By Scott Stern, MIT, presented at the 17th TCI Global Conference, Monterrey 2014.

1. Investing in Comparative Advantage
Scott Stern
Role of Innovation & Entrepreneurship in Competitiveness and
Regional Economic Performance
12 November 2014

2. Investing in Comparative Advantage
Scott Stern
MIT and NBER
2

3. Field of Dreams…
3

4. Some leading thinkers such a Richard Florida seem to
imply that regions are engaged in a war for talent and
the creative class to be the “next” Silicon Valley
4

5. With many “Silicon Xs” strategies being
implemented around the world….
5

6. “…we don’t want 50
Silicon Valleys; we want 50
different variations of
Silicon Valley, all unique
from each other and all
focusing on different
domains.”
Marc Andreesen, 2014
6

7. If we are not trying
to become the
“next” Silicon
Valley, what are we
trying to become?
What is the relationship
between cluster-led
economic development
How can we leverage
innovation-driven
entrepreneurship within
clusters to accelerate
economic performance and
social progress?
and a focus on
innovation-driven
entrepreneurship?

8. How can we invest in our
entrepreneurial comparative
advantage?

9. • Innovation-Driven Entrepreneurial Ecosystems
• IDE Ecosystems and Regional Economic Strategy
• Investing in Entrepreneurial Comparative Advantage

10. 10

11. MIT REAP Framework
System
Strategy Stakeholder
11

12. REAP IDE Ecosystem Framework
12
I-Cap Linkages E-Cap
IDE Framework

13. 13
Innovative Capacity & Entrepreneurial
Capacity Are Distinct Regional Assets
E-Capacity
Ability to start and build new to
the world businesses from
inception to maturity.
Strong I-Cap:
Universities, Central R&D,
Network of researchers,
Medical Centers
Strong E-Cap:
Entrepreneurs, Mentors,
Founding Teams
Investors at all stages
I-Capacity
Ability to develop new to the
world innovations from inception
through to the market.

14. Innovation and Entrepreneurship are Related but Different
14
Patent Application vs. New Firm Formation
Top 30 GDP per capita countries, 2011
Singapore
Norway
Switzerland
Hong Kong
United States
Netherlands
Ireland
Austria
Denmark
Sweden
Australia
Germany
Canada
Belgium
Finland
Iceland
France
United Kingdom
Japan
Italy
Spain
New Zealand
Israel
Korea
Czech Republic
Slovakia
3 4 5 6 7 8 9
-1 0 1 2 3
Log New Firm Formation per 1000 people
Data source: World Bank

15. 15
Innovative Capacity and Entrepreneurial Capacity
Reflect Distinct Investments, Policy and Norms
I-Capacity
PERFORMANCE
PEOPLE
FUNDING
INFRASTRUCTURE
POLICY
CULTURE &
COMMUNITY
DEMAND
Entrepreneurship output (new firms & growth)
Pool of entrepreneurs
Quality of entrepreneurial education
Accessibility of entrepreneurial capital
(government, private, equity, debt, grants)
Physical infrastructure (space, transportation)
Availability of key services (internet, training)
Clear rules on new business creation
Clear rules on business operations and growth
Culture of entrepreneurialism and failure
Societal support, ties and recognition
Government, corporate and consumer demand for
new products and services
Innovation output (patents and papers)
Pool of innovators
Education in tech and ommercialization
Funding for research
Government programs
Physical infrastructure
Example: hi speed internet
Clear rules around patents
Clear support for STEM education
Celebration of invention and innovation
-Rewards to innovation – tenure process
Nature of established companies in region
E-Capacity

16. 16
Assessing Innovative Capacity
I-Capacity

17. Not simply a matter of variation in the level of realized
innovation performance…
17
Average U.S. patents per 1 million
population, 2006-2008
300
250
200
150
100
50
0
–Germany
–Canada
–Norway
–Hong Kong
-10% -5% 0% 5% 10% 15% 20% 25% 30%
–Source: USPTO (2008), EIU (2008)
CAGR of US-registered patents, 1998 to 2008
–Belgium
–Netherlands
–Taiwan
–India
–France
–Israel
–Spain
–Sweden
–Finland
–China
–United States
–Denmark –Singapore
–Italy
–Australia
–Switzerland
–UK
–South Korea
10,000 patents =
–Austria
–South Africa
–Japan

