The Best Startup Ecosystem in the World (forget about the Valley, London or Singapore)
“The Peak Valley: why startups are going elsewhere” is the front page of the Economist, issue 35 this year. As the dynamism of the Bay Area is on the wane, where should entrepreneurs go to instead?
For the nineteenth consecutive year, the Global Entrepreneurship Research Association (GERA) has published the annual Global Entrepreneurship Monitor (GEM) report. Including results from 54 world economies, it is the largest and the most comprehensive study of entrepreneurial dynamics out there.
What is a startup ecosystem to start with?
The World Economic Forum identifies an entrepreneurial ecosystem as “a system of interrelated pillars that impact the speed and ability with which entrepreneurs can create and scale new ventures in a sustainable way”.
Mason and Brown (2014) define an entrepreneurial ecosystem as “a set of interconnected entrepreneurial actors (both potential and existing), organisations (i.e. firms, venture capitalists, business angels and so on), institutions (i.e. universities, public agencies, officiel bodies) and processes that build connections, facilitate and govern to improve entrepreneurial performance in its environment”.
How does the GEM assess each ecosystem?
First things first. Let’s not mix apples and oranges.
The 54 economies participating to this year’s report fall into different stages of development. According to the World Economic Forum classification:
- The first stage is the factor-driven economy, dominated by subsistence agriculture and extraction businesses, with heavy reliance on unskilled labour and natural resources.
- Then, in the efficiency-driven phase, the economy has become more competitive with more-efficient production processes and increased product quality.
- Lastly, as development advances into the innovation-driven stage, businesses are more knowledge-intensive, and the service sector expands.
N.B.: the transitioning economies from factor- to efficiency-driven have been placed in the factor-driven category, while those in transition from efficiency- to innovation-driven have been included in the efficiency-driven one.
With that being said, clear categories can be drawn up per phase of economic development and geographic region.
Now onto the main indicators used by the GEM.
- The environmental features of each country
The Entrepreneurial Framework Conditions created by the GEM assess 12 components of an ecosystem: entrepreneurial finance, government policies support and relevance, government policies regarding taxes and bureaucracy, government entrepreneurship programmes, entrepreneurship education at school age, entrepreneurship education at post-school stage and training, R&D transfer, commercial and legal infrastructure, internal market dynamics, internal market burdens or entry regulation, physical infrastructure, and cultural and social norms.
- The self-perception of entrepreneurship
The report identified the following aspects to measure the entrepreneurial behaviour and attitudes of individuals in each country: perceived opportunities (the percentage of the population aged 18–64 years who see good opportunities to start a business in the area where they live), perceived capabilities (the percentage of the population aged 18–64 years who believe they have the required skills and knowledge to start a business), fear of failure and entrepreneurial intentions.
- The societal values of being an entrepreneur
The study evaluates to which extent a country values entrepreneurship as a good career choice, how successful entrepreneurs are highly regarded and the media attention for entrepreneurship.
- The entrepreneurial activity
Last but not least, the GEM survey monitors three indicators: the Total Early-stage entrepreneurial Activity (TEA) which represents the pourcentage of adults between 18 and 64 who are in the process of starting a business or who have just started a business which is less than 3.5 years, the Entrepreneurial Employee Activity (EEA) which is the percentage of the adult population between 18 and 64 who, as employees, have been involved in entrepreneurial activities, and the established businesses that are running for over 3.5 years.
Now that we’ve laid down the methodology, time for results.
What are the main insights of the study?
- Over 50% of entrepreneurs are in wholesale/retail in the factor- and efficiency-driven economies
- 50% of entrepreneurs are in information and communication technology (ICT), and professional services such as finance services in innovation-driven places
- The most active age group having the highest Total Early-stage entrepreneurial Activity (TEA) is the 25–34 year olds
- Conditions for entrepreneurs are best overall in innovation-driven economies. No surprise here. Although, it’s interesting to note that internal market dynamics and government support are notably higher in factor-driven economies.
