Innovation Clusters and Entrepreneurial Ecosystems

Many believe that the first serious reference to geographic concentrations of interconnected companies—“clusters”—appeared in the work of Cambridge economist Alfred Marshall, who described “industrial districts” that arose from an observed tendency of specialized companies to cluster together to form geographic concentrations of expertise and economic activity.[1]  Marshall viewed these tendencies positively and, in fact, wrote in 1890 about how “…great are the advantages which people following the same skilled trade get from near neighboring to one another…”.[2]  Other economists built on Marshall’s initial theory by suggesting and adding other “necessary elements” for the creation and maintenance of “innovation clusters” including the importance of a “self-interested economic agents”, or “entrepreneurs”, willing to take on and attempt to overcome the risks associated with unproven technologies to seek substantial profits.  According to Schumpeter, these entrepreneurs drove the process of transferring and transforming emergent technologies into new products, services and product models and creating new methods for organizing economic activities to establish new industries and markets.[3]  Romer suggested that technological progress is driven by researchers searching for new ideas for innovations which can eventually provide them with monopoly profits.[4]

A century after Marshall’s work Porter undertook an extension examination and analysis of business clusters and uncovered evidence of a strong positive relationship between the proximity of specialized companies and extraordinary competitive success.[5]  Dearlove provided the following description of how Porter painted the boundaries of clusters: “Professor Porter suggests that clusters encompass an array of linked industries and other entities important to competition, including suppliers of specialized inputs and providers of specialized infrastructure.  Clusters also extend downstream to channels and customers and laterally to manufacturers of complementary products, and to companies in industries with common skills, technologies, or inputs.  Clusters often include governmental and other institutions, such as universities, standard-setting agencies, and think tanks, as well as providers of specialized training, education, information, research, and technical support.”[6]  Porter famously observed that the importance of clustering contrasts dramatically with the idea that the emerging global economy is breaking down barriers and making location less important as a condition for becoming a “global player” and referred to what he called the “paradox of location”: “Paradoxically, the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, and motivation that distant rivals cannot match.”[7]

In recent years it has become increasingly popular to refer to innovation clusters as “entrepreneurial ecosystems”, a concept that Mason and Brown discussed in 2013 as part of the broader question of what types of policy initiatives should be taken to promote the creation and maturation of high growth firms (“HGFs”).[8]  Mason and Brown cited the works of several researchers that supported the premise that HGFs have a significant impact on economic development.  For example, the OECD and Brown et al. have reported that HGFs drive productivity growth, create new employment, increase innovation and promote business internationalization[9], and Henrekson and Johansson, after conducting a meta-analysis of prior empirical studies, concluded that “a few rapidly growing firms generate a disproportionately large share of all net new jobs compared with non-high growth firms. This is a clear-cut result… [T]his is particularly pronounced in recessions when Gazelles continue to grow”.[10]  Others have suggested that HGFs have important spill-over effects that are beneficial to the growth of other firms in the same locality and industrial cluster.[11]

Mason and Brown noted that recognition of the disproportionate value of HGFs to economic development has led policymakers to consider adopting support programs for high growth entrepreneurship that are more “systems-based” and which rely mainly on “relational” forms of support including building connections and networks among entrepreneurs, prioritizing development of “blockbuster entrepreneurs” with significant economic potential and institutional alignment of priorities.  A number of researchers have referred to the overall framework for providing this type of support as an “entrepreneurial ecosystem”[12], which Mason and Brown defined, based on their own synthesis of definitions throughout the relevant literature, as: “a set of interconnected entrepreneurial actors (both potential and existing), entrepreneurial organisations (e.g. firms, venture capitalists, business angels, banks), institutions (universities, public sector agencies, financial bodies) and entrepreneurial processes (e.g. the business birth rate, numbers of high growth firms, levels of ‘blockbuster entrepreneurship’, number of serial entrepreneurs, degree of sell-out mentality within firms and levels of entrepreneurial ambition) which formally and informally coalesce to connect, mediate and govern the performance within the local entrepreneurial environment.”[13]  While Mason and Brown added that entrepreneurial ecosystems were geographically bounded, they noted that cities did not have to be a particular size to qualify and pointed to Austin, Texas and Boulder, Colorado in the US and Cambridge in England as examples of smaller cities that had been successful at developing what they referred to as “thriving entrepreneurial ecosystems”.  Mason and Brown also explained that a system could emerge around one industry or evolve and expand to cover several industries.[14]

