What Are Innovation Ecosystems and How To Build and Use Them

The innovation ecosystem is not new but it certainly has many new features. Jorn Bang Andersen looks back at the evolution of the innovation ecosystem, where it is now headed and how companies can develop ecosystem strategies.

Since James Moore introduced the term business ecosystem in 1993 the term ‘innovation ecosystems’ has gained currency within corporate headquarters’, management consultancy, government white papers for economic development and academic papers on global innovation and competition.  New concepts and words like ‘innovation ecosystems’ often denote a departure from an old reality to a new one and an underlying shift in mainstream thinking from an existing to a new paradigm.  The ecosystem raises (at least) two important questions.

How should we understand innovation ecosystems in the evolutionary context of global economics and innovation?

How should we operate and interact strategically with innovation ecosystems from a company perspective?

Innovation ecosystems in an evolutionary context

Though we pay little attention to it there is an evolutionary pathway for economic systems and transitions. We are currently accustomed to seeing the United States in the dominant global position influencing technology, enterprise systems, and culture, but clearly it hasn’t always been so.

We are currently accustomed to seeing the United States in the dominant global position influencing technology, enterprise systems, and culture, but clearly it hasn’t always been so.

Around 1850 the German economist George Friedrich List argued that Germany needed a ‘national system’ for economic development in order to catch up with Britain. Without going into detail one of Friedrich List’s main contributions was that of building a national manufacturing base and protecting ‘strategic infant industries’ from foreign competition until they had reached a mature level and would be able to compete successfully internationally.  His influence among developing nations has been considerable. Japan has followed his model.It has also been argued that Deng Xiaoping’s post- Mao policies were inspired by List.

In 1899 the English economist Alfred Marshall coined the term ‘agglomeration’ and the advantages it held for companies to be located in proximity to other companies within the same industry.  Marshall’s arguments for agglomeration was based on the numerous small companies and related services located around cutlery production in Sheffield in Northern England.

In 1950 the Swedish economist Eric Dahmén launched the term ‘development blocks’ as a recipe for Sweden’s economic development and industrial transformation. Dahmén’s thesis was very much inspired by Joseph A. Schumpeter and notions like the role of the entrepreneurs, capital, creative destruction and on the other hand focusing on particular development industries.

In the late 1980s Christopher Freeman and Bengt Åke Lundvall introduced the concept of ‘national system of innovation’. This concept embraced not only the primary actors of entrepreneurs, companies and capital but also national regulation of labour markets, factor markets, education and other policies into the framework for economic development.  The case studies for national systems of innovation were among others Japan and the Nordic countries.

In 1990 Michael Porter’s publication ‘The Competitive Advantage of Nations’ was published and it introduced the concept of ‘clusters’ as a vehicle for economic development of industries, regions, and nations.  Michael Porter’s cluster concept contained many of the same elements of the earlier economic development concepts mentioned above, yet it achieved more global recognition and followers than anyone else before. Today, more than 100 regions and/or nations have experimented or implemented some kind of cluster policy based on Porter’s framework.

In 2010 Stanford University launched the international innovation ecosystems network in cooperation with select partners in Finland, China and Japan.  At the same time innovation ecosystems denote Information and Communication Technology Platforms like Apple’s iPhone, Google’s Android, cloud computing and software platforms dominated by companies like Microsoft, Amazon etc.

Towards an understanding of innovation ecosystems

So what is an innovation ecosystem in 2011? When we talk today about innovation ecosystems, 90% of the concept is a combination of the aforementioned earlier historical examples and concepts.

Notably, innovation ecosystems are based on successful examples of agglomeration whether in geographic, economic, industrial or entrepreneurial terms. In Schumpeter’s words, innovation ecosystems are primarily about successful innovative regions (Silicon Valley, Bangalore), successful ICT platforms (iPhone, Android) or new industries (cloud computing) and entrepreneurs and investors from all over the world jump on the bandwagon of these successes. As such there is relatively little new about innovation ecosystems compared with earlier concepts like development blocks or clusters.

Yet, the remaining 10% that seems to be a novelty of today’s innovation ecosystem’s from earlier equivalents should not be underestimated.

