Alexandre Lazarow is a guest author who works as global venture capitalist and author who contributes to GeoTech Center work on tech innovation and funding. He is presently a venture capitalist with Cathay Innovation, a global fund that invests across North America, Europe, Asia and Africa. He teaches entrepreneurship at the Middlebury Institute for International Studies at Monterey.
In the last twenty years, one of the United States’ key exports has been the technology coming out of Silicon Valley—and along with it, its particular brand of innovation culture. People flock from everywhere to Silicon Valley to take a shot at their startup idea. Many of these ideas have taken off and become part of the innovation folklore of the Valley: Airbnb, Uber, Salesforce, Palantir, WeWork, and more. Innovation has become synonymous with Silicon Valley, with the world looking to understand its playbook for success.
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Unsurprisingly, other countries want the same. Innovation has risen to the top of policy makers’ agendas around the world. Yet, creating carbon copies of Silicon Valley is not the answer. To compete in the increasingly global innovation arena, countries and companies are writing a new playbook.
In the first segment of this series, we will first dive into the reasons that domestic innovation ecosystems are not just domestic strategies but foreign policy ones as well. Subsequently, we will explore strategic approaches for countries to build their own successful innovation ecosystems.
The clearest benefit to most countries is that innovation garners investments, growth, and domestic jobs. Startups have huge upsides for growth, which means that, if successful, they will have an outsized impact on job growth and lowering unemployment. They are also an important driver of research and development (“R&D”) spending. According to a 2015 Stanford study, 43 percent of publicly traded companies in the United States were once venture-backed and represent 38 percent of jobs and 82 percent of R&D spending. Second, a thriving market for startups creates economic resiliency. Small businesses are often the largest employer group, providing jobs for 47.5 percent of the US workforce and a greater share globally. Entrepreneurs were responsible for all net-new job creation in the United States over the last decade.
Startups also offer economic diversification. Many nations are over-leveraged and thus dependent on one sector. Saudi Arabia, for example, is planning for a future with much lower demand for oil and gas and thus diversifying its state subsidies to encourage downstream oil product production (e.g. plastics) and solar farming. Countries that rely heavily on tourism like many nations in the Caribbean are also starting to rethink their dependencies now that the world is in the middle of a pandemic that has obliterated the travel industry. A vibrant domestic startup scene is a healthy hedge.
Third, startups are a great way to showcase a forward-looking business environment that builds confidence in the direction that a nation is moving, which can attract sizable external investments. Israel is an example of a nation with finite natural resources that threw much of its weight behind an emerging startup technology sector that has proven to be one of the biggest hotspots for startup investment in the world. According to Pitchbook, 92 percent of venture deals in Israel in 2018 included foreign capital.
A strong local startup ecosystem also provides solutions to domestic challenges. Awareness of domestic problems like healthcare, housing, and financial access leads local entrepreneurs to try to solve those issues. Most countries realize that the public sector alone cannot solve the big problems that the country faces, so a burgeoning innovation sector can help the nation make progress without requiring large investments from the government and more red tape. Financial inclusion for instance is a global problem. There are over 1.5 billion unbanked people, and even more are underbanked. Some of the most powerful solutions had deep local roots. In Kenya, perhaps the most famous example is M-Pesa, which provides financial services infrastructure for 18 million Kenyans, and studies have indicated that its product has been the primary driver of lifting nearly 200,000 households out of poverty. Similarly, in China, Tencent and Alibaba have been huge drivers of financial inclusion through WeChat and Ant Financial. The same story repeats itself with players like PayTM in India, Pagatech in Nigeria, and Nubank and Neon in Brazil among others. Companies are addressing huge issues beyond financial inclusion, too. ShelterTech is taking on affordable housing in India; M-KOPA solar is addressing access to energy in East Africa; and Dr. Consulta is tackling affordable medical care in Brazil, just to name a few.
These examples are not without controversy, including data breaches, government scandals, exploitative profit models, and so on. However, they illustrate the clear advantages of startup ecosystems—innovative and rapid, if imperfect, solutions for national-scale problems. They also pose key questions: what is the ideal role of the public sector in fostering these ecosystems? How heavy a hand can they take in subsidizing and guiding ecosystem development, and what are the strengths and weaknesses of different government approaches?
National competitiveness and security in a born global world
Increasingly, innovation is ‘born global.’ The best businesses sell across multiple markets early, and often their teams are built in a distributed way—wherever there is the best talent and value for particular functions. Therefore,a thriving startup ecosystem is a source of national competitiveness. Ecosystems that position themselves well have an opportunity to take advantage of this reality. Singapore, for example, is a focal point for innovation in southeast Asia and is viewed as an ideal jumping-off point to do business in the region. As of 2016, Singapore was headquarters for 43,000 startups. A unique combination of strong rule of law, globally competitive banks, and being a hub for engineering and other relevant talent has made it a Mecca for any company trying to access the southeast Asian market.