- While perceived opportunities in entrepreneurship are roughly the same across all types of development, the perceived capabilities in the innovation-driven economies are noticeably lower. This can be explained by the concentration of high-skilled profiles in innovation-driven countries, leading to a perceived harsher competition to start a business. Hence, there is notably more fear of failure resulting in fewer entrepreneurial intentions in innovation-driven places. Another reason for such a small part of entrepreneurial behaviour in those places is the greater number of viable alternatives to self-employment.
- In terms of societal values, entrepreneurship is less well-regarded as a good career choice in innovation-driven economies unless you are a successful entrepreneur already. Since the vast majority of innovation-driven places do not encourage risk-taking attitude, they tend not to endorse entrepreneurial initiatives.
Now, let’s take a closer look at the regions.
We won’t dive into details on the regions of Africa and LAC as entrepreneurs are mostly necessity-driven, meaning they have started a business out of necessity because they have no other option, rather than out of an opportunity.
- Europe is the worst place to be an entrepreneur. The region holds the least positive perceptions on entrepreneurship being a good career choice (58.5% vs. 74.5% being the highest in Africa) and the lowest media publicity for entrepreneurial activity (54.3% vs. 75.5% in the North American region). Not surprisingly, the Old Continent holds the lowest Total Early-stage entrepreneurship Activity rate (TEA) out of all age groups (8.1%).
- North America is the historical world innovation hub. Thus far. The region ranks first in terms of improvement-driven opportunity entrepreneurs (seeking independence in their work or increased income via their own company), and is by far, the most innovative by the products or services delivered to customers (new to all or some customers with few or no competition).
- Asia-Oceana is increasingly becoming the place to be for entrepreneurship. The region is rapidly catching up North America on all aspects and has already surpassed it on the rate of new business ownerships (have started a business that is between 4 and 42 months old and is paying salaries or wages) and established business ownerships (more than 42 months). The advantage of Asia-Oceana is twofold: its support system and its internal market features. The government policies and programs along with the entrepreneurial finance in the region provide huge support to start a business. Then, the entrepreneurial education, the internal market dynamics and entry regulation are most favorable in this region compared to everywhere else in the world.
Where is the best startup ecosystem then?
Let’s take a look at the entrepreneurship framework conditions of the best candidates: the USA and China.
We notice that region-wise, North America and Asia-Oceania are pretty similar. Though, we notice a clear step ahead in Internal Market Dynamics in Asia-Oceania. To keep up with the innovation bandwagon, they should improve on their end the Commercial and Legal Infrastructure.
Now, let’s take a look at this interesting graph. The concentration of VC funding is on a decreasing trend for the USA while it’s increasing in Asia. We can only expect that VC funding in Asia will surpass that of the USA. Needless to say that the region is home to more than 5 billion people and the numbers will keep growing. The opportunities for starting a business as well.
Funny twist, China is not the reportedly best startup ecosystem.
Pretty impressive right? Indonesia beats everyone on the entrepreneurship conditions framework. This country is not home to 1.4 billion people like China is, but its 260 million inhabitants represent the most dynamic market in South East Asia thanks to its emerging middle class, young and digital savvy population (half of the population is under 30). In 2017, Indonesia ranked 36th vs. 41st the previous year in the Global Competitiveness Index by the World Economic Forum. Its position in the ranking is driven mainly by its large market size and a relatively robust macroeconomic environment, making the country one of the top innovators among the emerging economies. Hence, the perfect place for entrepreneurs to start a business. Many reports state that Indonesia is not ready for XYZ reasons but the question is what do you prefer: follow the hype like everyone else does? Or be a pioneer rather than a follower?
If you’re interested in the decline of the Silicon Valley, I suggest you read the issue of the Economist, here.
Global Entrepreneurship Monitor Report — GERA, 2017 / 2018 Global report
Entrepreneurial Ecosystems Around the Globe and Early-Stage Company Growth Dynamics — World Economic Forum Report, 2014
International Best Practices On Supporting Startup Ecosystems — Mekong Business Initiative, 2017
Global Startup Ecosystem Report — Genome Startup, 2018
The Global Competitiveness Report 2017–2018 — World Economic Forum