To invigorate stock markets as a source
of financing for young, growing companies and to provide a crucial exit channel for
investors, the Deutsche Börse Venture Network was set up in June 2015. In March
2017, Scale—a new segment for small and medium-sized companies—opened on
the Frankfurt Stock Exchange. Finally, the restrictive treatment of loss carry-forward
was newly regulated in 2016/2017.
These support measures from the German government were not intended to
promote the Berlin ecosystem as such, but to strengthen the whole of Germany as
a startup location. However, Berlin was able to profit from these measures to a
particular extent.
It remains to be seen whether the commitment of the German Government will
continue during and after the COVID-19 pandemic. The package of measures
announced by the German government in April 2019 supports startups and venture
capital funds to the tune of EUR 2 billion and creates hope that these entities have not
been forgotten. The first large tranche of the package is intended to support funds.
The second tranche is intended to support smaller startups through the federal states’
funding institutions. Thus, the availability of funds depends to a considerable extent
on the speed of implementation in federal states. The Berlin government has the
chance to demonstrate its commitment to Berlin as a creative metropolis, as a startup
hub, and as a place for innovative technology and science by acting swiftly and
unbureaucratically.
Medellín Innovation System
8
Alejandro Crespo Jaramillo, Cesar Augusto Zambrano Osorio,
Susana Crespo Jaramillo, and Ludovit Garzik

Abstract

Innovation for Medellín is synonymous with competitiveness, differentiation, and

economic development. Innovation can improve citizens’ quality by generating
knowledge-based jobs through the support of intercompany projects, universities,
entrepreneurs, investors, government, and other stakeholders.
This chapter shows how the innovation ecosystem works in the city, focusing
on the public policies that promote Science, Technology and innovation (STi), the
actors that support and promote businesses based on STi, and the establishment of
University-State Business Committees that facilitate synergies among business-
people, university delegates, unions, and the National Government. We also
describe public investments into institutions promoting innovation and entre-
preneurship. Finally, we show how two plans from Medellín’s Mayoralty intend
to support and promote the development of STi for the economic and social
benefit of the city. Specifically, these are the Development Plan Medellín Future
2020–2023 and the Strategic Plan for Science, Technology, and Innovation of
Medellín 2011–2021.

A. C. Jaramillo · C. A. Z. Osorio
Universidad de Medellin, Centro de Innovación y Desarrollo Empresarial, Medellín, Colombia
e-mail: [email protected]; [email protected]
S. C. Jaramillo (*)
Universidad Pontificia Bolivariana, Centro de Investigación para el Desarrollo y la Innovación,
Medellín, Colombia
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 127
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_8
128 A. C. Jaramillo et al.

8.1 Medellín as the Most Innovative City in the World

Who competed with New York and Tel Aviv for the title of the most innovative city
in the world? Medellín. Who won the competition? Again, Medellín.
In 2013, the city was recognized as the most innovative city in the world in the
City of the Year contest organized by the Wall Street Journal. The contest evaluated
cities’ promotion of social inclusion policies, modern public transport systems, and
environmental policies. The decision depended on an online vote overseen by the
Urban Land Institute, a nongovernmental organization that analyzed each shortlist to
choose one candidate. In the “most innovative” category, Medellín competed with
New York and Tel Aviv.
The award highlighted Medellín’s impressive development trajectory, especially
its reduction of CO2 emissions, its creation of cultural spaces such as the electric
stairs in Commune 13, and its reduction of crime. While there were about
400 homicides per 100,000 inhabitants in the 1990s, the number fell to 50 homicides
per 100,000 inhabitants in 2011.
Medellín is a pioneer in Colombia, incorporating in its development plan a public
policy to promote, coordinate, and articulate innovation as a development model.
Volunteerism, commitment, credibility, and a culture of innovation have made its
knowledge-based economy sustainable even across government changes. Medellín,
capital of the Antioquia region, is the second largest city in Colombia. With an
average temperature of around 24
C and a location 1479 m above sea level, it is
known as the city of eternal spring. Medellín has 105 km2 of urban zone and
270 km2 of rural land. The city is in the center of the Aburrá Valley in Colombia’s
central mountain range and is crossed from south to north by the Medellín River.
According to the 2018 census data (National Administrative Department of
Statistics), Medellín had a population of 2,427,129 inhabitants, 47% men and 53%
women. In economic terms, Medellín stands out as one of the main financial,
industrial, commercial, and service centers in Colombia—especially in the textile,
clothing, metal-mechanic, electrical and electronic, telecommunication, automotive,
food and health sectors. Six out of the top ten most valuable companies on
the Colombian Stock Exchange have their headquarters in Medellín. Its value on
the stock exchange represents more than 28% of the country’s stock market. Among
the 100 biggest companies in the country, 13 were born or have their main head-
quarters in Medellín. Four of those are in the top six, affirming Medellín as a center
of business and economy.1

1
https://www.rutanmedellin.org/es/nosotros/ruta-n/medell%C3%ADn-hub-mundial-de-innovaci%
C3%B3n
8 Medellín Innovation System 129

80.00%
67.45%

60.00%

40.00% 32.36%

20.00%
0.19%
0.00%

Públicos /Public Privados / Private Internacionales / International

Fig. 8.1 Financing of STI activities by type of resource, 2018 in Colombia. Source: Document
OCYT 2018 (https://ocyt.org.co/Libro2018_Completo/INDICADORES_OCyT_2018%20Version
%2023-07-19.pdf; The OCyT is the Colombian Observatory of Science and Technology that was
created in 1999 as a not-for-profit organization promoted and lead by Colciencias, the national
governmental agency in charge of policymaking and funding of STI activities in Colombia)

8.2 Facts and Figures of the Innovation Ecosystem in Medellín

In its last report, the national science and technology observatory2 shows indicators
for the investment in Science and Technology in Colombia. These indicators identify
streams of investment and show the country’s major drivers for growth and progress.
The report has a chapter that discusses investments in science, technology, and
innovation (STI) activities, segmented by actors’ investment percentage. The mea-
surement of investment in STI activities is based on the data published by DANE on
the growth of the gross domestic product (GDP) and the latest available results from
the technological development and innovation surveys for the years 2016, 2017
and 2018.

8.2.1 Investment in Science, Technology and Innovation (STI)

Activities

In 2018, a total of USD2 billion were invested in STI activities (Fig. 8.1).

8.2.2 Investment in Research and Development Activities (R&D)

The goal for 2021 in Medellín is to invest 3% of its GDP in innovation, science, and
technology. This is a consequence of public–private bets to stimulate investment and

2
Annual Report on Science and Technology Indicators 2018 https://www.ocyt.org.co/proyectos-y-
productos/informe-anual-de-indicadores-de-ciencia-y-tecnologia-2018
130 A. C. Jaramillo et al.

Financing of R&D by type of resource, 2018 in

Colombia
80.00% 72.23%
Públicos /Public
60.00%
Privados / Private
40.00%
27.25%
20.00% Internacionales /
0.53% International
0.00%

Fig. 8.2 Financing of R&D by type of resource, 2018 in Colombia. Source: Document OCYT
2018 (https://ocyt.org.co/Libro2018_Completo/INDICADORES_OCyT_2018%20Version%
2023-07-19pdf)

programs like the Great Pact for Innovation where nearly 4800 organizations, as a
symbolic act, declare that they commit to invest. The signatories of the Great Pact for
Innovation constitute the greatest demonstration to date in Colombia of a territory
moving cohesively toward a knowledge economy.
R&D Indicators 2018:

– Investment in Medellín in R&D ¼ 2.14% of gross domestic product (GDP)

compared to the USA, where 2.7% of GDP invests in R&D.3
– Investment in other Colombian cities in R&D ¼ 0.68% of GDP. The main cities
in Colombia are Bogotá, Cali, Barranquilla, Cartagena, and Bucaramanga.

In 2018, USD782 million were invested in R&D, as shown in Fig. 8.2. More than
70% of R&D is financed by companies, with the rest coming from national public
budgets. There is hardly any investment in R&D from international sources, which
can be interpreted as an opportunity to attract more foreign direct investment in the
future.
The quality of education and skills is rising in Colombia, driving human capital
growth. The Ministry for Science, Technology, and Innovation (Minciencias) is
designing calls that promote doctoral studies. This will help move the degree
attainment distribution by level of education as shown in Fig. 8.3.
Education and training in Colombia are categorized as follows: high school
graduate, technical (2-year training programs in operational and instrumental
occupations), technological (3-year programs training professionals in occupations
aligned with technological advances, emphasis on practice), professional (4–5-year
professional university programs), master (2-year postgraduate degree focused on
enhancing management skills and deepening and updating field-specific skills to

3
http://uis.unesco.org/apps/visualisations/research-and-development-spending/
8 Medellín Innovation System 131

Fig. 8.3 Education levels in Colombia (Data 2017). Source: Document OCYT 2018 (https://ocyt.
org.co/Libro2018_Completo/INDICADORES_OCyT_2018%20Version%2023-07-19pdf)

stimulate growth in the productive sector), and PhD (3–5-year program training
researchers and generating new knowledge).

8.3 Institutional Actors in the Medellín Innovation System

One fundamental actor is crucial for the development of STI in Colombia:

Minciencias–the Ministry of Science, Technology, and Innovation. Minciencias
manages public administration as the principal actor in the sector. As head of the
National Science, Technology, and Innovation System (NSTIS), Minciencias is in
charge of formulating, guiding, directing, coordinating, executing, implementing,
and controlling state policy in the matters of STI. It does this in accordance with
development plans and programs. This new Ministry was created in 2019, replacing
the old institution called Colciencias.
In the Antioquia region as well as the city of Medellín, the STI issue has been the
subject of intensive work for many years. The goal is to improve the region’s
competitiveness and productivity, achieving a transformation from a traditional
economy to one based on knowledge.
One key action has been the establishment of University-State-Business
Committees (CUEE) in 2003. These are spaces that facilitate synergies among
businesspeople, university delegates, unions, and the national government. The
goal is to formulate department-level work R&D&I agendas and plans to improve
the productivity and competitiveness of the strategic productive sectors. The Agenda
for Innovation and Technological Development for Medellín and Antioquia (2004)
and the Tecnnova Corporation (2007, began 2005) were both developed in CUEEs.
Both aim to facilitate, incentivize, promote, and realize opportunities in applied
research, innovation, and technological development projects. These should gener-
ate social capital across companies, universities, and the state to drive development,
competitiveness, and improved living conditions throughout the country.
Tecnnova was born as an initiative of the CUEE. In addition to the productive
sector, it aims to improve the productivity and competitiveness of the G8, a group
132 A. C. Jaramillo et al.

Table 8.1 Group of universities that make up the research G8

Scopus Granted
Universities Students products Professors Investigation patents
G8 2020 2020a 2020 groups 2020 Type
University of 10,352 977 468 30 19 Private
Medellín
EAFIT 14,909 2010 606 44 51 Private
University of 37,052 14,178 1763 269 46 Public
Antioquia
National 53,367 26,655 3005 611 25 Public
University of
Colombia
University 5632 1316 448 35 10 Private
CES
University Does not 322 175 8 10 Private
EIA apply
Bolivarian 8554 2908 1215 56 14 Private
Pontifical
University
University 11,345 637 535 42 2 Private
Corporation
Lasallista
a
Scopus is an expertly curated abstract and citation database. Is one of the largest and most
important indexes the world, cataloguing the results of research in the fields of science, technology,
medicine, social sciences, and the arts and humanities

made up of eight universities in the region (National University of Colombia,

headquarters Medellín, Bolivarian Pontifical University, EAFIT, University Corpo-
ration Lasallista, University of Medellín, University of Antioquia, CES, and
University EIA).
The G8 is a nonprofit institution founded to support applied research, technologi-
cal development, and innovation in Colombia. It is aiming for quality education that
encourages harmonious and sustainable development for people and the country. It
also intends to close Colombia’s gaps and inequities. The universities are recognized
by Minciencias, their research and scientific production groups are part of national
calls, and they have obtained outstanding results. Contributions of their research
groups raise the scientific level of the country, as shown in Table 8.1.
The Universities that make up the G8 and the Instituto Tecnológico
Metropolitano (ITM) created the regional R&D agenda. This prioritizes research
topics of global interest with local viability to promote the territorial development of
Antioquia. Topics include nature and resources, competitive organizations and
territories, health, social welfare, and culture.
The most important actor in Medellín is the Ruta N Corporation, which was
created in 2009. The Corporation develops programs and channels the resources of
the Municipality for STA with the aim of developing knowledge-based businesses in
Medellín and in the region.
8 Medellín Innovation System 133

Other key actors are the Antioquia Science and Technology Center (CTA),
established in 1989 to strengthen the development of science and technology. In
2011, the CTA built a map of the regional innovation system, identifying the role of
actors in the system. Among the main projects carried out by this entity is the
Antójate de Antioquia Award. Finally, the CREAME Incubator and accelerator
provide services that maximize business value. It was created in 1996 by 29 aca-
demic, governmental, and business institutions. It has national recognition and
operates programs in 80 municipalities in 19 departments of Colombia.

8.3.1 Main Institutions of the Financial System

There are a number of institutions promoting innovation and entrepreneurship

through financial support. These banks and other entities are as follows:
Culture E is a program promoted and financed by the Medellín’s Mayoralty that
seeks to create and improve the culture of entrepreneurship and the economy of the
city by creating innovative companies. It has different programs such as the oppor-
tunity bank, the entrepreneurship fund, training programs, business integration
projects, seedbeds, and microcredit networks.
Fondo emprender SENA is a seed capital fund created by the national govern-
ment. It is operated by the National Learning Service (SENA) and grants forgivable
credits. The main objective of the fund is to finance initiatives created by students or
associations between students, university practitioners, and/or professionals.
Resources are allocated through calls, some of them open throughout the year and
others established by seasons or by specific economic sectors. In 2018, the Fondo
emprender allocated more than USD90 billion for seed capital. This fund has
benefited 48% women and 52% men. Its ventures have been distributed 22% in
service companies, 23% in industrial companies, and 41% in commercial
companies. As of 2019, there have been 5006 business plans developed, 28,471
companies created, and 12,780 jobs generated since the program was created.4
Tecnoparques SENA is a national technological innovation program focused on
the development of projects that develop functional prototypes in four technological
areas: (1) electronics and telecommunications, (2) virtual technologies, (3) engineer-
ing and design, and (4) biotechnology and nanotechnology. The services they offer
include consulting for R&D&I projects, technology transfer, generation and social
appropriation of knowledge, and access to physical and technological infrastructure
like specialized laboratories.
Antioquia Science and Technology Center (CTA) is a corporation that articulates
three actors: universities, companies, and the state. Its purpose is to promote,
articulate, transfer, and generate scientific and technological knowledge. It should
contribute to improving the organizational performance of innovative companies.
The CTA helps in the creation and construction of agendas and guidelines for public

4
http://www.fondoemprender.com/SitePages/FondoEmprenderFE.aspx
134 A. C. Jaramillo et al.

policies. It also designs and creates projects focused on science, technology, and
innovation.5
Parquesoft is a cluster of digital art, science, and information technologies made
up of more than 200 companies from various cities in the country that share
innovation, knowledge, and experience in computer technologies.6
Apps.co is an initiative of the Colombian Ministry of Information and Communi-
cation Technologies (ICT). Its purpose is to promote and empower businesses based
on the use of ICT. It offers support for ideas, mentoring, and calls to promote the best
ventures. “Since its creation in 2012, Apps.co has accompanied 2175 teams and
companies and benefited more than 137,000 people through the entire offer.”
Innpulsa is an institution of the National Government designated to support and
promote business initiatives that can grow quickly, profitably, and sustainably. It
focuses on detecting and overcoming the obstacles that may impede the growth of
companies. It also works on the mental barriers that can slow down the creative
process and encourages the development of companies in all regions.
The CREAME Incubator is a business incubator created by academics, business,
and government institutions. It offers entrepreneurship programs, accompanies the
acceleration of high-potential ventures, and advocates for the incorporation of
companies in global financial and commercial markets.
CREAME operates in 80 municipalities in 19 departments of Colombia. Its main
areas of action are acceleration and entrepreneurship, climbing and innovation,
capital and operations and innovative culture.
Endeavor is a global network that supports and connects entrepreneurs to ensure
that their projects have a maximum level of impact. It offers entrepreneurs a network
of mentors and partners, also putting on education and networking events. Endeavor
also supports entrepreneurs in the creation of high-impact companies that promote
economic growth and the creation of quality jobs.7
Ventures Corporation is an extensive network of allies that promote the creation
and development of business projects in Colombia. Its mission is to attract capital
and link the public, social, and private sectors to strengthen the business ecosystem.
It has acceleration, financing, training programs, and the ventures contest that
rewards the most innovative and sustainable projects. It gives support in the follow-
ing four areas:

1. Entrepreneurs: financial enlistment; soft landing; strategy and corporate gover-

nance; sales; intellectual property and trademark registration; preparation for
export; marketing.
2. Corporate: innovation strategy; connection with entrepreneurs; acceleration of
projects; newco spin-off.

5
https://cta.org.co/
6
https://parquesoft.com/
7
endeavor.org.co
8 Medellín Innovation System 135

3. Investors: acceleration of portfolio; pipeline generation; how to invest.

4. Second-floor acceleration: custom acceleration; training in courses.8

Odiseo is a Colombian early stage fund targeting high growth, passionate, and
committed entrepreneurs leading scalable, innovative, and impactful businesses. The
fund provides acceleration, co-investment alternatives, and a formal scaling up
process to support companies in their expansion strategies. Odiseo is a USD20
million fund that invests in across industries including biotech, clean energy, applied
engineering, IT, and FinTech. Companies in these industries have capital
requirements of USD250,000 on average in their first round and USD1 million in
subsequent rounds.9 The fund has the backing of investors like Ruta N, which is the
Medellín Business and Innovation Center. The fund articulates and energizes the
innovation ecosystem of Medellín, emphasizing four key ingredients: talent training,
access to capital, generation of the necessary infrastructure, and the development of
innovative businesses.
FCP Innovation is an investment fund worth USD40 million. It focuses on
companies and projects that apply high levels of STI to the public services sector.
It is part of the EPM Ventures Program, exemplifying the general strategy of
investment in ventures associated with public services.10
VeroNorte manages corporate venture capital strategy in Colombia for Grupo
Sura (finance industry association) and Grupo Argos (construction industry associa-
tion). It invests in companies in the insurance, health, and financial services sectors
on the one hand and in the energy, infrastructure, and construction sectors on the
other hand.11

8.4 SWOT Analysis Medellín

Resources Strengths Weaknesses Opportunities Threats

Bank loans The banking Startup loans are Strengthening The innovation
system is well few and not yet lines of credit ecosystem needs
developed, with affordable. would help greater support
many actors. Interest rates are finance new from financial
Medellín is the high, banks processes, mainly entities. Innovation
headquarters of prefer to grant early stage depends on
the country’s private loans over ventures. The resources for new
main bank corporate loans, support of angel ventures. Without
(Bancolombia), it is difficult to investors from sufficient resources,
(continued)

8
http://ventures.com.co/
9
https://capria.vc/network/odiseo/
10
http://www.fcp-innovacion.com/
11
http://www.veronorte.com/en/
136 A. C. Jaramillo et al.

Resources Strengths Weaknesses Opportunities Threats

which has also access financial outside the startups will begin
made a sector resources country could be to migrate out of the
commitment to for new ventures, very helpful country and will not
innovation issues and there is a lack help Colombia
in recent years. of angel investors increase its
in the country competitiveness
The investment
of banks in high-
risk projects
depends on
evaluations that
banks make for
such loans
Culture and There is a solid The There is a great Vertical structures
mindset and well- entrepreneurial opportunity to and organizational
articulated and creative work on soft rigidity do not
ecosystem culture is lacking. skills, supported allow incorporating
supporting a There is a very by institutions new knowledge and
culture of tough attitude such as Ruta create a fear of
innovation. toward possible N. local openness innovating or
Medellín is a failure and what and an leaving traditional
national others think, international markets
benchmark for its which does not perspective can
strong and stimulate leaving help generate
innovative one’s comfort synergies with
mentality zone other cultures
Digital Medellín has Coverage is The current There is a lack of
infrastructure made lacking for the infrastructure can trained personnel to
investments into entire city. Due to be used the meet existing job
infrastructure. the high costs, foundation for demands and a lack
The city boasts the most future of training in
high-speed vulnerable development of second languages.
internet in public populations do the digital Growth and
places like parks not have access economy. In this internationalization
and libraries, plus to internet service sense, the current will make these
good 4G network government’s issues more acute
coverage development
plan focuses on
developing a
“software
valley.”
Education and Medellín has a There is not The combination Permanent training
skills good amount of much of high university to international
human capital at standardization education rates standards, offered
low costs of second with low labor by different public
language skills costs may and private
and subjects promote organizations
innovation through calls and
contests can raise
the level of
education and skills
Institutions Various entities There is a lack of Public and Public agendas lack
exist to promote articulated work private continuity and
innovation. For between institutions
(continued)
8 Medellín Innovation System 137

Resources Strengths Weaknesses Opportunities Threats

example, Ruta N, universities, contribute their change with each
CTA, and companies, the resources to administration
CREAME all state, and society innovation-
support research, to further promoting spaces
innovation and stimulate
entrepreneurship innovation. A
lack of financing
and support
entities
undermines
entrepreneurship
Intangible Scientific It is difficult to Redirect efforts Competition from
infrastructure knowledge transfer to international more developed
abounds in technology to markets to countries with more
Medellín, with companies, so commercialize researchers and
more than there are many knowledge and higher levels of
180 research knowledge assets technological technology
groups working and technological developments.
on innovation developments Strengthen the
issuesa that are not synergies
commercialized between
universities,
companies, and
government
Legal advisers There are plenty Not all attorneys Medellín is open Public policies and
of advisers; specialize in to receive tax payments are in
Medellín is a city intellectual technology-based some cases not
that has many property issues companies that attractive to foreign
lawyers help improve its investment. On
legal average, taxes are
development higher than other
developed countries
like the USA
Market and In Colombia, Competition with Expansion of There are many
demand most products are other regions and technology competing
for export. Those with the capital companies and companies, and
are recognized of Bogotá. high demand for domestic
and consumed Internationally, production consumption is
around the world Colombia has abroad create a focused on basic
low purchasing market for necessities
power due to its exported
high products and
unemployment services, and
rate, low Medellín can
education levels, meet high-quality
and increased standards
migration from
Venezuela
Migration Many of the Other countries Minciencias is Leakage of talented
people who enter offer better developing scientists with
Colombia are working strategies to doctorates to other
from Venezuela, conditions retain PhDs developed
Brazil, financed by countries, mainly
Argentina, Colombia. It is
(continued)
138 A. C. Jaramillo et al.

Resources Strengths Weaknesses Opportunities Threats

Ecuador, and also making the USA and
Mexico. These scientific Europe
migrants can get scholarships
jobs that available so that
strengthen everyone can
organizations access doctoral
with their and master
experience in studies
innovation topics
Policy and Medellín has an There is a low Supportive It is unclear whether
strategy STI plan for level of national policies could the STI plan’s goals
2011–2021 investment in STI encourage and will be reached, or
(0.24% of GDP) promote research if there is a further
and technological plan after 2021
development to
identify and
explore new
businesses
Quality of Generating jobs There is a lack of The existence of Inequality and
living through high- training for the CUEE increasing
performance human capital in promotes unemployment both
productive areas associated conditions that pose threats
activities has a with the digital enable economic
great impact for economy and the growth via social
society fourth industrial projects that
revolution improve quality
of life
Regulation A strategy of tax As the tax level is Raising Other countries
benefits in STI quite high, the awareness in could adapt their
promotes impact of tax political bodies regulations and tax
competitiveness benefits is and strategic systems faster,
in companies and reduced entities can which would
the development establish legal increase the gap in
of high-impact and regulatory competitiveness
research frameworks,
improve
technical and
regulatory
capacity, and
renew
institutions
Research Existence of the The alignment of The STI and Financing and
infrastructure research G8, applied ICT entrepreneurship investment for
CUEE, and other research with system is still in development and
actors creates a technology- its early innovation need to
solid foundation based ventures is activation stage. be strengthened
for the research not clear, only To move to the
ecosystem 3.05% of consolidation
researchers work stage, the system
with companies requires
and only 1.28% improved
are dedicated to articulation
the development among actors
of new
(continued)
8 Medellín Innovation System 139

Resources Strengths Weaknesses Opportunities Threats

knowledge or
technological and
industrial
development
Risk capital There are venture The quality of Foreign The innovation
capital funds for tutoring startups investment in ecosystem needs
startup financing is low. Startup R&D and risk greater support
in the city. The loans are few and capital is low from financial
startup not yet compared to entities. Innovation
ecosystem is affordable. other global requires resources
growing Interest rates are innovation to support new
high, banks regions. This is a ventures. Without
prefer to grant big opportunity sufficient resources,
private loans over for future startups will begin
corporate loans, development migrating outside
and it is difficult the country and will
to access not help improve
financial sector competitiveness
resources for new
ventures
Social Medellín is There have been Investment in Continued
infrastructure: undergoing urban delays in the urban development can
Community transformation development infrastructure create a sense of
through the timelines of works ownership among
construction of infrastructure (environmental citizens,
large urban projects in the urban planning encouraging them
infrastructure city and sustainable to use and care for
works, mobility) can new citizen
equipment, and generate jobs infrastructure
sustainable projects
mobility (electric
public transport,
improvement of
parks, streets,
spaces for
cyclists, etc.)
a
GrupLAC Minciencias, grupos con nombre innovación https://scienti.minciencias.gov.co/ciencia-
war/busquedaAvanzadaGruposdo?buscar¼buscar

8.5 Strategy and Implementation in Medellín’s Innovation

System

Currently, the city of Medellín has two plans focused on supporting and promoting
the development of STI for the economic and social benefit of the city. They are the
Strategic Plan for Science, Technology, and Innovation of Medellín 2011–2021 and
the Development Plan Medellín Future 2020–2023.
140 A. C. Jaramillo et al.

The Strategic Plan for Science, Technology, and Innovation of Medellín

2011–202112 aims to “promote and coordinate policies to support research and
scientific, technological and innovation development in Medellín, with a view to
identifying and exploitation of new knowledge businesses.” It prioritizes three
productive sectors: energy, health and information, and ICT.
The plan aims to achieve synergy between universities and companies, promoting
STI projects across the academic and productive and social sectors. These should
generate vanguard technologies, goods, and services that add value to the city’s
economy. These projects should also promote the creation and development of
technology-based companies to produce goods and services, especially in prioritized
sectors.
Specifically, the plan seeks to “incentivize basic and applied research, define
indicators to quantify the level of activity in the field of science, technology, and
innovation, and disseminate the achievements made to the public” through programs
and activities that involve technology transfer, the formation of human capital, and
the strengthening of the relationship between the academy and the productive sector.
Successful execution of the strategic plan relies on policies that favor a modern
eco-industrial environment and a strategic framework that guarantees the achieve-
ment of the proposed objectives through the institutionalization and governance of
the Regional System of Innovation (RSI).
The execution strategy of the Strategic Plan for Science, Technology and
Innovation will be the responsibility of Ruta N, which is “the innovation and
business center of the Medellín’s Mayoralty, which powers new knowledge-based
businesses, through the promotion, development, and strengthening the ecosystem
of science, technology, and innovation.”13
The purpose of the Medellín Future 2020–202314 Development Plan from
Medellín’s Mayoralty is to “contribute to closing gaps and social and economic
inequality, through informed and rational decision making and generation of
capacities and opportunities for all citizens,” where inclusive industrialization and
innovation will lay the foundations for Medellín’s future. The plan states that “the
entire science and technology ecosystem will be strengthened with strategies that
unleash the potential for innovation and entrepreneurship to be put at the service of
increasing productivity and solving the city’s great challenges, especially in social
and environmental matter.”
To achieve its goals, the plan includes a strategic line for economic reactivation
and the creation of a Software Valley. It aims to transform the city “through the
management of technological and scientific knowledge, applied to social, cultural,
and environmental fields, economic, and political.” The plan prioritizes clear and

12
Taken from the website of Ruta N. Plan for Science, Technology and Innovation, consulted on
July 2020.
13
https://www.rutanmedellin.org/es/nosotros/ruta-n/sobre-nosotros
14
19 Taken from the website of the Medellín’s Mayoralty. “Medellín Futuro 2020–2023” Devel-
opment Plan, consulted on July 2020.
8 Medellín Innovation System 141

precise data and information for decision making and promoting better conditions in
human talent and employment. The development plan and its objective of turning
Medellín into a Software Valley is a project of “transformation of human life, by
generating capacities, solutions, and opportunities that are efficient, effective, and
consistent with economic, social, cultural, and political needs of the entire popula-
tion; supported by technological innovation and social innovation.” This strategic
line aims to strengthen Medellín as the industrial capital of Colombia.
As Medellín undergoes the fourth industrial revolution and transitions to a digital
economy, it is a national science and technology hub. Institutions like Ruta N,
universities, new companies, and the scientific and technological communities
throughout the territory will be the engine of the new economy. This will be
achieved by connecting science, technology, innovation, and entrepreneurship
through the CUEE. New opportunities can help generate new opportunities for the
diversification and modernization of the city’s economy and can turn information
into an asset. Medellín’s Mayoralty will be leading the way as it executes the plan.

8.6 Lessons Learned from Medellín’s Innovation System

Medellín is an innovation hub for Latin America because it has sought technological
answers to the needs of its population. The city decided to stop supporting its
economic development exclusively in traditional industries and began to promote
a knowledge economy that gives more value to ideas and therefore promotes the
change to a high-quality workforce.
The main contributing factors to the success of this regional innovation ecosys-
tem are as follows:
– Government policies that support research, development, and innovation
projects.
– Companies that finance entrepreneurship and innovation initiatives.
– Human capital trained in technological skills.
– Creation of channels for financing innovation projects in companies.
– Careers or courses at universities focusing on innovation issues to promote and
improve student capacity.
– Increased investment in digital infrastructure (hardware and software).
– Universities that promote research and innovation through projects that impact
society and the articulation across universities, companies, the state, and society.

Medellín’s innovation ecosystem has continued improving thanks to the leader-

ship of Ruta N. The city’s innovative culture is reflected in the Great Pact for
Innovation that involves more than 4000 companies and in the existence of the
CUEE. Other key actors facilitate, incentivize, and promote STI in the city, enabling
further regional growth by increasing productivity and solving the city’s challenges,
especially in social and environmental matters.
Recent governments have consistently increased net monetary investments in
health, nutrition, education, and innovation programs in Medellín. As a result,
142 A. C. Jaramillo et al.

companies in the region benefit from innovation processes while enjoying the
support of several key actors in the city. Jobs focused on STI have been created
and are expected to develop human capital, especially skills related to the
technologies of the fourth industrial revolution.
It is important to highlight that investments in STI activities have increased as a
proportion of municipal GDP. Thanks to the high-level educational and research
offered by higher education institutions, the framework of technological and social
innovation, and the articulation of actors of the system, Medellín enjoys good
conditions for industrial development, cluster creation, service sales, access to new
markets, and more.
Investments in education in Medellín have increased by 0.8% every year from
2013 to 2018. This has led to 83% education coverage for the population. When the
population is more educated, mechanisms can be created to help entrepreneurship
and innovation. These, in turn, generate larger development projects that lead to
technologies that can be protected and give competitive advantages to organizations.
Moscow Innovation System
9
Dmitry Vasilev and Ludovit Garzik

Abstract

Russia, and the Moscow region specifically, are very promising sources for
innovative solutions and companies. Moscow has shown stable growth even
during the financial crisis at an average pace of 10% per year. The region doubled
its GDP in 10 years and managed to attract an impressive concentration of
research institutes, universities, researchers, solid infrastructure, and a variety of
other resources. The region has many highly educated citizens and boasts strong
roots and tradition in science, making it very promising for high-tech industries.
There are obviously local weaknesses, which are discussed in the chapter, but
these weaknesses create the potential for innovative transformation in the future.
The Russian Federation in general and Moscow specifically is very different from
the rest of the world, and this makes it very appealing to study its approach to the
innovation economy and derive new lessons.

9.1 Introduction to the Moscow Innovation System

The situation in the Russian Federation is very important for the frame in which
innovation happens in the Moscow region. This discussion will focus on the region,
beginning with an economic and geographical analysis of the Russian Federation
and then introducing the history and development of innovative culture in Russia.

D. Vasilev (*)
“Karfidov Lab” LLC, Moscow, Russian Federation
e-mail: dv@karfidovlab.com
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 143
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_9
144 D. Vasilev and L. Garzik

This chapter concludes with a description of the current state of the innovative
ecosystem considering these historical and cultural factors.
The Russian Federation is a democratic federal legal state with a republican form
of governance. Russia is the largest country in the world with a history dating back
thousands of years. The country is the largest in the world, with a territory larger than
17 million km2. It has the sixth highest purchasing power parity and ninth largest
population in the world. Its federal structure means that there are 85 equal subordi-
nate entities within the Russian Federation, including 22 republics, nine areas known
in Russia as “krais,” 46 provinces referred to as “oblasts,” three cities of federal
importance, one autonomous region, and four autonomous districts. The Russian
Federation is also divided into eight federal districts, each of which has an
empowered and authorized representative of the President of the Russian Federation.
The Federation’s subordinate entities each have their own administrative and
territorial subdivisions. As a rule, the main administrative–territorial units, within the
constituent entity of the Federation, are districts and cities of regional (republican,
areal, provincial) significance. This division is quite complex: The territory can be
divided by nationality, geography, or by some other or mixed issue. The complexity
of Russia’s administrative and territorial subdivisions means that even Russians are
not always familiar with the subordinate entities of their country.
The President of the Russian Federation1 performs the duties of the Head of State,
and is assisted by the Chairman of the Government. In 2020, the latter post was taken
by Mikhail Vladimirovich Mishustin, who was appointed after the resignation of
Dmitry Anatolyevich Medvedev in January 2020. This extraordinary event is prob-
ably an important signal for change in the country’s governance. It also might be a
sign of achieving the country’s development priorities as a technologically advanced
power. The Chairman of the Government of the Russian Federation takes over for
the president in case of death or resignation. The president is elected for a 6-year
term by secret ballot in general direct elections. The same person cannot hold a
presidential post for more than two consecutive terms.
It should be noted that the population density in Russia is extremely uneven, and a
large part of the country called Siberia, located in the Far East, has yet to be
developed. Moscow and St. Petersburg are Russia’s two central, richest cities.
They are the country’s largest and most population-dense cities, and also they are
most important in world trade and financial, cultural, and scientific terms. These two
cities are the engines of economic growth that attract, as if by force of gravity,
financial flows, and economically active populations. Local and international
companies have their head offices in these cities. Moscow and St. Petersburg are
Russia’s first cities for innovation, development institutions, and access to venture
capital.
At the same time, unfortunately, the once strong and rich rural life of the Soviet
period and Tsar’s Russia is of little importance in the national economy today. There
is an active process of urbanization, and villages are disappearing because of

1
In 2021: Vladimir Vladimirovich Putin.
9 Moscow Innovation System 145

unemployment and a lack of prospects for the young population. This is partly due to
poor territorial connectivity both on the highway system and the air transportation
system. Russia has 1442 km of highways, which is 100 times less than in China and
1000 times less than the USA. Today, in Russia there are only 254 airports, which is
comparable to a single USA state.
It is impossible to plunge into Russia’s history without a “quantum leap” into the
history of the Soviet Union. This is because the immense Russian legacy relates to
what was built during the Soviet Union. It was built not only in terms of bricks,
buildings, and factories, but also in terms of institutional construction, regulations,
norms, rules, and traditions.
The Soviet engineer generally had an excellent technical education. This educa-
tion model can be considered a blueprint for many other education systems like
Finland, Germany, and even parts of the USA system. Teachers of that time taught
precise sciences and made schoolchildren think logically, build conclusions, and
identify evidence. Moreover, teachers had an untouchable authority among
schoolchildren and their parents, often participating in the upbringing of their
students.
Now, teachers face criticism from all sides, are pushed to their limits, and are
forced to do a lot of paperwork. This pressure leaves very little time for education
and upbringing. The education system in Russia has switched to the Unified State
Exam, which is accepted by all universities. On the one hand, this equalizes the
rights of schoolchildren living in remote places with those living in cities and almost
solves the problem of corruption. On the other hand, today’s teaching is all about
successfully passing of the state exam tests without any ability to think, write, or
prove something.
During the Soviet period, everyone without exception could get technical educa-
tion for free. Studying at universities was not necessary and did not guarantee high
wages. In some cases, technical college graduates could earn more than those with
high-level degrees who worked at research institutes and universities. Therefore,
only those who wanted to devote their life to science and an academic environment
entered the university.
Between the end of World War II and the end of the 1980s, there was a dramatic
rise in industry and manufacturing. Invention and science were held at the same level
as religion. In fact, Communist Party doctrine banned all faiths and religions. The
typical Soviet engineer, doctor, or librarian believed in scientific and technological
progress rather than in God.
The time of high scientific and technological progress was the formative period
for all of Soviet Russia’s industrial spheres. Plants and factories were built, design
studios and R&D centers were created. The population of the Soviet Union was
sufficient to provide plants and factories with a large market for domestic consump-
tion. Scientific financing was readily available. Scientists and engineers were part of
an intellectual society better known as the Intelligentsia. At the same time, the
authoritarian regime of governing meant that tasks could be delegated to a team or
particular person without the resources to achieve it, and the consequences of failure
were strict. Modern management in Russia is sometimes described by phrases like
146 D. Vasilev and L. Garzik

“incredible goals achieved at a heavy cost.” This nature and approach to work comes
from the Soviet era, with earlier influences from the time of the Russian Empire.
While most capitalist countries had already opened their markets and joined the
world economy hundreds of years ago, the Russian free and open market only dates
to the late 1980s—just over 30 years. The Soviet period is characterized by its state-
planned and state-controlled economy. The government was the main buyer and
distributor of all benefits created in the process of economic activity (even the word
“economics” was prohibited). This may sound surprising, but the factory that
manufactured irons or vacuum cleaners named “Vihr” (translates as “Vortex”) did
not try to improve the devices to make them better, more technological or ergo-
nomic, or more attractively designed. It simply was not necessary because
consumers had no alternatives and would buy any model. There was no need for
innovation as we understand it today. Thus, almost all scientific achievements and
developments benefited only the military or heavy engineering.
The vision of the Communist Party can be understood as follows: The state
provides people with necessities, excessive luxury is not necessary and even harm-
ful, and defending against potential enemies is a vital necessity. Therefore, all
science should work for defense and heavy industry. It is obvious that there was
no competition in this field of activity, which initially put Russian enterprises in an
unfortunate position against world players. After the economic system converted a
more capitalist approach, Russian plants and factories simply did not have time to
rebuild their economic and management models. They did not know how to continue
their activities, how to be competitive, or how to develop products to meet the needs
of the market and satisfy sophisticated consumers.
One more feature of the Soviet period is that the education and research functions
were separated. Universities and academic teaching staff participated in the basic
educational process and separate independent R&D institutes were created for
research, including PhD dissertations. These R&D institutes were part of the
Russian Academy of Sciences or sometimes at universities or large enterprises.
Technical sciences graduates who entered the R&D institutes had the opportunity
to access a good career, which could not be said about the universities. This
advantage was more tangible in scientific and production associations (especially
in the military–industrial areas), which made it easier to switch from “pure science”
to production and vice versa.
On the one hand, this large system allowed scientists from R&D institutes to
focus exclusively on research without being distracted by students. On the other
hand, the gap between theory and practice grew and universities began to lose
contact with excellence in science. At the same time, due to the nature of the
economy, many inventions developed at R&D institutes simply did not reach
civilian enterprises as all were absorbed by military demands. The unclaimed residue
became paper stored in a locker or in a hidden archive. For this reason, Soviet
scientific achievements and a large number of Russian scientific papers were not
accessible to the English-speaking public for a long time. Many of these are now
used in patent wars by patent trolls within large companies.
9 Moscow Innovation System 147

Several thousand R&D institutes were inherited from the Soviet Union. The
following are just a few examples of typical institutes that were among the first to
appear in a Web search:

1. Research Institute of Optoelectronic Instrumentation.

2. Scientific Research Institute of Nutrition at Russian Academy of Sciences.
3. Research Institute of Atomic Reactors.

The conclusion of the discussion above is that despite advanced, extremely costly
research, scientists’ results did not turn into innovation in the Soviet era. Ordinary
citizens could not access innovative devices or products. There were no products that
could be successful on a competitive global market except for heavy engineering
products like nuclear reactors.

9.2 Cultural Characteristics of the Moscow Innovation System

It is important to mention that after the collapse of the Soviet Union, funding for
most of the R&D institutes ceased and the institutes were not able to earn money on
their own. People were either fired or they went to work in simple low-paying jobs.
Some went abroad. For survival, R&D institutes began to lease space and premises,
or individuals sold intellectual property. Some R&D institutes and their
competencies have been lost forever. However, some were saved.
Today, some of the Soviet R&D institutes have turned into successful and
innovative companies. For example, the team from the former Institute for System
Analysis of the Russian Academy of Sciences formed the basis of Cognitive
Technologies, a Russian software corporation that develops corporate applications,
AI-based advanced driver assistance systems, and more. The company operates in
Russia, the CIS countries, the Baltic States, Holland, China, South Korea, Germany,
France, the USA, Singapore, and Brazil.2 There are many similar examples. After
2000, the remaining institutions started receiving a moderate level of funding,
although new ideas and advanced developments continued to concentrate mainly
in the defense industry.
In 2009, Russia’s government, headed by Dmitry Medvedev, came up with the
idea to create a fundamentally new plan that would spur an innovation renaissance.
They understood that, under the existing conditions held over from Soviet times, no
innovation activity was likely to appear. They took Silicon Valley as a concept to
form a new plan. MIT joined as the main partner in the new adventure. This project,
called Skolkovo, will be discussed in detail in the next chapter.
Considering the brain drain and the loss or sale of a huge amount of intellectual
property in the early 90s, today’s Russia has inherited an interesting feature of the
Russian innovative business and its players. The inventor of an innovative product

2
https://ru.wikipedia.org/wiki/Cognitive_Technologies
148 D. Vasilev and L. Garzik

will try in vain to defend the idea—keeping it secret or trying to hide it behind a
dummy patent. Today, we see that such tactics simply do not work. An idea or
invention does not mean anything without an appropriate team. Today, the team is
the most important factor in investors’ consideration of a project and the most
important element of success.
Since about 2000, Russian science and industry have been driven by military
orders. Now that the army is 80% rearmed, the industry faces a revenue slump as
defense procurement tapers off. Industry players saw the slump coming several years
ago and began converting industries to civilian products. It is difficult to discuss the
potential results of that shift because its impact is not expected to be visible until
2025–2030. However, we can discuss the specific strategies undertaken to shift from
military to civilian production.
First, state-owned holding conglomerate Rostec3 set a targeted indicator for the
production of civilian products by its subsidiaries. According to the Rostec Strategy,
50% of the state-owned holding conglomerate’s revenue should come from civilian
products by 2025. As of the end of 2017, these products already accounted for
27.6%. Despite these stated goals and priorities, enterprises still prefer to develop
something large, heavy, and expensive—not a small gadget or device. Obviously, it
is easier to achieve the indicator by releasing a new civilian aircraft MS-21 or Sukhoi
Superjet-100. However, the risks are very high and both programs have encountered
considerable difficulties.
Second, large enterprises have launched their own accelerators and venture
capital funds to support innovative projects. Potential entrepreneurs can access
these funds from both inside and from outside the enterprise.
Third, state-owned corporations are encouraged to create demand for innovation
products, including through the purchase of startups. A good example for this is the
state bank Sberbank, which in 5 years bought dozens of Russian startups and built a
whole ecosystem of products.
Fourth, enterprises are beginning to invest their own resources in the develop-
ment of innovative products for the mass market. They are even opening the
necessary departments at plants and factories.
At one point, the major players and policymakers realized that universities were a
potentially powerful source of new ideas and products. Technology commercializa-
tion centers began to appear at universities (i.e., the National University MISiS) to
facilitate the transfer of university technologies to industry through licensing and
startup creation. However, university startups could not begin in practice until 2013
due to difficulties with motivation and the regulations over rights. As a rule,
everything done within the university had been owned by the university. Now,
according to Federal Law 217 of August 2, 2009, universities may cofound of
small innovative enterprises. This has given a boost to startup foundation and has
allowed for many companies with solid revenues. Much is being done to protect

3
The Rostec Group of Companies includes almost all state-owned enterprises and design bureaus.
In actuality, Rostec is the Ministry.
9 Moscow Innovation System 149

investments and increase investment prospects. As a result, Russia has risen from the
bottom to 31st position in the Doing Business—2020 rating, a World Bank4 ranking
of business climate. It has not yet been possible to get into the top 20 again, although
the president set that goal. In 2011, Russia ranked 120th position among
190 countries, so it has overcome a huge gap in 9 years.
In general, accounting for historical experience and understanding one’s own
weaknesses are not as much about key indicators and facts as it is about the
psychology of people. It is a huge job to train people to open new horizons and
opportunities for them and to bring small companies into the global arena. In modern
reality, the education of motivated and talented youth and the reeducation of senior
managers from older generations are crucial priority but not an easy task. Various
exhibitions, events, and conferences fill the calendars of those who want to develop
innovation. Their number increases every year, and the variety ranges from large
events like Startup Village and Open Innovations to small events in cities and
technoparks. All this is aimed at changing people’s culture and concentrating their
consciousness toward innovative development in a market-driven and competitive
world economy.
Russia’s main stakeholders and policymakers are taking steps to turn the tide and
build a digital economy instead of a resource-based one. In the following chapters,
we will consider the actions of the authorities, specific initiatives, and new forms of
supporting innovation activity in modern Russia.

9.3 Facts and Figures in the Moscow Innovation System

The economy of the Russian Federation ranks sixth in world and second among the
countries of Europe in terms of PPP GDP, which is estimated at USD4.4 trillion in
2019. Russia’s nominal GDP for 2019 was USD1.7 trillion. In nominal terms,
Russia ranks 11th in the world. According to the Russian Federal State Statistics
Service (Rosstat) and the calculations of the Analytic Center, the largest sectors
under the government of the Russian Federation in 2018 were mining,
manufacturing, and trade, which occupy 11.5%, 12.3%, and 12.8% of GDP,
respectively.
The oil and gas industry dominates the market by many figures and parameters.
The Russian petroleum industry is one of the largest in the world with the largest
reserves and largest export sales of natural gas. Russia has the second largest coal
reserves, the eighth largest oil reserves, and is one of the largest producers of oil in
the world. It is also the third largest energy user. Petroleum has been Russia’s major
source of income—especially in foreign currency—since Soviet times and the
industry are populated by both state-owned and privately owned companies.

4
Data The World Bank, provided by Creative Commons Attribution 4.0 International License
(CC BY 4.0).
150 D. Vasilev and L. Garzik

The oil and gas industry historically relied on foreign technologies and was not
innovation-driven—it was considered a low-tech industry for many years. The
situation began changing after 2014 when Western technologies became unavailable
for key producers. This forced companies to develop their own technologies like the
digital well, smart drilling, data science for reserves analytics, software, and more. It
also forced them to look at innovative companies and startups in the industry. In
general, the situation began changing after specific signals from both the market and
the government.
The major companies in oil and gas are generally monopolists. Other big
industries, like finance, development, manufacturing, and trade are also represented
by large corporations. To stimulate SMEs, the government has set a national project
for “small- and medium-sized entrepreneurship,” the goal of which is that, by 2019,
22.9% of the economy will be SMEs and 23.5% will be SMEs by the end of 2020.
The plan is to increase the role of SMEs in the economy, especially in nonmining
areas. Significant steps have also been made in the availability of venture
investment.
Russia’s venture capital market began to form in the first half of the 1990s.
During this period, Western countries showed their first financial interest in the new
market but classified all potential investments as high risk. From 1993 to 1996,
venture capital firms formed and spread throughout the country. Almost all of them
were funds for the late stages of investment and collaborated with existing
enterprises in the field of consumer production. The total number of funds during
this period was 26 companies with a capitalization of more than USD1.5 million.
Since the 1998 crisis, most regional funds have fallen apart. The current Russian
investment market actively developed between 2000 and 2013. The main events in
this time included the following:

1. Establishment of the innovation promotion fund (Fund for Assistance to Small

Innovative Enterprises) in 1994.
2. Establishment of the Venture Innovation Fund in 2000.
3. Investment growth in technology companies (Yandex, mail.ru, Kaspersky Lab,
Rambler, ozon.ru, etc.).
4. Development and adoption of the Russian venture capital industry development
concept in 2002–2004.
5. Opening of Russian Venture Company LLC in 2005.
6. Creation of national projects from large-scale and institutions to support
innovation: Rusnano, Skolkovo Science Center, Agency for Strategic Initiatives,
Russian Direct Investment Fund in 2010–2011.
7. Establishment of the Internet Initiatives Development Fund in 2013.
8. National Technological Initiative in 2014.
9 Moscow Innovation System 151

According to the Venture Barometer,5 a lot of investments were attracted to

projects at the primary stage (33%) in 2019. The average check ranges between
USD500,000 and USD2 million. The Dsight and EY study find slightly higher
estimates for the average check for all stages at USD3.8 million. Check amounts
are growing for the second year in a row. The percentage of investments in Russian
projects for the year has grown slightly from 21% in 2018 to 28% in 2019.
Nevertheless, the weighted average percentage of Russian companies in investor
portfolios is about half (54%) on average and stable over time.
2019 is not the first year when study participants have been conservative about
their investments. Artificial intelligence and machine learning are the most popular
fields, and, like the past 2 years, FinTech is third. In 2019, there was a boom in the
EdTech segment, and it climbed to second place in investors’ interest. Investors’
interest did not let them down—2020s capitalization of ZOOM (which can be
partially attributed to the EdTech segment) exceeded the capitalization of all airlines
in the world due to the COVID-19 pandemic.
According to a study by the Russian venture capital market Dsight and EY, the
total volume of investments in the venture capital market in 2019 increased by 13%
compared to 2018 at USD868.7 million, despite the fact that the total number of
transactions decreased from 310 to 230. Most of Russia’s funds and business angels
invest in projects at the seed and Series A stages—these make up for 65% of
respondents according to the same Venture Barometer. The Russian market is
characterized by a very low number of business angels and low number of related
transactions. In 2019, there were 37 transactions total investments from business
angels amounted USD47 million. At the same time, the role of accelerators and
funds created by corporations is increasing. We will talk about the main players in
the innovation market in the next section.

9.4 Institutional Players in the Moscow Innovation System

There are a lot of rich people who primarily reside in Moscow and can invest in
venture capital funds. However, as a rule, potential investors are wary of them,
fearing loss of capital control and long investment periods. Therefore, the role of
venture investors is often performed by large Russian corporations. For example,
VTB, KamAZ, Sberbank, Skolkovo Ventures, Russian Railways, Mail.ru Group,
Sistema joint-stock financial holding, RBC Group, and other corporations are active
in this space.
Large companies are increasingly using their accelerators to find innovation. For
example, Sberbank (500 Startups, SberUp), Kaspersky Lab (iHub for Cyber Security
projects), MTS (MTS StartUp Hub), Qiwi (Qiwi Universe Product Hub), and
Severstal (metallurgy projects) are actively developing accelerators. More than
that, multicorporate accelerators have begun to appear for whole industrial sectors.

