Kauffman Foundation Research Series on City, Metro, and Regional Entrepreneurship Enabling Entrepreneurial Ecosystems INSIGHTS FROM ECOLOGY TO INFORM EFFECTIVE ENTREPRENEURSHIP POLICY Philip E. Auerswald October 2015 ENABLING ENTREPRENEURIAL ECOSYSTEMS Philip P. Auerswald* This paper draws from and integrates prior work with (in chronological order) Stuart Kauffman, José Lobo, Karl Shell, and Lewis Branscomb, as well as conversations over time with Zoltan Acs, Richard Florida, Carl Schramm, Dane Stangler, Mary Walshok, and Richard Zeckhauser. For helpful recent discussions and exchanges, I thank Norris Krueger, Sandra Maxey, Valerie Mocker, Rhett Morris, Jonathan Ortmans, and Jenny Stefanotti. All errors are my own. A version of this report appears in David Audretsch, Al Link, and Mary Walshok, eds. (2015), The Oxford Handbook of Local Competitiveness, Oxford, UK: Oxford University Press. *School of Policy, Government, and International Affairs, George Mason University 3401 Fairfax Drive, Arlington, VA, 22201 tel: 703-993-3787; email: [email protected] ©2015 by the Ewing Marion Kauffman Foundation. All rights reserved. EXECUTIVE SUMMARY Enabling Entrepreneurial Ecosystems INSIGHTS FROM ECOLOGY TO INFORM EFFECTIVE ENTREPRENEURSHIP POLICY Philip E. Auerswald | October 2015 entrepreneurial entrants into new and EXECUTIVE SUMMARY existing markets by favoring incumbents less. Inspired by research on the importance of • Listen to entrepreneurs. Rather than entrepreneurship for sustained economic growth develop policies abstractly intended to and improved wellbeing, many governments and correct “market failures,” policymakers non-governmental grantmaking organizations have should engage local entrepreneurs in person sought over the past decade to implement policies to develop and implement practically focused and programs intended to support entrepreneurs. policies intended to encourage dynamism, Over this interval, growing appreciation of the increase diversity, and stimulate “metabolic” limits of strategies focused narrowly on financing or activity such as idea exploration, product training entrepreneurs has prompted a number of development, and increased rates of such entities to shift their efforts toward more broad- deal flow. based strategies aimed at enabling “entrepreneurial • Map the ecosystem. Create an inventory ecosystems” at the city or sub-national regional scale. or graph that indicates who the participants This paper takes the metaphor of the in the ecosystem are and how they are “ecosystem” seriously, seeking to draw lessons from connected. More ambitiously, map roles and evolutionary biology and ecology to inform policy for differentiate relationships by type, direction, entrepreneurship. In so doing, the paper provides a and magnitude of interaction. Once validated framework for data gathering and analysis of practical by the entrepreneurs and community value in assessing the vibrancy of entrepreneurial members, ecosystem maps can become ecosystems. valuable tools in developing strategies for engagement. Taking the ecosystem seriously as an economic • Think big, start small, move fast. This model suggests the following strategies to enable simple rule, which applies to entrepreneurial entrepreneurial ecosystems: ventures, also holds true for strategies to • Favor incumbents less. Policies and enable local entrepreneurial ecosystems. To be regulations that favor incumbents—existing, effective, such strategies should seek domains dominant companies—create barriers to for early success and rapidly iterate forward entry by new firms and restrict competition. from there to build well-grounded programs Examples of such regulations include at scale. assertive enforcement of non-compete • Avoid artificially segmenting your laws, excessively restrictive occupational community or your strategies. licensing requirements, and various forms of Entrepreneurs and members of regulatory complexity that inhibit contracting. entrepreneurial communities are not potted Policymakers should avoid enacting such plants: they are active participants in a range policies and regulations, instead working of activities, such as creating new companies, to reduce the disadvantages faced by investing in and/or advising startups, INSIGHTS FROM ECOLOGY TO INFORM EFFECTIVE ENTREPRENEURSHIP POLICY | 1 mentoring entrepreneurs, teaching in formal experiencing disruptions is an inevitable part settings, working at large corporations in of economic and social life, those involved in research or market development, providing enabling entrepreneurial ecosystems should services such as legal or accounting, and anticipate them and prepare to make the serving as customers of entrepreneurial most of the opportunities they create. companies. Expect