Editor’ note: This is the first part of a series of articles exploring three forms of global innovation competition.
The City of Helsinki, Finland, is engaged in an extended public debate about the best policies to promote regional economic growth. In a recent report, entitled “Innovation Strategy for the Helsinki Metropolitan Region,” the authors advocate a policy for economic growth based upon technological innovation.
They noted the uncertainty surrounding this new approach to economic development. “The development platform is still a fairly new,” they stated, “and therefore little is known about the operating format.”
The RTP region and Helsinki share a common problem regarding the best approach to implementing an innovation economic development strategy and, probably unknown to each other, they are competitors in a new form of global competition for jobs and incomes. The competition between regions is only one of three new forms of competition for innovation. The other two may surprise you.
While the officials in Helsinki can identify the goal that small new growth enterprises are crucial for the competitiveness and economic success of Finland and the Helsinki Region, they express frustration at an anomaly.
“Despite the country’s high level of R&D investment, however, there is rather little growth-oriented and growth-seeking entrepreneurship exploiting new business opportunities in Finland,” the report said.
In other words, just like the RTP, which ranks high on national indicators of R&D and patent activity, the RTP product development and new venture creation pipeline is puny.
Part of the anomaly for both regions is that traditional economic development policy focuses on industrial recruitment, based on an effort to make the region “globally competitive” for multinational corporations, even though every economist in the world knows that the jobs and wealth creation pipeline is in new venture creation.
As the Helsinki report states, “Although growth enterprises are a small fraction of all new businesses, they generate most of the new jobs that emerge in this area. The lack of new growth enterprises is particularly marked in the Helsinki Region, which represents about half of the innovation flow in the country as a whole.”
In Silicon Valley, to use an example from the U. S., start-up firms created 258,700 jobs from 1990 to 2001. In that same period, established firms that were around when the decade began lost 120,500 jobs. The same economic history is true for the RTP and North Carolina.
Global Corporations vs. Global Corporations
Professor Ed Feser, of the University of Illinois, has written about the second new form of global innovation competition that arises between large global corporations. Feser describes the competitive dynamics for innovation between global corporations in terms of value chains.
In his study, Globalization, Regional Economic Policy and Research, (2005), Feser begins by documenting how dominant the global corporations have become as a world-wide economic force. “It is hard to overstate how dominant multinational firms are as influences on globalization trends,” he writes. “Hanson and Slaughter (2003) report that 11,151 businesses in the U.S. were part of a multinational firm in 1999. That was roughly 1/20th of 1 percent of the total of over 24 million U.S. businesses. However, the authors estimate that multinationals accounted for 80 percent of U.S. goods exports, 66 percent of U.S. goods imports, 42 percent of U.S. capital investment, and 82 percent of U.S. industrial research and development in that year.
In addition, multinationals accounted for about 25 and 32 percent, respectively, of U.S. non-bank employment and GDP. Multinationals’ influence therefore well exceeds their modest numbers. They drive globalization whether gauged in terms of production activity or as conduits for technology diffusion.”
The surprising part of the competition for innovation between global corporations is their strategy. In recent years, they have competed with each other by outsourcing the search for technology. An astute region, like Helsinki, could probably use this form of competition to their local economic advantage, if they would re-focus their attention on creating a regional innovation system and not on maintaining a globally competitive region, which directs all the benefits to the global corporations.
As Feser notes, this innovation outsourcing is sometimes described as “slicing up the value chain.” He notes that “A given product is no longer produced by a single company and its suppliers and subsidiaries in a single location (a single agglomeration) but rather by specialized clusters of companies (multiple agglomerations) in different parts of the world.”
It is the strategy of slicing up the value chain that makes North Carolina’s reliance on industrial recruitment incentives so perverse and backwards as a public policy. The corporations are playing regions off against each other to obtain innovation, while regions are making themselves increasingly vulnerable to global economic disruption by relying on this strategy rather than promoting technological innovation.
Feser kindly provided the example of how one of North Carolina’s economic incentives actually served to outsource innovation from North Carolina to other states. “In 2003,” he wrote, “North Carolina found that its existing research and development tax credit had the inadvertent effect of rewarding companies for increasing their R&D activity outside the state.”
VCs vs. Large Corporations
The third new form of global innovation competition is even more surprising, and involves intense competition between global corporations and venture capital firms. In their theoretical model on this competition between venture capitalists and large corporations, Fabrizi, et al., (2007), describe how venture capitalists are more aggressive in pursuing early stage basic innovations because they are better informed about entrepreneurial events related to technological commercialization. The VC’s early advantage in seeking deals eventually leads to an inflated sale price of the innovation when it is sold to the larger corporations in the exit event.
The larger corporations are well aware of the role venture capitalists play in raising the price of the new product, and adopt competitive strategies to lessen the price affect. As Fabrizi et al., state, “We then show that incumbents can undertake early, preemptive, acquisitions to prevent such signaling driven overinvestment, despite the risk of buying a non-productive innovation. Therefore, to exist in equilibrium, venture capitalists must be sufficiently more efficient in selecting innovation projects, otherwise preemptive acquisitions will take place.”
Like the competition between regions, and the competition between multinational corporations, the third form of innovation competition between venture capitalists and global corporations could be used to gain local economic advantage if the VC’s and corporations were played off against each other.
Zoltan Acs describes how technological commercialization involves a knowledge filter. His basic idea is that there is plenty of knowledge in a region like Helsinki or the RTP that could be commercialized, under the right environmental conditions. The missing policy ingredient in both regions is an entrepreneurial support system that helps entrepreneurs translate ideas into new ventures.
Nascent entrepreneurs need much better information about the gaps in the regional industrial value chains and a much stronger inventors peer support system. The new global innovation competition allows a region, like Helsinki, to take advantage of the situation by playing the agents off against each other just like those players currently play regions off against each other.
Helsinki has the right type of local leadership but the wrong economic system in place for promoting the individual initiative that drives new venture creation.
The RTP has the right cultural values of individualism in place, but the wrong type of political leadership that is wedded to the past policy of industrial recruitment. One could scarcely imagine North Carolina’s corporate plutocrats entertaining the idea of using multinational corporations to promote the economic advantage of ordinary citizens.
© 2008 Tom Vass All Rights Reserved