5
rvc.ru
152 D. Vasilev and L. Garzik

Table 9.1 Main institutional players in Moscow Innovation system

Venture Corporate
companies VC funds Business angels Government development institutions
VEB Rostelecom Alexander R&D instituteF
Innovations Sberbank Rumyantsev Skolkovo Foundation
SBT MTS Sergey Dashkov IIDF
Venture mail.ru Igor Ryabenkiy RVC
Skolkovo MegaFon Konstantin Fund for Assistance to Small Innovative
Ventures Rostec Sinushin Enterprises (FASIE)
Da Vinci Rosatom Vitaly Polekhin ASI
Capital Rusnano Alexander NTI
Grishin Gazprom Borodich and
Robotics Neft many others
Maxfield Lanit
Capital
I2BF
AFK
Sistema
PAO
Baring
Vostok
Flint Capital
Runa
Capital
Almaz
Capital
Source: Author’s own figure

For example, Build UP operates in modern building technologies and is funded by

Hals-Development, Don-Stroy-Invest, and Fodd companies with the support of the
Skolkovo Foundation.
Government agencies have high expectations for acceleration programs. 2019
saw the launch of accelerators Russian Helicopters, Rosatom, Russian Railways,
VTB, GTLK, and KAMAZ. Russian Railways has already invested in 7 startups,
and VTB in 12. The demand for such incubators from corporations is expected to
increase every year.
Conventionally, it is possible to divide all participants in an innovation activity in
Russia into four types: a venture fund, a corporation/strategic investor, a business
angel, and a development institute. The most prominent representatives in each
category who actively invest in Russian technology companies at the moment are
as follows (Table 9.1):
Let us focus on two main institutional players in the region. First one is the oldest
and most active innovation development institution: the Fund for Assistance to
Small Innovative Enterprises (FASIE). Many consider FASIE the first stop for
assistance after kicking off a new startup or venture. All the programs are in the
form of nonreturn grants, which are a valuable resource for early stage startups or
even students with promising ideas. Typically, to receive a grant, one must submit a
specific set of documents through an online system for future judging. In some cases,
9 Moscow Innovation System 153

like the Umnik program, there is also a live pitch contest. Umnik is a great way to
work on an idea with some resources, to launch a prototype, or to check hypothe-
sis—it is easy to get and easy to submit the final financial report. Thousands of
students have received such grants. The more financial support is provided, the
tighter is the competition. Even though it is easy to apply to Umnik, competition is
stiff since resources are limited. In some cases (start programs and commercializa-
tion, NTI development), the competitions are anywhere between 5 and
10 submissions per winner. All programs operate throughout the country, which
stimulates geographical development in all regions.
Russia’s best-known innovation center is called Skolkovo in the Moscow suburb
area. Skolkovo is the modern scientific and technological innovation complex
operating to foster the development and commercialization of new technologies. It
is the first in post-Soviet Russia built from scratch as a science city, including
technoparks, R&D centers, offices, a graduate-level university, housing, parks, and
more. The plan was to launch the construction of large facilities in a clean field to
exclude the heavy legacy of perestroika and use unique human and financial
resources to create an ecosystem of researchers, students, businesses, and investors.
The idea is sound, though many criticize it strongly. Due to the catastrophic
shortage of private venture investments, the Russian venture market in 2019,
according to various estimates, was between USD500 and 900 million, which is
less than 0.3% of the world—many startups with Russian roots have left country and
built successful businesses in Europe or the USA. The Skolkovo project partially
compensates for the lack of private investment.
Today Skolkovo it is probably the best-known Russian innovation center inter-
nationally. The whole ecosystem provides special economic conditions, grants, and
support for companies operating in priority sectors of the Russian economy:
telecommunications and space, biomedical technologies, energy efficiency, infor-
mation technology, and nuclear technology. As of the beginning of 2019, the project
was estimated to be 80% complete. At the end of the same year, 730 people
permanently resided and 16,000 people worked in Skolkovo. According to the
updated master plan, the population of the innovation city should exceed 5000
people by the end of 2023. The completion of all facilities is planned after 2025—
at that point, 17,000 will live in Skolkovo and more than 80,000 people will work
there. As a result of the activities of the Skolkovo Foundation, it should be a self-
governing and self-developing ecosystem that is favorable for the development of
entrepreneurship and research, contributing to the creation of companies that are
successful in the global market.
Private capital constitutes a significant part of Skolkovo’s development. The
Skolkovo Foundation has concluded about 70 agreements with Russian and interna-
tional corporations. The first major partner to deploy a representative office in
Skolkovo in 2015 was Boeing. Other major partners include Sberbank,
Transmashholding, the Pipe Metallurgical Company, Sibur, Tatneft, and Yandex..
At the end of 2019, 64 R&D centers were operating on the territory of Skolkovo.
Over 40 agreements have been signed with Russian and foreign venture companies.
At the moment, more than 3000 active startups are based in Skolkovo.
154 D. Vasilev and L. Garzik

If one looks at the dry figures and facts, then the situation in the innovation
environment looks stable and even positively developing. However, several facts
and events have negatively affected or continue to affect the Russian innovation
market. First are the scandals of alleged embezzlement of state institutions’ funds to
develop an innovative environment. In 2012–2013, investigations into the Skolkovo
Foundation and its investments made it toxic for several years. The Vice President of
the Pumpyanskaya Foundation writes about those events, “Skolkovo had a very
good image in the West, on which we had been worked carefully. And the next day
all this work was gone. It was useless both to call to London and even to Silicon
Valley. Everyone wrote about this situation—the investments were over.”
Other recent events have severely damaged investment and innovation activity.
One example is the case of Michael Calvey, one of the largest and first Western
investors in modern Russia. The continuation of sanction policies by Western states
and pressure on some Russian companies like Yandex have had negative effects on
innovation policy. There is discussion about a law that will reduce the share of
foreigners in important Internet companies. There is an investigation going on about
the CEO of RVC, the well-known government institution with many venture capital
funds, that adds pessimism. These investigations are said to be for the purpose of
defeating corruption, but given the nature of venture financing the results are
unclear. Despite all these cases, Russian investors and startup founders remain
optimistic.
According to StartupBlink, Russia’s Startup Map has 1780 startups, and the most
popular startups in Russia are Badoo, amoCRM, and Skyeng. Russia ranks 17th
globally among 202 countries for the strength of its startup ecosystem. The cities
with the most vibrant startup ecosystems in Russia are Moscow, Saint Petersburg,
and Kazan. The most popular and innovative industries in Russia are the software
and data, e-commerce and retail, and social and leisure industries.

9.5 SWOT Analysis of the Moscow Innovation System

Resources Strengths Weaknesses Opportunities Threats

Bank loans Russia’s banking Loans for Capital An innovation
system is well businesses are availability is ecosystem
developed; there still hard to get. one of the requires a lot of
are many private The interest rates reasons for resources—
and government are high; banks startups to Money is blood
players. prefer to give migrate from one for startups.
private loans country to Without
Sberbank (now rather than another. There is sufficient
known as Sber) corporate loans, a room for resources,
is the most especially for development in startups will start
innovative bank risky new that sense in migrating out of
with its own ventures. There Russia and the country
is a lack of Moscow.
(continued)
9 Moscow Innovation System 155

Resources Strengths Weaknesses Opportunities Threats

startup resources outside Russian regions
ecosystem Moscow must attract
investments from
other countries
and build
presence in the
innovation
economy
Culture and There is a good Russia has a Partnerships with Adoption of
mindset research and highly vertical other countries innovation
development management could help outside
culture with its culture and weak mitigate weak corporations
roots in the horizontal attributes. This is could be
USSR and the connections a big opportunity hampered by
mindset of a between for further strong vertical
winning nation. departments in development of management and
A multinational corporations. soft skills decision-making
culture and mix Creative skills processes that are
of races enrich and mindset are not always
society weak. A very transparent and
tough attitude logical
toward possible
failure does not
stimulate
attempts at
innovation
Digital Highly Sometimes, The current Data leaks,
infrastructure developed digital infrastructure can business data
infrastructure. transformation is be used as a protection, and
High-speed done in the sake foundation for personal data
internet in any of achieving the future protection are all
city, very good KPIs development of challenges
coverage of 4G digital economy,
networks. Low like a digital
cost of data healthcare
system
Education There is a large Less developed Great potential to The education
and skills amount of highly practical skills. turn scientific system is no
educated human Sometimes weak research into longer among the
resources. Strong management and innovative leading
skills in marketing skills businesses. Good countries. Need
theoretical potential to for reform if the
sciences, convert corporate system is to
historically R&D into new come back to a
strong scientific ventures leading position.
component in Brain drain is a
national threat, and high
development quality of life is
needed to stop
the drain
(continued)
156 D. Vasilev and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

Institutions Many Institutions Measures taken Some institutions
institutions were should play a in the past are influenced by
created to more important 5–10 years create other players,
support role in the promising and sometimes
innovation development of opportunities for investigations
activities. measures to growth make it hard to
Nonreturn grants stimulate promote the
available from innovation innovative
the very first agenda
stages of a
project
Legal Affordable legal Lawyers have Corporate law, Fairness of the
advisers support is low skills rules, and norms courts is
available should be sometimes under
cultivated with question, which
more attention could be a threat
for the incoming
investments
Market and The population There is a high With decreasing A large portion
demand of 144 million percentage of poverty levels, of population is
people is almost poor citizens, the demand and in debt. The
enough for the and the poverty markets will situation should
economy to level is still high expand. Many be fixed,
focus on its own industries like otherwise
internal market. e-commerce and consumption will
With the retail are steadily go down
country’s growing many
development, times faster than
this demand is GDP
growing
Migration Incoming Brain drain to There is a high Brain drain to
migration from developed opportunity for developed
CIS countries countries is an the return of the countries may
forms a cheap issue brains, which is continue to be an
workforce of already issue
often-talented happening
people
(especially from
Belarus, Ukraine,
Kazakhstan)
Policy and There is a Sometimes New programs Policymakers
strategy strategy, policies do not and policies often have little
understanding, work should be to do with new
and desire to shift adopted like the ventures or
from an oil and China 2025 innovation. That
gas economy to program and is a threat
an innovation- others in
based economy. developing
Many policies countries
are written and
(continued)
9 Moscow Innovation System 157

Resources Strengths Weaknesses Opportunities Threats

under
implementation
to make that
happen
Quality of Quality of living There is still a Cities are The low quality
living is better than in low quality of changing their of living in
many countries. living outside of faces in recent remote regions is
The 2018 Human big cities years, becoming driving people to
Development more adapted for big cities like
Index that was citizens, leisure, Moscow. This
published in and work. The unbalances the
2019 places quality of living economy and
Russia 49th out is rising concentrates
of almost resources in one
190 countries or two regions.
Low quality of
living is also a
threat because it
drives brain drain
Regulation Regulation in the Regulation is The current Overregulation is
past 10–15 years considered too regulation is always bad for
has become more strict by many. under review. In the economy.
solid for Low tolerance late 2019, there New industries,
investment policies for was a plan to cut like autonomous
protection government regulation transport cannot
investments significantly. develop without
decrease the Many laws and cuts in
chances of rules especially regulation. This
success before a in food and drug may lead to
unicorn can industries are out startup drain in
emerge of date. the future
Reducing the
“regulatory
guillotine” may
create new
opportunities
Research There is a very The Availability of Sanctions block
infrastructure good level of infrastructure is infrastructure some important
research there, but makes it easy to research
infrastructure. sometimes is access and equipment from
The past 20 years rarely used. relatively cheap being delivered
have seen major Human and to use. Other to the country
transformation in financial opportunities
research resources are arise from
equipment in needed to scientific
government conduct research research
institutions
Risk capital Corporations The amount of Creation of The lack of
have launched venture capital is corporate funds available risk
their own funds not sufficient opens capital creates a
(continued)
158 D. Vasilev and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

to invest in risky opportunities that threat for the
ventures were not startup
previously ecosystem
available
Tolerance Russia inherits a Low tolerance High tolerance to Low tolerance of
and trust winning attitude toward failures, other cultures failure and low
and strong low confidence and easy confidence in
character from its in success adoption to success are a
past. The external threat to
nation’s ability to conditions. innovation
overcome Multi-nationality development
difficulties is and diverse
very strong culture create
opportunities to
build
multinational
companies

9.6 Strategy and Implementation

Decision makers in Russia have come up with several strategies and ideas, under-
standing the difficulties associated with bringing developments to the market for
both enterprises and the scientific community. First, they created transparent rules
and investment protection. Second, they poured money to a knowledge-based
economy. Third, they created new institutions and innovation centers from scratch.
These national- and high-level goals and policies are set by the President’s office and
Government and implemented by ministries, institutions, and agencies.
For example, the long-term strategy development up to 2035 in innovation,
technologies, and new markets is under the control of the Agency for Strategic
Initiatives (ASI). This agency oversees identifying future markets where national
companies can be competitive. It is also responsible for the distribution of resources
to support the most promising companies in their development and for investment
plans in high-tech areas.
As of 2021, there are 12 markets identified as most promising and that are
projected to be more than USD100 billion by 2035: AutoNet, MariNet, SafeNet,
TechNet, EnergyNet, AeroNet, HealthNet, FoodNet, NeuroNet, FasionNet,
MediaNet, and EduNet. The word “Net” is in the names of all future markets
because, according to the ASI website and FAQ, all emerging new markets are
related to the Internet either by using its physical infrastructure or its protocols or by
being built in its likeness. For example, principle will be used by “smart grids” that
will connect producers and consumers of electricity under EnergyNet. This is how
the transport systems of the future—AeroNet, AutoNet, and MariNet—will be
organized. Even conservative markets, such as agricultural machinery, are turning
9 Moscow Innovation System 159

into networks of cyber-physical devices owned by the manufacturer and leased to

farmers and renewed by software licenses. Essentially, all the markets of the future
also projected to be networks.
ASI develops roadmaps of technologies and how they evolve and function for
each market with support measures. The key goal of the strategy is to bring new
high-tech Russian businesses to the global level. One may also ask why ASI focuses
on markets and not on technologies, and the answer is because the technology is
nothing if there is no need or market for it. ASI is responsible for that as well—it
designs new rules and eliminates the old ones that might prevent the introduction of
new technologies (i.e., autonomous cars in heavy traffic). ASI has working groups
for each market comprising corresponding experts.
ASI is also responsible for creation of “boiling points,” which are places in cities
where innovators, businesses, and regulators can meet and work together.
Conferences on future markets, talks, and pitches are also hosted at boiling points.
They include space for working on projects and for early stage startups. ASI also
funds and promotes centers for basic research (competence centers) in the markets
mentioned above. As of 2021, 16 centers like these were created.
In addition, ASI supports centers for children’s development and children’s tech
contests. It has a number of programs that aim to show teenagers how technologies
and innovation change the world and foster national technological development.
The country-level strategy is implemented in several layers. The most influential
is probably the ministry level. As an example of how it works, in 2018 the former
Ministry of Communications and Mass Media of the Russian Federation was
renamed to the Ministry of Digital Development, Communications and Mass
Media. The digital economy and economic transformation are now under the control
of that ministry. It is in charge of achieving national goals in research and innovation
related to digital services and IT. Other ministries have their own sets of strategies
that, together, should fulfill the national goals set by the president and government.

9.7 Lessons Learned from the Moscow Innovation System

We have learned that Russia, and the Moscow region specifically, are very
promising sources for innovative solutions and companies. Moscow has shown
stable growth even during the financial crisis at an average pace of 10% per year.
The region doubled its GDP in 10 years and managed to attract an impressive
concentration of research institutes, many universities and researchers, solid infra-
structure, and a variety of other resources. Russia’s other regions are less developed,
and only a few can be named as candidates for being an innovation core: Saint
Petersburg as the second largest regional economy in the country, Novosibirsk with
its science centers and science parks, Tomsk as a students’ city, Yekaterinburg with
its heavy machinery and industries, and Vladivostok with its location and proximity
to Asia. New centers built from scratch like Skolkovo are a new part of the Moscow
ecosystem focused on fostering innovation activity and creating new local
ecosystems that are no longer based on historical sites with heavy backgrounds.
160 D. Vasilev and L. Garzik

The region has also some weaknesses. We have learned that innovation in Russia
is sometimes KPI-driven and sometimes relies on previously achieved results and
USSR science. The entrepreneurial culture needs to be improved, and it will be as
time passes and the market economy evolves. The investment climate, important for
tech-intensive industries, has been damaged by recent corruption cases and the
arrests of some well-known businesspeople. Legal reforms could improve transpar-
ency and increase the confidence and trust between government and business.
At the same time, thanks to its deep roots and tradition in science, the Russian
Federation has many highly educated citizens. Given its large amount of research
institutions, one can conclude that the most promising form of innovation is proba-
bly when the state invests in research and education while businesses (probably with
the participation of the state) invest in the creation of applied solutions on that basis.
The principle is quite simple common sense and also accounts for regional traditions
and peculiarities.
Nairobi Innovation System
10
Linet Kwamboka Nyang’au and Ludovit Garzik

Abstract

Africa, especially the sub-Saharan region, is a hot spot of “frugal innovation,”

which focuses on technology that meets the market’s needs. While this sounds
trivial, frugal technology’s precise alignment to specific needs is unlike
industrialized Western nations, where products come with hundreds of surplus
features that consumers will never be able to use. As an illustrative example of
this overfeaturing, it would clearly be overkill for a consumer intending to get
some fresh milk from the farmer around the corner to buy a Ferrari to drive there.
The high-speed undersea Internet cable arrived in Kenya in 2009 and, com-
bined with increasingly affordable mobile phones, meant that ordinary Kenyans
had consistent access to high-speed Internet on mobile devices. This access drove
the demand for the applications and infrastructure development that connected
Kenyans to the rest of the world. Companies like Safaricom, Jamii
Telecommunications, and Zuku have joined the government in efforts to spread
fiber connectivity. Companies like Fireside Communications bring last-mile
connectivity to Kenyans across the country.

L. K. Nyang’au (*)
Data Science Ltd, Nairobi, Kenya
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 161
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_10
162 L. K. Nyang’au and L. Garzik

10.1 Development Milestones of the Nairobi Innovation

Ecosystem

Today, Sub-Saharan Africa hosts many tech hubs. Some of the most dynamic
include South Africa, Kenya, Rwanda, Ghana, and Nigeria. Kenya, specifically the
region around Nairobi, was the birthplace of innovation in Africa in the early 2000s.
In 2007, Safaricom founded M-Pesa, a SIM-based banking service that enabled the
vast majority of the population in Kenya to access some kind of banking services for
the first time through their mobile devices. This approach hit the core of users’ needs.
Various technology incubators and co-working spaces were founded in 2008,
providing business development and services for technology startups in cooperation
with universities. These helped ensure the transfer of knowledge into business
activities. Many new companies were founded on the backbone of infrastructure
and business support provided by the incubators and co-working spaces.
Developments over the past 20 years have been based on the daily and urgent
needs of a population with low incomes but high willingness to adopt new
technologies. This so-called bottom of the pyramid creates demand in a phase of
product development where more developed regions cannot detect customers’
needs.
Africa, especially the sub-Saharan region, is a hot spot of “frugal innovation,”
which is focused on technology that meets the market’s needs. While this sounds
trivial, frugal technology’s precise alignment to specific needs is unlike
industrialized Western nations where hundreds of surplus features that consumers
will never be able to use come with products. An illustrative example of this
overfeaturing would be if that a consumer intended to get some fresh milk from
the farmer around the corner and bought a Ferrari to drive there.
However, frugal innovation is much more than merely the adjustment of techno-
logical levels. It is differentiated into six specific characteristics:

F: functional
R: robust/resource-efficient
U: user-friendly
G: growth opportunities
A: affordable (for consumers, society, and the environment)
L: less complex/simplified

Frugal innovation is also an important concept for innovation leaders. It focuses

on the question “How can I best address the needs of my customers?” Engineers love
their technology and may create an intricate product first and ask about the consumer
later. Frugal innovation is an ideal reflection technique for any innovator to stay
connected to the needs of their potential customer community. In the words of Erik
Hersman (Co-Founder of Ushahidi, iHub, BRCK): “The Western world should try to
be more like Africa and not the other way round.”
10 Nairobi Innovation System 163

10.2 Culture and Mindset of Ecosystem Players

For many years, the Kenyan economy was driven by Agriculture and Tourism both
for local development and as a valuable source for foreign income. Improved health
care and increased investment in education have rapidly increased Kenya’s human
capital and a demand emerged for more innovation and for innovative solutions to
local challenge. This in turn created a need for investment from the government and
the local private sector ecosystem to meet this need for innovation.
The high-speed undersea Internet cable arrived in Kenya in 2009 and, combined
with increasingly affordable mobile phones, meant that ordinary Kenyans had
consistent access to high-speed Internet on mobile devices. This access drove the
demand for the applications and infrastructure development that connected Kenyans
to the rest of the world. Companies like Safaricom, Jamii Telecommunications, and
Zuku have joined the government in efforts to spread fiber connectivity across the
country. Companies like Fireside Communications have joined in for last-mile
connectivity across the country.
Kenyans, in general, are attracted to technology and innovation. This is
demonstrated by the mobile payment and banking ecosystem, especially after the
introduction of mobile banking services like M-Pesa. Some of the most successful
technology companies in the country are involved in mobile money payments,
including Cellulant, PesaPal, and Kopokopo. This has led to the introduction of
lending and betting services, and while the jury is still out on their success and
ethical impact, there is no question about the extent of uptake for both homegrown
and foreign products and services in this space.

10.3 Facts and Figures in the Regional Economy

Nairobi and Kenya have undergone waves of success and crisis over the last few
decades. This development is best expressed with the rise and fall of GDP growth in
Fig. 10.1.
GDP development in Kenya was very volatile in the early 1960s and then had two
periods of stabilization of development in the mid-1970s and after the global
financial crisis in 2010. Stable and predictable economic development is one of
the preconditions for the development of regional innovation ecosystems because
risk is too dangerous under very unstable economic conditions.
After the promulgation of Kenya’s current constitution in 2010, Kenya was
devolved into 47 counties. This devolved system of government took effect in
2013, making and Nairobi one of Kenya’s counties in addition to its capital city.
The Kenya National Bureau of Statistics carries out an annual exercise of
calculating each county’s economic contribution to national GDP, called the Gross
County Product (GCP). Nairobi County has led GCP rankings since devolution,
aided by its historical strategic and geographical advantages as the capital city, as
shown in Fig. 10.2.
164 L. K. Nyang’au and L. Garzik

Kenya's Annual GDP growth (%) 1960-2019

25

20

15
GDP growth (annual %)

10

GDP growth (annual %)

5

0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
-5

-10
Year

Fig. 10.1 GDP growth in Kenya 1960–2018. Source: The World Bank (https://data.worldbank.
org/indicator/NY.GDP.MKTP.KD.ZG?locations¼KE; Provided by Creative Commons Attribution
4.0 International License (CC BY 4.0))

10.4 Institutional Players in the Nairobi Ecosystem

Kenya’s institutional players are structured according to the concept of the Triple
Helix Analysis, introduced by Henry Etzkowitz and further developed in Etzkowitz
H and Ranga M (2010).1 The Triple Helix comprises universities, industry (the
private sector), and government structured into the spaces of Knowledge, Innovation
and Consensus.
According to the triple helix structure, the innovation ecosystem consists of
different levels of institutional players. Knowledge production institutions like
universities or research organizations provide the raw material for innovation with
basic and applied research. These institutions also develop the human capital
necessary for the whole ecosystem, so their philosophies are central to the attitudes
that shape the region.

Knowledge Space (Knowledge Generation)

The greater Nairobi region includes approximately 60 universities and other higher
education/tertiary institutions. The following table shows the Top 4 universities in
Kenya according to uniRank. They are all located in Nairobi.

1
Etzkowitz H and Ranga M (2010) A Triple Helix System for knowledge-based regional develop-
ment: From “Spheres” to “Spaces,” in: VIII Triple Helix Conference, Madrid, October.
 10

25.0
21.7

20.0

15.0
Nairobi Innovation System

10.0

6.1
5.5
4.7
5.0
2.6 2.9 2.9 3.2
2.1 2.2 2.2 2.3 2.3 2.3 2.4
1.4 1.4 1.4 1.5 1.6 1.6 1.7 1.7 1.8 1.9
0.7 0.7 0.8 0.8 1.0 1.0 1.1 1.1 1.1 1.2 1.2 1.4 1.4 1.4
0.2 0.3 0.4 0.5 0.5 0.5 0.5 0.6
0.0
Kisii

Kilifi

Kitui
Meru

Wajir
Nyeri

IsioIo
Lamu
Busia
Siaya
Embu
Nandi
Narok

Kwale
Migori

Vihiga
Nairobi

Bomet
Nakuru

Kisumu
Kiambu

Kajiado

Laikipia
Kericho

Garissa
Baringo
Muranga

Turkana
Nyamira
Makueni

Marsabit
Bungoma

Mandera
Mombasa

Samburu
Machakos

Kirinyaga
Kakamega
Nyandarua

Homa Bay

Tana River
Uasin-Gishu

West Pokot
Trans Nzoia

Taita Taveta
Tharaka Nithi
Elgeyo Marakwet

Fig. 10.2 Kenya: Share of Counties in GDP (2013–2017). Source: Kenya National Bureau of Statistics (KNBS) (https://www.knbs.orke/?wpdmpro¼gross-
county-product-2019)
165
166 L. K. Nyang’au and L. Garzik

University Year of foundation Number of students

University of Nairobi 1956 98,000
Kenyatta University 1985 71,000
Strathmore University 1961 5000
United States International University Africa 1969 8500

Research Organizations

Public research institutions Private research institutions

Kenya Medical Research Institute Africa Institute for Capacity Development
(KEMRI) Academic Model Providing Access to Healthcare
Kenya Agricultural and Livestock (AMPATH)
Research Organization (KALRO) HJF Medical Research International Inc.
Kenya Forestry Research Institute International Cancer Institute
(KEFRI) International Livestock Research Institution (ILRI)
Kenya Industrial Research Institute The Research Care and Training Programme (RCTP)
(KIRDI) Family AIDS Care and Education Services (FACES)
Kenya Medical Research Institute Regional Centre for Mapping of Resources for
Kenya Veterinary Vaccines Development
Production Institute The International Centre of Insect Physiology and
Kenya Marine and Fisheries Research Ecology (ICIPE)
Institute The World Agroforestry Centre (ICRAF)
National Crime Research Centre
National Museums of Kenya
Tegemeo Institute of Agricultural
Policy and Development
Tourism Research Institute

Innovation Space (Knowledge Implementation)

The second key element of the triple helix ecosystem is known as the Innovation
Space, where knowledge implementation takes place. Small, medium, and large
businesses make up Kenya’s knowledge implementation ecosystem, along with
intangible assets like patents and intellectual property.
Of the seven million SMEs in Kenya, only 1.5 million are licensed and registered
with the government. In many cases, unregistered SMEs are in the informal sector.
The SMEs that are formally registered with the government have to pay taxes, which
can be quite high. As a result, many SMEs prefer to remain unregistered. This
presents a massive barrier preventing public authorities from managing or
supporting SMEs. Even if big businesses like Safaricom (M-Pesa) get most of the
attention, the Kenyan economy is driven by small businesses. 79 of the top
100 SMEs are in Nairobi County.
Kenya is ranked 61st in the World Bank’s ease of doing business index. This is a
major improvement, with the country moving 80 places upward since 2014.
Improvement has been driven by important reductions in the barriers to entry for
new businesses in Kenya (e.g., being able to open a business within one day and with
10 Nairobi Innovation System 167

only one person), but there are still many hurdles for startups. Things like unfavor-
able tax regimes and a lack of capital continue to hinder new companies’ progress.

Consensus Space
The triple helix’s consensus space contains all other institutions and the legal
framework that enables knowledge and innovation to evolve. One of the most
important elements of the consensus space is the strategy, which paves the way to
an innovative region and envisions the system as it should be in 10–15 years.

10.5 SWOT Analysis of the Nairobi Innovation Ecosystem

Resources Strengths Weaknesses Opportunities Threats

Culture and The community A traditional way Nairobi is a An insular way
mindset is open to new of approaching cosmopolitan of thinking can
ideas, technology can city, presenting lock out better
innovations, and be limited to the an opportunity ideas
investments. The adoption of new for integration
country is known innovations and knowledge
as a hotbed of exchange
innovation
Digital Significant There is a lack of Service Incomplete
infrastructure investment by capacity for the providers can utilization of
the government uptake of all make the existing digital
has helped set up available infrastructure infrastructure
the right digital infrastructure more affordable can discourage
infrastructure development to encourage investments
uptake
Education The general The lack of There is plenty An underutilized
and skills population is direct of well trained workforce
very well opportunities but underutilized creates
educated within human capital conditions for
especially at qualifications apathy and
secondary and has shifted the professional
tertiary levels interests of the brain drain
workforce
Institutions There are strong Institutions work A unifying The lack of
and well- in silos and do approach could coordination and
organized not always pull integrate and cooperation can
technology and together toward improve the mean duplicated
innovation common goals technology efforts and
institutions in ecosystem wasted resources
government, the
private sector,
and civil society
(continued)
168 L. K. Nyang’au and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

Legal The legal system The lack of a A strong legal The lack of a
advisers supporting and comprehensive system would clear direction in
regulating legal support encourage more legal
technology is system creates investment and developments
improving in a vulnerabilities opportunities in a creates
very good for technology stable system fragmentation,
direction goals misinformation,
and poorly
informed
activities
Market and A young and There is a lack of More Without the right
demand ready market has infrastructure investments in infrastructure to
created a lot of supporting rising infrastructure support rising
demand for market demand and capacity demand, the
innovation development can ecosystem risks
meet and losing the right
encourage investment and
demand support
Migration Nairobi attracts a An increasing More investment Frustration in the
lot of top talent supply of human can meet the lack of
both locally and capital increases demands of the opportunities can
internationally competition for increasing lead to criminal
limited resources population activities
Policy and There is The policies and There is an The lack of legal
strategy consistent effort strategies are not opportunity to frameworks
in curating the supported by a base new could invalidate
right policies and strong legal legislation on new and existing
strategies for the framework existing policies policies and
technology and strategies strategies
ecosystem
Quality of In general, the The quality of More investment Unpredictable
living quality of life in life is not in consistently quality of life
Nairobi is above consistent for all high quality of across the region
average people and life can reduces
places across the encourage higher confidence and
region productivity risk-taking
Regulation The historical The lack of Regulators can Regulation is
lack of detailed strong work with growing, and
regulation drives regulations innovators to innovation and
innovation. creates a weak come up with regulation are
Companies from support system regulations that often opposing
other regions are for more favor the concepts
attracted to sustainable and ecosystem’s
Nairobi as a test dependable current and
bed for logistics, innovation, since future plans
banking and no one knows
other branches how new
regulations will
disrupt their
efforts
(continued)
10 Nairobi Innovation System 169

Resources Strengths Weaknesses Opportunities Threats

Research The research With funding There is an With research
infrastructure ecosystem in coming from opportunity for topics and
Nairobi is due to external sources, local investors methods dictated
increased most of the and by external
investment and research work is philanthropists investors, local
international structured to to put resources research runs a
grants favor foreign into local risk of becoming
ideologies research irrelevant to
local problems
and ideas
Risk capital There is an The investments Investors need to Concentrating all
improved in this category cast their nets investments on a
appetite for and are still focused wider, spend small group of
trust in local on a few groups more time and innovators locks
innovations, of innovators resources, and out and
which have identify new discourages
started earning opportunities other groups
high returns and categories of from taking part
innovators in the ecosystem
or even
venturing into
potential high-
risk high-return
opportunities
Bank loans Banks have Common “know Banks can invest A lack of
started changing your customer” more in working capital
their attitudes (KYC) processes widening their can easily kill
toward lending and requirements risk appetites and innovation
to smaller and are still quite including
newer businesses cumbersome for nontraditional
some channels of
borrowers
Tolerance Having gone Being too High tolerance Tolerance and
and trust through and tolerant and and confidence confidence that is
overcome accepting can be can be harnessed not properly
adversity, the exploited by to enhance harnessed can
people of unscrupulous innovation and lead to apathy in
Nairobi are some individuals invention the ecosystem
of the most and the loss of
tolerant and valuable human
confident capital

10.6 Strategy and Goals for Midterm Future Development?

In 2009, the government of Kenya launched its first long-term strategy, called
“Vision 2030.” This was the first time the country defined knowledge and innovation
as key performance indicators for national prosperity and economic development.
170 L. K. Nyang’au and L. Garzik

As shown previously, GDP growth has been stable since 2010 after its 2008 slump
due to postelection chaos that brought the country to a standstill. This economic
stability and other long-term vision strategies from the government have provided a
feeling of stability that encourages long-term investment and entrepreneurial risk-
taking.

Vision 2030 Is Guided by Three Key Pillars

The economic pillar assesses the existing opportunities and challenges related to
Kenya’s economic growth.
The social pillar deals with the construction of a just and cohesive society that enjoys
equitable social development in a clean and secure environment.
The political pillar envisions a democratic political system that is issue-based,
people-centered, result-oriented, and accountable to the public.

All four pillars are founded on the vision’s goal of moving all Kenyans to the
future as one nation. The vision further aims to ensure that the economic, social, and
political gains made under its auspices are neither reversed nor lost as a result of
regime change.
While the government of Kenya has set up various institutions responsible for
innovation through the Ministry of ICT and Youth Affairs, various private and civil
society organizations have also stepped up to provide support and create innovative
solutions in the country. The government has worked to include the private sector,
especially in the governance boards of its innovation ecosystem and community.
With devolution in place, county governments are also responsible for championing
innovation beyond urban areas. Most of these efforts are supported and coordinated
through the Ministry of ICT.
Every other year, the government publishes innovation reports on progress in the
innovation ecosystem. Unfortunately, this puts the government in the position of
auditing itself as there is not much effort or investment from the private sector or
civil society toward this kind of reporting. Even so, multiple reports detail the
investments from independent private sector entities flowing into the technology
and innovation ecosystem.

Strategy in Finance
Over the past few years, venture capital funds have flooded the Nairobi innovation
and business ecosystem. Many have been criticized for favoring foreign innovators
and businesses moving into Kenya while ignoring local innovators, despite the
abundance of innovative and creative Kenyan people.2

2
https://www.theguardian.com/business/2020/jul/17/african-businesses-black-entrepreneurs-us-
investors
10 Nairobi Innovation System 171

In a recent proposal, the Ministry of ICT has moved to require that all foreign-
owned companies must have at least 30% Kenyan shareholding. This is more
favorable to foreign investment than similar policies in neighboring countries like
Ethiopia, where foreigners are required to make a joint venture with local companies
and are not allowed to have more than a 51% stake.3,4

10.7 Lessons Learned and Tools for Other Regions

Demography: Young Population

The population of Kenya is growing younger and younger. Younger people are
generally more educated and have better access to health care and technology. This
drives an increasing demand for more than basic needs, which includes the latest
technologies and hardware available in the global north (Fig. 10.3).

Access to Technology
Kenya has 91% mobile subscription penetration, compared to Africa’s 80% average.
More Kenyans access the Internet and Internet services via mobile phones compared
to traditional Internet access via computers. This creates a ripe environment for
stable future market demand for the services, tools, and innovation that are already
available in the Global North as the world becomes increasingly flat in terms of
access and demand.

Leapfrogging: Access to Mobile Banking

Despite its late arrival to the credit and cashless economy, Kenya essentially
leapfrogged the normal progression. Kenya skipped the credit card period with the
launch of mobile money services like M-Pesa from various telecommunications
operators and banks. Less than 5% of the population use credit cards in Kenya, while
more than 60% of the adult population uses mobile banking services. This is in
comparison to countries in the Global North like Germany, where more than 35% of
adults used credit cards in 2020. In the global spread of mobile money customers, an
overwhelming share of more than 40% live in Sub-Saharan Africa. As a result, more
people in Kenya have access to banking services than ever before.
In addition, a lot of innovation has gone into mobile banking. For example,
Kenyans can make cashless payments for all utility and government services. One
key advantage of this innovation is that it dramatically simplified navigation of the
COVID-19 pandemic.

3
https://www.standardmedia.co.ke/business/article/2001381825/foreign-firms-to-cede-30pc-stake-
under-new-law
4
https://www.theafricareport.com/44673/ethiopia-further-opens-up-sectors-to-diaspora-and-for
eign-nationals/
172 L. K. Nyang’au and L. Garzik

Fig. 10.3 Population Pyramid Kenya. Source: PopulationPyramid.net (www.populationpyramid.

net made available under a Creative Commons license CC BY 3.0)
New York Innovation System
11
Brian Frumberg, Lisa Stapleton, Sam Yazdanseta,
and Ludovit Garzik

Abstract

New York City (NYC) has transformed itself from military port to manufacturing
hub to financial epicenter and now takes center stage in the creative and applied
tech sectors. Driving over USD70 billion in startup valuation and exits every
year, holding more risk capital than any other city in the world, and with an
inherent culture of openness, diversity, and excellence, NYC has had a meteoric
rise to its current position in the top two innovation ecosystems globally.
This chapter explores the government initiatives, digital infrastructure, and
research institutions that helped harness NYC’s assets and allowed it to develop
as the world’s second largest startup and venture ecosystem. Given that capital is
required for innovation to take off, NYC’s proximity to capital is a strength few
ecosystems can match. Waves of IPOs from 2019 to present will only boost
innovation as talent from companies become new founders and investors bolster-
ing the NYC ecosystem. New York City will continue to strengthen its position as
a leader in the innovation space.

B. Frumberg (*) · L. Stapleton · S. Yazdanseta

VentureOut, New York, NY, USA
e-mail: [email protected]; [email protected]; [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 173
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_11
174 B. Frumberg et al.

11.1 Overview and Characteristics of the New York Ecosystem

In an era of rapid globalization, New York City (NYC) is considered a global center
of finance, commerce, and innovation. The city is home to the world’s largest stock
exchanges: the New York Stock Exchange (NYSE) and NASDAQ. The City of
New York has one of the largest tech ecosystems in the world—second only to the
San Francisco Bay Area—and boasts one of the fastest-growing startup ecosystems
in the world. This would not be possible without the businesses that operate in the
city. Many Fortune 500 corporations have their headquarters in New York City, and
one out of ten private sector jobs in the city is with a foreign company.1 In 2017,
foreign direct investment (FDI) employed almost 300,000 New Yorkers and
contributed 11% of the city’s economy.2
The financial crisis of 2008 that led to the Great Recession forced the New York
City government—under then-mayor and recent democratic presidential candidate,
Michael Bloomberg—to diversify away from financial services alone and create
initiatives to strengthen the innovation ecosystems. Since then, dozens of initiatives
and milestones have been launched and have transformed NYC into a diversified
ecosystem of innovation which includes the NYU Poly Incubator, General Assem-
bly, BioLab, RLab (AR/VR/xR), the NYC Cyber Center, and Civic Hall. Through
this work, the city has launched three applied sciences university campuses includ-
ing Cornell Technion on Roosevelt Island—a joint venture between Cornell Univer-
sity, Technion—Israel Institute of Technology, and the NYC government—NYU
CUSP (Center for Urban Science and Progress) and Columbia Data Sciences
Institute. These initiatives have helped harness NYC’s assets and have helped it
become the world’s second largest startup and venture ecosystem.
NYC has a scale to which only a few cities in the world can compare. Former
Mayor Michael Bloomberg used to demonstrate this scale through NYC’s student
population. The city has almost 900,000 students, which is more than the total
population of Boston (685 k) and San Francisco (884 k). The city is home to
124 universities, which in 2016 alone graduated nearly 19,000 STEM students,
and thus, technology is the fastest-growing FDI sector.
Like many global cities, New York City’s venture capital ecosystem experienced
a decade of tremendous growth between 2008 and 2017, fueled by a rebounding
postrecession economy. In 2008, businesses headquartered in New York City closed
fewer than 300 deals worth a cumulative USD1.7 billion. At the peak of the City’s
venture capital deal making in 2015, companies headquartered in New York City
finalized over 1440 venture capital deals worth approximately USD8.7 billion.
Although the deal count dropped sharply in the following 2 years, the total amount
of capital invested in New York City’s companies continued to rise after a pause in
2016. By 2017, deal and capital totals in New York City had risen by 256% and

1
Wylde K (2006) “Keeping the Economy Growing”. Gotham Gazette.
2
https://pfnyc.org/wp-content/uploads/2017/11/Global-Business-Local-Benefit-Nov-2017.pdf
11 New York Innovation System 175

439%, respectively, compared to nominal 2008 levels, with nearly 1000 deals
amounting to just under USD9.4 billion raised.

Timeline of Growth
Traditionally known for Wall Street, private equity, and hedge funds, NYC’s ramp-
up of IPOs over the past few years has forced venture capital (VC) onto the main
stage. The story of VC in NYC starts in 1996 when Fred Wilson and Jerry Colonna
cofounded Flatiron Partners. It continued in the late 90s with NY startups
DoubleClick, About.com, HotJob, and Datek all prospering before the initial tech
bubble burst in 2000.
From 2005 to 2010, NYC’s startups were often adjacent to NYC’s legacy
industries like consumer products and media. Peer-to-peer e-commerce website
Etsy came on to the scene in 2005, and Gilt Groupe launched in 2007 along with
crowdfunding platform Kickstarter. In 2010, consumer subscription startup
Birchbox and e-commerce eyewear site Warby Parker both launched, elevating the
tech scene even further.

In the mid-2010s, notable exits from IPO and acquisitions started to validated the
NYC scene.

Etsy—2015 IPO.
Jet—2016 Acq’d.
MongoDB—2017 IPO.
FlatIron Health—2018 Acq’d.

Ramp-up in IPOs: 2019–present:

Peloton—2019 IPO.
DataDog—2019 IPO.
Snowflake—2020 IPO.
Casper—2020 IPO.
DigitalOcean 2021 IPO.
Olo 2021 IPO.

Pipeline:

UiPath files IPO targeting USD35 billion.

Attentive raises USD470 million Series E
Squarespace raises at USD10 billion valuation.
WeWork preps SPAC at USD9 billion.
176 B. Frumberg et al.

11.2 Facts and Figures New York Innovation Ecosystem

11.2.1 The Data

Any discussion of New York’s advantages has to start with talent, density, and
dollars. NYC boasts a deep pool of university and corporate talent, a highly dense
community that supports entrepreneurs and startups, and the most corporate buying
dollars of any city in the world. VentureOut believes these advantages make NYC
the best tech ecosystem in the world and the most welcoming community for
startups.

Convenience of Corporate Concentration

New York City has more corporate headquarters than any city in the world except
Tokyo. There are more corporate buying dollars available in NYC than any other
city in the world. This concentration of enterprise clients in only 64 square
kilometers provides an incomparable opportunity for startups to meet, learn, coop-
erate, and commercialize with some of the world’s best companies.

Diversity of Industries
As the second biggest startup and venture ecosystem in the world, New York is
always competing to catch up to Silicon Valley. However, New York has more
strengths than weaknesses when compared to Silicon Valley, especially when it
comes to the diversity of the city. Most cities have a few industries that anchor their
business communities. For Silicon Valley, that has been tech ever since the semi-
conductor was invented in 1961. NYC, however, has been the capital of over a dozen
industries for well over 150 years, including finance, fashion, media, advertising,
publishing, and retail. This is why NYC is known as a “hyphen-tech” town,
including fin-tech, health-tech, ad-tech, media-tech, and fashion-tech. In these
hyphen-tech industries, technology innovation influences traditional industry.

Industrial Scale Equivalent to the Large Population

NYC has a scale that only a few cities in the world can compare to. Former Mayor
Michael Bloomberg used to demonstrate this comparative scale through NYC’s
student population. The city has almost 900,000 students, which is more than the
total population of Boston (685 k) and San Francisco (884 k). Another example: One
of Boston’s strengths over NYC is in healthcare innovation. However, as a startup
that is partnering or selling with patients, doctors, hospitals, or healthcare
corporations, NYC has 8.6 million residents and the largest corporate ecosystem in
the USA, which is a scale that would much better support those startups than Boston.
The New York region also boasts the largest tech talent market in the USA,
surpassing the Bay Area by more than 20,000, a statistic that surprises most people.
Traditionally known as a powerhouse in the financial, media, and real estate
sectors, New York’s story of becoming a hub for innovation across sectors has been
crucial to its growth in becoming the second biggest tech ecosystem and second
largest city for foreign direct investment.
11 New York Innovation System 177

Like many global cities, New York City’s venture capital ecosystem experienced
a decade of tremendous growth between 2008 and 2017, fueled by a rebounding
postrecession economy.
In 2008, businesses headquartered in New York City closed fewer than 300 deals
worth a cumulative USD1.7 billion. At the peak of the City’s venture capital deal
making in 2015, companies headquartered in New York City finalized over 1440
venture capital deals for approximately USD8.7 billion. Although the deal count
dropped sharply in the following 2 years, the total amount of capital invested in
New York City headquartered companies continued to rise after a pause in 2016. By
2017, deal and capital totals in New York City had risen by 256% and 439%,
respectively, compared to 2008 levels, in nominal terms, with nearly 1000 deals
amounting to just under USD9.4 billion raised.
Taking a look at the current funding ecosystem in NYC, 684 companies were able
to raise funding in 2020, a year of economic turmoil and still an increase of 13%
from 2019. This growth came largely from Series B and late-stage companies, where
there was a 50+% increase in the number of companies funded (Series B—60 to
91, late stage—62–96). There were 27 mega (USD100 million) funding rounds in
the city, an increase of 145% from 2019. These mega deals represent USD4.1 billion
or 34% of all capital raised.
Aggregate early stage funding was up with the number of companies raising
capital slightly down as the world moved remote, making funding more difficult for
founders that may not have established networks.

Unique to NYC
A current snapshot of NYC’s tech scene highlights a thriving, interconnected
ecosystem with all the ingredients for business success across every sector. Whether
it is the cutting-edge advanced manufacturing in Brooklyn, the state-of-the-art
applied sciences research on Roosevelt Island through Cornell Tech, or the food
production and distribution in the Bronx, NYC’s key story has always been
reinvention.

Diversified Economy
Manufacturing3: Advanced manufacturing firms based in NYC have seen a major
uptick in VC investment since 2017. The average deal size is USD7.5 million in
2020, an increase of more than 225% from just a few years before. Even during
the pandemic, the VC community recognizes the value and potential of this
growing sector of the city’s economy.
Life Sciences: While not typically known for advancements in the life sciences, the
city has created a burgeoning life sciences sector in Manhattan through the
LifeSci4 NYC initiative and the Alexandria Center for Life Science, offering
1.1 million square feet of office and laboratory space.

3
https://edc.nyc/article/nycs-manufacturing-renaissance-has-arrived
4
https://lifesci.nyc/
178 B. Frumberg et al.

Makerspace5: With over USD1 million of advanced equipment and tools, affordable
memberships, prototyping and design services, STEAM education, and ample
storage, this space supports people who have a product idea they want to bring
to life.

Legacy Industries
While diversifying its economy has been essential in its growth, we must note that
legacy industries with a historical stronghold in New York City have become
magnets for the creative startups within their verticals that develop new efficiencies
and create new jobs.
Home to more Fortune 500 companies than any other city in the world save
Tokyo, NYC has long been a global leader in traditional “anchor” industries
including financial services, media, and fashion retail and manufacturing. These
sectors play an invaluable role, fueling the adoption of new innovations in the
emerging tech industry. The city’s legacy industries have opened up a diverse
range of opportunities for locally based startup enterprises to leverage VC backing
for innovation and growth and to take advantage of city initiatives that help usher in
the next wave of success stories in these verticals.

Fashion and Arts: The future manufacturing hub, part of the Made in NY Campus at
Bush Terminal in Sunset Park, Brooklyn, is anticipated to open in 2021 and will
provide affordable, best-in-class industrial facilities for garment manufacturing,
film and media production, and related services and industries.
FinTech: FinTech companies have thrived in NYC since Bloomberg LP
revolutionized the way data was consumed in the early 1980s. Banks, capital
markets, and insurers have increasingly opened their eyes to the benefits of
building a strong FinTech ecosystem in NYC. The proximity that entrepreneurs
enjoy allows financial institutions to work collaboratively with startups looking to
enter the largest financial market in the world.
Media: To address the changing landscape of media and film, NYC will invest
USD6 million to create the first publicly funded VR/AR Lab in the country. The
laboratory will create thousands of jobs and accelerate the city’s leadership
position by providing entrepreneurs with the space, technology, and training to
turn their ideas into viable companies along with the space and resources they
need to sustain initial growth. The laboratory will also serve as a central hub
where VR/AR companies can draw on a pipeline of talent trained in the latest
VR/AR technology.
Health Care: The Digital Health Marketplace is a New York City Economic
Development Corporation (NYCEDC) program that aims to help companies
with market-ready products access commercial relationships. Its goal is to facili-
tate relationships between health-tech buyers and health-tech sellers through two
half-day matching sessions in the spring and fall of each year. Since its launch,

5
https://edc.nyc/program/futureworks-makerspace
11 New York Innovation System 179

the Digital Health Marketplace has facilitated 700 matches between buyers and
sellers. The program has disbursed USD2.5 million in commercialization grants
to 20 companies who have gone on to receive USD160 million in total venture
funding.
Real Estate: As the biggest metropolitan market in the USA, it is only fitting that
“proptech” (property-tech) pushing innovation forward in NYC.

Diversity and Talent

While NYC has the largest labor force at over four million people, it also has the
world’s most diverse and skilled labor pool. Roughly 2.3 million New Yorkers have
a bachelor’s degree or above—more than Los Angeles, San Francisco, Washington
DC, Philadelphia, and Boston combined—with nearly half of those obtaining a
graduate or professional degree. Moreover, 42% of New York’s workforce is
foreign-born, reflecting the city’s ability to attract foreign talent. New York also
turns out more computer science graduates annually than any other area.

Growing Footprint of Tech Giants

Even after COVID-19, major companies are taking notice of the city’s economic
transformation and resiliency by investing in NYC. For example:

– Google has added about 1.7 million square feet of office space in Manhattan.
– Facebook doubled down on NYC by leasing 2.2 million square feet of space in
Midtown Manhattan.
– Apple plans to expand to a second building, leasing an additional 220 thousand
square feet in Penn Plaza.
– Amazon is moving ahead with plans to lease 335 thousand square feet of office
space in Manhattan and studio and production space in Brooklyn.
– TikTok signed a lease to take over 232 thousand square feet of prime real estate in
the heart of Times Square.
– Beam Suntory relocated its corporate headquarters from Chicago to NYC, trans-
ferring 150 positions to Midtown Manhattan.
– Deerfield Management is redeveloping a 12-story building at 345 Park Avenue
South into a life sciences campus to provide life sciences space to support
healthcare and biotech startups and growing companies that work on cutting-
edge R&D to treat diseases and chronic conditions.

11.2.2 Innovation Ecosystem Operators

Institutions
Cornell NYC Tech
On December 19, 2011, the City of New York, Cornell University, and
Technion—Israel Institute of Technology announced a partnership to build a
USD2 billion, 2-million-square-foot applied science and engineering campus on
Roosevelt Island in New York City.
180 B. Frumberg et al.

The selection of the Cornell/Technion consortium pairs two of the world’s top
institutions in the fields of science, engineering, technology and research, marked a
major milestone. Cornell Tech brings together faculty, business leaders, tech
entrepreneurs, and students in a catalytic environment to produce visionary results
grounded in significant needs that will focus on building technologies to directly
address societal and commercial needs.
The key to Cornell Tech is its relationship with New York City—the campus has
a dedicated K-12 initiative to bring tech education into local schools. In addition, its
WiTNY program is a partnership with City University of New York to encourage
more young women to pursue degrees and careers in tech.
Columbia University’s Data Sciences Institute
On July 30, 2012, the City of New York and Columbia University announced an
agreement between the City of New York and Columbia University to create a new
Data Science Institute, located in Columbia’s Morningside Heights and Washington
Heights campuses in New York City. The agreement included the creation of 44,000
square feet of new applied science and engineering space on Columbia’s campus and
the addition of 75 new faculty hired within the University’s Fu Foundation School of
Engineering and Applied Science.
Since 2017, the Columbia Data Science Institute is now a university-level
institute whose “Data for Good” mission is to advance the state of the art in data
science, enhance fields, profession, and sectors through the application of data
science and to ensure the responsible use of data benefits the society. The Institute
has enhanced the level of training available to the city’s next wave of talented
engineers and applied scientists to generate nearly USD4 billion of economic growth
across the five boroughs over the next three decades.
NYU Center for Urban Science and Progress
The Center for Urban Science and Progress (CUSP) was created as a partnership
with NYU, the City of New York, and other academic and industrial partners to
make cities around the world more efficient, livable, equitable, and resilient. By
2050, 66% of the world’s population is projected to live in urban cities. This raises
key questions, for example, how can rapidly growing cities provide a high quality of
life to citizens of every socioeconomic status? How will the effectively and effi-
ciently deliver services, address resource allocation, and increase citizens access to
green space?
With NYC as its laboratory, NYU’s CUSP uses advances in data creation,
storage, and analytics to investigate and answer such questions. These activities
are making NYU CUSP the world’s leading authority in the emerging field of urban
informatics. CUSP’s impact-driven research and educational programs examine
complex urban issues and contribute practical solutions for challenges facing
New York City and growing cities worldwide. CUSP grants an M.S. and Advanced
Certificate in Applied Urban Science and Informatics. New research and
technologies developed at the Center are expected to generate USD5.5 billion in
overall economic impact and 7700 jobs over the next three decades.
11 New York Innovation System 181

11.2.3 Other Programs

New York City has a long history of supporting tech education and business at all
levels.

CS4All: Through an unprecedented USD81 million public–private partnership,

CS4All will ensure all NYC public school students learn computer science,
with an emphasis on female, black, and Latino students.
Metrotech Center: The nation’s largest urban academic–industrial research park is
home to businesses at all stages and facilitates cross-industry connections.
NYU Tandon School of Engineering (including space at Metrotech): A 2014 engi-
neering and applied sciences university merger, which created a comprehensive
school of education and research, rooted in a tradition of invention and entre-
preneurship, and dedicated to furthering technology in service to society.