18. 18
Innovative Capacity Reflects the Distinct Investments,
Resources, Institutions and Policies of a Region
I-Capacity
PERFORMANCE
PEOPLE
FUNDING
INFRASTRUCTURE
POLICY
CULTURE &
COMMUNITY
DEMAND
Innovation output (patents and papers)
Pool of innovators
Education in tech and ommercialization
Funding for research
Government programs
Physical infrastructure
Example: hi speed internet
Clear rules around patents
Clear support for STEM education
Celebration of invention and innovation
-Rewards to innovation – tenure process
Nature of established companies in region

19. 19
Taiwan:
Innovation Island

20. Taipei, 1960
20

21. Taiwanese Innovation Leadership Reflects Significant
Investment Over Time in People and Resources
21
Researchers /1,000
Employees
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007
OECD
average,
2006
Source: National Science Council, R.O.C., Indicators of Science and Technology, Taiwan, 2008; OECD Science, Technology, and Industry Scoreboard 2009.

22. As well as systematic long-term investment in institutions
supporting world-class innovation
22

23. Innovative Capacity Indices that weight framework conditions rather than
outputs are now a common benchmarking tool for nations and countries
(Porter and Stern, 1998)
23
230
180
130
80
30
-20
Figure 3-2 The Innovation Index for Selected Countries
Australia
Denmark
France
Germany
Italy
Japan
Ireland
S Korea
Sweden
Switzerland
UK
USA

24. The REAP IDE Ecosystem Framework
24
I-Cap Linkages E-Cap
IDE Framework
Globally impactful
innovation is
grounded in strong
innovative capacity

25. 25
Assessing Entrepreneurial Capacity
E-Capacity

26. While the entrepreneurship rate (# of registered businesses / cap)
tends to increase with GDP/cap, this rate is highly variable, even for
countries at similar stages of economic development
26
New Firm Formation Versus GDP per Capita
Singapore
New Zealand
Australia
United Kingdom
United States
Norway
Iceland
Sweden
Denmark
Netherlands
Switzerland
Ireland
France
Belgium
Finland
Latvia
Bulgaria
Hungary
Czech Republic
CGaenramdaany
Austria
Israel
Spain
Italy
Korea
Japan
South Africa
Macedonia
Chile
Slovakia
Russian Federation
Romania
Uruguay
CMroaalatiyasia
Georgia
Brazil
CSoelrobmiabia
Jordan
Tunisia
ZKayrmgbysiatan
TBaajnikgislatadnesh
Armenia
Argentina
Jamaica
Indonesia
Turkey
Ukraine
GSurai tLeamnaklaa
AMzeexribcoaijan
ATlhgaeirlaiand
PInPadkhiiiaslitpapnines
10 15
0 5
0 20000 40000 60000 80000 100000
GDP Per Capita, PPP Adjusted
Data source: World Bank
World Bank, 2011

27. 27
Similar to Innovative Capacity, Entrepreneurial Capacity
Reflects Distinct Investments, Policy and Norms
E-Capacity
PERFORMANCE
PEOPLE
FUNDING
INFRASTRUCTURE
POLICY
CULTURE &
COMMUNITY
DEMAND
Entrepreneurship output (new firms & growth)
Pool of entrepreneurs
Quality of entrepreneurial education
Accessibility of entrepreneurial capital
(government, private, equity, debt, grants)
Physical infrastructure (space, transportation)
Availability of key services (internet, training)
Clear rules on new business creation
Clear rules on business operations and growth
Culture of entrepreneurialism and failure
Societal support, ties and recognition
Government, corporate and consumer demand for
new products and services