The main novelties for today’s innovation ecosystems compared with earlier times can be found in the Internet/mobile/ICT systems’ platform dimension and web 2.0. This is because, today any entrepreneur with a good idea can, irrespective of geographical location, launch a business application for Apple’s or Google’s iPhone or Android platforms and become a successful business. This was not the case in e.g. Alfred Marshall’s time of cutlery in Sheffield. To benefit from the agglomeration or ecosystem of that time you had to be physically present in that place and time.

Even though, in 2011, most innovation ecosystems are still based on some kind of geographical concentration of amassed entrepreneurs, investors, talent, universities, the Internet seems finally to be so mature these 10% may very well be the most strategically important for any company, region or nation in the years to come. Add to this that the ICT revolution has made the old distinction between physical goods and services more or less obsolete or at best blurred. So how should companies navigate and position themselves advantageously in the 21st century’s global landscape of innovation ecosystems?

Initial strategy for positioning within innovation ecosystems

One way for companies (regions and nations for that matter) to approach which of the global innovation ecosystems they should network with and consider important could be by making an initial critical assessment of key strategic dimensions for partnering with or tapping into innovation ecosystems. Some of these strategic dimensions for consideration are highlighted below.

Leadership and partner role

  • How is the ecosystem governed? Is it centralized and closed with one or few dominant leading players like e.g. Apple, Google, Microsoft, or is it a more decentralized and open ecosystem with dispersed leadership like e.g. Linux?  Controlling ecosystems is a new source of competitive advantage and your own company needs to review carefully how you participate and what levels of control or risk reduction are available.

Technology lock-in risks

  • Tapping into just one ecosystem or platform may be similar to the risk of ‘just betting on one number at a roulette wheel’. This is usually a very risky strategy and it might be better to use smaller business projects to tap into a number of different ecosystems and test out their benefits this way.

Supply side risks

  • There might be superior management and transaction-cost gains derived from dealing with just one or a few ecosystems. Yet, such dependency can be fatal as Japanese companies learned when they temporarily were denied access to rare earth from China, the world’s leading producer and ecosystem for rare earth. Or as when the earthquake in Japan resulted in the suspension of 25% of the world’s production of silicon wafer supply, which could have had wide ranging implications for the global electronics industry.

Brand reputation

  • The outsourcing of for instance food-production and consumer goods to emerging markets’ ‘manufacturing ecosystems’ should be considered another example of risk in view of the quality and social responsibility within the entire supply-chain of the ecosystem. The scandals with tainted milk from Sanlu and Chongqing in China or Nike’s case of child labour are examples that show how fast and easily online communities like Facebook and You-tube can damage even leading global companies’ brands and reputations. Reputation is arguably one of the most underestimated dimensions when companies’ consider which ecosystem to engage with.

Pros and cons of tier one versus tier two ecosystems

  • What would be the advantages of going for non-obvious partners outside the mainstream of what is the norm within the industry? For example, most ICT companies consider Silicon Valley or Bangalore, but few consider tapping into Tomsk or Novosibirsk in Russian Siberia. Yet, both Russian cities have top-level talent and educational institutions within mathematics, physics and programming, and they come at a lower price than e.g. Bangalore. Deutsche Bank did such a change from Bangalore to Tomsk a couple of years ago. And Singapore and Japan set up a formal cooperation agreement with Tomsk. In fast changing markets tier twos can quickly become tier one and the individual company will often have a stronger bargaining position towards partners in a tier two than tier one ecosystem.

In conclusion, in order to make sense of today’s innovation ecosystems it might be useful to see them as successful agglomerations of industrious activity sharing many of the similarities of earlier such economic configurations. Moreover, the allure of partnering with the most successful and obvious ecosystems should be considered carefully with at least some robustness testing of options such as diversifying into a larger number of ecosystems and thereby avoiding the pitfalls and risks high-lighted under strategic dimensions in this article.

By Jørn Bang Andersen

About the author

Jørn Bang Andersen is currently senior advisor to the Nordic Innovation Centre on innovation and globalization. Prior to this he has worked as special advisor to the Ministry of Business and Industry on innovation and technology development, deputy director to the Ministry of Foreign Affairs of Denmark’s unit invest in Denmark as marketing and business development manager and special advisor to the Trade Council of Denmark on the global innovation strategy.