11.2.4 Supportive Infrastructure

Incubators and Accelerators

Newlab: Located in the Brooklyn Navy Yard, Newlab serves as an innovation hub
for over 130 NYC-founded startups. NewLab offers the space for founders to
build their ideas into reality with state-of-the-art equipment and testing facilities.
AlleyCorp: Focusing primarily on early stage companies, AlleyCorp is a fund and
incubator that invests in NYC startups. AlleyCorp carries out an integrative
approach to accelerating portfolio companies throughout their lifecycles.
500 Startups: The four-month seed accelerator program provides participants with
mentorship, hands-on sessions with startup experts, and a shared office space with
other founders.
Barclays Accelerator, powered by Techstars: This unique partnership between
Barclays and Techstars brings two networks together into one accelerator pro-
gram that offers entrepreneurs unprecedented access to a leading global bank and
to Techstars’ mentor and investor relationships.
Dreamit: A growth-focused accelerator designed for startups with market-ready
products.
ERA: The accelerator combines seed capital, hands-on help, and a co-working
location with an expert team to drive the trajectory of early stage startups. ERA
runs two 4-month programs per year.
FinTech Innovation Lab: An annual program run by the New York City Investment
Fund and Accenture, this accelerator focuses on early and growth-stage
companies that have developed cutting-edge technology products targeted at
financial services customers.
Food-X: Helps food entrepreneurs bring their products and services to market at
super speed. Food-X partners with early stage companies from across the food
supply chain from agriculture through consumer packaged goods and helps the
companies grow.
182 B. Frumberg et al.

MetaProp: As both a venture capital firm and tech accelerator, MetaProp invests,
advises, and accelerates ten of the top real estate startups each year through an
intensive curriculum filled with workshops, panel discussions, and pitch events.
New York Fashion Tech Lab: This accelerator is a community-driven, relationship-
building, collaboration, and business development platform. The nonprofit pro-
gram was cofounded by Springboard Enterprises and key fashion retailers to
support women-led companies that have developed innovations at the intersec-
tion of fashion, retail, and technology.
New York Digital Health Innovation Lab: This is an annual program for growth-
stage companies that have developed cutting-edge technology products for
healthcare organizations.
StartED: Focused on EdTech, StartED helps accelerate startups innovating in the
early to workforce learning space. With just 5 days of programming, StartED
serves as a pressure cooker for startups in the idea stage, connecting innovators
with the network, capital, and insights they need to succeed.
Techstars: This organization helps entrepreneurs raise startup funding and gain
critical insight to help launch their businesses through its startup accelerator
and development program.
Techstars Cedar-Sinai Accelerator: An accelerator that helps today’s technology
innovators turns their ideas into breakthroughs that can improve the lives of
patients around the world.
Urban-X: Guides founders in design, manufacturing, engineering, marketing, com-
munity building, and branding. Urban-X connects startups with the leading
community of founders, investors, companies, and city officials.
VentureOut: Based in NYC, VentureOut supports 200 of the world’s most innova-
tive technology companies each year to launch, raise capital, and scale in the
USA. It has supported over 1500 entrepreneurs representing 1000 companies that
have raised over USD2 billion in capital and exited to companies like Google. It
has created more than 13,000 jobs.
XRC Labs: This innovation accelerator focuses on the next generation of disruptors
in the retail and consumer goods sectors.

Investors Fueling Growth

From successful entrepreneurs looking to bolster their local economies to newly
minted titans in the VC ecosystem, NYC investors are only getting stronger as the
city continues to rack up successful IPOs.

Angel Groups
NY Angels is one of the longest running active angel groups in New York City and
has invested over USD100 million in entrepreneurial ventures. The group is an
independent consortium of over 135 individually accredited angel investors.
Empire Angels consists of some of the youngest members of any angel group in the
country. The group is dedicated to teaching millennials how to become successful
angel investors.
11 New York Innovation System 183

Investors
Union Square: Investors in Etsy, MongoDB, Cloudflare, and Lending Club, this
fund was founded in 2003 by Fred Wilson and Brad Burnham. It has earned a
reputation as a top venture fund.
Lerer Hippeau: Located in New York’s ever-trendy SoHo neighborhood, Lerer
Hippeau focuses on early stage investment and some investments include con-
sumer standouts like Casper, Glossier, and Warby Parker.
RRE: This group is of the most active investors in NYC with USD1.5 billion and
investments in Venmo, BARK, Camp, Datadog, Clearpath Robotics, and
GIPHY.
BoxGroup: This group boasts 3 billion-dollar exits including Flatiron Health, which
sold to Roche for USD2.1 billion, Harry’s, which sold for USD1.37 billion to
Edgewell Personal Care, and PillPack, which sold to Amazon. BoxGroup is one
of the more reputable VCs in the world.
Greycroft: This firm is consistently ranked among the most active global VC firms
with notable investments in Acorns, App Annie, iCertis, Medly, Plated, Shipt,
and The RealReal, which went public in 2019 at USD2.4 billion.

11.3 SWOT Analysis New York City

Resources Strengths Weaknesses Opportunities Threats

Culture and Collaboration and The city’s focus NYC is poised to A myopic view
mindset community are at on business be the best of tech and
the core of NYC’s models and innovation innovation as
tech culture, paths to revenue ecosystem in the bringing only
which is distinct inhibits some of world, incremental
from the the “dream big” surpassing even progress to the
hypercompetitive and “change the Silicon Valley, if industries that
cultures of world” culture its community dominate the
finance, media, that typifies can continue to city, rather than
and other Silicon Valley. leverage the the “create the
industries the city This results in a assets that are future” mindset
is known for. This form of risk inherent to the that inspires
culture, combined aversion in the city. The innovations that
with the city’s city’s VC mindset and change the
inherent culture of community, culture of the world, could
openness, which follows a community will diminish future
diversity, and model of high very much growth
excellence, has risk for high determine
fueled the reward, and is whether these
meteoric rise of seen by some as opportunities are
New York as one the reason the seized or not,
of the top city has not seen and the
innovation more large exits successes of the
and IPOs over
(continued)
184 B. Frumberg et al.

Resources Strengths Weaknesses Opportunities Threats

ecosystems the past decade. past year are
globally The IPOs and encouraging
acquisitions of
the past year,
however, show
that this
weakness is
diminishing
Digital NYC has With 8.4 million The city has A lack of
infrastructure developed a residents spread maintained a equitable access
digital backbone across focus on its to broadband
that supports the 322 square digital strategy and the benefits
largest business miles, NYC has and has made of digital
community on the a unique unprecedented infrastructure
planet as well as challenge in investments in investments for
the city’s 8.4 providing digital all new Yorkers
million residents. equitable infrastructure, could undermine
The city broadband most recently the progress of
government has access to every with USD20 the last nine
been at the new Yorker. The billion for the years and
forefront of city recognizes OneNYC 2050 underutilize the
digital this challenge plan. The city city’s human
infrastructure and the will be capital.
development. The importance of benefiting from Fortunately,
chief digital broadband these recent
officer, a role access to investments for investments
created in 2011, economic years to come should mitigate
reports directly to inclusion and this future threat
the mayor and mobility and
oversees the city’s recently doubled
digital roadmap, its investment in
which has expanding
directed hundreds internet
of millions in infrastructure to
investment to the most
fund the city’s underserved
biggest digital communities, for
infrastructure a total
challenges investment of
USD157 million
Education New York City’s The city’s talent With the largest If the city does
and skills greatest asset is its deficit has talent pool in the not continue to
people. It is the historically been country, invest in the
largest talent in the area of historical talent pipeline so
market in the applied sciences. educational the current talent
USA and has The city has investments like pool can meet
more tech made the three applied the city’s
workers than even tremendous sciences growing human
the Bay Area by investments in campuses, the capital needs, it
23,000 this area, with rapid expansion would
employees. the launch of of innovative significantly
Roughly 2.3 three applied companies like hinder the
(continued)
11 New York Innovation System 185

Resources Strengths Weaknesses Opportunities Threats

million new science general growth of
Yorker’s have a campuses since assembly, and an NYC’s tech
bachelor’s degree 2012, but the insatiable ecosystem and
or above, more demands of the business broader
than Los Angeles, world’s tenth community, economy
San Francisco, largest economy NYC will
Washington DC, (if NYC were a continue to
Philadelphia, and country, it would attract world-
Boston combined. have the tenth class talent, from
The pipeline of largest economy students to
future talent is by GDP) are still experienced
full, with over one not met by the employees. The
million students city’s current NYC tech talent
enrolled in talent pool pipeline is
undergraduate another key
and graduate initiative, with a
programs— USD ten million
Making NYC the industry
largest college partnership to
town in the USA train thousands
of new Yorkers
with skills for
in-demand fields
like web
development and
server
administration
Institutions Track record of An unintended NYC is poised to As NYC’s tech
success built post- consequence of maintain its ecosystem
2008 financial developing a position as the grows, so do the
crisis as strong tech second largest institutions that
evidenced by ecosystem may metropolitan helped support
diversification of have been a area in the world that growth. This
economy deepening of the might hinder
digital divide collaboration
and the speed of
execution
Legal New York City NYC’s VC The tech A global or
advisers has both the ecosystem is ecosystem in national
largest number of catching up to NYC continues economic
lawyers of any Silicon Valley’s to grow and downturn would
USA city and the in terms of by thrive, as decrease the
highest density deals done and evidenced by the deals that legal
with 14 attorneys dollars invested. explosion of tech advisers and
for every 1000 Decades of big IPOs and large other venture
people. Pair that tech deals in the funding rounds tech service
with the world’s San Francisco in NYC in early providers need
second largest Bay Area have 2021. The for growth of the
tech and venture built experience experience gap tech ecosystem
ecosystems and for legal advisers between NYC
you have the and other service venture tech
largest population providers. service providers
(continued)
186 B. Frumberg et al.

Resources Strengths Weaknesses Opportunities Threats

of legal advisers NYC’s legal and those in the
in the world ecosystem is San Francisco
stronger than Bay Area will
Silicon Valley’s continue to
in all areas other shrink
than early stage
ventures and
tech M&A, so
this is less a
weakness than
an area for
growth
Market and New York City is The pandemic The booming
demand the number-one has caused a cybersecurity
city globally for major shift in the industry coupled
SMB and way markets with NYC’s
corporate buying work. With commitment to
power, while also people being growing the
having one of the able to work sector will attract
highest-spending from home, there an influx of
consumer is a lower demand for
populations in the demand for workers and
world. The people to be firms
market demand present and do
for all services is business in the
extremely strong city
in NYC, which
makes it the likely
and the largest
consumer
Migration NYC is a magnet Without an The pandemic There is some
for international American visa has created an uncertainty
talent. In 2020, and good credit, opportunity to around whether
42% of the NYC people can have take advantage people will
workforce was difficulty finding of temporary return to NYC
foreign-born housing. low rent prices in postpandemic.
Creating NYC The high cost of
community can living and ability
be difficult when to work remotely
coming to NYC has resulted in
alone people moving
out of the city
Policy and Through five core The lack of NYC is Communities are
strategy strategies, NYC is transparency committed to highly relational
highly focused on with big tech facilitating and outspoken
quality job makes it difficult opportunity by about which
creation in the to regulate and investing in organizations
technology, predict the multifaceted they want in
manufacturing, consequences of city-owned their
life sciences, government property and neighborhoods,
manufacturing, implementing which can deter
(continued)
11 New York Innovation System 187

Resources Strengths Weaknesses Opportunities Threats

and construction policy and financial and tax corporations
spaces. NYC is strategy incentives that from planting
committed to will help headquarters in
investing businesses NYC.
hundreds of acquire and Additionally,
millions of dollars improve their recent political
in infrastructure, facilities. Other instability and
education policies include disapproval have
programs, and widespread created a divide
property to shape capital between the
NYC as an investment in people and the
industry leader scalable authorities
and grow the infrastructure
talent pipeline and land
development
Quality of NYC offers a rich Rising housing The city has NYC’s cost of
living and diverse costs across committed to a living continues
culture in every boroughs could USD one billion to increase while
area of the arts make it difficult neighborhood wages remain
and more. for NYC to hold development stagnant
New Yorkers onto its greatest fund to support
have broad access competitive the underlying
to public advantage in the infrastructure
transportation innovation needed to
economy: Its support growth
highly educated in
and neighborhoods
entrepreneurial that have been
workforce rezoned for more
housing
Regulation NYC boasts a NYC has higher New The recent
capable local taxes than other administration’s changes in the
government that states. It has a approach to presidential
gets involved in decentralized immigration will administration
economic business support provide easier may bring
development system. Many access to the US increased
policy making. city programs market with regulation to
The city operate across revised policies businesses
government agencies, but specifically
invests time, many not-for- geared to global
money, and profit groups are businesses
resources into its also involved setting up offices
projects, and or HQ in NYC
many of its
initiatives have
been at the
forefront
compared to its
peers. NYC’s
strong public
transit system is a
great equalizer,
(continued)
188 B. Frumberg et al.

Resources Strengths Weaknesses Opportunities Threats

allowing people
to travel to and
from work
regardless of
financial
situation. NYC
has the largest
public school
system in country
with more than
one million
students. It also
has a robust
higher public
education system
via CUNY and
SUNY
Research With With a heavy The diversity Significant
infrastructure 124 universities, concentration of within the city investment is
NYC provides universities, and the broad necessary to
research there are high variety of keep NYC’s
infrastructure for research costs research research
a broad variety of that require long- institutions infrastructure up
disciplines term investments available enables to international
including options that are not NYC to make research
for guaranteed to connections and standards. The
interdisciplinary yield a make a global wide variety of
projects significant return impact disciplines
on investment multiplies this
investment
compared to
other regions
Risk capital There is more risk NYC and Growing NYC faces
capital available New York state competition growing
in NYC than in have some of the between other competition with
any other city in highest taxes on major innovation other regions
the world. While businesses hubs like like London,
the San Francisco totaling 45%, London, Hong Hong Kong, and
Bay Area still has which is 25% Kong, and Singapore
the most VC higher than the Singapore
investment, NYC UK. The high
is number two tax rate is
unattractive for
major
corporations,
which could lead
to companies
pursuing cities
like Austin,
Texas with
lower tax rates
(continued)
11 New York Innovation System 189

Resources Strengths Weaknesses Opportunities Threats

Bank loans NYC has been Equitable access A lot of the Access to bank
home to the to capital is still banks and loans could
world’s largest an area for financial diminish should
financial services improvement services the economy
center for across all aspects institutions have face inflation, as
generations. It of financial innovation many are
boasts services offices in NYC predicting,
incomparable and have been which would
access to capital making capital greatly increase
for qualified available to the interest rates
businesses, which businesses in on these loans,
companies continually more but this is a
typically use as innovative ways threat across all
nondilutive lending
funding as an nationally
alternative to or
after raising risk
capital
Tolerance NYC is known While NYC is NYC is a magnet Although NYC
and trust globally for its one of the most for opportunistic leads as an
diversity and tolerant cities in people of all example of
tolerance and the world, there backgrounds. As collective
serves as the HQ is a growing NYC tends to be tolerance, NYC
for thousands of divide among more inclusive is still battling
organizations beliefs and while other systemic racism
fighting for the growing tensions states become and
rights of the more restrictive, disadvantaged
underserved, people will migrant
minorities, migrate to NYC. communities
immigrants, the Additionally
LGBTQ+ NYC has
community, and launched several
more. The anti-hate crime
diversity and programs to
density of the city combat
mean that people intolerance and
of all colors and promote
creeds can find inclusion
community in
New York. For
example, 40% of
new Yorkers are
immigrants, both
residents and the
workforce,
making NYC a
true immigrant
city
190 B. Frumberg et al.

11.4 Economic and Political Strategy

11.4.1 Impact of the COVID-19 Pandemic

Considering the current economic outlook and the effects of the pandemic on NYC,
it is clear that many of the industries that were able to weather previous economic
downturns, like tourism and education, are now the ones hit hardest by COVID-19.
Small businesses struggled with decreased revenue amid public health guidance and
certain government policies that affected their hours of operation.
Before the COVID-19 pandemic ended a decade-long economic expansion in
NYC, the city economy added 980,000 private sector jobs—about a one-third
increase—between August 2009 and February 2020. The most significant economic
impact of the COVID-19 recession has been job loss as the city’s unemployment rate
went from 3.4% in February 2020 to 20.4% in June. The city lost 894,000 jobs from
February to April and added back only 308,000 in the following 7 months. Approxi-
mately 5% of the city’s population left the city in the first 2 months of the pandemic,
and some of the city’s wealthier neighborhoods saw close to 40% of residents leave.
The city forecast a USD9 billion revenue shortfall through the middle of 2021,
forcing a reduction in the city government’s budget for fiscal year 2021. From May
to November, the construction industry gained back 72% of the jobs it lost in March
and April. In the same time period, the retail trade industry regained 55% of the jobs
it had lost. According to a December 2020 estimate by NYC & Company, the city’s
tourism industry will host only 22.9 million visitors in 2020, a 66% drop from 2019.
As of this writing, however, there are positive signs of a slight recovery from the
substantial economic losses NYC sustained due to the pandemic. Unemployment
claims have leveled off, and the demand for New York office space is currently the
second highest in the USA.

11.4.2 Strategies and Policies

New York Works

From 2007 to 2015, about 50% of employment growth came from the education, health, and
technology industries. As noted, the city’s diverse talent pool attracts companies looking for
employees with global understanding and demographics reflective of their customers.

The Mayor’s office has been vital in creating initiatives and developing tools for
creating jobs in the private sector ranging from City-owned property that can be
activated for commercial and industrial use. A concerted effort by the office to
provide additional financing and tax incentives that help businesses acquire property,
construct and renovate facilities, and invest in equipment—all allow capital invest-
ment in large-scale infrastructure—directly enabling businesses to start and grow in
the city.
11 New York Innovation System 191

NYC Plan for Job Market Success

Leading up to the pandemic, the New York City government was focused on
growing the job market and fueling the talent pipeline over the course of 10 years.
With COVID-19’s catastrophic impact on the job market, facilitating job market
growth and attracting talent to the city has become even more significant. Through
large investments in infrastructure, education, and supporting innovation platforms,
the city has launched five core strategies across the technology space, life sciences
and health care, industrial and manufacturing sectors, creative outlets, and office
space, to help achieve this.
The most relevant to framing NYC as a leading innovation hub is the city’s
commitment to developing prominent leadership in the cybersecurity space. Starting
with a USD30 million investment into cybersecurity, the city will generate 10,000
cybersecurity jobs and 30,000 innovation jobs in total. This large investment will
provide quality jobs with salaries of USD70,000—80,000. More importantly, 44%
of these job opportunities will be accessible to people without a college degree.
In addition to creating jobs in the technology sector, NYC is committed to
implementing computer science into the core curriculum in order to strengthen the
local talent pool by 2025. With this initiative, NYC will be the largest public school
in the country to implement computer science into their educational program.
Outside of the technology sector, the local government has devoted significant
investments to improving the life science and healthcare space. The New York
metropolitan area has the highest concentration of bioscience workforce within the
country, amounting to USD1.4 billion in National Institutes of Health awards.
Coupled with being home to nine major academic medical centers such Columbia
University, NYU, Albert Einstein College of Medicine and other notable institutions
make NYC a leader in the segment.
In efforts to grow the innovation aspect of the life sciences and healthcare sector,
the city is investing capital in connecting research to the industry, creating jobs, and
advancing health care and technology. Through this investment, the city will estab-
lish 16,000 permanent jobs and 1000 paid internships further fueling the talent
pipeline.

11.5 Lessons Learned

The city that transformed from military port to manufacturing hub to financial
epicenter now takes center stage in the creative and applied tech sectors. Driving
over USD70 billion in startup valuation and exits each year, NYC is a global tech
powerhouse.
NYC remains the preferred location for business leaders both domestically and
globally. However, with an unpredictable political and economic climate as well as a
growing preference for remote work, it would be a mistake for the city to rest on its
laurels. NYC cannot take its status as a global business capital for granted. Initiatives
taken by the government both pre and post-COVID-19 limit these fears, as does the
192 B. Frumberg et al.

inextricable draw of NYC as a global hub for artists, innovators, and entrepreneurs.
All of these still make NYC an extremely attractive destination.
Given that capital is required for innovation to take off, NYC’s proximity to
capital is a strength that few ecosystems can match. Initial concerns surrounding
NYC’s ability to match capital with the understanding of what it takes to develop a
thriving innovation hub proved unfounded. NYC has always been at the forefront of
innovation and evolution beginning with industries that the local market
understands.
Additionally, collaborative efforts from government, local universities, enter-
prise, and investors has allowed NYC to expand on initial strengths surrounding
talent and proximity to capital into the development of a thriving innovation
ecosystem that has diversified its economy and ushered in the “next wave” of legacy
industries.
Progressive and forward thinking initiatives in upskilling and reskilling talent
pool from day one can help address concerns that may arise in the future regarding
the local talent pool. Wave of IPOs from 2019 to present will only boost innovation
as talent from companies becomes new founders and investors—bolstering the NYC
ecosystem.
Shanghai Innovation System
12
Hui Yan, Yixi Xue, Xiong Li, and Ludovit Garzik

Abstract

Shanghai is not just a large city with around 23 million inhabitants; it is also one
of the world’s largest trade hubs. As a cultural melting pot, Shanghai is a hot spot
of knowledge and technology development. Shanghai’s Yangpu District hosts
more than one-third of the colleges and universities. Learn about the core of the
strength of this region with its creation of virtuous circles and the flexibility of
incubation mechanism. The three main points for Shanghai’s success compared
to other innovation regions are discussed as the degree of linkage across systems,
the education level of the population, and the degree of spatial integration. In
future, especially Yangpu District will be setting up special plans to attract social
institutions to participate in investments. It is also supporting university science
and technology parks to establish joint guiding funds for project equity invest-
ment in order to enhance the parks’ ability to cultivate high-quality early stage
projects.

12.1 Shanghai and Its Yangpu District

Shanghai is not just a large city with around 23 million inhabitants, but it is also one
of the world’s largest trade hubs. Its harbor is by far the largest container port in the
world with around 42 million standard container units (TEU) per year. For compari-
son, the largest European container port is Rotterdam handling around 14 million

H. Yan (*) · Y. Xue · X. Li

Shanghai University, Management School, Shanghai, China
e-mail: dolphinsurfi[email protected]; [email protected]; [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 193
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_12
194 H. Yan et al.

TEU per year or one-third of the capacity. Shanghai has a long history of trade as the
gateway for entry of many non-Asian nationals to China. As a cultural melting pot,
Shanghai is a hot spot of knowledge and technology development.
The core of Shanghai’s knowledge and technology ecosystem is in the Yangpu
district. This is due to its magnetic effect on national and international intellectuals
and to a sophisticated political strategy that focuses its dynamics. At the beginning of
the twenty-first century, the Yangpu District put forth the idea that “serving colleges
and universities is to serve Yangpu, developing colleges and universities is to
develop Yangpu” along with a development goal of building a Yangpu University
Town. In 2003, Shanghai’s administration further designed the strategy of building a
Yangpu Knowledge Innovation Zone. In 2010, Yangpu was identified as one of the
first batch of “national innovative pilot urban areas,” which put it on the road to
building innovative urban areas with integration and linkage development like
university campuses, science and technology parks, and public communities
(referred to as the “linkage of three districts”).
The universities are the core of Shanghai’s innovation ecosystem, as producers of
R&D and technological innovation and sources of knowledge innovation. The
development of cities like Boston in USA fully illustrates the key role of university
innovation in driving local economic development. The purpose of the Yangpu
District’s transformation into a university-type urban district is to strengthen the
university as the core force of knowledge innovation, improve the innovation
ecosystem around the university, and fully release the innovation potential of the
university. The approach lets the university and the city evolve from simple spatial
collocation to functional fusion, producing a chemical reaction from that physical
fusion. The chemical reaction stimulates innovation activity, and each single
innovation activity triggers a chain reaction, producing a multiplier effect and
forming the cluster effect so that the university’s scientific research strength and
innovation ability can be transformed into Yangpu’s economic strength.

12.2 Facts and Figures in the Shanghai/Yangpu Innovation

System

12.2.1 Yangpu District Location and Its Institutions

The Yangpu District, located in Shanghai’s northeast, has the highest intensity of
higher education resources and intellectual class in China. An area of about 60 square
kilometers hosts more than one-third of Shanghai’s colleges and universities,
including Fudan University, Tongji University, Shanghai University of Finance
and Economics, the Second Military Medical University, and other famous
universities. The district represents 87 national key disciplines, covering the fields
of economics, mathematics, physics, chemistry, biology, electronics, medicine,
journalism, architecture, civil engineering, transportation, finance, banking, account-
ing, optics, and more.
12 Shanghai Innovation System 195

The Yangpu District also boasts 14 scientific research institutes, including

Shanghai Internal Combustion Engine Research Institute, the 23rd Research Institute
of China Electronics Technology Corporation, the Chinese Academy of Fishery
Sciences, Shanghai Textile Research Institute, and Shanghai Optical Instrument
Research Institute. The educational and scientific research land area of the whole
district is 5.57 square kilometers, accounting for 10.1% of the total buildable land in
the Yangpu District.

12.2.2 Yangpu and Its Neighboring Districts

In general, the population of the Yangpu District is highly educated. Yangpu’s

comparative advantage in intellectual resources is apparent when comparing Yangpu
with the populations of other districts in Shanghai. Among the 1.3 million permanent
residents of Yangpu District, more than 30% of the population have education above
the junior college level.
In addition to high levels of education in general, Yangpu boasts more than 5000
professors and associate professors and more than 40 academics in the Chinese
Academy of Sciences and Chinese Academy of Engineering—more than half of
Shanghai’s total. More than 200,000 people are employed in the fields of education,
scientific research, and technical services, accounting for a large proportion of the
population. In 2008, around 10% of Yangpu’s population was employed in the
education sector, compared to around 3% average in the city overall.
Considering its intensity of educational facilities, the education level of the
population, and the employment structure, Yangpu District is an area with intensive
intellectual resources. Its development mission of “Knowledge Yangpu” is in line
with its comparative advantages.

12.2.3 Institutional Players in “Knowledge Yangpu” Area

Since the beginning of the twenty-first century, Yangpu District in Shanghai has
established a development strategy of “Knowledge Yangpu” and constructed its
innovation system of three-district linkage across university campuses, technology
parks, and the community. After more than 10 years of implementation, certain
achievements have been made, but overall development has not yet achieved a
qualitative breakthrough.
According to a review and evaluation of the “Knowledge Yangpu” strategy, the
main reasons for any shortfalls are differences between the policy’s intention and
implementation in target orientation, interest demand, and system management.
These have led to insufficient linkage and have hindered the effective operation of
the innovation ecosystem. Innovation from Yangpu’s university—a core part of the
strategy—has failed to play its role effectively.
Accordingly, there are four concrete countermeasures:
196 H. Yan et al.

Countermeasure 1:
Innovation source: Improve the microinnovation ecology of the universities.
Countermeasure 2:
Innovation direction: Give key disciplines full freedom to determine their own
innovation directions.
Countermeasure 3:
Innovation diffusion: Further promote the spatial integration between universities
and urban areas.
Countermeasure 4:
Innovative atmosphere: Create a microspace environment suitable for the creative
class.

12.2.4 Countermeasure 1: Innovation Source

To cultivate the innovation ecosystem of universities, universities in Yangpu should

actively learn from the MIT’s experience in building an ecosystem for transferring
knowledge into markets: set up innovation organizations, open innovation courses,
and organize student entrepreneurship communities. These actions will make knowl-
edge available and prepare teachers and students for innovation and
entrepreneurship.
As the innovation subject can take up large amounts of scientific research and
education resources, the university should strengthen its openness especially. Suc-
cessfully innovative universities need to learn from relevant experience and expand
their openness, which should not be limited to opening stadiums and gymnasiums to
communities or opening laboratories to enterprises. Wang Na, a scholar,
summarized MIT’s openness in four aspects1:

First, openness across disciplines to strengthen interdisciplinary teaching and

research and development cooperation within the university.
Second, openness between universities with the development of modern information
technology and cooperation with global R&D institutions and universities.
Third, openness to industry to promote technological innovation and transformation
of achievements while meeting the university’s R&D funding needs.
Fourth, openness of courses and resources to the whole world through a network
platform that promotes global participation and collaboration.

Universities in the Yangpu District have two main tasks: encouraging

knowledge-driven institutions and establishing systematic innovation courses. The
first job requires universities to actively encourage innovative organizations through
a variety of means. These include the following:

1
Wang Na (2014) Four Key Elements of MIT “Innovation Ecosystem” (J). Journal of Liaoning
Institute of Education Administration (1):61–64.
12 Shanghai Innovation System 197

Acting as a bridge between research centers and businesses, entrepreneurs, and

investors. Across universities and between the faculty and alumni who mediate
and providing platforms, the innovation organization aims to promote the coop-
eration between research institutions. Furthermore, it combines entrepreneurs,
business capital, patent applications, business licensing for technical
achievements, and the communication between teachers, students, and alumni
to make the difference in ecosystem performance.
Creating innovative organizations in professional fields, including R&D centers in
engineering technology, electronic technology, biomedicine, and other
disciplines.
Enabling the organization of students’ entrepreneurial associations to promote
exchange and cooperation between students of different disciplines and between
students and alumni, which is conducive to creating a strong entrepreneurial
atmosphere, in addition cultivating entrepreneurial ideas and innovative talents
and forming entrepreneurial networks.

The second main job of a knowledge-driven institution is the establishment of

systematic innovation courses. It is necessary to open innovative education for all
students and increase openness between departments and institutions. The content of
innovation courses should be as complete as possible, including four main strands.
First are general entrepreneurship courses on topics like business plans. Second,
universities should provide professional courses related to entrepreneurship issues
like management, law, finance, and marketing. Third, they need innovative courses
related to various disciplines and technical fields. Finally, knowledge-driven
institutions should provide experiential and practical entrepreneurship courses.

12.2.5 Countermeasure 2: Innovation Direction

The second measure to counteract innovation stagnation is to provide full play to the
advantages of key university disciplines. Yangpu District’s industrial development
policy during the 12th Five-Year Plan is “two priorities, two promotions, and one
maintenance.” It prioritizes the development of modern design, science and technol-
ogy, financial services, software and information services, electronic information,
and other industrial categories. Meanwhile, it proposes the cultivation and mainte-
nance of industries like cloud computing and real estate.
The priority industries cover many categories of high and new technology and the
modern service industry, which are related to the key disciplines of universities in the
Yangpu District—to a certain extent. However, the degree of correlation is not
strong overall and industry selection overlaps with neighboring Hongkou and
Baoshan districts. In the future, it will be necessary to prioritize the advantages of
key university disciplines, determine innovation directions based on the existing
industrial foundation, give priority to feasible innovation activities, transform disci-
plinary advantages into industrial advantages with market potential, and enhance the
competitiveness of Yangpu’s industrial structure.
198 H. Yan et al.

In addition to the well-developed design and electronics industries, other national

key disciplines in Yangpu should guide the direction for further fostering innovation
and entrepreneurship. As it selects priority industries, the government should play an
active role as a service provider through policy guidance and efficient service to
create a good environment for innovation and entrepreneurship.

12.2.6 Countermeasure 3: Innovation Diffusion

This countermeasure calls on Yangpu’s leadership to further promote the integration

of universities and urban space. At present, the openness of universities in Yangpu
District is still very weak. Neither the visible nor invisible walls have been fully torn
down. The demolition of fences to reveal green, open sports facilities and other
symbolic openings have had limited effects on promoting integration between
universities and urban areas and even less on diffusing innovation and entrepreneur-
ship. For example, the new Jiangwan Campus of Fudan University was built recently
but still adopts a closed management mode and has not formed its expected integra-
tion and interaction situation with the new Jiangwan City community. As a national
innovative pilot urban area, universities in Yangpu should break through these
figurative walls, overflow them in function and space, maximize opportunities for
social spillover effects, and gradually approach the openness of foreign universities.

Regional Management of Land Resources (Infrastructure)

Efforts to encourage university spillover effects should focus on the Wujiaochang
and Binjiang areas. At present, there are 8.27 square kilometers of industrial storage
land and 1.8 square kilometers of residential area in the Yangpu District and a total
of 10 square kilometers of land resources that can be renovated to provide sufficient
space for the overflow of university functions. The Wujiaochang area is an ideal
target for maximizing the transformation of industrial land in Yangpu District and
the spillover of university functions. It is adjacent to the university and the riverside
area and has excellent landscape resources.
Several requirements are important for the layout of the spillover space’s selec-
tion and planning. First, it must be close to the existing campus. For example,
Yangpu could set up a platform for enterprise science and technology R&D near
Chanwu Road at Tongji University.
Second, the land must have renovation potential. In the area south of Xiangyin
Road and east of Guoding East Road, the Shanghai Tractor Internal combustion
Engine Company is currently a low-rise and large-volume industrial workshop. A
new project can retain the framework of this industrial building as it is rebuilt into
loft blocks that meet the dual needs of talented young people in universities for social
integration and entrepreneurship support.
Third, a new spillover space must be ready to pull along the development of the
region. For example, the enterprise scientific research and international cultural
exchange center will be on Fuxing Island. This will become an island of culture
12 Shanghai Innovation System 199

and art, which will drive the transformation and upgrading of the 30-mile
riverside area.

Function Selection (Links to Companies)

Universities have many functions, and spillovers in some areas are more valuable
than others. As the main carrier of Shanghai’s vision for a global science and
technology innovation center, Yangpu should focus on linking enterprises, people,
and services. It should promote the integration of universities and urban areas more
fully and should build a service platform for international academic exchange and
international talent introduction.
There are three key aspects to the spillover functions of colleges and universities.
First is the teaching function. Universities can transmit knowledge about newly
established disciplines and specialties or provide joint training centers. Students and
faculty can also leave campus and settle in urban areas, which expands the space this
teaching function might occupy. The second function is the scientific research
function. This can be enhanced by the construction of university research institutions
and other scientific research hubs. Finally, the third function is the public service
function. Universities can establish catering services, business services, libraries,
sports facilities, student apartments, and more. They can also serve as talent man-
agement services for society.

12.2.7 Countermeasure 4: Innovation Atmosphere

This countermeasure focuses on building a spatial environment suitable for the

creative class. Richard Florida describes innovative talents in the new economy as
“the creative class.” He believes that this creative class tends to live in central areas
with moderate costs rather than in marginal areas with separated functions. They also
tend to integrate work, residential, and leisure spaces to facilitate the instantaneous
conversion between life, work, and leisure activities. Small family living spaces,
personalized lifestyles, convenient life service facilities, and flexible working
environments are more suitable for the work and lifestyles of the creative class.
Yangpu’s University Road has made a successful attempt to create an urban
environment suitable for the creative class. The SOHO home office combines living
and office functions, which is suitable for young entrepreneurs’ all-hour work habits.
Convenient service facilities are integrated with a studio, a book bar, creative “do it
yourself” retail stores, Chinese and Western restaurants, and other business forms,
creating a fashionable and personalized innovative atmosphere. The small- and
medium-sized commercial spaces are suitable for the operation and management
of creative businesses that facilitate the integration of personalized goods with
various cultural and artistic elements.
With Knowledge Yangpu and the innovative city as its north stars, Yangpu
should pay more attention to large-scale development and change from pursuing
high-end space environments to humanized microspace environments. It should also
pay more attention to the creation of innovative atmospheres. The “Central Wisdom
200 H. Yan et al.

Zone” in Wujiaochang should be Yangpu’s model for creating an innovative

atmosphere.
Guokang Road and Chifeng Road are design industry clusters, and Guoding
Road is the location of entrepreneurship demonstration park for college students.
This has the advantage of gathering creative and entrepreneurial talents gathering.
Zhengtong Road features small shops, young people, and leisure businesses. The
surrounding area of Changhai Road is characterized by its historical buildings from
the Republic of China, and its existing branch road system is utilized to form a
humanized street space suitable for walking and cycling.

12.3 SWOT Analysis Shanghai/Yangpu Region

Resources Strengths Weaknesses Opportunities Threats

Culture and Preliminary Opening should The openness of Different target
mindset establishment of not be limited to courses and orientations in
a regional the opening of resources to the different subjects
innovation stadiums and whole world lead to low
pattern. The gymnasiums to through network policy response.
policy of three- communities or platforms can Different interest
region linkage of laboratories to promote global demands lead to
and the enterprises participation and insufficient
knowledge collaboration policy influence
Yangpu strategy
establish a
preliminary
regional
innovation
system
Digital Yangpu’s The correlation The priority
infrastructure industrial to Yangpu’s industries are
development existing industry emerging
policy during the is not strong, and industries with
12th five-year industry large space for
plan prioritizes selection is too development
the development similar to
of modern neighboring
design, science Hongkou and
and technology, Baoshan districts
financial
services,
software, and
information
services
Education Yangpu hosts At present, the Shanghai/
and skills more than openness of Yangpu ranks
one-third of regional first in the
(continued)
12 Shanghai Innovation System 201

Resources Strengths Weaknesses Opportunities Threats

Shanghai’s universities in intensity of
colleges and Yangpu District higher education
universities. It is still very weak resources and
has 87 national intellectual class
key disciplines. in China
More than
200,000 people
are employed in
the fields of
scientific
research and
technical
services
Institutions Yangpu hosts Compared with New initiatives Neither visible
14 scientific Haidian District, near university nor invisible
research which is also a campuses have a walls have been
institutes. In national lot of potential. fully torn down.
2012, it innovative pilot For example, a The demolition
established the urban area, there platform for of fences around
first “technology is still a big gap enterprise sports facilities
bank” in China to in the software science and and other
provide financial and hardware technology R&D symbolic
services for high- innovation and can be openings have
tech enterprises: entrepreneurship established near limited effect on
the SPD Silicon atmosphere Chanwu road of promoting
Valley Bank Tongji integration
University between
universities and
urban areas or
the diffusion of
innovation and
entrepreneurship
Quality of University road There is a With its goals of
living has made a shortage of small knowledge
successful family living Yangpu and the
attempt to create spaces, innovative city,
an urban personalized Yangpu should
environment lifestyle and pay more
suitable for the convenience attention to
creative class facilities. large-scale
Flexible working development and
environments are provide a
more suitable for humanized
the work and microspace
lifestyles of the environment that
creative class pays attention to
creating an
innovative
atmosphere
(continued)
202 H. Yan et al.

Resources Strengths Weaknesses Opportunities Threats

Research At present, Compared with A total of The key problem
infrastructure Yangpu District Haidian District, 10 square lies in the failure
has built which is also a kilometers of to effectively
20 science and national land resources convert
technology innovative pilot can be renovated universities into
parks, among urban area, to provide more innovation hubs
which seven are Yangpu is space for the and the failure to
national lacking spillover of fully realize their
university incubation university potential as
science and institutions and functions engines of
technology flexibility in its innovation
parks, software incubation
parks, and high- mechanisms
tech
entrepreneurship
service centers
Policy and Since the After more than Policy making is Evaluation of the
strategy beginning of the 10 years of a rational implementation
twenty-first implementation, decision based effects of
century, Yangpu overall on the knowledge
has pursued the development has advantages of Yangpu shows
knowledge progressed but science and that the
Yangpu strategy has not yet education innovation
and constructed achieved a resource density virtuous circle
an innovation qualitative has not yet
system based on breakthrough. formed and the
three-district There are still driving effect of
linkage (campus, some problems universities is
park, and in policy limited
community) implementation
Risk capital Compared with Growing wealth
Haidian District, in the middle
Yangpu lacks class will
financial capital improve
density opportunities for
broad investment
in private equity
and venture
capital
Regulation Since the Overall The government
beginning of the development has has been
twenty-first not yet achieved increasing its
century, Yangpu a qualitative support for
has pursued the breakthrough innovation
knowledge systems and
Yangpu strategy improving
and constructed measures
an innovation
system based on
three-district
(continued)
12 Shanghai Innovation System 203

Resources Strengths Weaknesses Opportunities Threats

linkage (campus,
park, and
community)
Market and After more than Implementation Yangpu can The innovation
demand 10 years of stalled by achieve a virtuous circle
implementation, differences in qualitative has not yet
knowledge target orientation breakthrough formed, and
Yangpu and the and demand, as with four universities’
three-district well as poor concrete driving effects
linkage strategy implementation countermeasures are limited
have made management. related to
certain This leads to including
achievements insufficient innovation
linkage and sources,
hinders the innovation
innovation direction,
ecosystem. innovation
University diffusion, and
innovation failed innovative
to play its atmosphere
envisioned role
Migration Due to policy The influx of Yangpu District There are four
reasons, innovation has a huge space bottlenecks:
Shanghai has resources is not for the Institutional
focused its sufficient. development of bottlenecks,
science and Yangpu should scientific and resource
education focus on linking educational bottlenecks,
resources in its enterprises, resources, capital
Yangpu District. people, and providing bottlenecks, and
Yangpu is the service platforms opportunities for talent
main carrier of to promote the the migration and bottlenecks.
Shanghai’s integration of settlement of Segmentation of
ambitions as a universities and innovative land and
global science urban areas talents, resources for
and technology innovative scientific
innovation center companies, and research is an
other innovative issue
resources
Bank loans The first There is still a
“technology big gap in
bank” in China to financial capital
provides density
financial services compared with
for high-tech other systems
enterprises (SPD
Silicon Valley
Bank)
Tolerance With the The key problem The creation of
and trust knowledge is the failure of students’
Yangpu and universities to entrepreneurial
(continued)
204 H. Yan et al.

Resources Strengths Weaknesses Opportunities Threats

innovative city fulfill their associations can
strategies, innovation promote
Yangpu will pay potential, so the exchange and
more attention to atmosphere of cooperation
large-scale tolerance and across disciplines
development, trust for and between
develop a innovation is not students and
humanized fully established alumni. This is
microspace conducive to
environment, and creating a strong
pay more entrepreneurial
attention to the atmosphere,
creation of an cultivating
innovative entrepreneurial
atmosphere ideas and
innovative
talents, and
forming
entrepreneurial
networks

12.4 Strategy and Implementation in Shanghai/Yangpu Region

12.4.1 Knowledge Yangpu Strategy

In 2003, the city management of Shanghai decided on the Knowledge Yangpu

development plan. The goal of the strategy is to enable the preliminary establishment
of a regional innovation pattern. The policy of three-region linkage formulated by
the Knowledge Yangpu strategy should also support this local innovation ecosys-
tem. The essence of three-region linkage is to build a benefit-sharing mechanism
among regional innovation actors and form an efficient regional innovation system.
Three-region linkage is based on three key sources of innovation. The first is
university campuses. Second are science and technology parks, which can be
platforms for innovation. Finally, the plan relies on gathering, sharing, and
integrating resources in public communities. Communities are the source of linkage
across all three areas.
At present, Yangpu District has built 20 science and technology parks, among
which seven are national university science and technology parks, software parks,
and high-tech entrepreneurship service centers. They include the Fudan University
Science and Technology Park and the Tongji University Science and Technology
Park. Chuangzhi Fang is the model community of three-district linkage.
Another key part of the Knowledge Yangpu strategy is that the district actively
promotes financial innovation services. In 2012, it established the first “technology
12 Shanghai Innovation System 205

bank” in China to provide financial services for high-tech enterprises—the Shanghai

Pudong Silicon Valley Bank. However, compared with Haidian District—another
national innovative pilot urban area—Yangpu is still far behind in areas like its
innovation and entrepreneurship atmosphere, its financial capital density, its number
and area of incubation institutions, and the flexibility of its incubation mechanisms.

12.4.2 Implementation of the Knowledge Yangpu Strategy

The implementation of all the various strategy targets in Knowledge Yangpu is quite
demanding. In practice, different management systems and the necessary coordina-
tion of interests have led to a lack of connectivity. As a result, the implementation of
the Knowledge Yangpu has not yet yielded the desired results. Researchers mainly
believe that actors’ different target orientations led to low responsiveness to policies,
competing interests limited policies’ influence, and different management systems
led to policy fragmentation. As a result, the innovation system set up by the
government has not been functioning efficiently.
Specifically, scholars like Zhang Renbiao believe that the main problem with
implementing the Knowledge Yangpu strategy is that the conflicts of interest among
various departments weakened the basis of cooperation. According to Yao Fang,
there are four bottlenecks: resource bottlenecks, capital bottlenecks, talent
bottlenecks caused by segmentation of land and scientific research resources, and
institutional bottlenecks caused by actors’ different value orientations, different
evaluation systems, insufficient docking platforms, and different cultural
atmospheres. According to Guan Yuanfa, the main problem is that the target for
linkage is too restricted since it is limited to the high-tech and knowledge-based
service industries. In addition, the path dependence of linking real estate and land
development has caused their failure to form an interactive relationship model of
symbiotic cooperation.
To sum up, the views of all scholars are reasonable, but the real comparative
advantage resource of Yangpu is still its universities and its core innovation driver is
also its university. Therefore, the key problem lies in the failure to effectively
implement the universities as the subject of innovation and the failure to fully release
the potential of universities as the engine of innovation.

12.5 Conclusions and Lessons Learned

Yangpu District is designed to be

• A source of knowledge innovation and a leading area for emerging industries

• An agglomeration of innovation and entrepreneurship
• A pilot zone for the service economy
• A high-end talent gathering area
• A higher education reform experimentation area
206 H. Yan et al.

• An advanced culture promotion area

• And a quality-of-life demonstration area

In January 2010 at the National Science and Technology Conference, Yangpu

District of Shanghai was named as a “National Innovative Pilot City Area.” This is
the full affirmation of Yangpu’s unremitting efforts over the years to innovation-
driven and to become demonstrative regeneration pathway for old industrial city
areas.
With its credo of “innovation-driven transformational development,” Yangpu
relies on its rich regional scientific and educational resources and relatively perfect
regional innovation service system. It stands on the strategic height of enhancing
independent innovation ability and building an innovation-oriented country,
strengthening the construction of national innovation system and regional
innovation system, and promoting the innovative development of the city.
The core of the strength of the Shanghai/Yangpu innovation system is based on
the following key factors:

• Creation of a virtuous circle

• Degree of linkage throughout the system
• Intensity of educational facilities
• Educational level of the population
• Employment structure
• Innovation and entrepreneurship atmosphere
• Financial capital density
• Data and area of incubators
• Flexibility of the incubation mechanism
• Openness
• Degree of spatial integration

According to this analysis, three main points for Yangpu’s/Shanghai’s success

compared to other innovation regions are the degree of linkage across systems, the
education level of the population, and the degree of spatial integration. In the future,
Yangpu will focus on five functional zones to build its innovative ecosystem.

1. Optimizing district planning for innovation

This first functional zone focuses on optimizing the layout of the business district
in the south. Specifically, Yangpu should upgrade the level of commerce around
the central island and build a city-level business landmark. It should also build up
the northern innovation world and enhance its international orientation.
2. Constructing science and technology parks based on the knowledge economy
circle around Tongji University
This item focuses on the construction of a state-level industrial base with special
R&D and design services in the ring around Tongji University. It would also
entail the development of other science and technology parks based on that
model. These include parks at Fudan University focused on electronic
12 Shanghai Innovation System 207

information and new materials, at the Shanghai University of Finance and

Economics focused on science and technology financial services, at the Univer-
sity of Shanghai focused on optical mechatronics, at the Shanghai University of
Electric Power Science focused on new energy and smart grids, and at the
Shanghai University of Physical Education focused on sports, leisure, and health.
3. Making New Jiangwan City into an international, intelligent, ecological
community
This project supports the key functions an international science and technology
industrial park and demonstrates a low-carbon concept. This measure should
accelerate the construction of energy-saving buildings, green transportation,
and low-carbon communities. It should also increase the number of international
public facilities for services like education and medical care and build interna-
tional quality-of-life demonstration zones.
4. Constructing a Dalian Road Cluster Area
The cluster will be a gathering place for the regional headquarters, R&D centers,
and marketing centers of multinational corporations and leading domestic
enterprises. The location near Pudong connects this cluster to the Yangtze
River Delta and therefore all of China and the world.
5. Constructing a Yangpu Riverside Development Zone
This project builds on Yangpu’s century-old industrial heritage, promoting
projects like the World Expo Watergate, Fisherman’s Wharf, the China Shanghai
International Fashion Center and others. This will launch a global creative
economy city project and a modern service industry development belt featuring
spaces for innovation and creativity, science and technology, business, tourism,
and leisure. It will include exhibition areas and forums.

Yangpu provides four key lessons for other regions. First, cultivate the innovation
ecosystem of core actors like governments, innovation institutions, and universities
to develop a source of innovation. Second, give full play to the advantages of core
members and define the direction of innovation. Third, promote the integration of the
system with other spaces, especially the spatial integration of universities and urban
areas, to spread manufacturing innovation. Finally, create an environment suitable
for the entrepreneurial class and create an innovative atmosphere.

Strive to Get on the Fast Track

Supported by the Municipal Science and Technology Commission, a functional
service platform for transfer and transformation and a database of colleges’ and
universities’ scientific and technological achievements will be established to support
the analysis and evaluation of achievements and value-added cultivation services.
The capacity of university science parks to commercialize scientific and technologi-
cal achievements will be improved to accomplish the “last mile” of
commercialization.
208 H. Yan et al.

Make Good Use of Financial “Boosters”

Given the problems high risks, difficult evaluation, and a long cycle of early
investment in scientific research achievements, Yangpu is setting up special plans
to attract social institutions to participate in the initial investment. It is also
supporting university science and technology parks to establish joint guiding funds
for project equity investment, enhancing the parks’ ability to cultivate high-quality
early stage projects. A fund of RMB 300 million will be installed to build a life-cycle
investment and financing service chain from idea to industry. Furthermore, a science
and technology innovation board will be established in close alignment with the
Shanghai Stock Exchange to pilot the registration system, speed up sorting, and
accurately identify key enterprises.
Shenzhen Innovation System
13
Yiming Yang and Ludovit Garzik

Abstract

Shenzhen is one of the fastest-growing cities in human history. In 40 years,

Shenzhen has grown from a rural village to a major metropolis and innovation
hub. This chapter explores Shenzhen’s innovation ecosystem, infrastructure,
policies, and strategies. The examination suggests that the special economic
zone is an effective strategy, experimenting with regulations and bypassing
bureaucracy to create a space for smart people with great ideas.
Importantly, Shenzhen first achieved modern industrialization and then
transformed into an innovation hub. Its industrial power enabled Shenzhen to
achieve “Shenzhen speed”: If you have a smart idea in the morning, you are likely
to have a prototype in your hands in the evening. This speed separates Shenzhen
from other global innovation hubs.
Today, Shenzhen is keen to create an academic environment where knowledge
owners are encouraged to translate their knowledge into business ventures.
Shenzhen is also the base of many major venture capitalists. Shenzhen has
demonstrated that advanced industry plus knowledge owners plus venture
capitalists can achieve great results in innovation.

Y. Yang (*)
Country Manager China at Sedo.com, Dongguan, China
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 209
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_13
210 Y. Yang and L. Garzik

13.1 Shenzhen and Its Historic Development

Until the end of the 1970s, Shenzhen and the whole Pearl River Delta around were
farmland. Shenzhen was a rural community with a population around 20,000 people.
Compared to neighboring Hong Kong, the economic situation was very weak, and
people tried to escape for better jobs into the British-led mega-city. Chinese
authorities secured the border tightly and anyone trying to swim across the border
river would be risking his or her life.
In 1979, Deng Xiaoping visited the town as the new Chinese leader and asked
why it was necessary to hurt people who take a risky swim for a better life. He argued
that it would be much wiser to develop the economy on the Chinese side of the
border so people from Hong Kong would be the ones trying to get across the border.
This was the birth of one of the first special economic zones in China, which was
followed by many others. The success of the special economic zone was driven by a
large and cheap labor force, the financial capital of neighboring Hong Kong, and a
strong seaport for export.
In the first years after its designation as a special economic zone, Shenzhen
attracted a great deal of foreign direct investment and its population rose rapidly.
Today, its population is estimated around 20 million people—a 1000-fold increase
over 40 years.
Income levels rose similarly to population, and Shenzhen’s per capita income
today is the highest in China. Forty years after its formulation, Deng Xiaoping’s
mission was accomplished. Shenzhen’s GDP surpassed Hong Kong’s in 2019.
Today, Shenzhen offers more jobs than its neighbor and, according to some
statements, a better quality of life.

13.2 Cultural Characteristics in the Shenzhen Innovation

System

At the front gate of the Shenzhen Municipal Committee is a statue of a bull using its
full strength to drag a gigantic dry tree root out of the ground. The root represents all
the ideological constraints that restrict progress. The bull symbolizes the people of
Shenzhen, who sweep away these restrictions and move toward progress with their
full strength.
Full strength toward progress might seem an obvious approach today, but in
1970s, China the mainstream culture was consumed by the ideological conflict
between communism and capitalism. People generally thought capitalism was
equivalent to evil. The famous slogan at that time was “I would rather have the
grass of socialism than the seeds of capitalism.” Meanwhile, in Shenzhen, the slogan
is “time is money, efficiency is life.”
It would be hard to imagine the special economic zones strategy working if
China’s culture had not shifted from ideology to productivity. In Shenzhen’s case,
implementation of the new culture started with the selection of new management. In
January 1979, Yuan Geng—the one who coined the phrase “time is money,
13 Shenzhen Innovation System 211

efficiency is life”—was assigned to establish a pilot project for an industrial zone, the
Shekou Industrial Park. In April 1979, Deng Xiaoping’s policy to establish China’s
special economic zones was drafted on the base of the Shekou Industrial Park.1
Shenzhen was the first special economic zone in China to gain legislative power.
This power provides Shenzhen with a lot of options other regions do not have. For
example, Shekou law firm was the first law firm in mainland China. Shenzhen is the
first city in mainland China to implement a labor contract system. Shenzhen had the
direct election of a village chief or mayor with Shenzhen Dapeng town’s “two-vote
system.” Shenzhen’s big-ministry reform in 2009 was the most vigorous institutional
reform among the governments of major cities in China.