Of course, the other battle is where innovation teams are built and trained. The talent pool in technology is global and becoming more amenable to a distributed structure at the same time. Grab, for example has centralized operations in Singapore but has separate distribution offices across its markets, including in India, Indonesia, Vietnam, and Thailand. Likewise, SEA started in Singapore but now has offices across more than eleven countries.
Businesses that change the world can be built from anywhere because offirst mover advantage for technological innovation and because of network effects. Take the case of UiPath, a robotic process automation startup that emerged in Romania. Its solution was the best, and because it built a product that could be adapted to many local contexts, it has become one of the fastest growing enterprise startups of all time and out-innovated many of its global competitors including some from Silicon Valley.
Countries can actively position themselves to attract entrepreneurs to build their teams locally. Those that are ahead of the curve on remote employment law, like Estonia with its Startup Visa, and that have strong training programs for tech workers are well-positioned to benefit from this trend by opening up employment opportunities for citizens and attracting outside innovators. One of the surest ways to prevent and reverse the “brain drain” that affects so many nations is to provide job opportunities either via domestic companies or leveraging your citizens’ ability to work remotely for an international organization by establishing favorable infrastructure and regulatory conditions. Canada created an accelerated visa program, and through a program with quotas for immigration to all its provinces, businesses have been able to recruit top talent for their startups, especially those who put down roots in smaller provinces. Work is going global, and countries with the right employment and education plans will be best positioned to capitalize.
A related topic is national security. Countries with a strong domestic technology sector will have a greater proportion of homegrown technology solutions. A current global discussion is around the technological infrastructure around 5G connectivity. The US government has voiced concerns with Huawei 5G network hardware. A strong domestic innovation ecosystem can provide a greater option set to assuage some of these concerns.
With innovation primacy comes rulemaking. The company that builds a new product in high demand and the country in which it operates have an unmistakable advantage in that they are the first to write the rulebook around how a technology should be used, who gets to use it, and how it should be developed. If a country intends to block this technology so that its own firms can have a leg up, they are forfeiting speed, agility, and the other benefits of a free market, not to mention that in today’s world, technology tends to be imported anyway, despite government firewalls. The solution, many nations are finding, is to invest in innovation to be competitive on a global scale instead of kneecapping the free market. If you are not born global, then talent, innovation, and businesses will center themselves elsewhere.
Perhaps the least understood (but still potent) benefit is innovation’s role in soft power. Hollywood exported a culture that many moviegoers, particularly young people and filmmakers around the world, wanted to mimic. Silicon Valley has similarly been a cultural export, and with its platforms comes its culture. The mythology of the startup founder working away in his garage was born there. The Valley represents a place where one can mix a great idea with software and hard work to achieve both massive global impact and immense wealth. It is a place of visionaries, creatives, and computer engineers—builders of a new computerized age—all clicking away on laptops in coffee shops or remote workspaces or open office layouts. The innovation aesthetic has even been defined by players like Airbnb and WeWork with their kombucha taps, healthy snacks, and modern office decor.
This type of emulation extends beyond just a “look” and into the playbook of how innovation is nurtured and scaled. Many countries are trying to create their own Silicon Valley, pouring billions of dollars into startup ecosystems. Much of that capital is still coming from the West in the form of global venture capital funds, and with that money comes board seats and strategies plucked right from Silicon Valley. Thus, Silicon Valley is a classic example of how business and innovation act as critical pieces of national strength, security, and influence.
Other ecosystems have similarly focused on building their innovation soft power and influence. China for instance has developed a thriving startup ecosystem. Many of its stars like Alibaba and Tencent are expanding beyond their borders, investing in and supporting startups globally, particularly in southeast Asia. Unlike their Silicon Valley competitors who focus on either investing or acquiring, Chinese corporate investors provide a hybrid model, investing capital while giving innovators access to their formidable ecosystems. Additionally, China is starting to produce more than just domestic giants, but also global competitors. TikTok is one of the first examples of a Chinese culture app “going viral” around the world, as their short-form videos can be used as a platform for up-and-coming influencers or viral artists (and the platform is starting to see pushback, including recently in India where it, alongside many other Chinese apps, was banned while also facing pressure in the United States and internationally). But the story won’t end there: there will certainly be more TikToks.
Building the next Silicon Valley in another country, particularly in emerging markets, is not easy—nor is it necessarily the right framework for the diverse world we live in. It will require a unique strategy for each nation, but there are some constants and general rules that should be considered that reflect the changing nature of innovation. The path to planting and nurturing a successful innovation scene is not a simple step-by-step process, but there are some things that countries can do to foster growth. In the next part of our series we will explore those steps.