Internationally Andersen has worked for the European Commission on international business, trade and technology co-operation, responsible for notably China, India, Vietnam. Andersen has served as Denmark’s government’s senior advisor to Estonia and Latvia on their transition to market economies and EU memberships. Embedded in the Ministry of Economic Affairs in Estonia, Tallinn.

Private sector engagements have inter alia been as founder of Hansa Consulting House and Nordic and East European Area Manager for Interlace. Andersen received a MA in political science from Aarhus University, Denmark, and a MA in Western European Politics and International Economics from University of Essex as part of an Erasmus scholarship. Jørn B. Andersen has published books and articles on innovation and lectured on the issue in Denmark and internationally.

  • Frank Mattes

    I would be happy to see your thinking extended from ICT to ‘old industries’ such as Chemical or Automative. The Chemical industry is innovating in ecosystems (please search InnovationLab on this site) or google for Chemelot as well as the Automotive industry (there are several innovation clusters in Germany)

    Frank Mattes 

  • Paul H

    I think you provide a good background build to ecosystems. I feel the 10% you mention is certainly the compelling difference to advance into ecosystems. You begin to point out the risks, dangers and rewards. It does seem platforms and ecosystems are combining more

  • http://www.facebook.com/people/Jørn-B-Andersen/100000657813318 Jørn B. Andersen

    Dear Frank Mattes,

    Thanks for the link to the BASF and Chemelot examples. Both are good examples of innovation ecosystems or communities. Chemelot mentions in their presentation that at the heart of Chemelot is open innovation. Apart from ICT platforms, it seems  that ‘open innovation’ represents the most recent organisational and managerial challenge and transformation of innovation ecosystems, and that with this a new kind of what could be labelled ‘alliance capitalism’ is emerging for both old and new industries.  

  • http://www.facebook.com/people/Jørn-B-Andersen/100000657813318 Jørn B. Andersen

    Dear Paul H,

    Thanks for the comment. The 10% new mentioned in article and that  that ICT enabled services is a significant difference between the innovation ecosystems of yesterday and those of today. With this in mind I think that primary value is going to be captured by how firms organize themselves in relation to innovation ecosystems and innovate on how they do partnerships.

  • Scott Dempwolf

     Very nice, succinct explanation of the evolution of innovation ecosystems.

  • http://www.facebook.com/people/Jørn-B-Andersen/100000657813318 Jørn B. Andersen

    Dear Scott Dempwolf,

    Thanks, glad to hear you liked the coverage on innovation ecosystems. Ideally, the article should  have mentioned  Michael Piore and Charles Sabel’s ‘ “Second Industrial Divide and Flexible Specialization ” as well as Richard Nelson and Sidney Winter’s work on technological change.

  • Anonymous

    We can still put them in Jorn.

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  • http://www.scm-operations.com Supply Chain Guy

    I think the concept of Innovation Ecosystem provides me the the whole new perspective towards strategic partnership building. Because most people tends to focus on only particular company’s capability rather than the big picture as you described.

  • Siddharth Chaturvedi

    Mr. Andersen,

    Thought provoking article. It focussed mainly on private companies. As a student of innovation and innovation ecosystem I am also seeking answer to the following questions:

    1. How do we differentiate between reform and innovation when it comes to public policy?
    2. What innovative ways do you suggest for nations to build an innovation ecosystem? Or will it be innovative policies with the existing dissemination and execution mechanism?
    3. How do we measure innovation? Will it always be in terms of patents and R&D?
    4. Examples of innovation outside technology and products.

    I would be obliged if you chose to answer these questions. I am looking to bring a change in my own country, India using innovation as a tool. But wish to understand it before that.

    Siddharth Chaturvedi

  • Thiru

    Mr Andersen,

    Enyoyed reading the article. Very interesting. Would like to know from your experience the key factors that are needed to ensure the success of any self sustaining ecosystem. Thank you

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  • SJ

    Great article. I would like to know if there is any difference between business ecosystem and innovation ecosystem? As per my understanding these two terms are related to each other. Can anyone please give some details on this? Thanks.

  • Wing Wang

    Dera Mr. Jørn Bang Andersen
    Thanks for this article. This is Wing from Innovation Center of China in CEIBS. May I know your email address for future collaboration?Mine is [email protected]
    Thank you,