13.3 Institutional Players in Shenzhen

As stated, 40 years ago, Shenzhen was been a fishing village with less than 20,000
inhabitants. To build up to today’s 20-million-person urban area, regional manage-
ment had to establish every institution from scratch. Shenzhen turned the disadvan-
tage of having no institutional system at all into an advantage over regions with long
histories that would have to drag along unnecessary but entrenched institutions. In
this way, Shenzhen leapfrogged its international peers by constructing modern and
efficient institutional infrastructure. Educational institutions, including universities,
are part of a critical regional infrastructure and deserve special attention.

Knowledge Institutions
Knowledge institutions, especially universities, developed rapidly and dynamically
in Shenzhen and its neighboring cities. Today, the university infrastructure in the
region comprises approximately 15 high-class, internationally acknowledged
colleges and universities. More are established every year. The most important
knowledge institutions are as follows:

University/College Established Number of students (data year)

Shenzhen University 1983 35,000 (2019)
Shenzhen Polytechnic 1993 21,000 (2019)
Shenzhen Institute of Information Technology 2002 16,000 (2019)
Southern University of Science and Technology 2009 6000 (2018)
Shenzhen Technology University 2019 5000 (2020)

Shenzhen University
The installment of one of the first special economic zones in China forced the
regional administration to develop critical infrastructure. Shenzhen University was

1
Min Ye (2014). Diasporas and Foreign Direct Investment in China and India. Cambridge Univer-
sity Press.
212 Y. Yang and L. Garzik

an early sign of progress that has been acknowledged by many heads of state since its
establishment. The university is funded by the city administration of Shenzhen,
which provides it the flexibility to grow rapidly both in terms of faculty and student
numbers and in terms of quality and international rankings. The university’s budget
of around USD750 million in 2020 puts it in the top league of international
universities, especially for its current size of around 35,000 students.

Shenzhen Polytechnic
Shenzhen Polytechnic offers graduate courses and vocational training in a broad
variety of disciplines. This institution’s interdisciplinary exchange between deep
technology and fine arts is typical of the large education institutions in Shenzhen.
Employing around 1000 teachers for 20,000 students, Shenzhen Polytechnic has a
high student–teacher radio. Although established relatively recently in 1993, it was
already earning awards and prizes in the early 2000s like the first prize of national
education achievement. Chinese education institutions are, like those in other Asian
countries, assessed by the labor market’s interest in their students, called the “take-
up rate.” Shenzhen Polytechnic has a 95% take-up rate, which makes it attractive for
students and employers alike.

Shenzhen Institute of Information Technology

This Institute provides full-time higher learning programs organized in ten schools.
It was established due to the increasing need for IT specialists after the turn of the
century. Therefore, it focuses on providing human capital to Shenzhen’s core
industry. Due to rising demand in these areas, further expansion of the Institute’s
activities is expected in coming years.

Southern University of Science and Technology

The Southern University of Science and Technology was established in 2011 and
has had steep growth in recent years due to regional demand for skilled workers and
impressive corresponding investments from regional authorities. This university is a
research institution as well as an education institution and has already attracted a
number of world-class researchers. The University’s research has pushed it up in
international rankings in just a handful years since its establishment.

Shenzhen Technology University

The Shenzhen Technology University is a university of applied sciences that was
founded in November 2019 in the Pingshan District of Shenzhen. Its specialization
on engineering and design is due to the exploding demand for skilled workers from
local industries involved in high-tech planning, designing, and manufacturing for the
world. Shenzhen is the hot spot for global production of mobile phones, tablets,
computers, and drones, complemented by an equally strong software industry. The
Technology University’s focus on students’ direct market access is expressed in new
modes of education like the combination of university education, enterprise
internships, and engineering projects. This focus will continue to sharpen: The
Technology University plans to establish six new colleges to meet the quality and
13 Shenzhen Innovation System 213

quantity of labor required in the Shenzhen Action on Made in China 2025 and its
selected fields of advanced manufacturing and technology.
There are additional institutions in the tertiary sector in Shenzhen, most of them
subsidiaries of other Chinese education institutions like Shenzhen Graduate School
of Peking University, Shenzhen Graduate School of Tsinghua University, the
Chinese University of Hong Kong in Shenzhen, Shanghai Jiao Tong University
Antai College, and the Harbin Institute of Technology in Shenzhen. Other
institutions in this sector operate in specific technologies or branches. These include
the Shenzhen Radio and TV University, Shenzhen Institute for Information Tech-
nology, Shenzhen Institute of Advanced Technology, and the Shenzhen MSU-BIT
University.

13.4 Shenzhen Innovation System SWOT Analysis

Resources Strengths Weaknesses Opportunities Threats

Culture and There is a strong Shenzhen has an The focus on The large home
mindset preference for introverted global markets market will
market social culture will open society reduce the speed
implementation and limited to outside of opening and
in society and openness to cultural can be an
business. Culture other influences advantage for
of chàbùduō: nationalities other regions to
“That is working develop faster
quite well for the
moment”
Digital Shenzhen is the Infrastructure The top-down The rapid
infrastructure first city/region usage is management of development of
to accomplish restricted by infrastructure the greater area
full 5G coverage. government investments could lead to
It has a high regulations enforces speed of overexpansion
commitment to implementation
all kinds of
digital and
physical
infrastructure
Education High-quality The rhythm of There is an The pace of
and skills education of the education is still opportunity for change in
next generation very traditional higher education education may
is the highest and is organized attainment be too slow
priority in by discipline expansion in the
Shenzhen’s large rural
society population
Institutions Shenzhen has a Shenzhen is Decision makers The nearby cities
modern and lacking some are focused on of Guangzhou
efficient institutions like establishing and Hong Kong
(continued)
214 Y. Yang and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

institutional universities due subsidiaries of might draw
infrastructure to its short major national away academic
history and international talent. Both
universities like Guangzhou and
Peking Hong Kong have
University far more
Shenzhen, developed
HSBC Business institutional
School, and ecosystems
Tsinghua-
Berkeley
Shenzhen
Institute
Market and The local market Rising property Shenzhen will be Only 37% of the
demand size of prices in recent the core of the residents in
USD381.40 years have Greater Bay Shenzhen are
billion (2019) is weakened Area (GBA). The permanent
increasing by 7% consumer Greater Bay residents, which
annually. spending power. Area is a plan puts Shenzhen at
Consumers are Despite the per that integrates risk of
quick to adopt capita disposable 11 Chinese cities population
new income ranking includes Hong outflow if it loses
technologies, number four Kong and Macau its attractiveness
products, and among Chinese into an urban
services cities, area with a
Shenzhen’s total regional GDP of
retail sales only USD1.6 trillion
rank seventh (2018), making it
the 12th-biggest
economy in the
world
Migration The population There is a lack of As more Shenzhen’s
of well-educated international Shenzhen-based industry is
and skilled migration to the companies concentrated on
young Chinese region; it is still become tech sectors. The
people in the not on the radar multinational level of other
Shenzhen area is of smart corporations, the supporting
vast and internationals city’s services (legal,
unbeaten looking for new attractiveness to health care,
worldwide. A opportunities international education, etc.)
great deal of talent should for expats is
international continue to much weaker
Chinese increase. The than other
migration to new residence Chinese cities
Silicon Valley is permit regulation like Beijing or
attracted back to also makes it Shanghai
China by the easier for expats
favorable to immigrate
working and
living conditions
offered by
(continued)
13 Shenzhen Innovation System 215

Resources Strengths Weaknesses Opportunities Threats

national and
regional
authorities
Quality of The city offers Real estate price New urban Shenzhen is
living one of the best in Shenzhen is development running out of
infrastructures in among the projects are land. Shenzhen
the world with highest in China under has a land area of
well-planned construction, 2050 km2
business, including the compare to
residential, and Qianhai Bay Beijing
park areas and a area. Those (16,808 km2)
vast public projects will and Shanghai
transportation further improve (6340 km2).
network. Buses the infrastructure Shenzhen is the
and taxis are in Shenzhen. A smallest first-tier
fully electric. 5G network and city in terms of
Shenzhen has electric car land area, which
cleaner air and charging stations poses a
lower rates of are already challenge for
traffic than most implemented in urban planners
other Chinese Shenzhen, which
megacities makes the city
likely to be one
of the first to
achieve
autonomous
transportation
Research Shenzhen Compared to The Shenzhen Shenzhen might
infrastructure became one of Beijing and government will face the
the four Shanghai, spend USD7.3 challenge of
comprehensive Shenzhen is billion for attracting top
national science significant 12 new science researchers due
centers in China lacking in and technology to the lack of
in 2020. top-level infrastructure local universities
universities and projects. Those and institutes
The major institutes projects include
facilities in materials
Shenzhen are genome,
Pengcheng precision
Laboratory medical imaging,
(provides 1000 phase ii of the
petaFLOPS of national center
AI computing for
power), supercomputers,
Shenzhen Bay an Integrated
Laboratory Particle Facility
(focuses on life Research
sciences), and Institute,
quantum artificial
information intelligence, and
(a science
(continued)
216 Y. Yang and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

research digital economy
platform) laboratories
Bank loans Shenzhen has It can be very The Shenzhen Regulators are
many public, difficult to get a government has moving toward
private, and bank loan. a lot of programs tighter
international Banks typically targeting the tech regulation of the
banks. Local require industry. The financial sector.
banks like the guarantees like government That could
China Merchants property, gives direct potentially
Bank and Ping qualified funding or increase
An Bank are the purchase orders, guarantees for requirements for
top-ranking or accounts low-interest bank loans in certain
banks in China. receivable loans. FinTech industries
They have a companies are
variety of loan exploring
services opportunities for
targeting SMEs offering small-
sum loans based
on the
company’s or
funder’s credit
score
Legal High-quality Advisers focus Advisers may Due to the large
advisers advice is on Chinese move into risk Chinese
available, customers, and projects domestic market,
especially for there are themselves by opening to
patent issues complicated opening their foreigners will
procedures for contact be slow
foreigners portfolios to
founders
Policy and Shenzhen has a The areas Because of its The Shenzhen
strategy clear policy plan outside the Pilot good track Pilot Reforms
for the next Reforms Plan record of plan Plan is primarily
5 years, called might be completion, the focused on
the Shenzhen neglected private sector’s further opening
Pilot Reforms confidence in the the market,
Plan 2020 to Shenzhen especially
2025 government is opening the
high. This could capital market to
further improve foreign
efficiency in investors. The
driving resources uncertain
toward the international
targeted areas political
environment
could pose a
threat to the
Shenzhen Pilot
Reforms Plan
2020–2025
(continued)
13 Shenzhen Innovation System 217

Resources Strengths Weaknesses Opportunities Threats

Risk capital Shenzhen has a Due to its high Increasingly, The supply of
vast amount of dependence on successful capital is highly
VC capital, Chinese capital, founders become dependent on
mostly from the economic VCs. This China’s internal
Chinese cycle in China creates an economic cycle.
investors. Funds greatly affects upward growth There is
are denominated the supply of risk trajectory in relatively limited
in RMB. capital in Shenzhen’s VC exposure to
Shenzhen hosts Shenzhen ecosystem international
one of two stock capital
exchanges in
mainland China.
Hong Kong’s
Stock Exchange
is also within the
reach
Regulation Shenzhen is a Shenzhen is a New IPO rules The Shenzhen
special economic provincial-level enable startups to Pilot Reforms
zone. The local city under the be listed on Plan
regulators have jurisdiction of Shenzhen’s (2020–2025)
the authority to the Guangdong ChiNext board providing the
and a good track province (unlike with a Nasdaq- city with larger
record of Beijing or style process autonomy to
adopting Shanghai which implement
innovations. In are under the reforms in key
Shenzhen’s free central areas. This is a
trade zone, government). stress test for
enterprises and Therefore, policymakers
individuals can Shenzhen’s and may fail
enjoy some of policymakers
the lowest tax could be limited
rates and the in terms of their
most flexible level of
regulations autonomy
Tolerance Shenzhen ranks The use of The Greater Bay Increasing real
and trust as the most English is Area project estate pricing
tolerant city in limited requires may drive
Mainland China. compared to Shenzhen to be a people to move
The city is built Shanghai or global city. It is away from
by immigrants Beijing. For expected that the Shenzhen or
from all over example, most city will make a may make it
China. It is often VC events are greater effort to difficult to settle.
referred to as the held in Chinese increase its High rental costs
city with no only international could be a
locals. Shenzhen attractiveness challenge for
also has a startups
sizeable expat
community. The
city’s slogan is
“Once you
arrive, you’re a
Shenzhener”
218 Y. Yang and L. Garzik

13.4.1 Strengths

Human Capital and Quality of Living

The major strength of Shenzhen is the availability of well-educated human capital.
The numbers are impressive: Shenzhen itself and the area around it—the Pearl River
Delta and cities like Guangzhou or Dongguan—comprise approximately 120 million
people. Around 700,000 engineers leave the education system every year in China,
and many are attracted to Shenzhen due to its dynamic economic development and
its favorable quality of living with much cleaner air and lower rates of traffic than
most other Chinese megacities.

Policy, Strategy and Regulation

Over the past 40 years, there has been a straightforward line of the Pearl River
Delta’s development into a Mecca of economic prosperity. This development has
pulled many other regions in China in its slipstream. Defining the area as of the first
special economic zones made it possible to navigate expansion through volatile
markets. Other regions like Europe with tight competition regulations cannot operate
and control development with similar effects.

Risk Capital
We categorize risk capital as high-risk funding available to early stage companies.
This includes angel investors, microlenders, seed funds, grants, and venture capital.
Risk capital is crucial to the development of new technologies and business models.
Initially, the China’s risk capital came exclusively from government-led projects.
For incidence, the first venture capital fund in China is China New Technology
Venture Capital Corporation, founded in September 1985. On the local level, risk
capital is led by the provincial governments.
Shenzhen Capital Group Co., Ltd. was founded in 1999 by the Shenzhen munici-
pal government. By the end of May 2020, the Shenzhen Capital Group had invested
1107 projects, with a total investment amount of RMB 50.9 billion (equivalent to
USD7.2 billion). Among those investments, 164 companies are listed in 16 different
capital markets worldwide and 304 projects have reached exit targets
(including IPO).
Shenzhen Venture capital scene (with capital size data available):

Founded Capital size

IDG Capital 1992 USD20 billion
Shenzhen Capital Group 1999 USD51 billion
Fortune Venture Capital 2000 USD4.4 billion
Capital Today 2005 USD2.5 billion
Northern Light 2005 USD4.5 billion
Oriental Fortune Capital 2006 USD2.9 billion

The supply of the risk capital in Shenzhen comes mostly from Chinese investors
and funds denominated in RMB. This limits the risk of foreign investment
13 Shenzhen Innovation System 219

withdrawal. However, due to its high dependence on Chinese capital, the economic
cycle in China has a major impact on the supply of risk capital in Shenzhen. These
cycles are referred to as capital summer and capital winter.

Digital Infrastructure
Digital infrastructure is a strong driver of hardware and software business in
Shenzhen and neighboring Guangzhou and Dongguan. In September 2020,
Shenzhen became the first Chinese city with full 5G network coverage. Around
46,000 5G stations have been implemented, equivalent to the number of installations
in all of Europe at the time.
Digital infrastructure is as important as financing or human capital, accelerating
all digital transformation processes. 5G is not just for selling new smartphones; it
allows for an expanded range of applications. If a digital business startup needs a
certain bandwidth connected to sufficient processing power, its founders will have to
decide where to scale such a venture. Digital infrastructure will not be the only
criterion, but any region without sufficient infrastructure will excluded from the list.

Market and Demand

In 2019, Shenzhen surpassed Hong Kong with a total GDP of RMB 2.69 trillion
(USD381.4 billion). With 13.44 million residents, Shenzhen’s per capita GDP is
RMB 203,489 (USD29,498). Per capita disposable income in Shenzhen was RMB
62,522 in 2019, which is a 8.7% increase compared to 2018.
In the consumer sector, Shenzhen reached RMB 658.29 billion (USD100.5
billion) in retail sales in 2019, putting it in seventh place among Chinese cities.
The average age of residents in Shenzhen is 32.5 years of age, and consumers in
Shenzhen are generally open to trying new technologies and new ways of shopping.
For example, Shenzhen is leading the world in electric vehicle adoption. People no
longer visit stores for daily necessities because that kind of shopping is mostly done
online. Instead, they go out shopping for experience, novelty, and comfort.
In the future, Shenzhen is planned to be the core of the Greater Bay Area (GBA).
The GBA is a plan that integrate 11 Chinese cities including Hong Kong and Macau
to create an urban area with a regional GDP of USD1.6 trillion (2018), making it the
12th biggest economy in the world.

13.4.2 Weaknesses

Institutions
The development of Shenzhen’s institutional system has not kept pace with its
economic development in the last 40 years. Knowledge-driven institutions like
universities are especially lacking in the ecosystem. Decision makers try to over-
come that weakness by establishing subsidiaries of major national and international
universities like the Tsinghua-Berkeley Shenzhen Institute.
220 Y. Yang and L. Garzik

Human Capital
The pool of well-educated, skilled young Chinese people in the Shenzhen area is
vast and unbeaten worldwide, but there is a lack of international migration to the
region. Shenzhen is still not on the radar of smart internationals looking for new
opportunities. A great deal of international migration to Shenzhen is born out of the
Chinese diaspora in Silicon Valley. Many individuals are attracted back to China by
the favorable working and living conditions offered by national and regional
authorities.

Financial Capital
Even if Shenzhen managed to surpass Hong Kong in terms of GDP, it is still highly
dependent on capital from that neighbor. Most of Shenzhen’s daily value-chain
transactions in production and services are financially based across the river in
Hong Kong.

13.4.3 Opportunities

Migration and Quality of Living

Migration is not only a weakness today but an opportunity for tomorrow. Shenzhen’s
high quality of living is just not familiar to the international expat audience. National
migration to the area of Shenzhen has been consistently high in the last 40 years.
However, international migration–including opportunities to learn from other
innovation cultures–is still low. The last year has seen early steps toward interna-
tional migration with the policy of attracting the diaspora living in regions like
Silicon Valley to return to China by offering them an attractive package that ranges
from low real estate loans to venture capital and government liabilities.
Despite heavy pressure on the environment due to the fast economic expansion of
the region, there are success stories of balance between growth and protection. After
the national declaration of Shenzhen as a model city for environmental protection in
the end of the 1990s, it received international attention. In 2002, Shenzhen was
added to the United Nations Environment Program (UNEP) Global 500 Roll of
Honor. When crossing the border from Hong Kong to Shenzhen, one might notice a
surprising number of electrical vehicles on the roads, from buses to taxis and private
cars. Shenzhen was the first city in the world to change its bus fleet fully to electrical.
The decision was made in 2014, and 4 years later, the mission was accomplished. On
the way in 2016, the responsible Shenzhen-based company BYD (Build Your
Dreams) also managed to surpass Tesla as the leading manufacturer of electrified
cars worldwide.

Culture/Mindset and Education

China has developed its culture in education and research throughout recent
centuries. There is hardly another global region with a comparable history in the
process of educating and selecting experts for different kinds of duties in business
and public administration. It is a very competitive system that encourages young
13 Shenzhen Innovation System 221

people to gain knowledge in the expectation of being ranked against their peers from
the first moment they join the system of education and research. This creates a focus
on knowledge that may restrict young people’s energy for knowledge implementa-
tion. The next opportunity will be to develop more youth who are motivated to create
their own businesses. Still, there is a fair amount of market orientation in the business
world that can be an accelerant for young people to try entrepreneurship themselves.

13.4.4 Threats

Finance Capital
As stated in the weaknesses section, a most of the venture and loan capital for
Shenzhen’s whole production value chain is borne by banks and finance bodies in
Hong Kong. This has become a threat due to frequent flare-ups of political instabil-
ity. Hong Kong’s unclear status is a permanent threat to international investors, who
may look elsewhere and put their investments in alternative regions like the USA,
Europe, or Africa.

Advisers
Due the lingering conservative culture in business life and the strict separation of
disciplines, advisers like lawyers, patent lawyers, and accountants stick to their
traditional roles in the value chain. They provide professional services in a bureau-
cratic administrative system, but they have not been developing into modern roles
where they become part of a venture’s risk model by providing their contact
portfolios.

13.5 Shenzhen Innovation System Strategy

and Implementation

Shenzhen has a clear policy plan for the next 5 years, called the Shenzhen Pilot
Reforms Plan (2020–2025). The plan outlines policy on 40 items, categorized under
six different sectors. These include the market-oriented allocation of factors, the
business environment, technological innovation, further opening of the Chinese
market to foreigners, the public service system, environmental protection, and
urban space governance.
The major timeline of the plan is as follows:

2020
Introduce several major reform measures in areas like the market-oriented alloca-
tion of factors, improving the business environment, and overall planning for the
use of urban space. Draw and implement the first comprehensive list of items to
be authorized.
222 Y. Yang and L. Garzik

2022
Major progress in institutional development in all areas. Develop replicable
methodology on major institutional achievements.
2025
Achieve landmark results in reforms in key areas. Complete pilot reforms and set
a nationwide example for institutional development.

The Shenzhen government is responsible to implement the following reforms.

The reform plan includes six sectors outlined below:

13.5.1 Market-Oriented Allocation of Factors

• Explore potential innovation in the land management system.

• Improve the labor mobility system to suit the characteristics of megacities.
• Improve the domestic issuance of shares or depository receipts (CDR), list
innovative enterprises on the Shenzhen Stock Exchange.
• Set up a FinTech innovation platform based on the Institute of Digital Currency at
the People’s Bank of China in Shenzhen. Support the launch of a closed pilot test
of the digital RMB and then promote its development, application, and interna-
tional cooperation.
• Further improve the technology transfer system. Reform the way scientific
research projects are established and organized. Establish market-oriented
mechanisms for selection, funding allocation, and evaluation in scientific and
technological projects.
• Accelerate the development of the data market. Take the lead in improving the
data property rights system, explore new mechanisms for protecting and utilizing
data property rights, and establish a data privacy protection system.
• Improve market factor evaluation mechanisms. Explore the mechanisms for the
market’s evaluation of factors of productions’ contributions and then remunerate
according to contribution. Increase the remuneration of workers.

The Business Environment

• Further improve the fair and open market environment. Drawn up a list of
measures to relax market access based on the policy tool “National Unified
Negative List for Market Access.”
• Establish a benchmark for intellectual property rights protection.
• Improve the administrative system and legislation for special economic zones.

Technological Innovation
• Optimize and improve how resources are allocated and the managed.
• Establish an internationally competitive talent recruitment system.
13 Shenzhen Innovation System 223

Further Opening of the Chinese Market to Foreigners

• Increase institutional openness. Support closer cooperation between Guangdong,
Hong Kong, Macao, and the Greater Bay Area through rules of engagement. Give
full play to the role of the China (Guangdong) Pilot Free Trade Zone in Shenzhen
and the Qianhai (Shekou) Pilot Free Trade Zone. Comprehensively deepen
reform and expand economic opening, and produce more institutional innovation
that can be replicated.
• Open the financial industry to the outside world. Support qualified domestic
enterprises in Shenzhen as they list overseas for financing. Carry out trials to
integrate domestic and foreign currencies into cross-border capital pools. Support
Shenzhen as it takes the lead in promoting RMB internationalization and improv-
ing its foreign exchange management system.

The Public Service System

• Innovate the medical service system. Support the clinical application of cutting-
edge drugs in Shenzhen. Explore ways to improve cross-border medical services,
and establish standards for medical personnel training and hospital accreditation
in line with international standards.
• Explore ways to open the education sector to foreign investors, by enabling high-
level cooperation between Chinese and foreign entities and professionals
involved in the administration of schools and universities.

Environmental Protection and Urban Space Governance

Authorize Shenzhen to implement the reform of the environmental assessment
system and formulate a list of key projects that have to carry out such environmental
assessment, thus excluding from the said list the construction projects that shall not
be subject to the abovementioned assessment.

Shenzhen Action on Made in China

The Action on Made in China 2025 plan was published by the central Chinese
government in Beijing mid-2019. It builds on earlier plans, starting with the instal-
lation of one of the first Special Economic Zones in China in 1979 (see history at the
beginning of this chapter). The five-year’s goal is to maintain and expand
manufacturing success stories, and it targets the continuation and expansion of
foreign direct investment in the region. The plan also complements Shenzhen’s
links to Hong Kong territory and the whole development of the Greater Bay Area,
which comprises cities like Shenzhen, Hong Kong, Guangzhou, and Dongguan.
Every year, the Audit Bureau of Shenzhen Municipality publishes the Shenzhen
Annual Performance Audit Report. The KPI system measures the performance of
each government department and district government. The key objectives accom-
plishment count for 70% of scores and citizens’ satisfaction rates count for 30%.
100% is the best result. The key objectives include economic goals, market regula-
tion, social management, and public services. Citizens’ satisfaction rates are
measured by a questionnaire, feedback devices at service points, and third-party
consulting companies.
224 Y. Yang and L. Garzik

13.6 Lessons Learned from Shenzhen Innovation System

Shenzhen is a city of the future. It is a place where future technologies are

implemented in hardware and software. Shenzhen has a vibrant ecosystem and
shares one key ingredient with another famous global ecosystem in Silicon Valley:
It is a magnet for intellectuals and rebels, and—even more importantly—for rebel-
ling intellectuals.
Shenzhen’s status as a special economic zone starting in 1979 created a space for
smart people who had great ideas but were limited in their options to implement
them by regulation and bureaucracy. They felt more freedom in Shenzhen and
rushed into the city in large numbers from all over China. The setting is quite similar
to Silicon Valley, where adventurers and social rebels poured into the region starting
with the gold rush in the mid-19th and continue to flow in today.
“Shenzhen speed” is another reason for the impressive success of the regional
innovation ecosystem. Processes that take weeks in other regions can be accom-
plished in days or even hours in Shenzhen. If you have a smart idea in the morning,
you are likely to have a prototype in your hands in the evening—that is the essence
of Shenzhen speed. There is no other global region that can meet this level of
dynamism.
The third lesson learned is once more a part of the ecosystem that Shenzhen
shares with Silicon Valley: its universities. Shenzhen universities are far from the
ranking and international reputation of Silicon Valley universities like Stanford, but
they share two major ingredients in the secret sauce of successful innovation
ecosystems. One is the campus setting in a palm tree-dominated park more reminis-
cent of holiday destinations than a university campus, which invites students to stay
longer than strict requirements would. The other even more important ingredient is
the engagement and motivation of knowledge owners like university professors and
assistants. They are invited to hold shares of the companies founded based on their
research. In many regions, university professors owning shares of companies based
on their research would be regarded as a conflict of interest. Maybe it is, but if there
is no conflict there is also no interest and that is the worst option.
Silicon Valley Innovation System
14
Georg Fuerlinger and Ludovit Garzik

Abstract

Silicon Valley plays a key role in developing innovative technologies and paving
the way for new global trends. The region remains, for now, the undisputed leader
of the global startup and innovation scenes. So how did this special innovation
ecosystem develop, and which factors were at play in turning Silicon Valley into
the epicenter of startups and new technologies? Who are the main actors in the
region, and how do they contribute to fueling innovation and entrepreneurship?
This chapter aims to shed light on Silicon Valley’s unique history and its
central role in the global technology community. A special focus is given to
cultural characteristics fostering collaboration and experimentation, as well as the
social networks that underline the emergence and development of startups and
new technologies. The SWOT analysis assesses the region’s strengths and
weaknesses in a structured way and discusses the opportunities and threats that
could fuel or jeopardize Silicon Valley’s leading role in global innovation. The
lessons learned highlight some of the phenomena that underlie the regions
entrepreneurial strengths and provide ideas for unlocking similar innovative
potential in other regions around the world.

G. Fuerlinger (*)
Advantage Austria, Open Austria, San Francisco, CA, USA
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 225
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_14
226 G. Fuerlinger and L. Garzik

Fig. 14.1 Key industries and leading companies in Silicon Valley. Source: Own depiction, based
on Heaton et al. 2019 (Heaton S, Siegel D and Teece DJ (2019) “Universities and Innovation
Ecosystems: A Dynamic Capabilities Perspective.” Industrial and Corporate Change 28 (4):
921–39. https://doi.org/10.1093/icc/dtz038)

14.1 Facts and Figures Silicon Valley

Silicon Valley is often regarded as the global epicenter of disruptive innovation.

Over the last decades, it has transformed itself from a rural area known for its orange
groves to a dynamic ecosystem for startups, new technologies, and effective business
models. A healthy ecosystem consistently converts technology and other inputs into
product, service, and enterprise development. It survives—and even gives birth to—
disruptions like unforeseen technological change while creating niches to increase
diversity.1
Indeed, what is so special about Silicon Valley is that it has ridden successfully
through multiple technological waves (Fig. 14.1). While some participants have
fallen away, many Silicon Valley companies have evolved to participate in and to
shape new waves of innovation.2 The diverse set of actors and special situational
factors as well discussed in Chap. 2 contribute to the constant renewal of its

1
Iansiti M and Levien R (2004) The Keystone Advantage: What the New Dynamics of Business
Ecosystems Mean for Strategy, Innovation, and Sustainability. Harvard Business School Press:
Boston, MA.
2
Moore JF (1996) The Death of Competition: Leadership and Strategy in the Age of Business
Ecosystems. HarperBusiness: New York, NY.
14 Silicon Valley Innovation System 227

Table 14.1 Key figures comparison: Silicon Valley, California, USA

Silicon Valley California USA
Inhabitants 8 million 40 million 328 million
Area 18,040 km2 423,970 km2 9,833,520 km2
GDP USD781 billiona USD3.2 trillionb USD20.5 trillion
GDP per capita USD128,000 USD75,000 USD62,000
a
2016: http://www.bayareaeconomyorg/bay-area-gdp-watch/
b
2019 Bea.gov

technological base and the sustainability of its unique innovation ecosystem. With-
out such renewal, regional ecosystems will languish or collapse.
Marc Andreessen, co-founder of Mosaic and Netscape and now a venture capi-
talist in Silicon Valley, famously said, “software is eating the world.” This refers to
the disruptive power of information and communication technology in many aspects
of our lives. This disruptive force is impacting one industry after the other, with new
products and services often originating in Silicon Valley.
Today, Silicon Valley can be regarded as the generic trademark of an innovation
ecosystem. The Valley is often used as a synonym for a successful innovation
region. There are many “Silicon Somethings” around the globe, so named to let
people know that they intend to follow in the footsteps of their Californian role
model.
The name Silicon Valley initially referred to an area situated roughly between
Palo Alto (Stanford University) and San Jose, named because of its dominant
industry at the time: silicon wafers. Currently, due to the region’s strong growth
over recent decades, Silicon Valley is often used to mean the nine counties of the San
Francisco Bay Area. Consisting of multiple cities, it has no clear external borders,
but it is often divided into the North, East and South Bay regions. San Jose is its
southern capital, bookending the Peninsula with San Francisco in the north. There-
fore, this chapter uses the terms “San Francisco Bay Area” and “Silicon Valley”
interchangeably.
In total, the San Francisco Bay Area covers an area of 18,000 square kilometers
and is home to about eight million people. This is equivalent to 20% of California’s
population and about 2.5% of the total population of the USA. The region is home to
the second highest concentration of Fortune 500 companies, behind only the
New York metropolitan area, with 30 such corporations based in the Bay Area
(Table 14.1).3
Even though Silicon Valley is only home to about 2.5% of the US population,
more than 17% of all American patents issued in 2015 were issued in the Bay Area.4

3
Walker R and Schafran A (2015) The strange case of the Bay Area. Environment and Planning.
47: 14.
4
Bay Area Council Economic Institute and McKinsey & Company (2018) Continuing Growth and
Unparalleled Innovation: Bay Area Economic Profile. July 2018. Accessed: http://www.
bayareaeconomy.org/report/continuing-growth-and-unparalleled-innovation/
228 G. Fuerlinger and L. Garzik

In addition, seven of the top ten patent-generating cities in California were in Silicon
Valley in 2018.5 This remarkable scientific output underlines the strength of the
research institutions in the region. However, although patents are performance
indicators for the inventiveness of an institution or region, they should not be
confused as indicators for innovation. It is the process of turning science-based
inventions into commercially viable innovations—products and services that fulfill a
need or solve a problem—that spurs technological change in a society. In Silicon
Valley, the transfer from research to the market works particularly well. One reason
for this is the region’s social networks, which transcend traditional organizational
boundaries.

14.2 Silicon Valley Innovation Ecosystem Actors

Research on social networks in Silicon Valley has focused on the flow of people,
resources, and information across sectors. Silicon Valley is particularly well
equipped for this process due to the close collaboration of science and business in
the area.6 This section presents the various actors in the region’s innovation ecosys-
tem and then discusses the interrelation and collaboration among them.

Science and Research Actors

Universities play a crucial role in innovation ecosystems, and most leading metro-
politan areas globally are home to renowned universities.7 Through their basic
scientific research, universities influence technological development in the long
term and produce knowledge and technologies that can be applied to industrial
production as prototypes, new processes, and more. The commercialization of
research via university startups and spin-off companies, in addition to licensing
models, is a common method of fostering technology transfer from universities.8
The transfer of knowledge and technology from universities to the market—often
referred to as technology transfer—is enormously important for any region.9 Fur-
thermore, universities provide human capital, which is one of the most important
components of a well-functioning entrepreneurship ecosystem.

5
Silicon Valley Index 2020, Joint Venture Silicon Valley & Institute for Regional Studies, https://
jointventure.org/publications/institute-publications/1903-2020-silicon-valley-index
6
Castilla EJ, Hwang H, Granovetter M and Granovetter E (2000) Social Networks in Silicon Valley.
Chap. 11 in The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship, edited by
Chong-Moon Lee, William F. Miller, Henry Rowen, and Marguerite Hancock. Stanford: Stanford
University Press.
7
For example: Massachusetts Institute of Technology (MIT) and Harvard University in (Cambridge
near) Boston, ETH in Zurich, TMU and LMU in Munich, Imperial College and LSE in London,
Columbia University and New York University (NYU) in New York, to name just a few.
8
Matkin G 1990 Technology Transfer and the University. New York: MacMillan, pp. 240–274.
9
Witt P (2006) Stand und offene Fragen der Gründungsforschung, Studie für das
Bundesministerium für Bildung und Forschung (BMBF), März 2006, Dortmund.
14 Silicon Valley Innovation System 229

The San Francisco Bay Area is home to some of the best universities in the USA
and the world. Most notable are Stanford University in Palo Alto and four regional
campuses of the University of California system: UC Berkeley, UC San Francisco,
and in close vicinity to the Bay UC Davis and UC Santa Cruz.

Stanford University—The Heart of Silicon Valley

In 2012, a large-scale survey of entrepreneurs coming out of Stanford University
quantified the impact of university-based entrepreneurship ecosystems.10 The
authors of that study concluded that, if the active companies founded by Stanford’s
graduates were considered an independent nation, their revenues would make that
nation the tenth largest global economy. Combined, the 39,900 alumni-founded
companies employ 5.4 million people and generate annual worldwide revenues of
USD2.7 trillion.
To understand the affinity alumni feel toward their alma mater, one need only
take a closer look at Bay Area cars’ license plates. Many bear frames with statements
of school spirit like “Stanford Alumni,” showcasing the pride alumni feel in their
university and the feeling that the university formed the basis for their successful
careers. Stanford alumni donate over USD1 billion per year back to the university,11
unmatched by other universities in the USA or on a global scale.
Since its foundation in 1885, Stanford University has taken an unconventional
path. “The farm,” as the campus is called due to its history as a horse paddock, is an
open, green, and inspiring place. From its early days, Stanford has been dedicated to
the formation of “cultured and useful citizens.” Its pioneering spirit has been
sustained to today, especially in two main attributes: the search for adventure and
a focus on building communities. With around 2000 faculty and 16,000 students on
campus, an international crowd of smart people from around the world mingles and
one might meet a Nobel laureate at the coffee shop.
Just like they did at the University’s beginning, Stanford faculty and students
work to build companies, analyzing knowledge from independent blue-sky research
for market implementation potential. Today, this process draws financial fuel from
neighboring Sand Hill Road with its impressive density of Venture Capital investors.
The Silicon Valley ecosystem began to develop earlier than most people think,
often driven by Stanford graduates and faculty. Frederick Terman, for example, is
often referred to as the Father of Silicon Valley. He came to Stanford as a professor
of engineering in 1926 and was promoted to the Dean of Engineering in 1946.
Frederick Terman changed university rules by encouraging his students to start
companies and his fellow professors to consult or take board seats. Furthermore,
he eased technology transfer and IP licensing, fostering relationships between
industry and the university. This created an advantage for both sides: Industry gained
access to the university’s knowledge and technology, and researchers got to test and

10
Eesley C and Miller W (2012) Impact: Stanford University’s Economic Impact via Innovation
and Entrepreneurship, October 2012, Stanford University, Palo Alto, USA.
11
https://news.stanford.edu/2020/02/05/stanford-releases-2018-19-fundraising-results/
230 G. Fuerlinger and L. Garzik

implement their ideas on the market. Many of the principles that guide Stanford’s
collaboration with Silicon Valley and underlie the entrepreneurial mindset in the
region overall can be traced back to those early beginnings.
To assess the success of this university–industry cooperation strategy, one needs
only to look at the list of companies founded by Stanford faculty or alumni. Google,
Cisco, HP, Netflix, Nike, Gap, Nvidia, and PayPal—just to name a few—are some
companies that started in this way.

Laboratories and Research Institutes

The greater San Francisco Bay Area is also home to US Department of Energy
laboratories like the Lawrence Berkeley National Laboratory, Lawrence Livermore
National Laboratory, SLAC National Accelerator Laboratory, and NASA’s Ames
Research Center. Together, these laboratories manage an annual research budget of
almost USD4 billion and employ more than 16,000 scientists, engineers, and PhD
and postdoc research fellows. Their research focuses on energy science, (cyber)-
security, particle physics, plasma, nanoscience, and space. One laboratory is also
home to the largest laser in the world and one of the world’s fastest computers.12
Initially, these laboratories developed technology exclusively for the US govern-
ment. Now, they maintain relationships with private companies and corporations
interested in the technological inventions they develop.13 Furthermore, due the
increasing focus on technology transfer and commercialization, some laboratory-
developed technologies find their way to market through the formation of startup
companies.
Other research institutes in the Bay Area include SRI International and the Palo
Alto Research Center (PARC). The former, formerly known as Stanford Research
Institute, was founded 75 years ago with a mission of supporting government and
industry. SRI International is organized around broad disciplines and capabilities,
from research and development divisions and laboratories to groups who excel at
identifying new opportunities, developing products, and creating custom solutions.
Thus far, SRI International holds 4000 patents and their inventions include the
computer mouse and the iPhone’s Siri voice assistant.14
PARC is a research and development company that was founded 1969 as a
subsidiary of Xerox. Since then, it has created USD1 trillion in new industries,
USD60 billion in startups and spin-offs, and almost 6000 patents and patent
applications. PARC’s patents include laser printing, Ethernet, and the graphical

12
Bay Area Council Economic Institute (2019) The Bay Area Innovation System: Science and the
Impact of Public Investment. March 2019. Accessed: http://www.bayareaeconomy.org/report/the-
bay-area-innovation-system/
13
https://www.bayarealabs.org/aboutlinc
14
“About Us,” SRI International, https://www.sri.com/about-us/
14 Silicon Valley Innovation System 231

user interface.15 Some also argue that Apple’s Steve Jobs got the idea and technol-
ogy for the modern personal computer from the PARC.16

Financial Capital
Silicon Valley is well known for its high venture capital and private equity
investments going to startups and spin-off companies. About 80% of California’s
venture capital—and 40% of the USA overall—is invested here, accounting for
more than USD40 billion in 2019.17 A diverse network of business angels, business
angel syndicates, venture capital firms, corporate venture capital offices, and private
equity funds forms the world’s leading venture capital ecosystem, not only in the
USA but globally as well. One of the key advantages in Silicon Valley is the way
these various financial actors intertwine with each other, investing in different stages
of startup development.
Although the number of investment deals has fallen since 2015, the average size
of investment per deal has consistently increased. This highlights the trend toward
larger portions of venture capital investment going to later-stage startups, often
valued at several hundred million US dollars. Due this trend, angel investors and
groups for early stage startups have become increasingly important.18 A similar
development took place in Tel Aviv, which has turned from a startup hub to a region
increasingly focusing on scale-ups. The threat of this development is the potential
reduction in early stage startup funding, potentially jeopardizing the innovation
pipeline.

Business Angels and Early Stage Financing

Business angels are usually successful founders or experienced managers them-
selves, who often have made a considerable fortune in their own businesses and
wish to support the next generation of aspiring entrepreneurs. They invest in the
early stages of a startup, closing a gap in the financing landscape since banks do not
typically provide loans to companies in the risky early stage. For business angels, the
founder himself or herself is usually key for the decision to invest.19 Angels value
the founder’s background and experience, and trust their own assessments of
whether he or she “has what it takes” to successfully establish the company.
Business angels are often knowledgeable in the startup’s industry and prioritize
“chemistry” between themselves and the founder. For reasons of risk diversification,
experienced business angels usually invest in multiple young companies, not just

15
“About PARC,” PARC, A Xerox Company, https://www.parc.com/about-parc/
16
https://www.newsweek.com/silicon-valley-apple-steve-jobs-xerox-437972
17
Silicon Valley Index 2020, Joint Venture Silicon Valley & Institute for Regional Studies, https://
jointventure.org/publications/institute-publications/1903-2020-silicon-valley-index
18
Bay Area Council Economic Institute and McKinsey & Company (2018) Continuing Growth and
Unparalleled Innovation: Bay Area Economic Profile. July 2018. Accessed:
19
Mason C and Matthew S (2004) What do Investors Look for in a Business Plan? A Comparison of
the Investment Criteria of Bankers, Venture Capitalists and Business Angels, 2004 22: 227 Interna-
tional Small Business Journal.
232 G. Fuerlinger and L. Garzik

one. They also provide advice and assistance to the founders and grant access to
contacts in their social networks. That means that angels are not only financiers, but
also take on an important role as mentors and advisors.
Numerous angel networks, syndicates, and platforms exist in Silicon Valley.
Sand Hill Angels, Band of Angels, Keiretsu Forum, and Bay Angels are just a few
well-known groups. These formal and informal communities of angel investors
organize pitching and feedback sessions for startups, often conducting joint due
diligence and investment decisions in selected startups. Platforms like AngelList20
make it easier for entrepreneurs and angel investors to connect and facilitate angel
investments. Additionally, the website is a major hub for job postings in technology
startups based in Silicon Valley and beyond. According to AngelList,21 around
21,000 angel investors are interested in the region, with 12,000 of them also residing
in Silicon Valley.

Financing the Growth Phase: Venture Capital

Many startups are urged to grow rapidly and prevent their competitors from gaining
market share. To finance the scaling of business activities, many companies need a
lot of capital and therefore seek investment from venture capitalists (VCs). VCs are
professional investors who invest large sums of money in startups on behalf of other
wealthy individuals or financial institutions. The main interest of VCs is to increase
the valuation of their investments. When investee companies successfully go public
or are acquired by a large company, the VC receives a share of the profit (usually
around 20%).
Investing in new companies is an extremely risky business and is a difficult
undertaking even for experienced VCs.22 In addition to above-average market
potential, VCs are primarily looking for a team with the strength to implement.
The true value of a new company lies primarily in its implementation ability. Many
investors, therefore, attach great importance to both technical competence (i.e., can
the team build this product?) and business competence (i.e., can the team success-
fully take this product to the customer?). A VC’s investment also increases the
legitimacy of a young company, which can help its founders raise additional capital.
The role of VCs is not limited to providing financing—like a business angel, a good
VC helps founders grow their businesses.23

Spotlight: Sand Hill Road—The World’s Leading VC Neighborhood

Sand Hill Road, a street that runs along the northwest edge of Stanford University’s
campus, is home to many of the world’s leading venture capital firms. Andreessen

20
https://angel.co/
21
https://angel.co/silicon-valley/investors
22
Freeman J and Engel JS (2007) Models of Innovation: Startups and Mature Corporations, Fall
2007, Vol. 50, No. 1, UC Berkeley.
23
Senor D and Singer S (2011), Start-Up Nation The Story of Israel’s Economic Miracle“. Council
on Foreign Relations. April 2011.
14 Silicon Valley Innovation System 233

Horowitz, Draper Fisher Jurvetson, Greylock Partners, Khosla Ventures, Kleiner

Perkins, Lightspeed Venture Partners, Mayfield Fund, New Enterprise Associates,
and Sequoia Capital are just some of the VCs that maintain offices on this road.
Many of their investors are featured in the Forbes Midas List, which spotlights the
world’s best VC investors.24
The road’s proximity to Stanford University is one of the main reasons why the
networks between the investment and the research community work particularly well
in Silicon Valley. Personal connections are formed between investors, professors,
scientists, and students at numerous networking events on and off campus. VC funds
focused on early stage startup investments maintain relationships with research
laboratories to learn about promising research results and new technologies early
on, or about a dedicated team of entrepreneurs looking for funding for a new venture.
Corporate venture capital activity plays a greater role in the later-stage financing
of new ventures in Silicon Valley. In corporate venturing, a company invests in
startups that are potential business partners or takeover candidates. Numerous well-
known, established companies have established corporate venture capital funds to
maintain close exchange with innovative young companies and bind them to the
company early on. Some of the largest corporate venture funds are in the Valley’s
leading companies.25 Other companies go one step further and set up corporate
incubators and accelerators to provide young companies with office space, support
services, and contacts from their business network in addition to venture capital.

Support Infrastructure: Incubators and Accelerators

Y Combinator,26 founded in 2005 by Paul Graham and his team in Mountain View,
is often referred to as the world’s first startup accelerator. It has funded over 2000
startups, which have a combined valuation of over USD100 billion. The accelerator
phenomenon is internationally often referred to as a key factor and a major contri-
bution to increasing startup success.27 Accelerators select a small group of
entrepreneurs and invite them to startup boot camps that provide mentoring,
resources, and—above all—connections to customers, partners, and investors. Suc-
cessful graduates usually complete their next funding round before leaving, and a
small percentage of their equity remains with the accelerator. Accelerators address
the funding gap for startups and the information gap for potential investors, acting as
a network institution or intermediary between these two groups.
The terms “incubator” and “accelerator” should not be used interchangeably.
Different startup organizations offer different kinds of support, ideally tailored to the

24
https://www.forbes.com/midas/
25
https://www.connectionsiliconvalley.com/corporate-venture-funds
26
https://www.ycombinator.com/
27
More on the accelerator trend: Dempwolf CS/Auer J and D’Ippolito M (2014) Innovation
Accelerators: Defining Characteristics Among Startup Assistance Organizations. US Small Busi-
ness Administration, Office of Advocacy, October 2014.
234 G. Fuerlinger and L. Garzik

development stage of the startup.28 Steve Blank29 argues that the development of a
new venture can be divided into two phases: search (for a business model) and
execution (of the business model). Incubators mainly support new ventures during
the earlier search/discovery/exploration stage, with the aim of finding a repeatable
and saleable business model. Accelerators, on the other hand, are institutions that
“accelerate” the growth of new ventures through time-limited programs. The prereq-
uisite to enter an acceleration program is a working prototype and initial market
traction. By providing specific services, resources, and contacts, an accelerator
enables the new venture to grow its business (i.e., increase its users/customer base,
generate more profits) and to professionalize its organization. This lays the founda-
tion for scaling the business.
Regardless of the support organization, the key question is what should happen in
or through its support—especially from a social network perspective. Who are the
people (groups) who should be involved and how should they get involved? To
systematically support the development of startups and innovation in a region,
entrepreneurs and founders need to support each other (cp. community). On the
other hand, they should be matched with mentors who are willing to share their
knowledge, experience, and contacts. A pay-it-forward mentality supports the
knowledge transfer between experienced entrepreneurs and first-time founders.

Professional Service Providers

The network of service professionals that help with legal questions, accounting,
staffing and human resource issues, consulting services, and important investor or
partner introductions is also referred to as “the entrepreneurial life support sys-
tem”.30 Whereas these services are remunerated by the hour or based on daily fees
in most regions worldwide, Silicon Valley’s service providers get involved in the
startup risk system. Many will offer advice and services initially free of charge for
aspiring entrepreneurs and early stage startups. The idea is to get involved early on
with startups who might not have the financial liquidity yet to pay often substantial
fees. This increases the chance that service providers can stay on as the partner of
choice once the startup raises venture capital, experiences growth, and starts to have
positive cash flow. These “deferred service fees” are part of the pay-it-forward
mentality in Silicon Valley. The tight-knit network of service providers and investors
underlies a common understanding of how to do business in Silicon Valley. This, for
example, has also led to standardized documents for seed-round equity

28
Fuerlinger G (2014) Incubators vs. Accelerators: Fostering university spin-offs by leveraging
exploration and execution. Presentation at University Industry Conference, in Barcelona, Spain.
April 2014.
29
Blank S (2013) Why the lean Start-Up changes Everything, Harvard Business Review, May
2013, p. 65–72.
30
Pages ER, Freedman D and von Bargen P (2003) Entrepreneurship as a state and local economic
development strategy. In D. M. Hart (Ed.), The emergence of entrepreneurship policy: Governance,
start - ups, and growth in the U.S. knowledge economy (pp. 240–259) Cambridge: Cambridge
University Press.
14 Silicon Valley Innovation System 235

investments.31 By agreeing on the standard body of term sheets and other important
documents, negotiations can focus on the key terms of the deal and do not need to
start from scratch, easing the process of negotiating and reducing the time needed to
raise capital.

Startups and Corporate Networks

Startups in Silicon Valley also work with large firms considerably more often, than
entrepreneurs in other ecosystems in Europe or the USA. One study32 has identified
these as crucial relationships within an innovation ecosystem, enabling startups to
connect with global partners and suppliers. One might conclude that these startup-
corporate networks are also a central characteristic of mature entrepreneurship
ecosystems like Silicon Valley. It is not a question of whether large or small firms
will triumph, but rather how the regional economy links firms of various sizes and
competencies together and what the outcome is of these collaborations.
This notion of diverse-firm networks is also true for Silicon Valley, even though
most of the attention has gone to the network of small firms and startups. However,
the Valley’s success also depends crucially on its Hewlett-Packards, Intels, and
Cisco Systems—or now its Googles, Facebooks, and Apples. These large Silicon
Valley tech companies firms do not simply compete to death with small firms and
startups, but instead have an elaborate and complex relation to them that has been a
source of vitality for the region. Large established companies play important roles as
talent incubators and places to learn about management principles, processes, and
the use of technology in the workplace. As mentioned above, established firms can
also be a source of venture capital and an important route to market for startup
companies. With many world-leading technology companies having established
their global headquarters in the Bay Area, the region offers startups numerous
potential collaborators for partnerships.

