The Innovation Ecosystem
The Innovation Ecosystem is one of the most under-researched topics. One the one hand because policy researchers usually tend to focus more on polls, elections and international collaboration and business researchers usually tend to focus more on organizations and interorganizational collaborations. However, publisher Edward Elgar has repeatedly published interesting works on innovation policy, innovation systems and the like. An ecosystem of innovation could be described as, quoting Wikipedia, the flow of technology and information among people, enterprises and institutions [which] is key to an innovative process. It contains the interaction between actors who are needed in order to turn an idea into a process, product or service on the market. The Innovation Ecosystem is extremely important to the economy and welfare of a country or region. It is one of the main drivers of GDP. Over the past decades more research has been done on the dynamics behind these ecosystems and its subsystems. Below you’ll find a schematic overview of the innovation ecosystem. It will take you to the download side of Innovative Dutch, where you can download it in full resolution.
Click image to download a full-resolution copy. Below we’ll explain how it works.
System Dynamics within the Ecosystem
The Innovation Ecosystem could be defined as a dynamical system. Dynamical systems are a theory first mentioned by Jay Forrester in the 50s and applied to a wide range of disciplines such as demography, ecology, evolution, economy and sociology. It suggests that systems contain complex feedback loops, causal links, flows, stocks, delays among the agents. Because these agents influence each other with complex logic, mostly non-linear, it is very hard to predict how the system will behave. Usually the basic feedback loops consist of positive loops, that will keep enhancing itself without limitation. However, the system also holds several negative loops, that will discontinue the positive processes. Systems usually continue switching between positive flows and negative flows, making fluctuations very common. For instance, in climate, is it common to have fluctuations per the hour, per the day, per the season, per the year and over long era’s. The same holds for the economy or for rabbit populations. Complex dynamical systems can be mathematically programmed. The following example shows how a system with only two actors can even achieve chaos within a few cycles when there are small anomalies in its initial circumstances. This is called the chaos theory: imagine the long-term effect a small change can have. For instance, the effect of a local forest fire on the weather world-wide. Or losing a coin on the local economy. Innovation ecosystems work the same. There are many agents, that are influences by a wide range of actors. Imagine the effect of low-level corruption on a national ecosystem or the effect of a successful start-up on the world-wide ecosystem.
There are many different subsystems of innovation, for instance:
- National Innovation Systems: ‘The network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies’ (Freeman, 1987). Another word that is used on a regular basis for NIS is “Institutional Environment” – which describes the institutionalization of innovation policy in governments, research institutes, advisory boards and educational institutes.
- Regional Innovation Systems: ‘The regional innovation system can be thought of as the institutional infrastructure supporting innovation within the productive system of a region.’ (Asheim & Gertler, 2005). While NIS focuses more on the institutional environment of innovation, RIS usually focuses more on soft factors, such as network characteristics, trust, identity, cosmopolitism, quality of life and culture. These factors are often the first things if we think about successful RIS such as Grenoble, Silicon Valley, Helsinki or Brainport.
- Sectoral Innovation Systems: during the early zero’s more attention has come to sectoral innovation systems. In contrary to NIS and RIS, SIS focus on globally active sectors that function independently of the institutional environment. For instance, the Dutch government now prolongs the Top Sector Policy, focusing on different global sectors. NIS and RIS are now mainly supportive to SIS in the Netherlands. The Top Sectors defined are Agri-Food, Chemicals, Creative Industry, Energy, High-Tech, Logistics, Life Sciences & Health, Agriculture and Water. Another institute, the EIT, is also focusing on these sectors (Climate, Digital, Health, Raw Materials and Energy).
- Education Systems: these are the ecosystems that surround educational institutes, such as universities. This group is often referred to as the economics of education. An well-performing education system usually increases expenses because of increased income, increases in return on investments because of higher (company) incomes and increases in productivity. It enables academic inflation.
- Macro-economical Systems: this system refers to basic economics: output and income (GDP, GRP), unemployment and inflation and deflation.
- Start-up Systems: a startup ecosystem is a small-scale system that enables startups to arise. It involves aspects such as ideas, inventions, research, education, startups, entrepreneurs, angel investors, seed investors, mentors, advisors and events and is supported by universities, incubators, accelerators, facilitators, investors, coworking spaces and venture capitalists.
- Innovation Management Systems: these refer to a cyclical view of turning ideas into innovation; I’ve wrote a post about that earlier.
- Cluster or Science Park Systems: In 2000 Porter already wrote: ‘Geographic, cultural, and institutional proximity provides companies with special access, closer relationships, better information, powerful incentives, and other advantages that are difficult to tap from a distance. […] Competitive advantage lies increasingly in local things – knowledge, relationships, and motivation – that distant rivals cannot replicate.’ (Porter, 2000). Clusters usually go the four phases: emergence, growth, maturity and renewal. The reason why clusters seem to work well is proximity. Cooke et al. (2011) suggest 7 types of proximity, 1) Geographic proximity – referring to the physical distance between actors, 2) cognitive proximity – referring to the closeness in ways of thinking between the actors, 3) communicative proximity – referring to the closeness professional language between the actors, 4) organizational proximity – referring to the arrangements that organizations make to coordinate interactions and collaborate with each other, 5) functional proximity – referring to closeness in expertise in different industries/clusters, 6) cultural proximity – referring to closeness of cultural habits and virtues and 7) social proximity – referring to the intensity of trust-based social relations, such as friendship.
