Why Ecosystem-Building has Emerged as a New Approach to Economic Development

Ecosystem-building Needed to Prevent Economic Stagnation & Mitigate Economic Inequality

In a recent EShip Summit newsletter, Andy Stoll, from the Kauffman Foundation asked;

“Why Ecosystem Building, and Why Now?”

and followed up with an invitation to ecosystem builders to discuss the issue:

“Explain why ecosystem building has emerged as a new approach to economic development.”

I’m fairly new to ecosystem building. I’ve first got involved with ecosystem building in the Sacramento startup community as an organizer of local Startup Weekends. Lured in by the appeal and impact of supporting entrepreneurs in our region, I cofounded StartupSac, a non-profit with the mission to “accelerate Sacramento’s startup and innovation ecosystem by informing, educating, empowering, and connecting its startup founders and innovators.” In doing so, I had no idea I had become this thing called an ecosystem builder.

While I’ve had no formal training in economic development, long before getting involved in the local startup community, I had questioned the efficacy of chasing huge corporations with incentives to get them to relocate to a region in the name of economic development. So the question posed by Andy piqued my interest and drove me to research the factors that have driven the need for a new approach to economic development.

Coincidentally, I’d also been reading the 2017 Startup Genome Report. As it turns out, the authors of that report spent several pages outlining the context of startup ecosystems and included several references for other good background information, all lending significant insight into why ecosystem-building has emerged as a favored mechanism for economic development.

It would seem that global events over the last several years have put a lot of pressure on traditional approaches to economic development. For instance, the world has been undergoing a transformation from the Industrial Era to the Information Era, for decades, putting incredible pressure on traditional businesses and industries. The Great Recession exacerbated the situation for many. Businesses, industries, and even regions already under pressure from the transformation into an information economy fell even further behind during The Great Recession and have failed to catch up.

In their report Dynamism in Retreat, The Economic Innovation Group tracks the 30-plus year decline in the United States of economic dynamism, which they define as the rate and scale of the cycle of creative destruction in which new ideas, technologies, and industries are constantly disrupting and replacing those of the past.

According to the report, prior to 2008, at least 80 percent of metro areas saw more firms open than close in any given year, including recessions. The Great Recession completely inverted that trend, with only 11 percent of metro areas adding firms in 2009 resulting in the US economy becoming more reliant on a smaller number of metro areas for its base of economic growth.

“The Great Recession touched off a true collapse in new firm starts. It marked the first time on record that companies were dying faster than they were being born in the United States.“ — Dynamism in Retreat

The startup rate has continuously fallen by half since the late 1970s. Additionally, since the Great Recession there has been an increasingly smaller number of companies, people, and geographies powering an unprecedented share of the nation’s growth and prosperity. In fact, from 2010 to 2014, five American metro areas had the same level of business creation as the entire rest of the country.

Concurrently, as part of the transition from the industrial era to the information era, the technology sector has become the fastest growing, well-performing sector in the economy. Much of the trillions of dollars created by that sector is created by startups. Areas that incorporate technology better, perform better in terms of growing faster and creating jobs.

Rapid technological change, along with other drivers like the Great Recession and decreased dynamism are creating three economic challenges:

  1. Divergence between geographic regions — new business creation has been increasingly concentrated in a few metro regions
  2. Concentration of startups and their value — the value of startups and exit values of startups are also concentrated in a few metro regions
  3. Growing inequality among types of workers — as 80%+ of value created in the tech sector is increasingly concentrated in a small number of metro areas, economic inequality among individual workers grows

These technological challenges are key reasons that ecosystem-building is seen by many as essential to mitigate continued economic inequality, between regions, and types of workers. A few key quotes from the Startup Genome Report are particularly relevant to why ecosystem-building is being embraced to transform cities and regions.

“The upshot is that, while the technology sector is growing twice as fast as the world economy and transforming all types of different industries, the vast majority of that wealth creation is concentrated in only a handful of places. Without attending to creating a strong startup ecosystem, the slice of global technology and economic returns that is captured by other regions will fall. ”
“Startups are the key vehicle by which regions and their citizens can take advantage of technological change, and startups depend on strong ecosystems.”
Those places that fail to boldly and immediately invest in startup ecosystems, and thus fail to produce startups, will experience economic stagnation.

A Presidential Push for Entrepreneurship

In January of 2011, President Obama launched Startup America, a White House initiative that was launched to celebrate, inspire, and accelerate high-growth entrepreneurship throughout the nation.

President Obama called on both the federal government and the private sector to dramatically increase the prevalence and success of entrepreneurs across the country.

According to Brad Feld in his book Startup Communities, the launch of the Startup America program was instrumental in putting entrepreneurship at the forefront of discussion;

“Overnight everyone started talking about entrepreneurship as the way to revitalize our global economy.” Brad Feld, Startup Communities

Rapid technological change, the Great Recession, decreasing dynamism, increased concentration of economic innovation in a handful of metro areas, and a Presidential push to promote entrepreneurship have all raised awareness of the need to accelerate entrepreneurship and innovation in metro areas throughout the country.

No doubt there are other factors that have led to ecosystem building’s rise. Among those, arguments can be made that the traditional attraction-based approach of luring companies with incentives can’t be proven to be effective. In the eBook, Grow Your Own, produced by the Federal Reserve Bank of Kansas City, author, Dell Gines provides a concise summary of attraction-based economic development and argues that it’s a highly competitive, zero-sum game whose economic benefits are difficult to prove.

Yet, despite the increasing interest in ecosystem-building and the questionable efficacy of attraction-based economic development over the long term, there’s still an enormous challenge ahead to convince civic and business leaders to focus more attention on growing local ecosystems. Case in point, the recent scramble by hundreds of communities in an attempt to lure Amazon to build their HQ2 in their communities. Millions of dollars were spent preparing proposals and billions, yes billions, of dollars in incentives (Newark New Jersey alone offered $7 Billion in incentives) were offered to lure Amazon to relocate its second headquarters.

As someone involved in ecosystem-building in my community, I can only imagine what we could do for our local entrepreneurs with even a tiny fraction of the money used annually in attraction-based economic development. Nevertheless, I and others like me throughout the country will continue our work to grow our local startup ecosystems. Just like startup founders, we’re driven by the passionate belief that what we do can have an enormous impact and disruptively change the game for our communities.