14.3 Silicon Valley SWOT Analysis

Resources Strengths Weaknesses Opportunities Threats

Culture and The unique An America- The regional Some argue
mindset culture fostering centered advantage of its that a
technological worldview might special progressive
innovation in lead some innovation monoculture
Silicon Valley businesses to culture can help could exclude
has a long predominately Silicon Valley those with
(continued)

31
https://www.seriesseed.com/
32
Lazerson M and Lorenzoni G (1999) The Firms That Feed Industrial Districts: A Return to the
Italian Source. Industrial and Corporate Change 8, no. 2:235–66.
236 G. Fuerlinger and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

tradition. An focus on the home attract talent, other (political)
environment of market, omitting companies, and views,
openness, opportunities in capital in the decreasing
optimism, and other world future diversity—an
focus on impact markets important
attracts talents ingredient for
from the whole innovation
world and
connects experts
across different
domains
Digital Many of the Similar to the USA As the A focus on
infrastructure world’s leading overall, the quality technology building up the
technology of the digital mecca of the digital
companies and infrastructure can world, Silicon infrastructure
digital service vary depending on Valley will most predominantly
providers have the specific likely continue to in metropolitan
their location. Whereas develop areas could
headquarters in most of the region disruptive jeopardize the
Silicon Valley. enjoys reliable technology and digital access
Therefore, it is broadband internet introduce new of suburban
sometimes connection, some solutions for the and rural
referred to as the areas outside the global digital communities,
digital capital of cities might not be infrastructure already
the world as well connected arguably being
left behind the
digital
revolution
Education Some of the Like living costs, New solutions in The global war
and skills world’s best education costs in the educational for talent and
universities in the the Bay Area rank technology the skills gap
region attract among the highest (EdTech) space (too few
talent from all in the USA. developed in experts with
over the world. Furthermore, “the Silicon Valley mastery of new
The education American public (e.g., Khan technologies)
system fosters education system Academy, could harm the
the exchange has not kept up Coursera, region’s supply
between with the times and Udemy, Udacity) of talent,
academia and is currently facing democratize harming future
business and a number of access to cutting- growth of the
places a high serious problems”a edge learning tech-economy
value on material for
mentorship people around
the world.
Institutions Strong Some argue that a Established A liberal
institutions are a low level of institutions in market
hallmark of the regulation has led favor of economy
USA, based on to a rapid rise in entrepreneurship (compared to
liberal market prices for basic and innovation, the social
economics, services like health as well as a market
economic strong work ethic economies in
(continued)
14 Silicon Valley Innovation System 237

Resources Strengths Weaknesses Opportunities Threats

freedom, the rule care and (higher) among its many European
of law, and educationb citizens, position countries for
property rights the USA well for example) is less
the future efficient at
redistributing
wealth,
potentially
leading to more
economic
inequality and
social unrest
Market and The US economy The market in Attracting talent, Strong
demand is the world’s Silicon Valley is businesses, and offerings from
largest, with not at all capital from technology
strong household representative of around the world companies in
and business markets in the to Silicon Valley innovation
buying power. USA beyond the will strengthen hubs around the
Businesses and region, with an demand for the world will
customers in overrepresentation technologies, increase
Silicon Valley of people open to products, and competition in
are especially new products and services sectors that
open to buying early adopters developed in the were once
new technology region. So will reserved for
products and scouting for technology
services investment startups and
opportunities and companies in
new technologies Silicon Valley
Migration Silicon Valley is The high cost of Attracting the Changes in
a melting pot of living in the Bay smartest and immigration
people from Area makes it hard most motivated laws could
around the world, for people with talents from hamper access
especially from modest means to around the world to talent. For
Europe, China, immigrate to this to Silicon Valley example,
and India. This region creates a unique restricting the
diversity fuels ecosystem of H1B visa
innovation and entrepreneurs category that
businesses and technology technology
benefit from ties experts companies rely
to markets on to hire
around the world foreign experts
could lead to a
shortage of
human capital
and ultimately
stifle
innovation
Quality of California and The high cost of Due to the The ever-
living the Bay Area are living is a result of COVID-19 increasing cost
known for a strong economic crisis, the prices of living drives
pleasant climate, growth, for buying and out families
natural beauty, particularly in the renting housing and long-term
(continued)
238 G. Fuerlinger and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

and inhabitants’ technology field. in the Bay Area residents with
casual attitude. According to a have decreased lower incomes.
The proximity of survey conducted substantially.
technology by the United This could The COVID-19
centers to States Census provide crisis has
recreational areas Bureau, the Bay opportunities for pushed many
in nature is an Area ranks first in families, foreign Silicon Valley-
advantage for the median home founders, and based
local workforce values, median other people to corporations to
monthly mortgage move to the area remote work
costs, and median policies with
gross rentc employees
working from
anywhere in the
state, country,
or world. The
question
remains if
companies will
keep focusing
on building up
their workforce
in Silicon
Valley or move
their operations
to other hubs
once the
pandemic
ceases
Research Silicon Valley is A high level of Establishing ties Restricting
infrastructure home to some of research to other strong immigration
the best infrastructure research hubs in and increasing
universities and comes with an the USA and the legal
research equally high level abroad can hurdles for
institutes in the of reinvestment strengthen the talent to work
USA and the costs that are intellectual base in US research
world. Its per difficult to even further and organizations
capita scientific maintain long term tap into might
output in terms of additional jeopardize the
patents and funding sources region’s
publications is (e.g., the EU’s leading
one of the highest Horizon research position in
in the world program) basic and
applied
sciences
Bank loans Bank loans are There is a less An ecosystem As startups
offered by pronounced changing its develop into
nationally tradition of bank focus from established
operating banks loans in the region startups to scale- companies,
or those with a due to the more ups will increase they might be
strong local attractive venture the role of bank encouraged to
(continued)
14 Silicon Valley Innovation System 239

Resources Strengths Weaknesses Opportunities Threats

footprint in the capital and private loans and the look for better
region, equity models banking system loan options in
particularly those will further other regions
focused on develop
startup banking
Legal The tight-knit Establishing an New technology If the dynamic
advisers network of LLC or Inc. is platforms are growth of
service providers comparatively easy venturing into startups
underlies a in the USA, but the the legal services decreases in the
common more pronounced space, providing future, the pay-
understanding of litigation culture access to the it-forward
how to do means that new services startups system could
business in companies must and established slow down.
Silicon Valley spend substantial companies need. This could
and a strong pay- funds on legal fees These increase endanger the
it-forward to ensure legal businesses’ practice
mentality. Based security options and drive accepting
on this concept, prices down deferred
many advisors service fees for
are willing to legal advice
offer advice and
their services
initially free of
charge for
aspiring
entrepreneurs
and early stage
startups (deferred
service fees)
Policy and Silicon Valley Gaps in key areas Local and The growing
strategy was not created like housing and regional gap between
top-down by transportation policymakers Silicon
specific policies indicate public– must walk a fine Valley’s rich
or an overall private imbalance. line between and poor could
strategy. It is a Local and regional drafting policies necessitate
bottom-up governments in that help more policies that
system guided by and around Silicon people distribute
market dynamics Valley lack the participate in the wealth more
that support the governance region’s equally in the
ascendance of capacity to address economic future
new ideas and the the negative success while not
growth of the consequences of overregulating
best startups overweening and hampering
successd innovation
Risk capital About 80% of Time to exit has The ongoing If the flywheel
California’s extended in recent influx of smart of investment
venture capital years, making people migrating and exits
and 40% of that VCs’ investments to Silicon Valley begins to slow,
in the USA is increasingly risky will keep the the dynamics of
invested in and unattractive region attractive venture
Silicon Valley. for a high investments
(continued)
240 G. Fuerlinger and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

More than volume of risk could slow
USD40 billion capital down
(2019) was considerably
invested by
business angels,
venture
capitalists,
corporate venture
capital offices,
and private
equity funds
from around the
world
Regulation The USA is The methods and Local authorities Regulation in
known for its approaches that are accustomed other parts of
business- and fueled Silicon to the fast pace of the globe like
entrepreneurship- Valley’s growth in innovation and China or
friendly the past are have an inclusive Europe can be a
regulatory increasingly under approach to hurdle for the
environment, scrutiny. Various regulating new expansion of
which favors public actors have technologies. new business
innovation and threatened lawsuits Regulations models from
competition (e.g., and trust-busting drafted locally Silicon Valley,
lawsuits against actions against could function as hampering the
big tech; potential blueprints for growth of its
noncompete monopolies that other regions or companies
clauses for have formed over nations
employees). recent decades
Some argue that
the US case law
system is more
conducive to
innovation than
written-law
systems used in
many other parts
of the world
Tolerance The San The tolerance The high level of The outflow of
and trust Francisco Bay between different tolerance attracts tolerant people
Area is parts of society is tolerant people to other
considered one of threatened by the from all over the communities
the most tolerant growing gap in world, making and ecosystems
and liberal wealth distribution the level can lead to
regions in the sustainable even increased
USA and around if the migration competition for
the world (e.g., from less tolerant talent between
the free speech communities regions
and LGBTQ continues as well
movements
originated here).
This open
(continued)
14 Silicon Valley Innovation System 241

Resources Strengths Weaknesses Opportunities Threats

environment
attracts
optimistic people
with a think-big
mentality, driven
by missions to
change the world
a
https://www.publicschoolreview.com/blog/the-15-biggest-failures-of-the-american-public-educa
tion-system
b
https://www.publicschoolreviewcom/blog/the-15-biggest-failures-of-the-american-public-educa
tion-system
c
Bee CA (2013) The Geographic Concentration of High-Income Households: 2007–2011
(No. ACSBR/11–23). United States Census Bureau
d
Etzkowitz H and Steiber A (2019) Silicon Valley: Too Much Success? In: Nourani CF, ed.,
Computing Predictive Analytics, Business Intelligence, and Economics: Modeling Techniques
with Start-ups and Incubators. Oakville, Canada: Apple Academic Press Inc., pp. 155–170

14.4 Lessons Learned

Silicon Valley plays a key global role in developing innovative technologies and
paving the way for new global trends. The region remains, for now, the undisputed
leader of the global startup and innovation scene. Motivated to create a similar
innovation powerhouse in their countries or regions, policymakers around the world
are looking for a recipe to promote innovation and entrepreneurship. The aim is to
create a supportive environment that encourages people to act outside their usual
patterns of thinking, develop new products and services, and establish new
companies. Targeted measures and supports can make a decisive contribution and
get the ball rolling, but governments are given the difficult task of finding the right
balance.
According to Fiona Murray, a professor at MIT Sloan School, there are two
perspectives to creating an ecosystem.33 The pro-government perspective states that
specialized inputs like technology parks and innovation centers are necessary for
driving ecosystem emergence. The other perspective exclusively focuses on people
and their networks. According to this second perspective, the market can be distorted
by an excessive top-down approach without grassroots momentum. New companies
are created through constant recombination of ideas, talents, and capital34 embedded
in a supportive culture. Cultural change toward a startup-friendly environment,
however, is difficult to initiate top-down. The values and habits associated with

33
Regalado A (2013) In Innovation Quest, Regions Seek Critical Mass, MIT Technology Review,
September/October 2013, Vol. 116, No. 5. P. 84–86.
34
Timmons J (1994) New Venture Creation. Entrepreneurship for the twenty-first century. Volume
4, Irwin, Boston.
242 G. Fuerlinger and L. Garzik

entrepreneurship must emerge organically, from the bottom up, to promote the
development of a sustainable entrepreneurship ecosystem.
There was and is no direct political or overall top-down strategy that guided the
development of Silicon Valley. That development happened through a mosaic of
institutional and individual strategies and motivations (e.g., Fredrick Terman at
Stanford University). There are a multitude of factors that make the San Francisco
Bay Area such a unique innovation ecosystem: Above all, the diversity of the people
and the breadth of the (technology) issues addressed here are unrivaled in the rest of
the world. More than half of startup founders come from outside the USA, with
leading global universities and research institutions providing much of the intellec-
tual capital and talent that underpin disruptive companies. In addition, large sums of
venture capital help promising ideas reach market maturity at record pace. It is the
close-knit networks of relationships between people in different fields, embedded in
a culture of openness and experimentation, that create this fertile ground for
innovation.35
Ultimately, it is the interplay of numerous actors and factors in Silicon Valley’s
specific innovation ecosystem that are responsible for its innovative pre-eminence.
Some of the actors who are part of a thriving ecosystem have been described in
Chap. 2. Even with all necessary actors present, it is the rate of their interaction that
determines the innovative output and sustainability of an ecosystem. A special
culture based on openness and experimentation and strong social capital among
individual actors leads to a dynamic recombination of productive factors and
resources like human, financial, and intellectual capital.

Investment Based on Excellence Principle

Although awareness of and supportive landscapes for technology startups are grow-
ing steadily, the resources to support startups are usually limited. There are—
roughly speaking—two ways of distributing these funds. The first option is the
“watering can principle,” or giving many potential founders the same small portion
of available resources. The second option is to focus on a few promising companies
and support them with a relatively large part of the available resources—this is the
“excellence principle.” Depending on institutional and cultural circumstances as
well as the personal focus of the decision makers, the right distribution model will
fall somewhere between the two options. It is argued, however, that the best way to
achieve maximum effects with limited resources is to follow the principle of
excellence. Spending resources on low-potential startups drains those resources
from ventures with higher growth potential. Along those lines, it is arguably better
for the ecosystem, especially in later stages of startup development, to focus
available resources on selected high-potential ventures.

35
Fuerlinger G (2014) Die Bausteine eines Gruenderoekosystems. In Thomas Funke & W. Axel
Zehrfeld (Hg.) Abseits von Silicon Valley: Beispiele erfolgreicher Gruendungsstandorte, Frank-
furter Allgemeine Buch, Frankfurt.
14 Silicon Valley Innovation System 243

Mentors as Innovation Catalysts

Compared to their unsuccessful peers, successful entrepreneurs are able to build a
network of people that can help them launch and grow their businesses. Once they
have established these networks, the likelihood that they will be successful again in
their next venture increases dramatically. Therefore, one of the most important
features of a dynamic entrepreneurship ecosystem is that successful entrepreneurs
engage as mentors. Since they have already founded one or more companies
themselves, they know the typical problems that young entrepreneurs face. It can
be very helpful for founders to have someone on their side who has already gone
through this process and knows what is important.
Mentors can provide important feedback when developing the product or service,
thereby greatly reducing development time and the likelihood of failure. Further-
more, they can support the team (culture) and organizational development of the new
company, thereby helping to professionalize the company internally. This can
happen through open feedback discussions in which the mentor points out problems
in team dynamics. For example, an engaged mentor, with his outside perspective on
the startup, can help the founders define their roles in the team and provide feedback
on their overall strategy. In addition, mentors can share personal stories of success
(and failures), offering clues on how to navigate certain parts of the entrepreneurial
journey.
Mentors are experts in their industry and can help young entrepreneurs with
business development. They have many years of experience and usually have an
extensive network of business contacts. Through personal introductions, they bring
founders into contact with their first customers or relevant decision makers,
facilitating access to the market. Often, mentees (or protegés) become mentors
themselves, helping the next generation of young entrepreneurs build their
businesses. This mechanism can also be referred to as the “cycle of entrepreneur-
ship”,36 in which successful entrepreneurs contribute to the development of entre-
preneurship in a region through mentoring and support for young companies.
There are different ways to institutionalize such a “place of exchange” between
mentors and founders. The right approach depends on regional or local
idiosyncrasies. On the one hand, it is important to take a closer look at successful
startup support initiatives to understand which factors contribute to their impact. On
the other hand, due to the different cultural and institutional frameworks in each
region, it is not always possible to copy successful initiatives one-to-one from one
region in another. One has to understand the local characteristics of an ecosystem in
order to develop the right approach, and has to engage the right actors right from the
beginning.

36
Fuerlinger G (2014) Die Bausteine eines Gruenderoekosystems. In Thomas Funke & W. Axel
Zehrfeld (Hg.) Abseits von Silicon Valley: Beispiele erfolgreicher Gruendungsstandorte, Frank-
furter Allgemeine Buch, Frankfurt.
244 G. Fuerlinger and L. Garzik

Fig. 14.2 Successful entrepreneurs support by “Giving Back”. Source: own depiction, based in
Isenberg 2010 (Isenberg D (2010) How to Start an Entrepreneurial Revolution. Harvard Business
Review. Retrieved June 2010)

Pay It Forward Through Giving Back

Pay it forward refers to somebody helping someone else without expecting a direct
service in return. The return element is expected to come back through other players
of the system or, in the case of the related “giving back” culture, may have already
been received before the giver was in the position to give.
One of the most interesting cultural phenomena in a sustainable startup ecosystem
like Silicon Valley is that entrepreneurs support each other. Many successful
entrepreneurs become investors in, consultants to, or board members of new
companies and provide young entrepreneurs with capital, experience, and contacts
from their personal networks. This crucial principle for a functioning startup ecosys-
tem is called “giving back” as displayed in Fig. 14.2.

University Alumni Networks

Another important aspect of the social structure in an innovation region is the quality
of the connections between universities and their alumni. The profit is twofold:
Alumni feel that the university’s education helped lay the foundation for their
success, and are willing to share that success by donating part of their profits back
to their alma mater. The university will have an active channel to share new research
findings with their alumni community, which is actively engaged on the market and
can help transfer new findings into new products and services. For example, close
ties to decision makers in industry help university laboratories and research centers
find licensing or technology development partners, fostering technology transfer and
commercialization.
14 Silicon Valley Innovation System 245

Entrepreneurial Vision and Aspirations

Entrepreneurial vision and aspirations have a significant impact on startup growth
performance.37 Entrepreneurs see problems that need to be solved or discover a need
in the market they want to satisfy. This is their vision, giving them and their work
meaning and setting a direction or a goal. To get there, they might start with an initial
idea (plan A) to see whether that can bring them closer to their vision. If it turns out
that plan A does not deliver the desired result, they will switch to plan B to see
whether this approach works better.
It is therefore important to differentiate between visions and ideas. Ideas are of a
lower order and are subject to frequent change. Visions, on the other hand, must be
inspiring and represent the “guiding star” that sets the general direction of the
company and ignites passion for the cause among those involved. A motivated
entrepreneur with a convincing vision will not stop at this point but will try different
approaches (i.e., iterations and pivots) to get closer to fulfilling their vision.
The admission criteria at StartX, Stanford University’s startup accelerator, offer
an example38 that underlines the value of human capital for startups’ promise. The
startup idea might be great, but if the entrepreneur and his team do not meet certain
expectations, the startup will not be admitted in the accelerator program. Ultimately,
the founding team is one of the most deciding factors for a company’s success. It is
not without reason that most investors say that they would rather invest in a first-
class team with a mediocre idea than vice versa. This spotlights the importance of the
human factor (human capital) for selecting companies to support or invest in, instead
of focusing predominately on technology, product characteristics, business models,
and addressable market sizes. Essentially, what is the value of the best plan without
someone who is able to put it into practice?

Adapting to Silicon Valley Culture and Business Practices

Typically, the principles that apply to the business world overall apply even more in
Silicon Valley. Face-to-face contact counts and forms the basis of trust that business
relations are built on. Regardless of whether a company is seeking customers,
partners, or investors, it is often only possible to progress on or close a deal when
decision makers have a good personal connection. Here, Californians’ open and
cooperative nature often helps—for example, a person you have just met may
introduce you to a relevant contact. This, in turn, allows you to widen your network
at a rate that might not have been possible in another part of the world. This is
primarily attributable to flat hierarches, low power disparities, and the informal
character of interactions between people in different sectors, positions, and career

37
Fuerlinger G (2020) The Impact of Human and Social Capital on University Startup Performance:
Evidence from Entrepreneurship Ecosystems in USA and Europe. Doctoral Thesis, Vienna Univer-
sity of Technology, December 2020.
38
Fuerlinger G and Leitner KH (2017) Kulturelle Aspekte der Förderung universitärer Spin-offs, in
Wissenschaftsmanagement - Handbuch & Kommentar, Lemmens Medien GmbH, Bonn – Berlin,
1. Auflage, November 2017, ISBN: 978-3-86856-013-8.
246 G. Fuerlinger and L. Garzik

levels. In return, however, newcomers are also expected to share their network of
contacts and assist their counterparts.
The best way to obtain the right contacts is to bring the right people from your
own network together. To succeed in Silicon Valley in the long term, it is vital to
have an experienced team: one that understands how to communicate and cooperate
properly with tech companies and startups. Ideally, employees will also have
experience with collaboration agreements, contract drafting, and similar issues
since divergent expectations in these fields can often lead to misunderstandings.

Customer Centricity Is Key

The Silicon Valley digital industry managed to combine the concepts of customers
and products like no other global region. A data-driven, customer-focused approach
to measuring product and service performance and constant adaptation of the
product or service itself sets companies up for fast learning and growth. One notable
feature of the US market is that customers place a high value on service and customer
care. As such, companies entering the market must ensure they are aligned with
American habits and behaviors regarding customer care, quality standards, and
business development practices. It is important to US customers to interact with
someone immediately if a problem arises. As such, it is important for new companies
to consider early on how they will establish their service structure and guarantee
prompt responses to queries. In some cases, this is done with the help of local
partners.

Speed and Follow-ups

The corporate culture of both startups and larger companies plays a central role in
response and communication speeds. Only a comprehensive understanding of how
US residents communicate, behave, and do business can enable stronger collabora-
tion with local companies. For example, it is customary to send a “follow-up”
message within 24 h of meeting someone relevant to your area of business. Speed
is of the essence in Silicon Valley, and companies must be prepared to embrace this.
It is often noted that other global regions—Europe in particular—have much
catching up to do regarding the etiquette of following up on meetings. Furthermore,
European corporate cultures and traditional companies—many of which are family-
owned companies with storied histories—differ notably from young, growth-
oriented Silicon Valley startups financed by VCs and private equity firms. For
traditional companies, planning to do business in Silicon Valley requires a certain
degree of openness and a new mode of action—one that is adapted to the specific
features of the Silicon Valley ecosystem. This applies especially for employees who
are working locally.

Engage in Marketing and Networking

A huge emphasis is placed on marketing and sales in the US market and in Silicon
Valley in particular. The mere provision of an innovative and competitive product or
service is not sufficient. Rather, products are differentiated according to how they are
presented and by how their particular advantages stand out. A well laid-out website
14 Silicon Valley Innovation System 247

and marketing materials in impeccable English are the minimum requirements. Even
more important, however, are the marketing and salespeople hired to tap the market.
These must already have a strong network in the region, be experienced in dealing
with representatives from the technological world, and, above all, be prepared to
keep up with the fast pace.
Many initial contacts and new leads are generated by visiting networking events,
conferences, and discussion panels and, especially, through personal introductions.
Regular attendance at such events is a basic requirement for expanding and
strengthening networks and showcasing activity and influence in the field. In
addition, when starting out, regular participation in events is a good way to obtain
an overview of the industry and get to know the main players.

Partnerships and Joint Technology Development

Especially when partnering with young technology companies and startups, the right
engagement strategy is central to success. Most early stage startups cannot fill an
established company’s order for a high number of pieces because they have not yet
achieved the necessary size or revenue. However, if the established company has the
patience and resources to develop products and services alongside the startup, there
is often a unique opportunity for these mostly fast-growing companies to become
long-lasting resources, partners, or customers. This makes it possible for established
companies to tap new growth markets that might not previously have been on their
radar.
In many cases, a company’s primary purpose for meeting a Silicon Valley startup
will be to better understand the latter’s technology or business model. While this can
be helpful in enabling the two companies to get to know one another, ultimately, a
startup’s aim is to develop their new product or service and establish it on the market
in the long term. For this reason, young companies are primarily interested in
meetings and partnerships that focus on joint product development. For startups,
the question of whether to attend a meeting or devote time to working on the product
is one of opportunity costs. Accordingly, if an established company wishes to hold a
meeting with an innovative startup, they should carefully research the startup
beforehand so they can add value to the discussion. This also allows the established
company to engage meaningfully in discussion about opportunities for collaboration
and to highlight their own strengths or suitability for partnership.
Sofia Innovation System
15
Veneta Andonova, Christian Betov, Mira Krusteff, Nadia Soultanova,
Irina Obushtarova, and Ludovit Garzik

Abstract

Bulgaria’s innovation performance has been distinctly positive since 2015, driven
by remarkable innovation efficiency. Much of this dynamism is attributable to the
country’s capital, Sofia, and its bubbling innovation and entrepreneurial ecosys-
tem. EU funding has been one of the drivers for this process, but, unlike
elsewhere in the region, the Sofia experiment has been very successful from its
very first iteration.
Sofia’s strongest areas are its increasing employment in fast-growing innova-
tive companies and its number of design and trademark applications. These
achievements cannot offset its systemic challenges, the most urgent of which
are related to the country’s demographic crisis, low total early stage entrepreneur-
ial activity, small national and regional markets, and low buyer sophistication.
The local ecosystem needs to broaden its entrepreneurial community, build

V. Andonova (*)
Universidad de los Andes School of Management, GEM Bulgaria, Bogotá, Colombia
e-mail: [email protected]
C. Betov · M. Krusteff
GEM Bulgaria, Sofia, Bulgaria
e-mail: [email protected]; [email protected]
N. Soultanova
Urban Impact Ventures, Sofia, Bulgaria
e-mail: [email protected]
I. Obushtarova
The Recursive, Sofia, Bulgaria
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 249
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_15
250 V. Andonova et al.

collaboration at home and internationally—with the Bulgarian diaspora in partic-

ular—and implement a more soundly articulated national strategy for smart
growth as part of the global knowledge economy.

15.1 Introduction to the Regional Innovation System Sofia

According to the international rankings, Bulgaria’s innovation performance has been

distinctly positive since 2015. The data from the Global Innovation Index (GII) 2020
reveal that the country is among the top three performers in the upper-middle-income
group, behind only China and Malaysia. Much of this dynamism is attributable to the
country’s capital, Sofia, and its bubbling innovation and entrepreneurial ecosystem.
Sofia accounts for about 40% of the country’s GDP (USD67.9 billion), and since
2015 has exhibited sustained GDP growth a full percentage point above the national
average (Sofia Economic and Investment Profile, 2019).1 This makes Sofia
Bulgaria’s main driver for economic growth. While Sofia’s GDP per capita has
always been almost double the national average, the gap between per capita wealth
in the capital and the national average has widened since 2014.
Structurally, the nonfinancial sector in Sofia differs from Bulgaria’s nonfinancial
sector almost all creation and distribution of information, creative products, and
telecommunications are concentrated in the capital, along with the largest volume of
professional activities and scientific research.
The number of employees in nonfinancial enterprises in Sofia is increased by 11%
between 2008 and 2018. The largest increases were in the fields of education
(104%), the creation and distribution of information, creative products and
telecommunications (78%), administrative and support activities (47.4%), and pro-
fessional activities and scientific research (40%). These increases have come at the
expense of the extractive industry (
60%), construction (
36%), and
manufacturing (
16.5%) (National Statistics Institute, 2020).2
The role of Information and Communication Technologies (ICT) is crucial for
Sofia. In 2014, the city was ranked as the most attractive outsourcing destination in
Europe, and third among cities with the highest number of startups. Most of these
startups were innovation- and technology-driven ventures that relied heavily on
digitalization. In 2016, over 78% of those employed in Bulgaria’s ICT sector were
located in Sofia, pushing the annual turnover for the industry in the city to EUR 4.6
billion compared to EUR 2.9 billion in 2007 (Digital Cities Challenge, 2019).3
Although the last 4 years have seen an increase in the number of alternative ICT

1
Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia.
com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed
on January 5, 2021).
2
National Statistics Institute (NSI). Available at https://www.nsi.bg/
3
Digital Cities Challenge (2019) Available at https://www.intelligentcitieschallenge.eu/sites/
default/files/2019-07/Assesment_Report_SOFIA_0.pdf (accessed on December 14, 2020).
15 Sofia Innovation System 251

hubs with the rise of Varna, Gabrovo, Stara Zagora, and Bourgas, Sofia still accounts
for more than 80% of annual turnover in the industry.
Much of Sofia’s growth and dynamism is due to multinationals choosing Sofia for
outsourcing operations. It is a cost-effective location for business process
outsourcing (BPO) and IT-related R&D. In fact, in 2019/2020, fDi Intelligence
ranked Sofia as the world’s top cost-effective location for FinTech ahead of Vilnius
and Bucharest (Davies N (2019)).4 Nevertheless, local traditional businesses’
demand for ICT has been modest. Therefore, the larger innovation and entrepreneur-
ial ecosystems in Bulgaria offer somewhat limited prospects with most companies’
managerial processes and market positioning not relying heavily on innovative
products and services.
Despite this, the EU’s export-oriented Joint European Resources for Micro to
Medium Enterprises (JEREMIE) program invested more than USD1.6 billion in
Bulgaria between 2014 and 2019 (European Investment Bank (2018)).5 Among the
funds selected to manage a total amount of EUR 350 million, four were located in
Sofia. The funds were given that task conditional on raising additional private funds
and with a focus on innovation-driven startups and SMEs. These initial public
investments achieved a 2.57 multiplier effect, which by 2017 attracted EUR 875 mil-
lion in private financing (Angelov E (2017)).6 As a result, cities like Sofia became
important growth hubs for the Balkans’ tech sector, creating incentives for firms to
set up there. Arguably, these investments have enhanced the competitiveness of the
city’s 9476 SMEs and 180 startups, helping secure more than 25,550 jobs in the
region (Angelov E (2017)).7
The outcomes of these public investments have been positive given Bulgaria’s
increasing number of exits, volume of private investments, and the valuation of
innovation and technology-driven companies. In 2019, R&D expenditure was
0.84% of the GDP, an annual increase of 21% (Georgieva T, Yalamov T (2020)).8
As in previous years, businesses account for the greatest share of R&D activity with
a total budget equivalent to 0.56% of GDP, marking a peak in the country’s modern
history (Georgieva T, Yalamov T (2020)).9

4
Davies N (2019) FinTech Locations of the Future 2019/20: London tops first ranking. Available at
https://www.fdiintelligence.com/Locations/Asia-Pacific/Singapore/FinTech-Locations-of-the-
Future-2019-20-London-tops-first-ranking (accessed on January 17, 2020).
5
European Investment Bank (2018) The European Investment Bank Group in Bulgaria 11/2018.
Available at https://www.eib.org/attachments/country/the_eib_group_in_bulgaria_en.pdf
(accessed on January 17, 2021).
6
Angelov E (2017) Funding Entrepreneurs. Bulgarian VC Association (BVCA), Presentation,
Vienna.
7
Ibid.
8
Georgieva T, Yalamov T (2020) Economic Resilience through Innovation. Available at http://
www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on
January 6, 2021).
9
Ibid.
252 V. Andonova et al.

Although positive trends have not yet compensated for the relatively low absolute
volume of investments in R&D in Bulgaria, recent initiatives bring optimism for the
future. For example, Sofia became home to the Big Data for Smart Society Institute
(GATE) in 2019. This EUR 15 million teaming project is the only big data center of
excellence in Eastern Europe. It should play a strategic role in disseminating best
practices and innovative models to EU countries with lower-than-average R&D
performance. GATE is a joint initiative between Sofia University (Bulgaria), the
Chalmers University of Technology (Sweden), and the Chalmers Industrial Tech-
nology foundation. It was devised to bridge the gap between Eastern Europe and
Western Europe’s 55 big data centers. It should also produce large positive spillover
effects for Sofia’s ecosystem (European Commission, 2019).10
The rest of the chapter is organized as follows. The next section provides an
overview of the elements commonly understood as inputs and outputs of Sofia’s
innovation ecosystem. This is followed by a comprehensive SWOT analysis of
Sofia’s innovation ecosystem validated by key stakeholders before we conclude
the analysis.

15.2 Innovation Inputs and Outputs in Sofia Innovation System

15.2.1 Institutions and the General Political Environment

Government programs and policies and the public sector’s functioning are important
factors in Sofia’s innovation and entrepreneurial ecosystem, and cannot be separated
from wider national institutions and political realities. The annual Global Entre-
preneurship Monitor report (GEM Bulgaria Report (2019))11 provides a pertinent
comparative perspective on the institutional and political environment. The most
positive aspects of the Bulgarian institutional context that influence the local eco-
system are as follows:

• Low taxes and little bureaucracy,

• Supportive and relevant government programs related to entrepreneurial
efforts, and.
• State-sponsored entrepreneurship programs.

On all these accounts, Bulgaria consistently ranks lower than Baltic countries like
Estonia and Latvia, and is mostly on par with Central European countries. In
Bulgaria, it takes seven procedures, 23 days, and 1.1% of income per capita in

10
European Commission (2019) The first big data Centre of Excellence in Eastern Europe takes off.
Available at: https://ec.europa.eu/info/news/first-big-data-centre-excellence-eastern-europe-takes-
2019-oct-17_en. (accessed on February 2, 2021).
11
Andonova V, Betov C and Krusteff M (2019) 2017/18 & 2018/19 GEM national report on
entrepreneurship in Bulgaria. Global Entrepreneurship Monitor Bulgaria.
15 Sofia Innovation System 253

fees and taxes to start a business (World Bank Doing Business Report (2019)).12 In
the neighboring Balkan countries, the same process takes on average six procedures,
23 days, and more than 3% of income per capita.
There are undoubtedly a growing number of government programs for startups
and entrepreneurial ventures, as well as initiatives for the creation of science parks
(e.g., Sofia Tech Park)13 and business incubators. Some of these were championed
by Bulgaria’s highest-ranked public official—the country’s president—between
2012 and 2017. However, there are multiple ways these facilities’ operations and
the state apparatus might be improved and transformed into powerful support
mechanisms. Most experts concur that the scientific and business communities in
Sofia have not yet been fully able to exploit these initiatives and related
infrastructure.
Serious reservations about the capacity of government officials to effectively and
competently carry out their tasks are pervasive. However, one of the best-rated
aspects of government programs is the support that science parks and incubators
offer, with significant involvement by the private sector and successful entrepreneurs
who participate as mentors, role models, and investors.

15.2.2 Sofia Tech Park and Its Impact

Sofia Tech Park, the first science park in Bulgaria, opened in 2015. Envisioned as the
missing link in Bulgaria’s innovation ecosystem, its goal is to create a bridge
between business, academia, government, NGOs, and civil society at large. The
Park includes new and renovated building space located only three kilometers from
Sofia’s historical and administrative center. The Park houses fully functional scien-
tific infrastructure, 11 applied research laboratories, an incubator, co-working
spaces, an interactive science center, green spaces spanning over 40,000 square
meters, and facilities for lectures, training, and demonstrations of new technology.
The EUR 42.7 million project was financed by EUR 36.3 million from the EU’s
European Regional Development Fund and by the national budget (European
Commission (2015)).14 State-owned Sofia Tech Park JSC manages the Park. The
Park has established partnerships with leading universities, the Bulgarian Academy
of Science (BAS), business clusters, multinational companies, SMEs, local and
national authorities, NGOs, and other entities. After a few rocky years, the

12
World Bank (2019) Doing Business 2019: Training for Reform. Available at https://www.
doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_
web-version.pdf (accessed on January 17, 2020). Provided by Creative Commons Attribution 4.0
International License (CC BY 4.0).
13
European Commission. Sofia Tech Park creates a unique environment for innovation. Available
at https://ec.europa.eu/regional_policy/en/projects/bulgaria/sofia-tech-park-creates-a-unique-envi
ronment-for-innovation. (accessed on January 17, 2021).
14
European Commission (2020) European Innovation Scoreboard, 2020. Available at https://ec.
europa.eu/commission/presscorner/detail/en/QANDA_20_1150 (accessed on December 20, 2020).
254 V. Andonova et al.

government-owned innovation complex has started consistently taking steps toward

actively working with ecosystem participants. Still, its fragile financial model, red
tape-related limitations, and the extremely modest participation of research
institutions in its governance bodies remain key weaknesses.
December 31, 2020, witnessed the opening of the European Digital Innovation
Hub for Data Science, High Performance Computing, and Artificial Intelligence The
Hub is a joint not-for-profit venture by the Sofia Tech Park, the ICT Cluster, NEVEQ
capital management, the Strategic Center for Artificial Intelligence, Sofia
University’s GATE, the Technology University, and Sofia Municipality. The hub
should support the digital transformation of data, high-speed computing, and AI
industries in Southwest Bulgaria where Sofia is located. It emphasizes improving
existing infrastructure, know-how, technology, and expertise (Registry Agency
(2021)).15
In addition, in December 2020, the Sofia Tech Park, Sofia Municipality, and the
Health and Life Sciences Cluster Bulgaria signed a memorandum of association to
initiate the creation of the first-ever Bulgarian BioCentre.16 Its declared objective is
to support the joint work of institutions, the science sector, and the business sector to
popularize Sofia as a go-to place for science, investment, and health technology
development. The BioCentre should become the place where scientists,
entrepreneurs, students, SMEs, and innovators find the appropriate intellectual and
expert environment in which to create high-impact ventures.
In general, better coordination with the private sector and the scientific and
entrepreneurial communities could improve the talent pool and the efficiency of
existing government programs and initiatives. Following this line of argument, local
observers and the ecosystem’s participants recognize that Bulgarian government’s
efforts to establish programs for new and growing innovation- and tech-driven
businesses are better than most other government initiatives (GEM Bulgaria Report
(2019)).17 In September 2020, the government announced that it was establishing
the National Innovation and Scientific Research Agency to lead and coordinate
public institutions’ innovation efforts.

15
Registry Agency (2021) Memorandum of Association of European Digital Innovation Hub for
Data Science, High Performance Computing and Artificial Intelligence. Available at https://portal.
registryagency.bg/CR/Reports/ActiveConditionTabResult?uic¼206339600. (accessed on February
2, 2021).
16
Sofia Tech Park (2020) Sofia Tech Park, Sofia Municipality, and Health & Life Sciences Cluster
Bulgaria signed a memorandum of association that will initiate the creation of the first-ever
Bulgarian BioCentre. Available at https://sofiatech.bg/en/news/sofia-tech-park-sofia-municipality-
and-health-life-sciences-cluster-bulgaria-will-collaborate-in-creating-a-biocentre/. (accessed on
February 2, 2021).
17
Andonova V, Betov C and Krusteff M (2019) 2017/18 & 2018/19 GEM national report on
entrepreneurship in Bulgaria. Global Entrepreneurship Monitor Bulgaria.
15 Sofia Innovation System 255

15.2.3 Predictable Macroenvironment

Sofia’s developments happen in a general context of political and policy stability,

where the main risk is relatively high levels of corruption. According to Transpar-
ency International18 in 2019, Bulgaria ranked 74th out of 198 countries and 12% of
public service users reported having paid a bribe in the previous 12 months.
On the other hand, the long-standing currency board established in 1997 has
contributed to robust fiscal and external balances and the expected adoption of the
Euro in early 2022. This would guarantee a stable and predictable
macroenvironment. In parallel, none of the major local taxes and fees in Sofia
Municipality have been increased since 2012, so the tax environment is predictable
(Sofia Economic and Investment Profile (2020)).19

15.2.4 Business-Friendly Tax Regime

There is a 10% flat tax on profits in Bulgaria and 5% on dividends, a very attractive
arrangement for businesses in the EU context. This, plus the growing number of
well-run co-working places, accelerators, and VCs, sets the scene for Sofia as one of
the best regional entrepreneurial ecosystems. However, there a number of unques-
tionable challenges are also involved: The fragmentation and variety of the region’s
small markets can be one of the biggest obstacles facing the growth of innovation-
driven ventures in the region (Guerrini F (2017)).20

15.3 Human Capital and Research

15.3.1 Leading Talent Pool

Sofia stands out as the nation’s leading talent pool and innovation hub in terms of
human capital and research intensity. While the age structure of residents in Sofia is
similar to that of Bulgaria as a whole, their qualification levels differ significantly:
On a national level, 28.2% of the total population has completed higher education,
whereas Sofia shows a much higher concentration. Over 51% of Sofia’s residents
have completed higher education. Sofia residents also demonstrate the best

18
Transparency International (2019) Corruption Perceptions Index 2019. Available at https://
images.transparencycdn.org/images/2019_CPI_Report_EN_200331_141425.pdf (accessed on
January 17, 2021).
19
Sofia Economic and Investment Profile (2020) Available at https://investsofia.com/wp-content/
uploads/2020/10/Sofia-Economic-and-Investment-Profile-2020.pdf (accessed on December
1, 2020).
20
Guerrini F (2017) Is Sofia the real digital Capital of the New Markets?. Forbes. Available at
https://www.forbes.com/sites/federicoguerrini/2016/04/14/is-sofia-bulgaria-the-real-digital-capital-
of-the-new-markets/print/. (accessed on February 24, 2018).
256 V. Andonova et al.

performance in university entrance examinations and the smallest share of failing

grades (Sofia Economic and Investment Profile (2019)).21 Moreover, almost 70% of
students in profiled high schools study in language schools learning English, Ger-
man, Spanish, French, Italian, Russian, Japanese, and other languages. The capital
has a lower share of vocational school graduates than the country overall, which is
explained by its smaller share of manufacturing compared to the national level.
In 2020, Sofia’s unemployed accounted for 2% of its working age population of
682,000 people, while Bulgaria overall had 6% unemployment.
Differences in education, performance, and employment are also reflected in
wage levels. Wages in Bulgaria have been increasing continuously over the last
decade, from an average annual gross salary of EUR 3000 in 2008 to about EUR
6900 in 2018. The trend is even stronger in Sofia, which increased from EUR 4500
to EUR 9500 over the same period. In the last decade, salary growth in Sofia (10.6%)
slightly outpaced Bulgaria’s growth trend (Sofia Economic and Investment Profile
(2019)).22
The strong labor market and cultural wealth offered by Sofia’s theaters, museums,
concert halls, and sports venue help the city retain a young workforce. In 2019, 51%
of Sofia’s residents were under 40 years old compared to 45% in Bulgaria overall. In
comparison, the percentage of residents under 40 in neighboring Romania and in its
capital Bucharest are 46% and 47%, respectively. In 2010, Sofia represented 19% of
the total workforce in Bulgaria, or 650,000 people. In 2018, this share grew to 21%
or 697,000 people.
Retention is not the only factor in Sofia’s demographics; the city is also highly
attractive. An additional factor in youths’ attraction to and retention in Sofia is its
concentration of higher education institutions. It is home to 23 of the 51 accredited
institutions in the country, including the three best universities in Bulgaria. Despite
Bulgarian universities’ relatively low rankings in widely cited international
scoreboards, the 100,000 students in the city represent an exceptionally large talent
pool and account for 40% of all students. Many of them come from their hometowns
to study and stay in Sofia, representing a clear migration trend of young and highly
qualified individuals from smaller cities to the capital. The three top-ranking
universities that attract the largest number and the best students are Sofia University,
the Medical University, and the University of National and World Economy.
Sofia’s pre-COVID-19 pandemic unemployment was mainly frictional or volun-
tary for reasons like moving from one job to another or enjoying unemployment
benefits. In 2019, Sofia had 15,000 registered unemployed on average, 46% of
whom had a university degree, and 31% had a secondary school professional degree.
Some 61% of the registered unemployed in Sofia in 2019 were specialists in

21
Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia.
com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed
on January 5, 2021).
22
Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia.
com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed
on January 5, 2021).
15 Sofia Innovation System 257

services, transport, business, economics, or law. In 2019, only 5% of the unem-

ployed in Sofia were chronically unemployed and had maintained this status for over
a year, compared to 37% in the rest of Bulgaria. In 2018, the economic activity rate
of the working-age population (15–64 years old) in Sofia was about 77% compared
to 72% nationally. At the same time, the share of people not included in the
workforce is 22% in Sofia compared to the national average of 29%.

15.3.2 Scarcity of IT Specialists

As described in Andonova V et al. (2019),23 Bulgaria’s programming talent is

globally recognized. According to data from Stack Overflow, the dominant Q&A
platform for coders with about 3.5 million users, the best coders come from Bulgaria
(Salkever A (2015)).24 Stack Overflow ranks the skill level of coders worldwide
using up- and down-votes on their answers to posted questions about coding and
systems, as well as rankings by fellow users. Thus, the result is entirely crowd-
driven. Bulgarian coders score the highest average reputation in the world in average
country rankings from the 14,898 Stack Overflow users who have reputation scores
of 5000 or more. Bulgaria also has 40 top-performing Stack Overflow users, and
their impressively high scores make Bulgaria the country with the highest average
reputation in the world.
Despite Sofia’s 11,000 students enrolled in IT-related degree programs in
2016–2017 (Digital Cities Challenge (2019)),25 the country lacks necessary
competencies. This is especially true in the growing ICT sector, which is one of
the drivers of the city’s tight labor market. The need for more skilled workers
intensified when the capital shifted to accelerating IT services and BPO sectors
after the 2009 construction bubble. IT services and BPO increased the number of
employees by almost 80,000 between 2008 and 2018. In 2019, they accounted for
nearly 30% of total employment in the city (Sofia Economic and Investment Profile
(2019)).26
To tackle skilled-worker scarcity, companies and associations have created
academies and internship programs like Telerik Academy or SoftUni that train
thousands of students in IT-related skills. In addition, 10% of the companies in
Bulgaria provide ICT-related training for their employees. However, this is a low

23
Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected
Places, Palgrave Macmillan, 2019.
24
Salkever A (2015) Data: Best programming talent in the world is not in California. Available at
https://venturebeat.com/2015/04/05/data-best-programming-talent-in-the-world-is-not-in-
california/. (accessed May 19, 2018).
25
Digital Cities Challenge (2019) Available at https://www.intelligentcitieschallenge.eu/sites/
default/files/2019-07/Assesment_Report_SOFIA_0.pdf (accessed on December 14, 2020).
26
Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia.
com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed
on January 5, 2021).
258 V. Andonova et al.

training rate compared to the EU average of 24% (DESI (2020)).27 Despite the low
rate, the effects are visible: Bulgaria boasted the second largest increase in human
capital for 2019, and one in four of its ICT specialists are female—a markedly higher
share than elsewhere in Europe (DESI (2020)).28

15.4 Infrastructure in the Sofia Innovation System

Sofia’s physical and digital infrastructure is the most sophisticated in Bulgaria and
compares favorably to other innovation hubs in the EU. Sofia lies on three European
transport corridors linking the capital to the Black Sea and to neighboring Greece,
Serbia, and Turkey (Sofia Economic and Investment Profile (2019)).29 The largest
airport in the country guarantees international connectivity, operating two passenger
and cargo terminals and servicing more than 35 airlines that cover 70 destinations
and 7.1 million passenger arrivals in 2019 (Sofia Airport (2020)).30
In 2020, Sofia had direct flights to 24 of the top 100 innovation clusters ranked by
the World Intellectual Property Organization (WIPO). These include Vienna,
Austria; Brussels, Belgium; Copenhagen, Denmark; Paris, France; Berlin, Cologne;
Frankfurt, Hamburg, Munich, and Stuttgart, Germany; Tel Aviv, Israel; Milan and
Rome, Italy; Amsterdam and Eindhoven, Netherlands; Warsaw, Poland; Moscow,
Russia; Barcelona and Madrid, Spain; Basel and Zurich, Switzerland; Istanbul,
Turkey; and London and Manchester, UK. It also included three of the ten hot
spots in innovation economies: Paris, Frankfurt, and London (FlightsFrom.com
(2021),31 WIPO (2020)).32
In Sofia, Bulgaria’s only metro network ensures a quick commute for about
600,000 citizens every day. Improvements in transportation infrastructure should
contribute cumulatively to improving the quality of life in the Sofia region since the
expansion of the metro network and other eco-friendly transportation modes will

27
DESI, Digital Economy and Society Index (2020) Available at https://ec.europa.eu/digital-single-
market/en/digital-economy-and-society-index-desi (accessed on December 27, 2020).
28
DESI, Digital Economy and Society Index (2020) Available at https://ec.europa.eu/digital-single-
market/en/digital-economy-and-society-index-desi (accessed on December 27, 2020).
29
Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia.
com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed
on January 5, 2021).
30
Sofia Airport (2020) Passengers 2019–2020. Available at https://www.sofia-airport.bg/sites/
default/files/bg-passengers_2019-2020_14.pdf (accessed on January 16, 2020).
31
FlightsFrom.com (2021) Destinations from Sofia. Available on https://www.flightsfrom.com/
SOF/destinations (accessed on January 17, 2021).
32
WIPO (2020) Global Innovation Index 2020. Available at https://www.wipo.int/global_
innovation_index/en/2020/ (accessed on January 6, 2021). WIPO (2020). Global Innovation Index
2020, Special Edition: The Top 100 Science and Technology Clusters, Table S 1.3. Available at
https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2020.pdf (accessed on January 17, 2021).
15 Sofia Innovation System 259

effectively reduce yearly greenhouse gas emissions by 90,000 tons (Sofia Economic
and Investment Profile (2019)).33
Other large EU-funded projects valued between EUR 15 million and EUR
257 million are expected to further improve quality of life. These include several
highways, waste management plants and systems, new public transport vehicles,
improvements in the regional water supply and sewage system, and the expansion of
a radiotherapy clinic. Still, it is very hard to speculate about the implementation
timeline for these initiatives as they depend on the acquisition of land rights, urban
planning permits, and public discussions and approvals.
Regarding digital infrastructure, the share of households with Internet access in
Sofia is 81.9%, similar to Bucharest’s 89%. Data plans in Bulgaria tend to be cheap,
and the coverage of the national territory is very good. Moreover, the European
High-Performance Computing Joint Undertaking (EuroHPC JU) will install one of
five mid-to-high range supercomputers in the Sofia Tech Park, which will receive an
additional investment of about BGN 65 million. The other locations for such
mid-range supercomputers are Luxembourg, Portugal, Czechia, and Slovenia.

15.5 Market Sophistication

15.5.1 High Integration in the EU and the World Economy

Although almost 50% of Bulgaria’s exports are manufactured products, the

manufacturing sector represents only 18% of Sofia’s exports. For the metropolitan
area, the leading export sectors are trade and repairs, which makes up about 40% of
Sofia’s total export revenue, and the innovation-intensive sectors of IT and
telecommunications at 16% of revenue. In comparison, these sectors contribute
26% and 7% for Bulgaria, respectively (Sofia Economic and Investment Profile
(2019)).34
Sofia’s competitiveness as an ICT hub shows in its cumulative Foreign Direct
Investments (FDI). In 2018, Sofia achieved three times the national average of FDI
on a per capita basis, (Sofia Economic and Investment Profile (2019)).35 ICT
accounted for about 13% of the FDI flows in Sofia, compared to less than 10% at
national level. Generally, most investments in Sofia are in the services sector. In
2017, Sofia accumulated half of the inward FDI flows for Bulgaria and represented
more than a third (37%) of its exports. Figure 15.1 contains the cumulative FDI by
the end of 2018 in Sofia and Bulgaria by economic sector. Sofia’s ICT exports were

33
Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia.
com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed
on January 5, 2021).
34
Sofia Economic and Investment Profile (2020) Available at https://investsofia.com/wp-content/
uploads/2020/10/Sofia-Economic-and-Investment-Profile-2020.pdf (accessed on December
1, 2020).
35
Ibid.
260 V. Andonova et al.

Fig. 15.1 Cumulative foreign direct investments (FDI) by 31.12.2018. Source: The authors based
on the Sofia Economic and Investment Profile (2019) (Sofia Economic and Investment Profile,
November 2019 (2019). Available at https://investsofia.com/wp-content/uploads/2019/12/Sofia-
Economic-and-Investment-Profile-2019-EN.pdf (accessed on January 5, 2021))

about EUR 2.8 billion in 2019 (Sofia Economic and Investment Profile (2020)),36
testifying to the hyperconcentration of this sector in the capital city. Sofia’s ICT
sector accounts for 87% of the revenues, 80% of the employees, and about 91% of
the value-added in the national sector.
At the aggregate level, Sofia’s economic cycle is more like the European eco-
nomic cycle than other regions in Bulgaria. This is consistent with the city
economy’s strong export orientation and high level of competitiveness. The export
revenues of enterprises based in Sofia have been rapidly growing since 2014. In
2018, they exceeded EUR 14 billion, which is almost 40% of the country’s export
revenue (Sofia Economic and Investment Profile (2019)).37

15.5.2 Growing Digital Maturity

In 2018, stakeholder interviews during the Digital Cities Challenge contest showed a
somewhat cautious snapshot of Sofia’s digital maturity measured by digital skills,
technological competence, and competitiveness (Digital Cities Challenge (2019)).38

36
Ibid.
37
Ibid.
38
Digital Cities Challenge (2019). Available at https://www.intelligentcitieschallenge.eu/sites/
default/files/2019-07/Assesment_Report_SOFIA_0.pdf (accessed on December 14, 2020).
15 Sofia Innovation System 261

The assessment highlighted two insights. First, Sofia showed advanced digital
development in the ICT and startup domains as well as in digital infrastructure and
broadband connectivity. On the other hand, the manufacturing and services sectors
showed only modest digital development.
The key aspect for improving overall performance is a tighter link between
business, educational institutions, and science geared toward market introductions
with significant R&D components. One limitation for the positive development of
R&D activity is the scarcity of human capital. Despite the migration of well-
educated working-age individuals to the city, businesses in ICT and the bubbling
startup community are subject to shortages of such skilled workers as outlined
above.
The dynamic relationship between Sofia-based ICT and startup communities and
the sizable Bulgarian diaspora abroad brings dynamism and global opportunities,
and, to some extent, helps overcome the limitations of locally available skills.
However, these dynamics must broaden to include the more traditional
manufacturing and service sectors. The Sofia business community is in need of an
across-the-board drive toward digital maturity, rather than isolated areas of
excellence.

15.5.3 Path Dependency from Communism

As part of the Soviet bloc’s Comecon system, Bulgaria was assigned economic
specialization in IT (Andonova V et al. (2019)).39 This IT tradition, coupled with a
robust STEM-focused education, gave Bulgaria a strong start in the digital economy
when it became a member of the EU in 2007. However, STEM education has
declined since the fall of the Berlin Wall in 1989.
Recently, Bulgaria has rapidly become a competitive outsourcing destination for
leading incumbents in the digital economy like Cisco Systems, Hewlett-Packard,
VMWare, Microsoft, Oracle, SAP, and IBM. Some of those companies have
established R&D laboratories in the city. The presence of these IT leaders and the
availability of advanced IT professionals have prepared the ground for IT-based
entrepreneurial development. According to the President of the Bulgarian VC
Association (BVCA), the export of IT-related products and services has grown
more than fourfold since 2008. However, these powerful companies also impose a
heavy burden on the local entrepreneurial ecosystem because they compete against
domestic entrepreneurial ventures for the same limited local talent.
Immigration from the Balkans to Western Europe has been an ongoing process
since the early twentieth century. The Balkan countries have suffered from poor
governance and corruption, which pushes talent to seek opportunities in the wealth-
ier countries of Western Europe and the USA. Bulgaria is not the exception.

39
Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected
Places, Palgrave Macmillan, 2019.
262 V. Andonova et al.