participants in The search for effective strategies to enable local entrepreneurial ecosystems to be playing entrepreneurial ecosystems is a fundamentally practical multiple roles, and make sure to make the one. Better understanding of actual ecosystems most of the unique skillsets of your most provides a conceptual framework within which versatile community members. policymakers can ask relevant questions, envision better approaches, and evaluate resultant outcomes. • Prepare to capitalize on crises. Much like a rotting trunk of a fallen tree feeds the Keywords: algorithms; complexity; entrepreneurship; growth of new saplings, economic disruption entrepreneurial ecosystems; local competitiveness; creates entrepreneurial opportunities. Because recipes t is the systems so formed which, from the point of view of the ecologist, “Iare the basic units of nature on the face of the earth. Our natural human prejudices force us to consider the organisms (in the sense of the biologist) as the most important parts of these systems, but certainly the inorganic “factors” are also parts—there could be no systems without them, and there is constant interchange of the most various kinds within each system, not only between the organisms but between the organic and the inorganic. These ecosystems, as we may call them, are of the most various kinds and sizes. They form one category of the multitudinous physical systems of the universe, which range from the universe as a whole down to the atom.” —Arthur George Tansley1 I. INTRODUCTION affect the overall supply of entrepreneurs in a given economy, there is strong evidence that it can influence Entrepreneurship is present in all societies, but it where and how entrepreneurs—or entrepreneurially manifests itself differently depending on the context.2 inclined individuals—focus their abilities.4 Strategies Productive entrepreneurship corresponds to the that support development on a national, regional, or creation and expansion of new firms; unproductive local scale thus must consider not only the quality of entrepreneurship corresponds to rent-seeking activities; the general business climate, but also, and importantly, destructive entrepreneurship corresponds to trafficking how government actions affect the relative returns to in illicit goods. All three forms of entrepreneurship different types of entrepreneurship. create economic activity; however, institutions advance and societies progress only when the returns Informed by research on entrepreneurship’s to productive entrepreneurship exceed those to importance to sustained economic growth and unproductive and destructive entrepreneurship.3 While wellbeing,5 non-governmental grantmaking there is little evidence that government action can organizations as well as governments around the 2 | ENABLING ENTREPRENEURIAL ECOSYSTEMS EXECUTIVE SUMMARY | INTRODUCTION world increasingly have sought strategies to encourage My objective in this paper is to take the idea entrepreneurial initiatives and support entrepreneurial of the “entrepreneurship ecosystem” seriously and ventures.6 The growing interest in launching policies to consider what sort of guidance researchers and and programs that support entrepreneurship has policymakers can gain by making a direct comparison intersected with increasing recognition by very to the substantial literature on ecosystems in the different parties that entrepreneurship is a highly fields of evolutionary biology and ecology. There is, context-dependent activity, with the sub-national of course, nothing novel in theorizing that economic region, the city, or even the neighborhood being systems are analogous to biological systems. Nelson a more natural scale of analysis than is the nation. and Winter’s work is a particularly significant landmark Furthermore, experience with programs that support in this literature, but it goes back at least as far as entrepreneurs has called into question the effectiveness Herbert Spencer’s 1857 essay, “Progress: Its Law of interventions that focus solely on financing and Cause.”12 In this paper, I sketch a future path entrepreneurs or developing their personal abilities for this line of inquiry, arguing along the way that without paying specific attention to the operational developments over the last quarter century in both 7 context. As a consequence, institutional innovators economics and theoretical biology have substantially inside and outside of government have come to frame narrowed the representational gap between economics entrepreneurship-related interventions as aiming to and the life sciences, to the point where the analogy enable “entrepreneurial ecosystems” specifically at to evolutionary biology and ecology actually starts to the city or sub-national regional