What is an ecosystem for innovation and entrepreneurship

New enterprises are key generators of innovation and economic progress. But what fosters the emergence and growth of these enterprises? It is certainly true that growth- and innovation-oriented entrepreneurship is influenced by national conditions, but the drivers go far beyond that.

Ecosystem definition
To define the innovation ecosystem, it is necessary to start with three components and combine them to fully understand its meaning: innovation, system and ecosystem.

The concept of innovation has a long conceptual history with many connotations and fluid denotations, but it can be summarised as the result of a process that leads to a degree of novelty due to a change and a degree of usefulness or success in the application of something new.

The concept of an ecosystem originates in the field of ecology and is defined as a dynamic co-evolving community composed of different actors that create and capture new value through competitive and collaborative interaction mechanisms.

Hence, it follows that the innovation ecosystem is the evolving set of actors (firms, private organisations, government entities), activities and artefacts (products/services/technologies), institutions (policies, regulations) and their relationships, which combine together to achieve a comprehensive value proposition for the entire ecosystem (Adner, 2017). Under this logic, ecosystems enable value creation that no single firm could create alone.

Basic principles
Adopting an ecosystem approach to innovation therefore recognises that:

An innovation ecosystem is composed of different actors, (non-causal) relationships and resources capable of transforming an innovative idea into large-scale transformative impact.
The effectiveness of each part within the ecosystem is influenced by the other parts (e.g. entrepreneurs depend on being able to access funding).
Change in one part of the ecosystem leads to changes in other parts of the ecosystem, creating strong inter-dependencies between the parts (e.g. increased Internet connectivity will accelerate the design and testing of new technologies).

The evolutionary stages of the innovation ecosystem
Innovation and entrepreneurship ecosystems can be represented by a life cycle consisting of four stages, each identifiable by a different set of characteristics, challenges and goals.

The first activation phase is characterised by a limited start-up experience in terms of knowledge of entrepreneurs, experienced investors, advisors and mentors and community behaviour that is able to support the success of young companies. The objective of this phase must therefore be the definition of targeted programmes aimed at increasing entrepreneurial mindsets, fostering a sense of local community to create connections between actors and expanding the contribution of dedicated forms of financing to provide capital for embryonic enterprises.

In the globalisation phase, there is more experience in starting up entrepreneurial ventures and a series of Triggers (entrepreneurial experiences that act as triggers) have developed with wide resonance that lead to the attraction of national resources (entrepreneurs, talent, investors) from other ecosystems that are going through the previous phase, but are looking to global ecosystems. It is therefore necessary to focus on increasing the connection with the founders of the best ecosystems, which is the success factor that defines the scalability potential of an ecosystem, and on (financial) support for start-ups that are able to increase their initial presence in the global market.

In the attraction phase, the number of success stories increases globally, in some cases forming unicorn companies with exits of more than $1 billion, producing a global attraction for additional resources. At this stage it is necessary to leverage these resources to significantly expand the size of the ecosystem, fill remaining gaps and direct the attraction through well-designed policy programmes.

In the final stage of integration, the ecosystem becomes self-sustainable with a strong global connection and a flow of knowledge within the ecosystem that keeps its businesses integrated into the global fabric and able to produce cutting-edge business models and the skills needed to reach a high global level. In order to stably and sustainably integrate the ecosystem within global, national and local flows of resources and knowledge, it is necessary to optimise policy laws to support the competitiveness and growth of the ecosystem and spread the benefits (culture, source of competitiveness, capital, innovation) to other sectors of the economy and parts of the nation.

The evaluation of innovation ecosystems
As Michael Porter pointed out with reference to traditional sectors, the size of an ecosystem has a major influence on its performance. This happens due to a series of network effects such that the economic impact of each additional innovative firm within the ecosystem increases as the size of the ecosystem increases.

The same is true for the innovation ecosystem, as shown by research conducted by Startup Genome1. According to that study, in an ecosystem of 1,000 startups, each startup adds an average of $5.1 million in economic value, in an ecosystem of 2,000 startups each startup adds $6.9 million, in one of 3,000 startups the value of each increases to $10.6 million, and so on. Using a summary rule of thumb, it can be said that ecosystems 3 times larger produce 5 times more economic value, equal to exponential growth by a factor of 1.7. Similarly, an ecosystem that loses half of its businesses could lose more than half of the economic value previously created. From this simple analysis, one can understand the importance of creating and maintaining viable innovation ecosystems.

1 Startup Genome is the world’s leading research and policy advisor to public and private agencies committed to accelerating the success of their startup ecosystem.

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