Between 1990 and 2007 when Bulgaria joined the European Union, one million
Bulgarians left the country, that is an average of 60,000 per year. According to
estimates made in 2017, 30,000 individuals now leave every year, mostly students
seeking graduate degrees in IT, engineering, and medicine (Hope K (2018)).40
Bulgaria’s small population of around seven million, together with the negative
trend of an increasingly aging population, mean that this brain drain has a significant
impact. It reduces private sector activity, productivity, and overall economic com-
petitiveness. However, there are some early signs of optimism as industry
associations like the Bulgarian Association of Software Companies have started to
measure and communicate the number of returnees among their members
(BASSCOM Barometer (2020)).41

15.6 Culture

One defining feature of Bulgarian culture is pervasive pessimism. Even the most
progressive and supportive members of the Sofia entrepreneurial ecosystem agree
that changing the nation’s mindset from its communist past has been enormously
challenging. This is partly because postcommunist governments throughout the
region have resisted a full transition from old ways of thinking and doing. A
generational change should bring about a much-needed shift in mentality. That
shift is already beginning in the already global community of IT, highly skilled
professionals, and managers.
Given the country’s recent communist past, it is not surprising that there is a very
strong preference for employment rather than self-employment. Participants in the
local entrepreneurial ecosystem describe a tendency to shy away from responsibility
and an overanalysis of failure. Both of these may be cultural constraints on the faster
development of the entrepreneurial ecosystem. Sound business culture is only
incipient and shows in the consumption patterns of local tycoons who spend lavishly
on yachts and other luxury goods but do not see themselves as investors in the local
entrepreneurial and innovation ecosystems.

15.6.1 Diaspora and Returnees as Drivers of Cultural Change

Members of the diaspora community and returnees are very important participants in
Sofia’s ecosystem, bringing with them significant cultural shifts. Even though there
are no readily available statistics on the number of returnees in the Sofia

40
Hope K (2018) Bulgaria battles to stop its brain drain, FT. Available at https://www.ft.com/
content/51f1bd86-d6cc-11e7-ae3e-563c04c5339a. (accessed on March 3, 2018).
41
Bulgarian Association of Software Companies (2020) BASSCOM Barometer 2020. Available at
https://www.basscom.org/RapidASPEditor/MyUploadDocs/BASSCOM_Barometer_2020_BG_.
pdf (accessed on January 17, 2020).
15 Sofia Innovation System 263

entrepreneurial ecosystem or on diaspora members who actively support Sofia-based

ventures, the names of the most prominent actors are widely known within the
community. According to the National Statistical Institute and the Economic Insti-
tute with the Bulgaria Academy of Sciences, more Bulgarians work abroad than in
the country, and 55% of those who emigrate every year are aged 20 to 29 (O’Brien C
(2018)).42 Those who commit to and work hard in this ecosystem have a fully global
outlook and can participate in global networks, which imprints a pattern of behavior
that makes Sofia entrepreneurs indistinguishable from their international peers.
The Bulgarian diaspora and the returnees are key drivers of the local entrepre-
neurial culture and mindset. Most education institutions have only recently started to
stimulate entrepreneurial experimentation as part of their curricula. Meanwhile, the
entrepreneurial culture has been developing quickly, driven by international
exchange and collaboration as well as investment. VC investments come through
several VC funds with public and private money (e.g., Eleven and LAUNCHub) and
private funds (e.g., NEVEQ). Successful exits in the Sofia entrepreneurial ecosystem
have led to the emergence of a small but strong network of business angels and
mentors who bring new vision and behavior to the community, becoming serial
entrepreneurs and regional role models.
Entrepreneurial activity in Sofia does not depend only on the activities of the
current residents. It also draws on the ties that keep Sofia connected to global
entrepreneurial hubs via the Bulgarian diaspora and on the resources that the
diaspora makes available to local entrepreneurs (Schmutzler J, Andonova V, Pérez
J (2021)).43 Despite the initial brain-drain conditions in Bulgaria, the diaspora
stimulates opportunity-driven entrepreneurial activity by contributing essential
social and human capital to the Sofia entrepreneurial ecosystem. This effectively
turns Bulgaria’s brain drain into brain circulation, contributing positive value to the
local economy (Schmutzler J, Andonova V, Pérez J (2021)).44

15.7 Venture Capital

As presented in Andonova V et al. (2019),45 VC investment in Central and Eastern

Europe amounted to EUR 0.5 billion in 2015. That investment was 3% of the total
amount invested in the VC field across Europe in that year. There seems to be a

42
O’Brien C (2018) Bulgaria rising: Can a growing startup movement reinvent the country’s
economy? Available at https://venturebeat.com/2018/03/23/bulgaria-rising-can-a-growing-startup-
movement-reinvent-the-countrys-economy/. (accessed on May 19, 2018).
43
Schmutzler J, Andonova V and Pérez-Lopez J (2021) “The role of diaspora in opportunity-driven
entrepreneurial ecosystems: A mixed-methods study of Balkan economies” International Entre-
preneurship and Management Journal. Available at https://link.springer.com/article/10.1007/s113
65-020-00708-4
44
Ibid.
45
Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected
Places, Palgrave Macmillan, 2019.
264 V. Andonova et al.

growing interest in using private and institutional money to support regional

ventures in this part of the world and Sofia specifically.
In this context, Sofia has emerged as an accelerator capital in Europe (#3 in 2017
according to BVCA’s President, Evgeni Angelov). According to the EIF, growth has
been exponential. In 2016, 210 startups raised USD74 million (O’Brien C (2018)).46
2015 saw the creation of the Fund of Funds as a new mechanism to structure the
financial instruments that channel the EU’s public resources and the national budget.
Since its creation, the Fund of Funds has directed a total of EUR three billion, of
which EUR 211 million went to innovation and productivity programs. In 2020, it
launched new financial instruments for equity and quasi-equity investments (Fund of
Funds (2020)).47 These included Vitosha Venture Partners Fund 1, a 10-year
acceleration, and seed financing fund with EUR 19 million. By 2023, the fund
should invest in 116 new ventures. Innovation capital is another EUR 16 million
venture fund for innovation-driven Bulgarian ventures. Finally, New Vision 3 and
Morningside Hill operate VC funds amounting to EUR 21 million and EUR 29 mil-
lion, respectively (Fund of Funds (2020)).48
In 2012, two accelerator venture funds headquartered in Sofia were instrumental
in its early developments: Eleven and LAUNCHub. Eleven was a USD15 million
startup accelerator and seed fund. LAUNCHub started as a USD12 million preseed
fund. These were joined by others like NEVEQ, a venture equity fund that has
traditionally focused on revenue-generating companies rather than startups
(Andonova et al., 2019).
LAUNCHub announced in early 2021, that it had completed the first phase of its
new VC fund at EUR 44 million (USD53.5 million), backed by the European
Investment Fund, corporations, and a number of Bulgarian tech founders and
investors. The next phases should reach a target size of EUR 70 million by the
second quarter of 2021. This development is a massive boost for Sofia as a home of
serious VC funds in Central-Eastern and Southeast Europe (TechCrunch (2021)).49
Ultimately, most of Sofia’s entrepreneurial financing came from the European
Union, which invites possible policy discussions on the role of local governments as
an arms-length limited partner investor. Bulgaria’s positive experience shows that
the government needs to focus more on creating a broad context for the

46
O’Brien C (2018) Bulgaria rising: Can a growing startup movement reinvent the country’s
economy? Available at https://venturebeat.com/2018/03/23/bulgaria-rising-can-a-growing-startup-
movement-reinvent-the-countrys-economy/. (accessed on May 19, 2018).
47
Fund of Funds (2020) The Fund of Funds Established a Fourth Alternative Investment Fund.
https://www.fmfib.bg/en/news/153-the-fund-of-funds-established-a-fourth-alternative-investment-
fund (accessed on January 17, 2021).
48
Fund of Funds (2020) The Fund of Funds Established a Fourth Alternative Investment Fund.
https://www.fmfib.bg/en/news/153-the-fund-of-funds-established-a-fourth-alternative-investment-
fund (accessed on January 17, 2021).
49
TechCrunch (2021) LAUNCHub Ventures heading towards a USD85 million fund for South
Eastern European startups. Available at https://techcrunch.com/2021/01/12/launchub-ventures-
heading-towards-a-85m-fund-for-south-eastern-european-startups/ (accessed January 17, 2021).
15 Sofia Innovation System 265

entrepreneurial ecosystem to functioning, not on being an active manager of funds.

The right incentives lie with partners and managers, not with bureaucrats.
Despite these developments, Bulgaria and the region face a lack of late-stage
funding opportunities. This creates incentives for promising local entrepreneurial
ventures to sell prematurely since they cannot expect ready access to funds that will
fuel their growth (Andonova V et al. (2019)).50 This, however, is also an indicator
that the base of the ecosystem is solid and set for expansion.
The two accelerator venture funds headquartered in Sofia that started operations
in 2012 were instrumental for broader Balkan entrepreneurial community building.
Both accelerators catalyzed this process by channeling financial resources, attracting
substantial private capital. Private money brought discipline to companies and
investments, along with expertise and know-how. The newly built community that
formed around these two loci of the Balkan entrepreneurial landscape provided
support through contacts, strategy scrutiny, and helping keep ventures and their
portfolios on track. Thus, the accelerators brought many benefits in addition to
money and made it possible to build a community in Sofia. Establishing a pay-it-
forward culture was probably the most important component of this community. The
accelerators also played a crucial educational role in developing Balkan
entrepreneurs as these de facto funds adopted broader regional investment strategies.
On average, however, regional financing needs have remained comparatively
low. Most of the startups are in the ICT, digital, engineering, and mid-tech sectors.
The regional ecosystem promotes these kinds of startups with its tradition of
successful innovations and the presence of ICT-focused corporations, education
institutions, and community organizations. The entry costs and capital requirements
in these industries are low to moderate, and the region already has infrastructure and
a history of success in these domains. This allows startups to leverage complemen-
tary resources, thus limiting their capital requirements and the need for entrepre-
neurial finance (Andonova V et al. (2019)).
According to the application data obtained from accelerator venture fund Eleven
between November 2012 and December 2015, 81% of startups in the region reported
having invested their own funds in their startup ventures, with an average amount
equal to USD20,210 invested. Between 2014 and 2015, the average amount sought
by ventures to increase their operations, according to LAUNCHub data, was the
modest amount of USD645,730 (Andonova V et al. (2019)).51

50
Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected
Places, Palgrave Macmillan, 2019.
51
Ibid.
266 V. Andonova et al.

15.8 Business Sophistication

15.8.1 Early Adoption of Artificial Intelligence (AI)

In comparison with other EU countries, the average Bulgarian business is relatively

weak in digitization processes. Specifically, only 9% and 6% of all enterprises report
B2C and B2B Web sales, respectively (DESI (2020)).52 In 2019, 60% of enterprises
had adopted business digitization processes, 10% used medium-to-highly sophisti-
cated cloud computing services, and 6.5% used big data analysis—the fourth lowest
rate in the EU in 2018 (DESI (2020)).53
Overall, Bulgaria’s productivity per individual employed in 2017 was second to
last in the EU. Productivity in the ICT sectors was about EUR 60,000 per employee,
compared to total productivity of EUR 30,000 per employee. At the same time,
Bulgaria is above the EU average in terms of enterprises that reported adopting at
least one AI technology and that adopted e-government services for business in 2020
(54% compared to 42%). Additionally, Bulgaria showed one of the highest improve-
ment rates in the Brain Business Jobs concentration, putting the country in eighth
place in the EU (The Geography of Europe’s Brain Business Jobs: 2020 Index).54
Still, with 4.9–5.9% of the workforce being active in Brain Business Jobs, the
country has a gap to fill.

15.8.2 A Hub for Brain Business Jobs

Sofia, as the nation’s economic, political, and cultural center, accounts for about
40% of the national GDP. Its economic indicators are markedly distinct from the
country overall. 10.1% of Sofia’s working-age population is employed in Brain
Business Jobs (professional, scientific, technical, and other business services), which
is twice the national average and growing fast (The Geography of Europe’s Brain
Business Jobs: 2020 Index).55 Salaries in Sofia are 28% higher than the national
average.
The capital is also the country’s leading innovation hub, especially when it comes
to ICT innovation and entrepreneurial activity—both key growth drivers. Between
2012 and 2019, the number of employees in the most knowledge-intensive
organizations grew from 155,200 to 194,600. Of these, 39,400 were new Brain
Business Jobs—73% in ICT, 12% in creative professions, 8% in tech, and 7% in

52
DESI, Digital Economy and Society Index (2020) Available at https://ec.europa.eu/digital-single-
market/en/digital-economy-and-society-index-desi (accessed on December 27, 2020).
53
Ibid.
54
The Geography of Europe’s Brain Business Jobs: 2020 Index (2020) Available at https://www.
ecepr.org/wp-content/uploads/2020/01/Brain-Business-Jobs-2020-Index.pdf (accessed on January
5, 2021).
55
Ibid.
15 Sofia Innovation System 267

advanced services (The Geography of Europe’s Brain Business Jobs: 2020 Index).56
Sofia’s strengths are in the pharmaceutical sector, ICT, design, telecommunications,
and programming.
Sofia is the third fastest-growing hub for Brain Business Job creation in Europe.
Competitive wages, local talent, and favorable taxation drive its growth. Companies
whose knowledge-intensive units are located in more expensive geographies con-
tribute by relocating to Sofia and subcontracting there. Experts anticipate that links
will only grow stronger between Sofia and the European brain job hubs like London,
Paris, or Stockholm.
Some 10.5% of total employment in Sofia and 83% of the country’s total
employment in 2019 were in the creation and distribution of information and
creative products and telecommunications. The approximately 6500 IT in Sofia
employed these workers. Among them, five companies had more than 1000
employees, 33 had more than 250 employees, 133 were medium-sized companies
with 50–249 employees, and 561 were small companies employing between 10 and
49 people. Together, these companies created nearly 21,000 jobs. More than 5800
companies with less than nine employees also included self-employed individuals
(Sofia Economic and Investment Profile (2019)).57

15.8.3 Negative Country-of-Origin Effect and Unsophisticated Local

Buyers

The presence of leading global companies with R&D operations in Sofia has
unquestionably improved the country’s knowledge and relevant experience. Never-
theless, local and regional buyers are not very sophisticated, and often, there is no
local demand for the products that the advanced regional engineering talent creates.
More often than not, this pushes entrepreneurial ventures into early stage interna-
tionalization, adding another layer of complexity to their operations.
Two significant challenges arise from local markets being small and unsophisti-
cated. First, Bulgarian entrepreneurs experience a shortage of business skills for
internationalization because the vast majority lack proper business training.
Second, in the not-too-distant past, the prevailing negative image of Bulgaria and
other Eastern European countries produced a negative spillover effect even for the
most innovative entrepreneurial ventures. Some of the region’s most successful B2B
ventures were explicitly asked to keep the names of their world-renowned clients
confidential for fear that having Bulgarian suppliers might invite suspicion and
mistrust. This has been changing gradually, mainly because some of the most

56
Ibid.
57
Sofia Economic and Investment Profile, November 2019 (2019) Available at https://investsofia.
com/wp-content/uploads/2019/12/Sofia-Economic-and-Investment-Profile-2019-EN.pdf (accessed
on January 5, 2021).
268 V. Andonova et al.

successful entrepreneurial ventures made substantial efforts to educate their clients

and show pride in their country as part of their business strategy.
Branding Bulgaria and the region is very important for the future of Sofia’s
entrepreneurial ecosystem, and there have been some increased awareness and effort
made in this regard. Gaining recognition as an attractive place to live and work by
citizens and foreign talent is essential to the further maturation of this young
ecosystem.
Regional governments, especially those of Balkan EU member countries includ-
ing Bulgaria, are taking cautious steps to encourage the immigration of high-skilled
workers and attract talent from non-EU neighbors. There are also many voices in
favor of more aggressive government programs promoting high-skilled immigration
from outside the region. If there is broad consensus among actors within the
ecosystem about one thing, it is that the most important ingredients of a vibrant
entrepreneurial ecosystem are its people and their commitment to adding value
(Andonova V et al. (2019)).58

15.9 Outcomes of Innovation Activity

According to the European Innovation Scoreboard for 2020, which classifies

economies into innovation leaders, strong innovators, moderate innovators, and
modest innovators, Bulgaria is a modest innovator. It fits into this category along
with Romania because its innovation performance is below 50% of the EU average
(European Innovation Scoreboard (2020)).
According to Bulgaria’s innovation profile, its strongest areas are its increasing
employment in fast-growing innovative companies and its number of design and
trademark applications. These achievements cannot offset its systemic challenges,
the most urgent of which are related to the country’s demographic crisis, low total
early stage entrepreneurial activity, and low buyer sophistication.
Bulgaria ranks 37th in the GII 2020, mainly because it has improved its results
from innovation activity while maintaining its ecosystem inputs, thus enhancing its
innovation efficiency. Bulgaria’s long-standing obstacles to better performance in
terms of innovation are related to education—including STEM graduates and public
spending—the business environment, access to finance, and access to and use of
intellectual property protection mechanisms. Nevertheless, composite innovation
rankings like the GII can easily obscure the products and progress of this national
innovation system.

58
Andonova V, Nikolova M and Dimitrov D (2019) Entrepreneurial Ecosystems in Unexpected
Places, Palgrave Macmillan, 2019.
15 Sofia Innovation System 269

15.9.1 Patents

According to European Patent Office data, 181 Bulgarian individuals and legal
entities were granted patents in 2019, only two patents short of the 1999 record of
183. Since 2000, a total of 1781 patents were granted to Bulgarian individuals and
entities. Almost 19% of these were in class B (technological processes and trans-
port), followed by class A (human needs) at 17% (Georgieva T, Yalamov T
(2020)).59
Individual patent holders dominated the institutional structure of patent activity in
the same period. They had 40% of patents in 2019 and 57% in the last 20 years.
Analysts acknowledge that “despite growth in the number of patents issued to
businesses, and the Bulgarian Academy of Sciences (the main representative of the
public sector), the role of individuals remains key, and has been growing in the last
four years” (Georgieva T, Yalamov T (2020)).60
The business sector’s patent activity is largely concentrated in Sofia, which
claims 65% of that activity. Thirteen other towns are registered as the headquarter
locations for patent-earning businesses in 2019. Two of the five universities—all
public—that were granted a patent in 2019 are located in Sofia: Sofia University and
the Technical University in Sofia.
Experts highlight that these primary research organizations’ public nature
explains Bulgaria’s low degree of technical knowledge institutionalization. The
main motivation for public entities is not the industrial application of their inventions
but tenure. As a result, in Bulgaria, there is a phenomenon called hidden academic
entrepreneurship: new venture creation that embeds new products and processes in
personal initiative with no participation or commitment by the public research entity
(Georgieva T, Yalamov T (2020)).61 The unexploited potential in this domain is
enormous, but the regulatory framework and the national strategy are very weak or
nonexistent as of 2020.
According to the Patent Office of the Republic of Bulgaria, the top five techno-
logical areas of business patent activity in 2001–2019 are the following: human and
veterinary medicine, hygiene, dentistry, and pharmacology. Patents themselves
comprise basic elements of electrical equipment such as cables, wires, insulators,
resistors, magnets, detectors, transformers, switches, and resonators; food and food
products, like processing methods, milk, oils, coffee, tea, chocolate, and confection-
ery; ammunition, blasting, and pyrotechnics; and measurements of physical
quantities. Figure 15.2 contains the total number of patents for the top ten techno-
logical areas between 2001 and 2019.

59
Georgieva T and Yalamov T (2020) Economic Resilience through Innovation. Available at http://
www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on
January 6, 2021).
60
Georgieva T and Yalamov T (2020) Economic Resilience through Innovation. Available at http://
www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on
January 6, 2021).
61
Ibid.
270 V. Andonova et al.

Fig. 15.2 Patents in the top ten technological areas of business patent activity in Bulgaria,
2001–2019. Source: Georgieva T, Yalamov T (2020) (Georgieva T and Yalamov T (2020)
Economic Resilience through Innovation. Available at http://www.arcfund.net/fileadmin/user_
upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on January 6, 2021)), Economic Resil-
ience through Innovation, using data from the Patent Office of Republic of Bulgaria

In addition to patents, utility models can protect innovators’ rights over small
inventions. Between 2007 and 2019, 2377 certificates for utility models were issued,
of which almost 60% came from the business sector (Georgieva T, Yalamov T
(2020)).62

15.9.2 Research

Bulgaria ranked 61st in the world for research production in 2019 and 22nd in the
EU-28. It had 6022 publications, of which 5752 were scientific articles, reports, and
reviews (Georgieva T, Yalamov T (2020)).63 For every 1000 people employed in
science and technology, Bulgaria produces 29 scientific articles, reports, and
abstracts. Other Eastern European countries like Slovenia and Czechia show three
times as much productivity. A similar gap appears for productivity measured by the
number of scientific and technical publications per billion USD, as reported in
Fig. 15.3 (Andonova V (2021)).64
Bulgaria has a positive trend, reporting double-digit growth in annual publication
activity for the second consecutive year. The rate increased 13% in 2019 after an

62
Ibid.
63
Ibid.
64
Andonova V (2021) Entrepreneurial Ecosystems and Innovation in the Balkans in Cahen, F.,
Casanova, L., Miroux, A., (Eds.) Innovation from Emerging Markets: From Copycats to Leaders,
Cambridge University Press, 150–182.
15 Sofia Innovation System 271

Fig. 15.3 Scientific and technical publications per billion USD PPP GDP. Source: The authors,
based on Andonova. V et al. (2021) (Andonova V (2021) Entrepreneurial Ecosystems and
Innovation in the Balkans in Cahen, F., Casanova, L., Miroux, A., (Eds.) Innovation from Emerging
Markets: From Copycats to Leaders, Cambridge University Press, 150–182) with data from the
Global Innovation Index report 2019 (https://www.wipo.int/global_innovation_index/en/; Provided
by Creative Commons Attribution (BY) 3.0)

increase of 20% in 2018 (Georgieva T, Yalamov T (2020)).65 In 2020, the interna-

tional institutional ranking SCImago included 18 scientific organizations from
Bulgaria: BAS and seven of its units as independent legal entities, plus
10 universities—most located in Sofia.

15.9.3 R&D Spending and Institutional Arrangement

With R&D spending at 0.84% of GDP in 2019, Bulgaria is far from its declared
target for 2020 of 1.5%. However, systematic underreporting of R&D spending may
drive some of this, since Bulgarian companies have no legal obligation or stimulus to
disclose such activities publicly. Occasionally, when such incentives were part of
public grant application processes, reported investments increased significantly.
Some analysts have concluded that real R&D investments could be up to 10 times
higher than the reported numbers.

65
Georgieva T and Yalamov T (2020) Economic Resilience through Innovation. Available at http://
www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on
January 6, 2021).
272 V. Andonova et al.

Following a long-standing trend, businesses accounted for the largest contribu-

tion to R&D spending in 2019 at 0.56% of GDP. The 2019 investment was the
largest business investment in R&D in Bulgaria’s modern history (Georgieva T,
Yalamov T (2020)).66
The most important driver for the sustained increase of R&D investment is
European financing through operational programs. As with physical infrastructure,
European funding is instrumental for higher education institutions and public
research entities, mostly in the form of grants for the latter case (Georgieva T,
Yalamov T (2020)).67 This vehicle mobilizes complementary private investments
and, as such, stimulates a sustained commitment to R&D by the private sector.
Companies tend to absorb their own R&D budgets, with very little going to
public research institutes as outsourced research. Part of the reason for this is the
country’s relatively underdeveloped technology transfer framework and capacity,
the absence of a clear regulatory framework for new venture creation by public
research entities, administrative capacity, and researchers’ incentive systems
(Georgieva T, Yalamov T (2020)).68

15.9.4 Startups and Innovation-Driven Entrepreneurial Ventures

Data on startup and venture creation dynamics are not readily available because
many of the investments and exits in the Sofia entrepreneurial scene are done under
terms of confidentiality. It is evident, however, that Sofia has continued to attract VC
in the last decade. For example, Fig. 15.4 shows an overview of the highest valuation
companies in Central and Eastern Europe as reported by Dealroom. This list includes
an important number of Sofia-based ventures (Andonova V (2020)).69
In some ways, the young but bubbling entrepreneurial ecosystems in Sofia have
played a pivotal role in Bulgaria’s performance on innovation outcomes and effi-
ciency (Andonova V (2020)).70 In this regard, Sofia provides a fascinating case in
the search for innovation excellence. It has relatively modest total R&D investments
and a less-than-perfect institutional setup. The interactions facilitated by Sofia’s
entrepreneurial ecosystem have created spaces for collaboration and go-to-market

66
Andonova V (2021) Entrepreneurial Ecosystems and Innovation in the Balkans in Cahen, F.,
Casanova, L., Miroux, A., (Eds.) Innovation from Emerging Markets: From Copycats to Leaders,
Cambridge University Press, 150–182.
67
Ibid.
68
Georgieva T, Yalamov T (2020) Economic Resilience through Innovation. Available at http://
www.arcfund.net/fileadmin/user_upload/arcimages/INNO_2020_ENG_WEB.pdf. (accessed on
January 6, 2021).
69
Andonova V (2021) “Entrepreneurial Ecosystems and Innovation in the Balkans” in Cahen, F.,
Casanova, L., and Miroux, A. (Eds.) Innovation from Emerging Markets: From Copycats to
Leaders, 2020, Cambridge University Press, 150–182.
70
Ibid.
15 Sofia Innovation System 273

Fig. 15.4 Selected innovation- and technology-driven entrepreneurial ventures from Central and
Eastern Europe according to their valuation. Source: Andonova V (2021) (Ibid) based on Dealroom.
co

dynamics even though the research sector per se and technology transfer system are
somewhat deficient by international standards.
In particular, well-structured entrepreneurial finance schemes that rely on
performance-based market incentives rather than on slow-paced bureaucratic
procedures stimulate the development of entrepreneurial ecosystems seeking tech-
nology and innovation as key differentiators. Financing opportunities attract the
attention of local and regional talent and participants, who, in turn, engage with a
globally minded entrepreneurial community that thrives on a culture of sharing and
knowledge exchange. Far from being perfect, this creates an ecosystem with a level
of connectedness that supports the emergence and scaling of innovation-driven
ventures. At the same time, much of the innovation happens outside specialized
research centers and by individuals and businesses. These dynamics appear to be
particularly relevant for industries with relatively low entry costs, mostly those
related to digital technologies (Andonova V (2021)).71

71
Andonova V (2021) “Entrepreneurial Ecosystems and Innovation in the Balkans” in Cahen, F.,
Casanova, L., and Miroux, A. (Eds.) Innovation from Emerging Markets: From Copycats to
Leaders, 2020, Cambridge University Press, 150–182.
274 V. Andonova et al.

15.10 SWOT Analysis Sofia Innovation System

We present a detailed and balanced account of the forces in the regional innovation
system in the SWOT table below. To counterbalance any potential biases that the
authors of this chapter might have, we validated this SWOT analysis of the Sofia
innovation ecosystem with five key stakeholders who have been active in the Sofia
innovation and entrepreneurship scene for over a decade.

Resources Strengths Weaknesses Opportunities Threats

Bank loans The currency Loans for The European A threat comes
board guarantees startups and Investment Bank from the
the stability of scale-ups are the has been an active inconsistent
the banking exception rather supporter of the monitoring of
system. than the norm; local ecosystem bank
the banking by structuring performance.
Bulgaria will system provides high-impact This institutional
switch to the only a marginal financing weakness
EURO in percentage of the instruments. disturbs the
early 2022. capital in the dynamics, trust,
entrepreneurial The European and
Banks offer a ecosystem Investment Fund competitiveness
growing has signed of the banking
portfolio of guarantee industry
services and instruments with
loans to support a number of
firms’ Bulgarian banks
international to support SMEs
growth and startups.

Ecosystem
growth reduces
risks, leading to
banks being
interested in the
tech sector
Culture and Bulgaria has an The dominant The Bulgarian There is low
mindset IT tradition attitude toward diaspora and its societal and
coupled with positive returnees are business
STEM-focused development positive drivers awareness of the
education and progress is of the local Sustainable
inherited from its pessimistic. entrepreneurial Development
communist past. There is a very culture and Goals and lack
strong mindset. The of related
There are a long- preference for entrepreneurial policies.
standing tradition employment culture has been
and family rather than self- developing A “dependence
culture that employment. A quickly, driven on EU grants”
stimulates sound business by international mindset,
STEM-related culture is only exchange and especially
careers incipient. collaboration as among civil
Education well as VC servants, stands
institutions have investments. in contrast to the
(continued)
15 Sofia Innovation System 275

Resources Strengths Weaknesses Opportunities Threats

only recently entrepreneurial
started to There is growing market-driven
stimulate acceptance of mindset of VCs
entrepreneurial entrepreneurship and
experimentation as a career choice entrepreneurs
as part of their among younger
curricula Bulgarians
Digital Bulgaria boasts The The European Slightly over
infrastructure highly developed manufacturing High- 80% of Sofia’s
nationwide and services Performance households have
infrastructure, sectors show Computing Joint internet access
including high- modest digital Undertaking
speed internet development in (EuroHPC JU)
with the top contrast to the will install one of
speeds in Sofia. ICT and startup five mid-to-high
Data plans are domains range
very accessible supercomputers
in the Sofia
Tech Park.

There is a shift to
a value-adding
knowledge
economy where
Bulgaria has
long-standing
traditions.

Digital
infrastructure is
likely to remain
highly developed,
and will improve
thanks—in
part—to EU
funding
Education A large share of Bulgarian Sofia has the Deteriorating
and skills the ecosystem universities highest national demographic
participants are perform poorly share of relatively indicators in the
either educated in international young highly country and the
abroad or are rankings. skilled talent. absence of a
returnees. Entrepreneurship high-impact
Business and was introduced in immigration
Bulgaria has marketing the state policy for skilled
excellent education are education plan workers could
programming also weak. starting at create problems.
talent employed primary school
in There is a dearth level. Sofia’s labor
multinationals’ of well-qualified market is very
R&D centers in scientists and The well- tight with steady
Sofia. engineers educated and wage increases
well-positioned
(continued)
276 V. Andonova et al.

Resources Strengths Weaknesses Opportunities Threats

Bulgaria has diaspora is a
access to bridge and driver
generous EU of brain
grants and circulation,
international overcoming the
scientific brain drain phase
networks.

Sofia has a
higher-than-
national
concentration of
young and well-
educated
residents
Institutions Bulgaria has E-governance is The general Bulgaria has
comparatively patchy and often institutional relatively high
less bureaucracy inefficient. context enjoys levels of
than other political and corruption.
countries in the Regulations and policy-related
region. implementation stability. Worldwide
are not competition over
A growing efficiently Global tech global tech giant
number of synchronized giants’ R&D R&D center
institutions like and well- centers provide a locations is
the Public maintained substantial fierce
Registry Agency amount of capital,
and the National managerial
Revenue Agency attention, and
use electronic training for the
services, which ecosystem
reduces
paperwork for
businesses
Legal Legal services There is a IP protection is Law graduates
advisers are affordable in limited supply of still new for the in IP are not of
the EU expertise on ecosystem. sufficient
framework international quality.
dealings in niche Increasing
sectors during interest in The IP content
startup or scale- investing in created in
up phase. Bulgarian universities is
startups is not ready to be
Limited developing legal deployed in
experience in advisers’ skills at practice
enabling vesting supporting
and option different
agreements. investment
structures.
There is no
framework for Several
vesting and universities in
(continued)
15 Sofia Innovation System 277

Resources Strengths Weaknesses Opportunities Threats

startups have to Sofia have many
search for students
workarounds graduating in law
Market and Sofia’s economy The local market Leading The national
demand is highly is very small incumbents in the market is too
integrated into (approx. Seven digital economy small for scale-
the EU and world million people) have well- ups.
economies. and uses the established R&D
Bulgarian capabilities in The majority of
Sofia has a language and the city. local buyers are
highly Cyrillic alphabet not sophisticated
competitive ICT Sofia is a good or
sector and very market for small- technologically
competitive cost/ scale testing advanced.
productivity
ratios in brain There is a lack of
jobs strong global
Bulgarian
businesses in
industrial or
services sectors
that are research-
oriented
Migration The dynamic Bulgaria has There is an Anti-
relationship experienced increasing immigration
between the significant brain number of populist
Sofia-based ICT drain since the returnees in the politicians
and startup fall of ICT and startup normalize
communities and communism domains, but not xenophobia,
the sizable reliable statistics leading skilled
Bulgarian at national and labor from
diaspora abroad city levels. outside the EU
brings dynamism to potentially not
and global The COVID-19 feel safe or not
opportunities, pandemic and consider coming
and, to some Brexit are seen as to Bulgaria.
extent, triggers for the
overcomes increasing Returnees are
limitations in number of frustrated with
terms of locally returnees outdated public
available skills services and
biases
Policy and Bulgaria has low Most have The EU has a new Tax increases
strategy taxes and little serious program period can undermine
bureaucracy. reservations starting in 2020, Sofia’s
about the so strategies and positioning as a
Government capacity of EU spending very cost-
programs related government funds will be effective
to officials to updated innovation
entrepreneurial effectively and location in the
efforts offer competently EU.
(continued)
278 V. Andonova et al.

Resources Strengths Weaknesses Opportunities Threats

relevant support; carry out their
there are state- tasks Policies are not
sponsored focused on
entrepreneurship The current and SMEs nationally
programs. the subsequent or regionally,
government and SMEs are
There is a 10% coalitions are not not represented
flat tax on profits (expected to be) by the national
in Bulgaria, and very stable, consultation
5% on dividends, posing risks entities
a very attractive
arrangement for
businesses in the
EU. Labor laws
are also favorable
to business
Quality of Sofia has a good Vast groups of Returnees and IT Bulgaria has a
life standard of living the population sector workers relatively weak
at lower prices have low can afford a good brand as a
than in Western purchasing standard of country.
Europe. power. living.
Social injustice
Sofia is very safe There are high Bulgaria is a drives
and well- levels of air good destination talent away.
connected to pollution for a second
Europe. home for middle- Rural areas have
class Western suffered from
Sofia has good Europeans and abandonment,
commute and Russian citizens. and some have
leisure entered into
infrastructure. A trend of close- economic
to-nature living collapse
A remote work can potentially
culture was deurbanize Sofia
established in favor of
before the smaller cities
COVID-19 with good digital
pandemic, infrastructure.
around a growing
community of There is gradual
co-working improvement in
spaces suburban areas
Regulation Tech sectors There is a lack of Efforts to The introduction
thrive with low personal modernize the of extra
unnecessary bankruptcy blue card regulations on
regulation proceedings. program can E-commerce or a
Closing down a attract skilled ban on the
legal entity is a labor from sharing
complicated outside the EU. economy
process. (Airbnb, Uber)
Government Keeping a flat can reduce
policies are not 10% tax may still economic
(continued)
15 Sofia Innovation System 279

Resources Strengths Weaknesses Opportunities Threats

typically be the key to activity and tax
assessed for competitiveness. revenue.
impact.
There are many Regulations
FinTech is not sharing economy designed for a
clearly regulated platforms selected few
impose uneven
conditions for
competition
Research There is a good Research Universities have Low salaries
infrastructure level of public community in a bad reputation drive potential
research Sofia is among the talent away from
infrastructure relatively small entrepreneurial research.
like the Sofia and fragmented. community in
Tech Park. Sofia, and there is Legal loopholes
Tech giants little recognition prevent the use
Hidden academic poach talent and of their role in of infrastructure.
entrepreneurship inflate salaries. innovation. For example, the
is widespread. The low laboratories in
availability of Sofia Tech Park Tech Park
Sofia is home to academic has a fragile cannot be used
the top three positions in financial model, efficiently due to
universities in public limitations due to red tape.
Bulgaria universities fuels red tape, and
brain drain. extremely modest Top universities
participation of in Bulgaria are
Weak research ranked poorly
collaboration institutions in its internationally,
between governance which decreases
businesses and bodies their appeal to
public research potential
centers makes it international
difficult to bring partners
inventions to
market swiftly.

Sofia has
relatively
underdeveloped
technology
transfer
frameworks and
capacity, and
lacks a clear
regulatory
framework for
new venture
creation by
public research
entities.
Administrative
capacity is
(continued)
280 V. Andonova et al.

Resources Strengths Weaknesses Opportunities Threats

limited, and
researchers’
incentive
systems do not
promote
entrepreneurship
Risk capital Sofia is an Bulgaria is Sofia enjoys a Bulgaria has a
accelerator hub highly steady flow of poor country
in Europe, dependent on public early stage brand and
mostly because EU funding. and seed funding. reputation.
of EU funding
that drives Local and A growing Higher average
innovation and regional VCs are number of private valuation for
digital ventures. in the early stage investors are startups located
It has good of their learning interested in in Western
networks with curve. Sofia-based European or
global and projects. USA cities poses
experienced The angel risks for startup
VCs. investor The first and scale-up
community is accelerated drain.
The entry cost very small venture funds
and capital created a larger A lack of late-
requirements in regional stage funding
prominent local community that opportunities
sectors like ICT, brings more scale creates
digital, and makes Sofia incentives for
engineering, and more attractive to promising local
mid-tech are low smart money entrepreneurial
to moderate, from abroad ventures to sell
limiting the prematurely, as
capital they do not
requirements and expect to have
the need for access to readily
entrepreneurial available funds
finance for growth
Tolerance Bulgaria has a Bulgarian A growing group Bulgaria is
and trust long-standing startups might of serial dealing with
tradition of lack the entrepreneurs and social
promoting confidence to go angel investors polarization and
gender equality international and are investing in the significant
in science and be innovative in innovation- influence of
technology. terms of sales driven ventures fake news.
and marketing. and are
There is a shared committed to There is a
understanding Low self- strengthening widespread
among the confidence and Sofia’s position social perception
entrepreneurial national pride as an innovation that the
community that compared to and startup hub country’s fate is
diversity is one other EU in the hands of
of the drivers for countries the great
success. A new geostrategic
generation of powers (USA
(continued)
15 Sofia Innovation System 281

Resources Strengths Weaknesses Opportunities Threats

confident and Russia) and
Bulgarians is not its own
well-educated national
professionals institutions
fluent in English
and other
languages with
experience
abroad.

There is
traditional
tolerance toward
people from the
West

15.11 Lessons Learned from Sofia Innovation System

Sofia’s innovation and entrepreneurship ecosystem is highly dynamic and relatively

new. Geographically, it is located in a region from which positive news is rare and
somewhat unexpected. Thus, understanding the realities and the drivers behind
Sofia’s recent positive developments as a scene for innovation and entrepreneurial
creation is all the more relevant.
In recent years, Sofia has emerged as the go-to place for innovation and
technology-driven entrepreneurship in the Balkans. EU funding has been the main
driver for this process, but, unlike elsewhere in the region, the Sofia experiment has
been very successful from its very first iteration. This boosted local actors’ confi-
dence and kick-started the creation of a diverse and global entrepreneurial commu-
nity with its first generation of serial entrepreneurs mostly in the IT domain.
Sofia’s initial success has led to positive developments in its entrepreneurial
ecosystem’s complementary pillars, but has not yet produced a balanced and robust
result. This will be the main challenge for years to come. The country needs to
broaden its entrepreneurial community, build collaboration at home and internation-
ally—and with the Bulgarian diaspora in particular—and implement a more soundly
articulated national strategy for smart growth as part of the global knowledge
economy. Educational reform at all levels, fighting corruption, and improving the
country’s negative reputation are essential if Sofia wants to maintain its position on
the European and world maps for talent and become a well-established hub that
drives technology and human well-being in the twenty-first century.
Tel Aviv Innovation System
16
Ido Garbi and Ludovit Garzik

Abstract

The Tel Aviv ecosystem is one of the most vibrant innovation ecosystems in the
world. It is fast, dynamic, direct, and—most of all—extraordinarily successful.
This chapter dives into some of the elements that make it so successful, as well as
the lessons one can take from Tel Aviv and implement in other ecosystems.
Even though the Tel Aviv ecosystem relies almost entirely on private capital,
the market picture is quite different when the scope is limited to seed-level
venture capital. The Israeli government has managed to attract foreign capital
into the ecosystem through a combination of financial incentives, lax labor laws,
and a policy of keeping its regulatory power away from the innovation markets.
That governance style was not a product of design, but rather of necessity.
Culturally, Tel Aviv’s emphasis is on abstract thinking throughout life and its
no-barrier culture has assisted in making this ecosystem into a software
powerhouse.
A SWOT analysis of the ecosystem provides key factors in a format easily
comparable with other surveyed ecosystems. This analysis is expected to be
valuable to ecosystem designers, investors looking to expand their reach, and
entrepreneurs looking for the ideal ecosystem for their enterprise.

I. Garbi (*)
IGPT Innovation, Rosh Haayin, Israel
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 283
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_16
284 I. Garbi and L. Garzik

16.1 History and Status Quo of the Tel Aviv Innovation

Ecosystem

Tel Aviv is one of the most vibrant innovation ecosystems in the world. It is fast,
dynamic, direct, and most of all, extraordinarily successful. Those facts are common
knowledge, but the reasons behind Tel Aviv’s success are less well known. The
following discussion will dive into those reasons and describe this spectacular
ecosystem. The focus will be on its character, strengths, and weaknesses, as well
as the opportunities and threats that might affect it for better or worse.
The Tel Aviv ecosystem is one of the most successful technology-oriented
ecosystems in the world today. A few statistical highlights can show how successful
the Tel Aviv ecosystem is: According to the Global Startup Ecosystem Report from
2018, Tel Aviv has both the most startups per capita (one per 6000 people) and the
highest rate of R&D investment as a percentage of GDP in the world. Almost all this
R&D investment comes from private capital, and the majority of that private capital
is foreign.
The Tel Aviv region is home to many of Israel’s dozens of unicorn companies, so
it has grown far beyond the startup incubator it once was. Now, with thousands of
companies in growth stage, it is one of the most productive scale-up and unicorn
incubators in the world. As a result, it has been highlighted by Fortune and Compass
as one of the best places in the world to start a business.
In absolute numbers, the Tel Aviv ecosystem is composed of 3869 tech-centered
companies (entities with over USD1,000,000 in sales), 2052 startups, 191 R&D
centers, and 256 investors. The Tel Aviv region also enjoys the benefits of being the
technological epicenter of one of the most innovation-oriented countries in the
world—Tel Aviv is the core of Israel’s high-tech ecosystem. The Israeli high-tech
ecosystem is almost as impressive as the Tel Aviv ecosystem.
Among other things, Israel was recently ranked the most innovative country in the
world, is second in the OECD on both R&D private expenses per capita and in
highly educated working age population per capita, and ranks highest in raised per
capita venture capital in the world. Around 4% of all venture capital in the world is
invested in Israeli companies, far above Israel’s relative size.
These figures and the talent that generates them attract technology-oriented
companies from all over the world to Israel. More than 300 multinational tech
companies like Google and Facebook have R&D centers in the country. Almost
all of Israeli technological activity takes place either in the Tel Aviv region or less
than 100 miles away since Israel is geographically small and all other major
ecosystems are within a 100 mile radius of Tel Aviv.
In terms of both absolute and relative numbers, the Israeli ecosystem is quite
substantial. 44 unicorns have been established by Israeli entrepreneurs. In 2019,
4500 Israeli companies were in growth stage. 12 of Israel’s unicorns reached that
status in 2019, and 15 new unicorns were added in 2020. The Tel Aviv ecosystem is
the center of the Israeli high-tech scene, and as of 2016, the Greater Tel Aviv area is
home to 50% of the technology companies, 60% of the startups, and 40% of the
research centers in Israel.
16 Tel Aviv Innovation System 285

All of these elements have turned the Tel Aviv ecosystem into one of the most
significant technological centers in the world. Considering that the Tel Aviv region
was essentially nothing but sand only a century ago, this achievement is quite
spectacular.

16.1.1 Historic Development

The history of the Tel Aviv region tells a fascinating story—the story of how
persecuted people from all over the world joined together after one of humanity’s
greatest tragedies and built an oasis in the middle of a desert. Around 94% of the
population in Tel Aviv region, and Israel in general, are either migrants’ descendants
or migrants themselves.
Israel’s migrants originate from all over the globe. Despite that, Israeli society is
very cohesive, making it a modern migration success story. In the Tel Aviv region
itself, most of the land was undeveloped and barren until around 100 years ago.
Now, it is one of the most innovative and significant ecosystems in the world. To
shed light on how such a thing came to pass, this section provides a short summary
of the Tel Aviv region’s history.

National and Security History: A Brief Summary

The wars between Israel and its neighbors affected the greater Tel Aviv area on
several occasions. The full (and even partial) history of Israeli–Arab conflict is too
vast to be reviewed here, so this section tackles only selected examples and trends. In
general, until the fall of the iron curtain, Israel was under constant threat from
multiple Arab states backed by the USSR. On some occasions, there were even
direct skirmishes between Israeli and USSR forces acting as “advisors” in adversary
states. Direct conflict with the USSR would put any country in significant danger,
let alone a country the size of Israel, and the USSR posed a significant threat to Israel
directly and indirectly by backing adversary states.
The nature and magnitude of the threat on Israel changed dramatically following
the fall of the iron curtain. Israel’s Arab adversaries were left without their main
pillar of support, which rendered them unable to threaten Israel’s existence any
longer—at least in practice. However, aggression did not stop completely, and while
the Tel Aviv region’s existence was no longer in peril, its way of life was.
After the loss of their main military ally and with the fortification of Israel’s
military advantage, Israel’s adversaries resorted to guerilla tactics and terror attacks.
These attacks targeted the Tel Aviv region and its population for logistical reasons
and for impact-related purposes. For example, in the Gulf War of 1991, the Tel Aviv
region was attacked by Scud ballistic missiles fired from Iraq even though Israel was
not involved in Operation Desert Storm. Every city in the greater Tel Aviv area
except one was hit by the missiles, killing 74, injuring 230, and leaving 4000 people
homeless. The missiles were directed at civilian population centers, not at military
bases, under the (correct) assumption that Israel would not respond to the attacks and
compromise the newly formed US-centered coalition operating in Iraq.
286 I. Garbi and L. Garzik

Tel Aviv was also a center of terror attacks during the first and second Palestinian
armed uprisings (Intifadas). These attacks caused the deaths of 1095 Israelis. Terror
attacks continued throughout the following years, but preemptive work by Israeli
security agencies, in addition to cooperation between Israeli and Palestinian security
agencies, has reduced them to virtually zero today. To date, there have been no terror
attacks in the Tel Aviv region since 2017.
In recent decades, Israel has signed two peace agreements with Jordan and Egypt,
as well as mutual acknowledgment agreements with the Palestine Liberation Orga-
nization (PLO). In 2020, Israel signed two milestone peace agreements with the
United Arab Emirates (UAE) and Bahrain, plus normalization agreements with
Sudan, Morocco, and Kosovo as part of the US administration’s “Deal of the
Century” peace plan for the Middle East. Discussions regarding normalization
with Saudi Arabia and economic agreements with Lebanon are currently in progress
but remain unfruitful for now. This normalization with the Muslim world is expected
to decrease terror attempts in the foreseeable future and is hopefully a precursor to
the resolution of the Middle East conflict in the coming years. Until that stage is
reached, the newly achieved peace is expected to benefit all involved countries from
an economic standpoint.

Economic History and Philosophy

The Tel Aviv region is not sovereign and is bound by Israel’s laws and its economic
philosophy. Israel started its life as a social democracy, leaning in a socialist
direction both economically and in its mindset. This trend changed dramatically in
the 1970s with the growth of trade and deepening of the connections between Israel
and the USA. Israel turned more capitalistic over time with tax reductions followed
by layers of state-service reductions.
Nowadays, Israel is a capitalist country and economy, though some pockets of
social democracy remain like its centralized and state-owned electricity company,
naval ports, and airports. There is a trend of privatization even among these facilities,
with varying degrees of success as worker unions resist privatization. The shift
toward capitalism benefited Israel’s GDP, which increased dramatically. Israel’s
GDP per capita increased by 260% from 1970 to 1980 alone and by 1760% from
1970 to 2018 (USD41,750).
Israel’s Arab neighbors, on the other hand, have continued leaning toward
socialism. The results of that orientation are reflected in their GDPs per capita,
which range between USD2032 (Syria, lowest) and USD8269 (Lebanon, highest).
Israel’s GDP per capita is between 504% and 2056% higher.
Economically, the fall of the iron curtain was greatly beneficial for Tel Aviv for
two main reasons. First, it left Israel’s adversaries without their main pillar of support
and forced them to court the trade-oriented west. Second, it generated a giant wave
of over a million highly skilled migrants into the state of Israel and ultimately to the
region. This migration of former inhabitants of socialism-oriented nations did not
turn Israel more socialistic, and instead, the general state of mind in Israel is a
capitalistic one in most populations.
16 Tel Aviv Innovation System 287

Ecosystem Growth History

The seed of the Tel Aviv technological ecosystem was planted in the 1960s. The first
technology companies established were Electronic Communication Israel (ECI
Telecom) in 1961 and Tadiran and Elron Electronic in 1962. The first international
R&D center in the region was opened by Motorola in 1964. From that time and until
the early 1990s, growth was slow and only one or two successful companies were
established each year.
In 1967, the French—then a key arms supplier to the state of Israel—declared a
weapons embargo on Israel. This declaration forced Israel to take steps that were
very valuable to the Tel Aviv ecosystem. It developed its own military technology to
emphasize its military sovereignty and intensified its connection with the USA as a
close military and diplomatically. Over time, these steps played a part in Israel’s shift
toward a market-based economy and its development into the biggest arms exporter
in the world in per capita terms.
Commercial innovation for civil use of the newly developed military technology
started appearing in the market in the 1970s, but the real shift started in the 1980s. At
that time, the international computing industry shifted its focus from hardware to
software. This enabled Israel to offer a competitive advantage due to its abstract
thinking culture and the nature of software development, which often rewards
abstract thinkers. Following this global shift of focus, several successful companies
were established in Israel between the 1980s and 1990s, including Amdocs, NICE,
and Check Point. In that stage, Israel started to attract international attention.
In the 1990s, several positive developments increased foreign investments and
interest in the Tel Aviv ecosystem. Among them were extensive international media
coverage, a surge of 1,000,000 technically skilled immigrants from the former
USSR, the peace agreement with Jordan, and the Oslo Peace Accords with the
PLO. The first major “exits” came soon after. In 1998, Mirabilis, the Israeli devel-
oper of ICQ, was purchased by AOL for USD407 million. This success triggered the
dot-com boom in Israel, with thousands of startups established between 1998 and
2001 and capital raised peaking at USD3.7 billion in 2000.
After the dot-com bubble burst shook the ecosystem and scoured the company
landscape, Tel Aviv’s underlying dedication to risk-taking and entrepreneurship
began to evolve. The Tel Aviv ecosystem is now one of the most successful
technological ecosystems in the world, hosting many of Israel’s 44 unicorns.

Government Policy Highlights

As previously stated, the Tel Aviv region is not sovereign and has no local govern-
ment. It is subject to the laws, policies, and programs mandated by the state of Israel.
Several of these governmental policies and programs have affected the region
significantly and are worth mentioning.
The “Yozma” (initiative) program for incentivizing venture capital providers is
particularly worthy of a detailed discussion. The Yozma program was initiated in
1993 with the intention of incentivizing private capital investment in Israeli ventures.
The program offered attractive tax incentives to any foreign VC investments in Israel
and matching every investment with equal government funding.
288 I. Garbi and L. Garzik

The Yozma program was a resounding success. Israel’s VC outlays, almost all
private, rose by 6000% between 1991 and 2000, and Israel’s IT revenues rose from
USD1.6 billion to USD12.5 billion. Israel also opted for low taxes on its technologi-
cal sectors. It offers an attractive tax rate for technology-centered companies, with
rates ranging from 6% to 12% depending on the exact type of business. These rates
are very competitive in worldwide comparison.
Israel’s steps toward deregulation are another policy highlight. In recent years,
Israel has undergone and is currently undergoing significant deregulation efforts.
Those efforts are meant to reduce Israel’s high cost of living—some of which is the
product of red tape—and prevent red tape from inhibiting innovation in traditionally
high-regulation fields like cannabis tech and automotive tech. Those efforts seem to
be effective, and the Tel Aviv region is expected to benefit significantly.
In addition, the Israeli Innovation Authority (IIA) intends to offer government-
tech startups easy access to governmental facilities for use as beta sites. This policy
offers two key benefits: It has the potential to improve Israeli governmental services
dramatically as new technologies are introduced in a sector that tends to be sluggish,
and it can help turn Israel into a government-tech hub due to the relatively easy
access to beta sites. Since the Tel Aviv ecosystem is the locomotive of the Israeli
ecosystem, the Tel Aviv ecosystem is expected to be the greatest beneficiary from
this policy.

