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Imperial Professor on entrepreneurial ecosystems: challenges for policy

Imperial Professor on entrepreneurial ecosystems: challenges for policy

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James Russell

When it comes to legislation, entrepreneurial ecosystems just can’t be treated like regular policy objects.

Almost everyone today talks about ‘entrepreneurial ecosystems’, or ‘start-up ecosystems’. But what are they? In practitioner parlance, entrepreneurial ecosystems can mean anything. This means their value in guiding policy action easily amounts to nothing.

The bulk of the literature on entrepreneurial ecosystems is written by consultants.

Consultants love fuzzy concepts because they are less likely to be held into account. But, this ambiguity is bad for policy. If policy-makers try to build entrepreneurial ecosystems (as many do), it would be nice to actually know what it is that they are trying to build. Otherwise they will just resort to policies they know – regardless of whether these make sense or not.

My research suggests that entrepreneurial ecosystems differ from traditional objects of policy in important ways.

Traditional entrepreneurship policy falls into two categories: (1) market failure policy and (2) structural failure policy. A market failure policy fixes ‘market failures’ by throwing money at them. Say, start-ups have difficulty accessing funding, so policy-makers provide subsidized funding for start-ups.

A structural failure policy fixes ‘structural failures’ in ‘innovation systems’ by building walls. Say, there are too few science parks, so policy-makers build them.

These approaches are not likely to work well in entrepreneurial ecosystems.

To understand why, we need to understand what makes entrepreneurial ecosystems different from ‘markets’ (think market failure policy) and systems of innovation (think structural failure). My research points to several differentiating characteristics:

  • Entrepreneurial ecosystems are complex. They comprise a multitude of different stakeholders who are much more heterogeneous than the stakeholders of ‘markets’, ‘industries’, and even ‘systems of innovation’. Usually we don’t even know them all. And, there are higher-order elements such as infrastructure, culture, norms, and regulations. It is the interactions of all of these that drive the ecosystem benefits. We are talking about a complex, multi-level, and multilateral interaction systems here.
  • Entrepreneurial ecosystems create ‘ecosystem services’. Like natural ecosystems, also entrepreneurial ecosystems create ‘ecosystem services’. These are emergent, system-wide benefits that are created in myriad localized interactions among individual ecosystem stakeholders. The entrepreneurial ecosystem service created is system-wide allocation of resources towards productive uses through innovative and high-growth new ventures. This dynamic drives Total Factor Productivity, the difference between inputs required and valuable outputs created. This translates into the ecosystem’s ability to create new wealth.
  • In entrepreneurial ecosystems, no one is really in charge. Ecosystem stakeholders are mutually co-dependent, yet hierarchically independent. If the ecosystem works well, all stakeholders will benefit. But no one actually ‘owns’ the ecosystem. Because stakeholders are independent, you cannot do command and control in entrepreneurial ecosystems. It is more like herding cats. And with all these different stakeholders, how do you coordinate, if top-down command and control is not possible?
  • Entrepreneurial ecosystems are dynamic. The notions of ‘market’ and ‘structural’ failure are essentially static: they exist or not. Entrepreneurial ecosystem services are co-created in dynamic interactions among its stakeholders. There may be cascading effects, as interactions influence one another. This means you may get unintended consequences, as cascading effect chains complicate the link between interventions and outcomes.
  • Entrepreneurial ecosystems are inertial. It may sound incongruous that a dynamic system can also be inertial, yet that is what entrepreneurial ecosystems are. Because of their complexity, localised interactions, cascading effects, and large numbers of independent stakeholders, the typical outcome one tends to see for policy action is nothing. In complex dynamic systems, external impulses tend to create no discernible effect, if not appropriately targeted.

In practice, the above means that ‘market failure’ and ‘structural failure’ approaches tend to break down in entrepreneurial ecosystems, because their complexity makes it difficult to identify such failures.

If you do not see high-growth new firms, is the problem with insufficient funding (a market failure), or is it perhaps because of an absence of new business accelerators (a structural failure)? In complex dynamic systems it can be very difficult to trace the sources of such, ecosystem failures, as I like to call them.

What, then, are the implications for policy? Quite a few, as it turns out:

  • Instead of top-down, do bottom-up. It is usually very difficult for an outsider to tell what inhibits a given ecosystem. Because ecosystem services are emergent, so should ecosystem policies be. Top-down command and control does not work. Try coordinated bottom-up instead.
  • Engage the stakeholders. This is a direct corollary to the bottom-up approach. Because ecosystem services are typically created in a myriad, one-to-one interactions among ecosystem stakeholders, you need to engage those stakeholders to find out how the ecosystem really works. The very way ecosystem services are created also means that their underlying mechanisms are not easily visible outside. The information of the inner workings of the ecosystem tends to be embedded within the ecosystem itself. You need to engage the stakeholders to bring it out.
  • Facilitate multipolar coordination. The way ecosystem services are created calls for multipolar coordination among ecosystem stakeholders in order to improve the ecosystem processes. Centralized actions by a government agency are not likely to be sufficient. Instead of one big intervention, you need to coordinate myriad local ones, undertaken by the stakeholders themselves.
  • Build collective impact. The biggest source of ecosystem inertia is insufficient stakeholder participation. As no one ‘owns’ the ecosystem outcomes, few feel sufficient commitment to act. It is too easy for all stakeholders just to wait for others to act and then reap the collective benefits. To overcome this free-rider problem, you need an ecosystem facilitation approach that builds sufficient commitment and mutual awareness among stakeholders that they are compelled to act. And even with sufficient commitment, you likely still need a backbone organization to keep the momentum alive.

In entrepreneurial ecosystems, the best role for the policy-maker is not that of a failure spotter and top-down fixer, but rather, an ecosystem orchestrator and a facilitator that facilitates the build-up of ecosystem momentum through deep stakeholder engagement. This is a delicate role: more on this later.

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