For researchers like Isenberg, an entrepreneurial ecosystem is a “strategy for economic development” that depends on several key factors or domains: a conducive culture, enabling policies and leadership, availability of appropriate finance, quality human capital, venture friendly markets for products, and a range of institutional supports.[15]  For their part, Mason and Brown argued that the distinguishing features of entrepreneurial ecosystems include “a core of large established businesses, including some that have been entrepreneur-led (entrepreneurial blockbusters); entrepreneurial recycling–-whereby successful cashed out entrepreneurs reinvest their time, money and expertise in supporting new entrepreneurial activity; and an information-rich environment in which this information is both accessible and shared”.[16]   Mason and Brown also believed that in order for entrepreneurial ecosystems to thrive there must be a group of “dealmakers” who are involved in a fiduciary capacity in several entrepreneurial ventures, ready availability of start-up and growth capital, and a supportive community of large firms, universities and service providers.[17]  Others have suggested that an effective entrepreneurial ecosystem needs accessible domestic markets, including access to small and large companies and governments as customers; human capital, including managerial and technical talent and experience in launching and building knowledge-intensive firms; funding and finance; support systems, including mentors/advisors, professional services, incubators/accelerators and a network of entrepreneurial peers; regulatory framework and infrastructure; education and training; major universities as catalysts; and cultural support.[18]

On a practical level, entrepreneurial ecosystems should be able to provide entrepreneurs with the resources and tools they need to launch their emerging companies, including networks that can be used to tap into the human resources necessary to build a founding team and recruit knowledge workers who can create and develop new products and services; professional investors (e.g., venture capitalists) and/or corporate partners with the capital necessary to support the product development activities of the founders and the expansion of the company to the point required for effective promotion and distribution of the product or service; professional and business advisors, including attorneys, accountants, bankers, insurance brokers and consultants; regulatory framework that facilitates creation of business entities and establishment of governance systems and allows entrepreneurs to create and protect an intellectual property rights portfolio; and strategic partners that can collaborate with the new firm as suppliers, customers, manufacturers, distributors and research and development partners.[19]

As for the specific steps that should be taken to launch and stimulate entrepreneurial ecosystems, Mason and Brown argued that policymakers would need to focus on several dimensions including direct support of entrepreneurial actors through accelerators and incubators; development of entrepreneurial organizations and resource providers such as business angels, venture capital, banks, service providers, universities; creation of connectors within the ecosystem through public-private partnerships and alliances and peer-to-peer learning; and development and nurturing of an entrepreneurial environment or culture within the ecosystem through entrepreneurship education, role models, peer-to-peer networking and entrepreneurial recycling.[20]  Mason and Brown noted while there was a role for governments to play in developing entrepreneurial ecosystems, they should limit their involvement to facilitation and leave the details to the private sector, experienced local entrepreneurs and/or leading local companies.  Key to success would be the ability to create a local culture that was favorable to startup activity and which promoted and accepted entrepreneurial risk-taking.  Experienced entrepreneurs could do their part by training, coaching and mentoring their prospective peers and local companies could contribute by allowing and encouraging spinoff of promising ideas into new firms.  In many cases it will be necessary to provide training to both local entrepreneurs and investors on the financing process until such time as the ecosystem has a community of experienced angel and venture capital investors.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship.

[1] L. Lazzeretti, S. Sedita and A. Caloffi, “Founders and Disseminators of Cluster Research”, Journal of Economic Geography, 14(1) (2014), 21.