The above-mentioned (sub)systems of innovation are in fact ‘positive loops’; meaning that they will positively influence each other in an endless loop. As explained earlier, dynamic, chaotic systems, are almost always also containing negative loops, that break the positive flow. These negative loops can turn around the whole mechanism and cause crises, for instance the economic crisis. In the innovation system there are four main negative loops that create discontinuity:
- Labour market depletion: innovation not only creates new firms which in turn increase employment, innovation also creates more automated, efficient processes that in turn lead to less employment: labour market depletion. Take a look at the book stores for instance: digital innovation has caused the traditional book stores to adjust their business to the online world, closing down book stores and reducing the amount of employees.
- Other new (disruptive) technologies: from an industry perspective, other new technologies can cause the whole sector to be superfluous. This term is identified as disruptive innovation. Think about how the mobile phone radically made landlines superfluous.
- Imitation: rising profits within a sector also attracts new companies to the sector that will try to copy the products – at lower costs and without the initial investment. Especially sectors with low entrance barriers are receptive to this, such as software, app development and low-tech products.
- Policy failures: a various number of reasons can cause policy to fail. The most common ones are bureaucracy, corruption and short-term thinking.
The innovation policy regarding RIS and NIS involves many different aspects. One way or another, the institutional environment tries to (positively) influence the main industrial innovation system. A few of the soft factor that policy usually to focus on are:
- Smart infrastructure: this characteristic is about all kind of infrastructures that the region has to offer. This includes hard infrastructures, soft infrastructures and technological infrastructures.
- Quality of life: according to Sternberg and Arndt (2001) the quality of life is created by: labour quality, housing amenities, and leisure amenities. All of these factors attract highly qualified people to the region, but moreover, they also make people stay in the region.
- Cosmopolitanism: this aspect refers to any form of feeling that is evoked by the region. The characteristics of this factor are for example attractiveness for highly educated personnel, a world-wide reputation, a good atmosphere, a shared purpose, and highly motivated people (Whitley, 2002).
- Talented human capital: Micheals et al. (2001) describe that attracting talent, educating talent, and keeping talent is of high importance to the region. They focus on managerial talent, but they explain that technological, engineering and business talent also must be part of a regional strategy to win the war for talent.
- Creative cultural environment: a well-developed entrepreneurial climate is attracting and exploiting personal talent and is reinforcing the strong culture of the community. Hofstede, more than 25 years ago, received worldwide praise for constructing four – although years later a fifth one was added – dimensions to characterize cultures of different nations: power distance, uncertainty avoidance, individualism, and femininity (Hofstede, 1980).
- Trust: there is considerable evidence that a trusting relationship creates greater knowledge sharing. In a trust-based relationship, people are more willing to share useful knowledge. Trust promotes social and emotional ties on the one hand and promotes professional collaboration on the other hand, both facilitators of knowledge sharing (Chowdhury, 2005; Tsai & Ghoshal, 1998; Mayer, Davis, & Schoorman, 1995).
- Identity: scientists claim that knowledge is more effectively generated, combined and transferred by individuals who identify with a larger collective goal. The individual members then share a sense of purpose with the collective. Ultimately, this will lead to lower network costs, and more trust and commitment (Kogut & Zander, 2003; Dyer & Nobeoka, 2000; Orr, 1990)
- Diversity: this characteristic of knowledge refers to the extent to which a variety of knowledge, know-how, and expertise is available in a network. New opportunities and resources will be discovered more quickly with access to diverse knowledge and knowledge diversity therefore directly stimulates creativity and innovativeness of the actor in the network. (Galunic & Rodan, 2004; Galunic & Rodan, 2002; Rodan, 2002).
Over the last decade we’ve heard a lot about the triple helix. More recently also the quadruple and quintuple helix have been introduced. Moreover, also Open Innovation and Co-creation have been growing over the years. What they have in common is that these theories try to integrate the different actors in the traditional dynamical view of ecosystems with each other. In that case, it won’t be a ‘flow’ and it will therefore reduce the time delays within the flow. Simply said: deep integration between goverments and industry could result in quicker innovation. As does deep integration between education and industry; or different industries with each other, et cetera. The triple helix is a modern, 3D, view on system dynamics in the innovation ecosystem.
Games: simulation of complex dynamical systems
Games are a very common way to let actors in the network know how complex dynamics works. These games let you play with a few of the ‘agents’ in the ecosystem to experiment with the effects to better understand long-term behavior of ecosystems. Innovative Dutch creates these kinds of strategic simulation games for governments, companies and higher education; they created this infographic for their newest game; please take a look at their website.