28. Significant evidence that variation across countries due to the
ease of “Doing Business” and “Starting Business”
28
Country
Ease of Doing
Business Rank
Singapore 1
New Zealand 2
Hong Kong SAR,
China 3
Denmark 4
Korea, Rep. 5
Norway 6
United States 7
United Kingdom 8
Finland 9
Australia 10
Country
Starting a
Business Rank
New Zealand 1
Canada 2
Macedonia, FYR 3
Armenia 4
Georgia 5
Singapore 6
Australia 7
Hong Kong SAR, China 8
… …
Norway 22
Drawn from World Bank Doing Business Indicators

29. Murray, Moon and Stern (2014) documents the distinct and
separable roles of entrepreneurial resources (people, $),
entrepreneurial policy (Doing Business, etc), economic
development, and cluster strength
29
Assessing Country-Level Entrepreneurial Capacity
Dep Var = Number of New Businesses (1)
Entrepreneurial Resources
0.506*
(0.243)
Entrepreneurial Environment
0.524*
(0.158)
VARIOUS CONTROLS
R-Squared 0.724

30. From Entrepreneurial Quantity to Entrepreneurial Quality
• As part of the MIT Regional Entrepreneurship Acceleration
Program, the need for a step change to measure the quality of
start-ups within a region, on a real-time basis and at an
arbitrary level of generality
• We combine “big data” (using comprehensive business
registration records) with a predictive algorithm that assesses
the likelihood of a meaningful growth outcome (e.g., IPO or high-value
acquisition) based on observables available at the time of
incorporation (e.g., firm name, patents and copyrights, etc)
• Allows for a novel characterization of start-ups within clusters,
and allows for granular evaluation of IDE ecosystems
Source: Guzman and Stern, 2014, “Where is Silicon Valley?” Working Paper 30

31. Where is Silicon Valley?
Using complete CA business registration records, and novel algorithm to predict start-up
success, Guzman and Stern (2014) develop a nowcasting algorithm for Silicon Valley

32. While per capita start-up quantity is similar in Los Angeles, a much lower
level of entrepreneurial quality than the heart of Silicon Valley

33. The REAP IDE Ecosystem Framework
33
I-Cap Linkages E-Cap
IDE Framework
Globally impactful
innovation is
grounded in strong
innovative capacity
With enhanced conceptual and
empirical clarity, a close
connection between
entrepreneurial outcomes and
entrepreneurial capacity.

34. The third pillar of the IDE Ecosystem is the role of
clusters that enhance opportunities for innovation
and entrepreneurship and define the
entrepreneurial comparative advantage of regions
I-Cap E-Cap
34

35. Clusters Are Everywhere
A cluster is a regional concentration of
related industries connected through
various types of linkages and spillovers
and supporting institutions
35
Motion Pictures – LA Semiconductors - Taiwan
Fashion & Textiles -
Milan
Video Games -
Finland

36. Do Clusters Matter?
• Cluster theory suggests agglomeration arises
across related economic units (Porter, 1990,
1998, 2003)
• Our Approach: If clusters matter, then the growth of an
industry in a region will be increasing in the strength of the
regional cluster within which that industry operates
• Cluster-driven agglomeration could arise in
different channels:
– Across related industries Within a Cluster,
– Across Related Clusters
– Across the Same Cluster in Neighboring Regions
36

37. Do Clusters Matter for IDE Ecosystems?

38. INDUSTRY SPECIALIZATION
Low High
CLUSTER
SPECIALIZATION
Strength of Regional
Clusters (presence of
related industries)
Low +13% 0%
High +20% +1%
Note: Average Region-Industry Annualized Employment Growth over 1990-2005. Region (EA) and Industry (4-digit SIC).
N=55083. Cluster specialization variable is measured by Location Quotient. High means above the median of the variables.
38
Clusters and Jobs
• Industries within stronger clusters are associated with higher levels of job growth from
the early 1990s to the mid-2000s
• We test the role of clusters by estimating region-industry employment growth over
1990-2005 as a function of the initial Industry Specialization and Cluster Specialization
(outside the industry) in a region, and a set of region and industry fixed effects