[2] D. Dearlove, “The Cluster Effect: Can Europe Clone Silicon Valley?”, Strategy+Business, July 1, 2001 (citing A. Marshall, Principles of Economics (1890)).

[3] For extensive discussion of Schumpeter’s theories relating to “entrepreneurship”, see J. Schumpeter, Theory of Economic Development (1949).

[4] See D. Romer, Endogenous Growth, in Advanced Macroeconomics (4^th Ed.) (2011), 101.

[5] Porter explained his research and theories in a number of articles including M. Porter, “Clusters and the New Economics of Competition”, Harvard Business Review, 76(6) (1998), 77; and M. Porter, “Location, Competition, and Economic Development: Local Clusters in a Global Economy”, Economic Development Quarterly, 14(1) (2000), 16.

[6] D. Dearlove, “The Cluster Effect: Can Europe Clone Silicon Valley?”, Strategy+Business, July 1, 2001.

[7] Id. (citing M. Porter, “Location, Competition, and Economic Development: Local Clusters in a Global Economy”, Economic Development Quarterly, 14(1) (2000), 16).

[8] C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Background Paper (Final Version: January 2014).

[9] Organisation for Economic Co-operation and Development, An international benchmarking analysis of public programmes for high-growth firms (OECD LEED programme, Paris, 2013); and R. Brown, C. Mason and S. Mawson, Increasing the Vital 6%: Designing Effective Public Policy to Support High Growth Firms (National Endowment for Science Technology & Arts (NESTA), London, 2014).

[10] M. Henrekson and D. Johansson, “Gazelles as job creators: a survey and interpretation of the evidence”, Small Business Economics, 35 (2010), 227, 240.

[11] G. Mason, K. Bishop and C. Robinson Business Growth and Innovation; The Wider Impact of Rapidly Growing Firms in UK City-Regions (London: NESTA, 2009). [http://www.niesr.ac.uk/pdf/ 190509_94959.pdf]; J. Du, Y. Gong and Y. Temouri, High Growth Firms and Productivity: Evidence from the UK (London, NESTA, 2013). http://www.nesta.org.uk/publications/working_papers/assets/features/high_growth_ firms_and_productivity]; M. Feldman, J. Francis and J. Bercovitz, “Creating a Cluster While Building a Firm: Entrepreneurs and the Formation of Industrial Clusters”, Regional Studies, 39 (2005), 129-141; and R. Brown, “The determinants of high growth entrepreneurship in the Scottish food and drink cluster”, in G. Alsos, S. Carter, E. Ljunggren, & F. Welter (Eds.), The handbook of research on entrepreneurship in agriculture and rural development (Cheltenham: Edward Elgar, 2011).

[12] A. Zacharakis, D. Shepard and J. Coombs, “The development of venture-capital-backed internet companies: An ecosystem perspective”, Journal of Business Venturing, 18 (2003), 217; G. Napier and C. Hansen, Ecosystems for Young Scaleable Firms (FORA Group, 2011); and B. Feld, Startup Communities: building an entrepreneurial ecosystem in your city (Hoboken, NJ: Wiley, 2012).

[13] C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Background Paper (Final Version: January 2014), 5.

[14] Id. at 5-6.

[15] D. Isenberg, The entrepreneurship ecosystem strategy as a new paradigm for economy policy: principles for cultivating entrepreneurship (Babson Park, MA: Babson Entrepreneurship Ecosystem Project, Babson College, 2011), 4.

[16] C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Background Paper (Final Version: January 2014), 1.

[17] Id.

[18] Entrepreneurial Ecosystems around the Globe and Company Growth Dynamics: Report Summary for the Annual Meeting of the New Champions 2013 (World Economic Forum, September 2013).

[19] For further discussion of the specific issues and challenges associated with launching an emerging company, as well as a description of the characteristics of such a firm, see the Part on “Launching a New Business” in “Entrepreneurship: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).

[20] C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Summary Report.