16.2 Facts and Figures in the Tel Aviv Innovation Ecosystem

Few ecosystems match the Tel Aviv region in terms of facts and figures. Among
other things, the Tel Aviv ecosystem leads the world in its number of startups per
capita (1 per 1400 people) and capital raised per capita. Tel Aviv is the epicenter of
the Israeli technological ecosystem and is fed by all other ecosystems in Israel since
the geographic distance between Tel Aviv and all other major ecosystems is very
short. Some of the facts and figures regarding this ecosystem must be extrapolated
from data regarding Israel as a whole since region-specific data are not available. A
good general rule of thumb is to attribute 50% of Israel’s total numbers to the Tel
Aviv region.
With around 1,750,000 inhabitants, Tel Aviv is only 19% of the population of
Israel but is responsible for 54% of its GDP. Considering that Israel’s GDP is
USD42,850 per capita, Tel Aviv’s GDP should be around USD121,450 per capita.
According to estimates, Tel Aviv has 90 co-working centers with around 22,500
available co-working desks. The region has several high-ranking academic
institutions, mainly the Weizmann institute (ranked 93 globally) and Tel Aviv
University (ranked 100–150). The region also has access to alumni from the
Technion (ranked 85), located in the Haifa region.
In 2019, Israel was tenth in the world in the WIPO’s technological innovation
index, second in total R&D, first in R&D per capita, and first in R&D in relation to
GDP. It is ranked 15th worldwide for patent activity. Israel ranks fifth for its
percentage of millionaires in the world, and 23rd in overall millionaires. When it
16 Tel Aviv Innovation System 289

comes to wealth dispersion, Israel’s Gini index score is 0.35. Israel hosts more
NASDAQ-listed companies per citizen than any other country including the USA.
Over the years, Israel has become a shopping center for technology enterprises. In
fact, US-based companies tend to acquire Israeli startups more than startups from
anywhere else. These acquisitions account for half the transactions in 2018. When it
comes to startups establishment, 1100–1380 startups are established every year in
Israel. Around 60% of them are established in the Tel Aviv region. Israel is also
impressive when it comes to companies in growth stages—it hosts around 4500
companies with over USD1,000,000 in revenue.
Israel is home to 44 unicorn companies, more than the UK (7.3 times larger
population, 26 unicorns in total, most unicorns in Europe). 12 of Israel’s unicorns
reached unicorn status in 2019, which matches Germany’s total number of unicorns
(nine times the population). In absolute terms, only the USA (35.9 times the
population, 265 unicorns) and China (152.4 times the population, 204 unicorns)
generated more unicorns than Israel. Out of Israel’s unicorns, many are located in the
Tel Aviv region.
This is a summary of some of the key figures behind the Tel Aviv ecosystem. In
the next sections, we will attempt to dive into each component that is responsible, or
might be responsible, for these figures.

16.2.1 Research and Education

Education in the Tel Aviv region, like education in the rest of Israel, is fully
subsidized up to the high school level. When it comes to higher education, public
universities and colleges are subsidized at a rate of 50%. There are one private
university and several private colleges in the Tel Aviv region, and these are either
nonsubsidized or partly subsidized depending on the institution.
Public university after-subsidy tuition is around USD2908 per academic year for
undergraduate degrees and USD3930 for graduate degrees. Locals generally con-
sider tuition affordable, and students usually pay it through personal savings or
parental support. Student loans for tuition are rare, though students enjoy lower-
interest bank loans up to around USD21,400 in total for any purpose.
Several prominent research and educational institutions offer academic education
in the Tel Aviv region. The following analysis shows (in order of year of establish-
ment) how those prominent institutions differ in size and focus.

Number of
University/College Established students Focus
Weizmann Institute of 1934 2500 (2012) Basic research
Science
Tel Aviv University 1956 29,000 (2005) Traditional full
university
Open University of Israel 1974 48,000 (2014) Distance learning
College of Management 1978 12,000 (2018) Professional training
IDC College 1994 8000 (2018) Professional training
290 I. Garbi and L. Garzik

Through the years, each institution has gained a reputation in its specific field of
focus. When it comes to basic science research, the Weizmann Institute of Science in
Rehovot has a global reputation for its focus on natural and physical sciences. It is
not considered a full university since it only accepts graduate and postgraduate
students. With approximately 2500 students and 1000 academic staff, it has an
impressive student–faculty ratio. Furthermore, this institution is well known for its
international exchange programs and serves many international students every year
through its summer schools.
The Tel Aviv region does not fall short with regard to full universities—Tel Aviv
University (TAU) is among the finest research institutes in the world. It is among the
highest-ranking institutions in the world for cybersecurity and regularly ranks among
the top academic institutions in the world according to the World University
Ranking, the QS World University Ranking, and the Shanghai Ranking. TAU offers
a broad variety of disciplines from engineering to the liberal arts. It draws many
international students from undergraduates to doctoral students and offers programs
taught in English.
In terms of research impact, TAU was the most-cited university in Israel and the
22nd most cited in the world in the 2016 QS Ratings. It ranked 30th in the world in
computer science from 2007 to 2018 according to the CSR Ranking. In topic-
specific rankings, TAU is ranked seventh in the world on theory and methods in
computer sciences (CWUR rating). TAU is also ranked ninth among the top schools
producing entrepreneurs and eighth in the world on graduates that established
unicorn companies. It is the only non-US university in the top ten. When it comes
to patents submitted, TAU is the 43rd most productive university in the world, tenth
highest outside the USA, and first in Israel.
Another important institution for Tel Aviv’s ecosystem is the Technion, Israel’s
highest school of engineering. It is located outside the Tel Aviv region in the city of
Haifa, but the distance between the regions is less than 100 km and its alumni are
usually available for hire to companies operating in the Tel Aviv region. It is ranked
eighth for information systems and fourth in theory and methods in the CWUR
rating, and has three Nobel Prize laureates.
In addition to those research-oriented institutions, there are several other
institutions in the region reputed for their high education quality. The IDC Interdis-
ciplinary Center is a private research institution founded in 1994 and is the only
private university in Israel. Due to its location in the city of Herzliya, it is also called
the Herzliya Interdisciplinary Center. It is inspired by the model of the Ivy League
Universities and, as a result, is particularly favored by non-Israelis residing in Israel.
Out of its 8000 students, around 25% are non-Israelis who originate from
86 countries and provide a mix of cultures and experiences from many global
regions. It has an academic staff of around 1000, giving it a student–faculty ratio
comparable to high-ranking institutions like Stanford University in Silicon Valley.
The IDC has ranked first out of 66 Israeli academic institutions on student satisfac-
tion for the last four consecutive years.
16 Tel Aviv Innovation System 291

The College of Management of Academic Studies (COMAS) in Rishon LeZion is

in the wider Tel Aviv metropolitan area. It is particularly favored by soldiers and
alumni from Israeli Defense Forces (IDF) technological units as an additional
academic education layer over the training they get at the IDF. As a result of that
trend, COMAS students in the computer sciences program have extraordinarily high
aptitude.
The Open University of Israel, like other Open Universities worldwide, focuses
on distance learning. Today, around 40,000 students from all over the world are
enrolled in the Israeli branch of the university. With high growth rates in recent
decades, the Open University addresses the needs of people having parallel
commitments like jobs, military service, and family formation alongside their
studies. It is considered extremely rigorous from an academic standpoint, and its
alumni enjoy a good reputation among employers as a result.

16.2.2 Influencing Institutions

The Tel Aviv region is affected by several key institutions. Though it shares
characteristics with other ecosystems, Tel Aviv also has a number of specific
characteristics worth mentioning and describing. The main institutions influencing
the Tel Aviv ecosystem are the following:

External Influencing Institutions

Israeli Defense Forces (IDF)
The Israeli Defense Forces (IDF) is the armed forces of Israel. The IDF, specifi-
cally its technology-oriented and intelligence-oriented units, has significant influ-
ence on the Tel Aviv ecosystem. The IDF has resolved its HR disadvantage
compared to rival armies by relying on mechanization instead of infantry since its
institution. This continues to modern times, with emphasis on using superior tech-
nology as a key strategy. Based on its performance, these decisions have been
successful.
Some of the locally developed technology the IDF uses to maintain its advantage
is developed within the IDF by specialized technological units, and some is acquired
from non-IDF vendors. These vendors usually employ alumni from IDF technologi-
cal units. When technology is developed internally, it is done by soldiers educated
and professionally trained by the IDF. Because of this, the IDF technological units
are de facto training schools offering selected soldiers training programs and
qualifying them to perform various computer science-related tasks and occupations.
Given this structure, the IDF benefits the Tel Aviv ecosystem in two capacities—
as a customer and as a training institution. As Israel imposes conscription, the IDF
has a wider variety of individuals from whom to select high-aptitude candidates in
comparison with nonconscription armies. Following their technical training, these
selected soldiers face extreme scenarios during their service. These range from scale
issues to cyberthreats in systems of large proportions (around Fortune 500 size), and
these soldiers face these scenarios at a comparatively young age. All of this is done
292 I. Garbi and L. Garzik

in a stress-rich and resource-rich environment, which incubates and nurtures highly

skilled, high-performance personnel.
Soldiers’ experience and training are funneled into the private market at the end of
their mandatory service terms. This is a magnet to foreign companies looking for
high-level, readily available talent with long employment prospects. As most
technology-related IDF units are stationed in the greater Tel Aviv area and have
longer service periods (around 5 years in total, comprising a mandatory 3-year
service and 2-year elective extension), many of these soldiers relocate to the Tel
Aviv region to live closer to their bases. This move is a driving force for the
migration of highly skilled talent into Tel Aviv from the rest of Israel, which
significantly benefits the region.
Israeli Government
The Israeli government is the main governing and public investing body in the
Tel Aviv region. When it comes to the technology sector, the Israeli government
tends to be very accommodating. In fact, apart from banning legally questionable
items like binary options trade and regulating technologies affecting or possibly
affecting Israeli national security, the Israeli government seems to make an effort not
to interrupt the ecosystem.
This lenient regulation grants the ecosystem relative freedom in comparison with
other fields. However, unlike many European governments in similar-sized
countries, the Israeli government offers very little funding for commercial R&D.
Rather than using its available capital and funding R&D directly, the Israeli govern-
ment opted to incentivize private investment in various ways, from matching
funding for venture capital investment to red-tape elimination and offering competi-
tive tax rates.
In practice, these policies seem to have a very positive effect on the ecosystem
both in terms of public-opinion satisfaction and in terms of economic terms—
Israel’s developers have the fifth highest salaries in the world, despite (or perhaps
because of) them having almost only personal contracts and almost no unionization
in the technology sector. Public funding makes up only a small amount (around
5.5%) of all venture capital in Israel, making the Israeli technological sector very
independent. As stated, the Israeli government tries to incentivize and not interfere
with the ecosystem, providing both lax regulation and little to no support. Judging by
the prosperity of the Tel Aviv ecosystem, the method appears to be quite effective.
Israeli Innovation Authority (IIA)
The Israeli Innovation Authority (IIA) is the civil R&D office of the Israeli
government. In 2019, the IIA supported 1650 R&D projects with a budget of around
USD500 million. The average grant size given by the IIA is around USD385,000.
While data regarding IIA support in the Tel Aviv region specifically are not
available, the Tel Aviv ecosystem accounts for around 50% of the Israeli ecosystem,
so it is reasonable to assume that 50% of IIA support ends up reaching the Tel Aviv
ecosystem.
When it comes to funding size and total funding amounts, IIA support is quite
small by Israeli standards—the Israeli technological sector is funded mostly by
private capital, and IIA support funds are only 5.5% of capital raised and 2.5% of
16 Tel Aviv Innovation System 293

Fig. 16.1 European Research Council (ERC) and the Horizon 2020 Program. Source: Data EC,
Author’s own figure

civilian R&D expenses in the country. By its own admission and as a strategy, the
IIA focuses in areas where private capital entities are not interested in investing.
Instead of funding projects in fields where private capital is abundant, the current
strategy of the IIA is planting “ecosystem seeds” and letting ecosystems grow from
them by market forces rather than by funding growth directly.
One example of this seeding strategy is the IIA’s effort to create activity in new
vectors and fields where Israel has no significant activity, such as bio-convergence.
Another example is the IIA’s efforts to address the debt-raising issues of Israeli
scale-ups in worldwide comparison. To support Israel’s scale-up and address
companies’ debt-raising difficulties, the IIA plans to provide government guarantees
to banks that will loan money to scale-ups. Based on the success of previous
incentivization programs, it will be interesting to follow the effects of this program.
One last example of IIA involvement is government-tech beta site providing, a
program in which the IIA plans to let startups pilot their products at government—
and state-owned facilities like those owned by the Israeli Postal Service. This will
give Israeli business-to-government startups a better starting point and easier market
entry compared to their non-Israeli competitors. It is still too early to judge the value
of the IIA’s programs since the organization focuses on cultivating the future vectors
and fields with high-risk components that the private market avoids. The true value
of these activities will only be seen with time (Figs. 16.1 and 16.2).
Israel takes part in the Horizon 2020 program. Therefore, participation in the
program is open to entities in all of the country’s regions including the Tel Aviv
region. Tel Aviv-specific data regarding Horizon 2020 are not available, so we
present data regarding Israel in general. Up to 2017, the Horizon 2020 program
294 I. Garbi and L. Garzik

Fig. 16.2 Total Israeli Seed Stage Capital. Source: Data EC, Author’s own figure

cost Israel around USD469 million and returned around USD481 million, which is a
slight net positive (+2.56%).
Israel also took part in the previous ERC plan, FP7. Israel paid around USD633
million into the FP7 program and gained a return of around USD995 million
between 2007 and 2013—a significant net positive (+50.87%). These amounts are
small in Israeli ecosystem standards, but they still are significant when looking at
two specific niches—academic research funding and grants given to small and
medium enterprises. ERC programs are a substantial funding channel for academic
research, and Israeli universities use them heavily. In some years, ERC funding has
accounted for up to 25% of Israeli universities’ budget.
In the current program, 53% of grants from the Horizon 2020 program granted to
Israeli entities fund academic research. In fact, Israeli academia is ranked second of
37 in grant amounts received from the program. For comparison, Israel’s commer-
cial grants rank 9th. Therefore, although Horizon 2020 grants are not a significant
part of the available capital in the Israeli innovation ecosystem, these grants make up
a significant part of the ecosystem’s academic research funding.
ERC grants given to small and medium enterprises are also an interesting topic
for discussion. In 2019, Israeli small and medium enterprises (SMEs) were granted
around USD105 million from the Horizon 2020 program. While this is not a large
number in Israeli ecosystem standards, it is a very large number when looking only
at seed investments—the entire seed amount raised privately in Israel in 2019 was
USD148 million. Considering that, and under the assumption that small and medium
enterprise grants are meant to fund innovation and are at least somewhat efficient,
Horizon 2020 grants may be quite significant for early stage companies and may
16 Tel Aviv Innovation System 295

play a significant role in their funding even though the absolute funds from Horizon
2020 numbers are relatively small in Israeli standards.
However, the monetary share of ERC programs in early stage funding does not
indicate successful project selection by the ERC, and it is entirely possible that the
program funds the “wrong” companies and falls short in comparison with private
investors. The answer will likely be given with time, as companies granted Horizon
2020 funds will mature, flourish, or perish.
Jewish Communities Abroad
Israel is the only Jewish state in the world, and Jewish communities worldwide
are deeply rooted in and connected to it. Although the epicenter of this connection in
regard to religious affairs is Jerusalem, the epicenter of all nonreligious affairs is the
Tel Aviv region. This is true for both non-Israeli Jews and for Israeli emigrants. The
latter group is quite large—according to research done by the Shoresh Institute, 9%
of Israeli engineering graduates leave Israel. The trend becomes more distinct as
academic education levels increase. According to research done by Tel Aviv Uni-
versity, the share of Israeli professors and lecturers that migrated out of Israel is
around 25% of the number currently working in Israel, meaning a brain drain of one
of five academic minds.
Though brain drain is generally regarded as negative, it has a positive effect on
the ecosystem from a branding and networking standpoint. This migration pattern
ensures that the Tel Aviv ecosystem will always be a center of international attention
as a pool for exportable talent and as a center for talent worth investing in and
cultivating locally. This is particularly beneficial for Israeli startups and Israeli
experts wishing to establish a foothold abroad, as it is easy to find other Israelis in
most major ecosystems.
Israel’s international presence is especially notable in Silicon Valley, where both
Jews and Israelis are highly represented. Because Israelis enjoy relatively easy
access to other ecosystems and because they can find similar cultures in most
major ecosystems through the large Israeli expat community, moving to Silicon
Valley is far less demanding for Israelis than it would be without such access and
community.
External circumstances
No discussion regarding the Tel Aviv region, or Israel in general, is complete
without addressing its unique external circumstances. Those circumstances shed
light on how a country of less than ten million people became the eighth arms
exporter in the world in nominal terms and the first in per capita terms. To
understand that, one must start from World War 2 (WW2). In WW2, between 5.6
and 5.8 million Jews, around 59.8% of Europe’s Jewish population, were
obliterated.
Persecution of Jews, however, is not limited to WW2. Survivors of the carnage
were often persecuted by the local population even after the war ended, leading them
to look for refuge outside Europe. The then-young state of Israel was the safest place
for persecuted Jews regardless of ideology, though a strong ideological component
was usually a factor in migrants’ selection of Israel. As the main populated area in
296 I. Garbi and L. Garzik

Israel was the Tel Aviv region, these tragedies and the waves of migration they
generated played a significant role in the region’s development.
The bloodshed did not end in Europe and followed survivors to the Middle East.
The state of Israel was born into war, with seven Arab states declaring war on it on its
first day of independence. After that war, six wars and two waves of terrorism
followed, in addition to numerous military operations and campaigns not defined
as wars. This left the state of Israel in a constant state of defense, all while being
significantly outnumbered by its adversaries by a factor of more than 50 to 1.
These stress factors forced Israelis to use anything they could to gain an advan-
tage. As Israel was a low-resource environment at the time, they could only rely on
their minds for salvation. They did so extensively, working on anything from
deceptive warfare to weapon development. Some products of the Israeli military
industries are well known, like the Uzi, Galil, and Tavor rifles or the “Iron Dome”
and “Arrow” antimissile systems. Other products are less well known, like the shoot-
on-sight helmet and various autonomous drones and military vehicles. But one
common denominator can be found in almost all of them—they are designed to
address the severe HR disadvantage the IDF has by offering more value per soldier.
This added value sells and sells well—Israel is the eighth largest arms exporter in the
world and the largest in per capita terms. Major parts of all that activity are carried
out in the Tel Aviv greater area.
Lack of Natural Resources
The Tel Aviv region, and Israel in general, is very short on natural resources.
Apart from a significant natural gas deposit discovered in recent years and
phosphates originating from the Dead Sea, Israel is relatively low on natural
resources compared to the rest of the world.
The lack of natural resources has forced Israel’s population to focus on building a
service-based economy. Specifically, Israel has focused on high-knowledge
industries since it lacks a competitive advantage in manufacturing being geographi-
cally small, low on population and—until recent technological developments—short
on water. Knowledge-intensive services had the most apparent competitive advan-
tage Israel could offer, and the software revolution that started in the 1980s made this
competitive advantage very valuable from an economic standpoint. Tel Aviv has
benefited the most from that shift since it was and remains Israel’s main
technology hub.
War as a Catalyst
Calamities are obviously negative for an ecosystem, but they tend to come with a
silver lining: The innovation they drive tends to be significant and beneficial for
ecosystems. War, like other big transformations, tends to offer fertile ground for
innovation for two main reasons—big transformations funnel funding into innova-
tive ventures meant to accommodate transformation, and legislators tend to refrain
from intervening in these ventures.
In Israel, wars have served as big transformations several times and, in a manner
that was somewhat cyclical, have forced the Israeli government to fund military
innovation and enable local innovators to work without interference. The Israeli
innovation scene has had to keep innovating due to Israel’s constantly changing and
16 Tel Aviv Innovation System 297

often unique security needs. Therefore, in an unexpected turn of events, war has
become a catalyst for growth not by driving demand for goods but as an innovation
engine.
The mechanism linking war and innovation is the subject of a common miscon-
ception. War itself causes destruction and is an economic disaster. It is not the war
itself but the associated reduction in innovation-related restrictions—both regulatory
and social—that generates growth. An example of this principle can be seen
worldwide in the COVID-19 pandemic and the economic impulses it generated in
worldwide technology sectors. As the center of the Israeli innovation scene, no place
in Israel was more affected by this than the Tel Aviv region. The experience played a
significant role in turning Tel Aviv to the agile and dynamic ecosystem it is today.
Global Anti-Semitism
Rising worldwide anti-Semitism in recent years, especially in Europe, is driving
non-Israeli Jews to migrate to Israel. In fact, 59% of Europe’s post-WW2 Jewish
population has migrated out of Europe in the last 50 years. The natural destination of
this mass exodus is Israel, and the natural destination in Israel is the Tel Aviv region.
Israel supports such migration, and Israeli laws grant Jewish and Jewish-descendant
migrants citizenship relatively easily.
Israel is a country of migrants because of the combination between Jews’
persecution worldwide and their acceptance in Israel. As of 2017, 3.2 million
immigrants had come to Israel since its establishment in 1948. Of these immigrants,
26,400 immigrated in 2017. Most modern migrants to Israel are educated or other-
wise skilled enough to function in modern society.
Migration is particularly beneficial for the Tel Aviv region. Since Israel’s typical
migrants are highly skilled and culturally similar to the local population—sharing
the languages, values, and an emphasis on intellect and learning common among
Jews—most enjoy quick and simple assimilation. One good example would be
migrants from the former USSR. Among the former USSR migrants settling in
Israel in 1990, around 60% had higher education of some kind. This was a significant
brain gain (around one million people) for Israel as a whole. Since about 50% of this
brain gain was centered in the Tel Aviv ecosystem, it was a boon to that ecosystem in
particular.

Domestic Influencing Institutions

Regional Municipalities
Several local municipalities influence the region. The municipality of Tel Aviv,
or as it is more commonly referred to locally, Tel Aviv City, has the authority of a
city and is not sovereign by itself—as stated, the state of Israel has that power. Tel
Aviv City still plays a significant role in the ecosystem and its growth. It is only one
of the cities in the Tel Aviv ecosystem, but it is by far the largest and most influential.
In comparison with other Israeli cities, Tel Aviv City charges relatively high
nonresidential municipal taxes of between USD76 and 111 per square meter annu-
ally. Software enterprises get a lower rate in municipal taxes, paying 50% of the rate
for offices. While it is not considered business-friendly by Israeli citizens, Tel Aviv
City is friendly to large foreign corporations and, by its own admission, tries to
298 I. Garbi and L. Garzik

attract them. This effort is quite successful, with 20% growth in international
companies operating in Tel Aviv City from 2019.
While Tel Aviv City is the center of the ecosystem and its most significant player
municipality-wise, several other municipalities in the greater Tel Aviv region are
worth mentioning. The city of Rehovot, for example, hosts the Weitzman institute
and several international companies like HP. Another example is the city of
Herzliya, which hosts the IDC College and several international companies like
Microsoft. Each of those is an independent municipal authority and all compete for
business-paid municipal taxes, which are their main income source.
Private Entities with Significant Critical Mass
The Tel Aviv region is a hub for the hundreds of global corporations that operate
there including Amazon, Google, Microsoft, Intel, Facebook, eBay, and Yandex. In
addition, some Israeli companies like CheckPoint, Wix, IronSource, and Playtica are
large enough to affect the local market.
These large entities contribute to the ecosystem by enhancing human capital, but
also hinder it by driving salaries higher. The sheer amount of talent that is employed,
trained, and enhanced by those companies makes them the biggest de facto educa-
tion centers in the region. Those entities provide significant amounts of training
(including paid training) and pour enormous know-how into the region in exchange
for the use of its highly qualified workforce.

16.3 Tel Aviv SWOT Analysis Highlights

One of the key elements of this work is a SWOT analysis of the Tel Aviv ecosystem.
This chapter presents the highlights of that analysis, followed with the full SWOT
analysis table.

High Cost of Living

Tel Aviv is expensive by international standards, from the price of housing to the
McDonald’s Index. According to Mercer, Tel Aviv is the 19th most expensive city in
the world. Appropriately, wages in the Tel Aviv technology ecosystem are also high
and are currently ranked fifth in the world. The yearly salary in a startup is around
USD97,000, and median salary is USD83,000 annually.
This combination of high costs and high wages is negative for the ecosystem in
two main ways. First, the high cost of local labor should theoretically act as a
deterrent for foreign companies that consider opening development centers in the
country. However, the opposite seems to be true in practice—the region has seen a
30% increase in R&D centers in the last 3 years. Second, high costs and wages make
it harder to establish startups since talent is more expensive and potential founders
must resist stronger temptation to sell their skills as employees instead of founding a
company. IIA data suggest that this is true in practice, with the amount of newly
generated startups stagnating if not decreasing.
The Israeli government is attempting to reduce the cost of living, mainly through
deregulation and competition encouragement. So far, these efforts have only been
16 Tel Aviv Innovation System 299

partly successful in price reduction, mostly because of political lobbyism on behalf

of interest groups meant to prevent those changes.

Dynamic Migration Patterns

When it comes to domestic national migration, the city of Tel Aviv suffered a
negative migration of 1900 people in 2019. Migration is an important source for
cultural exchange and for establishing connections between ecosystems. Strong
innovation regions seem to share a domestic group of smart people moving in
between these regions.
According to Gold S. (2018)1 “Israeli immigrants have among the highest rates of
entrepreneurship of all national-origin groups in the United States” and “between
50,000 and 200,000 reside in the greater San Francisco Bay Area.” These migrants
are closely connected to their peers in Israel, extending the influence, exposure, and
reputation of the Tel Aviv ecosystem to other regions.

International Giants Hub

Hundreds of international companies operate in Tel Aviv, mostly as R&D centers.
These tech giants have had both positive and negative influences on the ecosystem.
On the one hand, they act as training agencies and generate a skilled workforce. On
the other hand, they drive salaries higher and make Israeli software engineers very
expensive in comparison with other countries—as stated, their wages are the fifth
highest in the world.
Overall, the effect international companies have on the ecosystem can be summed
up as talent enhancement—these companies take human capital and perfect it. The
result is highly qualified human capital, which in turn costs more to employ as a
result of its newly available skills.

Low Employer Costs

While tech sector wages in the Tel Aviv region are high, employer costs are
relatively low. These costs include vacation days, social insurance, health insurance,
and other legally mandated or field-mandated social benefits. Israel, and with it the
Tel Aviv region, has relatively lax labor laws in comparison with most European
countries. It mandates far fewer social benefits, requiring only 16 vacation days until
the 5th year in the workplace (up to 28 days maximum for a worker with 14 years in
the same workplace, which is rare in the technology sector) and 18 medical leave
days per year.
All of this leads to relatively low nonsalary employment costs when employing
Israelis. According to the international accounting firm UHY, nonsalary employ-
ment costs in Israel are around 7% of a salary, in comparison with an 18.8% world
average and a 22.7% G7 average. For higher salaries, this number drops further, with

1
Gold, S. (2018) Israeli Infotech Migrants in Silicon Valley. In: The Russell Sage Foundation
Journal of the Social Sciences, Vol. 4, No. 1.
300 I. Garbi and L. Garzik

Fig. 16.3 Competitive tax rates. Source: Author’s own figure

a minimum of 3.6% nonsalary employment costs for salaries above USD300,000

annually.
These low employer costs offset Israel’s higher salary costs to some degree.
Additionally, unionization is very rare in the Tel Aviv innovation ecosystem. While
large companies such as SAP and ECI have seen some unionization in recent years,
this is very uncommon and personal contracts remain the norm in the Israeli tech
market in general and in Tel Aviv in particular. This is very favorable for employers,
and in the case of the Tel Aviv ecosystem, it seems to be harmless—if not benefi-
cial—for employees.

High Happiness Levels

Israel’s population is one of the happiest in the world, ranking 13th in 2019.
Accounting for the higher productivity of happier people—estimated at a 20–37%
increase—the Israeli software employee offers quite a promising overall package
despite higher salary expenses (Fig. 16.3).
Corporate tax in Israel for technology companies is relatively low and has been
effectively reduced from 25% to rates of between 6 and 12%, depending on the exact
business type. Municipal tax is mainly levied per square meter of owned or rented
real estate, and not as a percentage of company revenue. This structure makes
municipal taxes a nonissue for international companies expanding to Israel, which
is naturally good for the Tel Aviv region as it is the most renowned Israeli ecosystem
worldwide.
In summary, the combination of low state taxes and land-based municipal taxes
makes the tax environment of the Tel Aviv region very globally competitive.
16 Tel Aviv Innovation System 301

Agile Culture and Mindset

Both mental agility and a can-do attitude are essentially part of the Tel Aviv
ecosystem’s DNA. The reason, or at a significant part of it, is probably the unique
combination of external circumstances the region has had to overcome.
The environments of the Tel Aviv region and Israel in general present severe
nature-related challenges. More than 50% of Israel is covered by the Negev Desert,
and the whole Middle East region suffers from low water availability. As a result,
drought has been a severe problem in neighboring countries like Syria and Lebanon.
The situation in Israel is different—unlike its neighbors, Israel evaded the current
Middle East drought situation and has no water shortage.
Israel has avoided drought through a combination of technology and the market
economy, specifically water desalination and price-based water conservation plans.
This combination was extremely effective—thanks to the use of technological
solutions and the government’s foresight to implement them in time, Israel literally
became an oasis. In fact, Israel is currently going through a process of
de-desertification, which is the subject of worldwide interest. Its neighboring
countries, on the other hand, still suffer from drought.
Israel’s drought-fighting approach is one example that represents the agile
mindset of the Israeli ecosystem in general. Israel’s geopolitical situation has created
a mindset of promptly implementing new knowledge as a survival mechanism, as
well as high tolerance for failure of such implementation. Moreover, it has also
called for the generation of market-relevant new knowledge from Israel’s basic
research institutions.

16.4 Strategy and Implementation in the Tel Aviv Ecosystem

16.4.1 Local-Level Strategy

Local-level strategy is set by each city in the ecosystem separately. The most
significant local-level strategy is set in the city of Tel Aviv. According to its own
statements, the city of Tel Aviv—at the center of the ecosystem—focuses on
bringing foreign companies to the city. Judging by numbers alone, it does so quite
successfully: Between 2012 and 2016, the number of foreign companies operating in
the city increased by 115%.
The city’s strategy seems to be more market-driven than centrally planned. This
enables businesses to determine their own nature but denies them municipal financial
support apart from municipal tax reductions, which is common in some parts of
Europe. The approach seems to be effective, and it has created a unique, agile, and
vibrant environment in the city that attracts young people from all over Israel. The
city enjoys a unique status in the Jewish community, the global LGBTQ community,
and among those dwelling in other international technology ecosystems. This unique
status attracts people to the city from all over the world.
Tel Aviv’s market-driven strategy has caused bottom-up development of the
entire region, resulting in massive construction of office space in recent years.
302 I. Garbi and L. Garzik

Based on its ability to attract multinational companies despite its high salary levels, it
seems that Tel Aviv’s local-level strategy is successful.

16.4.2 National-Level Strategy

The national-level strategy affecting the Tel Aviv region is determined by the state of
Israel. Though the current Israeli government has not yet published a long-term
strategy, the state of Israel has repeated a few key points in its strategies through the
years. These key strategic points are the following:

Maintaining Military Sovereignty and Superiority

Maintaining military superiority is paramount for Israel and specifically its ability to
overpower adversary states and state-like entities. Israel also puts great emphasis on
military sovereignty, or its ability to manufacture its own armaments in times of war
or need with little dependency on foreign countries. This emphasis is the result of the
French arms embargo on Israel in 1967 when the French were Israel’s main arms
supplier.
To accomplish both goals, Israel invests around 15% of its annual budget in its
ministry of security, approximately USD21.2 billion in absolute terms. Additionally,
the USA provides military foreign aid to Israel worth around USD3.8 billion. Israel’s
defense budget is the 15th highest defense budget in the world and the fifth in the
world as a percentage of GDP. This combined amount, in addition to its mortal need
for arms, has created a fertile ground for what has become one the largest arms
exporters in the world and the highest arms exporter in per capita terms.
Modern weapons systems are often highly technological instruments, and failure
tolerance in the industry (at least in the development stage) is relatively high. This
has served the ecosystem well. Israel’s IDF high command bases are located in Tel
Aviv and the surrounding area, so the region is the logical base of operations for
technology companies that provide or intend to provide services to the IDF. These
companies might work on technologies from aiming systems to cybercapabilities,
but the location of their buyer remains the same. The IDF is an army involved in
active conflict, so it is a good beta site for weapon systems. In addition, the IDF has
brand value in the eyes of other armies, and any system it buys is sought by others.
As previously stated, Tel Aviv hosts many IDF bases and most of its technologi-
cal unit bases. These bases house highly qualified soldiers who spend their time in
the city for several years as part of their service period. Many of these young people
get accustomed to the city and migrate to it during or following their service terms.
After that service, their talent is available for hire. Because they settled in the Tel
Aviv area during their service period, these former military personnel tend to prefer
companies positioned in the Tel Aviv area. This attracts companies to open R&D
centers in the Tel Aviv area.
16 Tel Aviv Innovation System 303

Maintaining Economic Growth

Israel, like most other countries, puts a significant emphasis on economic growth.
When it comes to high-tech, the main effects of this effort are attractive and low tax
rates between 6 and 12% (effectively), efforts by the IIA to create new innovation
ecosystems using its budget, intent to offer government guarantees for scale-up
loans, and attracting foreign companies into Israel with a competitive local legisla-
tive environment.
The Israeli government supports growth relatively well and seems to be very
careful not to interrupt the ecosystem with regulation or power grabs. Since the tax
rates in the Tel Aviv region are those of the state of Israel, the national tax policy is
crucial for the region. Based on the results of this policy in practice, it seems that this
combination of low tax and good legal environment is very beneficial for the region.

Maintaining R&D Positioning

Israel goes to great lengths to maintain its worldwide R&D positioning. Right now,
Israel is the first in the world in R&D expense per capita. Israel is currently ranked
14th in academic publications per capita but was ranked first for over 30 years. As
previously stated, around 4% of the world’s venture capital is invested in Israel,
which has only 0.12% of the world’s population.
As the center of R&D activity in Israel is the Tel Aviv region, the region is
affected by national R&D promotion efforts for better and worse. On the positive
side, as much of the R&D is done in the Tel Aviv region, these efforts benefit the
region even when they are focused outside of it. Due to Israel’s small geographic
size, all regions in Israel feed the Tel Aviv region and are fed by it. For example,
65% of Israeli startup founders who built startups in the early stages of the Tel Aviv
ecosystem were trained at the Technion Institute of Engineering, located in the Haifa
region in northern Israel. However, the epicenter and main beneficiary of the startup
scene was the greater Tel Aviv area where those startups were founded, not the Haifa
region where their founders were educated.
Due to government policies meant to develop other ecosystems in Israel, many
initiatives are intentionally established outside the Tel Aviv region, like the
FoodTech Valley initiative established in northern Israel. As those ecosystems
grow, they can potentially attract talent away from Tel Aviv in the same way that
region now attracts talent from the rest of Israel. However, that risk to the Tel Aviv
region is substantially mitigated by two main things: The trend is not large enough
yet to significantly affect the Tel Aviv region, and the fields of innovation selected
for those initiatives are usually different than those traditionally associated with the
innovation scene in the Tel Aviv region.
Since the intentionally non-Tel Aviv activity has not yet reached critical mass,
Israel’s government will need to rely on the Tel Aviv region if it wants to maintain
Israel’s R&D positioning. This is very likely in both the short and long terms, so the
Tel Aviv region will probably continue to be the main source of innovation in Israel
and its main beneficiary in the years to come.
304 I. Garbi and L. Garzik

16.5 SWOT Table of the Tel Aviv Innovation Ecosystem

To conclude and for easy comparison between ecosystems, this section provides a
summary table of the Tel Aviv ecosystem SWOT analysis.

Resources Strengths Weaknesses Opportunities Threats

Bank loans Tel Aviv has a Loans for startups Scale-ups and The ease of
robust and and scale-ups are ecosystem growth getting loans
internationally the exception reduce lender risks. abroad in
accredited rather than the Banks have been comparison
banking system norm (which is showing interest in with Israel, and
equity financing). the technology specifically the
The banking sector and opening ease of doing
system provides special departments so in the USA,
only a marginal to serve its specific poses risk for
percentage of the needs. The IIA has scale-up drain.
capital in the begun a new
ecosystem. initiative to back The Israeli
scale-up loans, banking
The Israeli reducing lender’s industry
banking system is risks mindset is very
very conservative, conservative,
and regulation and regulation
limits the limits the
establishment of establishment
new banks of new banks
so change may
be slow
Culture and Israel has a It is a highly vocal The informality of There is a
mindset good R&D society. Local Israeli society natural risk of
culture with culture is often enables fast action decrease in risk
abstract misunderstood as and fast motivation as
thinking and rude or know it all. connections. quality of life
problem- increases, and
solving Israeli expediency Abstract thinking as scale-ups
mindsets. It is often skills are very outbid
also has a misunderstood as useful when large startups’ salary
multinational pressure paradigm shifts offers
culture because (or despair) in occur
of its large other cultures
migrant
population and
strong
interecosystem
ties. It is an
informal
society that
welcomes a
direct approach
and promotes
(continued)
16 Tel Aviv Innovation System 305

Resources Strengths Weaknesses Opportunities Threats

and rewards
agility
Digital Infrastructure Some parts of the Digital Some parts of
infrastructure is highly population, like infrastructure is the population
developed, the ultra-orthodox, likely to remain do not use
including high- avoid digital highly developed, digital
speed internet infrastructure due to the infrastructure,
region- and usage as part of concentration of preventing the
country-wide their belief system global research government
and a low cost centers in Israel, from total
of data mostly for R&D digitalization.
This poses the
threat of lower
bureaucratic
speeds and
higher
bureaucratic
burdens on
local
companies
Education The region has The scarcity of The ecosystem’s Unlike Israeli
and skills a very large available academic high amounts of academia, the
percentage of positions generates practical training, public
highly brain drain especially from the education
educated, IDF and system (up to
working-age international R&D high school) is
population centers, generate considered
(second highly skilled bad, and
in OECD). human resources at produces low
relatively young PISA scores in
Israeli ages worldwide
universities comparison.
rank very high While local
in international students cover
indexes. the gap in
university, this
Strong can pose
theoretical higher risks to
skills in Israel’s future
sciences, as position in
well as knowledge-
developed rich fields
practical skills.

IDF and tech

giants feed the
ecosystem with
highly trained
talent
(continued)
306 I. Garbi and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

Institutions The ecosystem As most of the Many global tech Worldwide
has a wide institutions are giants’ R&D competition
variety of private, they are centers provide a over R&D
private affected by substantial amount center
institutions, as competition from of capital, locations for
well as public other ecosystems managerial global tech
institutions like and can leave the attention, and giants is fierce
the IIA that are ecosystem training for the and forces
meant to fill ecosystem without Israel to
market gaps a taxpayer burden constantly
offer distinct
competitive
advantages to
retain the
ecosystem’s
position
Legal The region has Legal advisor fees The accumulated Hyperinflation
advisers the most can be expensive experience of legal of legal advisor
lawyers per since Israel’s advisers in tech, as numbers and
capita in the living standard is well as in the USA, scale-up legal
world, with high. Contracts are EU, and Asian needs might
vast interpreted in markets, is a consume all
accumulated courts based on distinct advantage legal talent
experience in party intentions of legal talent in the
tech affairs. It and not only the ecosystem
also offers an actual contract,
impartial court sometimes causing
system obscurity in legal
results
Market and Tel Aviv has a The local market is The region is a The area is too
demand very innovative very small good market for small a market
market with (approx. nine testing grounds. for scale-ups in
relative ease of million people) most cases. It
entry because and uses a unique The current Israeli requires
of Israel’s language government market-specific
open-minded (Hebrew). addresses knowledge to
education regulation concerns handle
culture Some fields are by attempting to successfully
heavily regulated deregulate
Migration Incoming There is some Many Jews Israeli
migration from brain drain to other worldwide are immigration-
Jewish Western countries, interested in Israel related
populations mainly the USA. because of its local regulation,
worldwide is Israeli economic boom especially for
usually highly immigration- and the rise in expert work, is
skilled at the related regulation global anti- reducing the
point of is cumbersome Semitism. There is number of
migration. also interest from foreign
Israelis living non-Jewish skilled students and
outside Israel individuals because experts
provide a good
(continued)
16 Tel Aviv Innovation System 307

Resources Strengths Weaknesses Opportunities Threats

interecosystem of friendships with
network Israelis
Policy and Israel is very Israel was Large deregulation The current
strategy dependent on politically unstable efforts are being Israeli coalition
its tech in recent years and made, as well as is under
industry, had several efforts to provide a constant risk of
economically elections in good regulatory disassembly
and for 2 years. This environment for due to political
security, and prevented clear heavily regulated disagreements
sees great policy fields like between its
importance in determination and automotive tech members. This
keeping its execution and and cannabis tech. creates a risk of
competitive forced ad hoc future policy
advantage, policies. All recent The science and shifts if
resulting in lax government technology office deregulation
regulation and coalitions were not appointed a key efforts are not
large degree of very stable, posing media-tech made swiftly
freedom similar risks entrepreneur,
Moran Leshem
Bar, as head of
office, showing the
value it puts on the
sector
Quality of Tel Aviv The region is very The Israeli High price
living enjoys a high expensive government is levels increase
quality of compared to other making large the risk of
living. The regions (19th deregulation efforts brain drain and
2018 Human worldwide), both to reduce price have been
Development nominally and in levels. causing it in
Index was purchasing power recent years.
0.906 (22nd terms In recent years,
worldwide) competition is Increases in
rising and prices price levels are
remain stagnant likely to cause
despite average increasing
wage increases average
salaries,
making the
region less
attractive to
foreign
companies
Regulation By intention, Regulation is still Major deregulation Deregulation is
the Israeli tech too strict in some efforts have great a race between
industry industries, mostly potential for ecosystems,
regulation is those with national regulation- and rapid
relatively security dependent tech response by the
nondisruptive. implications and industries, Israeli
those concerning specifically government
In the case of the interests of cannabis tech, and can be crucial.
private automotive tech The Israeli
(continued)
308 I. Garbi and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

ventures and large pressure political
R&D capital groups and unions situation poses
regulation, risks to
regulation is regulation
even assistive reform speeds
Research There is a very Tech giants poach Research While research
infrastructure good level of talent and inflate infrastructure is infrastructure
research salaries. The low easy to access and is good, a low
infrastructure, availability of relatively cheap amount of
both public and academic positions (sometimes, free) to academic
private in public use. positions drive
universities fuels talent (and
brain drain Commercialization consequently
is relatively easy research)
due to extensive abroad
global tech giant
presence
Risk capital Tel Aviv has a There is a high A vast amount and The higher
very good dependence on variety of venture on-average
venture capital foreign capital capital are valuation for
ecosystem with available. This US-based
strong variety creates a lot startups poses a
interecosystem of potential for risk of startup
ties. Israel has smart money and scale-up
the highest drain
capital raised
per capita
worldwide
Tolerance Tel Aviv has a The area has The can-do attitude The can-do
and trust can-do attitude disproportionately makes the attitude
resulting from high confidence ecosystem very common in the
Israeli culture. and perceives fitting for high-tech ecosystem can
The national cautious behavior be problematic
ethos as stagnation in the mature
emphasizes stages of
overcoming technologies
difficulties, and business
high tolerance ideas, which
for failure tend to require
proven
methodologies
for scale rather
than abstract
thought
16 Tel Aviv Innovation System 309

Fig. 16.4 Private Capital Reliance. Source: Author’s own figure

16.6 Lessons Learned from the Tel Aviv Innovation Ecosystem

In the case of the Tel Aviv ecosystem, much indeed can be learned. This ecosystem
has handled calamities, brain drain, social changes, and bubble bursts. Some of those
events were to an extent and scope that very few other ecosystems have had to
handle. The ecosystem has not only survived those events but prospered
despite them.
The Tel Aviv ecosystem provides some valuable lessons in ecosystem foundation
and maintenance for both business and governance. This section outlines the reasons
for its success in a manner that will enable decision makers in other ecosystems to
implement the lessons learned from the Tel Aviv ecosystem (Fig. 16.4).
The Tel Aviv ecosystem is a private capital-based ecosystem. This capital is
mostly foreign, and Israeli government actions on the ecosystem are restricted to two
items: incentivizing private capital growth and incentivizing the establishment of
new domain-specific subecosystems the private market ignores.
While Tel Aviv still benefits from public funding programs such as Horizon
2020, and while some domestic public capital can also be found in the ecosystem,
the overwhelming majority of the venture capital in the ecosystem is private. To be
exact, 88% of the total capital in the ecosystem comes from the private market, and
around 55% of the total capital comes from private foreign sources. Hence, the Tel
Aviv ecosystem is clearly a private capital-based ecosystem. This has been very
beneficial for the ecosystem, and it is a major contributor to its success in the
long term.
310 I. Garbi and L. Garzik

Private investors have at least three key advantages over their public counterparts.
First, private investors have a strong intrinsic motivation for economic success,
including the generation of exit options. Those exits create more investors, as a
decent proportion of newly rich entrepreneurs tend to become investors themselves.
This generates more exits and starts a reciprocation cycle. In the best-case scenario,
this reciprocation cycle gives birth to a self-sustaining ecosystem in the long term. In
contrast, public investments are usually not exit-oriented and are often set (and
measured) to promote social goals rather than enterprise-related goals.
Second, private investors privatize the risk and socialize the gains. If an invest-
ment goes south the investor bears all of the capital loss, but if an investment goes
well, most of the revenue nourishes the ecosystem. These socialized benefits come in
the form of employee salaries, services acquired, and so forth. In fact, only a fraction
of the total value generated is actually gained by the shareholders. From a taxpayer
standpoint, this risk management policy is ideal.
Third, private investors bring their contacts and networks from different fields
and branches, providing confidence for early adopters to use the early stage products
startups generate. This shortens time to market and helps in establishing initial
market footholds, crucial elements for startup success.
In contrast, public investments tend to do exactly the opposite. They have few
(or even negative) exit incentives, they socialize risks, and they tend to slow down
pressure for market implementation and adaptation. This enables competitors to gain
a short but decisive market advantage and leaves the nonpressured company forever
behind.
As a result, private capital tends to outperform public capital in almost any field,
with the added benefit of reducing both tax load and the risk of taxpayers. Therefore,
available private capital is crucial for ecosystem success over time and venture
capital is very valuable for ecosystem growth over time as it funds new enterprises.
While government actions cannot generate or mimic private capital, they can
incentivize its allocation and, ideally, even its import. Tel Aviv provides a great
example of such successful incentivization. Since this incentivization started almost
30 years ago, Tel Aviv is also an example of the positive long-term effects such
incentivization can have on an ecosystem.
The existence and encouragement of private capital investment, as was done by
the Israeli Yozma incentive program and Israeli tax reduction programs, have proved
to be very valuable for establishing the region and generating new private venture
capital from both local and global sources. The expansion of venture capital in Israel
is a case in point, yielding a mature ecosystem with growth rates matching those of
emerging ecosystems. This growth is impressive by every standard.
Between 2004 and 2019, the venture capital available in Israel increased at an
average rate of 13% per year for a total of 450% growth. Between 2013 and 2019
alone, available venture capital increased by 371%. Data regarding the Tel Aviv
region exclusively is not available, but since the region is 50% of Israel’s tech market
we expect its share of the growth to be similar. The growth of Israeli venture capital
demonstrates that private capital incentivization can be a very effective strategy
(Fig. 16.5).
16 Tel Aviv Innovation System 311

Fig. 16.5 Venture capital growth Israel. Source: Author’s own figure

Stock Market Amalgamation

In times of global crisis, the Israeli stock market is relatively stable compared to its
peers. This is due to its low trade volume, low trade speed, and the use of a unique
low-volume trade currency—the Israeli Shekel. Double registration in other stock
markets is possible and common.
The first Israeli stock market was established in 1935 and reached its modern
form in 1968. From 1975 on, after Israel’s transformation from a centrally planned
economy to a market-driven economy, trade consisted mostly of stocks. Now,
450 companies with a joint value of USD251.2 billion are registered in the Israeli
Stock Market. In 2000, the Israeli parliament passed a law enabling companies to
incorporate both in the USA (at first, NASDAQ only) and in Israel (dual companies).
This was later expanded to include NASDAQ Small Cap companies plus companies
traded on the London, Singapore, and Toronto stock exchanges. Following its IPO in
2019, the Israeli Stock Exchange is 31.7% privately owned.
The Israeli stock market itself is not particularly interesting. Following the global
crisis of 2008, regulatory changes, and an increase in taxes, trade volumes in the
Israeli stock market have been reduced by 55% from 2007 to 2012. The market does
offer Israeli companies a strategic advantage since their company headquarters do
not have to move to be listed in key foreign stock exchanges.

Challenge as Red-Tape Inhibitor

Very little red tape limits the Tel Aviv innovation ecosystem, and this trend is
expected to remain as Israel depends on innovation for its national security and
survival. This reduces stagnation risks in the ecosystem as it matures and hosts more
growth-stage companies.
Tel Aviv is in the state of Israel, which faces a constant threat of war by other
states that are larger in geography, population, and combined economic size. Israel
addresses this threat mainly by maintaining distinct military advantage over those
states. This military advantage is achieved and preserved through two main
312 I. Garbi and L. Garzik

Fig. 16.6 Migration success story. Source: Research and Information Center, Knesset Israel
(Israeli Parliament)

mechanisms: maintaining a tight relationship with the US Department of Defense

and cultivating a strong domestic arms industry centered around innovation.
Israel safeguards both mechanisms very diligently. The former ensures Israel is
supplied with the best military systems exported by the USA. To maintain the latter,
innovation-curbing regulation is kept to a minimum to prioritize agility over stability
or safety. This approach seems to be doing wonders for the region, as can be seen by
its remarkable economic results. As worker welfare concerns are often a major
contributor (or a key justification) for overregulation, it is important to mention
that this prioritization of agility and lax regulation in the region has not driven up
unemployment rates, which remain extremely low.
Given Israel’s outcomes, agility and lax regulation are potentially preferable
strategies for any ecosystem, whether the ecosystem is worker welfare-driven or
growth-driven (Fig. 16.6).

The Tel Aviv region proves that mass migration from multiple countries of origin
can be successful in modern times if the value sets of the migrating and domestic
populations are compatible. The Tel Aviv region and the state of Israel in general are
migration success stories—almost all of those inhabiting the region (around 94%)
are either migrants or second-generation migrants.
The origins of Israel’s migrants are very diverse, including numerous countries in
Europe, Asia, Africa, and America. Surprisingly, this mass migration from multiple
origins has resulted in one cohesive society rather than in multiple seclusive ethno-
clusters, both in Israel in general and in Tel Aviv in particular. Israeli society’s
dividing lines correlate more with religious devotion (not the practiced religion
16 Tel Aviv Innovation System 313

itself, but rather the level of religious fundamentalism) than with migration origin,
indicating very successful cohesion. As is often seen in major urban areas, the Tel
Aviv region is even more cohesive and liberal than the Israeli average.
This success story shows that successful mass migration is possible, although it
also provides evidence that certain characteristics of the migrating population are
important for that success. In Israel, the mutual values of the migrating group and
existing domestic groups are largely similar or compatible. In the case of Tel Aviv,
an overwhelming number of the migrants were Jewish and showed strong affinity to
Israel prior to their migration, giving them religious ideological common ground
regardless of national origin.
Another success factor in Israel is that the newly migrated are left to fend for
themselves economically after the settlement process. In the case of the Tel Aviv
region, single-time settlement grants are given either in cash or in temporary tax
reductions, and the settler chooses where to settle in a free-market manner like every
other citizen. Planned migrant settlements were attempted in the period following
Israel’s independence declaration in 1948 and are now generally considered to be a
social failure as they ended in suboptimal integration for several generations.
It is unclear how successful the mass migration into the Tel Aviv region would be
without one or all of these characteristics. Given that several migration waves from
various countries—some massive in size—have integrated into the region and into
Israeli society successfully, successful mass migration leading to full integration is
certainly possible when those characteristics are present.

Emphasis on Early Stage Improvisation and Abstract Thinking

Israeli culture glorifies improvisation skills and agile thinking, and its citizens learn it
at a relatively early age. This skill helps them in setting up innovative and disrupting
companies later on in their life. This lesson can be learned from the Israeli ecosystem
in general, as it is pan-Israeli and not unique to Tel Aviv, though Tel Aviv is an
amplified example of its value.
Israeli culture glorifies improvisation skills and agile thinking. Israelis are trained
in improvisation and abstract thinking at relatively early age during their mandatory
military service. This is not done via standardized training programs or by design
(at least not officially), but rather as a byproduct of the challenges of military life.
The current legally mandated military service period in Israel is 2.5 years for men
and 2 years for women and that military service is rather demanding in nature.
As a result of the challenging conditions their military service dictates, Israelis
must learn to adapt and overcome disparities in a low-resource environment at a
relatively early age. This is not done by program or by design, but rather by the need
to overcome the hardships encountered during service and its associated environ-
ment. The incentive to overcome hardship can often be a very basic human need,
such as a need for survival or shelter in field training. Such incentives, though
primitive, tend to be quite powerful motivators for adaptation.
The mental agility generated by this process benefits the local innovation scene,
especially when it comes to startups in the early stages and their need to constantly
adapt to changes in short cycles. That being said, military service also comes at an
314 I. Garbi and L. Garzik

enormous cost to Israeli GDP since 3% of the able population is out of the workforce
at any given time due to active service alone. In nominal monetary terms, this
accounts for about USD11 billion loss in GDP each year.
Furthermore, it is important to state that this loss of years is very likely to be an
underestimation, as lost years often span longer than the years of service alone.
Former soldiers tend to travel internationally for long periods of time following the
service period. This travel period typically spans for between 6 and 12 months and is
often followed by another 6-month reacclimation in Israel, totaling in around
4–5 years of lost economic productivity. However, the travel period is not
completely negative—these young travelers interact with other cultures where they
are usually perceived very positively, branding Israel as a good travel destination. As
those who travel to Israel usually travel to Tel Aviv on their visit, this is very positive
for the region.
If we are to extend the GDP loss by another year, which is a conservative
estimation as lost time is usually longer, it accounts for roughly another 1% GDP
lost or an additional USD3 billion annually. This trade-off was forced on Israel, and
it is unlikely that other countries will opt to make a similar trade-off without
existential threats forcing them to do so—nor do we recommend they should.
However, an alternative system to military service capable of training the young
population in abstract thought and improvisation can offer, at least in theory, the
potential to provide similar benefits to those provided by military service without the
massive GDP loss drawback. However, no such system has been tested in a major
economy, so the concept remains unvalidated in practice.