39. Clusters and the IDE Ecosystem
– Industries that are part of a strong cluster environment register
• higher level, growth and sustainability of start-up activity
• higher level and impact of innovation
Level and Impact of Innovation
Level, Growth,
and Surivability of Start-ups
CLUSTER
ENVIRONMENT
Within a Cluster
Related Clusters
Neighboring Clusters
Source: Delgado/Porter/Stern, Clusters and Entrepreneurship, Journal of Economic Geography, 2010
39

40. Clusters Matter
• Positive effects of clusters on various facets of regional
industry and regional performance
– No measured trade-offs across multiple performance
dimensions
• Clusters matter at multiples levels of geography
• Clusters faciliate related economic diversification in
regions
40

41. Clusters and Regional Identity
41

42. The REAP IDE Ecosystem Framework
42
I-Cap Linkages E-Cap
IDE Framework
Globally impactful
innovation is
grounded in strong
innovative capacity
With enhanced conceptual
clarity, a close connection
between entrepreneurial
outcomes and entrepreneurial
capacity.
Clusters are the fulcrum around which a region realizes the potential from its
innovative and entrepreneurial capacity. Clusters shape the potential to develop
and commercialize new technology and scale new businesses for global impact.

43. Innovation-Driven Entrepreneurship and a New
Economic Strategy for the High North
• Clusters and Innovation-Driven Entrepreneurial Ecosystems
• IDE Ecosystems and Regional Economic Strategy
• Towards an IDE-Driven Economic Strategy for the High North

44. What role does regional
strategy and stakeholder
engagement play in shaping
the growth and evolution of
your IDE Ecosystem?

45. Regional Economic Development: Prevailing Approaches
“Open for
Business”
Improve the
general
business
environment
“The Next Big
Thing”
Enter new high
tech/ high
growth
industries
“Big Game
Hunting”
Compete
aggressively for
plants and new
investments
• Attempt to match
peers’ policies
• Long lists of
areas to improve
but limited
progress
• Table stakes
“Build it and
They Will
Come”
Invest in large
infrastructure/
industrial zone
projects
• Zero Sum
• “Winner’s curse”
• High cost, low
return unless
underlying
weaknesses
addressed
• Neglects existing
base
• Many competing
for the same
industries – e.g.
biotech, ‘creative
class’
• Very few regions
have the assets
to succeed in
them
• Rarely offer
advantage versus
other regions
• Generic
infrastructure will
not offset skill
gaps, weaknesses,
absence of related
businesses

46. A Move Towards Regional Economic Strategy
Regional Value Proposition
What is the distinctive competitive position of a
geographic area given its location, legacy, existing and
potential strengths?
Develop Unique Strengths
What do we do that is different or that
provides sustainable competitiveness in
international markets?
Achieve and Maintain Parity with Peers
What weaknesses must be addressed to
remove key constraints and achieve parity
with peer locations?

47. A Regional Economic Strategy is Not Just
“Good Policy”
Policy Improvement
• Implementing best practice in
each policy area
• A huge number of policy areas
matter
• No region should try to make
progress in all areas
simultaneously
• Often divorced from private
sector concerns
Regional Economic
Strategy
• A prioritized agenda to create a
unique position, based on its
particular circumstances
• Collaborative effort of across
stakeholders
• Leveraging regional strengths
through innovation and
entrepreneurship

48. This means making hard choices…
About what to do and what NOT
to do!

49. The Regional Strategy Frontier
Your Region’s
Foundational
Competitiveness
HIGH LOW
Your Region’s Cost Structure
HIGH
LOW
Inside Productivity Frontier
Possible to Improve through
Isolated Policy Improvement
Or Simply Cost Reduction
At the Frontier
Seeking to Achieve the Frontier
And Improve Foundational
Competitiveness

50. Traditional Economic Policy: Competing Through
Devaluation
Your Region’s
Foundational
Competitiveness
HIGH LOW
Your Region’s Cost Structure
HIGH
LOW

52. Traditional Economic Policy:
The Washington Consensus
Your Region’s
Foundational
Competitiveness
HIGH LOW
Your Region’s Cost Structure
HIGH
LOW

54. An IDE Ecosystem Strategy
Your Region’s
Foundational
Competitiveness
HIGH LOW
Your Region’s Cost Structure
HIGH
LOW
Innovation-Based
Entrepreneurship
Accelerates the
Ability to Reach a
New Frontier
Innovation Shifts
Out
the Regional
Strategy Frontier

55. Your Region’s
Foundational
Competitiveness
HIGH LOW
Your Region’s Cost Structure
HIGH
LOW
Clusters & Linkages
Allow Regions to
Focus / Prioritize
Innovation and
Entrepreneurhsip on
their Comparative
Advantage to
An IDE Ecosystem Strategy

57. Towards the Innovative
Cities Program…

58. IDE Ecosystem Strategy
REGIONAL OBJECTIVE
• What does the region want to
accomplish?
• Why is IDE crucial?
REGIONAL CAPABILITIES
• What are our iCap & eCap levels?
Key clusters? Ecosystem linkages?
• Who is responsible for building
missing components?
REGIONAL SCOPE
• What are the regional priorities?
• How do we prioritize innovators and
entrepreneurs?
• On which cluster do we focus? (Do
not “pick winners”)
REGIONAL POSITIONING
• How will upgrading IDE ecosystem
impact international
competitiveness?
• How can an IDE-based, regional
identity be established?

59. Strategy Realization: Choosing &
Implementing Strategic Interventions
ACCELERATORS COMPETITIONS
SPACES
NETWORKS & MENTORING
59
COMMERCIALIZATION
PROGRAMS
CROWDFUNDING
INITIATIVES

60. Strategy and Entrepreneurial Comparative Advantage
• IDE Ecosystem-led growth is different from traditional economic
development approaches
• Rather than competing directly with other regions for resources
and markets, entrepreneurial comparative advantage leverages
those factors that make your region unique and distinct
• There are several potential areas to leverage
– Unique clusters and economic structure
– Distinctive elements of innovative and entrepreneurial capacity
– Rich social networks and ties both within the region and to other
regions
– Advantageous programs and policies
• When each region leverages its unique elements in raising their
competitiveness, that provides a rationale for increased trade and
exchange among regions, thus upgrading all regions in the process

61. Your IDE Ecosystem Strategy is…
Investing in Your Entrepreneurial
Comparative Advantage

62. IDE Ecosystem Strategy Must be Shaped and
Realized through Stakeholder Engagement
62

63. This approach helped bring a much more diverse range of
stakeholders together for the first time throughout Scotland

64. What is the First Must-Win Battle?
64

65. NEW ZEALAND
Wynyard Quarter Innovation Precinct
REAP Goal: developing New Zealand into the innovation hub of the Asia-
Pacific rim.
“The innovation precinct will be an
ICT and digital media hub that brings
together innovative entrepreneurs
and multi-national companies, as well
as research and development-intensive
organizations.“ ATEED
Auckland
It will provide the focus, resources, connections and opportunities to launch successful IDE enterprises for
success on the global stage.
New Zealand REAP is committed to the Maori spirit of Kotahitanga: being highly collaborative and being
highly transparent and therefore works closely with government agencies to achieve their goals.

66. Some Parting Thoughts
• Rather than focusing on a “race” over a scarce
resource (the creative class, individual plants,
domination of the “next big thing”), regions need to
invest in their comparative advantage
• Regional strategy involves prioritizing those areas of
economic development that simultaneously leverage
their current relative strengths while offering rich
opportunities for innovation and entrepreneurship.
• Not simply aspirational, stakeholder engagement that
begins with a clear-eyed assessment of the strengths
and weaknesses of the IDE ecosystem can serve to
catalyze collective action around a set of shared
regional priorities and serve as the basis for
sustainable IDE Ecosystem Acceleration.

67. Let’s get started!!
Thank you!!
67 #MITREAP
sstern@mit.edu
www.scott-stern.com