Military Service as Social Adhesive

The mandatory military service in Israel benefits the region by being a strong social
adhesive and a good ladder to climb for the capable but unfortunate. This is true for
Israel in general and not just the Tel Aviv ecosystem. The mandatory military service
in Israel acts as a social adhesive element for Israeli society, and it is seemingly very
effective. As stated, however, it comes with a huge GDP loss.
The main reason for the military’s social adhesion benefit is probably the fact that,
during service, social status is irrelevant. Everyone is conscripted, and unit assign-
ment is done at least partly based on merit and not based on social status or pure luck.
This gives people of low means and high aptitude the ability to climb the social
ladder in a neutral setting, since the military provides all of the available resources. It
is unclear whether this social adhesive is worth the high cost of military service in
terms of GDP loss.

Value of No-Barrier Culture

The Tel Aviv ecosystem has a no-barrier culture. One can approach anyone and is
encouraged to speak one’s mind. This is very valuable for early stage startups, but is
less accepted and even frowned upon in other ecosystems. One of the most interest-
ing lessons from the Tel Aviv ecosystem is the value of its no-barrier approach,
which is a key feature of both the region and its inhabitants.
16 Tel Aviv Innovation System 315

Israeli culture and conversational norms are characterized by informality, and Tel
Aviv is an extreme example of that. In most situations, it is considered completely
acceptable to approach anyone via email or telephone, and to lesser extent even in an
unannounced office visit—so long as one shows adequate respect for the individual
being approached and has something valuable or interesting to say.
This no-barrier culture is very beneficial for local startup founders, as it enables
(and even encourages) them to approach experts and prospective clients without
significant prior validation or proof of their venture’s merit. Such validation is often
impossible to get without convincing such experts or clients to examine the startup’s
ideas in the first place. This early access to resources prevents the chicken-and-egg
situation many startups face in early stages and adds agility to the ecosystem. It
reduces the distance between an entrepreneur and resources to a high-value idea and
a valid plan of execution.
However, this no-barrier approach is both a blessing and a burden. This culture is
not widespread and may be frowned upon in other ecosystems, especially those in
Europe and Asia. This leads to Israelis having a reputation for being overly upfront
or even rude. As the no-barrier approach is far from being the worldwide standard, at
least for time being, and as adopting such an approach will usually require a
substantial cultural shift, adopting no-barrier culture is probably realistically feasible
only as a long-term goal in most ecosystems.

Equity Financing Rather than Debt Financing

In the Tel Aviv ecosystem, capital is raised for equity and not for debt. This can be
problematic for scale-ups and for scale-up retention, as debt-raising in other
ecosystems is significantly easier. In the Tel Aviv ecosystem, capital is rarely raised
via bank loans, but rather from domestic and foreign venture capital, usually in
exchange for equity and not as interest-bearing debt. Hence, the standard transaction
in the region is funds for equity, and not funds for interest.
While this is useful in reducing risk exposure for the local banking system, which
is generally conservative, it is a potential growth inhibitor for scale-up companies. In
fact, the Israeli Innovation Authority (IIA), the innovation promotion office of the
Israeli government, claims that raising debt in Israel is far harder than raising debt in
other markets and that US-based companies have three times more leverage than
their Israeli peers.
These debt-raising difficulties have the potential to drive scale-ups out of the Tel
Aviv ecosystem. This can be especially harmful as the Tel Aviv ecosystem matures
and hosts more scale-ups, competition for talent increases, salaries rise, and the need
for funds becomes even more imperative for scale-up companies. To address the
issue, the IIA is planning to offer incentives to bodies willing to offer scale-up loans.
As previous governmental programs creating tax incentives were generally success-
ful in the region, it will be interesting to follow the program and its effects on the
ecosystem.
316 I. Garbi and L. Garzik

Ecosystem Maturity-Related Identity Challenge

The Tel Aviv ecosystem is no longer just a startup incubator and hosts many scale-up
companies, including multiple unicorns. There is an ongoing debate about the
identity of the Israeli innovation ecosystem in general, one which specifically applies
to the Tel Aviv region as it is the locomotive of the Israeli tech market. It is the
question whether Israel is still “the startup nation” or whether it has reached satura-
tion and is now the “scale-up nation.”
Several trends point to “scale-up.” According to the Israeli Innovation Authority
(IIA), the amount of newly created Israeli startups is decreasing. Seed-round
fundraising remains mostly stable, but growth-round fundraising increased by 33%
from 2017 to 2018. This suggests a transition from a startup focus to a scale-up
focus. The number of Israeli startups choosing to incorporate outside of Israel
increased by 10% in 2019. In general, around 18% of Israeli startups incorporate
abroad, most of them in the USA (as stated, data for Tel Aviv were unavailable,
assumption of a similar ratio in Tel Aviv is reasonable). The main reason reported for
this trend is “investor preferences.”
Another important issue is talent availability for startups. The Israeli ecosystem
already hosts 44 unicorns and over 4500 successful tech companies. These
companies need human capital—and lots of it. Far more people in Israel are
employed in scale-ups than in startups, and scale-up companies have become a
major force in the Israeli talent ecosystem. From 2011 to 2019, the number of people
employed in scale-ups increased from 23,000 to 70,000, and sales increased from
USD3.5 to 17.7 billion. This growth has created a shortage in talent: The IIA reports
a shortage in qualified staff of around 18,500 experts in the Israeli ecosystem in
general. This shortage is leaving startups with less available talent, and this trend is
very likely to deepen as scale-ups grow further.
Considering the funding and personnel factors, the threat of regional saturation
appears viable. However, there are also solid arguments against saturation in the Tel
Aviv region when it comes to startup generation and regional growth in general. The
switch from start up to scale-up is not a regional or Israeli phenomenon, instead it
can be observed worldwide. When it comes to innovation levels in scale-ups, Vered
Raviv Schwarz, COO of Tel-Aviv-based unicorn Fiverr, claims that both scale-ups
and startups must be innovative and that the two do not counteract each other. In
other words, innovation is still happening, but it has moved to scale-ups. Scale-ups
can mimic startup structure by making separated small teams focusing on one
product, generating innovation in a similar fashion and at somewhat similar speed
to startups.
Another sound argument, and one we will discuss here, is that the human capital
needed in a scale-up is not the same as the human capital needed in a startup.
Startups focus on bringing innovation to market, and scale-ups focus on the optimi-
zation and scale of the innovation they brought to market in previous stages. The
shift of focus requires a shift in skill set, and talent with the skill set fitting a startups
is not necessarily the same talent desired by scale-ups.
Statistically speaking, the average successful startup team is composed of 3–7
people (founders and employees), with specialties in different fields. Having at least
16 Tel Aviv Innovation System 317

one founder with a PhD increases the chances of meeting fundraising goals by 60%,
so at least one highly educated founder is helpful. It is safe to assume that many of
the people involved in the early stages of a startup will be vision-oriented, not detail-
oriented, as startups typically cannot optimize their product fully until they find
product-market fit, which almost always requires some degree of pivot on the
startup’s part.
Each position in a startup usually requires hands-on work, and mass management
skills are not yet relevant. In a scale-up, however, the picture is quite different. In
general, startups focus on building a product and scale-ups focus on building a
company. The original founders, if they are still involved, tend to take managerial
roles in scale-ups with little to no hands-on work. Founders often fail to excel in their
new roles or find them frustrating, so they often leave scale-ups. For example, the
founder acting as the CEO is often replaced by a hired CEO as the scale-up grows
bigger and its ownership composition changes. The skill set needed for the CEO
position in a startup is very different from what is needed by a scale-up. We did not
find exact data regarding the prevalence of this trend, but it is well established across
ecosystems. Once they leave, founders may start another enterprise, at least based on
the patterns of founders residing in the Tel Aviv region.
Unlike startups, scale-ups have an additional layer of senior leadership team made
up of hired staff. This layer of people does not fit the profile of startup founders.
Their expertise is useful in scaled enterprises, and their value diminishes in infant-
stage companies. Therefore, it seems unlikely that scale-ups keep founders away
from the market.
There is some competition over talent between startups and scale-ups when skill
sets overlap, as both seek to acquire the finest talent available. In this competition,
scale-ups tend to win as they usually have more available funds. That being said,
startups and scale-ups usually require fundamentally different skill sets. As scale-ups
focus on optimization and startups focus on innovation, their requirements of their
developers are far from identical. Startups are expected to benefit more from
developers that exhibit high openness, unconventional thinking, and are less expen-
sive to hire. Scale-ups, in contrast, benefit more from subject-domain expertise and
experience in large-scale terms on previous occasions.
Similarly, in sales, startups usually focus their sales on the early adoption group,
which makes up only 2.5% of the market and has specific characteristics. This group
is interested in the startup’s product, which is innovative but usually not perfected.
Scale-ups, on the other hand, aim for the “late majority” adoption group. This group
makes up 82% of the market and appreciates a mature product and recognizable
brand. Selling to majority groups is very different from selling to early adopters and
requires a different skill set, so startups and scale-ups are not competing for sales
talent.
Given these examples, it is likely that startup and scale-up competition over talent
is less fierce than initially or intuitively thought. Competition between scale-ups and
R&D centers, however, is far more probable. The skill sets needed by scale-ups and
R&D centers are at least somewhat compatible.
318 I. Garbi and L. Garzik

Either way, the way the Tel Aviv ecosystem deals with this growth stage can
provide a valuable lesson to other regions, and is worth following. As the Tel Aviv
ecosystem is a very agile ecosystem that has survived several calamities in the past,
its lessons and consequences can be rapidly applicable and may even include
creative and novel solutions.
Zurich Innovation System
17
Mathias Beck and Ludovit Garzik

Abstract

The Zurich region frequently ranks among the top innovative and competitive
regions in the world. This chapter explores the drivers of Zurich’s unique
interplay of high competitiveness and innovativeness, distilling the important
components of this far-reaching innovation ecosystem. The analysis not only
evaluates the relative strengths of resources for economic activities, but also
includes the institutional, political, and social characteristics of the Zurich region
ecosystem.
The key factors of Zurich’s regional innovation ecosystem are its strong
research and university systems, its strong private sector with high levels of
private investments in R&D and innovation activities, and its flexible and stable
innovation and labor regulations. In Switzerland, the institutional system supports
the generation and dissemination of knowledge with its transparent structure and
public funding dedicated to the research institutions, which provides them with a
strong position and high-class infrastructure to produce scientific outcomes.
However, policymakers pay less attention to the dissemination of the knowledge
and technologies generated by scientific institutions into the private economy and
among private enterprises. The appropriation and implementation of newly
generated knowledge haves been, in large part, delegated to companies—improv-
ing their competitive position on the market.

M. Beck (*)
Department of Management, Technology, and Economics, KOF Swiss Economic Institute, ETH
Zurich, Zurich, Switzerland
e-mail: [email protected]
L. Garzik
Innovationorbit, Austrian Council for Research and Technology Development, Vienna, Austria
e-mail: [email protected]

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 319
L. Garzik (ed.), Successful Innovation Systems, Future of Business and Finance,
https://doi.org/10.1007/978-3-030-80639-2_17
320 M. Beck and L. Garzik

17.1 Zurich Innovation Ecosystem Introduction

Switzerland is famous worldwide as the home of excellent chocolate, cheese, and

watches—and of course as the home of Roger Federer—but it is also the home of
Roche, Novartis, ABB, Nestlé, and many more highly innovative and competitive
enterprises. In this chapter, we focus on one of the driving economic regions in
Switzerland, the greater Zurich region. This region hosts the European (research)
headquarters and laboratories of Google, IBM, Microsoft, and Disney.
Zurich is also home to world-leading scientific institutions. Two renowned
universities, the Swiss Federal Institute of Technology in Zurich (ETH Zurich for
its German name, Eidgenössische Technische Hochschule Zürich) and the Univer-
sity of Zurich, lie next to each other in the middle of the city. ETH Zurich is one of
the two Swiss Federal Institutes of Technology, the other being EPFL in Lausanne.
ETH Zurich is a publicly funded research university, originates from a strong focus
on science, technology, engineering, and mathematics, and has a world-class repu-
tation in academia and industry alike. Zurich’s two main universities are joined by
high-class universities of applied sciences, and together, they provide excellent
conditions for socially impactful innovation, knowledge generation, and knowledge
dissemination. Swiss Universities of Applied Sciences were renowned for their
practical orientation, providing high-level training for engineers.
Very recently, the Regional Innovation Scoreboard 2019 from the EU Commis-
sion lists the Zurich region first in a comparison of the innovation capabilities of
238 regions in 23 EU Member States plus Norway, Serbia, and Switzerland.
Notably, Zurich’s runner-up is Ticino, another Swiss region.1 At the same time,
Switzerland holds the fifth rank in the World Economic Forum’s Global Competi-
tiveness Report.2
In this chapter, we will dive deeper and explore the drivers for Zurich’s unique
interplay of high competitiveness and innovativeness. We look behind these
interdependencies and distill some important components of this far-reaching
innovation ecosystem.

17.2 Zurich Facts and Figures

The Zurich Innovation Ecosystem is strong in both its innovation efforts (input) and
its enterprises’ innovation successes. According to the EU Commission’s Regional
Innovation Scoreboard, the Zurich region occupies the leading position in the most
recent European comparison in 2019.3 The Regional Innovation Index comprises
several factors relevant to regional innovation performance, with 17 specific

1
European Commission, “Regional Innovation Scorecard 2019,” vol. 18, 2019, https://doi.org/10.
2873/85586
2
World Economic Forum, “The Global Competitiveness Report 2019,” ed. Klaus Schwab, 2019.
3
European Commission, “Regional Innovation Scorecard 2019.”
17 Zurich Innovation System 321

indicators. The report highlights the Zurich region’s excellent standing in a broad
range of those indicators.
According to the report, the Zurich region is the most innovative in Switzerland
and a leader in Europe. It has high levels of tertiary education (rank 4), lifelong
learning (rank 1), scientific co-publications (rank 1), and most-cited publications
(rank 2). Zurich also has strong R&D expenditure by the private business sector
(rank 19), SMEs introducing product or process innovations (rank 26), and SMEs
introducing marketing or organizational innovations (rank 4). Finally, it scores
highly for its public–private co-publications (rank 4), PCT patent applications
(rank 24), and employment in medium–high/high-tech manufacturing and
knowledge-intensive services (rank 16).
Despite the Zurich region’s leading role for a relatively long period of time
(2011–2019), its innovativeness is not unique in Switzerland. Six out of seven
Swiss regions are part of the top category of “Innovation Leaders +”, and all
Swiss regions are in the top 20 most innovative regions in Europe—five regions
are in the top 10.4 Notably, the comparative ranking of Swiss innovation regions is
quite dynamic. On one side, regions like Ticino and Ostschweiz have improved
recently, while others like Nordwestschweiz have declined.
A key driver of its success is that Zurich benefits from the general strength of
Switzerland’s innovation system and Switzerland’s overall high competitiveness,
which are both in the top worldwide. The World Economic Forum’s competitiveness
report ranks Switzerland fifth.5 Switzerland, Sweden, and the USA lead the
innovation rankings,6 while Switzerland ranks first among the highest-income
countries and top overall in Europe.
As pointed out by Carmen Walker Spaeh, the current cantonal councilor and
director of Economic Affairs of the Canton of Zurich, a key factor for Switzerland’s
success is the internal competition among the country’s regions, cantons, companies,
and academic institutions.7 Highlighting this national–regional interplay, we will
discuss national level to emphasize issues like development over time, and other data
at the regional level to show regional differences.

17.2.1 Input Indicators: Innovation Efforts in the Economy

Investments in R&D are one of the most important drivers of economic growth in
modern knowledge-based societies. The development of R&D and innovation
efforts is thus a key figure for a region’s future-oriented, long-term potential for
competitiveness and economic wealth. Sufficient R&D and innovation efforts are

4
European Commission.
5
World Economic Forum (2019) “The Global Competitiveness Report 2019.”
6
World Economic Forum (2020) Global Innovation Index.
7
digitalswitzerland, “Innovation in Zürich, Innovation Schweizweit,” 2019, https://
digitalswitzerland.com/2019/09/19/innovation-in-zurich-innovation-schweizweit/
322 M. Beck and L. Garzik

fundamental prerequisites for managing the transition toward a sustainable

knowledge-based society.
High R&D capacity innovation effort is also necessary due to the challenges of
the age of digital transformation and to further socioeconomic and environmental
challenges. A recent policy report about the firm-level effects of the digital transfor-
mation on Swiss enterprises’ performance finds that innovative strength enhances
firm productivity following investments in digital technologies.8 Evidently,
companies without high capacity for innovation will find it difficult to derive
productivity gains from their investments in digitalization.
The official survey of innovation activities in Swiss enterprises, which analyzed a
representative panel of Swiss enterprises in 2018, reports a slight decline in the share
of R&D-active companies in the overall economy (R&D ratio) over recent years.9
Nonetheless, the R&D ratio in manufacturing industries (i.e., high-tech and low-tech
sectors) has increased slightly. As the report states, the efforts attributed to
innovation activities have increased, where the share of R&D expenditure turnover
in innovative companies measures innovation activities.
Despite the overall trend of a declining R&D ratio, there has been a slight increase
in the concentration of R&D spending in Switzerland. This means that fewer
companies carry out R&D efforts. This concentration is also evident in other
industrialized countries like Germany. However, this trend of increasing concentra-
tion has slowed down very recently, and countries like France and Finland present a
contrary picture. Over time, and compared to Germany and Switzerland, these two
countries have been able to spread their overall R&D activities over a broader base of
companies.10
According to the Swiss innovation report, there are some considerable differences
in firms’ engagement in R&D activities across major regions. The share of R&D-
active companies is highest in northwestern Switzerland. Zurich has the highest
share of innovative companies, and innovative companies show the strongest aver-
age innovation efforts (measured by the share of R&D investment turnover) in
Espace-Mittelland. However, there are only slight differences across Swiss regions
related to the share of R&D-active firms (R&D ratio in 2018). For more details, refer
to the report by Spescha A and Woerter M (2020), which contains more information
about the differences between regions.11 For instance, the report states that these
differences are mainly driven by services and small enterprises.

8
Beck M, Plekhanov D and Woerter M (2020) “Analyse der Digitalisierung in der Schweizer
Wirtschaft,” KOF Studies 153 (2020), https://doi.org/10.3929/ETHZ-B-000432882
9
Spescha A and Woerter M (2020) “Innovation in der Schweizer Privatwirtschaft – Ergebnisse Der
Innovationserhebung 2018” (Bern, 2020), https://www.admin.ch/gov/de/start/dokumentation/
medienmitteilungen.msg-id-72767.html
10
Spescha and Woerter.
11
Spescha and Woerter.
17 Zurich Innovation System 323

Firm innovation activities’ “openness” is considered an important source of

innovation since it enables access to externally available knowledge.12 The different
facets of the “open innovation” phenomenon are not a concern of the private sector
along, but are also increasingly an economic policy concern—entire regions or
economies can benefit from the positive externalities of opening innovation pro-
cesses and increasing knowledge dissemination.13 Policymakers and academia in
Switzerland have reacted to these opportunities, have launched various clusters and
network initiatives, and have provided spaces for technology and innovation parks.
These activities are intended to foster the transfer and dissemination of knowledge
and technology between actors from science and industry and to accelerate the
generation of innovations.
The official Swiss innovation report shows that Swiss companies have recently
increased their R&D cooperation engagement.14 The reported figures show a steady
increase in the share of companies with R&D collaborations between 2002 and
2018. Specifically, R&D-active companies have formed in-country partnerships for
R&D more frequently, while international R&D cooperation agreements have
declined.
In sum, development over time indicates a clear increase in R&D partnerships
and thus a more open innovation processes within enterprises. Accounting for firm
size, the report indicates that smaller enterprises have difficulty with external partner
collaboration, especially related to universities. The figures generally show less
collaborative innovation activity between private companies and universities. This
is primarily because rather large companies enter into R&D cooperation with
universities, while smaller companies do so only very rarely. However, small
companies more commonly form partnerships with Universities of Applied
Sciences. In fact, Universities of Applied Sciences are the third most frequent
cooperation partner for SMEs after suppliers and customers (for more details and
figures, refer to the report by Spescha A and Woerter M, 2018).
R&D cooperation is becoming more important, but the literature indicates that
SMEs have difficulties benefiting from engagement with external partners, in partic-
ular with scientific partners from universities for the generation of innovation
outcome.15 The relatively low numbers of innovative SMEs in the Zurich region

12
Beck M and Schenker-Wicki A (2014) Cooperating with External Partners: The Importance of
Diversity for Innovation Performance. European Journal of International Management 8, no.
5 (2014), https://doi.org/10.1504/EJIM.2014.064604
13
Beck M, Junge M and Kaiser U (2017) Public Funding and Corporate Innovation. KOF Working
Papers, no. 11196 (2017); Spescha and Woerter, “Innovation in Der Schweizer Privatwirtschaft –
Ergebnisse Der Innovationserhebung 2018.”
14
Spescha A and Woerter M (2018). Innovation in der Schweizer Privatwirtschaft – Ergebnisse der
Innovationserhebung 2018.
15
Beck M and Lopes-Bento C (2019) Innovation, Partner Configuration and Partner Adaptation in
R&D Alliances. Proceedings of the 2019 International Industrial Organization Conference, 2019,
208.
324 M. Beck and L. Garzik

that engage in collaborative R&D are clear in the Regional Innovation Scoreboard
(RIS) Report from the European Commission.16
Policymakers have addressed these SME collaboration shortcomings, which are
not unique to Switzerland, through a number of policy instruments. For example, the
Eurostars Program from the EU targets SMEs and offers direct financial R&D
support. The program attracts an increasing number of Swiss enterprises engaging
in national but mostly international collaborative innovation to generate new
technologies and services. Recent research analyzing the effectiveness of the
Eurostars funding program has identified substantial positive employment effects
for the funded SMEs in Switzerland.17
Innovation inputs in the Zurich Innovation Ecosystem are strong, especially when
compared internationally on a vector of a wide range of factors. Various measures
and indicators show this, like the investments in R&D from the business sector, the
high quality of the publicly funded research and university system, and the high
number of well-educated students and graduates thereof. Zurich’s excellence is
evident at the national level, as confirmed by the Global innovation Index (GII)
report’s ranking Switzerland second for its innovation inputs.18
The GII report emphasizes robust R&D expenditures for and by the private
sector, and places special emphasis on the Swiss economy’s ability to produce
high-quality innovations consistently. It also underlines the overall innovative
capacity of the business sector, with its high share of knowledge-intensive labor.
However, the report also indicates some weaknesses at the national level. Zurich
has relatively weak engagement for performing and financing R&D in the public
sector.19 In addition, at the regional level, the RIS reports outlines a relative low
position with respect to innovative SMEs engaging in R&D collaboration for the
Zurich region.20

17.2.2 Output Indicators: Innovation Success in the Economy

According to the Global Innovation Index (GII), Switzerland is best among world
economies with respect to its innovation output capabilities.21 This outstanding
position remains constant compared to the previous year and in 2018. After the
USA, Switzerland ranks second for its quality of innovation, which is based on the
high quality of its universities and its scientific publication output. Additionally,

16
European Commission, “Regional Innovation Scorecard 2019.”
17
Beck M, Hansen J, Kaiser B, Sonne-Holm P, et al. (2019) Eurostars The International Programme
for Research Intensive SMEs A Joint Swiss Danish Impact Study. SERI Dossiers (Zurich, 2019),
https://www.research-collection.ethz.ch/handle/20.500.11850/413401
18
GII, “Global Innovation Index 2020 – Who Will Finance Innovation?”
19
GII.
20
European Commission, “Regional Innovation Scorecard 2019.”
21
GII, “Global Innovation Index 2020 – Who Will Finance Innovation?”
17 Zurich Innovation System 325

Switzerland also works hard to internationalize its inventions. Therefore, it also

ranks first in receiving patent families, or patents granted in two or more patent
offices. Remarkably, Switzerland is consistently among the top three countries
worldwide in patents by origin, PCT patents by origin, scientific and technical
articles, high-technology manufacturing, and receipt of intellectual property (IP).22
The GII report also points out to Switzerland’s particularly well-framed
innovation ecosystem.23 For instance, Switzerland’s quantity of university–industry
collaborations (UIC) ranks second in the GII. A recent policy report on knowledge
and technology transfer (KTT) in Switzerland provides a comprehensive perspective
on the form and intensity of KTT activities in Swiss enterprises and scientific
institutions.24 A representative survey found that enterprises in the Zurich region
are highly engaged in KTT.25 Switzerland is also strong in recent cluster develop-
ment and is ranked fifth in the GII 2020—Zurich (ranked 49th) and Lausanne
(ranked 89th) demonstrate their roles among the top 100 science and technology
clusters in the world.
The Zurich region’s scientific output is of exceptionally high quality. The RIS
2019 report ranks Zurich first for its international scientific co-publications, second
for scientific publications among the top 10% most-cited publications worldwide,
and fourth for public–private co-publications. International scientific co-publications
are one measure of scientific research quality, as collaborations intend to increase
scientific productivity. Similarly, the most-cited publications indicator is a proxy for
the efficiency of the research system since highly cited publications are generally
higher quality. Public–private co-publications indicate public–private research
linkages and active collaboration activities between business sector researchers
and public sector researchers. This again demonstrates the active knowledge and
technology transfer between private sector enterprises and scientific institutions in
the Zurich region.
If we look at the innovation output of companies in the Zurich region, a picture
emerges of generally strong innovation capacity. However, that capacity varies
across indicators as we have seen above in relation to scientific output. For example,
the RIS report lists Zurich 26th for the emergence of product or process innovators,
fourth for marketing or organizational innovators, and 56th for its performance in
generating sales with new-to-market and new-to-firm innovations. This latter indi-
cator measures the turnover of new or significantly improved products and includes
both new-to-the-firm and new-to-the-market products. Contrary to organizational
and marketing innovation, this captures both the successful introduction of state-of-

22
GII.
23
see also the Research & Innovation report 2020 of the State Secretariat for Education, Research,
and Innovation for a documentation about Switzerland’s innovation systems, SERI (2020).
24
Beck M et al. (2020) Analysis of Knowledge and Technology Transfer in Switzerland – the
Perspective of the Enterprises. Research and Innovation in Switzerland 2020 C, no. 4 (2020),
https://doi.org/10.3929/ETHZ-B-000412676
25
Unpublished data, figure can be provided by the authors upon request.
326 M. Beck and L. Garzik

the-art technological innovations (new-to-market products) and the diffusion of

these technological innovations (new-to-firm products) in the market. All three
indicators capture the ability of companies to successfully develop new products
and services and introduce them to the market, thus determining the basis for them to
achieve a competitive advantage.
The official Swiss innovation report provides information about private
enterprises’ introduction of product, process, marketing, and organizational
innovation in Switzerland’s overall economy over time (from 2002 to 2018) and
about regional variation in 2018.26 The report shows an increase in the share of
innovating enterprises in the most recent years after a longer period with decreasing
numbers. The report presents smaller differences across regions in Switzerland for
innovation output than for innovation input. According to the report, the Zurich
region has the most innovating companies.
The official Swiss innovation report also documents the development of private
enterprises’ sales of new-to-market and new-to-firm product and service innovations
in Switzerland over time (from 2002 to 2018), along with regional differences in
2018.27 These measures indicate the commercial success of private enterprises’
innovative products and services in Switzerland. The figures in this report show a
long-term stable share of turnover going to innovative products/services with only
small regional differences.
The official innovation report also confirms the Zurich region’s strength, this time
regarding the share of private enterprises with patent applications.28 The Zurich
region is among top the regions in Switzerland for patent applications, with a rate of
approximately 6% of private enterprises filing a patent application compared to
approximately 3% for the overall economy.
In conclusion, the Zurich innovation ecosystem is very well positioned on both
the input and output sides of innovation activities. This general picture is strongly
coherent with the overall innovation performance of the Swiss economy. According
to the GII 2020, Switzerland ranks second worldwide in the input side and first in
innovation output. This report also highlights Switzerland’s high capacity for
innovation in terms of human capital and shows the high quality of its research
system, which produces important scientific outcomes with an international out-
reach. In more detail, Switzerland ranks fourth in R&D expenditures, fifth in R&D-
intensive global companies, and fourth in the quality of universities, with ETH
Zurich and École Polytechnique Fédérale de Lausanne (EPFL) both among the top
20 ranked universities in the world.29

26
Spescha A and Woerter M (2018) “Innovation in der Schweizer Privatwirtschaft – Ergebnisse der
Innovationserhebung 2018.”
27
Spescha andSpescha A and Woerter M (2018) “Innovation in der Schweizer Privatwirtschaft –
Ergebnisse der Innovationserhebung 2018.” Woerter.
28
Spescha and Woerter.
29
GII, “Global Innovation Index 2020 – Who Will Finance Innovation?”
17 Zurich Innovation System 327

This high quality in innovation input and output also documents that Switzerland
is able to translate innovation input effectively into output. The GII report analyzes
the relationship between innovation inputs and innovation outputs for all the
economies covered in the GII 2020 report. Switzerland belongs to the category of
economies that effectively convert costly innovation investments into larger and
higher-value outputs. Specifically, the report highlights that Switzerland produces
relatively large innovation outputs in relation to its innovation investments.30

Main Institutional Players in the Regional Innovation Ecosystem

The Zurich region hosts a high density of well-connected universities and research
institutes. These include, in addition to ETH Zurich and the University of Zurich, the
interdisciplinary research institute for materials science and technology Empa and
various universities of applied sciences.
According to the World University Ranking 2018,31 ETH Zurich is the best
university in continental Europe and the global leader in computer science. ETH
Zurich has recorded an impressive 400 spin-offs in the last 20 years. It is one of the
two universities in Switzerland that are funded at the national level. All other
institutions in the region, among them the University of Zurich, are funded at the
cantonal level (see also Table 17.1).
ETH Zurich’s dynamic innovation environment has stimulated leading global
companies like Google (machine learning and artificial intelligence), Disney
Research (computer graphics laboratory including video manipulation and encoding,
3D, and perception study), and Microsoft (mixed reality and artificial intelligence) to
jointly operate research laboratories with the university. This fruitful symbiosis of
renowned science institutions with scientific and technological knowledge has also
stimulated the knowledge and technology transfer between private innovative
enterprises and scientific institutions.
According to an analysis about the knowledge and technology transfer activities
in Switzerland, private enterprises located in the canton of Zurich are frequently
engaged in KTT activities.32 As also pointed out in the official Swiss Research and
Innovation Report, the most important forms of transfer are informal contacts and
activities for education and training.33 In the high-tech industry, research coopera-
tion and the use of universities’ technical infrastructure are also relatively important
means of knowledge and technology transfer. Not surprisingly, research institutes in
the Swiss Federal Research Institutes domain (ETH Zurich and EPFL) are the most
frequent transfer partners, along with the universities of applied sciences.
The report also emphasizes that technology transfer offices (TTOs) and the public
innovation support agency Innosuisse are the most important mediators and

30
GII.
31
http://www.shanghairanking.com/World-University-Rankings-2018/USA.html
32
Unpublished work. Figure can be provided by the authors upon request.
33
Beck M et al. (2020) Analysis of Knowledge and Technology Transfer in Switzerland – the
Perspective of the Enterprises. 2020.
328 M. Beck and L. Garzik

Table 17.1 Facts about ETH Zurich and University of Zurich

ETH Zurich University of Zurich
Founded 1855 1833
Students 22,200 students, including 4180 Switzerland’s largest university with
doctoral students, from over 28,000 enrolled students, (4461 from
120 countries abroad), 5517 doctoral students
Staff 540 professors; 9845 employees 678 professorships; 6836 employees
(FTE)
Spin-offs 440 spin-offs since 1996 136 spin-offs from 2009 to 2019, 95%
success rate after 5 years of starting
Awards 21 Nobel Prize winners, including 12 Nobel Prize winners, including Erwin
and prizes Albert Einstein and Wolfgang Pauli Schrödinger, Paul Karrer, and Rolf
2 Fields Medal winners Zinkernagel
2 Pritzker Prize winners
Patents More than 100 patent applications and Over the last 20 years, 1200 patents filed
and 150 invention reports every year by Unitectra (UZH transfer office) and
inventions 2000 invention reports evaluated
(60 patent applications per year on
average and 100 invention reports)
Financial CHF 1.9 billion, comprising CHF 1.3 CHF 1.46 billion funding, comprising
budget billion core funding from the Federal CHF 316 million core funding from
Government public authorities, CHF 323 million
project funding (39 million from EU or
other international bodies, 170 million
from public Swiss administration
including Swiss National Science
Foundation, 113 million from private
economy or private bodies)
Rankings 14th in the ranking (2020/21) 73rd in THE Ranking (2020/21).
6th in QS ranking (2020/21) 69th in QS World University Rankings
19th in ARWU ranking (2019/20) (2020/21).
56th in ARWU Academic Ranking of
World Universities (Shanghai Ranking)
Website www.ethz.ch www.uzh.ch
Sources: ETH Zurich, University of Zurich

promoters of KTT. For example, around one-third of KTT-active companies see

TTOs and Innosuisse as very relevant to their transfer activities. Generally, while
there has been a significant increase in the share of KTT-active companies in
industry and large companies in Switzerland, the overall share of KTT-active
companies has remained constant over time.34 Notably, during the last survey
period, private enterprises’ transfer activities with foreign universities have tended
to decrease slightly, which might be cause for some concern given the high interna-
tional embeddedness of the Swiss economy.

34
Beck M et al.
17 Zurich Innovation System 329

In addition to the high reputation of scientific institutions and the availability of

well-trained personnel, certain accompanying institutional factors promote the
domestication of innovative global entrepreneurship. According to the GII report,
Switzerland has highly effective government institutions, and high environmental
performance—increasingly important as a reputational value for many companies in
times of greater ecological awareness. A strong domestic private credit sector is also
crucial for the formation of new enterprises, as is the support of professional ICT
services. Therefore, Zurich is fertile soil for new innovative businesses, not just
global companies.
In addition to the accelerator and incubator services that ETH Zurich and the
University of Zurich provide for academic spin-offs (e.g., ETH Transfer, Unitectra),
private incubators also support the growing and lively startup scene. These include
the startup factory, geographically centralized office spaces like the
Technologiepark, and a plenty of opportunities for co-working at spaces like Impact
Hub Zurich. The newly formed publicly funded nonprofit Innovationpark, located in
a former military airport in Duebendorf, is now the flagship innovation hub for
innovative technology-oriented startups in the greater Zurich region. The retired
airspace hangar offers opportunities to support the development of future
technologies for autonomous driving, robotics, exploratory geophysics, and modern
drone-based transport technologies.

17.3 Zurich SWOT Analysis

The following SWOT analysis evaluates the resources and institutional

characteristics of the Zurich region ecosystem according to their relative strengths,
weaknesses, opportunities, and threats. It is not limited to indicators from resource
economic activities in the narrow sense, but also includes institutional, political and
social aspects. In particular, we consider different aspects of human capital, infra-
structure, financial capital, legal framework and the global exposure.
The sources used for the SWOT analysis are mostly publicly available policy
reports.35 The objective of the SWOT table is not to provide conclusive results based
on an overarching comparative analysis consistent with the other major competing
regions in this book, even though that would be highly interesting. The essence of
this SWOT analysis is, instead, to indicate qualitatively some Zurich’s relative
strengths, weaknesses, opportunities, and threats as a regional Ecosystem.

35
European Commission (2019) Global Innovation Index, 2020; INSEAD, 2020; OECD, 2016;
SERI, 2020; World Economic Forum, 2019.
330 M. Beck and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

Bank loans Zurich is a strong Conservative Financial Investment
international hub investing is the opportunities for support for
for banking. It norm. Zurich startups and spin- innovative
has a flourishing has only offs are increasing. startups is
FinTech sector moderate access The emergence too weak.
and is a pioneer to venture and engagement of
in capital, Business Angels Low presence
cryptocurrencies especially for are increasing. of risk-tasking
and blockchain- SMEs and Cantonal investments in
based investing. startups and investment innovative
Zurich is a center moderate access programs have ventures.
in the crypto- to venture been launched
financial services capital in (e.g., Zuercher Startups and
industry particular for Kantonalbank) talents migrate
SME and to stronger
startups investment
locations
Culture and Linguistic and Zurich tends to There is an There is a threat
mindset cultural diversity be risk-averse emerging from political
is a special development of the trends toward
feature, and entrepreneurial international
English is very spirit in academia disintegration
common in and industry. and isolation
Switzerland as Large companies
the second most- are creating their
spoken language own startups and
in Zurich. The innovation
city is very incubators (e.g.,
internationally Zuercher
open and has Kantonalbank)
been the origin of
many famous
scientists,
entrepreneurs,
and industrial
pioneers
Digital Zurich is the The region has a Zurich is the Breakthrough
infrastructure European fairly good level European center technologies
technology hub of digital for future invented outside
of many large infrastructure technology Switzerland
tech companies compared to its development (e.g., diffuse slowly
such as Google, European Blockchain). because of
IBM, Microsoft, neighbors, but is regulations.
and Disney still too weak to Strong
research. compete with complementarities There is a low
international exist between level of
Zurich has a high innovation hot digital investments in
degree of digital spots technologies and information and
broadband other breakthrough communication
coverage, (e.g., technologies (e.g., technologies by
4G). biotech, health
(continued)
17 Zurich Innovation System 331

Resources Strengths Weaknesses Opportunities Threats

sciences, the private
High public geosciences, sector
investments medicine)
support the
distribution of
digital
infrastructure
Education Zurich is at the There is a Switzerland’s There is a risk
and skills top of the Global shortage of successful and that national
Talent qualified well-established and
Competitiveness personnel in dual vocational international
Index due to its diverse education and access to
high-quality disciplines training system qualified
education will be the perfect personnel might
system, high- ground for future become more
quality development difficult
apprenticeship
training, and its
attractiveness to
foreign labor
thanks to the
high quality of
life and
remuneration.

The region offers

a broad and
diverse
availability of
highly qualified
employees
Institutions Zurich’s Political Switzerland’s Political
institutional polarization is a institutions make misalignment
system is well problem in the country faster between federal
established, with some areas, like and more flexible and cantonal
a tradition of international in adapting to new public bodies
efficient and openness and services and with respect to
pragmatic international technologies, and far-reaching
development. relations; drive innovation innovation
governmental projects like the
Companies have (direct) Innovation Park
easy and direct innovation Zurich.
access to local support for the
authorities due to private sector Switzerland
the decentralized may lose access
government to the single
structure. European
market.
The region has a
functioning There is a risk
system of of the
(continued)
332 M. Beck and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

international termination of
harmonization harmonization
practices in many of regulations
areas (e.g., with EU and
patents and other other
intellectual international
property, trade) trade bodies
Legal Zurich boasts an The crowd of The sound Compared to
advisers international advisers has no education and other innovation
network of legal tradition of skills of advisers regions, the
consultants getting involved will pave the way conservative
in innovation for future understanding
projects innovation of tasks can act
activities as a stumbling
block for
innovation
Market and Zurich is highly There is no The future may An abundance
demand attractive for guarantee of stimulate green of bilateral
global, European market access to markets and contracts may
or divisional the EU. economies be required to
headquarters. including trends enable market
High export toward a circular access to the
It has high and orientation economy. Zurich European
stable private and makes combines a sound market.
public Switzerland is basis of
consumption vulnerable to technological and Exchange rate
levels. fluctuations in economic strength shocks also
foreign with strong pose a threat
The Swiss currencies that awareness and
economy is might affect mindset toward
highly export- companies’ ecologically
oriented. financial friendly economic
strength activities and
Switzerland is practices in finance
independent and and industry alike
yet a central
component of the
European single
market: Zurich
guarantees
access to more
than 500 million
consumers in
Europe.
Switzerland also
has free trade
agreements with
40 partners
outside the
European Union,
including China,
(continued)
17 Zurich Innovation System 333

Resources Strengths Weaknesses Opportunities Threats

Japan, the
Republic of
Korea, and
Canada
Migration Zurich is an Even after The quality of life Upcoming
attractive decades, the and remuneration innovation
workplace due to local packages will regions could
high community will attract a large develop faster in
remuneration. never regard international gaining
migrants as crowd in the future attractiveness
The presence of Swiss for the
diverse cultural international
groups enables smart crowd
social integration
Policy and Policy and The mindset of Strategy Switzerland
strategy strategy are the overall development at the generally, and
based on the population is political level is the Zurich
premise of conservative, pragmatic, which region in
providing which hinders will be very particular,
excellent dynamic helpful for benefits from
accessibility and changes. The unforeseeable openness to
infrastructure, speed of change future international
business and is growing in developments collaboration
innovation- the digital era and knowledge
friendly spillovers,
regulations, including
efficient local participation in
authorities, international
flexible labor innovation
laws, a wealth of programs.
qualified and Trends toward
motivated international
employees from isolation may
Switzerland and risk these
abroad, and, benefits
finally, an
attractive tax
system. Zurich
has high
economic, social,
and political
stability (e.g.,
few strikes) and
high trust in the
political and
institutional
system
Quality of Zurich is in the The housing Zurich has the It is difficult to
living top ten in the market is potential to create find threats in a
quality of living expensive, with new standards for country with the
report by the EU low availability highest quality
(continued)
334 M. Beck and L. Garzik

Resources Strengths Weaknesses Opportunities Threats

commission. of new sustainable living of living
apartments and and working standards.
The city offers an houses. Exploding
extremely well- housing costs
connected public Child care is could be one of
transport expensive, and them
network and an there is little
exceptionally support for
high quality young families
of life. in labor
regulations
The city is
surrounded by
natural beauty
and offers great
opportunities for
recovery, leisure,
and sports.

Work–life
balance is
prioritized.

The region
enjoys high
wages and
general high-
quality standards
Regulation A flexible job Labor Pragmatic Underneath all
market and regulations are regulation will be a the pragmatism
business-friendly rather weak boost for future lies the
regulations (e.g., young developments European style
attract innovative families), and of “first
global there is some regulation, then
companies, job innovation”
SMEs, and discrimination which may slow
startups. Swiss down dynamic
authorities changes in the
regulate without future
hindering
innovation. They
act pragmatically
and
progressively
and are in
constant contact
with the
industries
concerned
Research Zurich boasts The more the Intensifying the Except for the
infrastructure many well- infrastructure already existing two federally
(continued)
17 Zurich Innovation System 335

Resources Strengths Weaknesses Opportunities Threats

connected the higher the close cooperation financed
universities and reinvestment between research universities, the
research costs of keeping institutes and the larger number
institutes. These it up to date, private sector. of universities
include ETH which demands relies on
Zurich, which is increasing Building on the cantonal
the best budgets every strengths in budgets with the
university in year leading research in threat of
continental cutting-edge changing
Europe disciplines such as regional
according to the biotechnology, political
World geo-ecological and priorities
University IT
Ranking 2018
Risk capital Due to its history The tradition of The growing Global crises
as the world’s financing is number of exciting will bring
safe-deposit box, banking and not innovation investments
there is a lot of risk capital projects in the back to
capital in region will conservative
Switzerland motivate more investment
available for all capital into the risk strategies like
kinds of channel real estate or
investment low-risk funds
Tolerance The international The Swiss The top players in Incidents like a
and trust crowd inspires tradition is the region are pandemic can
all players to be conservative, gaining increasing push back the
tolerant with and trust is not international opening of the
each other extended to the momentum, which traditionally
world outside will boost the more
one’s own openness—At conservative
village least at a Swiss mindset,
generational hindering the
rhythm development of
further tolerance

17.4 Zurich Strategy and Implementation

The main strategic goals in Switzerland are set at the national level, whereas major
parts of their implementation take place at the regional level (the cantonal level). The
national strategy on education, research, and innovation was first presented in 2010
and was updated in July 2018.36 The magic of its power is in the professional
implementation of certain agencies like Presence Switzerland, The Greater Zurich
Area, or Swissnex. The branding and promotion of an image based on research and

36
https://www.sbfi.admin.ch/sbfi/en/home/services/publications/data-base-publications/int-strat
egy-eri.html
336 M. Beck and L. Garzik

innovation success stories are giving Zurich a magnetic appeal to a highly skilled
international crowd.
The strategy intends to open up the region and nation for international coopera-
tion and to make actors ready for the competition that comes with that kind of
openness. Correspondingly, the first guideline of the strategy is the “continuous
creation of optimal framework conditions for Swiss education, research and
innovation actors to freely engage in international activities.” Comparable strategies
in other regions or nations mainly focus on internal challenges before they head to
international relations.
In speaking to representatives from the national bodies responsible for strategy
development, one can feel their humility and respect for the implementing actors—
these leaders do not take themselves too seriously. This is also evident in the
principles of the strategy, which state that “education, research and innovation
cannot be prescribed top-down. . .that needs to be carried out bottom-up by the
actors.” The canton of Zurich has issued several strategy papers on topics like ICT
or e-government, but there is no dedicated strategy for research or innovation. The
strategy papers more or less define the goals for internal administration procedures.
In recent years, the implementation of the strategy to attract international top
players in innovation has borne fruit, most notably with the expansion of the
subsidiary of Google in Zurich. Increasing numbers of young and smart people
from the region have been recruited by this global player, which acted like a vacuum
cleaner for skilled human capital. The benefits of hosting a subsidiary of a company
like Google are challenged by the pains of all the startups and SMEs who cannot
compete with the salaries and fringe benefits of a multi-billion company for
developers or even management staff.
Other regional strategic elements also support research and innovation activities.
For example, Switzerland’s fiscal institutions have been successful at keeping the
overall levels of taxation and spending moderate.

17.5 Zurich Conclusions and Lessons Learned

17.5.1 Key Factors for the Regional Innovation Ecosystem

The key factors of Zurich’s regional innovation ecosystem are its strong research and
university systems, its strong private sector with high levels of private investments in
R&D and innovation activities, and its flexible and stable innovation and labor
regulations.
First, Zurich’s high density of well-connected, renowned universities and
research institutes provide a continuous supply of highly educated workforce in
future technology fields like biotech, robotics, and information and communication.
They also serve as a reputation flagship to attract global innovative companies to
locate business subsidiaries in the Zurich area. However, this high-profile university
and research system require continuous and high levels of public funding to avoid a
potential shortage of highly educated graduates or well-trained apprentices and
17 Zurich Innovation System 337

engineers. These potential threads of inadequate funding might relate more to the
canton-financed Universities of Applied Sciences, as they are more sensitive to
changing political priorities. A key challenge for the innovation region will be trying
to intensify the already close cooperation between research institutes and the private
sector. Success would offer additional potential for future value creation, innovation,
and competitive advantages on the global market.
A second key factor in the Zurich region concerns the private sector’s ability to
invest at high levels in R&D and innovation activities. However, remaining compet-
itive and securing future value creation and wealth will require continuous and
possibly increased investments in R&D and innovation activities. The development
and adoption of future frontier technologies, as well as the generation and commer-
cialization of cutting-edge technological innovations, necessitate high levels of
investment.
This requirement for investment on the input side of R&D and innovation may
even be strengthened by ongoing shifts in the economy, namely the digital transfor-
mation and the transition to a more sustainable and more ecologically friendly
economy. Due to its history of being a safe haven for the world’s money, there are
meaningful levels of capital available in Switzerland for all kinds of investment.
However, the tradition of financing is banking and not risk capital. Turning this into
a more risk-taking investment approach will be a challenge but also offers powerful
new opportunities.
A third key factor reflects regulations and the emergence of policy support
activities related to innovation. Over recent years, a variety of innovation support
activities (e.g., programs such as Innosuisse and Eurostars) have been initiated or
intensified at the cantonal level, and more importantly at the national and interna-
tional levels. These also include direct and indirect public financial support schemes
for private enterprises, and general stimulation to collaborate for innovative
activities.
These direct and indirect innovation support schemes have been met with keen
interest from the private sector. This is not surprising since financial barriers have
long been listed as one of the most important barriers to innovation activities in
Swiss enterprise.37 Support constitutes an important mechanism for translating
innovation activities into commercial success.38 Notably, these direct and indirect
innovation supports for the private sector have been proved to be efficient for Swiss
enterprises.39 In particular, they help increase private level of R&D investment

37
Spescha A and Woerter M (2018) Innovation in der Schweizer Privatwirtschaft – Ergebnisse der
Innovationserhebung 2018.
38
Beck M et al. (2020) Analysis of Knowledge and Technology Transfer in Switzerland – the
Perspective of the Enterprises. in Forschung Und Innovation in Der Schweiz 2020 (Staatssekretariat
für Bildung Forschung und Innovation SBFI, 2020), 382.
39
Beck M, Lopes-Bento C and Schenker-Wicki A (2016) Radical or Incremental: Where Does
R&D Policy Hit? Research Policy 45, no. 4 (May 2016): 869–83, https://doi.org/http://ssrn.com/
abstract¼2507850
338 M. Beck and L. Garzik

without creating overall substitution effects, they stimulate the generation of radical
innovation products, and they help increase employment.40
In recent decades, liberal, flexible, and stable political regulations have ensured
general international openness. This is particularly important for securing the labor
mobility of R&D workers and scientists. Labor mobility among R&D personnel is of
utmost importance for Zurich as an innovation region and for its outstanding higher
education and research systems. Furthermore, a flexible job market and business-
friendly regulations attract innovative global companies, SMEs, and startups alike.
Regulations have also facilitated access to international EU programs for private
companies and public research institutions. The key challenge will be to continu-
ously ensure the provision of these innovation support mechanisms and regulatory
conditions to the private sector. Large global innovative companies, national inno-
vative SMEs, and newly established academic or nonacademic startups depend on
having stable and supportive regulations to finance their innovative activities and
depend on the provision of qualified personnel.

What Are the Lessons Learned or Tools for Other Regions?

In any innovation ecosystem, there are role models of knowledge generation and
knowledge implementation. In Switzerland, the institutional system represents a
good role model with its transparent structure and public funding that support both
goals. Public money is dedicated to knowledge generation through research
institutions, and provides them with a strong position and high-class infrastructure
to produce scientific outcomes.
However, policymakers have paid less attention to the dissemination of the
knowledge and technologies generated by scientific institutions into the private
economy and among private enterprises. The IPR for the implementation of newly
generated knowledge has been, in large part, delegated to companies, improving
their competitive position on the market.
Very recently, there has been more emphasis on increasing scientific institutions’
roles in entrepreneurship. ETH Zurich has established ETH transfer, and the Univer-
sity of Zurich has launched Unitectra. Organizations like these are intended to
support the commercialization and dissemination of scientific outcomes into society
and the private sector. Following the example of US-based universities, ETH
transfer has accompanied 429 spin-offs from 1973 to 2018, with a five-year survival
rate of 92.9%. A subgroup of 148 analyzed spin-offs have generated market capital-
ization of CHF 4.8 billion. An average ETH transfer spin-off creates 30 full-time
equivalent jobs, more than double the average Swiss startup.
The political energy in an ecosystem is largely consumed by balancing interests
between the players and stakeholders in the system. Every institution is entitled to
fight for its position and for its share of public funding. Weak political structures

40
Beck M, Lopes-Bento C, Schenker-Wicki A, Beck M, Hansen J, Kaiser B, Sonne-Holm P et al.
(2019) Eurostars The International Programme for Research Intensive SMEs A Joint Swiss Danish
Impact Study. SERI Dossiers, 2019, https://doi.org/10.3929/ETHZ-B-000413401
17 Zurich Innovation System 339

distribute their fortunes like a watering can and try not to hurt anyone too much. In
other words, these political systems endeavor to avoid producing losers. But if there
are no losers, there are also no winners. The Zurich region and Switzerland as a
whole focus funding on two major universities. The others are also funded, but know
that there is a difference in the prioritization of funding.
In history, Switzerland always had a pragmatic view on conflicts: avoid them.
Therefore, it was not involved in most of the regular conflicts and wars in Europe or
worldwide. Ever more warring parties tried to rescue their fortunes by putting their
money in Swiss banks. Since both sides had the same idea, neither had any interest in
attacking the country. That genesis resulted in the current situation of Switzerland
having full European market access but being able to follow its own tax regime
because it is not a member of the European Union.
Finally, it is the continuous competitive interplay of the abovementioned key
components in this regional innovation ecosystem that constitute the foundation for
generating high competitiveness and innovativeness in the private sector and public
research system.